On December 5, the Securities and Exchange Commission approved Municipal Securities Rulemaking Board (MSRB) Rule G-18 (Best Execution Rule) that will require municipal securities dealers to seek the most favorable terms reasonably available for their retail customers’ transactions. The Best Execution Rule, which will become effective December 7, 2015, establishes explicit standards for how dealers handle and execute customer orders for municipal securities.

The Best Execution Rule will require municipal securities dealers to use “reasonable diligence” to identify the best potential trading venue for a particular security and then execute transactions in that venue to provide the customer with a price as favorable as possible under prevailing market conditions. The Best Execution Rule provides a non-exhaustive list of factors that a dealer must consider when exercising this diligence: the character of the market for the security, the size and type of transaction, the number of markets checked, the information reviewed to determine the current market for the subject security or similar securities, the accessibility of quotations and the terms and conditions of the customer’s inquiry or order. 

The Best Execution Rule is generally harmonized with the Financial Industry Regulatory Authority’s corresponding rule for best execution in the equity and corporate debt markets, but is tailored to the characteristics of the municipal securities market. Accordingly, transactions with sophisticated municipal market professionals (SMMPs) are exempt from the Best Execution Rule and its adoption is accompanied by amendments to related MSRB rules to help ensure that only appropriate investors are treated as SMMPs. SMMPs are institutional investors or individual investors with assets of at least $50 million. 

Prior to effectiveness of the Best Execution Rule, the MSRB and FINRA plan to provide practical guidance on complying with the best-execution standard in both the municipal securities and corporate debt markets. 

Click here for MSRB Regulatory Notice 2014-22.