For inter-dealer transactions, there is no specific requirement for brokers, dealers or municipal securities dealers (individually and collectively, “dealers”) to disclose all material facts to another dealer at time of trade. A selling dealer is not generally charged with the responsibility to ensure that the purchasing dealer knows all relevant features of the municipal securities being offered for sale. The selling dealer may rely, at least to a reasonable extent, on the fact that the purchasing dealer is also a professional and will satisfy their need for information prior to entering into a contract for the municipal securities.

 

The items of information that professionals in an inter-dealer transaction must exchange at or prior to the time of trade are governed by principles of contract law and essentially are those items necessary adequately to describe the municipal security that is the subject of the contract. As a general matter, these items of information do not encompass all material facts, but should be sufficient to distinguish the municipal security from other similar issues. The Board has interpreted Rule G-17 to require dealers to treat other dealers fairly and to hold them to the prevailing ethical standards of the industry. The rule also prohibits dealers from knowingly misdescribing municipal securities to another dealer. As a result, it is possible that non-disclosure of an unusual feature might constitute an unfair practice and thus become a violation of Rule G-17 even in an inter-dealer transaction.

 

For example, with respect to bonds that prepay principal, non-disclosure of the fact that a bond prepays principal could be a violation of Rule G-17. This would be especially true if the information about the prepayment feature is not accessible to the market and is intentionally withheld by the selling dealer. Whether or not non-disclosure constitutes an unfair practice in a specific case would depend upon the individual facts of the case. However, to avoid trade disputes and settlement delays in inter-dealer transactions, it generally is in dealers’ interest to reach specific agreement on the existence of any prepayment feature and the amount of unpaid principal that will be delivered.

 

The MSRB has received questions concerning the meaning of "list offering price" in Rule G-14 Real-Time Transaction Reporting Procedures.  As used in this context, the term means the publicly announced "initial offering price" at which a new issue of municipal securities is to be offered to the public. 

Real-time transaction reporting requires dealers to report most transactions within fifteen minutes of the time of trade execution.[1]  Transactions effected at the "list offering price" by syndicate or selling group members[2] on the first day of trading in a new issue are eligible for an exception found in Rule G-14 RTRS Procedures section (a)(ii)(A).  Such transactions instead are required to be reported by the end of the day.  Note that syndicate and selling group members are not required to wait to report such transactions at the end of the day and may choose to report prior to the end of the day. 

The exception from fifteen-minute transaction reporting for list-price syndicate trades is based on operational difficulties that otherwise might be presented for dealers when large numbers of transactions at the initial offering price must be reported by a dealer at one time.  The MSRB viewed these operational considerations as sufficiently important to allow trades to be reported at the end of the day given that the price of such trades (the "list offering price") is public.  Note that transactions by syndicate or selling group members at prices other than the "list offering price" on the first day of trading in a new issue are required to be reported within fifteen minutes of the time of trade execution.  For example, transactions between the syndicate manager and syndicate members ("takedown" transactions) that are at prices other than the "list offering price" must be reported within fifteen minutes of the time of execution.  Similarly, transactions done at offering prices that have not been publicly announced, e.g. "not reoffered" prices, also must be reported within fifteen minutes of the time of execution since these prices are not public.

Questions also have been asked about the availability of the three-hour trade reporting exception found in Rule G-14 RTRS Procedures section (a)(ii)(C).  When a dealer effects a trade in an issue it has not traded in the past year and does not have CUSIP numbers and indicative data for the issue in its securities master file used to process trades for confirmations, clearance and settlement, it is allowed three hours to report.[3]  This exception is designed to allow a dealer time to set-up a security it has not traded and is available for transactions on the first day of trading in a new issue.  Note this exception is not available for syndicate and selling group members.

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