MSRB Seeks SEC Approval of Rule to Strengthen Regulation of Broker's Brokers

Date: March 5, 2012

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

MSRB SEEKS SEC APPROVAL OF RULE TO STRENGTHEN
REGULATION OF BROKER’S BROKERS

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission (SEC) to put in place a new rule that would establish specific obligations for firms that provide secondary market liquidity for retail investors in municipal securities. The proposed regulations would also increase the duties of dealers that use these firms, called broker’s brokers.

“Most retail investors are unaware of what broker’s brokers are” said MSRB Executive Director Lynnette Kelly. “But broker’s brokers play a critical role in providing secondary market liquidity for retail investors by acting as intermediaries between selling and bidding dealers. Our proposed rules would ensure investors receive fair prices when buying and selling municipal securities.” 

In recent years, a number of regulatory enforcement actions against broker’s brokers made it clear to the MSRB that in some cases the actions of broker’s brokers were resulting in unfair pricing of municipal securities transactions conducted on behalf of retail investors. Today’s rule proposal would affirm a broker’s brokers’ duty to make a reasonable effort to obtain a fair and reasonable price for municipal securities. It would also remind selling and bidding dealers of their fair pricing obligations. 

Broker’s brokers engage in transactions called “bid-wanteds,” an important source of secondary market liquidity for municipal securities retail investors. The new rule would remind selling dealers that the high bid received in a bid-wanted is not necessarily a fair and reasonable price. Selling dealers would be cautioned against “screening” other dealers from their bid-wanteds or offering for anti-competitive reasons and against assuming customers need to liquidate their securities immediately.

Today’s proposed rules also would prohibit bidding dealers from submitting “throw-away” bids and from attempting to profit by “picking off” other dealers at off-market prices.

For dealers that use the services of broker’s brokers, the new rules would address concerns that their failure to price securities fairly could negate efforts of a broker’s broker to achieve fair pricing.

The MSRB’s proposed rule includes policies and procedures requirements designed to result in a fair process consistent with the special role of the broker’s broker as an intermediary between two dealers.  Broker’s brokers would be required to disclose these policies and procedures to sellers and bidders, in writing, and to post its policies and procedures in a prominent position on its website. Related amendments to existing MSRB rules would expressly require broker’s brokers to retain records for six years of all of the bids for municipal securities they receive.

The MSRB is requesting that the new rules become effective six months after approval by the SEC.


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.