MRSB seeks comments on changes made to draft rule on broker's brokers

By Angela McDaniels

Tacoma, Wash., Sept. 8 - The Municipal Securities Rulemaking Board is requesting comment on revisions to draft Rule G-43 on broker's brokers and revisions to draft amendments to Rule G-8 on books and records and Rule G-9 on preservation of records, according to an MSRB notice.

MSRB first requested comment on draft Rule G-43 and the associated draft amendments to Rules G-8 and G-9 in February 2011. Revisions were made after reviewing the comments received. Many of the changes were made to the section of draft Rule G-43 about bid-wanteds.

MSRB is also requesting comment on a draft interpretive notice about the obligations of brokers, dealers and municipal securities dealers that use broker's brokers.

Under the draft 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 they have an independent duty to determine that the prices at which they purchase municipal securities as a principal from their customers are fair and reasonable, MSRB said.

Revisions to Rule G-43

The summary of draft Rule G-43 on broker's brokers and the revisions made are as follows:

• Draft Rule G-43(a) lays out the basic duties of a broker's broker;

• Draft Rule G-43(a)(i) incorporates the same basic duty found in Rule G-18 regarding fair and reasonable dealing;

• Draft Rule G-43(a)(ii) provides that a broker's broker must not take any action that works against the client's interest to receive advantageous pricing.

Revised draft Rule G-43(a)(ii) would add that a broker's broker that acts for or on behalf of another dealer must not take any action that would work against that dealer's interest to receive advantageous pricing;

• Draft Rule G-43(a)(iii) notes that the potential seller is presumed to be the client of the broker's broker in a bid-wanted unless both the potential seller and the potential buyers (bidders) agree in writing to dual representation.

Under revised draft Rule G-43(a)(iii), a broker's broker would be presumed to act for or on behalf of the seller in a bid-wanted or offering, unless both the seller and bidders agreed otherwise in writing in advance of the bid-wanted or offering;

• Draft Rule G-43(a)(iv) requires disclosure to clients if the highest bid received in a bid-wanted or offering does not represent a fair and reasonable price in relation to prevailing market conditions;

• Draft Rule G-43(b) and (c) concern bid-wanteds, not offerings. Draft Rule G-43(b) provides that a bid-wanted conducted in a manner that satisfies the requirements of draft Rule G-43(c) will generally satisfy the obligation of a broker's broker under draft Rule G-43(a)(i).

Revised Draft Rule G-43(b) would create a safe harbor. MSRB said the provisions of the safe harbor are designed to increase the likelihood that the highest bid in the bid-wanted or offering is fair and reasonable.

Under revised draft Rule G-43(b)(ix), 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 consent before proceeding with the trade. MSRB said the recommended amendment would have the effect of notifying the selling dealer that the high bid in a bid-wanted might be off-market.

Revised draft Rule G-43(b)(vi) 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 and the broker's broker believed that the bid might have been submitted in error.

Revised draft Rule G-43(b)(iv) would permit a broker's broker that availed itself of the safe harbor to notify a bidder whether its bid was being used after the deadline for bids had passed. This would allow bidders to allocate their capital otherwise.

Under revised draft Rule G-43(b)(v), each bid-wanted or offering would be required to have a deadline for the acceptance of bids, after which the broker's broker would not be permitted to accept bids or changes to bids. That deadline could be either a precise deadline or an "around time" deadline that ends when the high bid has been provided to the seller;

• Draft Rule G-43(c) provides rules for the conduct of a bid-wanted.

Revised draft Rule G-43(c)(i)(H) 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; and

• Draft Rule G-43(d) provides for the adoption and following of policies and procedures for a fair process consistent with the role of the broker's broker as an intermediary between two dealers.

Under revised draft 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.

Amendments to Rules G-8, G-9

The draft amendments to Rule G-8 and Rule G-9 would make it express that broker's brokers must retain records of all bids received for three years, whether amended or withdrawn, together with the time of receipt.

The revisions to the draft amendments include:

• Revised draft Rule G-8(a)(xxv)(I) 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;

• Under revised Draft Rule G-8(a)(xxv)(D), 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; and

• Revised draft Rule G-8(a)(xxv)(C) 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.

Comments can be submitted through Nov. 3 via e-mail to CommentLetters@msrb.org. Commenters are asked to include "2011-50" in the subject line.

Questions about the notice should be directed to Peg Henry (703 797-6600), MSRB's general counsel, market regulation.

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