MSRB considers issuing guidance on broker's brokers, seeks comments

By Angela McDaniels

Tacoma, Wash., Sept. 9 - The Municipal Securities Rulemaking Board is requesting comments about proposed guidance to broker's brokers.

The board is also considering making rules that would require broker's brokers to adopt procedures that incorporate this guidance, disclose them to sellers and bidders in writing at least annually, post them in a prominent position on their websites and follow them.

A "broker's broker" means a broker, dealer or municipal securities dealer that principally effects transactions for other brokers, dealers and municipal securities dealers or that holds itself out as a broker's broker.

The MSRB said it last issued guidance on broker's brokers in 2004, when it noted the role of some broker's brokers in large intra-day price differentials of infrequently traded municipal securities. In some cases, differences between the prices received by the selling customers as a result of a broker's broker bid-wanted auction and the prices paid by the ultimate purchasing customers on the same day were 10% or more, according to an MSRB notice.

The board said rule violations brought to light by enforcement actions made by the Securities and Exchange Commission and the Financial Industry Regulatory Authority suggests it may be time to remind broker's brokers of their responsibilities.

Bid-wanted auctions

The board noted that all MSRB rules apply to broker's brokers, but the proposed guidance highlights the fair pricing requirements of MSRB Rules G-18 and G-30, the fair practice requirements of Rule G-17 and recordkeeping and record-retention requirements.

For example, under Rule G-18, a broker's broker is obligated to make a reasonable effort to obtain a fair and reasonable price in relation to market conditions - the same duty that a dealer has to a customer.

The proposed guidance noted that if a broker's broker uses a bid-wanted auction to fulfill its Rule G-18 obligation, it must disseminate the auction widely to obtain exposure to multiple dealers, although no fixed number of bids is required.

If the securities are of limited interest - e.g., small issues with credit quality issues and/or features generally unknown in the market - MSRB said the broker's broker must reach dealers with specific knowledge of the issue or known interest in securities of the type being offered, and it is not consistent with Rule G-18 to encourage off-market bids.

Comments can be submitted to Peg Henry, deputy general counsel, though Nov. 15.

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