Securities Regulatory Update Summary - April 2018

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  • Is the Fiduciary Rule Dead? The Department of Labor announced that it will not be enforcing the Fiduciary Rule “pending further review,” after the Fifth Circuit Court of Appeals vacated the Fiduciary Rule and all related exemptions on March 15.  This might not be the end, however.  The DOL has until April 30 to request a review of the ruling by a full panel of the Fifth Circuit. If no appeal is sought, the Fiduciary Rule will be vacated by May 7.  The DOL also has until June 13, 2018 to petition the Supreme Court to hear its appeal.

So what happens if the Fiduciary Rule is vacated?  The prior rule will be reinstated, including the five-party test of fiduciary status.  So a financial adviser would not become a fiduciary under ERISA unless it provided investment advice that is (1) individualized, (2) provided on a regular basis, (3) related to securities or other property, (4) pursuant to a mutual agreement, and (5) the primary basis for investment decisions by the recipient. This would mean that one-time roll-over advice would generally not be considered fiduciary advice.   Until the DOL makes a decision on whether to appeal the Fifth Circuit’s opinion, it’s too early to revert to the pre-June 9, 2017 practices.

For more details, check out our blog post. Contributed by Cari Hopfensperger, Compliance Consultant

  • MSRB Rules requiring Disclosure of Mark-Ups and Mark-Downs Effective May 14: Amendments to MSRB Rules G-15 (Confirmations) and G-30 (Prices/Commissions) are set to take effect on May 14, 2018.  The Municipal Securities Rule-Making Board’s (MSRB) intent in issuing these amendments is to provide meaningful transparency to investors and to promote consistent compliance by brokerage firms with their fair pricing obligations.
  • Rule G-15 – requires brokerage firms to disclose the markup or markdown (collectively “markups”) on municipal bond trades to retail investors.
  • Rule G-30 – provides guidance on for determining the prevailing market price and reasonable markups.

Disclosure Requirements

When a firm buys a municipal bond as principal from one party and sells the bond as principal to a retail investor, the firm must disclose on the following information on the trade confirmation:

  1. Price charged to the buyer;
  2. Price the firm paid to acquire from the seller (reference price); and
  3. Difference between the two prices.

Disclosure Requirement Exceptions

  1. Offsetting trades done by a functionally separate trading desk;
  2. Primary market trades executed at the listed offering price; and
  3. Municipal fund security transactions (mutual funds, closed-end funds, ETFs, etc.).

Prevailing Market Price

Currently under Rule G-30 brokerage firms are obligated to exercise reasonable diligence when establishing the prevailing marketing price (“PMP”) for a security.  Therefore, brokerage firms are expected to establish policies and procedures to apply consistently for all retail investors for determining the PMP of a security.  The amendment to this rule establishes factors that must be complied with for reasonably determining the PMP that is in turn used to calculate the compensation to be received.

Brokerage firms should look at their contemporaneous trades of the same security to establish a presumption of the PMP.  If this data is not available then additional factors may then be considered for determining the PMP.  Those factors, in their successive order, are as follows:

  1. Contemporaneous trades of the security in interdealer trades;
  2. Trades of the muni between other dealers and institutional investors;
  3. Trades on alternative trading systems or other electronic platforms;
  4. Contemporaneous trades of similar securities (firm must use non-exclusive factors like credit quality, size of issue, and comparable yield when determining if securities are “similar”);
  5. The firm’s contemporaneous cost as incurred, or contemporaneous proceeds as obtained; and
  6. Prices or yields as derived from economic models.

The MSRB recently released updated FAQs to assist Dealers with compliance by May 14th.  MSRB G-15 & G-30 Implementation Guidance is another useful resource.  Contributed by Doug MacKinnon, Senior Compliance Consultant

  • MSRB Reminds Dealers about Best Execution Obligations and Standards of Conduct for Filtering Bids and Offers: According to the MSRB, when a Municipal dealer filters bids and offers through a broker’s broker or an alternative trading system (“ATS”), it has an obligation to ensure the use of such filters does not limit access to and competition in the market. Although there may be legitimate purposes justifying the use of filters, the dealer must be able to demonstrate a reason that is not anti-competitive.  To this end, dealers must develop and review policies and procedures addressing when and how the firm uses filters.  Such procedures should document:
  • The criteria for or factors considered when establishing, modifying and removing filters, and how they are determined;
  • The processes for establishing, modifying and removing filters, including authorization;
  • The process for reviewing filters; and
  • The process for reviewing the policies and procedures related to the practice of filtering.

Contributed by Rochelle Truzzi, Senior Compliance Consultant

Electronic Customer Complaint Log

Under MSRB Rule G-8, Dealers and Advisors must maintain a customer complaint log in an electronic format, defined in Supplementary Material .01 as, “any computer software program that is used for storing, organizing and/or manipulating data that can be provided promptly upon request to a regulatory authority.”  The complaint log must include additional data fields set forth in Rule G-8(a)(xii), including complaint product and problem codes.  These codes can be found in the MSRB Rule G-8 Customer and Municipal Advisory Client Complaint Product and Problem Codes Guide.    As per Rule G-9, complaint records must be maintained for a period of not less than six years.

Notifications Regarding Customer Education and Protection

MSRB Rule G-10 was overhauled to require Dealers and Advisors to provide customers with regular notifications about their registration status and the availability of educational material and information about filing a complaint.

Advisors are required to provide these notifications promptly after the establishment of a municipal advisory relationship, and no less than once each calendar year during the course of the relationship.  Dealers are only required to provide the notification annually.  The notifications must: (1) disclose that the Firm is registered with the MSRB and the SEC; (2) provide the MSRB’s website address; and (3) disclose that there is a brochure available on the MSRB website that describes the protections available under MSRB rules, and how to file a complaint with an appropriate regulatory authority.  Firms are no longer required to deliver the actual Investor Brochure to customers.  If you are an introducing broker/dealer and rely on your clearing firm to deliver the required annual notification, you should verify that such notifications have been sent and contain the required information.  Also, please ensure that notifications are being delivered to your direct-business municipal customers. Contributed by Rochelle Truzzi, Senior Compliance Consultant

Hardin Compliance Consulting provides links to other publicly-available legal and compliance websites for your convenience. These links have been selected because we believe they provide valuable information and guidance.

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