Investors to gain access to your compensation info

System failure? System backup!
November 17, 2016
What lies ahead for fund regulation?
November 30, 2016

Yikes! The Securities and Exchange Commission (SEC) has just approved the Municipal Securities Rulemaking Board’s (MSRB) request to require municipal securities dealers to disclose their compensation when transacting with retail investors.

But there’s more regulatory compliance ahead…

…The SEC has also approved a similar, FINRA-proposed rule requesting like disclosures for the corporate and agency debt markets.

So, if you were expecting less regulatory oversight, not more…SURPRISE! The new MSRB rule goes into effect in 18 months.

According to Colleen Woodell, Chair of the MSRB Board of directors, “The municipal bond market will gain an unprecedented level of transparency when this new rule is put in place. We have been working tirelessly to improve transparency for municipal bond investors and the changes set in motion today will allow them to assess their municipal bond transaction costs in a way similar to other markets.”

According to the MSRB, retail investors in municipal securities receive less information on their written transaction confirmations about the cost of their transactions than investors in, for example, equities. The rule approved by the SEC is expected to provide municipal retail investors with meaningful and useful pricing information to help them better evaluate the overall cost of their municipal securities transactions.

What does that mean for you?

When the rule is in place, municipal securities dealers will be required to provide retail investors information about dealer compensation, in the form of a mark-up or mark-down, for certain transactions. The MSRB expects the disclosure to affect an estimated 8,000 retail investor municipal securities transactions each day.

The specifics of the MSRB’s rule focus on when a dealer in a principal capacity (for the dealer’s own account) purchases from or sells to a retail customer and on the same day has an offsetting sale or purchase of the same security to or from a third party. The rule requires that a dealer disclose on the customer’s confirmation the dealer’s compensation, in the form of a “markup” or “markdown” from the “prevailing market price” of the security. In addition to providing the dollar amount and percentage of the dealer’s compensation on a trade, the confirmation would include the investor’s time of the trade and a link to trade price data about the security on the MSRB’s Electronic Municipal Market Access (EMMA®) website.

The rule changes include guidance for dealers on establishing the prevailing market price of a security, from which a dealer’s mark-up or mark-down is determined. The guidance builds on existing guidance under the MSRB’s fair pricing rules, which requires dealers to use reasonable diligence in establishing the prevailing market price of a municipal security, and is also generally harmonized with prevailing market price guidance previously adopted by FINRA and applicable to other fixed income securities.

The MSRB’s detailed explanations in its rulemaking materials are designed to assist dealers in understanding the MSRB’s regulatory intent for the application of the markup disclosure rule and prevailing market price guidance to different trading situations and the unique characteristics of the municipal market, which has more than one million individual bonds, most of which do not trade frequently. For example, the MSRB’s materials specifically address establishing the prevailing market price by reference to contemporaneous customer transactions; the ability of dealers to calculate their compensation at the time of disclosure to a customer; the frequent absence of pricing information for sufficiently comparable municipal securities; and the implications of transactions with affiliated dealers.

So, what are you doing?

The right thing, of course. It’s just that now you’re going to have to do a little more of it, including updating your policies and procedures.

This is likely the tip of the iceberg. The regulatory bodies are not just going to ride off into the sunset…For now this new rule applies to municipal bond dealers, but futures traders, broker-dealers, and RIAs are in the regulator’s sights too.

Be prepared.

When your compliance function is under pressure to do more with less, do you have options?

Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community.

Let’s talk.

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