MIAMI – Vendors, dealers, and regulators say it's proving to be a heavy lift for the industry to integrate sometimes subjective markup disclosure rule requirements into broker-dealer systems.

The complexity of integrating multiple vendors is increasing the challenge, participants in an industry panel National Municipal Bond Summit here said Thursday.

The discussion featured officers of dealer firms, regulators, and a representative of a vendor developing a product designed to satisfy some of the rule’s requirements.

There has been much industry hand-wringing over the past few months about the May 14 effective date of the markup disclosure rule, which amends Municipal Securities Rulemaking Board Rules G-15 on confirmation and G-30 on prices and commissions, which will require dealers to disclose their markups and markdowns in retail transactions on the confirmation forms given to customers. The markups have to be disclosed as an absolute dollar amount as well as a percentage of a “prevailing market price” (PMP), which must be calculated according to a regulatory “waterfall” hierarchy.

Vendors who have developed or are developing products designed to calculate the PMP have said it's a challenge making a May 14 compliance date as is the process of integrating new products into the existing automated systems of the dealer firms. Panelists said the inherent subjectivity of some parts of the rule is a big part of what is making integration challenging.

“It becomes challenging,” said Brad Treichler, chief administrative officer and chief compliance officer at TMC Bonds, a vendor developing a PMP calculation tool. “Just the complexity of the subjective nature of the rule is perhaps the biggest thing.”

Don Winton, chief operating officer, Crews & Associates
Don Winton, Crews & Associates

The MSRB’s waterfall specifies that dealers initially are to look at their “contemporaneous” trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. Further down the waterfall, firms could look at contemporaneous trades of “similar securities.” Treichler noted that both terms are nebulous, given the variety of securities with unique characteristics in the muni market. His firm had to build in functionality to allow clients to choose their own definition of contemporaneous, he said.

“It’s just not a black and white thing,” Treichler said.

Peg Henry, deputy general counsel at Stifel Financial Corp., said that PMP calculation could be confusing because of the subjectivity involved. Two different firms could calculate two different PMPs for the same trade, she noted. Stifel has been in continuous contact with its chosen vendor, Henry said it still did not have in hand a testable PMP calculation product. When it does have one, she said, compliance will still involve a complex integration of that solution with other vendors that her firm uses.

Don Winton, chief operating officer at Crews & Associates, said he doubted anyone present at the conference was truly prepared for the effective date yet. “I bet I’m not going to get a hand raised in the room,” he said.

MSRB general counsel Michael Post said the process of answering questions about the markup rule has been like a “never-ending onion,” with the MSRB facing many new questions at each turn.

The board released an initial set of FAQs about the requirements in July 2017, and an updated set earlier this week. Post said that the MSRB has been involved in discussions with the Securities and Exchange Commission and the Financial Industry Regulatory Authority about a possible conformance period beyond May 14 in which firms working toward compliance would not face enforcement action, but that the SEC must ultimately make that decision. In the meantime, Post said, firms should be assuming they need to be prepared in just a few weeks.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is the Deputy Washington Bureau Chief of The Bond Buyer. He covers securities law, regulation, and enforcement.