MSRB Proposes to Establish First Best-Execution Rule for Municipal Securities Transactions

Date: February 19, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer 
            (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested public comment on a proposal to establish for the first time explicit requirements for municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors. If ultimately approved, the proposed “best-execution” standard would provide benefits for investors, promote competition among dealers and enhance market efficiency.

“The MSRB’s best-ex proposal is a significant step for protecting investors and improving the structure and efficiency of the municipal market,” said MSRB Chair Daniel Heimowitz. “This proposal complements dealers’ existing fair-pricing obligations by creating standards for how they handle and execute customer orders for municipal securities.”

Modeled on the Financial Industry Regulatory Authority’s best-execution rule for the equity and corporate fixed income markets, the MSRB’s proposed rule requires municipal securities dealers to seek to obtain for their retail customer transactions the most favorable terms reasonably available under prevailing market conditions. Specifically, dealers are required to use “reasonable diligence” to identify potential trading venues for a particular security and then execute transactions in the best venue to provide the customer with a price as favorable as possible. Dealers would generally meet these obligations by establishing and periodically reviewing customer order-handling procedures.

The MSRB’s proposal takes into consideration certain characteristics of the municipal securities market. For example, it provides guidance to dealers for situations when there are fewer price quotations and less relevant pricing information available. In defining possible trading venues that dealers should consider, the proposed rule includes alternative trading systems or platforms, broker’s brokers and other counterparties, such as the dealer acting as principal. This definition of trading venues reflects current characteristics of the municipal market, but also allows dealer practices to change as the municipal market continues to evolve and new technologies are introduced.

In conjunction with the proposal, the MSRB is seeking comment on an exception from the new rule for transactions with sophisticated municipal market professionals. This proposed exception follows a similar approach to fair-pricing obligations under existing MSRB rules, on the grounds that imposing additional execution requirements on dealers in transactions with such well-informed and sophisticated investors may not be necessary.

The MSRB’s best-execution proposal aligns with long-range market transparency initiatives begun by the MSRB in early 2012, and the recommendations of the Securities and Exchange Commission’s July 2012 report on the municipal securities market. The proposal also incorporates the MSRB’s preliminary economic analysis of the benefits, burdens and potential regulatory alternatives.

Comments on the best-execution rule proposal should be submitted to the MSRB no later than March 21, 2014. The MSRB is hosting an educational webinar on the main aspects of the proposed rule on March 6, 2014 at 3:00 p.m. ET. Register for the webinar.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.