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SIFMA Pushes for Higher Muni Trading Standard

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The Securities Industry and Financial Markets Association on Friday shared details on its proposed execution-with-diligence standard for municipal trading.

The proposal follows the industry group’s initial proposal to the self-regulatory organization Municipal Securities Rulemaking Board (MSRB) in June 2013 that an execution-with-diligence standard be applied to trades in municipal securities, which is a higher standard for dealers to meet than what is currently in place, according to SIFMA.

A working group of SIFMA members developed the standard following the release of the 165-page July 2012 SEC Report on the Municipal Securities Market. The industry group says an “overwhelming majority of members of SIFMA’s Municipal Securities Division” approved it.  

“SIFMA’s proposal moves the industry forward in a robust way that further enhances standards so that customers receive fair and reasonable prices,” said David Cohen, managing director and associate general counsel of the industry group, in a statement. “The proposal recognizes the unique characteristics of the municipal market and would strengthen regulation in a manner consistent with the way the market operates.”

Because muni bonds are not traded on a central exchange and do not have a central aggregator of quotes, the execution standard in the municipal market “cannot mirror that for equities,” SIFMA says. “The municipal securities market also has fundamental differences from other debt markets, including its diverse and fragmented nature, small securities trade sizes and far less frequent trading than corporate bonds.”

In general, SIFMA says that it supports efforts that would improve trade-execution standards. Since there is not one path for dealers to take for execution with diligence, the industry group says, its members have proposed a principles-based rule. 

The SIFMA proposal resembles the approach taken by the Financial Industry Regulatory Authority, an independent regulatory body, to corporate fixed-income securities. It seeks to define the muni bond market as one that includes brokers, dealers and municipal securities dealers known to trade particular securities, and it would require periodic review of trading counterparties, a new regulatory requirement.

For the proposal, SIFMA says it is encouraging the MSRB to amend its Rule G-18 to reflect an “execution-with-diligence” concept of execution.  The industry group also is asking the MSRB to consider “the short-term and long-term costs and potential benefit of any rulemaking before formally proposing any changes.”

According to the MSRB’s website, its board of directors  met this Wednesday through Friday to discuss the proposed consolidation of Rules G-18 and G-30 to create one new rule on fair pricing and other issues.

At the meeting, the MSRB board says it agreed to take “a two-step approach” to clarifying, and potentially expanding, the fair pricing obligations of dealers.

“First, it agreed to consolidate into a new rule municipal securities dealers’ obligations related to fair pricing outlined in a number of existing rules and interpretations,” the organization explained in a press release issued Friday. Also, the board will seek public comment “on condensing relevant requirements described in MSRB Rule G-30 on fair pricing, MSRB Rule G-18 on agency transactions and interpretations to MSRB Rule G-17 on fair dealing.”

The groups adds that it is going to publish “a concept release on the merits of requiring municipal securities dealers to take specific steps to obtain the best price for investors buying and selling municipal securities.”

In addition, the MSRB plans to seek public comment “on whether such a standard is necessary for the municipal market, the benefits that would be attained, as well as on the costs of establishing a more structured approach for documenting how dealers satisfy their existing obligation to obtain a fair price for investors.”

“Although there appears to be growing acceptance to applying certain best execution-like principles to our market, the Board looks forward to gathering broad public input in order to be as fully informed as possible before making any specific recommendations,” MSRB Chair Jay Goldstone said in a statement.

Last month, the MSRB warned investors to be aware of the terms of certain types of direct-pay municipal bonds to better understand if they are affected by the federal budget sequestration. It also alerted broker-dealers and municipal securities dealers of their customer protection obligations under MSRB rules in connection with customer transactions relating to direct-pay bonds.


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