MSRB Proposes to Establish First Best-Execution Rule for Municipal Securities Transactions
The MSRB requested public comment on a proposal to establish, for the first time, explicit requirements for municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors.According to the MSRB, if approved, the proposed "best-execution" standard would "provide benefits for investors, promote competition among dealers and enhance market efficiency."
The proposed rule, which was modeled after FINRA's best-execution rule for the equity and corporate fixed income markets, would require municipal securities dealers to seek to obtain for their retail customer transactions the most favorable terms reasonably available under prevailing market conditions. Specifically, dealers would be 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, the MSRB believes, generally would meet these obligations by establishing and periodically reviewing customer order-handling procedures.
The MSRB's proposal takes into consideration certain characteristics of the municipal securities market and, accordingly, provides guidance to dealers for situations in which there are fewer price quotations and less relevant pricing information available. In defining possible trading venues that dealers should consider, the proposed rule includes alternative trading systems or platforms, broker's brokers, and other counterparties. While reflecting current characteristics of the muni market, this definition of trading venues also allows dealer practices to change as the municipal market continues to evolve and new technologies are introduced.
In conjunction with the proposal, the MSRB is seeking comment on an exception to 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.
Comment are due by March 21, 2014.
See: MSRB Press Release; Request for Public Comment.See also: SIFMA Statement on MSRB Best-Execution Proposal. Related news: MSRB to Propose Rules on Best Execution and Muni Advisors (February 4, 2014); MSRB Requests Comment on Proposed "Best- Execution" Standard for Munis (August 6, 2013).Enforcement news regarding best-execution failures: SEC Sanctions and Settles Charges against an Investment Adviser for Best-Execution Failures in Selecting Mutual Fund Share Classes (October 10, 2013); FINRA Sanctions Firm for Best-Execution and Fair-Pricing Violations in Bond Markets (with Lofchie Comment) (August 22, 2013); SEC Sanctions Two Investment Advisers for Best-Execution Failures (with Lofchie Comment) (July 31, 2013); FINRA Fines Firm for System Deficiencies That Resulted in Customer Failures to Receive Best Execution (with Lofchie Comment) (April 16, 2013).