WASHINGTON – Bond Dealers of America is urging the Municipal Securities Rulemaking Board to leave unchanged some rules that relate to the municipal securities market’s move to a two- instead of three-day settlement cycle.
“Leaving other regulatory requirements that are tied to the settlement date, like the requirements for delivering offering documents under G-32, unchanged would minimize the regulatory and compliance cost burdens of the proposed rules without limiting the risk-reducing benefits of the shortened settlement cycle,” Mike Nicholas, BDA’s chief executive officer, wrote the Securities and Exchange Commission.
Rule G-32 requires underwriters to deliver offering documents to the customer no later than the settlement of the transaction.
Leslie Norwood, associate general counsel and co-head of munis for the Securities Industry and Financial Markets Association said there may need to be some changes to G-32.
In a previous comment letter, Norwood said SIFMA has concerns about a shortened timeframe for that delivery. If the MSRB revisits the rule, she said, it should both make clear that the rule applies to all dealers and not just underwriters. The MSRB should also harmonize the rule changes with the SEC's "access equals delivery" rule to only require paper statements on a transaction-by-transaction basis at the customer's request, she said.
However, Norwood stressed in this latest letter that SIFMA does not want the board to do anything that will impede the move toward T+2.
Both BDA and SIFMA, as well as the Investment Company Institute and the Financial Services Institute, an advocacy association made up of members of the independent financial services industry, all told the SEC that they support the proposal to settle transactions within two days of execution and think it will benefit the market.
The MSRB’s amendments would modify its Rule G-12 on uniform practice, Rule G-15 on confirmation, clearance, and settlement, and other requirements to move to a T+2 settlement cycle with respect to transactions with customers. The proposal would be tied to SEC changes to its Rule 15c6-1, which governs settlement for corporate bond and equity markets, and would be part of an industry migration to the new cycle that would be completed by the end of the third quarter of 2017.
Nicholas agreed with the MSRB that the muni market should be harmonized with the equity and corporate markets, but asked the board to consider the effect such a change could have on dealer operations and pre-existing rules not accounted for in the amendments.
The transition will affect the smaller, middle market firms that BDA represents the most as they will have to face costs and potential compliance burdens with changing their systems and processes to fit the new cycle, he said.
BDA also pointed to Rule 15c6-1 as a potential problem because it requires a broker-dealer to cancel or liquidate a cash account transaction if the transaction has not been paid for within five business days, or T+5, of the securities transaction. Shortening the settlement cycle would cut that timeline to T+4, which Nicholas said could negatively impact retail clients who still rely on sending checks that take longer to be processed. BDA asked that the SEC and other regulators preserve the five-day payment timeframe.
The FSI asked the MSRB to coordinate with other regulators and to develop “a comprehensive educational plan to ensure market participants and retail investors are well informed about the impacts of shortening the settlement cycle.”
David Bellaire, FSI’s executive vice president and general counsel who wrote the letter, said it is critical that broker-dealers educate both their personnel and their retail clients on the behavioral changes that are required because of the shortened timeframe.
SIFMA and the ICI are co-chairing the Industry Steering Committee tasked with leading the move to a shorter settlement cycle. ICI said it strongly supports the changes and is ready to work with the MSRB, other regulators, and the SEC to implement the T+2 settlement cycle.
SEC commissioners Michael Piwowar and Kara Stein released a statement last summer applauding the industry’s leadership on the issue and saying they were interested in having the settlement cycle shorted. SEC chair Mary Jo White also indicated support in a September 2015 letter to SIFMA and ICI in which she promised to work to make regulatory and other changes to support shortening the cycle by 2017.
