Muni Time of Trade Disclosure - Why a New Rule and Why the Delay?

The objective of the rule is simple: protect the retail investor. And, when it comes to the municipal market, the rule already exists. So why is Proposed Rule G-47 pending approval by the SEC, and how will it differ from the existing rule? Why is this well-intentioned and, as some believe, needed Rule the subject of an SEC Order that has delayed its implementation?

Let’s start with the existing “Fair Dealing” Rule. MSRB Rule G-17, is a simply written rule that has been the subject of a significant amount of interpretive guidance and letters over the past 30 years. In 2010, FINRA, in an attempt to bring some semblance of order to this plethora of guidance, issued its Regulatory Notice 10-41, also known as “The Checklist.” The Checklist was meant to provide market participants a level of clarity around the requirement of dealing fairly with non-sophisticated and retail investors. At the same time, the MSRB issued a notice reminding market participants of their obligations and its interpretive guidance issued over the years.

In February 2013, the MSRB, in an effort to create a rule that “would ease the burden on dealers and other market participants who endeavor to understand, comply with and enforce the time of trade disclosure obligation” introduced Proposed Rule G-47¹. The Proposed Rule, as the MSRB notes, is in response to feedback of market participants “who have expressed concern regarding the difficulty of reviewing years of interpretive guidance to determine current obligations.” So what has happened and why isn’t G-47 on the books?

Proposed Rule G-47, is a free-standing rule seeking to codify the relevant interpretive letters and guidance of G-17 around the time of trade disclosure obligation. In the proposed rule and request for comment, the MSRB made clear:

Proposed Rule G-47 would codify the principles from these interpretive notices without changing the time of trade disclosure obligation.

The MSRB, in its proposed rule filing with the SEC, responded to the comment letters it received making clear the proposed rule was meant to codify the existing interpretive guidance and letters and not create new or different requirements. The MSRB noted that, to the extent new requirements were suggested in the letters or if the MSRB were to suggest new requirements, the same would be proposed and addressed at a later time. In other words, the MSRB was sticking to its word – make it clear for those that want to comply and for those that enforce these rules.

The SEC published the proposed rule, two comment letters were submitted and the MSRB responded to both. On January 16, 2014, the SEC issued an Order seeking “additional input from interested parties on the MSRB’s proposed change in its treatment of past interpretive guidance.”²

… the MSRB proposed the deletion of certain interpretive guidance affected by these rule changes from the MSRB’s Rule Book… [T]o address a commenter concern, the MSRB states that it will archive on its website the existing guidance that is to be deleted from the Rule Book in connection with the proposed rule change. [Citation omitted] Moreover, the MSRB states that “[t]o the extent that past interpretive guidance does not conflict with any MSRB rules or interpretations thereof, it remains potentially applicable, depending on the facts and circumstances of a particular case” (together with the archiving on its website of the existing guidance that is to be deleted under the proposed rule change, this approach is referred to herein as “the MSRB’s proposed treatment of past interpretive guidance.”) The MSRB notes, however, that preserving the guidance at issue in the Rule Book itself would undermine the MSRB’s goal to provide streamlined rule language.

The MSRB was responding to a commenters’ request that time of trade disclosure interpretive notices be maintained because “there are nuances contained in these interpretive notices spanning over 30 years of guidance that brokers, dealers, and municipal securities dealers have long relied upon.” ³

The delay in the SEC ruling on this Proposed Rule, while warranted under the applicable rules, falls under the category of “no good deed goes unpunished.” In an effort to appease a reasonable comment from SIFMA, the MSRB offered a seemingly logical and balanced alternative. The problem is that the alternative proffered deviated from the original proposed rule. Thus the delay, the extent of which will not be known for, at least, a few more weeks. Irrespective, it seems one can have a high level of confidence that the substantive requirements of the proposed rule, the codification and embodiment of G-17 and the associated interpretive guidance and letters, will survive.

All of which leads back to technology. Why? The answer is fairly simple: the rule is a consolidation and codification of G-17 and its interpretive notices and guidance around time of trade disclosure. The obligation was and is to “disclose material information that is reasonably accessible.” What was “reasonably accessible” even a year or two ago has changed. Technology has evolved as have the ways in which to ensure your firm’s practices are in line with the policies. While firms periodically review their policies and procedures, the introduction of a codification of hard to decipher guidelines should be cause to revisit existing policies and practices. Have your policies and practices kept up with available technology and resources?

Technology brings to the fore two realities.

1. It has made more and better information available. As noted above, what is “reasonably accessible” today is very different than what fit this category one, three or five years ago.

Do those dealing with your retail clients have real-time access to material information for communication to the client at or before the time of trade? Is it current? Is it in one place for ease of use and delivery? Are you sure they disclosed all the required information? How? Checking the box? With the introduction of enhanced technology, is that the best way to ensure your firm’s policies are indeed practiced, especially as we hear regulators talk more about seeing proof? Can you easily and efficiently access information to answer the question of whether or not the material information was disclosed at or before the time of trade? This leads to the second reality around technology.

2. FINRA and the SEC have made clear that technology coupled with data examination and review will be an important part of the examination and enforcement protocol. They now have the data and technology to better identify the types of activity that may be riskier based on market or individual behavior and focus their examination in ways previously not available.

Combine the advances in technology with the reality that there is clarification around what is required to be disclosed and you have a changed landscape in terms of what is available and what is to be disclosed. A quick read of Proposed G-47 (and the interpretive guidance associated with G-17) makes clear that a simple review of past material event disclosure filings or an OS summary from the time of issuance will fall short of “material information reasonably accessible.”

Advances in technology and clarity around the time of trade disclosure obligation for your non-SMMP and retail client are cause to revisit your policies and actual practices. Have you kept up with technology, or will the regulator be a step ahead?

Gregg Bienstock is the CEO and CO-Founder of Lumesis, Inc. a technology and information delivery firm focused on providing compliance, credit and data tools and solutions for the municipal bond market. Gregg is a frequent speaker on municipal market and compliance panels.

¹MSRB Notice 2013-04 (2/11/2013).

²SEC Order “Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change Consisting of Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations, Proposed Revisions to MSRB Rule G-19, on Suitability of Recommendations and Transactions, Proposed MSRB Rules D-15 and G-48, on Sophisticated Municipal Market Professionals ("SMMPs"), and the Proposed Deletion of Interpretive Guidance.” SEC Release No. 34-71326; File No. SR-MSRB-2013-07, January 16, 2014

³Letter from David Cohen, SIFMA, 11/12/2013.

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