Tag: Rule G-18

Best Execution: It’s Not Just for Capital Punishment!

MSRB Rule G-18, effective March 21, 2016, establishes a best-execution rule for municipal security transactions. The rule requires brokers and dealers to make reasonable efforts to find as favorable a price as possible for a customer’s transaction, given the prevailing conditions of the market. G-18 is comparable to FINRA Rule 5310, though it is designed specifically to meet the needs of the municipal securities market. —This post is relevant to the Series 52 and Series 53.— Continue reading

Rule G-18
MSRB Rule G-18, effective March 21, 2016, establishes a best-execution rule for municipal security transactions.  The rule requires brokers and dealers to make reasonable efforts to find as favorable a price as possible for a customer’s transaction, given the prevailing conditions of the market. G-18 is comparable to FINRA Rule 5310, though it is designed specifically to meet the needs of the municipal securities market.

In deciding how and where to execute a trade, a broker-dealer is expected to consider these factors:

• The character of the market for the security, such as its price, volatility, and liquidity
• The size and the type of transaction
• The number of markets checked
• The information reviewed to determine the current market for the security or similar securities
• The accessibility of the quotation
• The terms and conditions of the transaction as communicated to the broker-dealer

Because municipal securities trade over-the-counter, the term “market” should be interpreted broadly to include trading among broker’s brokers, alternative trading systems, or other counter-parties. Dealers must be especially vigilant with transactions in markets where trading is thin and limited pricing information is available.

If a dealer does not get the best price possible in the market, this does not necessarily mean that reasonable diligence was not used.  However, if the dealer makes another trade soon after and gets a better price for a similar security and there has been no significant change in the market, this is an indicator that the dealer did not use reasonable diligence.

The following are a few examples of characteristics that may be used to determine if two securities are similar:

• Issuer
• Source of repayment
• Credit rating
• Coupon
• Maturity
• Redemption features
• Sector of the market
• Geographical region
• Tax status

Broker-dealers must institute written policies and procedures that address how they will make a best-execution determination in the absence of pricing information or multiple quotations. They must document compliance with those policies and conduct reviews at least once a year to assess their effectiveness.

Broker-dealers are exempt from the best execution requirement when acting on behalf of a sophisticated municipal market professional (SMMP).  An SMMP is:

• A bank, savings and loan association, insurance company, or investment company
• A registered investment adviser
• Any other individual or entity having total assets of at least $50 million

Note: Because broker-dealers are not considered to be customers, the best-execution standard does not have to be applied to trades between broker-dealers that are not on behalf of a customer.

This post is relevant to the Series 52 and Series 53.

Exam Alert: MSRB establishes regulation of broker’s brokers and related dealers

Effective December 22, 2012, the MSRB will implement a new rule that imposes fairness obligations on both broker’s brokers and the dealers who interact with them. The MSRB will also put in effect related amendments and interpretive guidance. Continue reading

Effective December 22, 2012, the MSRB will implement a new rule that imposes fairness obligations on both broker’s brokers and the dealers who interact with them.  The MSRB will also put in effect related amendments and interpretive guidance.  For broker’s brokers:

-The new rule requires broker’s brokers to make a reasonable attempt to buy securities at a fair price and that requires them to sell securities at a fair price.

-The rule puts in place safeguards regarding the use of a “bid-wanted,” which is where a broker’s broker seeks out bids for a bond that a dealer wishes to sell.

-The new rule also requires broker’s brokers to establish and publicly disclose policies designed to ensure that the broker maintains their place as a market intermediary.

-Amendments to existing rules impose additional recordkeeping requirements.

 

For dealers who interact with broker’s brokers:

-The rule prohibits dealers from making “throw-away” bids (bids below the fair market value of a security) on a bid-wanted in order to shut other dealers out of the market.

-An interpretive guidance warns dealers who use broker’s brokers that the dealer retains the responsibility to ensure a fair price for their customers, and that they cannot rely on a bid-wanted to produce a fair price.

-The guidance advises against “screening” out other dealers when selling securities through a broker’s broker, unless the dealer has a legitimate reason to do so (one that is not anti-competitive).

-The guidance adds that a dealer should not assume that a customer values fast trade execution over getting a better price.

 

Source: MSRB Receives SEC Approval to Implement Measures to Strengthen Regulation of Broker’s Brokers

This alert applies to the Series 7.