Rule G-13 Interpretations

Background

        On March 9, 1977, the Securities and Exchange Commission (the "Commission") approved the Municipal Securities Rulemaking Board’s proposed rules on quotations and reports of sales or purchases of municipal securities, rule G-13 applies to all quotations with respect to municipal securities transactions, including transactions between professionals.

        Rule G-13 prohibits the dissemination of a quotation relating to municipal securities unless the quotation represents a bona fide bid for, or offer of, securities. The term "quotation" is defined to mean any bid for, or offer of, municipal securities. A quotation is deemed to be "bona fide" if the firm on whose behalf the quotation is made is prepared to purchase or sell the municipal securities at the price stated in the quotation and under the conditions, if any, specified at the time the quotation is made. The rule does not prohibit requests for bids or offers or giving indications of price solely for informational purposes as long as clearly indicated to be for such purposes.

        Rule G-13 also prohibits a firm from entering a quotation on behalf of another broker, dealer, or municipal securities dealer if the firm entering the quotation has any reason to believe that the quotation does not represent a bona fide bid for, or offer of, municipal securities. In addition, participants in a joint account are prohibited from entering quotations relating to municipal securities which are the subject of the joint account, if such quotations indicate more than one market for the same securities.

        Under rule G-13, the price stated in a quotation for municipal securities has to be based on the best judgment of the person making the quotation as to the fair market value of such securities at the time the quotation is made. The rule does not require that the price stated in a quotation represent only the fair market value of the securities for which the quotation is made, but rather that the price stated have a reasonable relationship to the fair market value of the securities, taking into account all relevant circumstances, such as a firm’s current inventory position, overall and in respect of a particular security, and a firm’s anticipation of the direction of the movement of the market for the securities.

        In a letter to the Commission staff, the Board presented the following three examples of how this provision would operate:

        (1) Assume that a dealer submits a bid for bonds, knowing that they have been called by the issuer. The bonds are not general market bonds and the fact that they have been called is not widely known. While called bonds ordinarily trade at a premium, the dealer’s bid is based on the value of the bonds as though they had not been called and is accepted by the dealer on the other side of the trade who is unaware of the called status of the bonds. In these circumstances, the bid clearly would not have been based upon the best judgment of the dealer making it as to the fair market value of the bonds.

        (2) The provision would also apply to the situation in which a dealer submits a bid for bonds based on valuations obtained from independent sources, which in turn are based on mistaken assumptions concerning the nature of the securities in question. The circumstances indicate that the dealer submitting the bid knows that the securities have a substantially greater market value than the price bid, but the fact that independent valuations were obtained, albeit based on mistaken facts, clouds the dealer’s culpability. The best judgment standard of rule G-13 would apply in this situation.

        (3) The provision would also apply in the situation in which a dealer makes a bid for or offer of a security without any knowledge as to the value of the security or the value of comparable securities. While the Board does not intend that the best judgment of a dealer as to the fair market value of a security be second-guessed for purposes of the rule, the Board does intend that the dealer be required to act responsibly and to exercise some judgment in submitting a quotation. In other words, a quotation which has been "pulled out of the air" is not based on the best judgment of the dealer and, in the interests of promoting free and open markets in municipal securities, should not be encouraged.

        Under rule G-13, any quotation, unless otherwise indicated at the time the quotation is made, is subject to prior purchase or sale and to change in price.

Interpretations

 

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Notice of Interpretation of Rule G-13 on Published Quotations

April 21, 1988

        The Board has received complaints regarding published quotations, such as those appearing in The Blue List. The complaints, which have been referred to the appropriate enforcement agency, state that municipal securities offerings published by dealers often do not reflect prices and amounts of securities that currently are being offered by the quoting dealer.

        Board rule G-13, on quotations, prohibits the dissemination of a quotation relating to municipal securities unless the quotation represents a bona fide bid for, or offer of, municipal securities. The term quotation is defined to mean any bid for, or offer of, municipal securities. A quotation is deemed to be bona fide if the dealer on whose behalf the quotation is made is prepared to purchase or sell the municipal securities at the price stated and in the amount specified at the time the quotation is made.

        Under rule G-13, the price stated in a quotation for municipal securities must be based on the best judgment of the dealer making the quotation as to the fair market value of such securities at the time the quotation is made. The Board has stated that the price must have a reasonable relationship to the fair market value of the securities, and may take into account relevant factors such as the dealer’s current inventory position, overall and in respect to a particular security, and the dealer’s anticipation of the direction of the market price for the securities.

        Rule G-13 also prohibits a dealer from entering a quotation on behalf of another dealer if the dealer entering the quotation has any reason to believe that the quotation does not represent a bona fide bid for, or offer of, municipal securities. In addition, participants in a joint account are prohibited from entering quotations relating to municipal securities which are the subject of the joint account, if such quotations indicate more than one market for the same securities. Rule G-13 does not prohibit giving "nominal" bids or offers or giving indications of price solely for informational purposes as long as an indication of the price given is clearly shown to be for such purposes.

        A dealer that publishes a quote in a daily or other listing must stand ready to purchase or sell the securities at the stated price and amount until the securities are sold or the dealer subsequently changes its price. If either of these events occur, the dealer must withdraw or update its published quotation in the next publication. Stale or invalid quotations violate rule G-13. Rule G-13 does permit a dealer to publish a quotation for a security it does not own if the dealer is prepared to sell the security at the price stated in the quotation. If the dealer knows that the security is not available in the market or is not prepared to sell the security at the stated price, the quotation would violate rule G-13.

 

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