March 3, 2017
Dear Mr. Smith,
RW Smith thanks you for this opportunity to comment on the proposed amendments to the Minimum Denomination Rule. We support the original intent of the Rule which, as stated in the Notice, is to protect investors who own municipal securities below the stated minimum denomination. In general, RW Smith supports and reiterates the comments submitted by SIFMA on this rule proposal. We worked on that letter so our voice is fairly captured by it. We would, however, like to be heard separately on G49(c), Interdealer exceptions.
We feel that Rule G-49(c), which limits interdealer transactions, should be deleted. RW Smith agrees that retail customer transactions should be subject to the exceptions. Again, the purpose of the rule is to prohibit dealers from effecting transactions with customers in amounts below the minimum denomination – with certain exceptions without creating an additional number of below-denomination positions. With that in mind, Rule G- 49(c) which limits interdealer transactions is unwarranted, harms liquidity and is inconsistent with the original purpose of the rule of customer protection. Dealers should be permitted to accumulate below-minimum denomination positions and sell such a position to a customer to add to a customers existing below-minimum denomination position. There should be no limitation on Interdealer transactions and the liquidity statement should be eliminated. The liquidity statement is inefficient and does not provide customer protection in the slightest, and it is our opinion that both the limitations on Interdealer transactions and the requirement of these liquidity statements only serve to harm the very customers you are attempting to protect by denying them access to liquidity when they want to access the secondary market in order to sell their positions.
It is unfortunate that retail customers are, most often, allocated below minimum denomination positions by their advisor following the advisor's purchase of a block-sized security position. In our experience and our opinion, that is typically the point of creation of the majority of below minimum denomination customer positions, and we would like to see the regulators focus more on preventing these advisor allocations. Once allocated into retail customer accounts, that advisor has saddled that customer with a liquidity challenge that the advisor most times, and it could be argued all times, does not understand. Are allocations the only source of below minimum denomination position creation? No, but in our experience they are a significant source of them, and are voluntary unlike a court action or an issuer-related action.
Once a below minimum denomination situation exists for a retail customer, RW Smith believes it is imperative that the dealer community be granted an unrestricted right to help this customers source liquidity so they can get out of their (entire) below minimum denomination position. In almost every situation that we have seen the retail client is holding these positions through no fault of their own and G49(c), as written, only harms these customers and that is the last thing we want to see. Let the dealer community do what we do best, assist retail customers by providing access to liquidity and market pricing -- we all (regulators and the dealer community) owe that to them.
Thank you for providing us the opportunity to comment on this important rule proposal and for your thoughtful consideration of our comments.
Paige W Pierce