WASHINGTON – The Municipal Securities Rulemaking Board's seven-page resource document released Thursday to help dealers comply with markup disclosure rules that took effect in mid-May received mixed reactions from dealers.
Dealers appreciated the paper, but said they could have used it before the effective
date of the rule.
“We are reviewing today’s Compliance Resource on Disclosing Mark-ups and Determining Prevailing Market Price. While we appreciate the MSRB’s efforts, [Securities Industry and Financial Markets Association] members had hoped for such guidance prior to the effective date of the rule,” said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s municipal securities. “Also, today’s release appears to potentially require dealers to change their compliance procedures under the markup rule, which is concerning. We will continue to review the release and provide feedback to the MSRB.”
Michael Nicholas, chief executive officer of Bond Dealers of America, said “We appreciate the MSRB’s continued efforts to assist the industry with interpretative guidance and other related materials. The BDA looks forward to working with the MSRB concerning this interpretative guidance because it took our members off guard. Our members developed compliance policies and procedures and complex operational systems to ensure they were in compliance before the effective date of the rules."
But Nicholas added, "This interpretative guidance comes later in the process that we would have hoped and we need to be sure that it does not undo the hard work our members invested to ensure compliance.”
The MSRB stressed that the resource document “should be read in conjunction with the relevant rules and related guidance, including frequently asked questions” and “does not create new legal or regulatory requirements, or new interpretations or existing requirements.”
The changes to MSRB Rules G-15 on confirmation, clearance and settlement and G-30 on prices and commissions generally require dealers to include their markups and mark downs from certain transactions in their confirmations to retail customers.
A dealer must disclose markups or mark downs from a transaction if it also executes one of more offsetting principal transactions on the same trading day in an aggregate size that is the same or exceeds the size of the customer trade.
The resource document said a retail customer is not a bank, savings and loan association, insurance company, registered investment company, a Securities and Exchange Commission- or state-registered investment adviser or any other entity or person with total assets of at least $50 million.
The MSRB said there are three exceptions to the rules, under which markup disclosure is not required. One exception is a transaction in municipal fund securities, which would be executive in connection with a 529 savings plan. Another is list offering price transaction under Rule G-14 on reports of sales and purchases.
The other exception is if the dealer executes the offsetting principal trade on a trading desk that is functionally separate from the trading desk that executed the customer trade and the dealer has policies and procedures to ensure the separate trading desk had no knowledge of the customer trade.
Under a modification, if the dealer’s offsetting principal trade is executed with a dealer affiliate and doesn’t occur at “arm’s length,” the dealer must “look through” to the time and terms of the affiliate’s trade with a third party to determine if markup disclosure is required.
The markup disclosed on the confirmation is determined based on the prevailing market price (PMP) of the muni.
The resource document said dealers must use “reasonable diligence” in determining the PMP, consistent with G-30.
“Under the standard of reasonable diligence, dealers may rely on reasonable policies and procedures to facilitate PMP determination, as long as the policies and procedures are consistent with Rule G-30 and are consistently applied,” the MSRB wrotein the paper.
Under the rule changes, markup disclosures must be given as a total dollar amount and a percentage of the PMP. The rule changes establish a “waterfall” of factors for determining the PMP.
Dealers initially must look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of PMP. If that data is unavailable, they must make a series of other successive considerations.
They must look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms. Further down the waterfall, dealers can look at contemporaneous trades of similar securities.
The resource document contains information about each of these steps.
The document contains a list of key MSRB obligations that are relevant to compliance with the G-15 and G-30 rule changes.
It also contains compliance considerations for complying with Rule G-18 on best execution.
