[Federal Register Volume 81, Number 177 (Tuesday, September 13, 2016)]
[Notices]
[Pages 62947-62963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78777; File No. SR-MSRB-2016-12]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change to MSRB Rules G-15 
and G-30 To Require Disclosure of Mark-Ups and Mark-Downs to Retail 
Customers on Certain Principal Transactions and To Provide Guidance on 
Prevailing Market Price

September 7, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on September 2, 2016 the Municipal 
Securities Rulemaking Board (the ``MSRB'' or ``Board'') filed with the 
Securities and Exchange Commission (the ``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the MSRB. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change to amend 
MSRB Rule G-15, on confirmation, clearance, settlement and other 
uniform practice requirements with respect to customer transactions, 
and MSRB Rule G-30, on prices and commissions, (the ``proposed rule 
change'') to require brokers, dealers and municipal securities dealers 
(collectively, ``dealers'') to disclose mark-ups and mark-downs to 
retail customers on certain principal transactions and to provide 
dealers guidance on prevailing market price for the purpose of 
calculating mark-ups and mark-downs and other Rule G-30 determinations.
    If the Commission approves the proposed rule change, the MSRB will 
announce the effective date of the proposed rule change no later than 
90 days following Commission approval. The effective date will be no 
later than 365 days following Commission approval.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2016-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Proposed Amendments to Rule G-15
    The MSRB is proposing to amend Rule G-15 to require dealers to 
provide additional pricing information on customer confirmations in 
connection with specified municipal securities transactions with retail 
customers. Specifically, if a dealer trades as principal with a retail 
(i.e., non-institutional) customer in a municipal security, the dealer 
must disclose the dealer's mark-up or mark-down (collectively, ``mark-
up,'' unless the context requires otherwise) from the prevailing market 
price for the security on the customer confirmation, if the dealer also 
executes one or more offsetting principal transaction(s) on the same 
trading day as the customer, on the same side of the market as the 
customer, in an aggregate size that meets or exceeds the size of the 
customer trade.
    Many dealers already are required to disclose additional pricing 
information to customers for certain types of transactions under 
certain circumstances. Pursuant to Exchange Act Rule 10b-10, dealers 
effecting equity transactions in which they act in a riskless principal 
capacity must disclose on the customer confirmation the difference 
between the price to the customer and the dealer's contemporaneous 
purchase or sale price.\3\ Pursuant to Rule G-15, dealers effecting 
municipal securities transactions in which they act in an agent 
capacity must disclose on the customer confirmation the amount of 
remuneration received from the customer in connection with the 
transaction (i.e., the commission).
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    \3\ See 17 CFR 240.10b-10. Under Rule 10b-10, where a broker or 
dealer is acting as principal for its own account and is not a 
market maker in an equity security, and receives a customer order in 
that equity security that it executes by means of a principal trade 
to offset the contemporaneous trade with the customer, the rule 
requires the broker or dealer to disclose the difference between the 
price to the customer and the dealer's contemporaneous purchase (for 
customer purchases) or sale price (for customer sales). See Rule 
10b-10(a)(2)(ii)(A). Where the broker or dealer acts as principal 
for any other transaction in a defined National Market System stock, 
or an equity security that is listed on a national securities 
exchange and is subject to last sale reporting, the rule requires 
the broker or dealer to report the reported trade price, the price 
to the customer in the transaction, and the difference, if any, 
between the reported trade price and the price to the customer. See 
Rule 10b-10(a)(2)(ii)(B).
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    The MSRB has conducted analyses of various data reported to its 
Electronic Municipal Market Access (EMMA[supreg]) system \4\ in order 
to evaluate the potential need for the proposed mark-up disclosure 
rule. Over the period from July 1, 2015 through September 30, 2015 (Q3 
2015),\5\ the average daily number of retail-size \6\ customer 
transactions in the secondary market for municipal securities in which 
the dealer acted in a principal capacity was 15,538. The transactions 
were mainly concentrated

[[Page 62948]]

among large firms. These trades were reported by approximately 700 
dealers, however, the top 20 dealers with the highest volumes accounted 
for approximately 73 percent of the transactions in municipal 
securities. Of those retail-size customer transactions in the secondary 
market in which the dealer acted in a principal capacity, approximately 
55 percent would have likely received a disclosure if the proposed rule 
had been in place.\7\
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    \4\ EMMA is a registered trademark of the MSRB.
    \5\ Q3 2015 trading activity was substantially similar to 
trading activity in the preceding two and following one quarter. For 
example, the total number of trades reported to EMMA in Q3 2015 was 
2,319,070 while the average number of trades reported to EMMA per 
quarter in 2015 was 2,305,705. Similarly, the number of retail-size, 
customer transactions in the secondary market in which the dealer 
acted in a principal capacity in Q3 2015 was 994,409 while the 
average number of trades per quarter with the same characteristics 
during 2015 was 980,809.
    \6\ The data reported to the MSRB do not indicate whether the 
customer purchasing or selling a security has an ``institutional'' 
account as defined in Rule G-8(a)(xi). Therefore, for the purposes 
of the analysis included here, the MSRB has defined a ``retail-
size'' transaction as any customer transaction with a reported trade 
amount of 100 bonds or fewer or a face value of $100,000 or less. 
The MSRB recognizes that this proxy for retail customers may, in 
some cases, include transactions with institutional account holders 
and may also fail to include transactions with some retail 
customers.
    \7\ That is, the customer's trade with a dealer was preceded or 
followed, on the same trading day, by one or more trades equal to 
the customer trade, by the dealer on the other side of the market in 
the same security. The percentage of customer trades that would have 
received a disclosure may be overestimated because in some cases, 
the dealer trade on the other side of the market may have been with 
an affiliate and the ``look through'' provision of the proposed rule 
may not have identified another trade that would have required 
disclosure.
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    Of those trades which likely would have received disclosure, 38 
percent of the offsetting trade(s) that would have triggered the 
disclosure occurred simultaneously (the reported times of both the 
customer trade and the offsetting trade(s) were identical), 50 percent 
of the offsetting trade(s) occurred within 19 seconds of the customer 
trade, and 83 percent of the offsetting trades occurred within 30 
minutes.
    For those trades that likely would have received disclosure, the 
median value of the estimated mark-up for customer purchases was 
approximately 1.20 percent and the median value of the estimated mark-
down was approximately 0.50 percent.\8\ For both mark-ups on customer 
purchases and mark-downs on customer sales, many customers paid 
considerably more than the median value. For example, five percent of 
customer purchases that would have been eligible for disclosure 
(representing approximately 14,900 trades) had estimated mark-ups 
higher than 2.25 percent while five percent of customer sales 
(representing approximately 6,500 trades) had estimated mark-downs 
higher than 1.51 percent.
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    \8\ The mark-up and mark-down calculations involved matching 
customer trades to one or more offsetting same-day principal trades 
by the same dealer in the same CUSIP. This included matching same-
size trades as well as trades of different sizes where there was no 
same-size match (e.g., a dealer purchase of 100 bonds matched to two 
sales to customers of 50 bonds each). The mark-ups (mark-downs) on 
customer buys (sells) correspond to the percentage difference in 
price in customer trades and the offsetting principal trade.
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    The MSRB believes that retail investors are currently limited in 
their ability to assess and compare transaction costs associated with 
the purchase or sale of municipal securities. Joint investor testing 
conducted by the Financial Industry Regulatory Authority (``FINRA'') 
and the MSRB (``joint investor survey'') revealed that investors lack a 
clear understanding of how dealers are compensated when dealers act in 
a principal capacity and that investors have a desire for more 
information on this topic. Retail investors transacting with dealers 
acting in a principal capacity may, therefore, participate in the 
municipal securities market with less information than other market 
participants and be less able to foster price competition.\9\ This 
information asymmetry may be observable, in part, in the large 
differences between estimated median mark-ups and the highest mark-ups 
paid by retail customers. As noted above, the five percent of customer 
trades with the highest mark-ups have mark-ups that are more than twice 
as large as the median mark-up.
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    \9\ The SEC's 2012 Report on the Municipal Securities Market 
reached similar conclusions based on multiple studies. See U.S. 
Securities and Exchange Commission, Report on the Municipal 
Securities Market (July 31, 2012).
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    Some market participants have asserted that the observed dispersion 
in mark-ups might be explained by bond- or execution-specific 
characteristics (e.g., that higher mark-ups can be explained by the 
additional dealer costs associated with transacting in relatively small 
quantities). The data do not support this conclusion. An analysis of 
the transactions that took place during Q3 2015 and that likely would 
have received disclosures if the proposed rule had been in place 
indicates that not only are the large dispersions in mark-ups not fully 
explained by bond- or execution-specific characteristics, but also 
that, in some cases, factors that might be expected to result in lower 
mark-ups appear to be associated with higher mark-ups. For example, the 
median quantity of bonds traded in transactions with the highest mark-
ups was either the same or similar to the median quantity of bonds 
traded in transactions with significantly lower mark-ups and bonds with 
higher trading frequencies in Q3 2015, and presumably higher liquidity, 
actually had higher estimated mark-ups than bonds that traded less 
frequently. The MSRB believes that requiring dealers to disclose their 
mark-ups on retail customer confirmations would provide meaningful and 
useful pricing information and may lower transaction costs for retail 
transactions.
    As described in greater detail in the section on comments received 
on the proposed rule change, the MSRB initially solicited comment on a 
related proposal in MSRB Notice 2014-20 (the ``initial confirmation 
disclosure proposal''),\10\ and subsequently on a revised proposal in 
MSRB Notice 2015-16 (the ``revised confirmation disclosure 
proposal'').\11\ The MSRB also has been coordinating with FINRA 
regarding the development of similar proposals, as appropriate, to 
foster generally consistent potential disclosures to customers across 
debt securities and to reduce the operational burdens for firms that 
trade multiple fixed income securities. The MSRB and FINRA published 
their initial and revised confirmation disclosure proposals on similar 
timelines,\12\ and FINRA filed with the Commission a substantially 
similar proposed rule change to the proposed amendments to Rule G-15 on 
August 12, 2016.\13\
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    \10\ See MSRB Notice 2014-20 (November 17, 2014).
    \11\ See MSRB Notice 2015-16 (September 24, 2015).
    \12\ See FINRA Regulatory Notice 14-52 (November 2014) and FINRA 
Regulatory Notice 15-36 (October 2015).
    \13\ See SR-FINRA-2016-032 (Aug. 12, 2016).
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    Provided below is a more detailed description of each significant 
aspect of the proposed amendments to Rule G-15.
Scope of the Disclosure Requirement
    The proposed mark-up disclosure requirement would apply where the 
dealer buys (or sells) a municipal security on a principal basis from 
(or to) a non-institutional customer and engages in one or more 
offsetting principal trade(s) on the same trading day in the same 
security, where the size of the dealer's offsetting principal trade(s), 
in the aggregate, equals or exceeds the size of the customer trade. A 
non-institutional customer would be a customer with an account that is 
not an institutional account, as defined in Rule G-8(a)(xi), (i.e., a 
retail customer account).\14\ The proposed rule change would apply to 
transactions in municipal securities, other than municipal fund 
securities.\15\
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    \14\ Rule G-8(a)(xi) defines an institutional account as the 
account of (i) a bank, savings and loan association, insurance 
company, or registered investment company; (ii) an investment 
adviser registered either with the Commission under Section 203 of 
the Investment Advisers Act of 1940 or with a state securities 
commission (or any agency or office performing like functions); or 
(iii) any other entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.
    \15\ See discussion infra, Exceptions for Functionally Separate 
Trading Desks, List Offering Price Transactions and Municipal Fund 
Securities.
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    The MSRB believes that the proposed amendments would provide 
meaningful pricing information to retail investors, which would most 
benefit from such disclosure, while not imposing unduly burdensome 
disclosure requirements on

[[Page 62949]]

dealers. The MSRB believes that requiring disclosure for retail 
customers, i.e., those with accounts that are not institutional 
accounts, would be appropriate because retail customers typically have 
less ready access to market and pricing information than institutional 
customers. The MSRB believes that using the definition of an 
institutional account as set forth in Rule G-8(a)(xi) to define the 
scope of the disclosure requirement would be appropriate because 
reliance on an existing standard would simplify implementation and 
thereby reduce costs associated with the requirement.\16\
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    \16\ As discussed in greater detail below, the MSRB initially 
proposed that the disclosure requirement would apply to customer 
trades involving 100 bonds or fewer or bonds in a par amount of 
$100,000 or less. In response to comments that the proposed size-
based standard could either exclude retail customer transactions 
above that amount from the proposed disclosure, or subject 
institutional transactions below that amount to the proposed 
disclosure, the MSRB revised the proposal to incorporate the Rule G-
8(a)(xi) definition of an institutional account.
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Same-Day Triggering Timeframe
    The MSRB believes that it would be appropriate to require 
disclosure of the mark-up where the dealer's offsetting principal 
trade(s) equaled or exceeded the size of the customer trade on the same 
trading day. To the extent that a dealer will often refer to its 
contemporaneous cost or proceeds, e.g., the price it paid or received 
for the bond, in determining the prevailing market price for purposes 
of calculating the mark-up or mark-down, the MSRB believes that 
limiting the disclosure requirement to those instances where there is 
an offsetting trade in the same trading day would generally make 
determination of the prevailing market price easier.
    As is discussed in greater detail below, a number of commenters 
stated that the window for triggering disclosure should be limited to 
two hours. Among other things, commenters argued that a two-hour window 
would be easier to implement, and would more closely capture riskless 
principal trades, which would align the proposed disclosure to the 
riskless principal disclosure requirements for equity securities under 
Exchange Act Rule 10b-10.\17\
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    \17\ See 17 CFR 240.10b-10.
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    The MSRB believes that there are added benefits to requiring 
disclosure for trades that occur within the same trading day, rather 
than only trades that occur within two hours. First, the full-day 
window would ensure that more investors receive mark-up disclosure. 
Second, the full-day window may make dealers less likely to alter their 
trading patterns in response to the proposed requirement, as dealers 
would need to hold positions overnight to avoid the proposed 
disclosure.\18\
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    \18\ It is important to note that, under Rule G-18, on best 
execution, dealers must use reasonable diligence to ascertain the 
best market for the security and buy or sell in that market so that 
the resultant price to the customer is as favorable as possible 
under prevailing market conditions. Rule G-18, Supplementary 
Material .03 emphasizes that a dealer must make every effort to 
execute a customer transaction promptly, taking into account 
prevailing market conditions. Any intentional delay of a customer 
execution to avoid the proposed disclosure requirement or otherwise 
would be contrary to these duties to customers. A dealer that 
purposefully delayed the execution of a customer order to avoid the 
proposed disclosure also may be in violation of the MSRB's 
fundamental fair-dealing rule, Rule G-17, on conduct of municipal 
securities and municipal advisory activities.
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    Some commenters recommended that the proposed disclosure obligation 
be limited to riskless principal transactions involving retail 
investors, which, in their view, would more accurately reflect dealer 
compensation and transaction costs and be more consistent with the 
stated objectives of the SEC in this area. These commenters would apply 
the requirement to riskless principal transactions as previously 
defined in the equity context by the Commission, where the dealer has 
an ``order in hand'' at the time of execution. However, the MSRB 
believes that it may be difficult to objectively define, implement and 
monitor a riskless principal trigger standard for municipal securities. 
The MSRB also believes that customers would benefit from the disclosure 
irrespective of whether the dealer's capacity on the transaction was 
riskless principal and believes, at this juncture, that using the 
riskless principal standard ultimately would be too narrow.
Non-Arms-Length Affiliate Transactions
    With respect to the offsetting principal trade(s), where a dealer 
buys from, or sells to, certain affiliates, the proposal would require 
the dealer to ``look through'' the dealer's transaction with the 
affiliate to the affiliate's transaction(s) with third parties in 
determining when the security was acquired and whether the ``same 
trading day'' requirement has been triggered. Specifically, the MSRB 
proposes to require dealers to apply the ``look through'' where a 
dealer's transaction with its affiliate was not at arms-length. For 
purposes of the proposed rule change, an ``arms-length transaction'' 
would be considered a transaction that was conducted through a 
competitive process in which non-affiliate dealers could also 
participate--e.g., pricing sought from multiple dealers, or the posting 
of multiple bids and offers--and where the affiliate relationship did 
not influence the price paid or proceeds received by the dealer. As a 
general matter, the MSRB would expect that the competitive process used 
in an ``arms-length'' transaction, e.g., the request for pricing or 
platform for posting bids and offers, is one in which non-affiliates 
have frequently participated. The MSRB believes that, for example, 
sourcing liquidity through a non-arms-length transaction with an 
affiliate is functionally equivalent to selling out of a dealer's own 
inventory for purposes of the proposed disclosure trigger. The MSRB 
therefore believes it would be appropriate in those circumstances to 
require a dealer to ``look through'' its transaction in a security with 
its affiliate to the affiliate's transactions in the security with 
third parties to determine whether the proposed mark-up disclosure 
requirement applies in these circumstances.\19\
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    \19\ Similarly, as explained in greater detail, infra, in the 
discussion of the proposed prevailing market price guidance, in the 
case of a non-arms-length transaction with an affiliate, the dealer 
also would be required to ``look through'' to the affiliate's 
transaction(s) with third parties in the security and the time of 
trade and related cost or proceeds of the affiliate in determining 
the dealer's calculation of the mark-up pursuant to Rule G-30.
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Exceptions for Functionally Separate Trading Desks, List Offering Price 
Transactions and Municipal Fund Securities
    Functionally Separate Trading Desks. The proposed amendments 
contain a number of exceptions from the mark-up disclosure requirement. 
First, if the offsetting same-day dealer principal trade was executed 
by a trading desk that is functionally separate from the dealer's 
trading desk that executed the transaction with the customer, the 
principal trade by that separate trading desk would not trigger the 
disclosure requirement. Dealers must have in place policies and 
procedures reasonably designed to ensure that the functionally separate 
principal trading desk through which the dealer purchase or dealer sale 
was executed had no knowledge of the customer transaction. The MSRB 
believes that this exception is appropriate because it recognizes the 
operational cost and complexity that may result from using a dealer 
principal trade executed by a separate, unrelated trading desk as the 
basis for determining whether a mark-up disclosure is triggered on the 
customer confirmation. For example, the exception would allow an 
institutional desk within a dealer to service an institutional customer

[[Page 62950]]

without triggering the disclosure requirement for an unrelated trade 
performed by a separate retail desk within the dealer. At the same 
time, in requiring that the dealer have policies and procedures in 
place that are reasonably designed to ensure that the other trading 
desk had no knowledge of the customer transaction,\20\ the MSRB 
believes that the safeguards surrounding the exception are sufficiently 
rigorous to minimize concerns about the potential misuse of the 
exception. In other words, in the example above, the dealer could not 
use the functionally separate trading desk exception to avoid the 
proposed disclosure requirement if trades at the institutional desk 
were used to source securities for transactions at the retail desk.
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    \20\ This provision is distinguished from the ``look through'' 
provision noted above, whereby the customer transaction is being 
sourced through a non-arms-length transaction with the affiliate. 
Under the separate trading desk exception, functionally separate 
trading desks are required to have policies and procedures in place 
that are reasonably designed to ensure that trades occurring on the 
functionally separate trading desks are executed with no knowledge 
of each other and reflect unrelated trading decisions. Additionally, 
the MSRB notes that this exception would only apply to determine 
whether or not the proposed 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.
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    The MSRB also believes that this exception is appropriate and 
consistent with the concept of functional and legal separation that 
exists in connection with other regulatory requirements, such as SEC 
Regulation SHO, and notes that some dealers may already have experience 
maintaining functionally separate trading desks to comply with these 
requirements, depending upon their particular mix of business.
    List Offering Price Transactions. Second, the mark-up would not be 
required to be disclosed if the customer transaction is a list offering 
price transaction, as defined in paragraph (d)(vii)(A) of Rule G-14 
RTRS Procedures.\21\ For such transactions, bonds are sold at the same 
published list offering price to all investors, and the compensation 
paid to the dealer, such as the underwriting fee, is paid for by the 
issuer and typically is described in the official statement.\22\ Given 
the availability of information in connection with such transactions, 
the MSRB believes that the proposed mark-up disclosure would not be 
warranted for list offering price transactions.
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    \21\ The term ``list offering price transaction'' is defined as 
a primary market sale transaction executed on the first day of 
trading of a new issue ``by a sole underwriter, syndicate manager, 
syndicate member, selling group member, or distribution participant 
[to a customer] at the published list offering price for the 
security.'' Rule G-14 RTRS Procedures (d)(vii)(A).
    \22\ Under Rule G-32, on disclosures in connection with primary 
offerings, a dealer selling offered municipal securities generally 
must deliver to its customers a copy of the official statement by no 
later than the settlement of the transaction. Under Rule G-
32(a)(iii), any dealer that satisfies the official statement 
delivery obligation by making certain submissions to EMMA in 
compliance with Rule G-32(a)(ii) must also provide to the customer, 
in connection with offered municipal securities sold by the issuer 
on a negotiated basis to the extent not included in the official 
statement, among other things, certain specified information about 
the underwriting arrangements, including the underwriting spread.
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    Municipal Fund Securities. Lastly, disclosure of mark-ups would not 
be required for transactions in municipal fund securities. Because 
dealer compensation for municipal fund securities transactions is 
typically not in the form of a mark-up, the MSRB believes that the 
proposed mark-up disclosure would not have application for transactions 
in municipal fund securities. Additionally, the proposed requirement to 
disclose the time of execution and a reference and hyperlink to the 
Security Details page for the customer's security on EMMA (both 
discussed below) also would not be established for transactions in such 
securities.
Proposed Information To Be Disclosed on the Customer Confirmation
    If the transaction meets the criteria described above, the dealer 
would be required to disclose on the customer confirmation the dealer's 
mark-up from the prevailing market price for the security. The mark-up 
would be required to be calculated in compliance with Rule G-30 and the 
supplementary material thereunder, including proposed Supplementary 
Material .06 (discussed below), and expressed as a total dollar amount 
and as a percentage of the prevailing market price of the municipal 
security.\23\ The MSRB believes that it would be appropriate to require 
dealers to calculate the mark-up in compliance with Rule G-30, as new 
Supplementary Material .06 would provide extensive guidance on how to 
calculate the mark-up for transactions in municipal securities, 
including transactions for which disclosure would be required under the 
proposed rule change, and incorporates a presumption that prevailing 
market price is established by reference to contemporaneous cost or 
proceeds. While some commenters noted the operational cost and 
complexity of implementing a mark-up disclosure requirement, the MSRB 
notes that dealers are currently subject to Rule G-30, on prices and 
commissions, and already are required to evaluate the mark-ups that 
they charge to ensure that they are fair and reasonable.\24\
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    \23\ Some commenters stated that the mark-up should be expressed 
as a total dollar amount, while others suggested that disclosure as 
a total dollar amount should not be required. Others still stated 
that the mark-up should be required to be disclosed as both a 
percentage and a total dollar amount. While commenters did not 
uniformly favor any particular format of disclosure, results of the 
joint investor survey indicated that investors found that disclosing 
the mark-up or mark-down both as a dollar amount and as a percentage 
of the prevailing market price would be more useful than only 
disclosing it in one of those forms.
    \24\ Rule G-30, Supplementary Material .01(d).
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    The MSRB recognizes that the determination of the prevailing market 
price of a particular security may not be identical across dealers.\25\ 
Existing Rule G-30, however, requires dealers to exercise reasonable 
diligence in establishing the prevailing market price.\26\ The MSRB, 
therefore, would expect that dealers have reasonable policies and 
procedures in place to establish the prevailing market price and that 
such policies and procedures are applied consistently across customers.
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    \25\ For example, because the prevailing market price of a 
security is presumptively established by reference to the dealer's 
contemporaneous cost or proceeds, different dealers may arrive at 
different prevailing market prices for the same security depending 
on the price at which they contemporaneously acquired or sold such 
security. However, even where dealers may reasonably arrive at 
different prevailing market prices for the same security, the MSRB 
believes that the difference between such prevailing market price 
determinations would typically be small.
    \26\ Rule G-30, Supplementary Material .04(b).
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    The MSRB understands that some dealers provide confirmations on an 
intra-day basis. As explained in detail below in the context of the 
proposed amendments to Rule G-30, the proposed requirement to disclose 
a mark-up calculated ``in compliance with'' Rule G-30 (including the 
proposed prevailing market price guidance) need not delay the 
confirmation process. A dealer may determine, as a final matter for 
disclosure purposes, the prevailing market price based on the 
information the dealer has, based on the use of reasonable diligence as 
required by proposed amended Rule G-30, at the time of the dealer's 
generation of the disclosure.
    The proposed rule change also would require the dealer to provide a 
reference and hyperlink to the Security Details page for a customer's 
security on EMMA, along with a brief description of the type of 
information available on that page. This disclosure requirement would 
be limited to transactions with retail (i.e., non-institutional) 
customers, but would apply for all such transactions regardless of 
whether a

[[Page 62951]]

mark-up disclosure is required for the transaction.\27\ The MSRB 
believes that such a link would provide retail investors with a broad 
picture of the market for a security on a given day and believes that 
requiring a link to EMMA would increase investors' awareness of, and 
ability to access, this information. Additionally, results from the 
joint investor survey support the value to investors of a security-
specific link to EMMA, rather than a link to the EMMA homepage.\28\ The 
MSRB believes that a link to EMMA or such other enhancements would not 
be sufficient, as customers are not always able to identify with 
certainty a principal trade in the same security that was made by that 
customer's dealer. As a result, the customer would not always be able 
to ascertain the exact amount of the price differential between the 
dealer and customer trade or to determine whether such a trade 
accurately reflects the ``prevailing market price'' for purposes of 
calculating the dealer's compensation.
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    \27\ Because institutional customers typically have more ready 
access to the type of information available on EMMA, the MSRB is not 
proposing to require this disclosure for transactions with 
institutional customers. Of course, dealers are free to voluntarily 
provide such a disclosure on all customer confirmations, including 
those for institutional customers.
    \28\ Some commenters stated that EMMA already contains 
sufficient pricing information for municipal securities, such as the 
last trade price for a security, and recommended that the MSRB focus 
solely on enhancing access to EMMA instead of requiring additional 
pricing disclosure.
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    The proposed rule change also would require the dealer to disclose 
on all customer confirmations, other than those for transactions in 
municipal fund securities, the time of execution. Dealers are already 
under an obligation to either disclose such information on the customer 
confirmation or to include a statement that the time of execution will 
be furnished upon written request.\29\ The proposed amendments to Rule 
G-15 would essentially delete the option to provide this information 
upon request. The MSRB believes that the provision of a security-
specific link to EMMA on retail customer confirmations, together with 
the time of execution would provide retail customers a comprehensive 
view of the market for their security, including the market as of the 
time of their trade. This combined disclosure also would reduce the 
risk that a customer may overly focus on dealer compensation and not 
appropriately consider other factors relevant to the investment 
decision. Even in instances in which the mark-up would not be required 
to be disclosed to customers, the MSRB believes that the inclusion of 
the time of execution on all customer confirmations (retail and 
institutional) would increase market transparency at relatively low 
cost. Results from the joint investor survey support the MSRB's view 
that time of execution disclosure is valued by investors.
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    \29\ Dealers have an existing obligation to report ``time of 
trade'' to the Real-Time Transaction Reporting System pursuant to 
Rule G-14, on reports of sales or purchases. In addition, dealers 
have an existing obligation to make and keep records of the time of 
execution of principal transactions under Rule G-8(a)(vii). The time 
of execution for proposed 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 from the disclosure because the 
trade data displayed on EMMA does not include seconds (e.g., dealers 
should disclose a time of trade of 10:00:59 as 10:00).
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    As noted above, if the Commission approves the proposed rule 
change, the MSRB will announce the effective date of the proposed rule 
change no later than 90 days following Commission approval. The 
effective date will be no later than 365 days following Commission 
approval.
Proposed Amendments to Rule G-30
    The MSRB is proposing to add new supplementary material (paragraph 
.06 entitled ``Mark-Up Policy'') and amend existing supplementary 
material under MSRB Rule G-30, on prices and commissions, to provide 
guidance on establishing the prevailing market price and calculating 
mark-ups and mark-downs for principal transactions in municipal 
securities (the ``proposed guidance'' or ``proposed prevailing market 
price guidance''). The MSRB believes additional guidance on these 
subjects would promote consistent compliance by dealers with their 
existing fair-pricing obligations under MSRB rules, in a manner that 
would be generally harmonized with the approach taken in other fixed 
income markets. The MSRB also believes that such guidance would support 
effective compliance with the proposed amendments to Rule G-15, 
discussed above. In addition, commenters indicated that compliance with 
the proposed amendments to MSRB Rule G-15 would be less burdensome if 
the MSRB were to provide guidance on establishing the prevailing market 
price. Significantly, municipal securities dealers that also transact 
in corporate or agency debt securities must comply with FINRA Rule 
2121, including Supplementary Material .02 (``FINRA guidance'') for 
transactions in those securities.\30\
---------------------------------------------------------------------------

    \30\ See FINRA Rule 2121, Fair Prices and Commissions, 
Supplementary Material .02, Additional Mark-Up Policy For 
Transactions in Debt Securities, Except Municipal Securities.
---------------------------------------------------------------------------

    The proposed rule change also includes amendments to the 
Supplementary Material to Rule G-30. For example, the MSRB proposes to 
clarify in Supplementary Material .01(a) that a dealer must exercise 
``reasonable'' diligence in establishing the market value of a security 
and the reasonableness of the compensation received. This requirement 
is consistent with existing Supplementary Material .04(b) (``[D]ealers 
must establish market value as accurately as possible using reasonable 
diligence under the facts and circumstances'') and clarifies that the 
same standard applies under the Supplementary Material .01(a). 
Similarly, the proposed amendments to Supplementary Material .01(d) to 
Rule G-30 will clarify the relationship between that provision and the 
new proposed Supplementary Material .06 containing the proposed 
prevailing market price guidance. In addition, this provision will 
assist in understanding of the overall rule.
    When a dealer acts in a principal capacity and sells a municipal 
security to a customer, the dealer generally ``marks up'' the security, 
increasing the total price the customer pays. Conversely, when buying a 
security from a customer, a dealer that is acting as a principal 
generally ``marks down'' the security, reducing the total proceeds the 
customer receives. Rule G-30(a) prohibits a dealer from engaging in a 
principal transaction with customers except at an aggregate price 
(including any mark-up or mark-down) that is fair and reasonable. The 
Supplementary Material to Rule G-30, among other things, provides that 
as part of the aggregate price to the customer, the mark-up or mark-
down also must be a fair and reasonable amount, taking into account all 
relevant factors.\31\
---------------------------------------------------------------------------

    \31\ Rule G-30, Supplementary Material .01(d).
---------------------------------------------------------------------------

    A critical step in determining whether the mark-up or mark-down on 
a principal transaction with a customer and the aggregate price to such 
customer is fair and reasonable is correctly identifying the prevailing 
market price of the security. Currently, under Rule G-30, the total 
transaction price to the customer must bear a reasonable relationship 
to the prevailing market price of the security, and, in a principal 
transaction, the dealer's compensation must be computed from the inter-
dealer market price prevailing at the time of the customer 
transaction.\32\ Moreover, existing Rule G-30 requires dealers to 
exercise diligence in establishing the

[[Page 62952]]

market value of the security and the reasonableness of their 
compensation.\33\
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    \32\ Rule G-30, Supplementary Material .01(c), (d).
    \33\ Rule G-30, Supplementary Material .01(a).
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    Under the proposed guidance, the prevailing market price of a 
municipal security generally would be presumptively established by 
referring to the dealer's contemporaneous cost as incurred, or 
contemporaneous proceeds as obtained. This presumption could be 
overcome in limited circumstances. If the presumption is overcome, or 
if it is not applicable because the dealer's cost is (or proceeds are) 
not contemporaneous, various factors discussed below would be either 
required or permitted to be considered, in successive order, to 
determine the prevailing market price. Generally, a subsequent factor 
or series of factors could be considered only if previous factors in 
the hierarchy, or ``waterfall,'' are inapplicable.
    As described in greater detail below, the MSRB solicited comment on 
draft prevailing market price guidance in MSRB Notice 2016-07 (the 
``draft guidance''). The draft guidance was substantially similar to 
and generally harmonized with the FINRA guidance for non-municipal 
fixed income securities. As discussed below, the proposed guidance is 
substantially in the form of the draft guidance on which public comment 
was sought, with some minor changes. In addition, the MSRB provides 
additional explanation of the proposed guidance herein in response to 
commenters and to clearly express the MSRB's intended meaning of the 
proposed guidance. Moreover, the MSRB will continue to engage with 
FINRA with the goal of promoting generally harmonized interpretations 
of the proposed guidance, if approved, and the FINRA guidance, as 
applicable and to the extent appropriate in light of the differences 
between the markets.
    Provided below is a more detailed description of each significant 
aspect of the proposed amendments to Rule G-30.
Rebuttable Presumption Based on Contemporaneous Costs or Proceeds
    The proposed guidance builds on the standard in existing 
Supplementary Material to Rule G-30 that the prevailing market price of 
a security is generally the price at which dealers trade with one 
another (i.e., the inter-dealer price).\34\ The proposed guidance 
provides that the best measure of prevailing market price is 
presumptively established by referring to the dealer's contemporaneous 
cost (proceeds), as consistent with other MSRB pricing rules, such as 
the best-execution rule (Rule G-18). Under the proposed guidance, a 
dealer's cost is (or proceeds are) 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. The reference to dealer contemporaneous cost or 
proceeds in determining the prevailing market price reflects a 
recognition of the principle that the prices paid or received for a 
security by a dealer in actual transactions closely related in time are 
normally a highly reliable indication of the prevailing market price 
and that the burden is appropriately on the dealer to establish the 
contrary.
---------------------------------------------------------------------------

    \34\ See Rule G-30, Supplementary Material .01(d) (``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.'').
---------------------------------------------------------------------------

    A dealer may look to other evidence of the prevailing market price 
(other than contemporaneous cost) only where the dealer, when selling 
the security, made no contemporaneous purchases in the municipal 
security or can show that in the particular circumstances the dealer's 
contemporaneous cost is not indicative of the prevailing market price. 
When buying a municipal security from a customer, the dealer may look 
to other evidence of the prevailing market price (other than 
contemporaneous proceeds) only where the dealer made no contemporaneous 
sales in the municipal security or can show that in the particular 
circumstances the dealer's contemporaneous proceeds are not indicative 
of the prevailing market price.
    A dealer may be able to show that its contemporaneous cost (when it 
is making a sale to a customer) or proceeds (when it is making a 
purchase from a customer) are not indicative of the prevailing market 
price, and thus overcome the presumption, in instances where: (i) 
Interest rates changed to a degree that such change would reasonably 
cause a change in municipal securities pricing; (ii) the credit quality 
of the municipal security changed significantly; 1A\35\ or (iii) news 
was issued or otherwise distributed and known to the marketplace that 
had an effect on the perceived value of the municipal security.\36\
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    \35\ Consistent with FINRA statements with respect to other 
fixed income securities, although an announcement by a nationally 
recognized statistical rating organization (``NRSRO'') that it has 
reviewed the issuer's credit and has changed the issuer's credit 
rating is an easily identifiable incidence of a change of credit 
quality, the category is not limited to such announcements. It may 
be possible for a dealer to establish that the issuer's credit 
quality changed in the absence of such an announcement; conversely, 
a relevant regulator may determine that the issuer's credit quality 
had changed and such change was known to the market and factored 
into the price of the municipal security before the dealer's 
transaction (the transaction used to measure the dealer's 
contemporaneous cost) occurred. See Exchange Act Release No. 54799 
(Nov. 21, 2006); 71 FR 68856 (Nov. 28, 2006) (FINRA Notice of Filing 
of Amendments Related to Mark-Up Policy).
    \36\ Consistent with FINRA statements with respect to other 
fixed income securities, certain news affecting an issuer, such as 
news of legislation, may affect either a particular issuer or a 
group or sector of issuers and may not clearly fit within the two 
previously identified categories--interest rate changes and credit 
quality changes. Such news may cause price shifts in a municipal 
security, and could, depending on the facts and circumstances, 
invalidate the use of the dealer's own contemporaneous cost as a 
reliable and accurate measure of prevailing market price. See id.
---------------------------------------------------------------------------

    Hierarchy of Pricing Factors. Under the proposed guidance, if the 
dealer has established that the dealer's cost is (or proceeds are) not 
contemporaneous or if the dealer has overcome the presumption that its 
contemporaneous cost or amount of proceeds provides the best measure of 
the prevailing market price, the dealer must consider, in the order 
listed (subject to Supplementary Material .06(a)(viii), on isolated 
transactions and quotations), a hierarchy of three additional types of 
pricing information, referred to here as the hierarchy of pricing 
factors: (i) Prices of any contemporaneous inter-dealer transactions in 
the municipal security; (ii) prices of contemporaneous dealer purchases 
(or sales) in the municipal security from (or to) institutional 
accounts with which any dealer regularly effects transactions in the 
same municipal security; or (iii) if an actively traded security, 
contemporaneous bid (or offer) quotations for the municipal security 
made through an inter-dealer mechanism, through which transactions 
generally occur at the displayed quotations. Pricing information of a 
succeeding type may only be considered where the prior type does not 
generate relevant pricing information. In reviewing the available 
pricing information of each type, the relative weight of the 
information depends on the facts and circumstances of the comparison 
transaction or quotation. The proposed guidance also makes clear the 
expectation that, because of the lack of active trading in many 
municipal securities, these factors may frequently not be available in 
the municipal market. Accordingly, dealers may often need to consult 
factors further down the waterfall, such as ``similar'' securities and 
economic models, to identify sufficient relevant and probative pricing

[[Page 62953]]

information to establish the prevailing market price of a municipal 
security.
    Similar Securities. If the above factors are not available, the 
proposed guidance provides that the dealer may take into consideration 
a non-exclusive list of factors that are generally analogous to those 
set forth under the hierarchy of pricing factors, but applied here to 
prices and yields of specifically defined ``similar'' securities. 
However, unlike the factors set forth in the hierarchy of pricing 
factors, which must be considered in the specified order, the factors 
related to similar securities are not required to be considered in a 
particular order or particular combination. The non-exclusive factors 
specifically listed are:
     Prices, or yields calculated from prices, of 
contemporaneous inter-dealer transactions in a specifically defined 
``similar'' municipal security;
     Prices, or yields calculated from prices, of 
contemporaneous dealer purchase (sale) transactions in a ``similar'' 
municipal security with institutional accounts with which any dealer 
regularly effects transactions in the ``similar'' municipal security 
with respect to customer mark-ups (mark-downs); and
     Yields calculated from validated contemporaneous inter-
dealer bid (offer) quotations in ``similar'' municipal securities for 
customer mark-ups (mark-downs'').
    When applying one or more of the factors, a dealer would be 
required to consider that the ultimate evidentiary issue is whether the 
prevailing market price of the municipal security will be correctly 
identified. As stated in the proposed guidance, the relative weight of 
the pricing information obtained from the factors depends on the facts 
and circumstances surrounding the comparison transaction, such as 
whether the dealer in the comparison transaction was on the same side 
of the market as the dealer in the subject transaction, the timeliness 
of the information and, with respect to the final bulleted factor 
above, the relative spread of the quotations in the ``similar'' 
municipal security to the quotations in the subject security. As noted 
below, regarding isolated transactions generally, in considering yields 
of ``similar'' securities, except in extraordinary circumstances, 
dealers may not rely exclusively on isolated transactions or a limited 
number of transactions that are not fairly representative of the yields 
of transactions in ``similar'' municipal securities taken as a whole.
    The proposed guidance provides that a ``similar'' municipal 
security should be sufficiently similar to the subject security that it 
would serve as a reasonable alternative investment to the investor. At 
a minimum, the municipal security or securities should be sufficiently 
similar that a market yield for the subject security can be fairly 
estimated from the yields of the ``similar'' security or securities. 
Where a municipal security has several components, appropriate 
consideration may also be given to the prices or yields of the various 
components of the security. The proposed guidance also sets forth a 
number of non-exclusive factors that may be used in determining the 
degree to which a security is ``similar.'' These include: (i) Credit 
quality considerations; \37\ (ii) the extent to which the spread at 
which the ``similar'' municipal security trades is comparable to the 
spread at which the subject security trades; (iii) general structural 
characteristics and provisions of the issue; \38\ (iv) technical 
factors such as the size of the issue, the float and recent turnover of 
the issue, and legal restrictions on transferability as compared with 
the subject security; and (v) the extent to which the federal and/or 
state tax treatment of the ``similar'' municipal security is comparable 
to such tax treatment of the subject security.
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    \37\ Credit quality considerations include, but are not limited 
to, whether the municipal security is issued by the same or similar 
entity, bears the same or similar credit rating, or is supported by 
a similarly strong guarantee or collateral as the subject security 
(to the extent securities of other issuers are designated as 
``similar'' securities, significant recent information concerning 
either the ``similar'' security's issuer or subject security's 
issuer that is not yet incorporated in credit ratings should be 
considered (e.g., changes to ratings outlooks)).
    \38\ General structural characteristics and provisions of the 
issue include, but are not limited to, coupon, maturity, duration, 
complexity or uniqueness of the structure, callability, the 
likelihood that the municipal security will be called, tendered or 
exchanged, and other embedded options, as compared with the 
characteristics of the subject security.
---------------------------------------------------------------------------

    Because of the unique characteristics of the municipal securities 
market, including the large number of vastly different issuers and the 
highly diverse nature of most outstanding securities, the MSRB expects 
that, in order for a security to qualify as sufficiently ``similar'' to 
the subject security, such security will be at least highly similar to 
the subject security with respect to nearly all of the listed 
``similar'' security factors that are relevant to the subject security 
at issue. The MSRB believes that this recognition of a practical aspect 
of the municipal securities market supports a more rational comparison 
of a municipal security to only those that are likely to produce 
relevant and probative pricing information in determining the 
prevailing market price of the subject security. Pricing information, 
for example, for a taxable security will not be useful in evaluating a 
tax-exempt security without making some price adjustment for that 
difference, which would constitute a form of economic modeling that is 
not permitted except at the next level of the waterfall analysis. The 
same is true, just as additional examples, of a bond versus another 
with a different credit rating, a general obligation bond versus a 
revenue bond, a bond with bond insurance versus one without, a bond 
with a sinking fund versus one without, and a bond with a call 
provision versus one without. As a result of these practical aspects, 
and due also in part to the lack of active trading in many municipal 
securities, dealers in the municipal securities market likely may not 
often find pricing information from sufficiently similar securities and 
may frequently need to then consider economic models at the next level 
of the waterfall analysis.
    When a security's value and pricing is based substantially on, and 
is highly dependent on, the particular circumstances of the issuer, 
including creditworthiness and the ability and willingness of the 
issuer to meet the specific obligations of the security (often referred 
to as ``story bonds''), in most cases other securities would not be 
sufficiently similar, and therefore, other securities may not be used 
to establish the prevailing market price.
    Economic Models. If information concerning the prevailing market 
price of a security cannot be obtained by applying any of the factors 
at the higher levels of the waterfall, dealers may consider as a factor 
in assessing the prevailing market price of a security the prices or 
yields derived from economic models. Such economic models may take into 
account measures such as reported trade prices, credit quality, 
interest rates, industry sector, time to maturity, call provisions and 
any other embedded options, coupon rate, and face value, and may 
consider all applicable pricing terms and conventions used.\39\
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    \39\ Consistent with FINRA's commentary with respect to other 
fixed income securities, when a dealer seeks to identify prevailing 
market price using other than the dealer's contemporaneous cost or 
contemporaneous proceeds, the dealer must be prepared to provide 
evidence that would establish the dealer's basis for not using 
contemporaneous cost (proceeds), and information about the other 
values reviewed (e.g., the specific prices and/or yields of 
securities that were identified as similar securities) in order to 
determine the prevailing market price of the subject security. If a 
dealer relies upon pricing information from a model the dealer uses 
or has developed, the dealer must be able to provide information 
that was 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 prevailing market 
price). See supra n. 35, FINRA Notice of Filing of Amendments 
Related to Mark-Up Policy.

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[[Page 62954]]

    Isolated Transactions and Quotations. The ultimate issue the 
proposed guidance is intended to address is the prevailing market price 
of the security; therefore, isolated transactions or isolated 
quotations generally would have little or no weight or relevance in 
establishing the prevailing market price. Due to the unique nature of 
the municipal securities market, including the large number of issuers 
and outstanding securities and the infrequent trading of many 
securities in the secondary market, the proposed guidance recognizes 
that isolated transactions and quotations may be more prevalent in the 
municipal securities market than other fixed income markets and 
explicitly recognizes that an off-market transaction may qualify as an 
``isolated transaction'' under the proposed guidance.
    The proposed guidance also addresses the application of the 
``isolated'' transactions and quotations provision. The proposed 
guidance explains that, for example, in considering the factors in the 
hierarchy of pricing factors, a dealer may give little or no weight to 
pricing information derived from an isolated transaction or quotation. 
The proposed guidance also provides that, in considering yields of 
``similar'' securities, except in extraordinary circumstances, dealers 
may not rely exclusively on isolated transactions or a limited number 
of transactions that are not fairly representative of the yields of 
transactions in ``similar'' municipal securities taken as a whole.
Contemporaneous Customer Transactions
    Because the proposed guidance ultimately seeks to identify the 
prevailing inter-dealer market price, a dealer's contemporaneous cost 
(for customer sales) or proceeds (for customer purchases) in an inter-
dealer transaction is presumptively the prevailing market price of the 
security. 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. In establishing the 
presumptive prevailing market price, in such instances, the dealer 
should refer to such contemporaneous cost or proceeds and make an 
adjustment for any mark-up or mark-down charged in that customer 
transaction. This methodology for establishing the presumptive 
prevailing market price is appropriate because, as explained in the 
relevant case law, it reflects the fact that the price at which a 
dealer, for example, purchases securities from customers generally is 
less than the amount that the dealer would have paid for the security 
in the inter-dealer market. To identify the prevailing market price for 
the purpose of calculating the mark-up or mark-down in the 
contemporaneous customer transaction, the dealer should proceed down 
the waterfall, according to its terms, identifying the most relevant 
and probative evidence of the prevailing inter-dealer market price.
    This approach is supported by the relevant case law, in which the 
prevailing market price has been established by reference to a customer 
price by adjusting the customer price based on an ``imputed'' mark-up 
or mark-down.\40\ This approach is also consistent with the text of the 
proposed guidance because the presumptive prevailing market price is, 
through this methodology, established ``by referring to'' the dealer's 
contemporaneous cost or proceeds, as required by proposed Supplementary 
Material .06(a)(i).\41\ Moreover, this approach is consistent with the 
fundamental principle underlying the proposed guidance, because it 
results in a reasonable proxy for what the dealer's contemporaneous 
cost or proceeds would have been in an inter-dealer transaction. 
Indeed, because this adjustment methodology occurs at the first step of 
the waterfall analysis (proposed Supplementary Material .06(a)(i)), the 
resulting price from this methodology is presumed to be the prevailing 
market price for any contemporaneous transactions with the same 
strength of the presumption that applies to prices from inter-dealer 
transactions.
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    \40\ In a number of instances, where a dealer lacked 
contemporaneous inter-dealer transactions, the prevailing market 
price in connection with a sale to a customer was calculated by 
identifying contemporaneous cost from a transaction with another 
customer and then making an upward adjustment. The adjustment, 
referred to in the cases as an ``imputed markdown,'' was then added 
to the dealer's purchase price from the customer to establish 
pricing at the level at which an inter-dealer trade might have 
occurred. Similarly, in determining the prevailing market price of a 
municipal security in connection with a purchase from a customer, 
the prevailing market price was determined by identifying the 
dealer's contemporaneous proceeds in a transaction with another 
customer, and then making a downward adjustment by deducting an 
``imputed mark-up'' from such contemporaneous proceeds.
    \41\ For example, assume that Dealer A sells municipal security 
X to Dealer B at a price of 98.5. Then, assume that Dealer C 
purchases municipal security X from a customer at a price of 98 and 
contemporaneously sells the security to a customer at a price of 
100. Because Dealer C itself has no other contemporaneous 
transactions in the security, it would proceed down the waterfall to 
the hierarchy of pricing factors, discussed supra. A dealer at that 
level of the waterfall analysis must first consider prices of any 
contemporaneous inter-dealer transaction in establishing the 
prevailing market price. Accordingly, Dealer C would consider the 
contemporaneous inter-dealer transaction between Dealer A and Dealer 
B at 98.5 in determining the amount of the mark-down, and deduct its 
contemporaneous cost of 98 from 98.5 to arrive at a mark-down of 
0.5. Then, Dealer C would add the amount of the mark-down to the 
dealer's contemporaneous cost for a presumptive prevailing market 
price (or adjusted contemporaneous cost) of 98.5. In the absence of 
evidence to rebut the presumption, when disclosing the mark-up to 
the customer to whom Dealer C sold municipal security X, Dealer C 
would then disclose the difference between Dealer C's adjusted 
contemporaneous cost (98.5) and the price paid by the customer to 
whom Dealer C sold municipal security X (100) for a mark-up of 1.5 
(1.02% of the prevailing market price).
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    This interpretation of the proposed prevailing market price 
guidance takes on special significance in the context of a mark-up 
disclosure requirement, such as contained in the proposed amendments to 
Rule G-15. Where, for example, a dealer purchases a security from one 
retail customer and contemporaneously sells it to another retail 
customer, with no relevant market changes in the interim, the total 
difference between the two prices may be attributed to dealer 
compensation, but each customer pays only a portion of this difference 
(as either a mark-up or a mark-down). Without adjustments to the 
contemporaneous cost and proceeds based on the mark-down and mark-up, 
respectively, the confirmation disclosures to both customers would 
reflect ``double counting.'' By contrast, under the adjustment 
approach, where there are no relevant market changes in the interim 
that would rebut the presumption, there is a complete apportionment of 
the total difference in price (i.e., no double counting and no part of 
the total difference in price left undisclosed to either customer).
    Non-Arms-Length Affiliate Transactions. The ultimate issue the 
proposed guidance is intended to address is the prevailing market price 
of the security, using the most relevant and probative evidence of the 
market price in the inter-dealer market. Therefore, as noted in the 
discussion above of the mark-up disclosure requirement, a non-arms-
length transaction in a security (as defined in that context) with an 
affiliate should not be used to identify a dealer's contemporaneous 
cost or proceeds and presumptively the prevailing market

[[Page 62955]]

price of the security. The MSRB believes that, for example, sourcing 
liquidity through a non-arms-length transaction with an affiliate is 
functionally equivalent to selling out of a dealer's own inventory for 
purposes of the calculation of the mark-up. The MSRB therefore believes 
it would be appropriate in those circumstances to require a dealer to 
``look through'' its transaction in a security with its affiliate to 
the affiliate's transaction(s) in the security with third parties and 
the related time of trade and cost or proceeds of the affiliate in 
determining the dealer's calculation of the mark-up pursuant to Rule G-
30. This is the case not only for transactions for which mark-up 
disclosure would be required under the proposed amendments to Rule G-
15, but for the application of proposed amended Rule G-30 generally, 
including the proposed prevailing market price guidance, for purposes 
of evaluating the fairness and reasonableness of mark-ups and mark-
downs.\42\
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    \42\ For example, assume Dealer A1, a market-facing dealer, and 
Dealer A2, a retail customer-facing dealer, are affiliates both 
owned by Company A. On the same trading day, Dealer A1 purchases 
municipal security X from an unaffiliated dealer at $90 
(``Transaction 1''). Dealer A1 displays municipal security X for 
sale at $93 on Dealer A2's customer-facing platform, on which other 
dealers have not frequently participated. A retail customer places 
an order to purchase municipal security X from Dealer A2 at the 
displayed price of $93. Dealer A2 purchases municipal security X 
from Dealer A1 at $93 in a non-arms-length transaction within the 
meaning of proposed amended Rule G-15 (``Transaction 2''). Dealer A2 
then sells municipal security X to the retail customer at $93, plus 
$1 trading fee (``Transaction 3''). During the day, there are no 
other transactions in municipal security X and no other dealers 
display any price for municipal security X. In this example, 
Transaction 2 should not be used to indicate Dealer A2's 
contemporaneous cost. Instead, Dealer A2 would be required to ``look 
through'' Transaction 2, a non-arm's length transaction with 
affiliated Dealer A1, and use Transaction 1 and the time of that 
trade and the related cost to Dealer A1 in determining the 
prevailing market price.
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    Compliance at the Time of Generation of Disclosure. As noted, the 
MSRB understands that some dealers provide confirmations on an intra-
day basis. The requirement under the proposed amendments to Rule G-15 
to disclose a mark-up or mark-down calculated ``in compliance with'' 
Rule G-30 (including the proposed prevailing market price guidance) 
need not delay the confirmation process. A dealer may determine, as a 
final matter for disclosure purposes, the prevailing market price based 
on the information the dealer has, based on the use of reasonable 
diligence as required by proposed amended Rule G-30, at the time the 
dealer inputs the information into its systems to generate the mark-up 
disclosure.\43\ Such timing of the determination of prevailing market 
price would avoid potentially open-ended delays that could otherwise 
result if dealers were required to wait to generate a disclosure until 
they could determine, for example, that they do not have any 
``contemporaneous'' proceeds for a particular transaction. Such timing 
would also permit dealers who, on a voluntary basis, choose to disclose 
mark-ups and mark-downs on all principal transactions to generate 
customer confirmations at the time of trade, should they choose to do 
so. To clarify, a dealer would not be expected to cancel and resend a 
confirmation to revise the mark-up or mark-down disclosure solely based 
on the occurrence of a subsequent transaction or event that would 
otherwise be relevant to the calculation of the mark-up or mark-down 
under the proposed guidance. Where, however, a dealer has 
contemporaneous proceeds by the time of generation of the disclosure, 
the dealer presumptively must establish the prevailing market price of 
the municipal security by reference to such contemporaneous 
proceeds.\44\
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    \43\ For example, assume Dealer A systematically inputs the 
mark-up-related information into its systems intra-day for the 
generation of confirmations. At 9:00 a.m., Dealer A purchases 
municipal security X from a customer at a price of 98. At 1:00 p.m., 
Dealer A sells such security to another dealer at a price of 100. 
Dealer A does not sell municipal security X at any other time before 
1:00 p.m. At the time of the 9:00 a.m. transaction, Dealer A does 
not have any contemporaneous proceeds for municipal security X. 
Therefore, to determine the prevailing market price for municipal 
security X, Dealer A would proceed down the waterfall to the next 
category of factors--in this case, the hierarchy of pricing factors, 
as discussed supra. Dealer A would not be required to consider the 
price of 100, which the dealer would only know at 1:00 p.m. In 
contrast, assuming instead that Dealer A systematically inputs the 
mark-up-related information into its systems for confirmation 
generation at the end of the day, under the same facts as above, it 
would be required to consider, to the extent required by the 
prevailing market price guidance, the 1:00 p.m. inter-dealer trade 
price in determining the prevailing market price and the related 
mark-down to be disclosed for the 9:00 a.m. purchase.
    \44\ For example, a dealer that operates an alternative trading 
system or ATS may often, if not always, be in a position to identify 
its contemporaneous proceeds in connection with a purchase from a 
customer. Also, as discussed in supra n. 18, under Rule G-18, 
Supplementary Material .03, a dealer must make every effort to 
execute a customer transaction promptly, taking into account 
prevailing market conditions. Any intentional delay of a transaction 
to avoid recognizing proceeds as contemporaneous at the time of a 
transaction or otherwise would be contrary to these duties to 
customers. A dealer found to purposefully delay the execution of a 
customer order for such purposes also may be in violation of Rule G-
17, on conduct of municipal securities and municipal advisory 
activities.
---------------------------------------------------------------------------

Consideration of Benefits and Costs
    The MSRB believes that requiring dealers to disclose their mark-ups 
on retail customer confirmations based on the proposed amendments to 
Rule G-30 would provide meaningful and useful pricing information to a 
significant number of retail investors and may lower transaction costs 
for retail transactions. The MSRB also believes that the proposed 
amendments would provide retail customers engaged in municipal 
securities transactions covered by the rule with information more 
comparable to that currently received by retail customers in equity 
securities transactions and municipal securities transactions in which 
the dealer acts in an agent capacity. In addition, the disclosure may 
improve investor confidence, better enable customers to evaluate the 
costs and quality of the execution service that dealers provide, 
promote transparency into dealers' pricing practices, improve 
communication between dealers and their customers, and make the 
enforcement of Rule G-30 more efficient.
    The MSRB believes that the proposed amendments to Rule G-30 reflect 
an appropriate balance between consistency with existing FINRA guidance 
for determining prevailing market price in other fixed income 
securities markets and modifications to address circumstances under 
which use of the FINRA guidance in the municipal securities market 
might be inappropriate (e.g., treatment of similar securities).\45\ The 
MSRB also believes that the guidance would promote consistent 
compliance by dealers with their existing fair-pricing obligations 
under MSRB rules and would support effective compliance with the 
proposed amendments to Rule G-15.
---------------------------------------------------------------------------

    \45\ For example, the municipal securities market includes a 
larger number of issuers and larger number of outstanding securities 
than the corporate bond market, and most municipal securities trade 
less frequently in the secondary market. In addition, many municipal 
securities are subject to different tax rules and treatment, and 
have different credit structures, enhancements and redemption 
features that may not be applicable to or prevalent for other fixed 
income securities.
---------------------------------------------------------------------------

    The MSRB recognizes, however, that the proposed rule change, 
comprised of amendments to both Rule G-15 and Rule G-30, would impose 
burdens and costs on dealers.\46\ In MSRB Notices

[[Page 62956]]

2014-20, 2015-16 and 2016-07, the MSRB specifically solicited comment 
on the potential costs of the draft amendments contained in those 
notices. While commenters stated that the initial and the revised 
confirmation disclosure proposals would impose significant 
implementation costs, no commenters provided specific cost estimates, 
data to support cost estimates, or a framework to assess anticipated 
costs.
---------------------------------------------------------------------------

    \46\ The MSRB's evaluation of the potential costs does not 
consider all of the costs associated with the proposal, but instead 
focuses on the incremental costs attributable to it that exceed the 
baseline state. The costs associated with the baseline state are, in 
effect, subtracted from the costs associated with the proposed rule 
change to isolate the costs attributable to the incremental 
requirements of the proposal.
---------------------------------------------------------------------------

    Among other things, the proposed rule change would require dealers 
to develop and deploy a methodology to satisfy the disclosure 
requirement, identify trades subject to the disclosure, convey the 
mark-up on the customer confirmation, determine the prevailing market 
price and the mark-up, and adopt policies and procedures to track and 
ensure compliance with the requirement. To apply the ``look through'' 
to non-arms-length transactions with affiliates, dealers also would 
need to obtain the price paid or proceeds received and the time of the 
affiliate's trade with the third party. The MSRB sought data in the 
above-referenced notices that would facilitate quantification of these 
costs, but did not receive any data from commenters.
    Any such costs, however, may be mitigated under certain 
circumstances. Dealers choosing to provide disclosure on all customer 
transactions would not incur the cost associated with identifying 
trades subject to the disclosure requirement; dealers already 
disclosing mark-ups to retail customers likely would incur lower costs 
associated with modifying customer confirmations, and dealers with 
processes in place to evaluate prevailing market price in compliance 
with FINRA Rule 2121 and MSRB Rule G-30 may be able to leverage those 
processes to comply with the proposed amendments to Rule G-30.
    Based on comments received in response to the Notices, the MSRB 
made a number of changes to the draft amendments in an effort to make 
implementation less burdensome. These changes include utilizing 
existing processes for identifying retail customers, providing detailed 
prevailing market price guidance alongside the mark-up disclosure 
proposal, and ensuring that prevailing market price could be determined 
in the least burdensome way among the reasonable alternatives.
    The MSRB believes that the proposed rule change reflects the 
overall lowest cost approach to achieving the regulatory objective. To 
reach that conclusion, the MSRB evaluated several reasonable regulatory 
alternatives including relying solely on modifications to EMMA, 
requiring the disclosure of a ``reference price'' rather than mark-up, 
and providing only a mark-up disclosure rule without accompanying 
prevailing market price guidance. These alternatives were deemed to 
either not sufficiently address the identified need (in the case of the 
EMMA alternative) or to represent approaches that offered lesser 
benefits and greater costs.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
the provisions of Section 15B(b)(2)(C) of the Act,\47\ which provides 
that the MSRB's rules shall:
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o-4(b)(2)(C).

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
---------------------------------------------------------------------------
municipal entities, obligated persons, and the public interest.

    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act \48\ because it would provide retail 
customers with meaningful and useful additional pricing information 
that retail customers typically cannot readily obtain through existing 
data sources such as EMMA. This belief is supported by the joint 
investor testing, which indicated that investors would find aspects of 
the proposed requirements useful, including disclosure of the time of 
execution and mark-up or mark-down in a municipal securities 
transaction both as a dollar amount and as a percentage of the 
prevailing market price. The MSRB believes that a reference and 
hyperlink to the Security Details page of EMMA, along with a brief 
description of the type of information available on that page, will 
provide retail investors with a more comprehensive picture of the 
market for a security on a given day and believes that requiring a link 
to EMMA would increase investors' awareness of, and ability to access, 
this information. Additionally, results from the joint investor survey 
support the value to investors of a security-specific link to EMMA, 
rather than a link to the EMMA homepage. The MSRB believes that the 
proposed rule change will better enable customers to evaluate the cost 
of the services that dealers provide by helping customers understand 
mark-ups or mark-downs from the prevailing market prices in specific 
transactions. The MSRB also believes that this type of information will 
promote transparency into dealers' pricing practices and encourage 
communications between dealers and their customers about the execution 
of their municipal securities transactions. The MSRB further believes 
the proposed rule change will provide customers with additional 
information that may assist them in detecting practices that are 
possibly improper, which would supplement existing municipal securities 
enforcement programs.
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    The proposed amendment to Supplementary Material .01(a) to Rule G-
30 will clarify the applicable ``reasonable diligence'' standard in 
that provision and conform to existing supplementary material 
referencing that standard. The proposed amendments to Supplementary 
Material .01(d) to Rule G-30 will clarify the relationship between that 
provision and the new proposed Supplementary Material .06 containing 
the proposed prevailing market price guidance and aid in understanding 
of the overall rule.
    The proposed guidance on prevailing market price will provide 
dealers with additional guidance for determining prevailing market 
price in order to aid in compliance with their fair-pricing and mark-up 
disclosure obligations. The MSRB believes that clarifying the standard 
for correctly identifying the prevailing market price of a municipal 
security for purposes of calculating a mark-up, clarifying the 
additional obligations of a dealer when it seeks to use a measure other 
than the dealer's own contemporaneous cost (proceeds) as the prevailing 
market price and confirming that similar securities and economic models 
may be used in certain instances to determine the prevailing market 
price are measures designed to remove impediments to and perfect the 
mechanism of a free and open market in municipal securities, prevent 
fraudulent practices, promote just and equitable principles of trade 
and protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) \49\ of the Act requires that MSRB rules not 
be designed to impose any burden on competition not necessary or

[[Page 62957]]

appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

    The MSRB believes that the proposed rule change will improve price 
transparency and foster greater price competition among dealers. The 
MSRB recognizes that some dealers may exit the market or consolidate 
with other dealers as a result of the costs associated with the 
proposed rule change relative to the baseline. However, the MSRB does 
not believe--and is not aware of any data that suggest--that the number 
of dealers exiting the market or consolidating would materially impact 
competition.
    Some commenters noted that the requirement to make a disclosure to 
retail customers if the dealer engaged in both the retail customer's 
transaction and one or more offsetting transactions on the same day 
could disproportionately impact smaller dealers as larger dealers might 
be more able to hold positions overnight and not trigger the proposed 
disclosure requirement. The MSRB has noted that any intentional delay 
of a customer execution to avoid a disclosure requirement would be 
contrary to a dealer's obligations under Rules G-30, G-18, on best 
execution, and G-17, on conduct of municipal securities and municipal 
advisory activities. If the proposed amendments are approved, the MSRB 
expects that FINRA would monitor trading patterns to ensure dealers are 
not purposely delaying a customer execution to avoid the disclosure.
    Although commenters did not provide any data to support a 
quantification of the costs associated with these proposals, commenters 
did indicate that the costs associated with modifying systems to comply 
with these proposals would be significant. It is possible that larger 
dealers may be better able to absorb these costs than smaller dealers 
and that smaller dealers could be forced to exit the market or pass a 
larger share of the implementation costs on to customers. The MSRB 
believes that these concerns may be mitigated by several factors. As 
noted above, dealers choosing to disclose to all customers may not 
incur the costs associated with identifying transactions that require 
disclosure and dealers engaging in relatively fewer transactions may be 
able to develop processes for determining prevailing market price that 
are relatively less costly than larger, more active dealers. In 
addition, the MSRB believes that smaller dealers are more likely to 
have their customer confirmations generated by clearing firms. To the 
extent that clearing firms would not pass along the full implementation 
cost to each introducing firm, small firms may incur lower costs in 
certain areas than large firms.
    The proposed rule change may disproportionately impact less active 
dealers that, as indicated by data, currently charge relatively higher 
mark-ups than more active dealers. However, overall, the MSRB believes 
that the burdens on competition will be limited and the proposed rule 
change will not impose any additional burdens on competition that are 
not necessary or appropriate in furtherance of the purposes of the Act. 
In addition, the MSRB believes that the proposed rule change may foster 
additional price competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

Proposed Amendments to Rule G-15
    The revised confirmation disclosure proposal was published for 
comment in MSRB Notice 2015-16 (September 24, 2015), and was preceded 
by the initial confirmation disclosure proposal in MSRB Notice 2014-20 
(November 17, 2014). The MSRB received 30 comments in response to MSRB 
Notice 2014-20,\50\ and 25 comments in response to MSRB Notice 2015-
16.\51\ A copy of MSRB

[[Page 62958]]

Notice 2014-20 is attached as Exhibit 2a; a list of comment letters 
received in response is attached as Exhibit 2b; and copies of the 
comment letters are attached as Exhibit 2c. A copy of MSRB Notice 2015-
16 is attached as Exhibit 2d; a list of comment letters received in 
response is attached as Exhibit 2e; and copies of the comment letters 
are attached as Exhibit 2f.
---------------------------------------------------------------------------

    \50\ See Letter from Eric Bederman, Chief Operating and 
Compliance Officer, Bernardi Securities, dated December 26, 2014 
(``Bernardi Letter I''); Letter from Michael Nicholas, Chief 
Executive Officer, Bond Dealers of America, dated January 20, 2015 
(``BDA Letter I''); Letter from Chris Melton, Executive Vice 
President, Coastal Securities, dated January 16, 2015 (``Coastal 
Securities Letter I''); Letter from Micah Hauptman, Financial 
Services Counsel, Consumer Federation of America, dated January 20, 
2015 (``CFA Letter I''); Letter from Larry E. Fondren, President and 
Chief Executive Officer, DelphX LLC, dated January 7, 2015 (``DelphX 
Letter I''); Letter from Herbert Diamant, President, Diamant 
Investments Corp., dated January 9, 2015 (``Diamant Letter I''); 
Letter from Norman L. Ashkenas, Chief Compliance Officer, Fidelity 
Brokerage Services LLC and Richard J. O'Brien, Chief Compliance 
Officer, National Financial Services, LLC, Fidelity Investments, 
dated January 20, 2015 (``Fidelity Letter I''); Letter from Darren 
Wasney, Program Manager, Financial Information Forum, dated January 
20, 2015 (``FIF Letter I''); Letter from David T. Bellaire, 
Executive Vice President and General Counsel, Financial Services 
Institute, dated January 20, 2015 (``FSI Institute Letter I''); 
Letter from Rich Foster, Vice President and Senior Counsel for 
Regulatory and Legal Affairs, Financial Services Roundtable, dated 
January 20, 2015 (``Financial Services Roundtable Letter I''); 
Emails from Gerald Heilpern, dated December 9, 2014, December 18, 
2014 and January 8, 2015 (collectively ``Heilpern Letter I''); 
Letter from Alexander I. Rorke, Senior Managing Director, Municipal 
Securities Group, Hilliard Lyons, dated January 20, 2015 (``Hilliard 
Letter I''); Letter from Thomas E. Dannenberg, President and Chief 
Executive Officer, Hutchinson Shockey Erley and Co., dated January 
20, 2015 (``Hutchinson Shockey Letter I''); Letter from Andrew 
Hausman, President, Pricing & Reference Data, Interactive Data, 
dated January 20, 2015 (``Interactive Data Letter I''); Email from 
John Smith, dated December 10, 2014 (``Smith Letter I''); Email from 
Jorge Rosso, dated November 24, 2014 (``Rosso Letter I''); Letter 
from Karin Tex, dated January 12, 2015 (``Tex Letter I''); Email 
from George J. McLiney, Jr., McLiney and Company, dated December 22, 
2014 (``McLiney Letter I''); Letter from Vincent Lumia, Managing 
Director, Morgan Stanley Smith Barney LLC, dated January 20, 2015 
(``Morgan Stanley Letter I''); Letter from Peter G. Brandel, Senior 
Vice President, Municipal Bond Trading, and Kenneth T. Kerr, Senior 
Vice President, Municipal Bond Trading, Nathan Hale Capital, LLC, 
dated January 20, 2015 (``Nathan Hale Letter I''); Letter from Rick 
A. Fleming, Investor Advocate, Office of the Investor Advocate, U.S. 
Securities and Exchange Commission, dated January 20, 2015 (``SEC 
Investor Advocate Letter I''); Email from Private Citizen, dated 
November 23, 2014 (``Private Citizen Letter I''); Letter from 
Richard Seelaus, R. Seelaus & Co., Inc., dated January 8, 2015 (``R. 
Seelaus Letter I''); Email from Paige Pierce, RW Smith & Associates, 
LLC, dated January 21, 2015 (``RW Smith Letter I''); Letter from 
Sean Davy, Managing Director, Capital Markets Division, and David L. 
Cohen, Managing Director and Associate General Counsel, Municipal 
Securities Division, Securities Industry and Financial Markets 
Association, dated January 20, 2015 (``SIFMA Letter I''); Letter 
from Gregory Carlin, Vice President, Standard & Poor's Securities 
Evaluations, Inc., dated January 20, 2015 (``S&P Letter I''); Letter 
from Kyle C. Wootten, Deputy Director--Compliance and Regulatory, 
Thomson Reuters, dated January 16, 2015 (``Thomson Reuters Letter 
I''); Letter from Robert J. McCarthy, Director of Regulatory Policy, 
Wells Fargo Advisors, LLC, dated January 20, 2015 (``Wells Fargo 
Letter I'').
    \51\ See Email from Aaron Botbyl, dated October 9, 2015 
(``Botbyl Letter II''); Letter from Eric Bederman, Senior Vice 
President, Chief Operating and Compliance Officer, Bernardi 
Securities, Inc., dated December 4, 2015 (``Bernardi Letter II''); 
Letter from Michael Nicholas, Chief Executive Officer, Bond Dealers 
of America, dated December 11, 2015 (``BDA Letter II''); Letter from 
Kurt N. Schacht, Managing Director, Standards and Financial Market 
Integrity, and Linda L. Rittenhouse, Director, Capital Markets 
Policy, CFA Institute, dated December 11, 2015 (``CFA Institute 
Letter II''); Letter from Jason Clague, Senior Vice President, 
Trading & Middle Office Services, Charles Schwab & Co. Inc., dated 
December 11, 2015 (``Schwab Letter II''); Email from Chris Melton, 
Coastal Securities, dated October 30, 2015 (``Coastal Securities 
Letter II''); Email from Christopher [Last Name Withheld], dated 
September 25, 2015 (``Christopher Letter II''); Letter from Micah 
Hauptman, Financial Services Counsel, Consumer Federation of 
America, dated December 11, 2015 (``CFA Letter II''); Letter from 
Herbert Diamant, President, Diamant Investment Corporation, dated 
November 30, 2015 (``Diamant Letter II''); Letter from Norman L. 
Ashkenas, Chief Compliance Officer, Fidelity Brokerage Services, 
LLC, and Richard J. O'Brien, Chief Compliance Officer, National 
Financial Services, LLC, Fidelity Investments, dated December 11, 
2015 (``Fidelity Letter II''); Letter from Darren Wasney, Program 
Manager, Financial Information Forum, dated December 11, 2015 (``FIF 
Letter II''); Letter from David T. Bellaire, Executive Vice 
President & General Counsel, Financial Services Institute, dated 
December 11, 2015, (``FSI Institute Letter II''); Letter from Gerald 
Heilpern, undated (``Heilpern Letter II''); Email from Jonathan 
Bricker, dated October 20, 2015; Letter from David P. Bergers, 
General Counsel, LPL Financial LLC, dated December 10, 2015 (``LPL 
Letter II''); Letter from Elizabeth Dennis, Managing Director, 
Morgan Stanley Smith Barney LLC, dated December 11, 2015 (``Morgan 
Stanley Letter II''); Letter from Rick A. Fleming, Investor 
Advocate, Office of the Investor Advocate, U.S. Securities and 
Exchange Commission, dated December 11, 2015 (``SEC Investor 
Advocate Letter II''); Letter from Patrick Luby, dated December 11, 
2015 (``Luby Letter II''); Letter from Hugh D. Berkson, President, 
Public Investors Arbitration Bar Association, dated December 8, 2015 
(``PIABA Letter II''); Letter from David L. Cohen, Senior Counsel 
and Director, RBC Capital Markets, LLC, dated December 15, 2015 
(``RBC Letter II''); Letter from Paige W. Pierce, President & Chief 
Executive Officer, RW Smith and Associates, LLC, dated December 11, 
2015 (``RW Smith Letter II''); Letter from Sean Davy, Managing 
Director, Capital Markets Division, and Leslie M. Norwood, Managing 
Director & Associate General Counsel, Municipal Securities Division, 
Securities Industry and Financial Markets Association, dated 
December 11, 2015 (``SIFMA Letter II''); Letter from Manisha Kimmel, 
Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated 
December 11, 2015 (``Thomson Reuters Letter II''); Letter from 
Thomas S. Vales, Chief Executive Officer, TMC Bonds LLC, dated 
December 11, 2015 (``TMC Bonds Letter II''); Letter from Robert J. 
McCarthy, Director of Regulatory Policy, Wells Fargo Advisors LLC, 
dated December 11, 2015 (``Wells Fargo Letter II'').
---------------------------------------------------------------------------

Summary of Initial Confirmation Disclosure Proposal and Comments 
Received
    As proposed in MSRB Notice 2014-20, for same-day principal 
transactions in municipal securities, dealers would have been required 
to disclose on the customer confirmation the price to the dealer in a 
``reference transaction'' and the differential between the price to the 
customer and the price to the dealer. The initial proposal would have 
applied where the transaction with the customer involved 100 bonds or 
fewer or bonds in a par amount of $100,000 or less, which was designed 
to capture those trades that are retail in nature.
    Of the 30 comments the MSRB received on the proposal, six supported 
the proposal, while 24 commenters generally opposed the proposal or 
made recommendations on ways to narrow substantially the scope of the 
proposal. Generally, commenters that supported the proposal stated that 
the proposed confirmation disclosure would provide additional post-
trade information to investors that would be otherwise difficult to 
ascertain.\52\ Three commenters, including the Consumer Federation of 
America and the SEC Investor Advocate, stated that this additional 
information would put investors in a better position to assess whether 
they are paying fair prices and the quality of the services provided by 
their dealer, and also could assist investors in detecting improper 
practices.\53\ The Consumer Federation of America indicated that the 
proposal would foster increased price competition in fixed income 
markets, which would ultimately lower investors' transaction costs.\54\ 
Two commenters recommended that the proposal not be limited to retail 
trades under the proposed size threshold, but that disclosure should be 
made on all trades involving retail customers, regardless of size.\55\
---------------------------------------------------------------------------

    \52\ See, e.g., SEC Investor Advocate Letter I at 1-2.
    \53\ See CFA Letter I at 1; DelphX Letter I at 2; SEC Investor 
Advocate Letter I at 2.
    \54\ See CFA Letter I at 1.
    \55\ See Hutchinson Shockey Letter I at 2; Thomson Reuters 
Letter I at 7.
---------------------------------------------------------------------------

    Other commenters opposed the proposal on several grounds. 
Commenters questioned whether the proposed disclosure would provide 
investors with useful information,\56\ or whether the disclosure would 
simply create confusion among investors.\57\ Commenters asserted that 
the proposed methodology for determining the reference transaction 
would be overly complex \58\ and costly for dealers to implement.\59\ 
Commenters also indicated the proposal could impair liquidity in the 
municipal market.\60\
---------------------------------------------------------------------------

    \56\ See Diamant Letter I at 5.
    \57\ See BDA Letter I at 4-5; FSI Institute Letter I at 3; 
Morgan Stanley Letter I at 2; SIFMA Letter I at 17; Wells Fargo 
Letter I at 5.
    \58\ See Fidelity Letter I at 4; FIF Letter I at 2; SIFMA Letter 
I at 24-26; Thomson Reuters Letter I at 2; Wells Fargo Letter I at 
8.
    \59\ See BDA Letter I at 2-3; Diamant Letter I at 7-8; Fidelity 
Letter I at 4-5; FIF Letter I at 2; FSI Institute Letter I at 5; 
Financial Services Roundtable Letter I at 5; Morgan Stanley Letter I 
at 3; Wells Fargo Letter I at 7-9.
    \60\ See Diamant Letter I at 8-9; FSI Institute Letter I at 3.
---------------------------------------------------------------------------

    Several commenters suggested ways to narrow the scope of the 
proposal. Some commenters recommended that the MSRB limit the 
disclosure obligation to riskless principal transactions involving 
retail investors, as this would more accurately reflect dealer 
compensation and transaction costs,\61\ and would be more consistent 
with the stated objectives of the SEC in this area and of the proposal 
itself.\62\ Some commenters suggested that the proposed rule should 
apply to riskless principal transactions as previously defined by the 
Commission for equity trades, wherein the dealer has an ``order in 
hand'' at the time of execution.\63\ One commenter, however, did not 
think that such a limitation would appreciably reduce the complexity or 
cost of the proposal.\64\ Commenters also suggested that the MSRB 
eliminate institutional trades from the scope of the proposal: For 
example, by not covering institutional accounts as defined in Rule G-
8(a)(xi) or sophisticated municipal market professionals (``SMMP'') as 
defined in MSRB Rule D-15.\65\ Both Fidelity and SIFMA stated that the 
proposal should permit trading desks that are separately operated 
within a firm to match only their own trades for purposes of pricing 
disclosure.\66\ Morgan Stanley and SIFMA also stated that transactions 
between affiliates should not constitute a firm principal trade that, 
if accompanied by a same-day customer trade, would trigger the 
disclosure requirement.\67\ Commenters also suggested that the proposal 
exempt the disclosure of mark-ups on new issues.\68\ One commenter 
suggested specifically that this exemption should cover transactions in 
new issues executed at the public offering price on the date of the 
issue's sale.\69\
---------------------------------------------------------------------------

    \61\ See Hilliard Letter I at 2; Morgan Stanley Letter I at 2; 
SIFMA Letter I at 29; Wells Fargo Letter I at 11.
    \62\ See SIFMA Letter I at 31.
    \63\ See Hilliard Letter I at 2; SIFMA Letter I at 30; Wells 
Fargo Letter I at 11.
    \64\ See Thomson Reuters Letter I at 7.
    \65\ See BDA Letter I at 6; FIF Letter I at 3; Morgan Stanley 
Letter I at 3; SIFMA Letter I at 35.
    \66\ See Fidelity Letter I at 8; SIFMA Letter I at 36.
    \67\ See Morgan Stanley Letter I at 3; SIFMA Letter I at 21.
    \68\ See BDA Letter I at 6; Coastal Securities Letter I at 1; 
SIFMA Letter I at 22.
    \69\ See Coastal Securities Letter I at 1.
---------------------------------------------------------------------------

    Rather than proposing pricing reference disclosure, several 
commenters suggested that the MSRB instead enhance EMMA, in part by 
providing greater investor education about EMMA,\70\ and requiring 
dealers to make EMMA more accessible \71\ by, for example, providing 
more near-real-time EMMA information to investors \72\ or providing a 
link to EMMA on customer confirmations,\73\ or by aggregating all TRACE 
and EMMA data on a single Web site.\74\
---------------------------------------------------------------------------

    \70\ See Fidelity Letter I at 7; FSI Institute Letter I at 6-7; 
Financial Services Roundtable Letter I at 6; Hilliard Letter I at 2-
3; Morgan Stanley Letter I at 2; SIFMA Letter I at 15-16.
    \71\ See Thomson Reuters Letter I at 6.
    \72\ See Wells Fargo Letter I at 7.
    \73\ See Fidelity Letter I at 7; FSI Institute Letter I at 6; 
Hilliard Letter I at 3; Morgan Stanley Letter I at 2; SIFMA Letter I 
at 15-16.
    \74\ See FIF Letter I at 4.
---------------------------------------------------------------------------

Summary of Revised Confirmation Disclosure Proposal and Comments 
Received
    In response to the comments received on MSRB Notice 2014-20, the 
MSRB proposed a different disclosure standard that was built upon the 
framework of the initial confirmation disclosure proposal, but modified 
a number of its

[[Page 62959]]

key aspects and added several exceptions to the proposed disclosure 
requirement.\75\
---------------------------------------------------------------------------

    \75\ See MSRB Notice 2015-16 (September 24, 2015).
---------------------------------------------------------------------------

    First, in response to concerns that the disclosures may be 
misconstrued by investors who may equate them with mark-ups or believe 
that they are always reflective of contemporaneous market conditions, 
the MSRB proposed requiring dealers to disclose the amount of mark-up 
or mark-down, as calculated from the prevailing market price for the 
security, rather than disclose the difference between the customer's 
price and the dealer's price in a reference transaction. The MSRB also 
proposed that the mark-up or mark-down disclosure be expressed as a 
total dollar amount and as a percentage.
    Second, the MSRB proposed to narrow the disclosure time window from 
a same-day disclosure standard to a two-hour disclosure standard. Thus, 
mark-up disclosure would be required only where the dealer's same-side 
of the market transaction occurs within the two hours preceding or 
following the customer transaction. The MSRB explained that it believed 
that such a time frame would be sufficient to cover transactions that 
could be considered ``riskless principal'' transactions under any 
current market understanding of the term, but that it was not proposing 
a broader same-day trigger out of concern about the potential for 
additional costs and complexities associated with a broader disclosure 
time trigger. However, the MSRB specifically sought public comment as 
to whether a broader disclosure time trigger, such as a same-day 
standard, might be warranted.
    Third, the MSRB proposed to replace the transaction size retail-
customer proxy (i.e., 100 bonds or fewer or bonds in a par amount of 
$100,000 or less) proposed in the initial confirmation disclosure 
proposal with a status-based exclusion for transactions that involve an 
institutional account, as defined in Rule G-8(a)(xi). This would ensure 
that all eligible transactions involving retail customers, regardless 
of size or par amount, would be subject to the proposed disclosure and 
was responsive to dealer concerns about using disparate definitions of 
a retail customer.
    Fourth, the MSRB proposed to require the disclosure of two 
additional data points, even if mark-up disclosure would not be 
required under the MSRB's proposal. The MSRB proposed to require that: 
(i) Dealers add a CUSIP-specific link to EMMA on all customer 
confirmations and (ii) dealers disclose the time of execution of a 
customer's trade on all customer confirmations. These disclosures were 
intended to provide context for the mark-up disclosures received by 
providing retail customers with a comprehensive view of the market for 
their security, including the market as of the time of trade. They were 
also responsive to commenter suggestions that the MSRB leverage EMMA 
and direct investors to the more comprehensive information there.
    Finally, the MSRB proposed three exceptions to the mark-up 
disclosure requirement. Under the first exception, in response to 
concerns from commenters that compensation disclosure is not warranted 
for primary market transactions, the MSRB proposed to provide an 
exclusion from a confirmation disclosure requirement for a customer 
transaction that is a ``list offering price transaction,'' as defined 
in paragraph (d)(vii)(A) of Rule G-14 RTRS Procedures. A ``list 
offering price transaction'' is a primary market sale transaction 
executed on the first day of trading of a new issue by a sole 
underwriter, syndicate manager, syndicate member, selling group member, 
or distribution participant to a customer at the published list 
offering price for the security.
    Under the second exception, in response to concerns from commenters 
that having the disclosure requirements triggered by trades made by 
separate trading departments or desks would undermine the legal and 
operational separation of those desks, the MSRB proposed to except from 
the mark-up disclosure requirement transactions between functionally 
separate trading desks. Under this exception, confirmation disclosure 
would not be required where, for example, the customer transaction was 
executed by a principal trading desk that is functionally separate from 
the retail-side desk if the functionally separate principal trading 
desk had no knowledge of the customer transaction.
    Under the third exception, in response to concerns from commenters 
about having the disclosure requirements triggered by certain trades 
between affiliates, the MSRB proposed to require dealers to ``look 
through'' a transaction with an affiliated dealer and substitute the 
affiliate's trade with the third party from whom the dealer purchased 
or to whom the dealer sold the security to determine whether disclosure 
of the mark-up would be required. This ``look through'' would apply 
only for dealers that, on an exclusive basis, acquire municipal 
securities from, or sell municipal securities to, an affiliate that 
holds inventory in such securities and transacts with other market 
participants. Some commenters stated that acquiring a security through 
an affiliate was functionally similar to an inventory trade, and that 
this trade would be of limited value,\76\ particularly where the inter-
affiliate trades are tantamount to a booking move across 
affiliates.\77\
---------------------------------------------------------------------------

    \76\ See SIFMA Letter I at 21.
    \77\ See Morgan Stanley Letter I at 3.
---------------------------------------------------------------------------

    As an ongoing alternative to the revised confirmation disclosure 
proposal, the MSRB also sought comment on a revised pricing reference 
proposal that was largely consistent with a revised confirmation 
disclosure proposal then under consideration by FINRA \78\ and, more 
broadly, sought comment on the revised FINRA confirmation disclosure 
proposal itself. Under the revised FINRA confirmation disclosure 
proposal, if a firm sells to a customer as principal and on the same 
day buys the same security as principal from another party in one or 
more transaction(s) that equal or exceed the size of the customer 
transaction, the firm would have to disclose on the customer 
confirmation the price to the customer; the price to the firm of the 
same-day trade (the ``reference price''); and the difference between 
those two prices. The revised FINRA confirmation disclosure proposal 
would permit firms to use alternative methodologies for calculating the 
reference price for more complex trade scenarios and would also permit 
firms to omit the reference price in the event of a material change in 
the price of the security between the time of the firm principal trade 
and the customer trade. Lastly, the revised FINRA confirmation 
disclosure proposal would require firms to provide a link to TRACE data 
on confirmations that are subject to the disclosure requirement.
---------------------------------------------------------------------------

    \78\ See FINRA Regulatory Notice 15-36 (October 2015).
---------------------------------------------------------------------------

    The revised FINRA confirmation disclosure proposal also contained a 
number of exclusions that were generally consistent with those in the 
MSRB revised confirmation disclosure proposal. These included 
exclusions for: Transactions that involve an institutional account; 
transactions that are part of a fixed price new issue and are sold at 
the fixed price offering price; firm principal trades that are executed 
on a trading desk functionally separate from the retail trading desk 
for purposes of calculating a reference price; and firm principal 
trades with affiliates for positions that were acquired by the 
affiliate on a previous trading day.
    In response to the MSRB's revised confirmation disclosure proposal, 
some

[[Page 62960]]

commenters reiterated that retail investors would benefit from some 
form of enhanced price disclosure. For example, the Consumer Federation 
of America stated that increased price disclosure would provide 
investors with the opportunity to make more informed investment 
decisions, and would foster increased price competition in the fixed 
income markets.\79\ The SEC Investor Advocate stated that some kind of 
regulatory solution was necessary, as retail investors in fixed income 
securities ``remain disadvantaged by the lack of information they 
receive in confirmation statements.'' \80\ The PIABA stated that 
``abuse of undisclosed mark-ups and mark-downs is not a hypothetical 
problem,'' and that making additional pricing information available 
could result in customers being charged more favorable prices.\81\
---------------------------------------------------------------------------

    \79\ See CFA Letter II at 6.
    \80\ See SEC Investor Advocate Letter II at 2.
    \81\ See PIABA Letter II at 3.
---------------------------------------------------------------------------

    A number of commenters supported the MSRB's proposal of disclosing 
the mark-up based on the prevailing market price instead of the 
reference price.\82\ Both BDA and Schwab stated that the reference 
price proposal would be costly, difficult for dealers to implement and 
for retail customers to understand, and may not provide customers with 
meaningful information about the costs associated with particular 
transactions.\83\ Schwab noted that, under the reference price 
proposal, a customer may receive disclosure for the execution of one 
lot of a particular order, but not for another lot of the same 
order.\84\ Schwab stated that the reference price proposal would also 
reflect market fluctuations, so that a customer may infer that the 
dealer lost money on a transaction with a customer, even if a mark-up 
was charged.\85\ FSI noted that using prevailing market price would 
ensure that customers ``receive the most reasonably accurate 
understanding of the cost of their trade.'' \86\ In addition, FSI 
indicated that ``structuring pricing disclosure around prevailing 
market price will align any new disclosure requirements with existing 
fair pricing policies enforced by both FINRA and the MSRB.'' \87\ 
Fidelity stated that the proposed disclosure requirement should focus 
on the difference between the price the customer was charged for a 
fixed income security and the prevailing market price of the fixed 
income security.\88\ Fidelity noted that a dealer's actual 
contemporaneous costs or proceeds are a reasonable proxy for the 
prevailing market price in some situations, but stated that there are 
many situations in which a dealer's costs or proceeds are not a 
reasonable proxy for the prevailing market price.\89\ Fidelity proposed 
that the prevailing market price be defined as the dealer's best 
available price for the subject security under the best available 
market at the time of trade execution.\90\ Fidelity proposed different 
methodologies that dealers could apply when determining the prevailing 
market price, including (1) looking at a trader's mark-to-market at the 
end of the day; (2) contemporaneous cost; (3) top of book; and (4) 
vendor solutions that offer real time valuations for certain 
securities.\91\
---------------------------------------------------------------------------

    \82\ See BDA Letter II at 6; Fidelity Letter II at 5; FSI Letter 
II at 5; LPL Letter II at 1; Schwab Letter II at 3; SEC Investor 
Advocate Letter II at 5.
    \83\ See BDA Letter II at 4-5; Schwab Letter II at 2.
    \84\ See Schwab Letter II at 2.
    \85\ See Schwab Letter II at 2.
    \86\ See FSI Letter II at 5.
    \87\ Id.
    \88\ See Fidelity Letter II at 5, 7-8.
    \89\ Id. at 7.
    \90\ Id.
    \91\ Id. at 8.
---------------------------------------------------------------------------

    In supporting the MSRB's mark-up disclosure approach, the SEC 
Investor Advocate noted that although mark-up disclosure may lead to 
disclosure to an investor of information indicating a smaller cost 
under some circumstances than under the reference price proposal, it 
nonetheless provides relevant information about the actual compensation 
the investor is paying the dealer for the transaction, reflects market 
conditions and has the potential to provide a more accurate benchmark 
for calculating transaction costs.\92\ LPL Financial noted that mark-up 
disclosure based on prevailing market price would be relevant to retail 
transactions in all kinds of fixed income securities that might be the 
subject of future disclosure requirements.\93\
---------------------------------------------------------------------------

    \92\ See SEC Investor Advocate Letter II at 5.
    \93\ See LPL Letter II at 4.
---------------------------------------------------------------------------

    Some commenters opposed limiting the disclosure requirement to 
circumstances where the dealer principal and customer trades occur 
closer in time to each other, such as two hours, as the MSRB previously 
had proposed. Coastal Securities, the Consumer Federation of America 
and the SEC Investor Advocate noted that a shorter timeframe would 
increase the possibility that dealers would attempt to evade the 
disclosure requirement by holding onto positions.\94\ Other commenters, 
including Morgan Stanley and SIFMA, supported the two-hour timeframe 
for disclosure.\95\ These commenters stated that the two-hour window 
would capture the majority of the trades at issue, and would also be 
easier to implement.\96\ Commenters stated that the concern that a 
shorter timeframe would facilitate gaming of the disclosure requirement 
was misplaced, as it was unlikely that dealers would change trading 
patterns and increase risk exposure merely to avoid disclosure.\97\ One 
commenter also said that regulators have sufficient access to data that 
would show whether dealers were attempting to game a two-hour 
disclosure window.\98\
---------------------------------------------------------------------------

    \94\ See Coastal Securities Letter II at 1; CFA Letter II at 2; 
SEC Investor Advocate Letter II at 5.
    \95\ See Bernardi Letter II at 1; CFA Institute Letter II at 1; 
Coastal Securities Letter II; Morgan Stanley Letter II at 3; RBC 
Letter II at 2; SIFMA Letter II at 7.
    \96\ See CFA Institute Letter II at 5; Morgan Stanley Letter II 
at 3; SIFMA Letter II at 7.
    \97\ See Morgan Stanley Letter II at 3; RW Smith Letter II at 2; 
SIFMA Letter II at 10.
    \98\ See RW Smith Letter II at 2.
---------------------------------------------------------------------------

    Commenters generally supported the change of the scope of the 
proposal from the ``qualifying size'' standard (transactions involving 
100 bonds or fewer or $100,000 face amount or less) to all transactions 
with non-institutional accounts.\99\ The Consumer Federation of America 
noted that the revised standard would help ensure that all retail 
transactions would receive disclosure, regardless of size.\100\
---------------------------------------------------------------------------

    \99\ See CFA Letter II at 4; PIABA Letter II at 2; Schwab Letter 
II at 5; SIFMA Letter II at 15.
    \100\ See CFA Letter II at 4.
---------------------------------------------------------------------------

    Three commenters opposed the proposal to require dealers to 
disclose the time of the execution of the customer transaction.\101\ 
FIF stated that this proposal would create additional expense for 
dealers, and information related to time of execution could not be 
adjusted in connection with any trade modifications, cancellations or 
corrections.\102\ FIF also indicated that the execution time is not 
necessary because ``the number of trades in each CUSIP listed on EMMA 
are so limited that investors will not have difficulty in ascertaining 
the prevailing market price at or around the time of their trade.'' 
\103\ Schwab indicated that this would not be a necessary data point 
for investors if mark-ups are disclosed from the prevailing market 
price.\104\
---------------------------------------------------------------------------

    \101\ See FIF Letter II at 5; Schwab Letter II at 6; SIFMA 
Letter II at 16.
    \102\ See FIF Letter II at 5.
    \103\ See FIF Letter II at 6.
    \104\ See Schwab Letter II at 6.
---------------------------------------------------------------------------

    Other commenters, however, supported including the time of 
execution of the customer trade.\105\ Thomson Reuters stated that 
including

[[Page 62961]]

the time of execution would allow retail investors to more easily 
identify relevant trade data on EMMA \106\ and FSI stated that this 
would allow investors to understand the market for their security at 
the time of their trade.\107\
---------------------------------------------------------------------------

    \105\ See CFA Institute Letter II at 4; FSI Letter II at 7; 
Thomson Reuters Letter II at 2.
    \106\ See Thomson Reuters Letter II at 2.
    \107\ See FSI Letter II at 7.
---------------------------------------------------------------------------

    Several commenters supported adding a security-specific link to 
EMMA,\108\ while other commenters, including FSI, SIFMA and Thomson 
Reuters, supported adding a general link to the EMMA Web site, noting 
that, in their view, a CUSIP-specific link could be inaccurate or 
misleading, and could be difficult for dealers to implement.\109\ BDA 
stated that a general link to the main EMMA page would be operationally 
easier to achieve.\110\
---------------------------------------------------------------------------

    \108\ See Bernardi Letter at 1; CFA Institute Letter II at 3-4; 
Schwab Letter II at 6; Fidelity Letter II at 8; RBC Letter II at 2.
    \109\ See FSI Institute Letter II at 6; SIFMA Letter II at 19; 
Thomson Reuters Letter II at 2.
    \110\ See BDA Letter II at 3.
---------------------------------------------------------------------------

    Commenters supported the proposed exception for transactions 
involving separate trading desks,\111\ although Schwab indicated that 
this exception should be subject to information barriers and rigorous 
oversight.\112\ The Consumer Federation of America suggested the MSRB 
specifically require, in the rule text, that dealers have policies and 
procedures in place to ensure functional separation between trading 
desks,\113\ and the SEC Investor Advocate suggested that the MSRB 
provide more ``robust'' guidance as to what constitutes a functional 
separation and applicable requirements.\114\
---------------------------------------------------------------------------

    \111\ See CFA Letter II at 5; CFA Institute Letter II at 3; 
Schwab Letter II at 6; SIFMA Letter II at 14-15.
    \112\ See Schwab Letter II at 6.
    \113\ See CFA Letter II at 5.
    \114\ See SEC Investor Advocate Letter II at 6.
---------------------------------------------------------------------------

    Some commenters supported the proposed requirement, in cases of 
transactions between affiliates, to ``look through'' to the affiliate's 
principal transaction for purposes of determining whether disclosure is 
required.\115\ FIF and Thomson Reuters stated, however, that not all 
dealers are able to ``look through'' principal trades, given 
information barriers and the fact that dealers often conduct inter-
dealer business on a completely separate platform than the retail 
business.\116\
---------------------------------------------------------------------------

    \115\ See CFA Institute Letter II at 3; Fidelity Letter II at 
11-12; PIABA Letter II at 2; Schwab Letter at 6; SIFMA Letter II at 
18.
    \116\ See FIF Letter II at 5; Thomson Reuters Letter II at 3.
---------------------------------------------------------------------------

Summary of Proposed Amendments to Rule G-30
    The proposed amendments to Rule G-30 to provide prevailing market 
price guidance was published for comment in MSRB Notice 2016-07 
(February 18, 2016). The MSRB received nine comment letters in response 
to the request for comment on the draft guidance.\117\ A copy of MSRB 
Notice 2016-07 is attached as Exhibit 2g. A list of comment letters 
received in response to MSRB Notice 2016-07 is attached as Exhibit 2h, 
and copies of the comment letters received are attached as Exhibit 2i.
---------------------------------------------------------------------------

    \117\ Letter from Michael Nicholas, Chief Executive Officer, 
Bond Dealers of America, dated March 31, 2016 (``BDA Letter III''); 
Emails from G. Lettieri, Breena LLC, dated February 23, 2016 and 
March 10, 2016 (``Breena Letter III''); Letter from Brian Shaw, 
dated March 28, 2016 (``Shaw Letter III''); Email from Herbert 
Murez, dated March 28, 2016 (``Murez Letter III''); Letter from 
Marcus Schuler, Head of Regulatory Affairs, Markit, dated March 31, 
2016 (``Markit Letter III''); Letter from Rick A. Fleming, Investor 
Advocate, Office of the Investor Advocate, U.S. Securities and 
Exchange Commission, dated March 31, 2016 (``SEC Investor Advocate 
Letter III''); Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Municipal Securities Division, and Sean 
Davy, Managing Director, Capital Markets Division, Securities 
Industry and Financial Markets Association, dated March 31, 2016 
(``SIFMA Letter III''); Letter from J. Ben Watkins III, Director, 
State of Florida, Division of Bond Finance, dated March 31, 2016 
(``State of Florida Letter III''); Letter from Manisha Kimmel, Chief 
Regulatory Officer, Wealth Management, Thomson Reuters, dated March 
31, 2016 (``Thomson Reuters Letter III'').
---------------------------------------------------------------------------

Summary of the Proposed Guidance and Comments Received
    As proposed in MSRB Notice 2016-07, generally, the prevailing 
market price of a municipal security would be presumptively established 
by referring to the dealer's contemporaneous cost as incurred, or 
contemporaneous proceeds as obtained. If this presumption is either 
inapplicable or successfully rebutted, the prevailing market price 
would be determined by referring in sequence to: (1) A hierarchy of 
pricing factors, including contemporaneous inter-dealer transaction 
prices, institutional transaction prices, and if an actively traded 
security, contemporaneous quotations; (2) prices or yields from 
contemporaneous inter-dealer or institutional transactions in similar 
securities and yields from validated contemporaneous quotations in 
similar securities; and (3) economic models.
    Of the nine comments the MSRB received on the proposal, the 
majority suggested alternatives or made recommendations to modify 
substantially more than one key aspect of the proposal.\118\ The SEC 
Investor Advocate described the draft guidance as generally useful, 
clear, and consistent with the FINRA guidance, but urged the MSRB to 
tighten a perceived ``loophole'' with respect to transactions between 
affiliates.\119\
---------------------------------------------------------------------------

    \118\ See Shaw Letter III at 2; Markit Letter III at 1-5; SEC 
Investor Advocate III at 5-8; SIFMA Letter III at 3-14; Thomson 
Reuters Letter III at 2.
    \119\ See SEC Investor Advocate Letter III at 8.
---------------------------------------------------------------------------

    Other commenters opposed the draft guidance on several grounds. 
Commenters questioned the appropriateness of a hierarchical approach in 
the municipal market.\120\ These commenters generally expressed a 
belief that while a prescriptive hierarchical approach may be 
appropriate for more liquid non-municipal debt securities, it is not 
appropriate for the more unique and heterogeneous municipal market.
---------------------------------------------------------------------------

    \120\ See BDA Letter III at 2; Markit Letter III at 2.
---------------------------------------------------------------------------

    A number of commenters stated that additional factors not permitted 
to be considered under the draft guidance should be expressly permitted 
to be considered when determining the prevailing market price of a 
municipal security. These include: Trade size; \121\ spread to an 
index; \122\ and side of the market.\123\ Others still suggested 
modifying or providing additional guidance for certain factors that are 
required or permitted to be considered under the draft guidance such as 
isolated transactions; \124\ economic models; \125\ and similar 
securities.\126\ One commenter requested additional guidance on the 
meaning of the term, ``contemporaneous.'' \127\
---------------------------------------------------------------------------

    \121\ See SIFMA Letter III at 7; Thomson Reuters Letter III at 
2; Markit Letter III at 4.
    \122\ See Thomson Reuters Letter III at 2.
    \123\ See SIFMA Letter III at 7.
    \124\ See Thomson Reuters Letter III at 2; SIFMA Letter III at 
9.
    \125\ See Thomson Reuters Letter III at 2.
    \126\ See Thomson Reuters Letter III at 2; SIFMA Letter III at 
8.
    \127\ See SIFMA Letter III at 6.
---------------------------------------------------------------------------

    One commenter suggested that SMMPs should be exempted from the fair 
pricing requirement under Rule G-30, reasoning that, if SMMPs are 
sophisticated enough to opt out of Rule G-18 best-execution 
protections, they should similarly be able to opt out of fair pricing 
protections.\128\ Another commenter suggested that the draft guidance 
should be limited to apply only to non-institutional accounts, 
consistent with the scope of the mark-up disclosure proposal.\129\
---------------------------------------------------------------------------

    \128\ See BDA Letter III at 4.
    \129\ See SIFMA Letter III at 9-10.
---------------------------------------------------------------------------

    Based on a concern that a disclosed mark-up could appear 
misleadingly small when calculated from a non-arms-

[[Page 62962]]

length transaction with an affiliated dealer, the SEC Investor Advocate 
urged the MSRB to require dealers acquiring securities from, or selling 
securities to, an affiliated dealer to always ``look through'' a non-
arms-length transaction with an affiliate in establishing prevailing 
market price.\130\ The SEC Investor Advocate further suggested that the 
underlying concern could be addressed in a number of ways (or 
combination thereof), including potentially modifying the draft 
guidance, modifying the proposed mark-up disclosure requirement or 
providing further explanation regarding non-arms-length inter-affiliate 
transactions in any filing of a proposed rule change.\131\
---------------------------------------------------------------------------

    \130\ See SEC Investor Advocate Letter III at 5-8.
    \131\ Id.
---------------------------------------------------------------------------

    Commenters suggested that the MSRB should provide the market 
sufficient implementation time before any prevailing market price 
guidance is effective.\132\ Two commenters specifically suggested that 
any final prevailing market price guidance and any final mark-up 
disclosure requirements should be adopted at the same time.\133\ One 
commenter suggested a minimum three-year implementation period.\134\
---------------------------------------------------------------------------

    \132\ See SIFMA Letter III at 13; Thomson Reuters Letter III at 
2-3.
    \133\ See BDA Letter III at 2-3; SIFMA Letter III at 13.
    \134\ See SIFMA Letter III at 13.
---------------------------------------------------------------------------

    A number of commenters suggested that the MSRB take an alternative 
approach to adopting prevailing market price guidance. One commenter 
suggested that the MSRB should permit dealers to rely on the use of 
third-party pricing vendors under certain conditions,\135\ while 
another suggested the MSRB should calculate and disseminate a net 
weighted average price which should be used in place of the prevailing 
market price.\136\
---------------------------------------------------------------------------

    \135\ See Markit Letter III at 4.
    \136\ See Shaw Letter III at 2.
---------------------------------------------------------------------------

    One commenter stated that dealers may calculate different 
prevailing market prices from the same set of facts and that dealers 
should be permitted to rely on reasonably designed policies and 
procedures to determine, in an automated fashion, the prevailing market 
price of a security.\137\ Others expressed concern about the burden on 
dealers in complying with the draft guidance, and questioned whether 
such burden would be outweighed by any benefits to the market.\138\
---------------------------------------------------------------------------

    \137\ See SIFMA Letter III at 3.
    \138\ See BDA Letter III at 1; State of Florida Letter III at 1; 
SIFMA Letter III at 14.
---------------------------------------------------------------------------

    More generally, three commenters suggested that the MSRB should 
coordinate with FINRA to develop consistent guidance and standards with 
respect to determining the prevailing market price of a security, 
including, potentially, the making by FINRA of corresponding changes to 
the FINRA guidance.\139\
---------------------------------------------------------------------------

    \139\ See SIFMA Letter III at 5; Markit Letter III at 5; SEC 
Investor Advocate Letter III at 6.
---------------------------------------------------------------------------

    In response to the comments received on the draft guidance, the 
MSRB clarified in the text of the proposed guidance that the list of 
factors specifically set forth in the proposed guidance to be used in 
determining whether a municipal security is sufficiently similar to the 
subject security as to be a ``similar'' security under the proposed 
guidance is a non-exclusive list. The text of the proposed guidance 
also makes clear that the determination of whether such security is 
``similar'' may be determined by all relevant factors.
    With respect to isolated transactions, the proposed guidance now 
clarifies that the determination of whether a transaction is an 
``isolated transaction'' as that term is used in the proposed guidance 
is not limited to a strictly temporal consideration, and that ``off-
market transactions'' may be deemed isolated transactions under the 
proposed guidance.
    The MSRB agrees with the SEC Investor Advocate's concern regarding 
the potential for misleading mark-up or mark-down calculations and 
disclosures when the mark-up or mark-down is determined by reference to 
a non-arms-length transaction with an affiliated dealer. The MSRB has 
addressed this concern, as discussed above, through a combination of 
provisions in the proposed mark-up disclosure requirement and 
explanation in this filing of the MSRB's intended meaning of the 
proposed prevailing market price guidance.\140\
---------------------------------------------------------------------------

    \140\ See discussion supra, Non-Arms-Length Affiliate 
Transactions.
---------------------------------------------------------------------------

    The MSRB is not, at this time, providing any additional guidance 
regarding the defined term, ``contemporaneous,'' as that term is used 
in the proposed guidance. This term is used in the FINRA guidance and 
adoption of the same term and definition within the proposed guidance 
promotes consistency and harmonization across fixed income markets. 
However, as discussed above, the determination of prevailing market 
price, as a final matter for purposes of confirmation disclosure, may 
be made at the time of a dealer's generation of the disclosure.
    As noted above, the MSRB recognizes that the determination of the 
prevailing market price of a particular security may not be identical 
across dealers, although the MSRB expects that even where dealers may 
reasonably arrive at different prevailing market prices for the same 
security, the difference between such prevailing market price 
determinations would typically be small. The MSRB would expect that 
dealers have reasonable policies and procedures in place to calculate 
the prevailing market price and that such policies and procedures are 
applied consistently across customers.
    Also as noted above, the MSRB has been in close coordination with 
FINRA on the development of the MSRB's mark-up disclosure proposal and 
the proposed guidance. The MSRB believes that the MSRB proposals are 
generally harmonized with the FINRA confirmation disclosure proposal 
and the interpretation of FINRA guidance, as applicable and to the 
extent appropriate in light of the differences between the markets.
    The MSRB believes that the cumulative effect of the MSRB's 
modifications and clarifications contained in the proposed guidance is 
to make the waterfall generally less subjective and more easily 
susceptible to programming (e.g., specific guidance with respect to 
determining contemporaneous cost or proceeds, the ability to determine 
the prevailing market price at the time of the making of a disclosure 
and the ability to consider economic models earlier in the process to 
the extent there are no ``similar'' securities to be considered). At 
the same time, these modifications and clarifications provide dealers 
with a greater degree of flexibility with respect to certain elements 
of the waterfall (e.g., more flexibility in determining the similarity 
of securities). The MSRB believes that these changes make the 
hierarchical approach more appropriate for the municipal market.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period of up to 90 days (i) as 
the Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or

[[Page 62963]]

    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MSRB-2016-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2016-12. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the MSRB. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-MSRB-2016-12 
and should be submitted on or before October 4, 2016.

    For the Commission, pursuant to delegated authority.\141\
---------------------------------------------------------------------------

    \141\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-21909 Filed 9-12-16; 8:45 am]
 BILLING CODE 8011-01-P