[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]
[Notices]
[Pages 17548-17557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7133]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66625; File No. SR-MSRB-2012-04]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule G-43, on Broker's Brokers;
Proposed Amendments to Rule G-8, on Books and Records, Rule G-9, on
Record Retention, and Rule G-18, on Execution of Transactions; and a
Proposed Interpretive Notice on the Duties of Dealers That Use the
Services of Broker's Brokers
March 20, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on March 5, 2012, the Municipal Securities Rulemaking
Board (``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``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 is filing with the SEC a proposed rule change consisting
of (i) proposed MSRB Rule G-43 governing the municipal securities
activities of broker's brokers and certain alternative trading systems
(``Proposed Rule G-43''), (ii) proposed amendments to MSRB Rule G-8 (on
recordkeeping by broker's brokers and certain alternative trading
systems), MSRB Rule G-9 (on record retention), and MSRB Rule G-18 (on
agency trades and trades by broker's brokers) (collectively, the
``Proposed Amendments''); and (iii) a proposed interpretive notice on
the duties of brokers, dealers, and municipal securities dealers
(``dealers'') that use the services of broker's brokers (the ``Proposed
Notice''). The MSRB requests that the proposed rule change be made
effective six months after approval by the Commission.
The text of the proposed rule change is available on the MSRB's Web
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2012-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
The MSRB decided to consider additional rulemaking concerning
broker's brokers and the dealers that use their services due to the
important role that broker's brokers play in the provision of secondary
market liquidity for retail investors in municipal
[[Page 17549]]
securities. In 2004,\3\ the MSRB issued a notice that, among other
things, addressed the role of broker's brokers in large intra-day price
differentials in the sale of retail size blocks of securities.
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\3\ MSRB Notice 2004-3 (January 26, 2004).
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``Transaction Chains''
A frequent scenario in large intra-day price differentials
occurs when a single block of securities moves through a ``chain''
of transactions during the day. The securities involved in these
scenarios often are infrequently traded issues with credits that are
relatively unknown to most market participants. In a typical case,
the transaction chain starts with a dealer buying securities from a
customer, usually in a ``retail'' size block of $5,000 to $100,000.
The securities are then sold through a broker's broker. Two or more
inter-dealer transactions follow, with a final sale of the
securities being made by a dealer to a customer. In certain cases,
the difference between the price received by the selling customer
and the price received by the purchasing customer is abnormally
large, exceeding 10% or more. In reviewing such transaction chains,
it often appears that the two dealers effecting trades with
customers at each end of the chain--one dealer purchasing from a
customer and the other selling to a customer--did not make excessive
profits on their trades. Instead, the abnormally large intra-day
price differentials can be attributed in major part to the price
increases found in the inter-dealer trading occurring after the
broker's broker's trade.
The MSRB deferred its rulemaking on the subject of broker's brokers
until the completion of Commission and Financial Industry Regulatory
Authority (``FINRA'') enforcement actions, which subsequently
highlighted broker's broker activities that constitute clear violations
of MSRB rules.\4\
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\4\ FINRA v. Associated Bond Brokers, Inc. Letter of Acceptance,
Waiver and Consent No. E052004018001 (November 19, 2007) (settlement
in connection with alleged violation of Rule G-17 by broker's broker
due to lowering the highest bids to prices closer to the cover bids
without informing either bidders or sellers); FINRA v. Butler Muni,
LLC Letter of Acceptance, Waiver and Consent No. 2006007537201 (May
28, 2010) (settlement in connection with alleged violation of Rule
G-17 by broker's broker due to failure to inform the seller of
higher bids submitted by the highest bidders); D. M. Keck & Company,
Inc. d/b/a Discount Munibrokers, et al., Exchange Act Release No.
56543 (September 27, 2007) (settlement in connection with alleged
violation of Rules G-13 and G-17 by broker's broker for
dissemination of fake cover bids to both seller and winning bidder;
also settlement in connection with alleged violation of Rules G-14
and G-17 by broker's broker due to payment to seller of more than
highest bid on some trades in return for a price lower than the
highest bid on other trades, in each case reporting the fictitious
trade prices to the MSRB's Real-Time Trade Reporting System);
Regional Brokers, Inc. et al., Exchange Act Release No. 56542
(September 27, 2007) (settlement in connection with alleged
violation of Rules G-13 and G-17 by broker's broker for
dissemination of fake cover bids to both seller and winning bidder;
broker's broker allegedly violated Rule G-17 by accepting bids after
bid deadline); SEC v. Wolfe & Hurst Bond Brokers, Inc. et al.,
Exchange Act Release No. 59913 (May 13, 2009) (settlement in
connection with alleged violation of Rule G-17 by broker's broker
for dissemination of fake cover bids to both seller and winning
bidder and for lowering of the highest bids to prices closer to the
cover bids without informing either bidders or sellers). These cases
also involved violations of Rules G-8, G-9, and G-28.
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The MSRB recognizes that some broker's brokers make considerable
efforts to comply with MSRB rules. However, given the nature of the
rule violations brought to light by Commission and FINRA enforcement
actions and the important role of broker's brokers in the provision of
secondary market liquidity for retail investors, the MSRB determined
that additional guidance and/or rulemaking concerning the activities of
broker's brokers was warranted.
Summary of Proposed Rule G-43
The role of the broker's broker is that of intermediary between
selling dealers and bidding dealers. Proposed Rule G-43(a) would set
forth the basic duties of a broker's broker to such dealers.\5\
Proposed Rule G-43(a)(i) would incorporate the same basic duty
currently found in Rule G-18. That is, a broker's broker would be
required to make a reasonable effort to obtain a price for the dealer
that was fair and reasonable in relation to prevailing market
conditions. The broker's broker would be required to employ the same
care and diligence in doing so as if the transaction were being done
for its own account.
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\5\ The duties of a broker's broker to any customers (as defined
in Rule D-9) it may have are addressed under Rule G-18 (in the case
of agency transactions) and Rule G-30 (in the case of principal
transactions).
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Proposed Rule G-43(a)(ii) would provide that a broker's broker that
undertook to act for or on behalf of another dealer in connection with
a transaction or potential transaction in municipal securities could
not take any action that would work against that dealer's interest to
receive advantageous pricing. Under Proposed Rule G-43(a)(iii), a
broker's broker would be presumed to act for or on behalf of the seller
\6\ in a bid-wanted, unless both the seller and bidders agreed
otherwise in writing in advance of the bid-wanted.
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\6\ Under Proposed Rule G-43(d)(ix), ``seller'' would mean the
selling dealer, or potentially selling dealer, in a bid-wanted or
offering and would not include the customer of a selling dealer.
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Proposed Rule G-43(b) would create a safe harbor. The safe harbor
would provide that a broker's broker that conducted bid-wanteds in the
manner described in Proposed Rule G-43(b) would satisfy its pricing
duty under Proposed Rule G-43(a)(i).\7\ The provisions of the safe
harbor are designed to increase the likelihood that the highest bid in
the bid-wanted is fair and reasonable.
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\7\ A broker's broker that did not avail itself of the safe
harbor in section (b) would still be subject to sections (a), (c),
and (d) of Proposed Rule G-43.
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Proposed Rule G-43(b)(i) and (ii) would require a broker's broker
to disseminate a bid-wanted widely and, in the case of securities of
limited interest, to make a reasonable effort to reach dealers with
specific knowledge of the issue or known interest in comparable
securities.
Proposed Rule G-43(b)(iii) would require that each bid-wanted have
a deadline for the acceptance of bids to assist in measuring compliance
with the safe harbor.
Proposed Rule G-43(c)(i)(F) would require broker's brokers that
availed themselves of the safe harbor to use predetermined parameters
designed to identify possible off-market bids in the conduct of bid-
wanteds. For example, the predetermined parameters could be based on
yield curves, pricing services, recent trades reported to the MSRB's
Real-Time Trade Reporting System (RTRS), or bids submitted to a
broker's broker in previous bid-wanteds or offerings. Broker's brokers
would be required to test the predetermined parameters periodically to
see whether they were achieving their designed purpose.
Proposed Rule G-43(b)(iv) would permit a broker's broker that
availed itself of the safe harbor to contact the high bidder in a bid-
wanted about its bid price prior to the deadline for bids without the
seller's consent, if the bid was outside of the predetermined
parameters described above and the broker's broker believed that the
bid might have been submitted in error. If the high bid was within the
predetermined parameters, yet the broker's broker believed it might
have been submitted in error (e.g., because it significantly exceeded
the cover bid), the broker's broker would be required to obtain the
seller's consent before contacting the bidder. In all events, under
Proposed Rule G-43(c)(i)(D), the broker's broker would be required to
notify the seller if the high bidder's bid or the cover bid had been
changed prior to execution and provide the seller with the original and
changed bids.
Under Proposed Rule G-43(b)(v), a broker's broker would be required
to notify the seller if the highest bid received in a bid-wanted was
below the predetermined parameters and receive the seller's oral or
written consent
[[Page 17550]]
before proceeding with the trade. This required notice would have the
effect of notifying the selling dealer that the high bid in a bid-
wanted might be off-market. The selling dealer would then need to
satisfy itself that the high bid was, in fact, fair and reasonable, if
it wished to purchase the securities from its customer at that price as
a principal.
Proposed Rule G-43(c) is designed to ensure that bid-wanteds and
offerings are conducted in a fair manner. Many of the requirements of
Proposed Rule G-43(c) would address behavior that would also be a
violation of Rule G-17 (e.g., the prohibitions on providing bidders
with ``last looks,'' encouraging off-market bids, engaging in self-
dealing, changing bid or cover prices without permission, and failing
to inform the seller of the highest bid), although the requirements of
Proposed Rule G-43(c) would not supplant those of Rule G-17. Other
requirements of Proposed Rule G-43(c) are designed to notify sellers
and bidders of the manner in which bid-wanteds and offerings will be
conducted and disclosing potential conflicts of interest on the part of
broker's brokers (e.g., when a broker's broker has its own customers or
when it allows an affiliate to enter bids). Proposed Rule G-43(c) would
apply to the conduct of all bid-wanteds and offerings by broker's
brokers, regardless of whether the broker's broker had elected to
satisfy its Proposed Rule G-43(a)(i) pricing duty for bid-wanteds by
means of the Proposed Rule G-43(b) safe harbor. A broker's broker would
be required by Proposed Rule G-43(c)(i)(G) to describe the manner in
which it would satisfy its Proposed Rule G-43(a)(i) pricing obligation
in the case of offerings and in the case of bid-wanteds not subject to
the Proposed Rule G-43(b) safe harbor.
Proposed Rule G-43(d) would contain the definitions of terms used
in Proposed Rule G-43. Under Proposed Rule G-43(d)(iii), the term
``broker's broker'' would mean a dealer, or a separately operated and
supervised division or unit of a dealer, that principally effects
transactions for other dealers or that holds itself out as a broker's
broker, whether a separate company or part of a larger company. Certain
alternative trading systems would be excepted from the definition of
``broker's broker.'' To be excepted, the alternative trading system
would be required, with respect to its municipal securities activities,
to utilize only automated and electronic means to communicate with
bidders and sellers in a systematic and non-discretionary fashion (with
certain limited exceptions), limit any customers to sophisticated
municipal market professionals, and operate in accordance with most of
the provisions of Proposed Rule G-43(c). In essence, an alternative
trading system qualifying for the exception from the definition of
``broker's broker'' would be subject to most \8\ of the requirements of
Proposed Rule G-43 except the Proposed Rule G-43(a)(i) pricing
obligation.
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\8\ Such an excepted alternative trading system would not be
subject to the provision of Proposed Rule G-43(c)(i)(C) concerning
compensation. It would also not be subject to the requirements of
Proposed Rule G-43(c)(i)(D) and (E) in recognition of the fact that
much of the municipal securities trading conducted on alternative
trading systems is computerized and it would be difficult for
alternative trading systems to satisfy those requirements.
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Summary of Proposed Amendments
The proposed amendments to Rule G-8 would require recordkeeping
designed to assist in the enforcement of Proposed Rule G-43. Records
would be required to be kept of bids, offers, changed bids and offers,
the time of notification to the seller of the high bid, the policies
and procedures of the broker's broker concerning bid-wanteds and
offerings, and any agreements by which bidders and sellers agreed to
joint representation by the broker's broker.
Proposed Rule G-8(a)(xxv)(D) would require broker's brokers to keep
the following records of communications with bidders and sellers
regarding possibly erroneous bids: The date and time of the
communication; whether the bid deviated from the predetermined
parameters and, if so, the amount of the deviation; the full name of
the person contacted at the bidder; the full name of the person
contacted at the seller, if applicable; the direction provided by the
bidder to the broker's broker following the communication; the
direction provided by the seller to the broker's broker following the
communication, if applicable; and the full name of the person at the
bidder, or seller, if applicable, who provided that direction.
Under Proposed Rule G-8(a)(xxv)(E), the broker's broker would be
required to keep records of the date and time it notified the seller
that the high bid was below the predetermined parameters; the amount by
which the bid deviated from the predetermined parameters; the full name
of the person contacted at the seller; the direction provided by the
seller to the broker's broker following the communication; and the full
name of the person at the seller who provided that direction.
Proposed Rule G-8(a)(xxv)(J) would require that each broker's
broker keep a record of its predetermined parameters, its analysis of
why those predetermined parameters were reasonably designed to identify
most bids that might not represent the fair market value of municipal
securities that were the subject of bid-wanteds to which the parameters
were applied, and the results of the periodic tests of such
predetermined parameters required by Proposed Rule G-43(c)(i)(F).
Proposed Rule G-8(a)(xxvi) would impose comparable recordkeeping
requirements on alternative trading systems.
In the case of broker's brokers or alternative trading systems that
are separately operated and supervised divisions of other dealers,
separately maintained or separately extractable records of the
municipal securities activities of the broker's broker or alternative
trading system would be required to be maintained to assist in
enforcement of Proposed Rule G-43.
The proposed amendments to Rule G-9 would provide for the retention
of the records described above for six years.
The proposed amendment to Rule G-18 would eliminate duplication, as
the deleted text would be moved to Proposed Rule G-43(a)(i).
Summary of Proposed Notice
The Proposed Notice would discuss the duties of dealers that use
the services of broker's brokers.
Under the Proposed Notice, selling dealers would be reminded that
the high bid obtained in a bid-wanted or offering is not necessarily a
fair and reasonable price and that such dealers have an independent
duty under Rule G-30 to determine that the prices at which they
purchase municipal securities as a principal from their customers are
fair and reasonable. Selling dealers would be cautioned that any
direction they provided to broker's brokers to ``screen'' other dealers
from their bid-wanteds or offerings could affect whether the high bid
represented a fair and reasonable price and should be limited to valid
business reasons, not anti-competitive behavior. Selling dealers would
be urged not to assume that their customers needed to liquidate their
securities immediately without inquiring as to their customers'
particular circumstances and discussing with their customers the
possible improved pricing benefit associated with taking additional
time to liquidate their securities. The Proposed Notice also would
provide that, depending upon the facts and circumstances, the use of
bid-wanteds by selling dealers solely for price discovery purposes,
without any intention of selling the securities through the broker's
brokers might be an
[[Page 17551]]
unfair practice within the meaning of Rule G-17.
Under the Proposed Notice, bidding dealers that submitted bids to
broker's brokers that they believed were below the fair market value of
the securities or that submitted ``throw-away'' bids to broker's
brokers would violate MSRB Rule G-13. The Proposed Notice would provide
that, while Rule G-30 provides that bidders are entitled to make a
profit, Rule G-13 does not permit them to do so by ``picking off''
other dealers at off-market prices.
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2) of the Securities Exchange Act (``Exchange Act''),
which provides that:
The Board shall propose and adopt rules to effect the purposes
of this title with respect to transactions in municipal securities
effected by brokers, dealers, and municipal securities dealers and
advice provided to or on behalf of municipal entities or obligated
persons by brokers, dealers, municipal securities dealers, and
municipal advisors with respect to municipal financial products, the
issuance of municipal securities, and solicitations of municipal
entities or obligated persons undertaken by brokers, dealers,
municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Exchange Act, provides that the rules of
the MSRB shall:
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 proposed rule change is consistent with Sections 15B(b)(2) and
15B(b)(2)(C) of the Exchange Act for the following reasons. Enforcement
agencies have informed the MSRB that they continue to observe the same
kinds of series of transactions in municipal securities that prompted
the MSRB's 2004 pricing guidance. They have also informed the MSRB
about their observations of other trading patterns that indicate some
market participants may misuse the role of the broker's broker in the
provision of secondary market liquidity and may cause retail customers
who liquidate their municipal securities by means of broker's brokers
to receive unfair prices. Proposed Rule G-43 is designed to improve
pricing in the secondary market for retail investors in municipal
securities by increasing the likelihood that bid-wanteds and offerings
made through broker's brokers will result in fair and reasonable
prices. It would do that by encouraging the wide dissemination of bid-
wanteds to those who are likely to have interest in the securities,
drawing potential below market prices to the attention of selling
dealers, and discouraging the type of fraudulent and unfair conduct
that may result in prices that are lower than they would otherwise have
been. At the same time, Proposed Rule G-43 is structured in a manner
that should not impede the operation of the secondary market for
municipal securities. The MSRB has worked extensively with broker's
brokers and other dealers to refine the proposed rule so that it
targets abuses without reducing liquidity. The proposed amendments to
Rules G-8 and G-9 would assist the Commission and FINRA in the
enforcement of Rule G-43. The proposed amendment to Rule G-18 would
eliminate unnecessary duplication as the broker's brokers pricing
obligation would be transferred to Proposed Rule G-43. The Proposed
Notice would remind dealers that use the services of broker's brokers
of their own pricing obligations, as sellers and as bidders. In order
for retail investors to receive fair and reasonable prices for their
municipal securities, all dealers in the secondary market (whether
sellers, broker's brokers, or bidders) must satisfy their pricing
obligations.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change would
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act, since it would apply
equally to all broker's brokers and all alternative trading systems
would have the opportunity to qualify for the exception from the
definition of ``broker's broker.'' The MSRB notes that alternative
trading systems that have voice brokerage components would be subject
to all of the provisions of Proposed Rule G-43 and would not be given a
competitive advantage over voice brokers. The MSRB also does not
believe that the provisions of the proposed rule change would be unduly
burdensome to broker's brokers or would have the effect of reducing the
number of broker's brokers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
On September 8, 2011, the MSRB requested comment on a draft of the
proposed rule change.\9\ Comments were received from Bond Dealers of
America (``BDA''); Tom Dolan (``Mr. Dolan''); Hartfield, Titus &
Donnelly, LLC (``Hartfield Titus''); Knight BondPoint; Regional
Brokers, Inc. (``RBI''); Securities Industry and Financial Markets
Association (``SIFMA''); TMC Bonds L.L.C. (``TMC''); Vista Securities,
Inc. (``Vista Securities''); and Wolfe & Hurst Bond Brokers, Inc.
(``Wolfe & Hurst''). Summaries of those comments and the MSRB's
responses follow.
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\9\ MSRB Notice 2011-50 (September 8, 2011).
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References in this section to ``Draft Rule G-43'' and ``Draft Rule
G-8(a)(xxv)'' are to the draft version of Proposed Rule G-43 and the
draft amendments to Rule G-8 upon which comment was requested in MSRB
Notice 2011-50. The underlined rule text in this section does not
reflect amendments agreed to by the MSRB's Board that are now included
in the proposed rule change. This text has been included in this filing
for the convenience of the reader because a number of the sections of
the draft rule were reordered in the proposed rule change, although not
substantively changed.
Draft Rule G-43(a)(i): Each dealer acting as a ``broker's broker''
with respect to the execution of a transaction in municipal securities
for or on behalf of another dealer shall make a reasonable effort to
obtain a price for the dealer that is fair and reasonable in relation
to prevailing market conditions. The broker's broker must employ the
same care and diligence in doing so as if the transaction were being
done for its own account.
Comments: Wolfe & Hurst argued that ``it is not feasible for a
broker's broker to determine fair market value nor is this the role of
a broker's broker.'' It further argued that the clients of a broker's
broker, broker-dealers and bank dealers, are in a better position to
make a determination as to fair market value and should therefore be
responsible for making this determination, not broker's brokers.
MSRB Response: The pricing duty of a broker's broker under Draft
Rule G-43(a)(i) is not new. It is the same duty as that found in
existing Rule G-18. In view of the important role that a broker's
broker plays in arriving at a fair and reasonable price for a retail
investor
[[Page 17552]]
in the secondary market, the MSRB considers it important to reemphasize
that duty by including it in a rule directed solely to broker's
brokers. Draft Rule G-43 clearly spells out the duties of broker's
brokers and the conduct in which they may not engage. However, the MSRB
also has proposed the companion notice on the duties of dealers using
the services of broker's brokers because it agrees that both sellers
and bidders also play an important role in the achievement of a fair
and reasonable price for retail investors.
Draft Rule G-43(a)(iii): A broker's broker will be presumed to act
for or on behalf of the seller in a bid-wanted or offering, unless both
the seller and bidders agree otherwise in writing in advance of the
bid-wanted or offering.
Comments: SIFMA requested that the reference to offerings in Draft
Rule G-43(a)(iii) be removed. In the conduct of offerings, it said that
there is not, in practice, a presumption that the broker's broker is
working for the seller of bonds. It agreed that the presumption is
accurate in the case of bid-wanteds. SIFMA also requested that ``the
requirement to obtain prior written authorization from buyers and
sellers should be clarified to reflect that the authorization is not
intended to be required on a transaction-by-transaction basis, and that
it may be included in a customer agreement or similar terms-of-use
agreement for electronic systems.'' If a transaction-by-transaction
scheme was envisioned, SIFMA requested the MSRB to reconsider such an
approach, as obtaining written consents in this manner would be
unworkable in practice.
Hartfield Titus also suggested restricting this section to bid-
wanteds. It said that broker's broker activity in offerings is not
consistent with the requirement of Draft Rule G-43(a)(iii). It said
that a broker's broker works for either the seller or buyer in the
negotiation, depending on which side initiates the negotiation.
RBI said that Draft Rule G-43(a)(iii) should be revised to indicate
the difference between ``bid-wanteds'' and ``offerings.'' It agreed
that the broker's broker represents the seller in the operation of a
bid-wanted auction, but did not agree that the broker's broker will
always work for the seller in an ``offering'' as it represents the
bidder and seller equally.
Wolfe & Hurst said that a broker's broker is a ``dual-agent for the
seller and the buyer of securities.'' It stated that it is not
practicable to require a broker's broker to get written consent from
both the buyer and seller in advance of the bid-wanted or offering.
Wolfe & Hurst suggested that the definition of a broker's broker be
revised to reflect the dual nature of their business. If not modified,
it suggested that the provision clarify that ``the clients of a
broker's broker could consent to a dual-agency relationship either
through an initial service agreement or through Terms of Use on the
firm's Web site.''
MSRB Response: The MSRB agrees with the comments concerning the
role of a broker's broker in an offering and has modified Proposed Rule
G-43(a)(iii) to remove references to ``offerings'' and to clarify that
a broker's broker may obtain the requisite agreement in a customer
agreement.
Draft Rule G-43(b)(i): Unless otherwise directed by the seller, a
broker's broker must make a reasonable effort to disseminate a bid-
wanted or offering widely (including, but not limited to, the
underwriter of the issue and prior known bidders on the issue) to
obtain exposure to multiple dealers with possible interest in the block
of securities, although no fixed number of bids is required.
Comments: Hartfield Titus suggested restricting this section to
bid-wanteds. It said that offerings are displayed by dealers on many
systems and through many broker's brokers, unlike bid-wanteds, which
are usually given to one broker's broker. Therefore the requirement for
disseminating an offering widely is not necessary. In bid-wanteds,
there is an obligation to find the buyer, but there is no such
obligation for an offering. If any such an obligation does exist, it is
with the seller.
SIFMA noted that, in offerings, a broker's broker will typically
approach a dealer with known interest in the securities being offered
or comparable securities, rather than reaching out to a wide universe
of dealers.
MSRB Response: The MSRB has modified the safe harbor of Rule G-
43(b) so that it applies to bid-wanteds, but not offerings, in view of
the fact that most offerings are the subject of negotiations among a
limited number of parties, unlike bid-wanteds, which are generally
distributed widely.
Draft Rule G-43(b)(iii), (iv), (vii), and (viii):
(iii) A broker's broker may not encourage bids that do not
represent the fair market value of municipal securities that are the
subject of a bid-wanted or offering.
(iv) A broker's broker may not give preferential information to
bidders in bid-wanteds or offerings, including where they currently
stand in the bidding process (including, but not limited to, ``last
looks,'' directions to a specific bidder that it should ``review'' its
bid or that its bid is ``sticking out''); provided, however, that after
the deadline for bids has passed, bidders may be informed whether their
bids are the high bids (``being used'') in the bid-wanteds or
offerings.
(vii) A broker's broker may not change a bid without the bidder's
permission or change an offered price without the seller's permission.
(viii) A broker's broker must not fail to inform the seller of the
highest bid in a bid-wanted or offering.
Comments: SIFMA said Draft Rule G-43(b) includes both safe harbor
provisions and anti-fraud provisions for which the failure to adhere
likely would constitute violations of Rule G-17. SIFMA thus requested
that Draft Rule G-43(b)(iii), (iv), (vii), and (viii) be removed and
either be published as interpretations under G-17, or moved to G-43(c).
SIFMA agreed with Draft Rule G-43(b)(iv), which prohibits broker's
brokers from giving preferential treatment to bidders during a bid-
wanted. However, it suggested that broker's brokers be allowed to
inform a bidder whether their bid is being used before a bid-wanted is
completed. Wolfe & Hurst agreed with SIFMA.
Hartfield Titus suggested restricting Draft Rule G-43(b)(iv) to
bid-wanteds. It said that offerings are traded through negotiation
rather than an auction. It also suggested that broker's brokers ``be
allowed to give a bidder information on whether their bid is being used
and subsequently prohibit them from any further bidding on the item.''
TMC noted that Draft Rule G-43, by its definition, includes all of
the electronic trading platforms. It said that Draft Rule G-43(b)(vii)
would be meaningless as all alternative trading systems would be
required to inform every registered firm that every price they post
will be changed, and in multiple ways, as each recipient firm defines
its own matrix. Current guidelines already prohibit unfair dealing. TMC
suggested that Draft Rule G-43(b)(vii) be removed or modified to
accommodate private label Web sites that allow customers and registered
reps to view inventory.
MSRB Response: The MSRB agrees that Draft Rule G-43(b)(iii), (iv),
(vii), and (viii) should be applicable whether or not the safe harbor
is availed of by a broker's broker and has moved these provisions to
Proposed Rule G-43(c). The MSRB is sensitive to the need to maintain
liquidity in the secondary market for municipal securities and has,
[[Page 17553]]
accordingly, modified the draft rule to permit a broker's broker to
tell a bidder whether its bid is being used before a bid-wanted is
completed. Nevertheless, to protect against gaming of the bid-wanted
process, bidders would not be permitted to change their bids (other
than to withdraw them) or resubmit bids for the same bid-wanted after
receiving a comment. This portion of the draft rule has been moved to
Proposed Rule G-43(c), so that it is applicable whether or not the safe
harbor is used. As noted above, the MSRB has removed references to
offerings in Proposed Rule G-43(b) and in the comparable text moved to
Proposed Rule G-43(c).
The MSRB does not agree with TMC's comment. Under the proposal, a
seller's consent would be required before an offered price could be
changed by a broker's broker. The same would be true for alternative
trading systems excepted from the rule. However, that consent could be
obtained in advance (e.g., in a customer agreement).
Draft Rule G-43(b)(v): Notwithstanding subsection (a)(ii) of this
rule, each bid-wanted or offering must have a deadline for the
acceptance of bids, after which the broker's broker must not accept
bids or changes to bids. That deadline may be either a precise (or
``sharp'') deadline or an ``around time'' deadline that ends when the
high bid has been provided (or ``put up'') to the seller.
Comments: SIFMA agreed that bid-wanteds must have identifiable
deadlines, but disagreed that the deadline for ``around time'' bid-
wanteds should be based on when the bids are ``put up'' to the seller.
SIFMA suggested that the deadline for ``around time'' bid-wanteds
should be defined to occur at the time the seller informs the broker's
broker that the bonds should be sold to the high bidder (when the bonds
are ``marked for sale''), or when the seller informs the broker's
broker that the bonds will not be sold in that bid-wanted (that the
bonds ``will not trade''). If neither of these events occurs in an
``around time'' bid-wanted, it should be deemed to terminate at the end
of the trading day. SIFMA said that the rule as currently drafted would
have a ``detrimental effect on liquidity, especially for retail
customers of the broker-dealer.''
Hartfield Titus suggested restricting Draft Rule G-43(b)(v) to
apply only to bid-wanteds and not to offerings. It said that current
industry practices have no time limits on offerings. Hartfield Titus
agreed with SIFMA that ``the deadline for accepting bids on an `around
time' item be when the bonds are marked `FOR SALE'.''
RBI said that the imposition of a deadline could drastically deny
the retail customer from receiving the highest bid available. RBI also
noted that, in MSRB Notice 2011-18 (February 24, 2011), the MSRB stated
that it ``believes that most retail customers would prefer a better
price to a speedy trade.'' RBI agreed with this and said the imposition
of an arbitrary ``deadline'' does the opposite. ``RBI believes that any
deadline that is imposed upon its ability to accept bids, especially on
odd-lot bid-wanted items that are being advertised as an `around time',
will be vastly detrimental to the ability of broker's brokers to
provide the best price, and therefore the best execution, for the
retail seller who is trying to get the best price for their municipal
bonds.'' RBI also commented that the MSRB has not provided guidelines
regarding the procedures that should be taken when late, high bids are
returned to the broker's broker that cannot be reported to the seller
because of this ``deadline.'' Like SIFMA and Hartfield Titus, RBI
proposed that instead of the bid deadline ending at the time that a bid
is ``put up'' to the seller, that the bid deadline should end when the
bonds are marked ``for sale.''
Wolfe & Hurst objected to Draft Rule G-43(b)(v). It said that the
rule currently applies to both ``sharp'' and ``around time'' deadlines.
It argued that the ``requirement restricts the broker's broker from
getting the best bid for its client, which will ultimately have a
negative impact on smaller retail clients and the market as a whole.
Wolfe & Hurst suggested that the ``rule be modified in the case of
`around time' bid-wanteds only. Specifically, where a selling dealer
requests an `around time' deadline, the broker's broker should be
permitted to accept and change bids up until the point that the trade
is marked for sale. Prohibiting modification at the point where the
high bid is `put up' to the seller is restricting liquidity in the
market. This rule change would be detrimental to the industry.''
MSRB Response: The MSRB's principal reason for proposing Rule G-43
was to improve the pricing received by retail investors in the
secondary market. Accordingly, the MSRB has modified the deadline
provisions of the safe harbor to increase the likelihood of the receipt
of higher prices. Under the revision, an ``around time'' deadline would
end upon the earliest of: (1) the time the seller directs the broker's
broker to sell the securities to the current high bidder, (2) the time
the seller informs the broker's broker that the bonds will not be sold
in that bid-wanted, or (3) the end of the trading day as publicly
posted by the broker's broker prior to the bid-wanted. Additionally,
the deadline provisions would apply only to bid-wanteds.
Draft Rule G-43(b)(vi): If the high bid received in a bid-wanted is
above or below the predetermined parameters of the broker's broker and
the broker's broker believes that the bid may have been submitted in
error, the broker's broker may contact the bidder prior to the deadline
for bids to determine whether its bid was submitted in error, without
having to obtain the consent of the seller. If the high bid is not
above or below the predetermined parameters but the broker's broker
believes that the bid may have been submitted in error, the broker's
broker must receive the permission of the seller before it may contact
the bidder to determine whether its bid was submitted in error. In all
events, if a bid has been changed, the broker's broker must disclose
the change to the seller prior to execution and provide the seller with
the original and changed bids.
Comments: Hartfield Titus suggested that there was no need to
notify the seller of all changes in bids under the safe harbor and that
to do so would only delay the process. It stated that such a
requirement should apply only when the safe harbor was not being used.
TMC said, ``The requirement of a broker's broker to contact a
seller for permission to contact a bidder, when the bid itself is
within the parameters of the safe harbor is neither practical nor
realistic. A selling dealer, who is acting in the best interest of its
selling client, is not likely to give such approval.'' TMC also said
that ``the requirement to document the communication, the original bid,
and the changed bid is superfluous and an added regulatory burden.''
BDA expressed concern that ``if a broker's broker set the
parameters too broadly on the upper end, erroneous bids would not be
identified, the bidder would not be notified and might, in future
dealings with that broker's broker, bid more conservatively or not at
all. The result would be reduced liquidity in the market and lower
prices for investors. Similarly, if the broker's broker set the
parameters too narrowly on the lower end, the selling broker would
receive a notice and quite likely not go through with the trade, or
risk litigation if it did.''
Wolfe & Hurst objected to the use of predetermined parameters for
bid-wanteds. It said that erroneous bids typically occur due to human
error and should not be permitted to reach the marketplace as they do
not reflect an accurate bid. Wolfe & Hurst also said
[[Page 17554]]
that ``requiring a broker's broker to obtain written permission from
the seller prior to contacting the owner of an erroneous bid may result
in a distortion of the market.'' It suggested that broker's brokers be
allowed to inform a bidder of ``a clearly erroneous bid without the
consent of the seller and without providing the same opportunity for
modification to all bidders.''
MSRB Response: By definition, ``predetermined parameters'' must be
designed to identify off-market bids. Broker's brokers currently
compare bids to where securities have traded before with them and where
they have traded most recently, as displayed on the MSRB's Electronic
Municipal Market Access (EMMA[supreg]) System.\10\ Some also subscribe
to pricing services. Many broker's brokers already notify sellers and
bidders if they think bids may be off-market. The requirement that they
establish pre-determined parameters and use them to alert sellers and
bidders to possible off-market bids simply incorporates current
business practice in many cases. As markets move over time, the
predetermined parameters of a broker's broker may cease to be effective
in identifying off-market bids. That is the purpose of the periodic
testing requirement.
---------------------------------------------------------------------------
\10\ EMMA[supreg] is a registered trademark of the MSRB.
---------------------------------------------------------------------------
The concept of ``predetermined parameters'' has two purposes.
First, if the high bid in a bid-wanted is below the predetermined
parameters, a broker's broker using the safe harbor must notify the
seller of that fact, thus alerting the seller that the bid may be off
market. Second, if the high bid is outside of the parameters, the
broker's broker may inquire of the bidder whether its bid was in error.
Considerable abuse has occurred previously when some broker's brokers
signaled to bidders that they could lower their bids to be closer to
cover bids. This practice resulted in less favorable prices for retail
investors. Cover bids are, therefore, under the proposal not permitted
to be taken into account in the pricing parameters of a broker's
broker.
The MSRB has modified Proposed Rule G-43(b)(vi) to clarify that a
broker's broker need only inform the seller of changes in the winning
high bidder's bids and in cover bids, rather than changes to other
bids. Additionally, the MSRB has clarified that the permission of a
seller to contact a bidder need not be in writing, although a broker's
broker must keep a written record of such communication.
Draft Rule G-43(b)(ix): If the highest bid received in a bid-wanted
is below the predetermined parameters of the broker's broker, the
broker's broker must disclose that fact to the seller, in which case
the broker's broker may still effect the trade, if the seller
acknowledges such disclosure either orally or in writing.
Comments: TMC acknowledged the MSRB's desire to limit the number of
off-market trades that result from the bid-wanted process, but said
that the attempt to add written communication and/or oral confirmation
will greatly reduce the efficiency and accuracy of the electronic
market. TMC stated that ``(t)he fallacy of the proposal lies in the
belief that a single model will be sufficient for determining
reasonableness.'' TMC also noted that Draft Rule G-43(b)(ix) ``still
proposes that the broker's broker provide a fair price, but the Board
has relaxed the requirement to include a price band.'' TMC responded
that ``its tools are designed to help with a user's valuation process,
not to replace the decision maker.'' TMC said that ``recognizing that
volatile periods will generate the most exceptions with any model, the
burdens placed on participants to record and acknowledge price levels
will be unbearable.'' TMC suggested that ``a standard of reasonable
care for broker's brokers should include `reasonable' tools to help
with the decision process, but the construction of a scheme to
establish value in a fragmented and diffuse market seems to be more
appropriate for a position taker than for an intermediary.''
BDA also said that it is not a function of a broker's broker to
determine a fair price or a range of fair prices. It also noted a
practical problem if the draft rule is applied to alternative trading
systems (``ATSs''). BDA suggested that ``the Proposal should not be
applied to ATSs, which allow for the wide and impartial distribution of
bids.''
MSRB Response: The MSRB believes that the exception for certain
alternative trading systems from the definition of ``broker's broker''
in the revised rule should address TMC's and BDA's concerns.
Draft Rule G-43(c)(i)(F): [A broker's broker must adopt and comply
with policies and procedures pertaining to the operation of bid-wanteds
and offerings, which at a minimum:] subject to the provisions of
section (b) of this rule, if applicable, prohibit the broker's broker
from providing any person other than the seller (which may receive all
bid prices) and the winning bidder (which may receive only the price of
the cover bid) with information about bid prices, until the bid-wanted
or offering has been completed, unless the broker's broker makes such
information available to all market participants on an equal basis at
no cost, together with disclosure that any bids may not represent the
fair market value of the securities, and discloses publicly that it
will make such information public.
Comments: SIFMA said Draft Rule G-43(c)(i)(F) should not apply to
offerings. It also requested clarification regarding when a transaction
has been completed. It suggested the appropriate point in time for the
purposes of this provision should be the time at which both the
purchase and sale sides of the transaction have been executed.
Hartfield Titus suggested restricting Draft Rule G-43(c)(i)(F) to
apply only to bid-wanteds. It said that offer and bid information on
offerings should be made available to interested parties throughout the
negotiation process. Hartfield Titus also suggested that a definition
of when a bid-wanted is ``completed'' be any of the following: ``1) the
item traded, i.e., the sell is executed and the buy is executed; 2) the
item is `Traded Away' (it was traded by the seller to another dealer or
customer); and 3) the item is identified as `No Trade' (we are told by
the seller that the item will not trade).''
MSRB Response: In response to this comment, the MSRB has removed
the reference to offerings in this section of the rule and proposed a
definition of when a bid-wanted will be considered ``completed'' that
is consistent with Hartfield Titus' request.
Draft Rule G-43(c)(i)(G): [A broker's broker must adopt and comply
with policies and procedures pertaining to the operation of bid-wanteds
and offerings, which at a minimum:] if a broker's broker has customers,
provide for the disclosure of that fact to both sellers and bidders in
writing and provide for the disclosure to the seller if the high bid in
a bid-wanted or offering is from a customer of the broker's broker.
Comments: Hartfield Titus suggested that generally disclosing that
it has customers would be a sufficient way to inform its clients
instead of telling them on a transaction-by-transaction basis. A
general statement would help the broker's broker keep anonymity in its
brokering services while informing its clients that it also brokers
with sophisticated municipal market professionals.
TMC supported the notion that brokers' brokers should prominently
disclose the types of firms that constitute its client base but does
not agree with disclosing to a seller information about the buyer of an
item at the time of trade stating this to be
[[Page 17555]]
``unfair and against the anonymous nature of the broker's market.'' TMC
said that ``[a]nonymity is an extremely important component of the
utility of an intermediary (either a voice broker or an ATS) in the
municipal market.'' It said that ``[a]ny regulatory requirement that
would serve to compromise anonymity would be a negative development for
a market that has always given participants ways to protect their
identities.''
MSRB Response: The role of the broker's broker has traditionally
been that of an intermediary, and the MSRB has previously said that a
broker's broker has a special relationship with other dealers.
Therefore, the MSRB continues to be of the view that a broker's broker
should make it known to a seller if it has customers and if the high
bid in a bid-wanted or offering is from a customer of the broker's
broker. The MSRB has, however, modified the draft rule to clarify that
the broker's broker need not disclose the name of its customer. The
MSRB believes that the same concerns would exist if an affiliate of a
broker's broker could bid in a bid-wanted or offering and has added
comparable provisions concerning affiliates.
Draft Rule G-43(c)(i)(H): [A broker's broker must adopt and comply
with policies and procedures pertaining to the operation of bid-wanteds
and offerings, which at a minimum:] if the broker's broker wishes to
conduct a bid-wanted in accordance with section (b) of this rule,
require the broker's broker to adopt predetermined parameters for such
bid-wanted, disclose such predetermined parameters in advance of the
bid-wanted in which they are used, and periodically test such
predetermined parameters to determine whether they have identified most
bids that did not represent the fair market value of municipal
securities that were the subject of bid-wanteds to which the
predetermined parameters were applied.
Comments: BDA said that the requirement that the parameters be
tested periodically is problematic. It stated that Draft Rule G-
43(c)(i)(H) is not clear regarding what constitutes a successful test.
``If no bids exceeded the parameters, is that an indication that the
parameters are correct? Or that they are too broadly set? Or does it
say something about the bids.''
TMC said that ``providing users with useful market and security
specific tools should suffice to satisfy the Board's desire to improve
bid quality. If a firm uses the same systematic approach for each
posted bid-wanted and has a set of tools that helps traders establish
value, then there should be no need for a safe harbor.''
MSRB Response: If many trades were occurring at prices outside the
parameters, that would be an indication that the parameters should be
adjusted. A broker's broker could adjust its predetermined parameters
as frequently as it considered necessary to adapt to changing markets,
as long as the new parameters were disclosed in advance of use and not
made applicable to bid-wanteds already under way.
Draft Rule G-43(d)(iii): ``Broker's broker'' means a dealer, or a
separately operated and supervised division or unit of a dealer, that
principally effects transactions for other dealers or that holds itself
out as a broker's broker. A broker's broker may be a separate company
or part of a larger company.
Comments: Knight BondPoint requested that the draft definition of a
broker's broker be revised to clarify that ``ATS operators whose
platforms operate in a manner in which subscribers electronically
disseminate their bids and offers broadly to other subscribers and
electronically interact with such bids and offers to consummate
transactions, and which offer subscribers an automated, systematic and
non-discretionary platform to conduct their bids wanted auctions--are
not broker's brokers for purposes of this rule.''
BDA argued that the inclusion of ATSs within the definition of
broker's broker is not warranted.
Wolfe & Hurst suggested a more detailed definition of broker's
broker to include the nature and role of a broker's broker as well as
the duties and responsibilities of a broker's broker. It argued that
this would eliminate the need to include the phrase, ``or that holds
itself out as a broker's broker'' in Draft Rule G-43(d)(iii).
TMC said that the language in Draft Rule G-43(d)(iii) on whether a
firm ``holds itself out as a broker's broker'' discourages dealers from
competitive (``in-comp'') bidding. TMC requested clarification
regarding the following questions: (1) As a dealer's business is not
usually ``principally effecting transactions for other dealers'' but
for its client, would a broker-dealer be exempt from the definition or
is acting like a broker's broker the equivalent of ``holds itself out
as a broker's broker?'' (2) Many dealers post the same bid-wanted with
multiple broker's brokers. Does the use of multiple broker's brokers
create an unfair practice with respect to G-17? (3) If a dealer uses
multiple brokers, should that be disclosed to the broker so that the
broker can disclose that fact to potential bidders? (4) If the same
bond is out for the bid with multiple broker's brokers, and the bond
can only trade once, would that be viewed negatively by the regulators,
barring disclosure to the marketplace? (5) If a broker's broker
receives a bid-wanted that has been posted to multiple firms, does the
broker need to use the same level of care as if the item were for its
own account?
MSRB Response: This proposal would not require selling dealers to
keep any records or discourage competitive bidding. It also would not
prevent a selling dealer from posting bid-wanteds with multiple firms.
The portion of the Proposed Notice on price discovery concerns a
practice of some dealers of using broker's brokers to gauge the market
price of securities so that they themselves may purchase the securities
rather than trading them at the high bids obtained by broker's brokers.
The pricing duty of a broker's broker does not depend upon whether the
selling dealer has posted the bid-wanted with multiple broker's
brokers.
The MSRB continues to be of the view that a function-based
definition of ``broker's broker'' is appropriate, rather than a
detailed list such as that proposed by Wolfe & Hurst.
The MSRB has determined that it is appropriate to except certain
alternative trading systems from the definition of ``broker's broker,''
because they do not engage in the types of voice communications that
have led to abuses in the past. Nevertheless, in order to qualify for
the exception, under Proposed Rule G-43(d)(iii) such systems would be
subject to the same prohibitions on abusive behavior to which a
broker's broker would be subject.
Miscellaneous
Comments: SIFMA said that the restrictions on control of bid-
wanteds by the selling dealers in the draft interpretive notice are
unreasonably restrictive. It suggested that ``an appropriate standard
would be to allow selling dealers discretion to control this aspect of
bid-wanteds so long as they could demonstrate that any restrictions
imposed were intended to benefit the selling customer, and were not
intended to solely benefit the selling dealer.''
MSRB Response: The MSRB is concerned that the standard for
permissible screening suggested by SIFMA would be difficult to employ
and to enforce. It also has the potential for resulting in a less
favorable price for the customer than had the screening not occurred.
Moreover, if a selling dealer's customer were to request expressly that
the dealer screen certain bidders from the bid-wanted or offering for
its
[[Page 17556]]
securities, such screening would not be requested for competitive
reasons.
Comments: Mr. Dolan asked whether a broker-dealer using an
electronic platform is permitted to screen its competitor's bonds from
the platform, thereby encouraging its customers to purchase securities
from the dealer's inventory (i.e., whether the MSRB had a best
execution rule).
MSRB Response: The MSRB is concerned that certain dealers may be
refusing to show their customers municipal securities offered by their
competitors at more favorable prices than those the dealers place on
the same securities in their inventory. At this time, the MSRB has no
best execution rule comparable to that of the Financial Industry
Regulatory Authority. As long as the price paid by the customer is fair
and reasonable, there is no requirement under MSRB rules that a dealer
seek out the most favorable price for its customer. The MSRB will take
this comment under advisement as it continues to review its rules.
Comments: Vista Securities asked, ``If there is a material change
in the description of a bond being advertised for the bid, * * * is not
the item as incorrectly advertised simply invalid and any bids null and
void? As opposed to the broker's broker not being `prohibited' from
notifying all bidders about material changes in a bid-wanted item,
should not the broker's broker be obliged to notify all bidders that
the item was incorrectly described, all bids are void, and have the
seller resubmit the item for the bid if the seller so chooses? Can a
potential buyer of any security, municipal or otherwise, be held to
his/her bid if the security is advertised incorrectly in a material
way? If an intermediary in the transaction becomes aware of the
problem, should not the intermediary be obliged to halt the process?''
MSRB Response: If a broker's broker learned of material changes in
a bid-wanted item it would be required by MSRB Rule G-17 to notify all
bidders and accept changed bids.
Draft Rule G-8(a)(xxv)(A): [A broker's broker (as defined in Rule
G-43(d)(iii)) shall maintain the following records:] (A) All bids to
purchase municipal securities, and offers to sell municipal securities,
that it receives, together with the time of receipt.
Comments: SIFMA said that the requirements under Draft Rule G-
8(a)(xxv)(A) are not workable or necessary for offerings. It said that
applying this requirement will impose a significant recordkeeping
burden on broker's brokers, and is not warranted. It requested
clarification if Draft Rule G-8(a)(xxv)(A) is intended to apply only to
the initial time an offering is given to a broker's broker.
Hartfield Titus said that the majority of negotiations on municipal
offerings are performed through ``voice brokering.'' Price may change
many times. It suggested that the time and price record be limited to
when the offering is first received, when it is updated for display or
distribution, and displaying the offering as it was given to the
brokers' broker or updated, by the seller. Hartfield Titus also said
that there should be no requirement to record the reason.
RBI agreed that the requirements are reasonable for bid-wanteds,
but said they are not workable or necessary for offerings. Negotiated
offerings involve back and forth communications between a potential
buyer and seller, not always resulting in a trade. RBI said the
requirement would impose a significant recordkeeping burden on broker's
brokers while adding no significant compliance benefits.
MSRB Response: The MSRB agrees with the comments concerning records
of offers and has amended the rule to require that a broker's brokers'
records concerning offers must include the time of first receipt and
the time the offering has been updated for display or distribution.
Draft Rule G-8(a)(xxv)(E)-(F): [A broker's broker (as defined in
Draft Rule G-43(d)(iii)) shall maintain the following records:]
(E) For all changed bids, the full name of the person at the bidder
firm that authorized the change; the reason given for the change in
bid; and the full name of the person at the broker's broker at whose
direction the change was made;
(F) For all changed offers, the full name of the person at the
seller firm that authorized the change; the reason given for the change
in offering price; and the full name of the person at the broker's
broker at whose direction the change was made.
Comments: Wolfe & Hurst said that the ``recordkeeping requirements
as set forth in the draft rule are overly burdensome to broker's
brokers and would cause unnecessary delay and inefficiency in the
market.''
TMC said that ``[r]equiring brokers' brokers to document price
changes would be of no value to the market, as traders know that
offering prices are always subject to change.'' It also added that
``documenting tens of thousands of price changes on a daily basis would
be cost prohibitive.''
MSRB Response: The requirement that a record of the reason for a
change in bid or offering price has been eliminated. However, the
remaining recordkeeping requirements have not been modified. Many were
suggested by broker's brokers themselves, and good records are
essential for enforcement of Proposed Rule G-43.
The MSRB issued two other requests for comment on the regulation of
broker's brokers prior to the request for comment described above. On
September 9, 2010, the MSRB published ``Request for Comment on MSRB
Guidance on Broker's Brokers'' (``MSRB Notice 2010-35''). In MSRB
Notice 2010-35, the MSRB requested comment on an interpretive notice
reviewing the fair pricing requirements of MSRB Rules G-18 and G-30 and
the fair practice requirements of MSRB Rule G-17 as they applied to
transactions effected by broker's brokers. It also proposed to discuss
the recordkeeping and record retention requirements for broker's
brokers. On February 24, 2011, the MSRB published ``Request for Comment
on Draft Broker's Brokers Rule (Rule G-43) and Associated Recordkeeping
and Transaction Amendments'' (``MSRB Notice 2011-18''). In MSRB Notice
2011-18, the MSRB requested comment on the original version of Draft
Rule G-43 (on broker's brokers), as well as associated draft amendments
to Rule G-8 (on books and records), G-9 (on records preservation), and
G-18 (on execution of transactions). Copies of MSRB Notices 2010-35 and
2011-18 and associated comment letters are included in Attachment 2
hereto. Each subsequent request for comment has included a summary of
the comments received on the previous request for comment, as well as
the MSRB's responses to those comments.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
[[Page 17557]]
change is consistent with the Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-MSRB-2012-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2012-04. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Web site (http://www.sec.gov/rules/sro.shtml). Copies
of the submission, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the MSRB's offices. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-MSRB-2012-04 and should be submitted on or before April
16, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-7133 Filed 3-23-12; 8:45 am]
BILLING CODE 8011-01-P