MSRB issues request for comment on time of trade proposal

The Municipal Securities Rulemaking Board is seeking comment on draft amendments to Rules G-47 on time of trade disclosures and D-15, which defines the sophisticated municipal market professional.

The draft amendments to Rule G-47 codifies existing guidance, adds additional disclosures that may be material, retires and consolidates certain elements of interpretive guidance and makes other clarifying changes to the rule. Amendments to Rule D-15 would, in defining the sophisticated municipal market professional, exempt investment advisers registered with the Securities and Exchange Commission from having to meet certain affirmation requirements to qualify under the rule.

“As part of the MSRB’s rule book modernization efforts, we are finding opportunities to modernize certain rules in light of evolving market dynamics and to streamline our rule book by codifying certain guidance into the relevant rule and retiring guidance that no longer reflects market practices,” said Saliha Olgun, interim chief regulatory officer for the MSRB. “We believe that today’s draft amendments are reflective of our commitment to issuer and investor protection while being mindful of compliance burdens on regulated entities. We look forward to input from market participants.”

MSRB Rule G-47 was introduced in 2013, approved by the SEC in 2014, and is mainly built on guidance issued for Rule G-17 on fair dealing. The RFC follows the board’s controversial one-minute reporting window proposal in attempts to improve pre-trade data, in addition to following the board’s further plans to improve time of trade and post-trade data.

Rule G-47 currently includes two distinct disclosure obligations, requiring dealers to disclose all material information known about the transactions as well as the obligation to disclose all information about the security that is reasonably accessible to the market.

The draft amendments retain these provisions but clarify that “the time of trade disclosure obligation does not require dealers to disclose to their customers material information that, pursuant to the dealer’s policies and procedures regarding insider trading and related securities laws, is intentionally withheld from the dealer’s registered representatives who are engaged in sales to and purchase from a customer,” the MSRB said. “It is not the MSRB’s intent to require dealers to violate dealer processes that may have been established to facilitate compliance with one obligation (e.g. prohibitions on insider trading) in order to comply with Rule G-47.”

The draft amendments also remind dealers that customers do not have a Rule G-47 obligation to dealers and that purchasing dealers should obtain all information about the securities that is not otherwise readily available in the market in order for a dealer to accurately describe them when reintroducing them into the market, the MSRB said.

G-47 also defines the term ‘material information’ as “that information is considered to be material if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision,” the MSRB said. The draft amendments knock out “or significant” as part of the definition.

The amendments also stipulate that material information also includes if a municipal security bears a market discount.

The board is also proposing in relation to G-47 that the details of zero coupon and stepped coupons, namely the increases to the interest rates, be disclosed as they are material to investors.

The rule currently requires “disclosure of the fact that a security prepays principal and the amount of unpaid principal that will be delivered on the transaction,” the MSRB said. The amendments add a section to offer factor bonds as an example of a bond that prepays principal.

The draft amendments also state that if an official statement is not available or is only available from the underwriter, that must also be disclosed.

The MSRB will also be retiring guidance on conversion costs and secondary market insurance.

In related initiatives, the MSRB has also retagged all interpretive guidance so that dealers do not have to consult both Rule G-47 and Rule G-17, from which much of the rule is based. They also specify disclosures and suitability obligations in connection with 529 savings plans and consolidated fair dealing guidance related to inter-dealer transactions.

The proposal also includes amendments to Rule D-15, which exempts investment advisers registered with the SEC from having to affirm that they are exercising independent judgment in evaluating the recommendations of the dealer, the quality of the customer’s transactions by the dealer and the transaction price for non-recommended secondary market transactions if the advisers generally maintain over $100 million in regulatory assets and owe a fiduciary duty to their clients.

The board will be accepting comments until April 17.