MSRB Seeks Comment on Pricing Proposal for Municipal Securities Transactions

Date: April 21, 2010

Contact:             Jennifer A. Galloway, Chief Communications Officer
                         (703) 797-6600



Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) is requesting comment on draft interpretive guidance for municipal securities dealers on how they determine the fair market value of a municipal bond in investor transactions. The MSRB is seeking to harmonize its rules for pricing municipal bonds with the approach used for corporate and other debt securities, and to clarify how dealers should apply this approach to the unique characteristics of the municipal securities market.   

“The municipal market has nearly 1.3 million individual bonds that, for the most part, are traded infrequently,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “It is important that firms have clear guidance on the fundamental principles of securities pricing that is consistent with similar regulations established by the Financial Industry Regulatory Authority (FINRA) and that takes into account trading patterns of municipal bonds.” 

MSRB rules require dealers to transact municipal securities with customers at a price that is fair and reasonable, taking into account all relevant factors. The rules also require that a customer’s price “must be reasonably related to the market value of the municipal securities in the transaction and that the mark-up or mark-down on a transaction must not exceed a fair and reasonable amount.” The prevailing market price of a municipal security forms the basis on which mark-ups and mark-downs are calculated in principal transactions, and compliance with MSRB rules requires both that the total transaction price to the customer be reasonably related to the market value of the security and that the mark-up or mark-down not exceed a fair and reasonable amount. 

If adopted by the MSRB and approved by the Securities and Exchange Commission, today’s draft guidance would create a structured approach to establishing the prevailing market price of a municipal security that, like the FINRA approach for other debt securities, relies on specific price comparisons. The draft guidance expands on the structured approach by providing further guidance on its application to municipal securities transactions and includes a series of specific examples tailored to the municipal market. Industry participants are encouraged to provide comments to the MSRB on whether the proposed pricing approach is appropriate.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.