MSRB Proposes to Establish First Best-Execution Rule for Municipal Securities Transactions
On February 19, the Municipal Securities Rulemaking Board (MSRB) requested public comment on a proposal (Regulatory Notice to establish for the first time explicit requirements for municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors.
In response to the MSRB, SIFMA released the following statement from Randy Snook, executive vice president, business policies and practices, SIFMA, “SIFMA appreciates the proposal issued by the MSRB. We and our members share the MSRB’s goal of improving execution standards for dealers and promoting fair and reasonable pricing for investors. Developing a higher standard is in the best interest of investors and the municipal market, and is something SIFMA has been focused on for the past year. SIFMA appreciates the MSRB’s consideration of our ‘execution with diligence’ proposal. We also appreciate that the MSRB, in its proposal, noted that a failure to have actually obtained the most favorable price will not necessarily mean that the dealer failed to use reasonable diligence. We are reviewing the MSRB’s best-execution proposal, particularly with regard to the extent it reflects the unique characteristics of the municipal securities market as FINRA 5310 is, at its core, an equity market rule. SIFMA is committed to working with the MSRB on this issue and will provide more substantive comments after a full review with our members.”
Modeled on the Financial Industry Regulatory Authority’s (FINRA's) best-execution rule for the equity and corporate fixed income markets, the MSRB’s proposed rule requires municipal securities dealers to seek to obtain for their retail customer transactions the most favorable terms reasonably available under prevailing market conditions. Specifically, dealers are required to use “reasonable diligence” to identify potential trading venues for a particular security and then execute transactions in the best venue to provide the customer with a price as favorable as possible. Dealers would generally meet these obligations by establishing and periodically reviewing customer order-handling procedures.
In conjunction with the proposal, the MSRB is seeking comment on an exception from the new rule for transactions with sophisticated municipal market professionals. This proposed exception follows a similar approach to fair-pricing obligations under existing MSRB rules, on the grounds that imposing additional execution requirements on dealers in transactions with such well-informed and sophisticated investors may not be necessary.
Comments on the best-execution rule proposal should be submitted to the MSRB no later than March 21, 2014. The MSRB is hosting an educational webinar on the main aspects of the proposed rule on March 6, 2014 at 3:00 p.m. ET. Register for the webinar.
Detroit Debt Plan Announced
On February 21, Detroit filed a plan with the Bankruptcy Court to restructure its $18 billion debt which may lead to more litigation, if confirmed. The draft plan given to creditors this week by Emergency Manager Kevyn Orr offers different recovery rates for classes of unsecured creditors. The plan defines general obligation bonds as “unsecured,” and gives other similarly classed “unsecured” creditors preferential treatment, including unfunded pension and retiree healthcare liabilities.
"We have serious concerns about general obligation bonds being treated as unsecured debt," said SIFMA Leslie Norwood, associate general counsel and co-head of the municipal securities group in a Bond Buyer interview. "We think municipalities, investors, and taxpayers should care about this." Norwood said that reduced investor confidence in GO bonds could lead to a reduction in market access and higher borrowing costs for Detroit and other Michigan issuers, which will in turn lead to higher taxes on residents. "It will potentially have impacts not just on Detroit, but on other cities," Norwood said.
Bond Buyer Article | NPR: All Things Considered - Detroit Unrolls Its Bankruptcy Blueprint | SIFMA Letter MI Governor and Treasury on Detroit's Outstanding Munis (July 18, 2013)
MSRB Proposes Supervision Rule for Municipal Advisors
On February 25, the MSRB requested public comment on proposed supervisory and compliance obligations for municipal advisors when engaging in municipal advisory activities. The MSRB earlier this year requested comment on a proposal to establish core standards of conduct for municipal advisors. Future MSRB rule proposals for municipal advisors will include measures to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of municipal advisors acting as solicitors. The MSRB also is developing a comprehensive professional qualifications program, as well as appropriate fees to be charged to municipal advisors.
Comments on the draft supervision rule should be submitted to the MSRB no later than April 28, 2014. The MSRB is hosting an educational webinar on the main aspects of the proposed supervisory and compliance requirements on March 20, 2014 at 3:00 p.m. ET. Register for the webinar.
MSRB Request for Public Comment | MSRB Core Standards of Conduct for MA's | Register for MSRB Webinar
SIFMA Muni Credit Report Finds Issuance Declined in 2013
SIFMA’s Municipal Bond Credit Report found that long-term municipal issuance volume declined by 13.0% year-over-year ($315.2 billion in 2013 versus $362.2 billion in 2012), and was well below the current 10-year average ($381.5 billion). According to the 2014 SIFMA Municipal Issuance Survey, issuance is expected be $309.5 billion in 2014 (of which tax-exempt issuance is $265 billion, taxable issuance is $33.5 billion, and AMT issuance is $11 billion). Panelists once again expect general purpose bonds to lead issuance totals in 2014. The Report is a quarterly publication on the trends and statistics of U.S. municipal bond market, for both taxable and tax-exempt issuance. Additional data points and commentary cover refunding volumes, use of proceeds (education, water, sewer) and more.
View the full report.