WASHINGTON — The Bond Dealers of America is suggesting a change to the way dealers would get affirmations from sophisticated municipal market professionals under a Municipal Securities Rulemaking Board proposal.
At issue are amendments the MSRB proposed to its rule governing interactions with those market participants to whom dealers owe fewer duties.
BDA Chief Executive Officer Mike Nicholas' letter to Securities and Exchange Commission muni chief John Cross concerns the MSRB's pending best execution rule, which is before the SEC.
Current MSRB guidance says that for a customer to be an SMMP, the dealer must have "a reasonable basis to believe [it] is capable of evaluating market risks and market value independently in evaluating the recommendations of the dealer." The customer must also "affirmatively indicate it is exercising independent judgment" in evaluating the dealer recommendations.
To comply with this requirement, dealers typically obtain certificates to this effect from customers, although the rule says the information can be obtained verbally instead of in writing.
The new provisions contained in the proposed Rule G-48 on transactions with SMMPs would also require further affirmations, such as an indication from the customer that it has access to "established industry sources" such as the MSRB's EMMA system and rating agency reports as well as "material information. Dealers have said this would require all new affirmations.
Some customers who are SMMPs will not want to be excluded from the best execution obligation dealers will owe them, but might want to remain SMMPs for other purposes such as suitability requirements. But as of now, they will have no way to become SMMPs without also lumping in an exclusion for themselves under the best execution rule.
The SEC should require a two-pronged affirmation, Nicholas wrote. The first would be the current affirmation, and if a customer provided that the customer would be treated as an SMMP for all purposes other than for best execution. The second affirmation would be tailored just to the best execution rule.
"If the institutional investor provides the first affirmation but not the second, then the investor would not be treated as an SMMP for the best execution rule but would still be an SMMP for all other rules," Nicholas wrote.
BDA would also like more guidance from the MSRB, Nicholas told Cross.
