Date: June 25, 2012
Contact: Jennifer A. Galloway, Chief Communications Officer
MSRB RECEIVES SEC APPROVAL TO IMPLEMENT MEASURES TO STRENGTHEN
REGULATION OF BROKER'S BROKERS
Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to establish specific obligations for municipal securities dealer firms that act as “broker’s brokers” and to provide additional guidance on the duties of dealers that use such firms.
Broker’s brokers help to provide secondary market liquidity in the municipal securities market. Such liquidity is critical to ensuring that retail investors receive fair and reasonable pricing for their purchases and sales of municipal securities.
The MSRB is establishing a new rule, MSRB Rule G-43, that affirms a broker’s broker’s duty to make a reasonable effort to obtain a fair and reasonable price for municipal securities, and reminds selling and bidding dealers of their fair pricing obligations. The rule is effective on December 22, 2012.
Broker’s brokers serve as intermediaries between other broker-dealers seeking to buy and sell municipal securities on behalf of their customers. One mechanism commonly used by broker’s brokers to bring together sellers and potential buyers of a specific municipal security is referred to as a “bid-wanted,” in which the broker’s broker seeks bids from dealers for a particular bond that another dealer wishes to sell. The new rule establishes a series of safeguards relating to the conduct of bid-wanteds designed to promote fairer results from such bid-wanteds.
The additional interpretive guidance reminds dealers that use broker’s brokers to sell municipal securities for their customers that they cannot rely conclusively on a bid-wanted producing a fair and reasonable price, but that such dealers retain primary responsibility for the fairness of the price that their customers receive. Selling dealers are cautioned against “screening” other dealers from their transactions through broker’s brokers for anti-competitive reasons and against automatically assuming customers prefer quick execution of their trades over better pricing.
The new rule also prohibits dealers that are placing a bid to purchase a municipal security in a bid-wanted from submitting “throw-away” bids and from attempting to profit by “picking off” other dealers at off-market prices.
Rule G-43 also requires broker’s brokers to establish and publicly disclose comprehensive policies and procedures designed to result in a fair process consistent with the special role of the broker’s broker as a market intermediary. Related amendments to existing MSRB rules strengthen the recordkeeping requirements of broker’s brokers.