(First published July 12, 2017)

Effective May 14, 2018, amendments to MSRB Rule G-15 require dealers to disclose additional information on retail customer confirmations for a specified class of principal transactions, including the dealer’s mark-up or mark-down as determined from the prevailing market price (PMP) of the security. Dealers generally also are required to disclose on retail customer confirmations the time of execution and a security-specific URL to the MSRB’s Electronic Municipal Market Access (EMMA®) website.[1] Related amendments to Rule G-30, on prices and commissions, provide guidance on determining the PMP for the purpose of calculating a dealer’s mark-up or mark-down and for other Rule G-30 determinations.

 

Also, effective May 14, 2018, amendments to Financial Industry Regulatory Authority (FINRA) Rule 2232 create similar confirmation disclosure requirements for other areas of the fixed income markets. Among other things, the FINRA amendments require dealers to determine their disclosed mark-ups and mark-downs from the PMP of the security that is traded, in accordance with existing guidance under FINRA Rule 2121.

 

Below are answers to frequently asked questions (FAQs) about the confirmation disclosure requirements under Rule G-15 and related PMP guidance under Rule G-30, Supplementary Material .06 (also referred to as the “waterfall” guidance or analysis). While these FAQs address MSRB rules only, FINRA has also issued guidance for the FINRA rules applicable to agency and corporate bonds. The MSRB and FINRA worked together to produce this guidance. While each has published its own version to refer to MSRB and FINRA rules and materials, respectively, the versions are materially the same and reflect the organizations’ coordinated approach to enhanced confirmation disclosure for debt securities. To the extent the MSRB and FINRA offer different guidance based on differences between the markets for corporate, agency and municipal securities, those differences are discussed in the context of the relevant question and answer.

 

During the implementation period, the MSRB will continue to work with dealers on questions related to the confirmation disclosure requirements and PMP guidance. Dealers are encouraged to contact the MSRB to suggest additional topics or questions for inclusion in the FAQs. Accordingly, the MSRB may add to, update or revise this guidance. The most recent date for the content of an answer will be clearly marked.

 

For ease of reference, unless otherwise noted, the term “mark-up” refers both to mark-ups applied to sales to customers and mark-downs applied to purchases from customers, and the term “contemporaneous cost” refers both to contemporaneous cost in the context of sales to customers and contemporaneous proceeds in the context of purchases from customers.

 

Section 1:  When Mark-Up Disclosure Is Required

1.1 When does Rule G-15 require mark-up disclosure?

A dealer is required to disclose on a customer confirmation the mark-up on a transaction in municipal securities with a non-institutional customer if the dealer also executes one or more offsetting principal transaction(s) on the same trading day as the customer transaction in an aggregate trading size that meets or exceeds the size of the customer trade. A non-institutional customer is a customer with an account that is not an institutional account, as defined in MSRB Rule G-8(a)(xi).

As noted during the MSRB’s confirmation disclosure rulemaking process, any intentional delay of a customer execution to avoid triggering the mark-up disclosure requirements may violate Rule G-18, on best execution, and Rule G-17, on conduct of municipal securities and municipal advisory activities.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 7 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 3-4 (November 14, 2016)

(July 12, 2017)

1.2  Is mark-up disclosure required only where the sizes of same-day customer and principal trades offset each other?

Yes. Mark-up disclosure is required only where a customer trade offsets a same-day principal trade in whole or in part. For example, if a dealer purchased 100 bonds at 9:30 a.m., and then, as principal, satisfied three non-institutional customer buy orders for 50 bonds each in the same security on the same trading day without making any other purchases of the bonds that day, mark-up disclosure would be required only on two of the three customer purchases, since one of the trades would need to be satisfied out of the dealer’s prior inventory rather than offset by the dealer’s same-day principal transaction.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 4; 7-8 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 3-4 (November 14, 2016); Amendment No. 1 to SR-MSRB-2016-12, at 4 (November 14, 2016)

(July 12, 2017)

1.2.1  Are position moves between separate desks within a firm considered “transactions” for purposes of determining whether a dealer has offsetting transactions that trigger a mark-up disclosure requirement?

No. Mark-up disclosure is triggered under Rule G-15 when a customer trade is offset by one or more “transactions.”  For purposes of the rule, the MSRB considers a “transaction” to entail a change of beneficial ownership between parties. Accordingly, if a retail desk within a dealer acquires bonds through a position move from another desk within the same firm and then sells those bonds to a non-institutional customer, the dealer is required to provide the customer with mark-up disclosure only if the dealer bought the bonds in one or more offsetting transactions on the same trading day as the sale to the customer (subject to the exceptions discussed in Question 1.7).

(March 19, 2018)

1.3  When are trades executed by a dealer’s affiliate relevant for determining whether the mark-up disclosure requirements are triggered?

If a dealer’s offsetting principal trade is executed with a dealer affiliate and did not occur at arm’s length, the dealer is required to “look through” to the time and terms of the affiliate’s trade with a third party to determine whether mark-up disclosure is triggered under Rule G-15. On the other hand, if the dealer’s transaction with its affiliate is an arms-length transaction, the dealer would treat that transaction as any other offsetting transaction (i.e., the dealer would not “look through” to the time and terms of the arms-length transaction).

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 9­‑10; 23; 26 (September 1, 2016)

(July 12, 2017)

1.4  What is considered an “arms-length transaction” when considering whether a dealer must “look through” to the time and terms of an affiliate’s trade?

The term “arms-length transaction” is defined in Rule G-15(a)(vi)(I) to mean a transaction that was conducted through a competitive process in which non-affiliate firms could also participate, and where the affiliate relationship did not influence the price paid or proceeds received by the dealer. The MSRB has noted that as a general matter, it expects the competitive process used in an arms-length transaction to be one in which non-affiliates have frequently participated. In other words, the MSRB would not view a process, like a request for pricing protocol or posting of bids and offers, as competitive if non-affiliates responded to requests or otherwise participated in only isolated or limited circumstances.

Factors that may be relevant to a dealer’s determination that a transaction with an affiliate was conducted at arm’s length include, but are not limited to: counterparty anonymity during the competitive process to the time of execution; the presence of other competitive bids or offers, in addition to the affiliate's, in the competitive process; contemporaneous market activity in the same or a similar security (or securities) which is used to evaluate the relative competitiveness of bids or offers received during a competitive process; and a lack of preferential arrangements between the affiliates concerning, or based on, the handling of orders between them. The MSRB notes that no one of these factors is necessarily determinative on its own.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 9 (September 1, 2016)

(July 12, 2017)

(Updated March 19, 2018)

1.5  If a dealer has an exclusive agreement with a non-affiliated dealer under which it always purchases its securities from, or always sells its securities to, that non-affiliate, would the “look through” requirements apply when the dealer transacts with the non-affiliate?

No. The “look through” applies only to certain transactions between affiliated dealers. Under Rule G-15, a “look through” is required when the dealer’s offsetting transaction is with an affiliate and is not an “arms-length transaction.” A transaction with a non-affiliate would not meet these conditions, so a “look through” would not be required. The MSRB notes that dealers should continue to evaluate the terms and circumstances of any such arrangements in light of other MSRB rules and guidance, including best execution. In evaluating these terms and circumstances, dealers should consider whether they diminish the reliability and utility of mark-up disclosure to investors.

(July 12, 2017)

1.6  Does the mark-up disclosure requirement in Rule G-15 apply to transactions that involve a dealer and a registered investment adviser?

No. To trigger the mark-up disclosure requirement in Rule G-15, a dealer must execute a trade with a non-institutional customer. Under the rule, registered investment advisers are institutional customers; accordingly, mark-up disclosure is not required when dealers transact with registered investment advisers. This is the case even where the registered investment adviser with whom the dealer transacted later allocates all or a portion of the securities to a retail account or where the transaction is executed directly for a retail account if the investment adviser has discretion over the transaction. The MSRB notes that this answer is specific to the mark-up disclosure requirement in Rule G-15; it is not intended to alter any other obligations.

(July 12, 2017)

1.7  Are there any exceptions to the mark-up disclosure trigger requirements?

Yes. There are three exceptions. First, disclosure is not required for transactions in municipal fund securities. Second, mark-up disclosure is not necessarily triggered by principal trades that a dealer executes on a trading desk that is functionally separate from a trading desk that executes customer trades, provided the dealer maintains policies and procedures reasonably designed to ensure that the functionally separate trading desk had no knowledge of the customer trades. For example, the exception allows an institutional desk within a dealer to service an institutional customer without necessarily triggering the disclosure requirement for an unrelated trade performed by a separate retail desk within the dealer. Third, disclosure is not required for transactions that are list offering price transactions, as defined in paragraph (d)(vii)(A) of Rule G-14 RTRS Procedures.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 10 (September 1, 2016)

(July 12, 2017)

1.8  May dealers voluntarily provide mark-up disclosure on additional transactions that do not trigger mandatory disclosure?

Yes. In disclosing this information on a voluntary basis, dealers should be mindful of any applicable MSRB rules. For example, while mark-up disclosure is voluntary for trades that are not triggered by the relevant provisions of Rule G-15, the process for determining the PMP according to Rule G-30 applies in all cases. In addition, to avoid customer confusion, voluntary disclosure should also follow the same format and labeling requirements applicable to mandatory disclosure.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 13 n. 27 (September 1, 2016)

(July 12, 2017)

1.9  In arrangements involving clearing dealers and introducing or correspondent dealers, who is responsible for mark-up disclosure?

The introducing or correspondent dealer bears the ultimate responsibility for compliance with the disclosure requirements under Rule G-15. Although an introducing or correspondent dealer may use the assistance of a clearing dealer, as it may use other third-party service providers subject to due diligence and oversight, the introducing or correspondent dealer remains ultimately responsible for compliance.

(July 12, 2017)

Section 2:  Content and Format of Mark-Up Disclosure

2.1  What information must be included when dealers provide mark-up disclosure on a confirmation?

When mark-up disclosure is provided on a customer confirmation, Rule G-15 requires firms to express the disclosed mark-up as both a total dollar amount and a percentage amount of PMP. The mark-up should be calculated and disclosed as the total amount per transaction; disclosure of the per bond dollar amount of mark-up (e.g., $9.45 per bond) would not satisfy the requirement to disclose the total dollar amount of the transaction mark-up.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 12 (September 1, 2016)

(July 12, 2017)

2.2  Where is mark-up disclosure required to be located on a confirmation?

For printed confirmations, Rule G-15(a)(i)(E) requires the mark-up disclosure to be located on the front of the customer confirmation. For electronic confirmations, the disclosure should appear in a naturally visible place. Because the rule requires mark-up disclosure to be on the confirmation itself, the inclusion of a link on the customer confirmation that a customer could click to obtain his or her mark-up disclosure would not satisfy the requirements of Rule G-15.

(July 12, 2017)

2.3  May dealers use explanatory language to provide context for mark-up disclosure?

Yes. Dealers may include accompanying language to explain mark-up related concepts, or a dealer’s particular methodology for calculating mark-ups according to MSRB guidance (or to note the availability of information about the methodology upon request), provided such statements are accurate and not misleading. However, dealers may not label mark-ups as “estimated” or “approximate” figures, or use other such labels. These types of qualifiers risk diminishing the utility of the disclosure and of the dealer’s own determination of the security’s PMP and mark-up charged, and otherwise risk diminishing the value to retail investors of the disclosure.

MSRB Response to Comments on SR-MSRB-2016-12, at 11-12 (November 14, 2016)

(July 12, 2017)

2.4  If a dealer encounters a situation where a mark-up is negative (i.e., the dealer sold to the customer at a price lower than the PMP), may it choose to disclose a mark-up of zero instead?

The MSRB believes that negative mark-ups will be very infrequent; however, if such a case arises, a dealer may not disclose a mark-up of zero where the mark-up is not, in fact, zero. Dealers should disclose the mark-up that they calculate based on their determination of PMP consistent with Rule G-30. As an alternative to disclosing a negative mark-up, dealers are permitted to disclose “N/A” in the mark-up/mark-down field if the confirmation also includes a brief explanation of the “N/A” disclosure and the reason it has been provided. Dealers also have the flexibility to provide an explanation for trades with disclosed negative or zero mark-ups as well, consistent with Question 2.3 above.

(July 12, 2017)

2.5  How many decimal places should dealers use when disclosing the mark-up as a percentage amount?

Dealers should disclose the percentage amount rounded to at least two decimal places (e.g., hundredths of a percent). For example, if a dealer charged a $120 mark-up on a 10-bond transaction where the PMP was 99, the mark-up percentage should be disclosed to at least the hundredth of a percentage point, as 1.21% (as opposed to 1.2% or 1%). However, if a dealer charged a $100 mark-up on a 10-bond transaction where the PMP was 100, the mark-up percentage could be disclosed as 1.00% or 1%.

(March 19, 2018)

Section 3:  Determining Prevailing Market Price

3.1  How should dealers determine PMP to calculate mark-ups?

Dealers must calculate mark-ups from a municipal security’s PMP, consistent with Rule G-30 and the supplementary material thereunder, particularly Supplementary Material .06 (sometimes referred to as the “waterfall” guidance or analysis). Under the applicable standard of “reasonable diligence” (discussed below), dealers may rely on reasonable policies and procedures to facilitate PMP determination, provided the policies and procedures are consistent with Rule G-30 and are consistently applied.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 12 (September 1, 2016)

(July 12, 2017)

3.2  Does the PMP guidance in Rule G-30, Supplementary Material .06 apply for mark-up (and mark-down) disclosure purposes under Rule G-15 and for fair pricing purposes under Rule G-30?

Yes. Dealers should read the guidance in Supplementary Material .06 together with Rule G-30 and all the other supplementary material thereto. For example, while Supplementary Material .06 provides guidance in determining the PMP, Supplementary Material .01(a) explains that dealers must exercise “reasonable diligence” in establishing the market value of a security, and Supplementary Material .01(d) states that dealer compensation on a principal transaction with a customer is determined from the PMP of the security, as described in Supplementary Material .06. Read as a whole, Rule G-30 requires dealers to use reasonable diligence to determine the PMP of a municipal security in accordance with Supplementary Material .06.[2] This standard applies for mark-up disclosure purposes under Rule G-15 and for fair pricing purposes under Rule G-30.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 25; 28 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 9-11 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

3.2.1  Does the functionally separate trading desk exception apply for purposes of determining the PMP of a security?

No. As explained in the rule filing, this exception “would only apply to determine whether or not the [mark-up] disclosure requirement has been triggered; it does not change the dealer’s requirements relating to the calculation of its mark-up or mark-down under Rule G-30.”

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at n. 20 (September 1, 2016)

(March 19, 2018)

3.3  When reading the PMP guidance in Rule G-30, Supplementary Material .06, what does the language in parentheses mean?

Unless the context requires otherwise, language in parentheses that is not preceded by an “i.e.,” or “e.g.,” within sentences refers to scenarios where a dealer is charging a customer a mark-down. Thus, for example, in the phrase, “contemporaneous dealer purchases (sales) in the municipal security in question from (to) institutional accounts,” the terms “(sales)” and “(to)” apply where a dealer is charging a customer a mark-down.

(July 12, 2017)

3.4  When should dealers determine PMP and calculate the mark-up to be disclosed on a confirmation?

The MSRB recognizes that dealers may employ different processes for generating customer confirmations such that this may occur at the end of the day, or during the day for firms that use real-time, intra-day confirmation generation processes. Therefore, although the objective must always be to determine the price prevailing at the time of the customer transaction, different dealers may consistently conduct the analysis to make that determination at different times. Specifically, dealers may base their mark-up calculations for confirmation disclosure purposes on the information they have available to them (based on the exercise of reasonable diligence) at the time they systematically input relevant transaction information into the systems they use to generate confirmations.

This means that a dealer that systematically inputs the information at the time of trade may determine the PMP—and therefore, the mark-up—at the same time (even if the confirmation itself is not printed until the end of day). On the other hand, if a dealer systematically inputs such information at the end of the day, the dealer must use the information available to the dealer at that time to determine the price prevailing at the time of the customer transaction—and, therefore, the mark-up.

The timing of the determination must be applied consistently across all transactions in municipal securities (e.g., the dealer may not enter information into its systems at the time of trade and determine the PMP at the time of trade for some trades but at the end of the day for others).

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 24 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 10 (November 14, 2016)

(July 12, 2017)

3.4.1  May a dealer determine PMP between the time of trade and the end of the day? 

Yes. The MSRB recognizes that firms may employ different processes for generating customer confirmations, and dealers are not limited to determining PMP for purposes of confirmation disclosure only at the times provided as examples in Question 3.4 (i.e., the time of trade or the end of the day). While the objective must always be to determine the price prevailing at the time of the customer transaction, as noted above in Question 3.4, PMP may be determined for disclosure purposes when a firm systematically enters the information into its confirmation generation system, based on information that is reasonably available to it at that time. Accordingly, a dealer may determine PMP at various times, including at the time of the trade, at the end of the day, or at times in between, provided the dealer does so according to reasonable, consistently applied policies and procedures and does not “cherry pick” favorable data.

(March 19, 2018)

3.4.2  May a dealer determine PMP at the time of trade (or at some other time before the end of the day) and wait until later in the day to analyze which trades triggered the disclosure requirement?

Yes. A dealer may determine PMP, enter the PMP information into a confirmation generation system, and later populate the mark-up field only on confirmations of trades that trigger disclosure. The MSRB would expect in such cases that the PMP determination would not be subject to change when the dealer performs the trigger analysis later in the day, other than for a reasonable exception review process (as discussed in Question 3.8.1). In all cases, dealers must follow consistently applied policies and procedures and may not “cherry pick” favorable data. Dealers are reminded that when determining PMP, they must use the information reasonably available to them at the time of the PMP determination and that the objective is always to determine the price prevailing at the time of the customer transaction.

(March 19, 2018)

3.4.3  What is considered a confirmation generation system, for purposes of the guidance on when dealers may determine PMP for disclosure purposes?

As noted above in Question 3.4, the MSRB recognizes that dealers may employ different processes for generating customer confirmations. For purposes of this guidance, the MSRB would consider a dealer to enter information systematically into a confirmation generation system when it stores the information in a location that is part of the confirmation generation process. The MSRB expects that the stored PMP information would not be subject to change, other than for a reasonable exception review process (as discussed in Question 3.8.1). The MSRB also expects that a dealer will clearly explain in its policies and procedures its confirmation generation process, including the timing and role of each material step in the process.

(March 19, 2018)

3.5  Once dealers determine PMP and input relevant information into their confirmation generation systems, would they be required to cancel and correct a confirmation to revise a disclosed mark-up if later events might contribute to a different PMP determination?

No. The disclosure must be accurate, based on the dealer’s exercise of reasonable diligence, as of the time the dealer systematically inputs the information into its systems to generate the disclosure. Once the dealer has input the information into its confirmation generation systems, the MSRB does not expect dealers to send revised confirmations solely based on the occurrence of a subsequent transaction or event that would otherwise be relevant to PMP determination under Rule G-30. On a voluntary basis, dealers may correct a confirmation, pursuant to reasonable and consistently applied policies and procedures.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 24 (September 1, 2016)

(July 12, 2017)

3.5.1 If a dealer corrects the price to a customer or determines that, at the time the dealer systematically entered the information into its systems to generate the mark-up disclosure, the PMP was inaccurate, must the dealer send a corrected confirmation that reflects a corrected mark-up disclosure and price?

Yes. Consistent with Question 3.5, dealers are not required to cancel and correct a confirmation to revise a disclosed mark-up solely based on the occurrence of a subsequent transaction or event that would otherwise be relevant to PMP determination under Rule G-30. However, if the dealer corrects the price to the customer or determines that a PMP was inaccurate at the time it was systematically entered into the dealer’s confirmation generation system, the dealer must send a confirmation that reflects an accurate mark-up and price.

(March 19, 2018)

3.6  May dealers engage third-party vendors to perform some or all of the steps required to fulfill the mark-up disclosure requirements?

Yes. Dealers may engage third-party service providers to facilitate mark-up disclosure consistent with Rules G-15 and G-30. For example, dealers that wish to perform most of the steps of the waterfall internally may choose to use the services of a vendor at the economic models level of the waterfall. Other dealers may wish to use the services of a vendor to perform most or all of the steps of the waterfall. In either case, the dealers retain the responsibility for ensuring the PMP is determined in accordance with Rule G-30 and that the mark-up is disclosed in compliance with Rule G-15 and must exercise due diligence and oversight over their third-party relationships.

As a policy matter, the MSRB does not endorse or approve the use of any specific vendors.

MSRB Response to Comments on SR-MSRB-2016-12, at 8 (November 14, 2016)

(July 12, 2017)

3.7  May dealers use a third-party evaluated pricing service as an economic model at the final step of the waterfall?

Yes. However, before doing so, the dealer should have a reasonable basis for believing the third-party pricing service’s pricing methodologies produce evaluated prices that reflect actual prevailing market prices. A dealer would not have a reasonable basis for such a belief, for example, where a periodic review of the evaluated prices provided by the pricing service frequently (over the course of multiple trades) reveals a substantial difference between the evaluated prices and the prices at which actual transactions in the relevant securities occurred. In choosing to use evaluated prices from any pricing service, a dealer should assess, among other things, the quality of the evaluated prices provided by the service and the extent to which the service determines its evaluated prices on an intra-day basis.

To be clear, dealers are not required to use such pricing services at this stage of the waterfall analysis. Rather, third-party evaluated pricing services are only one type of economic model. Other types of economic models may include internally developed models such as a discounted cash flow model or a reasonable and consistent methodology to be used in connection with an applicable index or benchmark. Dealers are reminded that when using an internally developed model, the dealer must be able to provide information that the dealer used on the day of the transaction to develop the pricing information (i.e., the data that was input and the data that the model generated and the dealer used to arrive at the PMP).

MSRB Response to Comments on SR-MSRB-2016-12, at 8 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

3.8  May dealers use or rely on automated systems to determine PMP?

Yes. While dealers are not required to automate the PMP determination and mark-up disclosure, they may choose to do so, provided they (and/or their vendors) do so consistent with Rule G-30 and Rule G-15, and all other applicable rules. The MSRB has provided guidance in several areas during the rulemaking process to facilitate automation for firms that choose to employ it. First, as noted above in Question 3.4, dealers are permitted on certain conditions to determine PMP on an intra-day basis (e.g., at the time of trade), allowing dealers that generate confirmations intra-day to continue to do so. Second, as noted in Question 3.1 and discussed throughout this guidance, the MSRB has acknowledged that dealers may develop policies and procedures that rely on reasonable, objective criteria to apply the PMP guidance in Supplementary Material .06 at a systematic level. Consistent with the reasonable policies and procedures approach, the MSRB further recognized during the rulemaking process that reasonable policies and procedures could result in different firms making different PMP determinations for the same security. (The MSRB would expect, however, that the consistent application of policies and procedures within a dealer would result in different traders or desks arriving at PMP determinations that are substantially the same under comparable facts and circumstances.)

MSRB Response to Comments on SR-MSRB-2016-12, at 7-8 (November 14, 2016)

(July 12, 2017)

3.8.1 May dealers adopt a reasonable exception review process to evaluate PMP determinations?

Yes. As a general matter, the MSRB expects that dealers will employ supervisory review processes that consider, among other things, the reliability of their (or their vendors’) PMP determinations. To review reliability, a dealer might review PMP determinations that result in mark-ups that exceed pre-determined thresholds, and it also might compare PMP determinations with some other measure of market value to ascertain whether the PMP determinations fall outside pre-established ranges.

In cases where a dealer reviews PMP determinations before the associated trade confirmations are sent, dealers may correct PMP determinations to promote more accurate mark-up calculations, provided they do so according to reasonable and consistently applied policies and procedures. As a general matter, however, the MSRB expects that it will be rare for a dealer to correct the PMP of a security based on exception reporting, and documentation in such situations will be paramount. To prevent “cherry picking,” the dealer’s policies and procedures should be specific in describing the PMP review process and the conditions under which the dealer may show that a PMP was erroneous (e.g., the PMP determination was based on an isolated transaction, or a PMP determined through the use of an economic model did not reflect recent news about the security). If a dealer determines that a PMP is erroneous, it must correct it consistent with Rule G-30, and it must do so using the information reasonably available to it at the time it makes the correction.

There may also be cases where a dealer’s exception review process results in corrected customer trade prices. For example, a dealer may review a trade where the mark-up exceeded a pre-determined threshold and the PMP was determined correctly. Dealers may refer to Question 3.5.1 in these cases.

(March 19, 2018)

3.9  May dealers develop objective criteria to automatically determine whether a trade is “contemporaneous” for purposes of establishing a presumptive PMP at the first step of the waterfall analysis?

Yes. Dealers may establish an objective set of criteria to determine whether a trade is contemporaneous, provided the objective criteria are established based on the exercise of reasonable diligence. For example, dealers could define an objective period of time as a default proxy for determining whether the trade is contemporaneous. Dealers could also define criteria to consider other relevant factors, such as whether intervening trades by other firms occurred at prices sufficiently different than the dealer’s trade to suggest that the dealer’s trade no longer reasonably reflects the current market price for the security, or whether changes in interest rates or the credit quality of the security, or news reports were significant enough to reasonably change the PMP of the security.

Given the different trading characteristics of different municipal securities, and relevant court and SEC case law applicable to debt securities in general, it likely would not be reasonable for a dealer’s policies and procedures to determine categorically that all transactions that occur outside of a specified time frame are not “contemporaneous.” Accordingly, dealers should include in their policies and procedures an opportunity to review and override the automatic application of default proxies (e.g., by reconsidering the application for transactions identified through reasonable exception reporting and specifying designated time intervals (or market events) after which such proxies will be reviewed).

(July 12, 2017)

3.10  Since Rule G-15 adopts a same-day trigger standard for mark-up disclosure, would it be reasonable to assume a same-day standard for determining whether trades are contemporaneous for purposes of determining PMP under Rule G-30?

The MSRB notes that the determination of whether mark-up disclosure is required under Rule G-15 is distinct from the determination of whether a transaction is contemporaneous under the waterfall analysis. The PMP guidance under Rule G-30 provides that a dealer’s cost is considered contemporaneous if the transaction occurs close enough in time to the subject transaction that it would reasonably be expected to reflect the current market price for the municipal security. While same-day transactions may often be contemporaneous according to this meaning, the MSRB has not set forth a specific time-period that is categorically contemporaneous. As noted above in Question 3.9, the MSRB would expect that dealers developing objective criteria for this purpose would base the determination of such criteria on the exercise of reasonable diligence.

(July 12, 2017)

3.11  How should dealers determine their contemporaneous cost if they have multiple contemporaneous purchases?

Dealers may rely on reasonable and consistently applied policies and procedures that employ methodologies to establish PMP where they have multiple contemporaneous principal trades. For example, a dealer could employ consistently an average weighted price or a last price methodology. Such methodologies could further account for the type of principal trade, giving greater weight to principal trades with other dealers than to principal trades with customers.

MSRB Response to Comments on SR-MSRB-2016-12, at 12-13 (November 14, 2016)

(July 12, 2017)

3.12  What is the next step in the analysis, when determining contemporaneous cost or proceeds, if a dealer has no contemporaneous transactions with another dealer?

Where the dealer has no contemporaneous cost or proceeds, as applicable, from an inter-dealer transaction, the dealer must then consider whether it has contemporaneous cost or proceeds, as applicable, from a customer transaction. Note that, because the dealer’s contemporaneous cost or proceeds from a customer transaction will also include the mark-up or mark-down charged in that transaction, the dealer should adjust its contemporaneous cost or proceeds from that customer transaction to account for the mark-up or mark-down included in the price. In these instances, the difference between the dealer’s “adjusted contemporaneous cost or proceeds” (the dealer’s contemporaneous cost or proceeds in the customer transaction, adjusted by the mark-up or mark-down) and the price to its customer is equal to the mark-up (or mark-down) to be disclosed on customer confirmations under Rule G-15. The MSRB has noted that this approach allows the dealer to avoid “double counting” in the mark-up and mark-down it discloses to each customer. For example, if a dealer buys 100 bonds from Customer A at a price of 98 and immediately sells 100 of the same bonds to Customer B at a price of 100, the dealer may apportion the mark-up and mark-down paid by each customer. Assuming for illustration that the dealer determines the PMP in accordance with the waterfall guidance to be 99, then the dealer would disclose to Customer A a total dollar amount mark-down of $1,000, also expressed as 1.01% of PMP, and it would disclose to Customer B a total dollar amount mark-up of $1,000, also expressed as 1.01% of PMP.[3]

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 21 (September 1, 2016)

(July 12, 2017)

(Updated March 19, 2018)

3.12.1  May dealers adopt a reasonable default proxy or process to apportion the mark-up and mark-down on contemporaneous customer buy and sell transactions, as contemplated in Question 3.12? 
Yes. As explained in Question 3.12, the purpose of adjusting a dealer’s contemporaneous cost or proceeds in the case of contemporaneous customer buy and sell transactions is to arrive at a more accurate indication of the PMP of the securities, for example, by avoiding “double counting” in the mark-up and mark-down disclosed. Consistent with this goal, as an alternative to the process described in Question 3.12, dealers may adopt a reasonable default proxy or process to apportion the amount of the total mark-up and mark-down charged on contemporaneous customer transactions. Such proxy or process should be based upon and not inconsistent with a reasonable review of the typical mark-ups and mark-downs actually charged in the dealer’s municipal securities transactions. For example, assume that, based upon a review of the actual mark-ups and mark-downs charged on a dealer’s municipal securities transactions, a dealer determines that its mark-ups on municipal securities transactions are typically larger than its mark-downs by a quantifiable amount. The dealer may use such information to develop a consistently applied apportionment methodology—for example, by consistently apportioning x% of the total mark-up and mark-down to the customer buy transaction and y% of the total mark-up and mark-down to the sale transaction. If such a default proxy or process is adopted, a dealer should be mindful to review its continued appropriateness over time in a manner that is consistent with the dealer’s ongoing supervisory and compliance obligations.

(June 10, 2020)

3.13  May dealers adjust their contemporaneous cost to reflect what they believe to be a more accurate PMP, or their role taking risk to provide liquidity?

Dealers may adjust their contemporaneous cost only in one case: where a dealer’s offsetting trades that trigger disclosure under Rule G-15 are both customer transactions (discussed above at Question 3.12). Other adjustments to reflect the size or side of market for a dealer’s contemporaneous cost are not permitted.

(July 12, 2017)

3.14  May dealers apportion their expected aggregate monthly fees—for example to access an alternative trading system (ATS) or other trading platform—to individual contemporaneous transactions to be included in their contemporaneous costs?

No. For any given mark-up on a transaction, Supplementary Material .06 requires dealers to look first to their contemporaneous cost as incurred. The MSRB does not believe it would be consistent with Rule G-30 for dealers to consider an estimated apportionment of a future charge to be part of the specific cost they incurred in a contemporaneous transaction.

(July 12, 2017)

3.15  In determining contemporaneous cost, may dealers include transaction fees—for example to access an ATS or other trading platform—that were included in the price they paid?

Yes, provided the transaction fee is reflected in the price of the contemporaneous trade that is reported to EMMA, consistent with MSRB rules and guidance on pricing, trade reporting and fees. The MSRB will monitor and adjust this guidance as needed if it determines that pricing practices change in a way that diminishes the utility and reliability of mark-up disclosure.

(July 12, 2017)

3.16  May a dealer treat its own contemporaneous transaction as “isolated” and therefore disregard it when determining PMP?

No. Under Supplementary Material .06, isolated transactions or isolated quotations generally will have little or no weight or relevance in establishing PMP. The guidance also specifically provides that, in the municipal market, an “off-market” transaction may qualify as an isolated transaction. Through cross-references, Supplementary Material .06 makes clear that a dealer may deem a transaction or quotation at the hierarchy of pricing factors or similar-securities level of the waterfall to be isolated. However, the concept of “isolated” transactions or quotations does not apply to a dealer’s contemporaneous cost, which presumptively determines PMP.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 19; 21 (September 1, 2016)

(July 12, 2017)

3.17  Supplementary Material .06 notes that changes in interest rates may allow a dealer to overcome the presumption that its own contemporaneous cost is the best measure of PMP. Does this refer only to formal policy interest rate changes, or does it also contemplate market changes in interest rates?

It refers to any change in interest rates, whether the change is caused by formal policy decisions or market events. However, Supplementary Material .06 notes that a dealer may overcome the presumption that its contemporaneous cost is the best measure of PMP based on a change in interest rates only in instances where they have changed after the dealer’s transaction to a degree that such change would reasonably cause a change in municipal securities pricing.

(July 12, 2017)

3.18  Supplementary Material .06 notes that changes in the credit quality of the municipal security may allow a dealer to overcome the presumption that its own contemporaneous cost is the best measure of PMP. Does this refer only to formal credit rating changes, or does it also contemplate market changes in implied or observed credit spreads such as those due to market-wide credit spread volatility or anticipated changes in the credit quality of the individual issuer?

It refers to any changes to credit quality, with respect to that particular security or the particular issuer of that security, whether the change is caused by a formal ratings announcement or market events. Thus, for example, this could include changes in the guarantee or collateral supporting repayment as well as significant recent information concerning the issuer that is not yet incorporated in credit ratings (e.g., changes to ratings outlooks). However, Supplementary Material .06 notes that a dealer may overcome the presumption that its contemporaneous cost is the best measure of PMP based on a change in credit quality only in instances where it has changed significantly after the dealer’s transaction.

(July 12, 2017)

3.18.1 When considering inter-dealer trades at the hierarchy of pricing factors level of the waterfall analysis, if the only contemporaneous inter-dealer trades in the security are executed at the same time and involve a broker’s broker or an ATS, may a dealer choose to determine PMP by reference to the inter-dealer trade price which is reasonably likely to be on the opposite side of the market from the dealer seeking to determine PMP?

Yes. Consistent with the standard of reasonable diligence, dealers may adopt a reasonable approach to consistently choosing between or referring to multiple contemporaneous inter-dealer trades. If the only contemporaneous inter-dealer trades in the security are executed at the same time and involve a broker’s broker or an ATS in the security, it may be reasonable for the dealer seeking to determine PMP to do so by reference to the trade price which is reasonably likely to be on the opposite side of the market from the dealer seeking to determine PMP.

For example, assume that Dealer XYZ is selling a municipal security to a retail customer. Also, assume that the dealer lacks contemporaneous cost and that there are only two contemporaneous inter-dealer transactions in the security, and that both of those transactions occur at the exact same time and in the exact same trade amount. Additionally, both inter-dealer transactions are identified by an ATS special condition indicator on EMMA. One transaction is executed at a price of 113.618 and the other is executed at a price of 113.868. Assume further that the difference between these two ATS transaction prices is in the customary and typical range of the fee an ATS would charge for its services. In this case, it may be reasonable for Dealer XYZ to conclude that the transaction at 113.618 reflects a sale from a dealer to an ATS taking a principal position in the security, and that the transaction at 113.868 reflects a sale from that ATS to another dealer. Under these circumstances, Dealer XYZ may reasonably determine the PMP by reference to the transaction at 113.868, because the counterparty to the ATS in that transaction was purchasing the security and thus on the opposite side of the market from the side of Dealer XYZ in its customer trade.

(March 19, 2018)

3.19 May dealers adopt a reasonable default proxy where the waterfall guidance refers to trades between dealers and institutional accounts with which any dealer regularly effects transactions in the same security, if such information cannot be ascertained through reasonable diligence?

Yes. Consistent with the Rule G-30 standard of “reasonable diligence” in establishing the PMP of a municipal security, dealers reasonably may use objective criteria as a proxy for the elements of these steps of the waterfall that they cannot reasonably ascertain, such as whether a customer transaction involves an institutional customer and whether that institutional customer regularly trades in the same security with any dealer. A reasonable approach might assume that transactions at or above a $1,000,000 par amount involve institutional customers, since that size transaction is conventionally considered to be an institutional-sized transaction. In addition, because institutional investors transacting at or above this size threshold are typically sophisticated investors, the same size proxy might be used to assume that the institutional customer regularly transacts with a dealer in the same security.

(July 12, 2017)

3.19.1 May a dealer reasonably determine that new issue trade prices executed at list offering/takedown prices are not reflective of the PMP at the time of their execution?

Yes. Because new issues may be priced days before the transactions are executed and reported to RTRS, a dealer may, but is not required to, determine that new issue trades executed at list offering or takedown prices are not reflective of the PMP at the time of their execution. These transactions generally are denoted by a list offering price/takedown indicator on EMMA and in the MSRB Transaction Subscription Service. Market participants may also determine the list offering price by viewing the security’s home page (i.e., the Security Details page) on EMMA.

(March 19, 2018)

3.20  Can an “all-to-all” platform (i.e., one that allows non-dealers to participate) qualify as an inter-dealer mechanism at the step of the waterfall that refers to bids and offers for actively traded securities?

Yes, provided that the dealer determines that the prices available on an “all-to-all” platform are generally consistent with inter-dealer prices. Dealers should include in their policies and procedures how they will periodically review a platform’s activity to make such a determination.

(July 12, 2017)

3.21  When considering bid and offer quotations from an inter-dealer mechanism, how many inter-dealer mechanisms must a dealer check before considering the next category of factors under the waterfall analysis?

The obligation to determine PMP requires a dealer to use reasonable diligence. It does not require a dealer to seek out and consider every potentially relevant data point available in the market. With respect to this factor in the waterfall analysis, a dealer must only seek out and consider enough information to reasonably determine that there is no probative information to determine PMP before proceeding to the next category of factors.

(July 12, 2017)

3.22  In considering bids and offers for actively traded securities made through an inter-dealer mechanism, how can a dealer determine that transactions generally occur at the displayed quotations on the inter-dealer mechanism?

Consistent with the Rule G-30 standard of reasonable diligence and a reasonable policies and procedures approach, a dealer could request and assess from the platform relevant statistics and relevant information reasonably sufficient to conclude that the inter-dealer mechanism meets the applicable requirements under Supplementary Material .06. A dealer could then periodically request and assess updated statistics and relevant information to confirm that the inter-dealer mechanism continues to satisfy the requirements.

(July 12, 2017)

3.23  At the similar securities stage of the waterfall analysis, how can a dealer determine on a systematic basis that an inter-dealer quotation is “validated”?

Consistent with the standard of reasonable diligence and a reasonable and consistently applied policies and procedures approach to the PMP determination, for example, a dealer could determine that a bid (offer) quotation is validated if it is quoted on an “inter-dealer mechanism” (including the all-to-all platforms that qualify, as discussed above). With respect to a dealer’s own bids or offers, dealers are reminded of their existing regulatory obligations under applicable MSRB rules regarding bona fide bids or offers and the requirement that any published quotations must be based on the dealer’s best judgment of the fair market value of the securities. See, e.g., Rule G-13 and MSRB Notice to Dealers That Use the Services of Broker’s Brokers (December 22, 2012). Dealers are also reminded that under Rule G-30, Supplementary Material .06, isolated transactions or isolated quotations (including those that are off-market) generally will have little or no weight or relevance in establishing the PMP of a security.

Due to the lack of bid (offer) quotations for many municipal securities, under the waterfall analysis, dealers in the municipal securities market may not often find information from contemporaneous bid (offer) quotations in the municipal securities market.

(July 12, 2017)

(Updated March 19, 2018)

3.24  May a dealer use the same process it uses to identify a “similar” security for best-execution purposes to identify “similar” securities for PMP purposes?

Yes. Assuming the dealer’s process for identifying “similar” securities for Rule G-18 best-execution purposes is reasonable and in compliance with Rule G-18, a dealer may rely on the same process in connection with identifying similar securities under Rule G-30, Supplementary Material .06.

Alternatively, due to the different purposes of the “similar” security analysis for best-execution purposes as compared to PMP determination purposes, dealers reasonably may adopt a more restrictive approach to identifying “similar” securities for Rule G-30 than they may for Rule G-18. While the relevant part of the best-execution analysis under Rule G-18 seeks to identify the best market to address a customer’s order or inquiry by reference to another security, the relevant part of the waterfall analysis seeks to identify the PMP of one security by reference to another security. Further, Rule G-30 Supplementary Material .06 provides that, in order to qualify as a “similar” security, at a minimum, the municipal security should be sufficiently similar that a market yield for the subject security can be fairly estimated from the yield of the “similar” security. Due to the large number and diversity of municipal securities, the MSRB is of the view that, generally, if the prices or yields of a security would require an adjustment in order to account for differences between the security and the subject security, it would be reasonable for a dealer to determine that that security is not sufficiently “similar” to the subject security for purposes of Supplementary Material .06. To be clear, dealers have the flexibility to determine that a security that requires an immaterial adjustment in order to account for differences is sufficiently “similar” for these purposes, but they are not required to do so. This approach also is consistent with the MSRB’s view that, in order for a security to qualify as sufficiently “similar,” the security must be at least highly similar to the subject security with respect to nearly all the “similar” security factors listed in Rule G-30 Supplementary Material .06(b)(ii) that are relevant to the subject security.

Whichever approach a dealer chooses to apply, the dealer must apply that approach consistently across all municipal securities.

Due to the lack of active trading in many municipal securities and the above discussion regarding the identification of “similar” securities in the municipal securities market, under the waterfall analysis, dealers in the municipal securities market may not often find information from sufficiently similar securities as compared to dealers in other fixed income markets.

Because of the unique characteristics of the municipal securities market, the MSRB response to this question may differ from the FINRA interpretation under FINRA Rule 2121.

(July 12, 2017)

3.24.1 How many “similar” securities must a dealer consider at the “similar” securities stage of the waterfall analysis?

The obligation to determine PMP requires a dealer to use reasonable diligence. It does not require a dealer to seek out and consider every potentially relevant data point available in the market. At this point in the waterfall analysis, a dealer must only seek out and consider enough information to reasonably determine that it has identified the prevailing market price of the security (or that there is no probative information to determine PMP before proceeding to the next level). A dealer’s policies and procedures should explain the process for identifying similar securities (and, if relevant, how the dealer may adjust the prices or yields of identified similar securities). Because the reasonable diligence standard is often guided by industry norms, dealers should periodically revisit their policies and procedures to ensure that their established processes continue to remain reasonable.

Due to the unique characteristics of the municipal securities market, including the large number of issuers and the bespoke nature of many municipal securities, it is unlikely that the dealer will identify a substantial number of “similar” securities for many municipal securities. For example, it would be reasonable for a dealer to determine that a comparison security is not sufficiently “similar” to the subject security for purposes of Supplementary Material .06 if the prices or yields of the comparison security would require an adjustment in order to account for differences between that security and the subject security.

(March 19, 2018)

3.25  How is the “relative weight” provision in paragraphs (a)(v) (regarding the hierarchy of pricing factors) and (a)(vi) (regarding similar securities) of Supplementary Material .06 meant to be used in operation?

This provision is meant to be used when there is more than one comparison transaction or quotation within the categories specified in the hierarchy of pricing factors and when there is more than one comparison transaction or quotation within the similar securities level of the waterfall analysis. In these cases, a dealer may consider the facts and circumstances of the comparison transactions or quotations to determine the weight or degree of influence to attribute to a particular transaction or quotation. For example, a dealer might give greater weight to more recent (timely) comparison transactions or quotations. Similarly, to the extent a dealer considers comparison transactions or quotations in which the dealer is on the same side of the market as the dealer in the subject transaction (if known from dealer customer trade reports),[4] a dealer might give relatively less weight or influence to such information in determining PMP than information from transactions or quotations in which the dealer was on the opposite side of the market from the dealer in the subject transaction.

Consistent with the standard of reasonable diligence and a reasonable policies and procedures approach to the PMP determination, a dealer may adopt a reasonable methodology that it will consistently apply when considering the facts and circumstances of comparison transactions or quotations and assigning relative weight to such transactions or quotations. For example, a dealer might employ an average weighted price methodology (if all relevant trade sizes are publicly available) or last price methodology, provided its policies and procedures called for the reasonable and consistent use of the methodology and did not ignore potentially relevant facts and circumstances, such as side of the market.

Due to the unique characteristics of the municipal securities market, the MSRB response to this question may differ from the FINRA interpretation under FINRA Rule 2121.

(July 12, 2017)

(Updated March 19, 2018)

3.26  When dealers consider the hierarchy of pricing factors under Supplementary Material .06(a)(v), or similar securities factors under paragraph (a)(vi), may they consider the size of comparison transactions to determine their relative weight?

Yes. Paragraphs (a)(v) and (a)(vi) include a non-exhaustive list of facts and circumstances that may impact the “relative weight” of comparison transactions or quotations that may be considered at that point in the waterfall analysis. The MSRB believes it would be reasonable to consider the size of a comparison transaction when considering its relative weight.

(July 12, 2017)

3.27  What is an “applicable index” as that term is used at the “similar securities” level of Supplementary Material .06?

Supplementary Material .06 lists a number of non-exclusive factors that a dealer can look to in determining whether a security is sufficiently “similar” to the subject security. One of these factors is how comparably they trade over an applicable index or U.S. Treasury securities of a similar duration. The inclusion of the more general term “applicable index,” is intended to give dealers flexibility to consider, for example, commonly used municipal market bond indices, yield curves and benchmarks as these may be more relevant than data on Treasury securities (especially for tax-exempt bonds).

Amendment No. 1 to SR-MSRB-2016-12, at 5 (November 14, 2016)

(July 12, 2017)

3.28  Must dealers keep their PMP determination for each trade in their books and records?

The MSRB believes that dealers should keep records to demonstrate their compliance with Rule G-30, particularly where they have the evidentiary burden to demonstrate why a contemporaneous transaction was not the best measure of PMP for a given trade. The MSRB further notes that it would expect PMP documentation to be an important component of a firm’s system to supervise compliance with Rules G-15 and G-30.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 20 n. 39 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 8 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

3.29  Is there a difference between the PMP that is determined for mark-up disclosure purposes under Rule G-15 and for fair pricing purposes under Rule G-30?

As noted during the rulemaking process, the MSRB recognizes that by allowing dealers to determine PMP for mark-up disclosure purposes at the time of entry of information into systems for confirmation generation, a mark-up disclosed on a confirmation may not reflect subsequent trades that could be considered “contemporaneous” under Supplementary Material .06. However, the MSRB does not believe it is necessary to make a formal distinction between a PMP determined for disclosure purposes and a PMP determined for other regulatory purposes. Still, in connection with any post-transaction fair pricing review process, dealers should not disregard any new information relevant under Supplementary Material .06 that occurs after the mark-up determination (e.g., contemporaneous proceeds obtained after the customer transaction).

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 14; 25; 28 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 10 (November 14, 2016)

(July 12, 2017)

Section 4:  Time of Execution and Security-Specific URL Disclosures

4.1  When must dealers disclose the time of execution on a customer confirmation?

Under Rule G-15, dealers must disclose the time of execution for all transactions, including principal and agency transactions. However, for transactions in municipal fund securities and transactions for an institutional account, as defined in Rule G-8(a)(xi), in lieu of disclosing the time of execution, dealers may instead include on the confirmation a statement that the time of execution will be furnished upon written request of the customer. This time-of-execution disclosure requirement is not limited to circumstances where mark-up disclosure is triggered; therefore, it is required even where mark-up disclosure is not.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 13-14 (September 1, 2016); Amendment No. 1 to SR-MSRB-2016-12, at 4-5 (November 14, 2016)

(July 12, 2017)

4.2  How should the time of execution be disclosed?

Dealers have an obligation under Rule G-14, on reports of sales or purchases of municipal securities, to report the “time of trade” to the MSRB’s Real-Time Transaction Reporting System. In addition, dealers have an obligation under Rule G-8(a)(vii) to make and keep records of the time of execution of principal transactions in municipal securities. The time of execution for confirmation disclosure purposes is the same as the time of trade for Rule G-14 reporting purposes and the time of execution for purposes of Rule G-8(a)(vii), except that dealers should omit all seconds, without rounding to the minute, from the time-of-execution disclosure because the trade data displayed on EMMA does not include seconds.

Alternatively, if disclosure in this format is operationally challenging or burdensome for a dealer, a dealer may choose to disclose the seconds, again without rounding to the minute (e.g., a time of trade of 10:00:59 may be disclosed as 10:00:59 or 10:00). Additionally, because EMMA displays the time of trade in eastern standard time (EST), dealers may disclose on the customer confirmation the time of execution in either military time (as reported to RTRS under Rule G-14) or in traditional EST with an AM or PM indicator (e.g., a time of trade of 14:00:59 may be disclosed on a confirmation as 14:00:59, 14:00, 2:00:59 PM or 02:00 PM). The time-of-execution disclosure format used by a dealer should be consistent for all municipal securities transaction confirmations on which the disclosure is provided.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 14 n. 29 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 6 n. 11 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

4.3  When must dealers disclose a security-specific URL on a customer confirmation?

Under Rule G-15, dealers must disclose a security-specific URL, in a format specified by the MSRB as discussed below, for all non-institutional customer trades other than transactions in municipal fund securities, even where mark-up disclosure is not required. In the rare situations where there is no CUSIP assigned for a security that is subject to Rule G-15 at the time the dealer trades the security with a customer, the dealer is not required to include the security-specific URL on the customer confirmation.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 13-14; 27; 35 (September 1, 2016); Amendment No. 1 to SR-MSRB-2016-12, at 4 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

4.4  What is the security-specific URL that must be disclosed?

The template for the URL that must be disclosed under Rule G-15 is:  https://emma.msrb.org/cusip/[insert CUSIP number]. [5] The URL is currently live and operational. Paper confirmations must include this URL with the security-specific CUSIP in print form; electronic confirmations must include the security-specific URL as a hyperlink to the web page.

MSRB Response to Comments on SR-MSRB-2016-12, at 6 (November 14, 2016)

FINRA has provided its own security-specific URL template in its guidance.

(July 12, 2017)

(Updated March 19, 2018)

4.5  Do dealers need to provide any other disclosure concerning the security-specific URL?

Yes. Dealers must include a brief description of the type of information that is available on the security-specific web page for the subject security, such as information about the prices of other transactions in the same security, the official statement and other disclosures for the security, ratings and other market data and educational material. To be clear, the disclosure does not need to describe with specificity all of the information available on the relevant web page. As described above, the description should be brief. Additionally, it only needs to describe enough information about the relevant web page that a reasonable investor would understand the type of information available on that page. For example, the following language would satisfy this obligation: “For more information about this security (including the official statement and trade and price history), visit [insert link]."[6]  Because this language is an example only, dealers may use other language to describe the content of the web page.

As a reminder, Rule G-15(a)(i)(E) requires all requirements to be clearly and specifically indicated on the front of the confirmation, subject to limited exceptions. Because the description of the type of information available on the security-specific web page is not listed as an exception, it must be on the front of the confirmation.

SR-MSRB-2016-12 Proposed Rule Change to MSRB Rules G-15 and G-30, at 13; 27 (September 1, 2016); MSRB Response to Comments on SR-MSRB-2016-12, at 6 n. 9 (November 14, 2016)

(July 12, 2017)

(Updated March 19, 2018)

4.6 Is disclosure of the time of execution or security-specific URL required for transactions that involve a dealer and a registered investment adviser?

No. Disclosure of the time of execution and security-specific URL is not required for transactions with an institutional customer. Under Rule G-15, a registered investment adviser is an institutional accountholder; accordingly, disclosure is not required for these transactions. This is the case even if the registered investment adviser with whom the dealer transacted later allocates all or a portion of the securities to a retail account or where the transaction is executed directly for a retail account if the investment adviser has discretion over the transaction. The MSRB notes that this answer is specific to the time-of-execution and security-specific URL disclosure requirements in Rule G-15; it is not intended to alter any other obligations.

(July 12, 2017)

[1] EMMA is a registered trademark of the MSRB.

[2] Prior to May 14, 2018, Supplementary Material .01(d) provides that dealer compensation on a principal transaction is considered to be a mark-up or mark-down that is computed from the inter-dealer market price prevailing at the time of the customer transaction. As of May 14, 2018, the reference to the prevailing “inter-dealer” price is amended to instead, as noted above, reference the “prevailing market price,” as described in Supplementary Material .06. Supplementary Material .06, which applies to customer transactions and not internal position movements, generally embodies the principle that the PMP of a security is generally the price at which dealers trade with one another. This underlying principle does not mean that dealers may avoid following the steps of the waterfall analysis in the specific order prescribed in Supplementary Material .06. However, it remains a useful principle that dealers may wish to consider in approaching certain unspecified aspects of the waterfall analysis. The MSRB’s responses to Questions 3.11, 3.12, 3.20 and 3.23, in part, are reflective of this underlying principle. Other answers, including those in response to Questions 3.9, 3.10, 3.21 and 3.25 are reflective of the MSRB’s longstanding “reasonable diligence” standard, discussed above.

[3] This example assumes that the dealer has identified that it has contemporaneous cost and proceeds at the time that it is determining the mark-up and mark-down to each customer. If this is not the case, however, because the dealer systematically inputs information into its systems for the generation of PMP at the time of trade, then there is a different result. For example, assume that the trade at 98 occurs at 10:00 AM, the trade at 100 occurs at 3:00 PM and these trades are contemporaneous. If the dealer systematically determines PMP at the time of trade, consistent with Question 3.4, at the time of the 10:00 AM trade, the dealer may simply proceed down the waterfall to determine the PMP for the security without the need to adjust that PMP. At the time of the 3:00 PM trade, however, the dealer should adjust its contemporaneous cost as described above to account for the mark-down included in the price.

[4] At the institutional transactions and quotations categories in the hierarchy of pricing factors level of the waterfall, generally, dealers consider information from only one side of the market, depending on whether the dealer is charging a mark-up or mark-down. However, pursuant to reasonable and consistently applied policies and procedures, a dealer may consider information from transactions in which the dealer is on the other side of the market when reasonable to do so. For example, this may be reasonable where the dealer has identified no comparison transactions in which the dealer is on the opposite side of the market as the dealer in the subject transaction. In this case, the dealer may reasonably adjust the transaction price by an amount to account for the price at which that transaction might have occurred had it been a transaction in which the dealer was on the opposite side of the market from the dealer in the subject transaction. Also for example, where the dealer has identified comparison transactions on both sides of the market, the dealer reasonably may perform a similar adjustment (i.e., adjust a price from a transaction in which the dealer is on the same side of the market as the dealer in the subject transaction by an amount to account for the price at which that transaction might have occurred had it been a transaction in which the dealer was on the opposite side of the market from the dealer in the subject transaction). A dealer’s ability to consider such information may be particularly important in the municipal market in which securities often trade infrequently and in which dealers may often have such limited information available to them at the time of their PMP determination.

[5] The MSRB previously announced the URL template as: http://emma.msrb.org/cusip/[insert CUSIP number]. Accordingly, confirmations for dealers that began to program their confirmations in accordance with the previously announced URL template may begin with the http format, rather than the https format. The MSRB does not expect such dealers to reprogram the URLs provided on customer confirmations as the http format will continue to function and will automatically redirect to the more secure https site.

[6] As a reminder, for dealers that currently seek to satisfy their obligation to provide a copy of the official statement to customers under Rule G-32(a)(iii) by notifying customers of the availability of the official statement through EMMA, the provision of the link described in this set of FAQs would satisfy both the relevant Rule G-15 security-specific URL obligation and the Rule G-32(a)(iii), provided that, for purposes of Rule G-32(a)(iii), the URL address also is accompanied by the additional information described. For example, if a dealer included the sample description included in this question, the addition of the language “Copies of the official statement are also available from [insert dealer name] upon request” would satisfy both the Rule G-15 security-specific URL obligation and Rule G-32(a)(iii) obligations. 

Background

In November 1998, the Municipal Securities Rulemaking Board (the “MSRB” or “Board”) published an interpretation about the use of electronic media to deliver and receive information by brokers, dealers and municipal securities dealers (collectively, “dealers”) under Board rules (the “1998 Interpretation”).[1] The 1998 Interpretation addresses how dealers may use electronic media to satisfy their delivery obligations under MSRB rules, including communications among dealers and between dealers and issuers. It states, “. . . a dealer that undertakes communications required under Board rules with other dealers and with issuers in a manner that conforms with the principles stated [in the 1998 Interpretation] relating to customer communications will have met its obligations with respect to such communications.”[2]

Discussion

The MSRB wishes to remind dealers of the 1998 Interpretation, particularly in light of the January 13, 2020 compliance date for certain amendments to MSRB Rule G-11, on primary offering practices.[3] Among other modifications, the amendments to Rule G-11 require senior syndicate managers to provide certain information to issuers regarding allocations and net designations.

The MSRB understands that dealers acting as senior syndicate managers may use external third-party electronic systems or proprietary electronic systems to manage aspects of the primary offering process, such as the tracking of orders, the automated communication of certain information to syndicate members, and other electronic data sharing features (“electronic bookrunning systems”). With respect to certain information required to be delivered to other dealers and issuers under Rule G-11, the Board believes that such information may be provided by electronic means so long as the standards established in the 1998 Interpretation with respect to electronic communications are met, including providing timely and adequate notice that such information may be accessed electronically. For example, with respect to Rule G-11(g)(ii), within two business days following the date of sale, a senior syndicate manager can inform an issuer that allocation information is available electronically (e.g., on an electronic bookrunning system that an issuer has access to) by pushing notice to the issuer (e.g., email). Additionally, consistent with the 1998 Interpretation, a dealer should provide a paper version of the allocation information should an issuer request or object to receiving the information electronically.

[1] See Exchange Act Release No. 40848 (Dec. 28, 1998), 64 FR 544 (Jan. 5, 1999) (File No. SR-MSRB-98-12); see also Notice Regarding Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers (Nov. 20, 1998).

[2] Id. 

[3] See MSRB Notice 2019-15 (June 28, 2019).

The MSRB has become aware of problems in transaction reporting as a result of dealers "bunching" certain inter-dealer transactions in the comparison system.  Recently, some dealers have reported the sum of two trades as one transaction in instances when two dealers effected two trades with each other in the same issue and at the same price.  When two transactions are effected, two transactions should be reflected in each dealer's books and records and two transactions are required to be reported to the MSRB.  The time of trade for each transaction also must accurately reflect the time at which a contractual commitment was formed for each quantity of securities.  For example, if Dealer A purchases $50,000 of a municipal issue at a price of par from Dealer B at 11:00 am and then purchases an additional $50,000 at par from Dealer B at 2:00 pm, two transactions are required to be reflected on each dealers' books and records and two transactions are required to be reported to the MSRB. 

Since the same inter-dealer trade record submitted for automated comparison under Rule G-12(f) also is used to satisfy the requirements of Rule G-14, on transaction reporting, each inter-dealer transaction should be submitted for automated comparison separately in order to comply with Rule G-14's requirement to report all transactions.  Failure to do so causes erroneous information concerning transaction size and time of trade to appear in the transparency reports published by the MSRB as well as in the audit trail used by regulators and enforcement agencies.  To the extent that dealers use the records generated by the comparison system for purposes of complying with MSRB Rule G-8, on recordkeeping, it may also create erroneous information as to the size of transactions effected or time of trade execution.

In recent months, the MSRB has received a number of questions relating to certain kinds of transactions in which independent investment advisors instruct selling dealers to make deliveries to other dealers.  This notice addresses questions that have been raised relating to Rule G-12(f)(i), on automated comparison, and Rule G-14, on transaction reporting.  It describes existing requirements that follow from the language of the rules and does not set forth any new policies or procedures.

An independent investment advisor purchasing securities from one dealer sometimes instructs that dealer to make delivery of the securities to other dealers where the investment advisor's clients have accounts.  The identities of individual account holders typically are not given.[1] The dealers receiving the deliveries in these cases generally are providing "wrap fee" or similar types of accounts that allow investors to use independent investment advisors to manage their municipal securities portfolios. In these kinds of arrangements, the investment advisor chosen by the account holder may be picked from a list of advisors approved by the dealer; however, dealers offering these accounts have indicated that the investment advisor acts independently in effecting transactions for the client's municipal securities portfolio.

The following example illustrates the situation. An Investment Advisor purchases a $1 million block of municipal bonds from the Selling Dealer and instructs the Selling Dealer to deliver $300,000 of the bonds to Dealer X and $700,000 to Dealer Y. The Investment Advisor does not give the Selling Dealer the individual client accounts at Dealer X and Dealer Y to which the bonds will be allocated and there is no contact between the Selling Dealer and Dealers X and Y at the time of trade. The Investment Advisor, however, later informs Dealer X and Dealer Y to expect the delivery from the Selling Dealer, and gives the identity and quantity of securities that will be delivered, the final monies, and the individual account allocations. For example, the Investment Advisor may instruct Dealer X to allocate its $300,000 delivery by placing $100,000 in John Doe's account and $200,000 in Mary Smith's account. 

With respect to transaction reporting requirements in this situation, the Selling Dealer should report a $1 million sale to a customer.  No other dealer should report a transaction.  The comparison system should not be used for the inter-dealer transfers between the Selling Dealer and Dealers X and Y because this would cause them to be reported as inter-dealer trades. 

Frequently Asked Questions

One frequently asked question in the context of the above example is whether the transfers of the $300,000 and $700,000 blocks by the Selling Dealer to Dealer X and Dealer Y should be reported as inter-dealer transactions.  Another question is whether these transfers may be accomplished by submitting them to the automated comparison system for inter-dealer transactions.  Based on the information that has been provided to the MSRB, these transfers do not appear to represent inter-dealer trades and thus should not be reported under Rule G-14 or compared under Rule G-12(f)(i) using the current central comparison system. 

One reason for the conclusion that no inter-dealer trade exists is that municipal securities professionals for firms in the roles of Dealer X and Y have stated that the Investment Advisor is acting independently and is not acting as their agent when effecting the trade with the Selling Dealer.  In support of this assertion, they note that they often are not informed of the transaction or the deliveries that they should expect until well after the trade has been effected by the Investment Advisor.  They also note that the actions of the Investment Advisor are not subject to their control or supervision.  Thus, the $300,000 and $700,000 inter-dealer transfers in the above example appear to be simply deliveries made in accordance with a contract made by, and the instructions given by, the Investment Advisor.  The inter-dealer transfers thus do not constitute inter-dealer transactions.

Because Rule G-14 transaction reporting of inter-dealer trades is accomplished through the central comparison system, any dealer submitting the $300,000 and $700,000 inter-dealer transfers to the comparison system is in effect reporting inter-dealer transactions that did not occur.  In addition, this practice tends to drive down comparison rates and the overall performance of dealers in the automated comparison system.  As noted above, the trading desks of Dealer X and Dealer Y generally do not know about the Investment Advisor's transaction at the time of trade.  They consequently cannot submit comparison information to the system unless the Investment Advisor provides them with the trade details in a timely, accurate and complete manner.  Since the Investment Advisor is acting independently and is not supervised by municipal securities professionals at Dealer X and Dealer Y, there is no means for the municipal securities professionals at Dealer X and Dealer Y to ensure that this happens.

Questions also have been received on whether the individual allocations to investor accounts (e.g., the $100,000 and $200,000 allocations to the accounts of John Doe and Mary Smith in the example above) should be reported under Rule G-14 as customer transactions.  Even though the dealer housing these accounts obviously has important obligations to the investor with respect to receiving deliveries, paying the Selling Dealer for the securities, and processing the allocations under the instructions of the Investment Advisor, it does not appear that the dealer entered into a purchase or sale contract with the investor and thus nothing is reportable under Rule G-14.  This conclusion again is based upon statements by dealers providing the "wrap fee" and similar accounts, who indicate that the investment advisor acts independently and not as the dealer's agent when it effects the original block transaction and when it makes allocation decisions. 

For purposes of price transparency, the only transaction to be reported in the above example is a single $1 million sale to a customer.  This is appropriate because the only market price to be reported is the one set between the Selling Dealer and the Investment Advisor for the $1 million block of securities.  It is appropriate that the $300,000 and $700,000 inter-dealer transfers, and the $100,000 or $200,000 investor allocations are not disseminated as transactions since they would have to be reported using the price for the $1 million block.  This could be misleading in that market for $1 million round lots are often different than market prices for smaller transaction sizes.

On April 29, 2003, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) a proposed rule change consisting of an interpretive notice on marketing by brokers, dealers and municipal securities dealers (“dealers”) of 529 college savings plans in the workplace.[1] The proposed interpretive notice provides guidance on the application of Rule G-8, on recordkeeping, Rule G-17, on fair dealing, Rule G-19, on suitability, Rule G-27, on supervision, and Rule G-32, on disclosure, in the context of workplace marketing programs relating to 529 college savings plans. The proposed interpretive notice will become effective upon approval by the SEC.

Draft Interpretive Guidance

On November 18, 2002, the MSRB published for comment draft interpretive guidance on marketing of 529 college savings plan employee payroll deduction programs.[2] The MSRB received six comment letters. After reviewing these comments, the MSRB approved the draft interpretive guidance, with certain modifications, for filing with the SEC. The MSRB modified the draft interpretive guidance to: (i) change the term “introducing broker” to “selling broker;” (ii) reflect the existence of other scenarios in which 529 college savings plans are marketed in the workplace; (iii) provide more guidance as to when dealers may rely on others to fulfill regulatory responsibilities; and (iv) clarify certain recordkeeping obligations. The text of the proposed interpretive notice filed with the SEC appears at the end of this notice.

Summary of Comments on Draft Interpretive Guidance

One commentator fully supported the draft interpretive notice, stating that it “clearly sets out the rationale for providing guidance in this area … [and] will make it possible for our Representatives to assist companies in offering 529 college savings plans to their employees.” Four other commentators generally supported the draft interpretive notice, although each requested that the MSRB further broaden and/or clarify the guidance in various respects.[3]

Three commentators requested that the MSRB substitute the term “selling broker” or “selling dealer” for the term “introducing broker” used in the draft interpretive notice. They stated that the term “introducing broker” is used with different meanings under the federal securities laws applicable to other types of securities and may cause some confusion. In addition, one of these commentators recommended that, for purposes of the interpretation, the term “selling broker” also encompass the primary distributor where it directly establishes the relationship with the employer. It stated, “In addition to recognizing that a selling broker rarely, if ever, has a suitability obligation in the context of a payroll deduction program, the Notice should clarify that a primary distributor who makes 529 Plan investments available through a third-party broker would not have a suitability obligation under Rule G-19, as it too makes no recommendation to an employee.” The MSRB has changed the term “introducing broker” to “selling broker” in the revised interpretive notice. Contrary to the statement that the interpretive notice recognizes “that a selling broker rarely, if ever, has a suitability obligation,” the notice does not assess the likelihood or frequency of recommendations being made by selling brokers. The notice does provide some guidance regarding the factors to consider when determining whether a recommendation has occurred. The MSRB believes that no further guidance in this area is necessary.

Four commentators noted that the scenario described in the draft interpretive notice is not the only form in which dealers may seek to market 529 college savings plans through employers. In addition to arrangements where selling brokers having a contractual relationship with the primary distributor to market through employers, with the employees making investments directly through the primary distributor (as described in the draft interpretive notice), these commentators noted that: (1) primary distributors may themselves market 529 college savings plans through employers; (2) selling brokers sometimes have contractual relationships with the issuer rather than the primary distributor; (3) selling brokers may handle employee investments and maintain long-term relationships with employees, rather than merely introducing employees to the primary distributor; (4) transfer agents may undertake significant responsibilities in connection with employees’ investments; and (5) employees may in some instances use a dealer other than the selling broker or primary distributor to make an investment that may still be considered part of the employer-sponsored program. These commentators requested that the MSRB address some or all of these additional scenarios. In addition, one of these commentators suggested that the MSRB make clear that the scenarios addressed in the draft interpretive notice are illustrative and that other models may be implemented.

The MSRB has made significant modifications to the initial paragraphs of the notice to reflect the existence of these other scenarios. No significant change in interpretation results from a primary distributor acting in the role of a selling broker. The identity of the selling broker’s counterparty on the selling agreement also does not significantly change its regulatory obligations. Selling brokers that make recommendations remain fully obligated under MSRB rules and remain ultimately responsible where the primary distributor has not affirmatively undertaken regulatory obligations on behalf of the selling broker (as discussed below). The guidance provided by the notice is primarily intended for dealers that are formally involved in a workplace marketing program; thus, the notice is of limited applicability to dealers that do not have a formal role in such a program.

A commentator observed that the draft interpretive notice referred to on-line enrollment with the primary distributor and noted that in many circumstances enrollment and investments continue to be handled by mail. Also, three commentators noted that other forms of payment, such as ACH (automated clearing house) bank transfers, may be used in addition to traditional employee payroll deductions. These commentators requested that the MSRB recognize these variants in its final notice. The revised interpretive notice now more clearly acknowledges these different processes.

Four commentators sought further clarification on the circumstances under which selling brokers may rely on other parties to meet their regulatory obligations. Two of these commentators stated that dealers should be able to rely on issuers to distribute official statements to customers. One noted its concern that customers may be confused by the receipt of redundant (and possibly out-dated) disclosure documents if dealers must deliver official statements regardless of whether the issuer has sent them to customers. Another suggested that the ability of the selling broker to rely on the primary distributor for delivery of the official statement as provided in the draft interpretive notice be extended to the ability to rely on other parties, such as other dealers, employers and issuers.

The revised interpretive notice permits a selling broker to conclusively rely on the primary distributor to meet its disclosure obligations and certain supervisory obligations (described below) only under the limited circumstances in which employee orders are not accepted without actual delivery of the official statement and the primary distributor has affirmatively agreed to undertake such regulatory obligations on behalf of the selling broker. In such circumstances, the primary distributor will be responsible for fulfilling such obligations. In all other circumstances, the notice clarifies that a selling broker may agree with another party to take certain actions on its behalf but that if such other party fails to take such actions, the selling broker remains responsible for fulfilling its regulatory obligation.

One commentator suggested that the MSRB should permit selling brokers to enter into arrangements with the primary distributor to meet their supervisory obligations to review and approve customer accounts and transactions based upon having procedures in place that provide assurances to the selling brokers that such review and approval is being undertaken by the primary distributor. Another commentator questioned the value of requiring a selling broker to review customer accounts and transactions well after the transaction is executed, especially if the transaction was not recommended. In addition, it questioned why a requirement for such review and related recordkeeping would be dependent upon whether the selling broker receives compensation for a transaction.

The revised interpretive notice clarifies that, where a selling broker does not make a recommendation and the primary distributor affirmatively agrees to take on both the disclosure responsibilities and the supervisory responsibilities with regard to opening of accounts and approval of transactions, the regulatory obligation may be shifted to the primary distributor. However, supervisory responsibility remains with the selling broker so long as the selling broker retains any affirmative duties to employees. The MSRB believes that the limited recordkeeping obligations imposed on all selling brokers in the notice are appropriate. The revised interpretive notice makes clear that the limited recordkeeping requirements that remain for subsequent transactions effected by the primary distributor where compensation is paid to the selling broker applies only when such compensation is transaction based since, depending on the facts and circumstances, this information may be necessary to determine compliance with MSRB’s fair pricing and fair commission requirements.

With respect to transfer agents, a commentator noted that many plans provide for applications and customer orders to be sent directly to a transfer agent, with the primary distributor’s activities “limited to managing the overall marketing of the program and the production of marketing and promotional materials.” It stated that “only the transfer agent maintains any investor records and these records are the plan’s investor records. Thus, in this model, the primary distributor’s regulatory responsibilities are limited primarily to compliance with applicable rules governing marketing materials but not those rules mandating customer account related procedures.” The commentator sought assurance that primary distributors did not retain residual customer protection obligations under MSRB rules in the scenario where applications and orders are submitted directly to the transfer agent.

The MSRB notes that transfer agents generally are viewed under the Exchange Act as working on behalf of the issuer but that, in the 529 college savings plan market, transfer agents also sometimes contractually agree to act on behalf of the primary distributor. In the revised interpretive notice, where transactions are effected through a transfer agent without the direct involvement of the primary distributor or the selling broker, the selling broker is permitted to conclusively rely on the primary distributor to fulfill certain of the selling broker’s regulatory obligations only if the transfer agent has contractually agreed to act on behalf of the primary distributor. Otherwise, the transfer agent is effectively treated as an agent of the issuer and the dealer that enlisted the corresponding employer to participate in the workplace marketing plan remains ultimately responsible for compliance with MSRB rules.

A commentator asked why a selling broker would have a fair dealing obligation under Rule G-17 to an employer since the employer is not the dealer’s client. It also sought guidance regarding the nature of information that a dealer would be obligated to provide to the employer under the Rule G-17 disclosure obligation. Two commentators also questioned the need for the selling broker to maintain a record of the name and address of an employer that the dealer solicited, as well as for principal review of such solicitation. Another commentator sought assurances that the fair dealing obligation toward the employer would not give rise to any inference that the issuer has any federal securities law obligation to employers under the scenario described in the draft interpretive notice.

The fair dealing requirement of Rule G-17 applies, on its face, to all persons, not just customers. The MSRB believes that it appropriately applies to the selling broker’s relationship with employers, particularly since the selling broker is inducing the employer to create a captive audience of investors and the employer’s agreement to participate in the program may lead employees to believe that the employer endorses investment under the program. Under these circumstances, it is important that selling brokers provide adequate information regarding the program to the employer so that it can make an informed decision with regard to enrollment in the program. The limited recordkeeping regarding the employer required by the notice is important in the context of documenting the ability of a selling broker to rely on the guidance provided in the notice with respect to particular transactions. The revised interpretive notice provides assurances that a dealer’s fair dealing obligation to the employer is not intended to imply that the issuer has a similar legal obligation to the employer.

* * * * *

 

---

 

[1] The Daily Report is available by subscription at no cost. Currently, "frequently traded" securities are those that traded two or more times during a trading day. As noted below, inter-dealer transactions must be compared on trade date to be eligible for this report.

[2] The MSRB also publishes a "Daily Comprehensive Report," providing details of all municipal securities transactions that were effected during the trading day one week earlier. The Daily Comprehensive Report is available by subscription for $2,000 per year. Along with trades in issues that are not "frequently traded," this report includes transactions reported to the MSRB late, inter-dealer trades compared after trade date, and transaction data corrected by dealers after trade date.

[3] A dealer may call the MSRB at (703) 797-6600 and ask to speak with a Transaction Reporting Assistant who can check to see if its firm is signed up for this free service.

[4] A complete description of the service is available at www.msrb.org in the Municipal Price Reporting / Transaction Reporting System section. NASD also has informed dealers of this service in "Municipal Transaction Reporting Compliance Information," Regulatory and Compliance Alert (Summer 2002).

[5] Under NSCC procedures, no buy-side trade report should be submitted for comparison against a syndicate "takedown" trade submitted by the syndicate manager. Syndicate transactions are "one-sided submissions" and compare automatically after being submitted by the syndicate manager. Paragraph (a) (ii) of Rule G-14 procedures thus requires that only the syndicate manager submit the trade.

[6] The EBS statistics reflect the aggregate number of such errors found in transaction data submitted by a particular NSCC member firm for itself and/or for its correspondents. This statistic cannot be generated individually for each correspondent because the EBS needed to identify the correspondent is itself missing or invalid. EBS statistics only measure the validity of the input the submitter provides to identify its own side of the trade and do not measure the accuracy with which a dealer uses EBSs to identify its contra-parties.

[7] In 1994, the MSRB stated that, "introducing brokers share the responsibility for complying with [Rule G-12(f)] with their clearing brokers. Introducing brokers who fail to submit transaction information in a timely and accurate manner could subject either or both parties to enforcement action for violating [Rule G-12(f)]." See "Enforcement Initiative," MSRB Reports, Vol. 14, No. 3 (June 1994) at 35. NASD has since reiterated this policy; see the following articles in Regulatory and Compliance Alert: "Introducing Firm Responsibility When Reporting Municipal Trades Through Service Bureaus and Clearing Firms" (Winter 2000) and "Municipal Securities Transaction Reporting Compliance Information" (Spring 2001).

[8] As explained above, one of the problems often associated with stamped advisories is that the EBS on transaction records may be missing or inaccurate. Since a clearing broker may have many correspondents, stamping an advisory can make it impossible for market regulators to know which correspondent actually effected the trade.

[9] Of course, if the initial information reported to the MSRB, such as total par value, is changed, the trade record must be amended to make it correct.