[Federal Register Volume 81, Number 177 (Tuesday, September 13, 2016)]
[Notices]
[Pages 62947-62963]
[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

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

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

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

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

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.'').
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    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

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.

---------------------------------------------------------------------------

    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

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

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

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

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

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.
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    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

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

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,