WASHINGTON – The Municipal Securities Rulemaking Board's proposal to require dealers acting as principals to disclose markups and markdowns on transactions with retail customers does not include institutional investors because of the large amount of information those investors already have.
That's what an MSRB official said in a webinar Thursday to answer dealer questions and explain the thought process behind its September markup proposal.
Saliha Olgun, the MSRB's assistant general counsel, said the MSRB decided to focus on retail investors because it saw those customers operating with less information than institutional investors who already "have quite a bit of information available to them."
She also said that compensation on municipal securities transactions, to the extent that it is material, is already required to be disclosed in offering documents in the primary market under other rules.
The MSRB held its webinar ahead of the recently extended Dec. 11 comment deadline for the rule.
The changes to MSRB Rule G-15 on confirmations would require a dealer buying or selling munis for its own account to disclose the markup or markdown on a customer's confirmation when it executes a transaction on the same side of the market as the customer; the transaction is greater than or equal to the size of the customer's; and the dealer transaction occurs within a two-hour window on either side of the customer transaction.
Those markups and markdowns would be equal to the difference between the price to the customer and the prevailing market price for the security and would have to be disclosed both as a total dollar amount and as a percentage of the prevailing market price of the customer transaction. Even if the markup did not have to be disclosed, a dealer would have to provide the investor a hyperlink and URL address to the Security Details page for the security on EMMA as well as a time of execution, accurate to the nearest minute, for the customer's trade.
The MSRB would also try to limit the proposed rule to the secondary market by excluding transactions in new issue securities affected at the list offering price by members of the underwriting group.
Olgun added the MSRB is soliciting comments to hear what people think on the proposals and that the self-regulator is open to market suggestions.
Later in the webinar, she dismissed a concern about whether a dealer would get specific guidance on where the MSRB draws the line between "fair and reasonable" markups and those that are excessive. MSRB Rule G-30 on prices and commissions already requires dealers to make sure markups are fair and reasonable, she said, meaning the current proposal should not change the way dealers are already making those determinations.
Olgun said the MSRB plans to carefully consider the questions and comments they get in letters and then make a determination on whether to give dealers any other guidance on the rule.
Participants also asked about the MSRB's decision to use a two-hour window for the rule.
Michael Post, the MSRB's general counsel for regulatory affairs, said the two hours was a different way to approach the idea of riskless principal transactions, which have proved troublesome in rulemaking in the past. The time span would be "a wide enough net" to capture the transactions and would avoid problems from having to define riskless principal transactions, he said. But Post, like Olgun, encouraged commenters to share any concerns or ideas for changes they may have.
Another part of the September markup proposal asked for comments on a revised version of an earlier MSRB rule that avoided markup disclosure but would require dealers to disclose a reference price of the same security traded on the same day. The MSRB has said it favors the markup rule after dealers complained that the reference price idea was too complex and would confuse investors.
Olgun said the MSRB is still keeping the reference price alternative under consideration "mainly because even though [the MSRB] does favor markup disclosure at this time, we really want to see based on those comments whether our current [stance] would hold."
When asked about the possible timeline for the rule, Post said the MSRB's coordination with the Financial Industry Regulatory Authority and the Securities and Exchange Commission make it "very difficult to say" when the rule would be finished.
"This is something that has been discussed for nearly 40 years," Post said. "When two or even three organizations are coordinating well in an area, that sort of coordination has great benefits for the market but it takes additional time."
