The Municipal Securities Rulemaking Board (MSRB) has proposed enhancing the pricing and related obligations of broker’s brokers—an important source of secondary market liquidity for investors in municipal securities—along with those of the dealers that use their services.

The MSRB’s rule proposal was filed with the Securities and Exchange Commission (SEC) on March 5.

Broker’s brokers in the municipal securities market execute trades exclusively for other broker-dealers. Although broker’s brokers do not execute trades for public investors, their activities affect the price investors pay or receive when buying and selling municipal securities.

Under the proposed new MSRB Rule G-43, a broker’s broker would be required to “make a reasonable effort to obtain a price for the dealer that is fair and reasonable in relation to prevailing market conditions.” A broker’s broker would also be prohibited from taking “any action that works against that dealer’s interest to receive advantageous pricing” when acting on behalf of another dealer in the purchase or sale of municipal securities.

The proposed rule specifically addresses the obligations of broker’s brokers when conducting “bid-wanteds”—auction sales of municipal securities where the selling dealer does not specify a minimum price or yield for the securities. Following these auctions, the selling and bidding dealers, in turn, transact with public investors.

Under the proposed rule, the broker’s broker would be presumed to be acting on behalf of the selling dealer in a bid-wanted. So long as a broker’s broker conducts a bid-wanted in the manner prescribed by the MSRB, it can avail itself of a safe harbor in meeting its fair pricing obligations. To benefit from the safe harbor, a broker’s broker would be required to widely disseminate a bid-wanted to gain exposure to dealers possibly interested in the securities and to specify a deadline for accepting bids. Broker’s brokers would also be required to make a reasonable effort to reach dealers with a specific knowledge of the issue or known interest in comparable securities, if the securities are of limited interest, such as a small issue with credit problems.

The MSRB’s proposed rule would also mandate that broker’s brokers conducting a bid-wanted use predetermined parameters designed to identify possible off-market bids as part of the safe harbor requirements. If the high bid in a bid-wanted is below the predetermined parameters of the broker’s broker, the broker’s broker would be required to disclose this to the selling dealer, who would decide whether or not to complete the transaction.

The proposed rule would prohibit a broker’s broker from giving preferential treatment to bidders, such as letting a specific bidder know that its bid is “sticking out” as higher than other bids.

As part of its rule proposal, the MSRB included an interpretation regarding the duties of selling and bidding dealers using the services of broker’s brokers. For example, bidding dealers would be prohibited from submitting “throw-away” bids to broker’s brokers, or “picking off” other dealers at off-market prices.

For more information, please contact Darci L. Stephens at 801.531.3056 or stephensd@ballardspahr.com, Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com, or any other member of Ballard Spahr’s Public Finance Group.


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