MSRB Requests Comment on Time-of-Trade Disclosure Requirements for Dealers (Significant Rule Proposal with Lofchie Comment)

The MSRB released a regulatory notice seeking comment on a proposal to consolidate into a newly proposed rule (which would be titled "G-47: Time of Trade Disclosure") the existing requirements for dealers to disclose material information to customers in connection with the purchase or sale of a municipal security. These disclosure obligations are currently set forth in various interpretations to the MSRB's rule on fair dealing (Rule G-17). Under this guidance, dealers must disclose to their customers, at or prior to the time of trade, all material information about the transaction known by the dealer, as well as material information about the security which is reasonably accessible to the market.

Comments Due: March 12, 2013.

Lofchie Comment: The MSRB proposal describes the new rule solely as a consolidation of existing interpretations for the purpose of making the MSRB's requirements easier to follow. Nonetheless, I strongly recommend that firms engaged in the municipals business consider the proposed rule very carefully. By way of example of a requirement that is worth review, the new rule would require a municipal securities dealer to disclose to a customer, at or before the initiation of a trade, all information which is reasonably accessible to the market through "established industry sources." That term is, in turn, defined to mean "EMMA," rating agency reports, and other information relating to municipals that are in general use by municipal dealers. In short, the term is open-ended. This requirement would apply to both purchases and sales, and to transactions that were both solicited and unsolicited. Further, the disclosure requirement cannot be satisfied by the dealer's directing the customer to an established industry source. This requirement seems potentially ambiguous and expensive. Further, I wonder if it is really in customers' best interests. That is, if a retail customer wants to sell an existing municipal securities position in order to raise cash, (i) is it going to be worthwhile for a broker-dealer to do all of the necessary research before the broker-dealer can buy the securities and (ii) is the expense of doing the research going to take a good chunk out of what is offered to the customer (presuming that, ultimately, customers must bear the cost of gathering the information required to make this disclosure)?Leaving aside the municipals market, firms should review the proposal and consider whether it has implications for other markets and products.

See: MSRB Notice 2013-04.