MSRB Rule G-47, as it relates to time of trade disclosure, requires firms to disclose, at or prior to the time of trade, all material information known about the transaction, as well as material information about the municipal security that is reasonably accessible to the market. The MSRB has previously provided interpretive guidance on specific types of information that is material where specific scenarios occur and requires time of trade disclosure, and recently published a notice to state its interpretation that the fact that a municipal security bears market discount is material information that must be disclosed to a customer under Rule G-47.
When a municipal security is acquired in the secondary market for less than par value, the security may have “market discount.” The amount of market discount is equal to the excess, if any, of the stated redemption price at maturity over the basis of the security immediately after its purchase by the investor. Market discount occurs when the value of a municipal security declines after its issue date—which often may occur due to a rise in interest rates. The fact that a municipal security bears market discount may significantly affect its tax treatment.
As noted, Rule G-47 requires dealers to disclose to their customers, at or prior to the time of trade, “all material information known about the transaction, as well as material information about the security that is reasonably accessible to the market.”
This disclosure obligation applies whether the transaction is unsolicited or recommended, and whether it is a primary offering or secondary market transaction. Information is considered to be material under Rule G-47 if there is a substantial likelihood that the information would be considered important or significant by a reasonable investor in making an investment decision. The MSRB has previously stated that the fact that a municipal security bears an original issue discount is material information that dealers are obligated to disclose, because it may affect the tax treatment of the security. In explaining this interpretation, the MSRB noted that appropriate disclosure of a security’s original issue discount feature should assist customers in computing the market discount or premium on their transaction. The MSRB also noted its concern that, absent adequate disclosure of a security’s original issue discount status, an investor might not be aware that all or a portion of his or her investment return represented by accretion of the discount is tax exempt, and might therefore, for example, sell the security at an inappropriately low price.
Similarly, the MSRB is concerned that, absent adequate disclosure that a security has market discount, an investor might not be aware that all or a portion of his or her investment return represented by accretion of the market discount is taxable as ordinary income, and therefore might, for example, purchase the securities at an inappropriately high price. As a result, the MSRB believes that the fact that a security has market discount is material information that is required to be disclosed to a customer under Rule G-47 at or prior to the time of trade.
For more guidance related to this topic, please refer to MSRB Regulatory Notice 2016-27.
