Muniland’s regulator hard at work

July 26, 2013

I heard an economics editor give an amusing response the other day when asked if the U.S. has “free” markets. She responded that, since all markets are regulated, that, pretty much, yes. I had to chuckle because municipal bond markets, although regulated reasonably-well on the primary side when bonds are issued, have minimal supervision or regulation on the secondary or trading side after bonds have been issued. It’s difficult to have confidence that investors are always protected when you read stories about abuses like excessive mark-ups, for example.

Listening to a press call with the MSRB (the municipal market’s overseer), after its quarterly meeting on Friday, I felt a jolt of enthusiasm. The board has been spending a lot of effort untangling the thorny issues that must be addressed to bring more transparency into primary and secondary municipal bond markets. Here is the MSRB’s priority list (my comments in parentheses):

Trade Reporting Concept Release: To support the MSRB’s ongoing commitment to increasing transparency in the municipal market related to pricing of municipal securities, the Board agreed to publish the second concept release in a series of releases on the MSRB’s existing transaction reporting system. The new concept release will seek public comment on improving the quality and usefulness of available post-trade information and the appropriate standards for the collection and dissemination of pre-trade information on the MSRB’s Electronic Municipal Market Access (EMMA®) website. (I can’t wait to see the details)

Fair Pricing: The Board agreed to take a two-step approach to clarifying, and potentially expanding the fair pricing obligations of dealers. First, it agreed to consolidate into a new rule municipal securities dealers’ obligations related to fair pricing outlined in a number of existing rules and interpretations. The Board will seek public comment on condensing relevant requirements described in MSRB Rule G-30 on fair pricing, MSRB Rule G-18 on agency transactions and interpretations to MSRB Rule G-17 on fair dealing. (Consolidating rules would hopefully help market participants understand, follow and enforce fair pricing more easily)

The second part of fair pricing: Best Execution: The Board will seek public comment on a concept proposal relating to the application of ‘best execution’ concepts for transactions in municipal securities. (SIFMA, the dealers trade association, is already out of the box with its “execution-with-diligence” concept release and is urging the MSRB to use it as template for public comment. MSRB reps said that they did not discuss SIFMA’s release at the meeting. A quick read of SIFMAs proposal suggests that it would allow dealers to check with the dealers they always do business with for prices, rather than the broader market)

MSRB Registration Rule: The Board will issue a draft rule to combine registration requirements from existing MSRB rules into a single registration rule. (Administrative stuff)

Front Running: The Board had said that there might be a proposed new rule to address concerns relating to trading in municipal securities by persons in possession of material, non-public trade information. (The Board decided not to issue the rule and to instead continue to monitor the situation)

This is really dry stuff, but it could decide the shape of muniland for years. He who shapes the rules, owns the game. It’s critical that smaller dealers, investment advisers, securities attorneys, municipal advisors, public issuers and investors keep an eye on this process and make comments to the MSRB about these issues. Otherwise, it’s likely that the will of the big banks will prevail and muniland price discovery will remain in the dark.

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