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SECURITIES AND EXCHANGE COMMISSION
File No.* SR - 2013 - * 05
WASHINGTON, D.C. 20549
Amendment No. (req. for Amendments *)
Form 19b-4
Page 1 of * 153
Filing by
Municipal Securities Rulemaking Board
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Initial *
Amendment *
Withdrawal
Section 19(b)(2) *
Section 19(b)(3)(A) *
Section 19(b)(3)(B) *
Rule
Extension of Time Period
for Commission Action *
Pilot
19b-4(f)(1)
Date Expires *
19b-4(f)(5)
19b-4(f)(3)
19b-4(f)(6)
Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010
Section 806(e)(1)
Security-Based Swap Submission pursuant
to the Securities Exchange Act of 1934
Section 806(e)(2)
Exhibit 2 Sent As Paper Document
19b-4(f)(4)
19b-4(f)(2)
Section 3C(b)(2)
Exhibit 3 Sent As Paper Document
Description
Provide a brief description of the action (limit 250 characters, required when Initial is checked *).
The proposed rule change amends MSRB Rules G-8, G-11 and G-32 to include provisions specifically tailored for retail
order periods.
Contact Information
Provide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization
prepared to respond to questions and comments on the action.
First Name * Kathleen
Last Name * Miles
Title *
Associate General Counsel
E-mail *
kmiles@msrb.org
Telephone * (703) 797-6600
Fax
(703) 797-6700
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
Municipal Securities Rulemaking Board
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
(Title *)
Corporate Secretary
Date 06/17/2013
By
Ronald W. Smith
(Name *)
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this form. A digital signature is as legally binding as a physical
signature, and once signed, this form cannot be changed.
Persona Not Validated - 1360872994442,
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For complete Form 19b-4 instructions please refer to the EFFS website.
Form 19b-4 Information *
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Exhibit 1 - Notice of Proposed Rule Change *
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Exhibit 1A- Notice of Proposed Rule
Change, Security-Based Swap Submission,
or Advance Notice by Clearing Agencies
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Exhibit 2 - Notices, Written Comments,
Transcripts, Other Communications
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The self-regulatory organization must provide all required information, presented in a
clear and comprehensible manner, to enable the public to provide meaningful
comment on the proposal and for the Commission to determine whether the proposal
is consistent with the Act and applicable rules and regulations under the Act.
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change being deemed not properly filed. See also Rule 0-3 under the Act (17
CFR 240.0-3)
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change, security-based swap submission, or advance notice being deemed not
properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)
Copies of notices, written comments, transcripts, other communications. If such
documents cannot be filed electronically in accordance with Instruction F, they shall be
filed in accordance with Instruction G.
Exhibit Sent As Paper Document
Exhibit 3 - Form, Report, or Questionnaire
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Copies of any form, report, or questionnaire that the self-regulatory organization
proposes to use to help implement or operate the proposed rule change, or that is
referred to by the proposed rule change.
Exhibit Sent As Paper Document
Exhibit 4 - Marked Copies
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Exhibit 5 - Proposed Rule Text
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Partial Amendment
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The full text shall be marked, in any convenient manner, to indicate additions to and
deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
the staff to identify immediately the changes made from the text of the rule with which
it has been working.
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes
to rule text in place of providing it in Item I and which may otherwise be more easily
readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part
of the proposed rule change.
If the self-regulatory organization is amending only part of the text of a lengthy
proposed rule change, it may, with the Commission's permission, file only those
portions of the text of the proposed rule change in which changes are being made if
the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
amendment shall be clearly identified and marked to show deletions and additions.
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1.
Text of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of
1934 (the “Act”), 1 and Rule 19b-4 thereunder, 2 the Municipal Securities Rulemaking
Board (the “MSRB” or “Board”) is filing with the Securities and Exchange Commission
(the “SEC” or “Commission”) a proposed rule change consisting of amendments to Rules
G-8, on books and records, G-11, on primary offering practices, and G-32, on disclosures
in connection with primary offerings, and conforming changes to Form G-32 (the
“proposed rule change”). The MSRB requests that the proposed rule change be approved
with two separate implementation dates: the amendments to Rules G-8 and G-11 with an
implementation date six months after the SEC approval date; and the amendments to
Rule G-32 with an implementation date not later than March 31, 2014, or such earlier
date to be announced by the MSRB in a notice published on the MSRB website with at
least a thirty day advance notification prior to the effective date.
(a) Modified Form G-32 is attached as Exhibit 3. The text of the proposed rule
change is attached as Exhibit 5. Material proposed to be added is underlined. Material
proposed to be deleted is enclosed in brackets.
(b) Not applicable.
(c) Not applicable.
2.
Procedures of the Self-Regulatory Organization
The proposed rule change was approved by the MSRB at its January 23-25, 2013
meeting. Questions concerning this filing may be directed to Kathleen Miles, Associate
General Counsel, at 703-797-6733.
3.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory
Basis for, the Proposed Rule Change
(a) Purpose
The proposed rule change amends Rules G-8, G-11 and G-32 to include
provisions specifically tailored for retail order periods. These provisions will establish
basic protections for issuers and customers and provide additional tools to assist with the
administration and examinations of retail order period requirements, as further described
below under “Summary of Proposed Rule Change” and under “Discussion of
Comments.”
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b-4.
4 of 153
The MSRB previously issued guidance to dealers on the subject of retail order
periods. In 2010, the MSRB stated that Rule G-17 requires an underwriter to follow an
issuer’s directions in any applicable retail order period. 3 Most recently, the MSRB stated
that fair dealing requires an underwriter to take reasonable steps to ensure that retail
clients are bona fide; that an underwriter that knowingly accepts an order that has been
improperly designated as a retail order violates Rule G-17; and that a dealer placing a
non-qualifying order under a retail order period violates Rule G-17. 4 In that same notice,
the MSRB indicated that it will continue to monitor retail order period practices to ensure
that they are conducted in a fair and orderly manner consistent with the intent of the
issuer and the MSRB’s investor protection mandate. The proposed rule change reflects
the MSRB’s determination that additional rulemaking in this area is necessary and
appropriate.
The MSRB believes that the proposed rule change is necessary in consideration of
its mandate to protect municipal entities and investors. The proposed rule change
addresses concerns related to retail order periods presented from issuers, dealers, and
municipal advisors. Those concerns include the mischaracterization of orders as “retail”
and the failure of syndicate managers to disseminate timely notice of the terms and
conditions of a retail order period to all dealers, including selling group members, 5 or that
pricing information that had been requested was not delivered or had not been delivered
in sufficient time to allow for communication with the requesting dealer’s “retail”
customers to determine whether the investor would like to purchase the bonds. 6
To address these concerns, the proposed rule change establishes specific
obligations on the senior syndicate manager to disseminate to the syndicate and selling
group members detailed information about the terms and conditions of any retail order
period. The proposed rule change also requires dealers to capture certain additional
information in connection with orders placed under a retail order period designed to
ensure that such orders are from bona fide retail customers. In addition, the MSRB
proposes to increase transparency for regulators regarding the use of retail order periods
3
See MSRB Notice 2010-26 (August 15, 2010).
4
See MSRB Notice 2012-25 (May 7, 2012) (the “G-17 Underwriters’ Notice”).
5
In some cases the length of a retail order period may be less than five hours.
6
In some jurisdictions, it is not common practice to advertise the issuer’s intention
to conduct retail order periods on the radio, television or in the newspaper to
inform the investing public of upcoming issuances and terms related to a retail
order period. Advertisements to notify the investing public of retail order periods
in connection with primary offerings of municipal securities can be very
expensive and often issuers do not wish to incur this cost or reimburse dealers for
this expense.
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by amending Form G-32 to require an underwriter to report to the Electronic Municipal
Market Access (EMMA®) 7 system when a retail order period was conducted.
The MSRB proposed, but thereafter reconsidered a decision to issue interpretive
guidance related to Rules G-17 and G-30 in connection with the proposed rule change.
The proposed interpretive guidance, among other things, emphasized that during a retail
order period, an issuer may require underwriters to make a bona fide public offering to
retail customers at the initial offering price for the securities, either directly or through
other dealers, and that dealers must follow the issuer’s instructions for retail order
periods. The particular statement that a duty of fair dealing includes following an
issuer’s instructions for retail order periods is inherent in a rule on fair dealing, and, as
mentioned earlier, was recently addressed in the G-17 Underwriters’ Notice.
The proposed guidance also addressed pricing differentials, including that large
differences between institutional and individual prices that exceed the price/yield
variance that normally applies to transactions of different sizes in the primary market
provide evidence that the duty of fair pricing to individual clients may not have been met.
This statement repeated guidance previously provided by the MSRB. 8 The discussion
that followed sought to apply that previously articulated guidance to a few specific
factual scenarios but did not provide any analysis or guidance that did not fairly and
reasonably flow from the MSRB’s prior guidance. As discussed below, the limited scope
of the discussion and the perception that only those items discussed would justify a
pricing differential was of concern to some commenters. The thrust of this proposed rule
change is to provide mechanisms by which issuers can have greater assurance that a
dealer has, when directed to do so by the issuer, made a bona fide public offering of the
securities to retail customers at their initial offering prices, as well as provide regulators
with enhanced information to monitor the activities of dealers participating in retail order
periods. A further discussion for the reasons the MSRB has not included the interpretive
guidance is set forth below under “Self-Regulatory Organization’s Statement on
Comments on the Proposed Rule Change Received from Members, Participants, or
Others.”
The MSRB proposes to establish two separate implementation dates for the
proposed rule change. The amendments to Rules G-11 and G-8, the core of the proposal,
would be implemented six months after the SEC approval date to allow dealers sufficient
time to make necessary software or systems modifications. It also would allow time for
the MSRB to create educational materials, host webinars and conduct outreach to the
dealer and issuer communities, as appropriate, regarding the new rules.
The second implementation date would relate to the amendments to Rule G-32
that require syndicate managers or sole underwriters to designate to EMMA whether a
7
EMMA is a registered trademark of the MSRB.
8
See Guidance of Disclosure and Other Sales Practice Obligations to Individual
and Other Retail Investors in Municipal Securities (July 14, 2009) (the “Sales
Practice Notice”).
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retail order period was conducted. The implementation date would be not later than
March 31, 2014, or such earlier date to be announced by the MSRB in a notice published
on the MSRB website with at least a thirty day advance notification prior to the effective
date. This time frame would allow for the MSRB to design an automated system for
dealers to report to the EMMA system. It would include approximately six months of
lead time for Rule G-32 submitters to design automated interfaces and allow time for
both Rule G-32 submitters and FINRA to test all of these changes.
Certain proposed rule changes are intended to be clarifying changes only and are
not related to retail order periods, as further described below under “Summary of
Proposed Rule Change.”
SUMMARY OF PROPOSED RULE CHANGE
Rule G-11
MSRB Rule G-11 addresses syndicate practices and management of the
syndicate, and among other things, requires syndicates to establish priorities for different
categories of orders and requires certain disclosures to syndicate members, which are
intended to assure that allocations are made in accordance with those priorities.
The proposed addition of provisions addressing retail order periods necessitates
several new definitions in Rule G-11. First, the term “retail order period” is defined in
subparagraph (a)(vii) to mean an order period during which solely going away orders will
be solicited solely from customers that meet the issuer’s designated eligibility criteria.
Second, the term “going away order” is defined in subparagraph (a)(xii) to mean an order
for which a customer is already conditionally committed. Third, the term “selling group”
is defined in subparagraph (a)(xiii) to mean a group of brokers, dealers, or municipal
securities dealers formed for the purpose of assisting in the distribution of a new issue of
municipal securities for the issuer other than members of the syndicate. Selling groups
are sometimes included by issuers in the distribution of new issues of municipal
securities to expand the distribution channel beyond the customers of syndicate members.
Rule G-11(f) requires that the senior syndicate manager furnish in writing to the
other members of the syndicate a written statement of all terms and conditions required
by the issuer. The proposed rule change expands these requirements to require expressly
that such written statement must be delivered to selling group members and that the
statement must include all of the issuer’s retail order period terms and conditions and
pricing information. The proposed rule change further requires that an underwriter
furnish each dealer with which it has an arrangement to market the issuer’s securities all
of the information provided by the senior syndicate manager. 9
9
This arrangement, commonly referred to as a “distribution or marketing
agreement,” is used by some firms to enhance the firm’s ability to “reach” retail
customers, such as in the case where a firm does not have a significant retail
distribution network. Under the proposed rule change, the onus to furnish the
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Rule G-11(f) also provides that if a senior syndicate manager prepares the
statement of all of the terms and conditions required by the issuer (including those related
to the issuer’s retail order period requirements), the statement must be provided to the
issuer. The proposed rule change adds the requirement to obtain the approval of the
issuer of any statement prepared by the senior syndicate manager. This approval must be
secured in all cases and is not solely limited to those instances when a retail order period
is conducted. The MSRB believes that it is important to ensure that an issuer is aware of,
and agrees with, any requirements imposed on the syndicate and selling group members
in its name.
New paragraph (k) requires any dealer placing an order during a retail order
period to provide certain information to assist in the determination that such order is a
bona fide retail order. Specifically, the order must provide (i) whether the order met the
issuer’s eligibility criteria for participation in the retail order period; (ii) whether the
order was a going away order; (iii) whether the dealer received more than one order from
a single customer for a security for which the same CUSIP number has been assigned;
(iv) any identifying information required by the issuer, or the senior syndicate manager
on the issuer’s behalf, in connection with such retail order (but not including customer
names or social security numbers); and (v) the par amount of the order. This information
must be submitted no later than the Time of Formal Award (as defined in Rule G34(a)(ii)(C)(1)(a)), and may be part of the order submitted to the senior syndicate
manager through an electronic order entry system. Because a senior syndicate manager
generally would not have independent knowledge of the details of an order placed on
behalf of another dealer’s customer, the proposed rule change provides that the senior
syndicate manager may rely on the information furnished by such dealer, unless the
senior syndicate manager knows, or has reason to know, that the information is not true,
accurate or complete.
Rule G-8
Under Rule G-8(a)(viii)(A), for each primary offering for which a syndicate has
been formed for the purchase of municipal securities, the syndicate manager shall
maintain a variety of records which show: the description and aggregate par value of the
securities; the name and percentage of participation of each member of the syndicate; the
terms and conditions governing the formation and operation of the syndicate; a statement
of all terms and conditions required by the issuer (including whether there was a retail
order period and the issuer’s definition of “retail,” if applicable); all orders received for
the purchase of the securities from the syndicate; 10 all allotments of the securities and the
information is placed on the underwriter that has entered into such arrangement,
rather than the senior syndicate manager, to circulate this information because the
senior syndicate manager may not be aware that a given syndicate member has
entered into this type of arrangement.
10
See Rule G-8(a)(vii) relating to dealer records for principal transactions. Dealers
are not required to retain records related to customer orders unless an order has
8 of 153
price at which sold; those instances in which the syndicate manager allocated securities in
a manner other than in accordance with the priority provisions, including those instances
in which the syndicate manager accorded equal or greater priority over other orders to
orders by syndicate members for their own accounts or their respective related accounts
and the specific reason for doing so; the date and amount of any good faith deposit made
to the issuer; the date of settlement with the issuer; the date of closing of the account; and
a reconciliation of profits and expenses of the account. The proposed rule change to Rule
G-8(a)(viii)(A) would add to the documentation that must be maintained in the files of
the syndicate manager all orders received for the purchase of the securities from the
selling group; the information required by Rule G-11(k) and all pricing information
distributed pursuant to Rule G-11(f). Such changes will facilitate review by the
examining authorities of all of the records related to a primary offering from files
maintained by one underwriter 11 (which is more efficient) rather than a review of the files
of each dealer that participates in the primary offering. The proposed rule change to Rule
G-8(a)(viii)(A) (and the identical provision found in subsection (B)) reflects a change in
phraseology. The parenthetical would be revised in each case to delete the reference to
“whether there was a retail order period and the issuer’s definition of retail” and to
replace it with “those of any retail order period.” This part of proposed rule change is not
intended to be a substantive change.
Under Rule G-8(a)(viii)(B), for each primary offering for which a syndicate has
not been formed for the purchase of municipal securities, the sole underwriter shall
maintain a variety of records which show: the description and aggregate par value of the
securities; all terms and conditions required by the issuer (including whether there was a
retail order period and the issuer’s definition of “retail,” if applicable); all orders received
for the purchase of the securities from the underwriter; all allotments of the securities and
the price at which sold; those instances in which the underwriter accorded equal or
greater priority over other orders to orders for its own account or its related accounts and
the specific reason for doing so; the date and amount of any good faith deposit made to
the issuer; and the date of settlement with the issuer. The proposed rule change to Rule
G-8(a)(viii)(B) would add to the documentation that must be maintained in the files of the
sole underwriter the information required by Rule G-11(k).
Rule G-32
Generally, Rule G-32(b) provides detailed requirements for underwriters
submitting documents or disclosure-related information to EMMA. Rule G32(b)(vi)(C)(1)(a) provides that an underwriter must submit data such as CUSIP
numbers, initial offering prices or yields, if applicable, the expected closing date for the
been filled. The requirement in the rule for a memorandum of the transaction
including a record of the customer’s order applies only in the event such purchase
or sale occurs with the customer.
11
Records related to a successful primary offering are required to be maintained for
a period of not less than six years. See Rule G-9(a)(iv).
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transaction and whether the issuer or other obligated persons have agreed to undertake to
provide continuing disclosure information as contemplated by Securities Exchange Act
Rule 15c2-12. The proposed rule change to Rule G-32(b)(vi)(C)(1)(a) adds to the data
that must be submitted a requirement that the underwriter report to the EMMA system
(for solely regulatory purposes) whether a primary offering of securities included a retail
order period and each date and time (beginning and end) 12 it was conducted. 13
Miscellaneous clarifying changes unrelated to retail order periods
Rule G-11(h)(i) provides that discretionary fees for clearance costs to be imposed
by a syndicate manager and management fees shall be disclosed to the syndicate
members prior to submission of a bid. The proposed rule change would require the
syndicate manager specifically to disclose to each syndicate member the amount of any
discretionary fees for clearance costs or any management fees imposed by the syndicate
manager. The proposed rule change addresses concerns that certain syndicate managers
failed to disclose the amount of such fees.
Rule G-32(a) provides requirements for the disclosure to customers of certain
information in connection with primary offerings of municipal securities. Rule G32(a)(i) provides, among other requirements, that no broker, dealer or municipal
securities dealer shall sell, whether as a principal or agent, any offered securities to a
customer unless such dealer delivers to the customer a copy of the official statement. The
proposed rule change amends Rule G-32(a)(i) to clarify that all dealers, not just
underwriters, are subject to the official statement delivery requirement of the rule during
the primary offering disclosure period. This proposed change codifies the MSRB’s longstanding position and would promote consistent application and reduce the number of
interpretive questions surrounding this requirement.
Rule G-32(b)(v) provides that in the event a syndicate or similar account has been
formed for the underwriting of a primary offering, the managing underwriter shall take
the actions required under the provisions of the rule and shall also comply with the
recordkeeping requirements of Rule G-8(a)(xiii)(B). Subsection (B) of Rule G-8(a)(xiii)
addresses the recordkeeping requirements in the case of a primary offering in which a
syndicate has not been formed. The proposed rule change would delete the reference to
such recordkeeping requirements because the cross reference to “(B)” is incorrect.
12
All times would be required to be reported as Eastern Time to be consistent, for
example, with the requirement to report time of trade under Rule G-14 as Eastern
Time.
13
Under the proposed rule change, the underwriter would be required to report to
EMMA that a retail order period has occurred by no later than the closing date of
the transaction. Under Rule G-32(b)(vi)(C)(1)(a), Form G-32 submissions shall
be “initiated on or prior to the date of first execution…” The “date of first
execution” is defined in Rule G-32(d)(xi) and, for purposes of this report, is
deemed to occur by no later than the closing date.
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(b) Statutory Basis
The MSRB believes that the proposed rule change is consistent with Section
15B(b)(2)(C) of the Act, 14 which provides that the MSRB’s rules shall:
be designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions in
municipal securities and municipal financial products, to remove
impediments to and perfect the mechanism of a free and open market in
municipal securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the public
interest.
The proposed rule change is consistent with Section 15B(b)(2)(C) of the Act. As
summarized above, the proposed rule change protects, among others, investors and
municipal entities by establishing certain basic regulatory standards to support the use of
retail order periods. It would prevent fraudulent and manipulative acts and practices by
requiring additional representations and disclosures to support whether the orders placed
during a retail order period meet the eligibility criteria for retail orders established by
issuers. It also provides enhanced recordkeeping to assist regulators in determining
whether the requirements of Rule G-11 are being met. By ensuring that a syndicate
manager must communicate an issuer’s requirements for the retail order period and other
syndicate information to all dealers, including selling group members, the proposed rule
change should also foster cooperation and coordination among all dealers engaged in the
marketing and sale of new issue municipal securities. In addition, the proposed rule
change should minimize the opportunities for misrepresentation of orders as “retail
orders” by requiring that certain information about each order is submitted in writing to
the syndicate manager or sole underwriter in sufficient time so that the information can
be examined by issuers and their financial advisors before bonds are allocated to dealers.
4.
Self-Regulatory Organization’s Statement on Burden on Competition
The MSRB does not believe that the proposed rule change would impose any
burden on competition not necessary or appropriate in furtherance of the purposes of the
Act. The MSRB solicited comment on the potential burdens of the proposed rule change
in the most recent request for comment. 15 Among the questions asked were:
•
Would the Revised Draft Proposal effectively further the MSRB’s objective of
protecting issuers and retail investors?
14
15 U.S.C. 78o-4(b)(2)(C).
15
See MSRB Notice 2012-50 (October 2, 2012) (the “October Notice”).
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•
Would any aspects of the Revised Draft Proposal have a negative effect on the
protection of issuers, retail investors or the public interest, or on the fair and
efficient operation of the municipal securities market?
•
What would be the incremental additional burden, if any, to dealers resulting from
the Revised Draft Proposal beyond the existing burden of compliance with Rule
G-11?
•
Are there alternative methods the MSRB should consider to providing the
protections sought under the Revised Draft Proposal that would be more effective
and/or less burdensome?
The specific comments and responses thereto are discussed in Part 5. The MSRB
believes that the proposed rule change will benefit issuers, individual investors and the
municipal market by improving the fairness and effectiveness of retail order periods.
Specifically, the benefits of the proposed rule change should accrue to those issuers who
have decided to conduct retail order periods by providing greater assurance that bonds
will in fact be marketed to those “retail” investors that issuers have determined should
have the opportunity to compete to buy their bonds in the primary market. Retail
investors will benefit from the proposed rule change because they will have greater
access to bonds sold in the primary market. Dealers will benefit through improved
management of primary offerings and enhanced communication by and among syndicate
members and selling group members. Also, improvements to the order taking process as
a result of the proposed rule change will foster greater accuracy and fairness and limit
opportunities for abuse. Finally, the proposed rule change will benefit the municipal
market because it provides regulators with the necessary tools and information to ensure
compliance with retail order period requirements.
The MSRB could, as an alternative to the proposed rule change, determine to
“wait and see” if earlier rulemaking related to retail order periods issued in 2010 and
2012 16 results in significant improvements in the conduct of syndicate managers and
other dealers participating in retail order periods. However, the Board believes that
earlier rulemaking lacked specific, concrete requirements necessary to modify dealer
practices and foster improvements in compliance. In addition, previous rulemaking did
not address many of the issues associated with recordkeeping which the Board believes is
necessary and appropriate to support enforcement of Rule G-11.
The MSRB also considered whether education and training of issuers and dealers
was a suitable regulatory alternative. However, the MSRB concluded that a significant
and uniform regulatory response is needed to efficiently and effectively address
widespread concerns involving retail order period practices.
The MSRB recognizes that there are costs of compliance associated with the
proposed rule change. The MSRB notes that the requirement to submit additional
16
See MSRB Notices cited in footnotes 3 and 4 above.
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information about each order would apply equally to all dealers that participate in
primary offerings that include retail order periods. At the present time, dealers routinely
submit a number of details related to each order. Many dealers have utilized software
platforms which can be modified to capture the newly required disclosures. Details about
orders are reflected in a report created by the platform. The customer specific
information required under the proposed rule change is consistent with the type of
information dealers normally must obtain in performing appropriate diligence on a
customer’s order. The proposed rule change attempts to minimize the potential burden
on dealers by allowing the required information about each order to be submitted
electronically. Moreover, any dealer that believes that gathering this additional
information is an undue burden does not need to participate in collecting orders for an
issuer’s retail order period. The burden on dealers to capture additional information on
each customer order in a retail order period is balanced against the need for issuers to
have confidence that orders placed during a retail order period are bona fide and meet the
issuer’s eligibility requirements for participation in the retail order period.
The MSRB addressed concerns regarding the potential burdens to syndicate
managers of auditing potentially large numbers of orders submitted to it by other dealers
by expressly stating that a senior syndicate manager may rely upon the information
furnished by each broker, dealer, or municipal securities dealer unless the senior
syndicate manager knows, or has reason to know, that the information is not true,
accurate or complete. The proposed rule change does not require that a syndicate
manager undertake an exhaustive investigation of the disclosures about each order. Thus,
the proposed rule change does not impose additional requirements on the senior syndicate
manager other than those that would normally be required under principles of fair dealing
that currently apply.
The recordkeeping requirements in Rule G-8 would be expanded under the
proposed rule change to require the syndicate manager or sole underwriter to maintain all
of the new documentation required as a result of amendments to Rule G-11. The MSRB
believes that the maintenance of this basic information is necessary to ensure the integrity
of the primary offering process in general and the retail order period in particular. These
burdens are incremental in that under current Rule G-8, these parties are already required
to maintain comprehensive records relating to each primary offering including all of the
terms and conditions required by the issuer and whether there was a retail order period.
Any reports produced electronically can be easily printed or saved and included in the
deal file for easy retrieval.
Lastly, the amendments to Rule G-32 in the proposed rule change requiring the
syndicate manager or sole underwriter to notify the MSRB of the date and time of each
retail order period conducted presents only a modest, incremental burden to the existing
requirements of Rule G-32, but provides significant regulatory value. Without this
reporting requirement, neither the MSRB nor the examination authorities will have any
notification of whether an offering contained a retail order period. To minimize the costs
to dealers associated with this requirement, the MSRB would undertake to design an
automated system for dealers to report to the EMMA system. The MSRB believes that it
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is reasonable to delay the implementation date for this part of the proposed rule change
until such time as the automated system has been tested by the dealer community.
The MSRB notes that one issuer 17 has stated that the proposed rule change does
not negatively impact the municipal securities market or its efficient operation and that,
while there may be claims that the proposed rule change creates some additional burdens,
in the opinion of that commenter, it is far outweighed by the benefit of an open, fair and
efficient municipal marketplace.
5.
Self-Regulatory Organization’s Statement on Comments on the
Proposed Rule Change Received from Members, Participants, or Others
The proposed rule change was developed with input from a diverse group of
market participants. On October 2, 2012, the MSRB requested comment on a revised
proposal on retail order periods under Rules G-11, G-8 and G-32 and a draft interpretive
notice concerning the application of Rules G-17 and G-30 to retail order periods. 18 The
revised proposal in the October Notice modified certain draft provisions of Rule G-11,
Rule G-8 and the draft interpretive notice but did not further revise the provisions of Rule
G-32 under the initial draft proposal. 19 The MSRB received 24 comment letters in
response to the March and October Notices. 20
DISCUSSION OF COMMENTS
Definition of Retail Customer for Purposes of a Retail Order Period
17
See the comment letter submitted by the Executive Director of the Rhode Island
Health and Educational Building Corp (RIHEBC).
18
See the October Notice.
19
See MSRB Notice 2012-13 (March 6, 2012) (the “March Notice”), which
contained the initial draft proposal regarding retail order periods under Rules G11, G-8 and G-32 and a draft interpretive notice concerning the application of
Rules G-17 and G-30 to retail order periods.
20
Comment letters were received from: Alamo Capital (“Alamo”); Bond Dealers of
America (“BDA”); CFA Institute (“CFA”); Dorsey & Company, Inc. (“Dorsey”);
Edward D. Jones & Co. (“Edward Jones”); Financial Planning Association
(“FPA”); Full Life Financial LLC (“Full Life”); Government Finance Officers
Association (“GFOA”); Investment Company Institute (“ICI”); Richard Li (“Li”);
Chris Melton (“Melton”); National Association of Independent Public Finance
Advisors (“NAIPFA”); Rhode Island Health and Educational Building Corp.
(“RIHEBC”); Securities Industry and Financial Markets Association (“SIFMA”);
Thornburg Investment Management (“Thornburg”); Vanguard (“Vanguard”); and
Wells Fargo Advisors (“Wells Fargo”). Some of the commenters submitted
comment letter responses to both notices.
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Comments: MSRB Should Not Create a Definition of “Retail:” SIFMA
generally supported the approach that it is an issuer’s prerogative to determine whether
there should be a retail order period and to define retail, but indicated concern on the part
of some members that lack of uniformity as to the definition of retail may make it
difficult to comply with the MSRB requirements to ensure that only qualifying orders are
placed and to maintain adequate records. FPA agreed that there is no reason for the
MSRB to create a uniform definition of retail but understood the appeal of a uniform base
definition that could be modified by an issuer.
Comments: MSRB Should Create a Definition of “Retail:” Many
commenters recommended, for a variety of reasons, that the MSRB establish a uniform
definition of “retail” for use by issuers, or, in the alternative, create a “model” definition
that issuers can use or modify as they deem appropriate. 21 GFOA’s comments were
representative of those commenters that believed that a boilerplate definition would
benefit infrequent issuers who do not have sufficient expertise or who do not engage a
financial advisor and may avoid reliance on other parties to the transaction who do not
have a fiduciary duty to the issuer. Wells Fargo, Li and CFA believed that a uniform
definition would make compliance more effective and less costly. Li, Full Life, GFOA
and Edward Jones also supported a standard definition created by the MSRB with the
option provided to issuers to create their own definition.
Comments: Divergent Views of “Retail:” Many commenters proffered specific
proposals regarding definitions of retail that should be considered by the MSRB. 22 Some
commenters favored a more limited definition that would include only individuals (i.e.,
natural persons) while others would include orders from a trust department or registered
investment advisor acting on behalf of a specifically identifiable natural person. Still
others were either in favor of or against including mutual funds as “retail” customers. A
few commenters offered arguments on behalf of or against the size of the customer order
or locality of the customer as appropriate criteria for “retail.”
MSRB Response: The current MSRB rules do not contain a definition of a
“retail” customer and the MSRB has declined to create a definition in the proposed rule
change in part because of concerns that an MSRB definition of “retail” may unduly
influence certain issuers regarding the scope of eligible customers for a retail order
period. The MSRB believes that issuers should designate the eligibility criteria for their
retail order period on an issue-by-issue basis and issuers should have the flexibility to
choose the criteria that best suits their unique circumstances even if this option results in
lack of uniformity in the marketplace or challenges in compliance. As an alternative to a
model MSRB definition, the MSRB believes that it is preferable to develop educational
materials concerning retail order periods that would assist issuers in selecting their own
definition. The MSRB can work with issuers and industry groups to develop model
21
CFA, Edward Jones, Full Life, GFOA, ICI, Li, NAIPFA, and Wells Fargo.
22
Dorsey, Edward Jones, FPA, Full Life, ICI, NAIPFA, Vanguard, and Wells
Fargo.
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definitions and other best practices which would address this issue without the
imprimatur of being a regulatory standard.
Communications Relating to Issuer Requirements
Comments: CFA supported the need for better and honest communication
between various parties involved in the initial sale of municipal securities to investors.
Full Life supported the proposals in principal, in particular requiring syndicate managers
to disseminate timely notice of issuer requirements to all dealers, including selling group
members.
MSRB Response: The MSRB appreciates these comments.
Comments: SIFMA was supportive of the timing in the current rule which
requires the dissemination of information “prior to the first offer of any securities.…”
SIFMA stated that among the terms and conditions required by the issuer related to the
retail order period would be any time parameters for which the retail order period would
be conducted. SIFMA stated that this information is especially important to dealers
contacting customers with non-discretionary accounts. GFOA was supportive of a
specific time frame in which the syndicate manager must provide issuer terms and
conditions for the retail order period to other dealers.
MSRB Response: The MSRB is appreciative of SIFMA’s comments. The
MSRB does not agree that it is appropriate to impose a fixed time frame on dealers in a
rule because of concerns that such a requirement could have unintended consequences.
For example, it could hamper the marketing of a transaction if an issuer determines that
an offering must come to market quickly.
Length of the Retail Order Period
Comments: Full Life said that the length of a retail order period should be
sufficiently long to fulfill the issuer’s intent. Full Life and Dorsey said that it should
afford a genuine opportunity for retail investor participation. FPA stated that the period
should be meaningful--it should be sufficiently long to allow an individual investor to
make an informed decision.
Two commenters recommended that either the MSRB or the syndicate should fix
the length of the retail order period. Dorsey said that the syndicate should specify a time
reasonably sensible in length and should include the pricing structure. NAIPFA
suggested that the MSRB establish a fixed timeframe for the retail order period.
Edward Jones recommended that “meaningful notice of the retail order period”
would include 24-hour notice with preliminary pricing terms (e.g., coupon, maturity,
price and yield that an individual retail investor could use to form a reasoned investment
decision) before the retail order period is to begin. Edward Jones suggested that an
adequate retail order period should include a minimum of a full trading day with the
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issuer having the opportunity to extend the retail order period beyond a single trading
day. Edward Jones supported a “full day retail order period” even if an institutional order
period runs concurrently for some portion of the day.
MSRB Response: The MSRB believes that the current rule should not be revised
because an issuer should retain control over the issuance process which includes the
ability to adjust the length of time for the retail order period to suit its needs or market
conditions.
Representations and Required Disclosures about Each Order
Comments: GFOA was supportive of the requirement to provide additional
information about each order. NAIPFA was also supportive and believed it would be
beneficial to issuers because it would allow issuers to better assess the effectiveness of
their underwriter’s ability to sell the issuers’ securities as well as the underwriter’s
adherence to the issuers’ instructions and also may help curtail flipping. Li said that
details regarding the order could possibly be required by the senior manager to be
communicated during the order process not just afterwards in order to prevent inadvertent
misrepresentations. RIHEBC stated that it already requires much of the same
information listed in the proposed rule change in order for it to judge the performance of
the senior manager and co-managers.
MSRB Response: The MSRB appreciates these comments.
Comments: Alamo and BDA generally did not support the additional disclosures
about each order because it would be an unreasonable administrative burden, costly and
inconsistent. BDA said that the requirements are particularly burdensome in cases in
which the dealer obtains large numbers of retail orders during retail order periods. BDA
stated that burdens on dealers could have unintended consequences for everyone and
perhaps discourage the practice of retail order periods altogether and this can hurt issuers
and retail investors. BDA suggested that, at most, dealers should comply with
requirements of issuers to document or represent that they have complied with retail
order period requirements. Melton said that required detailed disclosures regarding each
order is inconsistent with permitting issuers to define retail and may not be completely
necessary.
MSRB Response: The MSRB believes that the additional required disclosures
will provide important information to the issuer. The MSRB understands that it is not
uncommon for certain experienced issuers already to demand this additional information
about orders. The MSRB believes it is essential to require the type of information
contained in the rule because some issuers may not be sufficiently knowledgeable to ask
for it or have appropriate leverage. Moreover, even when issuers have requested this
information be gathered, it may not have been provided to them prior to the execution of
the bond purchase agreement; this deadline is important so that the senior syndicate
manager has all of the information it will need before committing the underwriters to the
purchase of the bonds and before it allocates a share of securities to each dealer. In
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addition, one of the benefits of requiring written representations and disclosures is that it
should help to minimize the likelihood of inadvertent misrepresentations related to
whether or not a particular order meets the issuer’s designated eligibility criteria.
Comments: SIFMA said that the representation that an order meets the issuer’s
definition of retail is more appropriate for the master Agreement Among Underwriters
(AAU). Rather than providing the information about each order, the MSRB could
provide that a dealer is deemed to have made the required representations by virtue of
submitting an order during a retail order period or the representations can be made in the
AAU or Selling Group Agreement (SGA), and that, therefore, it is not necessary for the
representation to be made separately for each order submitted during the retail order
period.
MSRB Response: SIFMA may wish to revise its standard form of AAU or SGA
in support of the proposed rule change and the MSRB would be supportive of any
agreement which seeks to bind members of the syndicate or selling group to honor the
issuer’s intentions. However, compliance with MSRB rules should stand independent of
private agreements between parties.
Comment: Melton noted privacy concerns that may have led the MSRB to
require dealers to identify customers without providing names and social security
numbers. Dorsey and Edward Jones supported the required disclosure of zip codes to
support retail priority as adequate and stated this should be adopted as an industry
standard practice. Edward Jones suggested that the MSRB revise the proposal to limit
the identifying information that the issuer may require. Edward Jones also suggested that
an issuer should not be allowed to require dealers to provide customer account numbers,
addresses, phone numbers or tax identification numbers. SIFMA said the rule should
specify that any identifying information required by the issuer may not include customer
account numbers, names or taxpayer identification numbers.
MSRB Response: Certain issuers have said to the MSRB that it would be helpful
to have additional tools to verify orders. The MSRB believes that, if there are legitimate
customer privacy protection issues associated with a specific request, particularly as it
relates to certain identifying information or account numbers, an issuer may be amenable
to allowing a dealer to truncate numbers before submission. The MSRB is aware that zip
codes are often requested by issuers and usually provided by dealers in support of
evidence that an order is from an individual or that the order is from a customer from a
particular locality. Both issuers and dealers have acknowledged that it is easy to supply a
zip code for a residential area and “claim” that it belongs to the order.
Comment: SIFMA also recommended that the MSRB create a safe harbor for
senior syndicate managers so that senior managers would satisfy their own fair dealing
obligations to the issuer when relying on representations made to them by other dealers
that any orders submitted are retail orders.
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MSRB Response: The MSRB agrees that a senior syndicate manager should,
subject to certain exceptions, be entitled to rely on the information furnished by another
dealer. However, the MSRB believes that a senior syndicate manager would not be
entitled to rely on the information if the senior syndicate manager knows, or has reason to
know, that the information is not true or accurate.
Recordkeeping
Comments: GFOA supported the new recordkeeping requirements on syndicate
managers. SIFMA said that the proposed amendments requiring the syndicate members
to keep such records are not warranted as they would be duplicative of recordkeeping
requirements already imposed upon dealers. Edward Jones sought clarification as to
whether the recordkeeping requirements applied to a sole managed deal, i.e., a deal where
there is no syndicate.
MSRB Response: The MSRB does not agree that proposed revisions to the
recordkeeping requirements would be duplicative of recordkeeping requirements already
imposed on dealers. Rule G-8(a)(vii) provides that the dealer keep a record of the
customer’s order in the event of a purchase or sale of municipal securities (so that a
record of orders need not be retained if the order is not filled). Existing Rule G-8(a)(viii)
requires that the records of all orders received (regardless of whether an order is filled) be
maintained by the syndicate manager. The proposed rule change is necessary so that the
additional information that must be provided by the senior syndicate manager or by each
dealer as a result of the amendments to Rule G-11 will be retained in the centralized file
maintained by the syndicate manager. The MSRB agrees and the proposed rule change
applies to recordkeeping requirements in the case of a sole managed deal.
Comment: SIFMA said that dealers should not be required to share customer
specific information with syndicate managers, and that it would be more appropriate (and
should be sufficient for recordkeeping and enforcement purposes) that these customer
order details remain with the dealer that maintains the customer relationship.
MSRB Response: The MSRB disagrees for the reasons stated above. Issuers will
benefit from having access to customer specific information to verify orders and
examinations will likely be more efficient due to centralized recordkeeping.
Revisions to Rule G-32 to Indicate that a Transaction Included a Retail Order
Period
Comments: SIFMA and Full Life supported the proposed revisions to Rule G32. Full Life said that it provides an opportunity for regulatory oversight essential to
fostering administration of bona fide retail order periods that actually result in retail
participation. SIFMA also recommended that the dates and times of any retail order
period be reported to EMMA.
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MSRB Response: The MSRB appreciates these comments. The MSRB agrees
with SIFMA’s recommendation and it is reflected in the proposed rule change to Rule G32.
Additional Rulemaking Regarding Retail Order Periods
Comment: SIFMA stated that the G-17 Underwriters’ Notice has adequately
addressed the concerns regarding retail order periods so that additional rulemaking is not
necessary.
MSRB Response: The MSRB considers the G-17 Underwriters’ Notice as an
important step towards improving practices in this area but it did not address all of the
issues associated with retail order periods. More specific, concrete requirements in the
proposed rule change should assist in compliance. For example, the G-17 Underwriters’
Notice does not address many of the issues associated with recordkeeping. The proposed
rule change also will support efforts by the issuer and the syndicate manager to audit
orders.
Alternatives to Rulemaking
Comment: BDA suggested that if the MSRB produces educational materials,
they should include specific guidance practices that issuers should consider in
formulating effective retail order period rules. BDA recommended that issuers reserve
the right to conduct an audit of compliance by the syndicate of retail order period rules.
GFOA recommended that the MSRB seek to establish some type of protocol or system so
that the issuer can have some comfort that retail orders meet the preset criteria set by the
issuer.
MSRB Response: The MSRB would consider working with issuer trade
associations on best practices which may address these issues.
Other Comments
Comment: Combined Order Periods: Vanguard said that all interested
investors should be permitted to submit orders for municipal securities in the primary
market and no priority should be given to retail orders, and that issuers would benefit
from more accurate price discovery.
MSRB Response: The MSRB does not wish to substitute its judgment in place
of that of issuers who manage their debt issuances. Issuers may choose to conduct
combined order periods and the proposed rule change does not prevent them from doing
so.
Comment: Definition of Selling Group: SIFMA suggested the definition of
selling group be limited to those dealers that sign an SGA or substantially similar
agreements for a particular new issue of municipal securities.
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MSRB Response: The MSRB does not wish to define selling group by reference
to an agreement which may not be executed in all cases, although the MSRB recognizes
that it may be customary practice for selling group members to execute an SGA. In
addition, duties of selling group members and the duties of syndicate managers to selling
group members should apply to a dealer in a selling group even if for some reason it does
not become a party to an SGA since to provide otherwise might have the unintended
consequence of subverting the intent of Rule G-11 to apply to all dealers.
Comments: Definition of Going Away Orders: SIFMA suggested that the
term going away order has not been previously defined under MSRB rules. Li included
recommendations to address flipping.
MSRB Response: The term going away order was defined in an approval order
concerning a previous revision to Rule G-11. 23 The proposed rule change was not
directed at concerns related to flipping.
Comments: Interpretive Guidance related to Duties of All Dealers Placing
Orders in Retail Order Periods and Fair Pricing: Wells Fargo suggested that the
proposed guidance created a compliance challenge for firms, making almost any pricing
difference subject to the whims and vagaries of which person is viewing the pricing and
its fairness. SIFMA, BDA and Edward Jones raised concerns related to differential
pricing between retail and institutional investors seeking specific examples of the
characteristics of the securities that may fairly justify differences in pricing. SIFMA
recommended that the MSRB clarify that the specific examples provided are not an
exhaustive list and acknowledge that market conditions could shift within a day. GFOA
suggested that the MSRB revise the interpretive guidance to state that price differences
between the retail order period and the later institutional order period do not per se create
an assumption of lack of fair dealing.
BDA found that revisions to the guidance provided a helpful discussion of how
prices and yields may legitimately differ on sales of the same security. Wells Fargo
suggested that retail and institutional orders should not receive different pricing and Full
Life was supportive of guidance that would discourage differences in pricing as between
retail and institutional investors in the new issue market. GFOA and NAIPFA were not
supportive of the guidance as it related to fair pricing because of concerns that it would
hurt issuers and, in the long-term, retail customers may be forced from the market.
MSRB Response: The MSRB is not proposing to issue additional guidance
related to fair pricing at this time. The MSRB most recently issued guidance on the issue
of fair pricing to individual clients in 2009. 24 The comments received on retail order
23
See Securities Exchange Act Release 34-62715 (August 13, 2010); 75 FR 51128
(August 18, 2010); File No. SR-MSRB 2009-17.
24
See the Sales Practice Notice.
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periods and the Board’s study of such programs does not establish a basis for additional
pricing guidance at this time. In particular, that MSRB is mindful that any guidance
should be grounded from further study and analysis and should consider the extent to
which pricing differentials may affect an issuer’s willingness to use a retail order period.
As the MSRB continues to promote price transparency in the primary market, new issue
pricing practices will be monitored to ascertain whether additional guidance is warranted.
Topics Related to Primary Offerings But Beyond the Scope of the Proposed Rule
Change
Comment: Takedown: Full Life suggested that the MSRB should discourage
consideration of disparity in takedown as influencing dealers’ motivation to exhibit
greater effort to secure institutional customers versus retail.
MSRB Response: The MSRB appreciates this comment but believes that at this
time the MSRB should direct its rulemaking efforts towards ensuring that dealers submit
orders only from retail customers.
Comment: Disclosures of Sales by Underwriters Following the End of the
Underwriting Period: Li requested that the MSRB consider promulgating a rule
requiring disclosure to issuers of sales for a period of time (perhaps seven days)
following the end of the underwriting period. Li believed that this might allow the issuer
to identify any pricing problems and support fair dealing.
MSRB Response: The MSRB appreciates this comment and will consider
whether additional rulemaking is appropriate, but views this comment as outside the
scope of the proposed rule change on retail order periods.
6.
Extension of Time Period for Commission Action
The MSRB declines to consent to an extension of the time period specified in
Section 19(b)(2) or Section 19(b)(7)(D) of the Act.
7.
Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for
Accelerated Effectiveness Pursuant to Section 19(b)(2) or Section 19(b)(7)(D)
Not applicable.
8.
Proposed Rule Change Based on Rules of Another Self-Regulatory
Organization or of the Commission
Not applicable.
9.
Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act.
Not applicable.
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10.
Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing
and Settlement Supervision Act
Not applicable.
11.
Exhibits
Exhibit 1
Completed notice of proposed rule change for publication in the
Federal Register
Exhibit 2
Notices Requesting Comment and Comment Letters
Exhibit 3
Modified Form G-32
Exhibit 5
Text of Proposed Rule Change
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EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-___________; File No. SR-MSRB-2013-05)
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a
Proposed Rule Change to Amend MSRB Rules G-8, G-11 and G-32 to Include Provisions
Specifically Tailored for Retail Order Periods
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) 1 and
Rule 19b-4 thereunder, 2 notice is hereby given that on
the Municipal
Securities Rulemaking Board (the “MSRB” or “Board”) filed with the Securities and Exchange
Commission (the “SEC” or “Commission”) the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the MSRB. The MSRB requests that the
proposed rule change be approved with two separate implementation dates: the amendments to
Rules G-8, on books and records, and G-11, on primary offering practices, with an
implementation date six months after the SEC approval date; and the amendments to Rule G-32,
on disclosures in connection with primary offerings, with an implementation date not later than
March 31, 2014, or such earlier date to be announced by the MSRB in a notice published on the
MSRB website with at least a 30 day advance notification. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested persons.
I.
Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed
Rule Change
The MSRB is filing with the Commission a proposed rule change consisting of
amendments to MSRB Rules G-8, G-11 and G-32, and conforming changes to Form G-32 (the
“proposed rule change”).
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b-4.
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The text of the proposed rule change is available on the MSRB’s website at
www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-Filings.aspx, at the MSRB’s
principal office, and at the Commission’s Public Reference Room.
II.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the MSRB included statements concerning the purpose
of and basis for the proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of
the most significant aspects of such statements.
A.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change amends Rules G-8, G-11 and G-32 to include provisions
specifically tailored for retail order periods. These provisions will establish basic protections for
issuers and customers and provide additional tools to assist with the administration and
examinations of retail order period requirements, as further described below under “Summary of
Proposed Rule Change” and under “Discussion of Comments.”
The MSRB previously issued guidance to dealers on the subject of retail order periods.
In 2010, the MSRB stated that Rule G-17 requires an underwriter to follow an issuer’s directions
in any applicable retail order period. 3 Most recently, the MSRB stated that fair dealing requires
an underwriter to take reasonable steps to ensure that retail clients are bona fide; that an
underwriter that knowingly accepts an order that has been improperly designated as a retail order
3
See MSRB Notice 2010-26 (August 15, 2010).
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violates Rule G-17; and that a dealer placing a non-qualifying order under a retail order period
violates Rule G-17. 4 In that same notice, the MSRB indicated that it will continue to monitor
retail order period practices to ensure that they are conducted in a fair and orderly manner
consistent with the intent of the issuer and the MSRB’s investor protection mandate. The
proposed rule change reflects the MSRB’s determination that additional rulemaking in this area
is necessary and appropriate.
The MSRB believes that the proposed rule change is necessary in consideration of its
mandate to protect municipal entities and investors. The proposed rule change addresses
concerns related to retail order periods presented from issuers, dealers, and municipal advisors.
Those concerns include the mischaracterization of orders as “retail” and the failure of syndicate
managers to disseminate timely notice of the terms and conditions of a retail order period to all
dealers, including selling group members, 5 or that pricing information that had been requested
was not delivered or had not been delivered in sufficient time to allow for communication with
the requesting dealer’s “retail” customers to determine whether the investor would like to
purchase the bonds. 6
To address these concerns, the proposed rule change establishes specific obligations on
the senior syndicate manager to disseminate to the syndicate and selling group members detailed
information about the terms and conditions of any retail order period. The proposed rule change
4
See MSRB Notice 2012-25 (May 7, 2012) (the “G-17 Underwriters’ Notice”).
5
In some cases the length of a retail order period may be less than five hours.
6
In some jurisdictions, it is not common practice to advertise the issuer’s intention to
conduct retail order periods on the radio, television or in the newspaper to inform the
investing public of upcoming issuances and terms related to a retail order period.
Advertisements to notify the investing public of retail order periods in connection with
primary offerings of municipal securities can be very expensive and often issuers do not
wish to incur this cost or reimburse dealers for this expense.
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also requires dealers to capture certain additional information in connection with orders placed
under a retail order period designed to ensure that such orders are from bona fide retail
customers. In addition, the MSRB proposes to increase transparency for regulators regarding the
use of retail order periods by amending Form G-32 to require an underwriter to report to the
Electronic Municipal Market Access (EMMA®) 7 system when a retail order period was
conducted.
The MSRB proposed, but thereafter reconsidered a decision to issue interpretive guidance
related to Rules G-17 and G-30 in connection with the proposed rule change. The proposed
interpretive guidance, among other things, emphasized that during a retail order period, an issuer
may require underwriters to make a bona fide public offering to retail customers at the initial
offering price for the securities, either directly or through other dealers, and that dealers must
follow the issuer’s instructions for retail order periods. The particular statement that a duty of
fair dealing includes following an issuer’s instructions for retail order periods is inherent in a rule
on fair dealing, and, as mentioned earlier, was recently addressed in the G-17 Underwriters’
Notice.
The proposed guidance also addressed pricing differentials, including that large
differences between institutional and individual prices that exceed the price/yield variance that
normally applies to transactions of different sizes in the primary market provide evidence that the
duty of fair pricing to individual clients may not have been met. This statement repeated
guidance previously provided by the MSRB. 8 The discussion that followed sought to apply that
previously articulated guidance to a few specific factual scenarios but did not provide any
7
EMMA is a registered trademark of the MSRB.
8
See Guidance of Disclosure and Other Sales Practice Obligations to Individual and Other
Retail Investors in Municipal Securities (July 14, 2009) (the “Sales Practice Notice”).
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analysis or guidance that did not fairly and reasonably flow from the MSRB’s prior guidance.
As discussed below, the limited scope of the discussion and the perception that only those items
discussed would justify a pricing differential was of concern to some commenters. The thrust of
this proposed rule change is to provide mechanisms by which issuers can have greater assurance
that a dealer has, when directed to do so by the issuer, made a bona fide public offering of the
securities to retail customers at their initial offering prices, as well as provide regulators with
enhanced information to monitor the activities of dealers participating in retail order periods. A
further discussion for the reasons the MSRB has not included the interpretive guidance is set
forth below under “Self-Regulatory Organization’s Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others.”
The MSRB proposes to establish two separate implementation dates for the proposed rule
change. The amendments to Rules G-11 and G-8, the core of the proposal, would be
implemented six months after the SEC approval date to allow dealers sufficient time to make
necessary software or systems modifications. It also would allow time for the MSRB to create
educational materials, host webinars and conduct outreach to the dealer and issuer communities,
as appropriate, regarding the new rules.
The second implementation date would relate to the amendments to Rule G-32 that
require syndicate managers or sole underwriters to designate to EMMA whether a retail order
period was conducted. The implementation date would be not later than March 31, 2014, or such
earlier date to be announced by the MSRB in a notice published on the MSRB website with at
least a thirty day advance notification prior to the effective date. This time frame would allow
for the MSRB to design an automated system for dealers to report to the EMMA system. It
would include approximately six months of lead time for Rule G-32 submitters to design
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automated interfaces and allow time for both Rule G-32 submitters and FINRA to test all of
these changes.
Certain proposed rule changes are intended to be clarifying changes only and are not
related to retail order periods, as further described below under “Summary of Proposed Rule
Change.”
SUMMARY OF PROPOSED RULE CHANGE
Rule G-11
MSRB Rule G-11 addresses syndicate practices and management of the syndicate, and
among other things, requires syndicates to establish priorities for different categories of orders
and requires certain disclosures to syndicate members, which are intended to assure that
allocations are made in accordance with those priorities.
The proposed addition of provisions addressing retail order periods necessitates several
new definitions in Rule G-11. First, the term “retail order period” is defined in subparagraph
(a)(vii) to mean an order period during which solely going away orders will be solicited solely
from customers that meet the issuer’s designated eligibility criteria. Second, the term “going
away order” is defined in subparagraph (a)(xii) to mean an order for which a customer is already
conditionally committed. Third, the term “selling group” is defined in subparagraph (a)(xiii) to
mean a group of brokers, dealers, or municipal securities dealers formed for the purpose of
assisting in the distribution of a new issue of municipal securities for the issuer other than
members of the syndicate. Selling groups are sometimes included by issuers in the distribution
of new issues of municipal securities to expand the distribution channel beyond the customers of
syndicate members.
Rule G-11(f) requires that the senior syndicate manager furnish in writing to the other
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members of the syndicate a written statement of all terms and conditions required by the issuer.
The proposed rule change expands these requirements to require expressly that such written
statement must be delivered to selling group members and that the statement must include all of
the issuer’s retail order period terms and conditions and pricing information. The proposed rule
change further requires that an underwriter furnish each dealer with which it has an arrangement
to market the issuer’s securities all of the information provided by the senior syndicate manager. 9
Rule G-11(f) also provides that if a senior syndicate manager prepares the statement of all
of the terms and conditions required by the issuer (including those related to the issuer’s retail
order period requirements), the statement must be provided to the issuer. The proposed rule
change adds the requirement to obtain the approval of the issuer of any statement prepared by the
senior syndicate manager. This approval must be secured in all cases and is not solely limited to
those instances when a retail order period is conducted. The MSRB believes that it is important
to ensure that an issuer is aware of, and agrees with, any requirements imposed on the syndicate
and selling group members in its name.
New paragraph (k) requires any dealer placing an order during a retail order period to
provide certain information to assist in the determination that such order is a bona fide retail
order. Specifically, the order must provide (i) whether the order met the issuer’s eligibility
criteria for participation in the retail order period; (ii) whether the order was a going away order;
(iii) whether the dealer received more than one order from a single customer for a security for
9
This arrangement, commonly referred to as a “distribution or marketing agreement,” is
used by some firms to enhance the firm’s ability to “reach” retail customers, such as in
the case where a firm does not have a significant retail distribution network. Under the
proposed rule change, the onus to furnish the information is placed on the underwriter
that has entered into such arrangement, rather than the senior syndicate manager, to
circulate this information because the senior syndicate manager may not be aware that a
given syndicate member has entered into this type of arrangement.
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which the same CUSIP number has been assigned; (iv) any identifying information required by
the issuer, or the senior syndicate manager on the issuer’s behalf, in connection with such retail
order (but not including customer names or social security numbers); and (v) the par amount of
the order. This information must be submitted no later than the Time of Formal Award (as
defined in Rule G-34(a)(ii)(C)(1)(a)), and may be part of the order submitted to the senior
syndicate manager through an electronic order entry system. Because a senior syndicate
manager generally would not have independent knowledge of the details of an order placed on
behalf of another dealer’s customer, the proposed rule change provides that the senior syndicate
manager may rely on the information furnished by such dealer, unless the senior syndicate
manager knows, or has reason to know, that the information is not true, accurate or complete.
Rule G-8
Under Rule G-8(a)(viii)(A), for each primary offering for which a syndicate has been
formed for the purchase of municipal securities, the syndicate manager shall maintain a variety
of records which show: the description and aggregate par value of the securities; the name and
percentage of participation of each member of the syndicate; the terms and conditions governing
the formation and operation of the syndicate; a statement of all terms and conditions required by
the issuer (including whether there was a retail order period and the issuer’s definition of “retail,”
if applicable); all orders received for the purchase of the securities from the syndicate; 10 all
allotments of the securities and the price at which sold; those instances in which the syndicate
manager allocated securities in a manner other than in accordance with the priority provisions,
10
See Rule G-8(a)(vii) relating to dealer records for principal transactions. Dealers are not
required to retain records related to customer orders unless an order has been filled. The
requirement in the rule for a memorandum of the transaction including a record of the
customer’s order applies only in the event such purchase or sale occurs with the
customer.
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including those instances in which the syndicate manager accorded equal or greater priority over
other orders to orders by syndicate members for their own accounts or their respective related
accounts and the specific reason for doing so; the date and amount of any good faith deposit
made to the issuer; the date of settlement with the issuer; the date of closing of the account; and a
reconciliation of profits and expenses of the account. The proposed rule change to Rule G8(a)(viii)(A) would add to the documentation that must be maintained in the files of the
syndicate manager all orders received for the purchase of the securities from the selling group;
the information required by Rule G-11(k) and all pricing information distributed pursuant to
Rule G-11(f). Such changes will facilitate review by the examining authorities of all of the
records related to a primary offering from files maintained by one underwriter 11 (which is more
efficient) rather than a review of the files of each dealer that participates in the primary offering.
The proposed rule change to Rule G-8(a)(viii)(A) (and the identical provision found in
subsection (B)) reflects a change in phraseology. The parenthetical would be revised in each
case to delete the reference to “whether there was a retail order period and the issuer’s definition
of retail” and to replace it with “those of any retail order period.” This part of proposed rule
change is not intended to be a substantive change.
Under Rule G-8(a)(viii)(B), for each primary offering for which a syndicate has not been
formed for the purchase of municipal securities, the sole underwriter shall maintain a variety of
records which show: the description and aggregate par value of the securities; all terms and
conditions required by the issuer (including whether there was a retail order period and the
issuer’s definition of “retail,” if applicable); all orders received for the purchase of the securities
from the underwriter; all allotments of the securities and the price at which sold; those instances
11
Records related to a successful primary offering are required to be maintained for a
period of not less than six years. See Rule G-9(a)(iv).
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in which the underwriter accorded equal or greater priority over other orders to orders for its own
account or its related accounts and the specific reason for doing so; the date and amount of any
good faith deposit made to the issuer; and the date of settlement with the issuer. The proposed
rule change to Rule G-8(a)(viii)(B) would add to the documentation that must be maintained in
the files of the sole underwriter the information required by Rule G-11(k).
Rule G-32
Generally, Rule G-32(b) provides detailed requirements for underwriters submitting
documents or disclosure-related information to EMMA. Rule G-32(b)(vi)(C)(1)(a) provides that
an underwriter must submit data such as CUSIP numbers, initial offering prices or yields, if
applicable, the expected closing date for the transaction and whether the issuer or other obligated
persons have agreed to undertake to provide continuing disclosure information as contemplated
by Securities Exchange Act Rule 15c2-12. The proposed rule change to Rule G32(b)(vi)(C)(1)(a) adds to the data that must be submitted a requirement that the underwriter
report to the EMMA system (for solely regulatory purposes) whether a primary offering of
securities included a retail order period and each date and time (beginning and end) 12 it was
conducted. 13
Miscellaneous clarifying changes unrelated to retail order periods
Rule G-11(h)(i) provides that discretionary fees for clearance costs to be imposed by a
syndicate manager and management fees shall be disclosed to the syndicate members prior to
12
All times would be required to be reported as Eastern Time to be consistent, for example,
with the requirement to report time of trade under Rule G-14 as Eastern Time.
13
Under the proposed rule change, the underwriter would be required to report to EMMA
that a retail order period has occurred by no later than the closing date of the transaction.
Under Rule G-32(b)(vi)(C)(1)(a), Form G-32 submissions shall be “initiated on or prior
to the date of first execution…” The “date of first execution” is defined in Rule G32(d)(xi) and, for purposes of this report, is deemed to occur by no later than the closing
date.
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submission of a bid. The proposed rule change would require the syndicate manager specifically
to disclose to each syndicate member the amount of any discretionary fees for clearance costs or
any management fees imposed by the syndicate manager. The proposed rule change addresses
concerns that certain syndicate managers failed to disclose the amount of such fees.
Rule G-32(a) provides requirements for the disclosure to customers of certain
information in connection with primary offerings of municipal securities. Rule G-32(a)(i)
provides, among other requirements, that no broker, dealer or municipal securities dealer shall
sell, whether as a principal or agent, any offered securities to a customer unless such dealer
delivers to the customer a copy of the official statement. The proposed rule change amends Rule
G-32(a)(i) to clarify that all dealers, not just underwriters, are subject to the official statement
delivery requirement of the rule during the primary offering disclosure period. This proposed
change codifies the MSRB’s long-standing position and would promote consistent application
and reduce the number of interpretive questions surrounding this requirement.
Rule G-32(b)(v) provides that in the event a syndicate or similar account has been formed
for the underwriting of a primary offering, the managing underwriter shall take the actions
required under the provisions of the rule and shall also comply with the recordkeeping
requirements of Rule G-8(a)(xiii)(B). Subsection (B) of Rule G-8(a)(xiii) addresses the
recordkeeping requirements in the case of a primary offering in which a syndicate has not been
formed. The proposed rule change would delete the reference to such recordkeeping
requirements because the cross reference to “(B)” is incorrect.
2. Statutory Basis
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The MSRB believes that the proposed rule change is consistent with Section
15B(b)(2)(C) of the Act, 14 which provides that the MSRB’s rules shall:
be designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions in
municipal securities and municipal financial products, to remove
impediments to and perfect the mechanism of a free and open market in
municipal securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the public
interest.
The proposed rule change is consistent with Section 15B(b)(2)(C) of the Act. As
summarized above, the proposed rule change protects, among others, investors and municipal
entities by establishing certain basic regulatory standards to support the use of retail order
periods. It would prevent fraudulent and manipulative acts and practices by requiring additional
representations and disclosures to support whether the orders placed during a retail order period
meet the eligibility criteria for retail orders established by issuers. It also provides enhanced
recordkeeping to assist regulators in determining whether the requirements of Rule G-11 are
being met. By ensuring that a syndicate manager must communicate an issuer’s requirements for
the retail order period and other syndicate information to all dealers, including selling group
members, the proposed rule change should also foster cooperation and coordination among all
dealers engaged in the marketing and sale of new issue municipal securities. In addition, the
proposed rule change should minimize the opportunities for misrepresentation of orders as “retail
orders” by requiring that certain information about each order is submitted in writing to the
syndicate manager or sole underwriter in sufficient time so that the information can be examined
by issuers and their financial advisors before bonds are allocated to dealers.
14
15 U.S.C. 78o-4(b)(2)(C).
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B.
Self-Regulatory Organization’s Statement on Burden on Competition
The MSRB does not believe that the proposed rule change would impose any burden on
competition not necessary or appropriate in furtherance of the purposes of the Act. The MSRB
solicited comment on the potential burdens of the proposed rule change in the most recent
request for comment. 15 Among the questions asked were:
•
Would the Revised Draft Proposal effectively further the MSRB’s objective of protecting
issuers and retail investors?
•
Would any aspects of the Revised Draft Proposal have a negative effect on the protection
of issuers, retail investors or the public interest, or on the fair and efficient operation of
the municipal securities market?
•
What would be the incremental additional burden, if any, to dealers resulting from the
Revised Draft Proposal beyond the existing burden of compliance with Rule G-11?
•
Are there alternative methods the MSRB should consider to providing the protections
sought under the Revised Draft Proposal that would be more effective and/or less
burdensome?
The specific comments and responses thereto are discussed below under “Discussion of
Comments.” The MSRB believes that the proposed rule change will benefit issuers, individual
investors and the municipal market by improving the fairness and effectiveness of retail order
periods. Specifically, the benefits of the proposed rule change should accrue to those issuers
who have decided to conduct retail order periods by providing greater assurance that bonds will
in fact be marketed to those “retail” investors that issuers have determined should have the
opportunity to compete to buy their bonds in the primary market. Retail investors will benefit
15
See MSRB Notice 2012-50 (October 2, 2012) (the “October Notice”).
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from the proposed rule change because they will have greater access to bonds sold in the primary
market. Dealers will benefit through improved management of primary offerings and enhanced
communication by and among syndicate members and selling group members. Also,
improvements to the order taking process as a result of the proposed rule change will foster
greater accuracy and fairness and limit opportunities for abuse. Finally, the proposed rule
change will benefit the municipal market because it provides regulators with the necessary tools
and information to ensure compliance with retail order period requirements.
The MSRB could, as an alternative to the proposed rule change, determine to “wait and
see” if earlier rulemaking related to retail order periods issued in 2010 and 2012 16 results in
significant improvements in the conduct of syndicate managers and other dealers participating in
retail order periods. However, the Board believes that earlier rulemaking lacked specific,
concrete requirements necessary to modify dealer practices and foster improvements in
compliance. In addition, previous rulemaking did not address many of the issues associated with
recordkeeping which the Board believes is necessary and appropriate to support enforcement of
Rule G-11.
The MSRB also considered whether education and training of issuers and dealers was a
suitable regulatory alternative. However, the MSRB concluded that a significant and uniform
regulatory response is needed to efficiently and effectively address widespread concerns
involving retail order period practices.
The MSRB recognizes that there are costs of compliance associated with the proposed
rule change. The MSRB notes that the requirement to submit additional information about each
order would apply equally to all dealers that participate in primary offerings that include retail
16
See MSRB Notices cited in footnotes 3 and 4 above.
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order periods. At the present time, dealers routinely submit a number of details related to each
order. Many dealers have utilized software platforms which can be modified to capture the
newly required disclosures. Details about orders are reflected in a report created by the platform.
The customer specific information required under the proposed rule change is consistent with the
type of information dealers normally must obtain in performing appropriate diligence on a
customer’s order. The proposed rule change attempts to minimize the potential burden on
dealers by allowing the required information about each order to be submitted electronically.
Moreover, any dealer that believes that gathering this additional information is an undue burden
does not need to participate in collecting orders for an issuer’s retail order period. The burden on
dealers to capture additional information on each customer order in a retail order period is
balanced against the need for issuers to have confidence that orders placed during a retail order
period are bona fide and meet the issuer’s eligibility requirements for participation in the retail
order period.
The MSRB addressed concerns regarding the potential burdens to syndicate managers of
auditing potentially large numbers of orders submitted to it by other dealers by expressly stating
that a senior syndicate manager may rely upon the information furnished by each broker, dealer,
or municipal securities dealer unless the senior syndicate manager knows, or has reason to know,
that the information is not true, accurate or complete. The proposed rule change does not require
that a syndicate manager undertake an exhaustive investigation of the disclosures about each
order. Thus, the proposed rule change does not impose additional requirements on the senior
syndicate manager other than those that would normally be required under principles of fair
dealing that currently apply.
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The recordkeeping requirements in Rule G-8 would be expanded under the proposed rule
change to require the syndicate manager or sole underwriter to maintain all of the new
documentation required as a result of amendments to Rule G-11. The MSRB believes that the
maintenance of this basic information is necessary to ensure the integrity of the primary offering
process in general and the retail order period in particular. These burdens are incremental in that
under current Rule G-8, these parties are already required to maintain comprehensive records
relating to each primary offering including all of the terms and conditions required by the issuer
and whether there was a retail order period. Any reports produced electronically can be easily
printed or saved and included in the deal file for easy retrieval.
Lastly, the amendments to Rule G-32 in the proposed rule change requiring the syndicate
manager or sole underwriter to notify the MSRB of the date and time of each retail order period
conducted presents only a modest, incremental burden to the existing requirements of Rule G-32,
but provides significant regulatory value. Without this reporting requirement, neither the MSRB
nor the examination authorities will have any notification of whether an offering contained a
retail order period. To minimize the costs to dealers associated with this requirement, the MSRB
would undertake to design an automated system for dealers to report to the EMMA system. The
MSRB believes that it is reasonable to delay the implementation date for this part of the
proposed rule change until such time as the automated system has been tested by the dealer
community.
The MSRB notes that one issuer 17 has stated that the proposed rule change does not
negatively impact the municipal securities market or its efficient operation and that, while there
17
See the comment letter submitted by the Executive Director of the Rhode Island Health
and Educational Building Corp (RIHEBC).
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may be claims that the proposed rule change creates some additional burdens, in the opinion of
that commenter, it is far outweighed by the benefit of an open, fair and efficient municipal
marketplace.
C.
Self-Regulatory Organization’s Statement on Comments on the Proposed Rule
Change Received from Members, Participants, or Others
The proposed rule change was developed with input from a diverse group of market
participants. On October 2, 2012, the MSRB requested comment on a revised proposal on retail
order periods under Rules G-11, G-8 and G-32 and a draft interpretive notice concerning the
application of Rules G-17 and G-30 to retail order periods. 18 The revised proposal in the
October Notice modified certain draft provisions of Rules G-11, Rule G-8 and the draft
interpretive notice but did not further revise the provisions of Rule G-32 under the initial draft
proposal. 19 The MSRB received 24 comment letters in response to the March and October
Notices. 20
DISCUSSION OF COMMENTS
18
See the October Notice.
19
See MSRB Notice 2012-13 (March 6, 2012) (the “March Notice”), which contained the
initial draft proposal regarding retail order periods under Rules G-11, G-8 and G-32 and a
draft interpretive notice concerning the application of Rules G-17 and G-30 to retail order
periods.
20
Comment letters were received from: Alamo Capital (“Alamo”); Bond Dealers of
America (“BDA”); CFA Institute (“CFA”); Dorsey & Company, Inc. (“Dorsey”);
Edward D. Jones & Co. (“Edward Jones”); Financial Planning Association (“FPA”); Full
Life Financial LLC (“Full Life”); Government Finance Officers Association (“GFOA”);
Investment Company Institute (“ICI”); Richard Li (“Li”); Chris Melton (“Melton”);
National Association of Independent Public Finance Advisors (“NAIPFA”); Rhode
Island Health and Educational Building Corp. (“RIHEBC”); Securities Industry and
Financial Markets Association (“SIFMA”); Thornburg Investment Management
(“Thornburg”); Vanguard (“Vanguard”); and Wells Fargo Advisors (“Wells Fargo”).
Some of the commenters submitted comment letter responses to both notices.
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Definition of Retail Customer for Purposes of a Retail Order Period
Comments: MSRB Should Not Create a Definition of “Retail:” SIFMA generally
supported the approach that it is an issuer’s prerogative to determine whether there should be a
retail order period and to define retail, but indicated concern on the part of some members that
lack of uniformity as to the definition of retail may make it difficult to comply with the MSRB
requirements to ensure that only qualifying orders are placed and to maintain adequate records.
FPA agreed that there is no reason for the MSRB to create a uniform definition of retail but
understood the appeal of a uniform base definition that could be modified by an issuer.
Comments: MSRB Should Create a Definition of “Retail:” Many commenters
recommended, for a variety of reasons, that the MSRB establish a uniform definition of “retail”
for use by issuers, or, in the alternative, create a “model” definition that issuers can use or
modify as they deem appropriate. 21 GFOA’s comments were representative of those
commenters that believed that a boilerplate definition would benefit infrequent issuers who do
not have sufficient expertise or who do not engage a financial advisor and may avoid reliance on
other parties to the transaction who do not have a fiduciary duty to the issuer. Wells Fargo, Li
and CFA believed that a uniform definition would make compliance more effective and less
costly. Li, Full Life, GFOA and Edward Jones also supported a standard definition created by
the MSRB with the option provided to issuers to create their own definition.
Comments: Divergent Views of “Retail:” Many commenters proffered specific proposals
regarding definitions of retail that should be considered by the MSRB. 22 Some commenters
favored a more limited definition that would include only individuals (i.e., natural persons) while
others would include orders from a trust department or registered investment advisor acting on
21
CFA, Edward Jones, Full Life, GFOA, ICI, Li, NAIPFA, and Wells Fargo.
22
Dorsey, Edward Jones, FPA, Full Life, ICI, NAIPFA, Vanguard, and Wells Fargo.
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behalf of a specifically identifiable natural person. Still others were either in favor of or against
including mutual funds as “retail” customers. A few commenters offered arguments on behalf of
or against the size of the customer order or locality of the customer as appropriate criteria for
“retail.”
MSRB Response: The current MSRB rules do not contain a definition of a “retail”
customer and the MSRB has declined to create a definition in the proposed rule change in part
because of concerns that an MSRB definition of “retail” may unduly influence certain issuers
regarding the scope of eligible customers for a retail order period. The MSRB believes that
issuers should designate the eligibility criteria for their retail order period on an issue-by-issue
basis and issuers should have the flexibility to choose the criteria that best suits their unique
circumstances even if this option results in lack of uniformity in the marketplace or challenges in
compliance. As an alternative to a model MSRB definition, the MSRB believes that it is
preferable to develop educational materials concerning retail order periods that would assist
issuers in selecting their own definition. The MSRB can work with issuers and industry groups
to develop model definitions and other best practices which would address this issue without the
imprimatur of being a regulatory standard.
Communications Relating to Issuer Requirements
Comments: CFA supported the need for better and honest communication between
various parties involved in the initial sale of municipal securities to investors. Full Life
supported the proposals in principal, in particular requiring syndicate managers to disseminate
timely notice of issuer requirements to all dealers, including selling group members.
MSRB Response: The MSRB appreciates these comments.
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Comments: SIFMA was supportive of the timing in the current rule which requires the
dissemination of information “prior to the first offer of any securities.…” SIFMA stated that
among the terms and conditions required by the issuer related to the retail order period would be
any time parameters for which the retail order period would be conducted. SIFMA stated that
this information is especially important to dealers contacting customers with non-discretionary
accounts. GFOA was supportive of a specific time frame in which the syndicate manager must
provide issuer terms and conditions for the retail order period to other dealers.
MSRB Response: The MSRB is appreciative of SIFMA’s comments. The MSRB does
not agree that it is appropriate to impose a fixed time frame on dealers in a rule because of
concerns that such a requirement could have unintended consequences. For example, it could
hamper the marketing of a transaction if an issuer determines that an offering must come to
market quickly.
Length of the Retail Order Period
Comments: Full Life said that the length of a retail order period should be sufficiently
long to fulfill the issuer’s intent. Full Life and Dorsey said that it should afford a genuine
opportunity for retail investor participation. FPA stated that the period should be meaningful – it
should be sufficiently long to allow an individual investor to make an informed decision.
Two commenters recommended that either the MSRB or the syndicate should fix the
length of the retail order period. Dorsey said that the syndicate should specify a time reasonably
sensible in length and should include the pricing structure. NAIPFA suggested that the MSRB
establish a fixed timeframe for the retail order period.
Edward Jones recommended that “meaningful notice of the retail order period” would
include 24-hour notice with preliminary pricing terms (e.g., coupon, maturity, price and yield
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that an individual retail investor could use to form a reasoned investment decision) before the
retail order period is to begin. Edward Jones suggested that an adequate retail order period
should include a minimum of a full trading day with the issuer having the opportunity to extend
the retail order period beyond a single trading day. Edward Jones supported a “full day retail
order period” even if an institutional order period runs concurrently for some portion of the day.
MSRB Response: The MSRB believes that the current rule should not be revised
because an issuer should retain control over the issuance process which includes the ability to
adjust the length of time for the retail order period to suit its needs or market conditions.
Representations and Required Disclosures about Each Order
Comments: GFOA was supportive of the requirement to provide additional information
about each order. NAIPFA was also supportive and believed it would be beneficial to issuers
because it would allow issuers to better assess the effectiveness of their underwriter’s ability to
sell the issuers’ securities as well as the underwriter’s adherence to the issuers’ instructions and
also may help curtail flipping. Li said that details regarding the order could possibly be required
by the senior manager to be communicated during the order process not just afterwards in order
to prevent inadvertent misrepresentations. RIHEBC stated that it already requires much of the
same information listed in the proposed rule change in order for it to judge the performance of
the senior manager and co-managers.
MSRB Response: The MSRB appreciates these comments.
Comments: Alamo and BDA generally did not support the additional disclosures about
each order because it would be an unreasonable administrative burden, costly and inconsistent.
BDA said that the requirements are particularly burdensome in cases in which the dealer obtains
large numbers of retail orders during retail order periods. BDA stated that burdens on dealers
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could have unintended consequences for everyone and perhaps discourage the practice of retail
order periods altogether and this can hurt issuers and retail investors. BDA suggested that, at
most, dealers should comply with requirements of issuers to document or represent that they
have complied with retail order period requirements. Melton said that required detailed
disclosures regarding each order is inconsistent with permitting issuers to define retail and may
not be completely necessary.
MSRB Response: The MSRB believes that the additional required disclosures will
provide important information to the issuer. The MSRB understands that it is not uncommon for
certain experienced issuers already to demand this additional information about orders. The
MSRB believes it is essential to require the type of information contained in the rule because
some issuers may not be sufficiently knowledgeable to ask for it or have appropriate leverage.
Moreover, even when issuers have requested this information be gathered, it may not have been
provided to them prior to the execution of the bond purchase agreement; this deadline is
important so that the senior syndicate manager has all of the information it will need before
committing the underwriters to the purchase of the bonds and before it allocates a share of
securities to each dealer. In addition, one of the benefits of requiring written representations and
disclosures is that it should help to minimize the likelihood of inadvertent misrepresentations
related to whether or not a particular order meets the issuer’s designated eligibility criteria.
Comments: SIFMA said that the representation that an order meets the issuer’s definition
of retail is more appropriate for the master Agreement Among Underwriters (AAU). Rather than
providing the information about each order, the MSRB could provide that a dealer is deemed to
have made the required representations by virtue of submitting an order during a retail order
period or the representations can be made in the AAU or Selling Group Agreement (SGA), and
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that, therefore, it is not necessary for the representation to be made separately for each order
submitted during the retail order period.
MSRB Response: SIFMA may wish to revise its standard form of AAU or SGA in
support of the proposed rule change and the MSRB would be supportive of any agreement which
seeks to bind members of the syndicate or selling group to honor the issuer’s intentions.
However, compliance with MSRB rules should stand independent of private agreements between
parties.
Comment: Melton noted privacy concerns that may have led the MSRB to require
dealers to identify customers without providing names and social security numbers. Dorsey and
Edward Jones supported the required disclosure of zip codes to support retail priority as adequate
and stated this should be adopted as an industry standard practice. Edward Jones suggested that
the MSRB revise the proposal to limit the identifying information that the issuer may require.
Edward Jones also suggested that an issuer should not be allowed to require dealers to provide
customer account numbers, addresses, phone numbers or tax identification numbers. SIFMA said
the rule should specify that any identifying information required by the issuer may not include
customer account numbers, names or taxpayer identification numbers.
MSRB Response: Certain issuers have said to the MSRB that it would be helpful to have
additional tools to verify orders. The MSRB believes that, if there are legitimate customer
privacy protection issues associated with a specific request, particularly as it relates to certain
identifying information or account numbers, an issuer may be amenable to allowing a dealer to
truncate numbers before submission. The MSRB is aware that zip codes are often requested by
issuers and usually provided by dealers in support of evidence that an order is from an individual
or that the order is from a customer from a particular locality. Both issuers and dealers have
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acknowledged that it is easy to supply a zip code for a residential area and “claim” that it belongs
to the order.
Comment: SIFMA also recommended that the MSRB create a safe harbor for senior
syndicate managers so that senior managers would satisfy their own fair dealing obligations to
the issuer when relying on representations made to them by other dealers that any orders
submitted are retail orders.
MSRB Response: The MSRB agrees that a senior syndicate manager should, subject to
certain exceptions, be entitled to rely on the information furnished by another dealer. However,
the MSRB believes that a senior syndicate manager would not be entitled to rely on the
information if the senior syndicate manager knows, or has reason to know, that the information is
not true or accurate.
Recordkeeping
Comments: GFOA supported the new recordkeeping requirements on syndicate
managers. SIFMA said that the proposed amendments requiring the syndicate members to keep
such records are not warranted as they would be duplicative of recordkeeping requirements
already imposed upon dealers. Edward Jones sought clarification as to whether the
recordkeeping requirements applied to a sole managed deal, i.e., a deal where there is no
syndicate.
MSRB Response: The MSRB does not agree that proposed revisions to the
recordkeeping requirements would be duplicative of recordkeeping requirements already
imposed on dealers. Rule G-8(a)(vii) provides that the dealer keep a record of the customer’s
order in the event of a purchase or sale of municipal securities (so that a record of orders need
not be retained if the order is not filled). Existing Rule G-8(a)(viii) requires that the records of
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all orders received (regardless of whether an order is filled) be maintained by the syndicate
manager. The proposed rule change is necessary so that the additional information that must be
provided by the senior syndicate manager or by each dealer as a result of the amendments to
Rule G-11 will be retained in the centralized file maintained by the syndicate manager. The
MSRB agrees and the proposed rule change applies to recordkeeping requirements in the case of
a sole managed deal.
Comment: SIFMA said that dealers should not be required to share customer specific
information with syndicate managers, and that it would be more appropriate (and should be
sufficient for recordkeeping and enforcement purposes) that these customer order details remain
with the dealer that maintains the customer relationship.
MSRB Response: The MSRB disagrees for the reasons stated above. Issuers will benefit
from having access to customer specific information to verify orders and examinations will
likely be more efficient due to centralized recordkeeping.
Revisions to Rule G-32 to Indicate that a Transaction Included a Retail Order Period
Comments: SIFMA and Full Life supported the proposed revisions to Rule G-32. Full
Life said that it provides an opportunity for regulatory oversight essential to fostering
administration of bona fide retail order periods that actually result in retail participation. SIFMA
also recommended that the dates and times of any retail order period be reported to EMMA.
MSRB Response: The MSRB appreciates these comments. The MSRB agrees with
SIFMA’s recommendation and it is reflected in the proposed rule change to Rule G-32.
Additional Rulemaking Regarding Retail Order Periods
Comment: SIFMA stated that the G-17 Underwriters’ Notice has adequately addressed
the concerns regarding retail order periods so that additional rulemaking is not necessary.
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MSRB Response: The MSRB considers the G-17 Underwriters’ Notice as an important
step towards improving practices in this area but it did not address all of the issues associated
with retail order periods. More specific, concrete requirements in the proposed rule change
should assist in compliance. For example, the G-17 Underwriters’ Notice does not address many
of the issues associated with recordkeeping. The proposed rule change also will support efforts
by the issuer and the syndicate manager to audit orders.
Alternatives to Rulemaking
Comment: BDA suggested that if the MSRB produces educational materials, they should
include specific guidance practices that issuers should consider in formulating effective retail
order period rules. BDA recommended that issuers reserve the right to conduct an audit of
compliance by the syndicate of retail order period rules. GFOA recommended that the MSRB
seek to establish some type of protocol or system so that the issuer can have some comfort that
retail orders meet the preset criteria set by the issuer.
MSRB Response: The MSRB would consider working with issuer trade associations on
best practices which may address these issues.
Other Comments
Comment: Combined Order Periods: Vanguard said that all interested investors should
be permitted to submit orders for municipal securities in the primary market and no priority
should be given to retail orders, and that issuers would benefit from more accurate price
discovery.
MSRB Response: The MSRB does not wish to substitute its judgment in place of that of
issuers who manage their debt issuances. Issuers may choose to conduct combined order periods
and the proposed rule change does not prevent them from doing so.
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Comment: Definition of Selling Group: SIFMA suggested the definition of selling
group be limited to those dealers that sign an SGA or substantially similar agreements for a
particular new issue of municipal securities.
MSRB Response: The MSRB does not wish to define selling group by reference to an
agreement which may not be executed in all cases, although the MSRB recognizes that it may be
customary practice for selling group members to execute an SGA. In addition, duties of selling
group members and the duties of syndicate managers to selling group members should apply to a
dealer in a selling group even if for some reason it does not become a party to an SGA since to
provide otherwise might have the unintended consequence of subverting the intent of Rule G-11
to apply to all dealers.
Comments: Definition of Going Away Orders: SIFMA suggested that the term going
away order has not been previously defined under MSRB rules. Li included recommendations to
address flipping.
MSRB Response: The term going away order was defined in an approval order
concerning a previous revision to Rule G-11. 23 The proposed rule change was not directed at
concerns related to flipping.
Comments: Interpretive Guidance related to Duties of All Dealers Placing Orders in
Retail Order Periods and Fair Pricing: Wells Fargo suggested that the proposed guidance created
a compliance challenge for firms, making almost any pricing difference subject to the whims and
vagaries of which person is viewing the pricing and its fairness. SIFMA, BDA and Edward
Jones raised concerns related to differential pricing between retail and institutional investors
23
See Securities Exchange Act Release 34-62715 (August 13, 2010); 75 FR 51128 (August
18, 2010); File No. SR-MSRB 2009-17.
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seeking specific examples of the characteristics of the securities that may fairly justify
differences in pricing. SIFMA recommended that the MSRB clarify that the specific examples
provided are not an exhaustive list and acknowledge that market conditions could shift within a
day. GFOA suggested that the MSRB revise the interpretive guidance to state that price
differences between the retail order period and the later institutional order period do not per se
create an assumption of lack of fair dealing.
BDA found that revisions to the guidance provided a helpful discussion of how prices
and yields may legitimately differ on sales of the same security. Wells Fargo suggested that
retail and institutional orders should not receive different pricing and Full Life was supportive of
guidance that would discourage differences in pricing as between retail and institutional
investors in the new issue market. GFOA and NAIPFA were not supportive of the guidance as it
related to fair pricing because of concerns that it would hurt issuers and, in the long-term, retail
customers may be forced from the market.
MSRB Response: The MSRB is not proposing to issue additional guidance related to fair
pricing at this time. The MSRB most recently issued guidance on the issue of fair pricing to
individual clients in 2009. 24 The comments received on retail order periods and the Board’s
study of such programs does not establish a basis for additional pricing guidance at this time. In
particular, that MSRB is mindful that any guidance should be grounded from further study and
analysis and should consider the extent to which pricing differentials may affect an issuer’s
willingness to use a retail order period. As the MSRB continues to promote price transparency
in the primary market, new issue pricing practices will be monitored to ascertain whether
additional guidance is warranted.
24
See the Sales Practice Notice.
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Topics Related to Primary Offerings But Beyond the Scope of the Proposed Rule Change
Comment: Takedown: Full Life suggested that the MSRB should discourage
consideration of disparity in takedown as influencing dealers’ motivation to exhibit greater effort
to secure institutional customers versus retail.
MSRB Response: The MSRB appreciates this comment but believes that at this time the
MSRB should direct its rulemaking efforts towards ensuring that dealers submit orders only from
retail customers.
Comment: Disclosures of Sales by Underwriters Following the End of the Underwriting
Period: Li requested that the MSRB consider promulgating a rule requiring disclosure to issuers
of sales for a period of time (perhaps seven days) following the end of the underwriting period.
Li believed that this might allow the issuer to identify any pricing problems and support fair
dealing.
MSRB Response: The MSRB appreciates this comment and will consider whether
additional rulemaking is appropriate, but views this comment as outside the scope of the
proposed rule change on retail order periods.
III.
Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within
such longer period of up to 90 days (i) as the Commission may designate if it finds such longer
period to be appropriate and publishes its reasons for so finding or (ii) as to which the selfregulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be
disapproved.
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IV.
Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning
the foregoing, including whether the proposed rule change is consistent with the Act. Comments
may be submitted by any of the following methods:
Electronic comments:
•
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
•
Send an e-mail to rule-comments@sec.gov. Please include File Number SR-MSRB2013-05 on the subject line.
Paper comments:
•
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2013-05. This file number should be
included on the subject line if e-mail is used. To help the Commission process and review your
comments more efficiently, please use only one method. The Commission will post all
comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies
of the submission, all subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all written communications
relating to the proposed rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission’s Public Reference Room, 100 F
Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and
3:00 pm. Copies of the filing also will be available for inspection and copying at the principal
office of the MSRB. All comments received will be posted without change; the Commission
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does not edit personal identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions should refer to File
Number SR-MSRB-2013-05 and should be submitted on or before [insert date 21 days from
publication in the Federal Register].
For the Commission, by the Division of Trading and Markets, pursuant to delegated
authority. 25
Elizabeth M. Murphy
Secretary
25
17 CFR 200.30-3(a)(12).
Notice · MSRB.org
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EXHIBIT 2
MSRB NOTICE 2012-13 (MARCH 6, 2012)
REQUEST FOR COMMENT ON PROPOSED RULE
AMENDMENTS AND INTERPRETIVE NOTICE ON RETAIL
ORDER PERIODS
The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on
proposed amendments concerning retail order periods to MSRB Rules G-11 (on
primary offering practices), G-8 (on books and records), and G-32 (on disclosures in
connection with primary offerings), and a proposed interpretive notice concerning the
application of MSRB Rules G-17 and G-30 to retail order periods. If the MSRB
subsequently files the proposed amendments and the proposed interpretive notice
with the Securities and Exchange Commission, the MSRB will request that it be given
prospective application.
Comments should be submitted no later than April 13, 2012, and may be submitted in
electronic or paper form. Comments may be submitted electronically by clicking here. Comments submitted in paper form should be sent to Ronald W. Smith, Corporate
Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600,
Alexandria, VA 22314. All comments will be available for public inspection on the
MSRB’s website.[1]
Questions about this notice should be directed to Kathleen Miles, Associate General
Counsel, at 703-797-6600.
BACKGROUND
The MSRB is proposing the amendments and the interpretive notice as part of its
mandate to protect municipal entities and investors and in consideration of the
prevalence of retail order periods. Over the last two years, the MSRB has been made
aware of various concerns related to retail order periods from issuers, dealers, and
municipal advisors. Those concerns have ranged from concerns about disregard by
brokers, dealers, and municipal securities dealers (“dealers”) of terms and conditions
required by issuers for retail order periods, to failure of syndicate managers to
disseminate timely notice of issuer terms and conditions regarding retail order periods
to all dealers, including selling group members, to the use of retail order periods to
achieve yields that may be below market. Enforcement agencies have also requested
that the MSRB adopt additional recordkeeping requirements concerning retail order
periods to assist in the enforcement of MSRB rules.
The provisions of existing Rule G-11 that cover syndicate practices and management
of the syndicate, do not specifically address retail order periods; however, Rule G11(f) does require that a senior syndicate manager furnish in writing to the other
members of the syndicate, a written statement of all terms and conditions required by
the issuer. Also, existing Rule G-11 does not acknowledge selling groups or address
a syndicate manager’s duty to members of a selling group that wish to place orders
during retail order periods.
Existing Rule G-8 requires that a statement of all terms and conditions required by the
issuer (including whether there was a retail order period and the issuer’s definition of
“retail”) be included in records maintained by the syndicate manager. However, Rule
G-32 does not contain a mechanism that would alert enforcement agencies that a
new issue of securities included a retail order period.
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The MSRB also has not provided guidance to those dealers that are not underwriters
(e.g., selling group members) regarding the Rule G-17 fair practice obligations of
dealers to issuers when conducting retail order periods or the fair practice obligations
of dealers placing orders in retail order periods to other dealers.
PROPOSED RULE AMENDMENTS
The proposed amendments to Rule G-11 would include definitions of the terms “going
away order,” “selling group,” and “retail order period.” The definition of the term “retail
order period” would make it clear that it is the prerogative of the issuer to establish the
definition of “retail” for that purpose. In addition, the proposed amendments to Rule
G-11 would require a senior syndicate manager to furnish in writing to members of the
selling group, if any, a written statement of the issuer’s terms and conditions (including
any retail order period requirements), the priority provisions, and any subsequent
changes to those terms and conditions and priority provisions. Finally, the proposed
amendments to Rule G-11 would require that any dealer placing an order during a
retail order period provide, in writing (which could be electronic), the following
information regarding each order submitted during the retail order period: (i) whether
the order met the issuer’s definition of “retail”; (ii) whether the order was a going away
order; (iii) whether the dealer placed more than one order from a single customer for a
security for which the same CUSIP number has been assigned; (iv) for any customer
who was a natural person, any identifying information required by the issuer in
connection with such retail order (but not including customer names or social security
numbers); (v) the par amount of the order; and (vi) for any order from a trust
department, investment advisor, or firm representing customers with separately
managed accounts, the par amount and any identifying information required by the
issuer in connection with such retail order (but not including the name or social
security number of each natural person to whose account the securities were
designated).
The proposed amendments to Rule G-8 would require that the senior syndicate
manager maintain a record of the information related to retail orders required by Rule
G-11, along with the other information required under existing Rule G-8(a)(viii) relating
to syndicate or other primary offering transaction records.
The proposed amendments to Rule G-32 would require an underwriter to report to the
MSRB’s Electronic Municipal Market Access (EMMA®)[2] system whether a primary
offering of securities included a retail order period and when the retail order period
was conducted.[3]
SUMMARY OF PROPOSED INTERPRETIVE NOTICE
The proposed interpretive notice would address the duties of all dealers placing orders
in retail order periods, not just underwriters. The notice would provide that, under
Rule G-17, issuers may reasonably expect that all dealers will deal fairly with them by
abiding by the terms and conditions established by the issuers for the retail order
periods, including the issuers’ respective definitions of “retail.” The notice would also
remind dealers that they have fair practice obligations to other dealers, so that any
dealer that submitted an order as a “retail” order when it knew that it was not, or
violated any of the other retail order period provisions of Rule G-11, would also violate
the fair practice requirements of Rule G-17. Under the notice, Rule G-17 would also
require syndicate managers to provide adequate and timely notice of issuers’ terms
and conditions for the retail order period to all dealers permitted by issuers to place
orders during retail order periods. For example, it might be a violation of Rule G-17, if
a syndicate manager withheld information regarding retail order periods to provide an
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advantage to itself or its customers, or to disadvantage other dealers or their
customers.
The proposed interpretive notice also would provide that dealers must balance their
duty of fair pricing to issuers under Rule G-17 with their duty of fair pricing to
customers under Rule G-30(a), when pricing a new issue of securities generally, but
in particular when pricing securities that will be sold to retail customers. It would
remind dealers of previous MSRB guidance that, “Large differences between
institutional and individual prices that exceed the price/yield variance that normally
applies to transactions of different sizes in the primary market provide evidence that
the duty of fair pricing to individual clients may not have been met.” An example would
be provided of an issue with two CUSIPS for the same maturity, one of which is
marketed exclusively to retail customers and the other to institutional customers.
REQUEST FOR COMMENT
The MSRB is requesting comment from the industry and other interested parties on
the proposed rule amendments and the proposed interpretive notice set forth below.
The proposed amendments to Rule G-11 would leave the definition of “retail” for
purposes of retail order periods to the determination of issuers. Certain market
participants have expressed concern that issuer definitions of “retail” are not uniform
and may vary considerably from one another (for example, “retail” may be defined in
reference to the par amount of the order rather than the characteristics of the
customer), possibly leading to unintended erroneous orders by dealers. They have
also expressed concern that separately-managed accounts are frequently allowed to
place orders during the retail order period, while mutual funds are not, despite the fact
that fund clients, the indirect owners of the bonds, are often natural persons. In light
of these concerns, the MSRB is also seeking comment on whether it should adopt a
uniform definition of “retail” for purposes of its retail order period rules and, if so, what
it should be?
March 6, 2012
*****
TEXT OF PROPOSED AMENDMENT TO RULE G-11 [4]
Rule G-11: Primary Offering Practices
(a) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i) - (vi) No change.
(vii) The term “retail order period” means an order period during which
orders will be solicited solely from customers that meet the issuer’s
definition of “retail.”
(viii) - (xi) No change.
(xii) The term “going away order” means an order for which a customer
is already conditionally committed.
(xiii) The term “selling group” means a group of brokers, dealers, or
municipal securities dealers that assist in the distribution of a new
issue of municipal securities for the issuer but are not members of the
syndicate.
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(b) - (e) No change.
(f) Communications Relating to Issuer Syndicate Requirements, Priority Provisions and
Order Period. Prior to the first offer of any securities by a syndicate, the senior
syndicate manager shall furnish in writing to the other members of the syndicate and
to members of the selling group, if any, (i) a written statement of all terms and
conditions required by the issuer (including any retail order period requirements),
(ii) the priority provisions, (iii) the procedure, if any, by which such priority provisions
may be changed, (iv) if the senior syndicate manager or managers are to be permitted
on a case-by-case basis to allocate securities in a manner other than in accordance
with the priority provisions, the fact that they are to be permitted to do so, and (v) if
there is to be an order period, whether orders may be confirmed prior to the end of
the order period. Any change in the priority provisions shall be promptly furnished in
writing by the senior syndicate manager to the other members of the syndicate and
the selling group, if any. Syndicate and selling group members shall promptly
furnish in writing the information described in this section to others, upon request. If
the senior syndicate manager, rather than the issuer, prepares the written statement
of all terms and conditions required by the issuer, such statement shall be provided to
the issuer.
(g) - (j) No change.
(k) Retail Order Period Representations and Required Disclosures. At the end of
the retail order period but no later than the Time of Formal Award (as defined in
Rule G-34(a)(ii)(C)(1)(a)), each broker, dealer, or municipal securities dealer that
submits an order during a retail order period shall provide, in writing, which
may be electronic, the following information relating to each order submitted
during a retail order period:
(i) whether the order meets the issuer’s definition of “retail”;
(ii) whether the order is a going away order;
(iii) whether the broker, dealer, or municipal securities dealer has
received more than one order from a single customer for a security for
which the same CUSIP number has been assigned;
(iv) for any customer who is a natural person, any identifying
information required by the issuer in connection with such retail order
(but not including customer names or social security numbers);
(v) the par amount of the order; and
(vi) for any order from a trust department, investment advisor, or firm
representing customers with separately managed accounts, the par
amount and any identifying information required by the issuer in
connection with such retail order (but not including the name or social
security number of each natural person to whose account the securities
are designated).
*****
TEXT OF PROPOSED AMENDMENT TO RULE G-8
Rule G-8: Books and Records to be Made by Brokers, Dealers and Municipal
Securities Dealers
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(a) Description of Books and Records Required to be Made. Except as otherwise
specifically indicated in this rule, every broker, dealer and municipal securities dealer
shall make and keep current the following books and records, to the extent applicable
to the business of such broker, dealer or municipal securities dealer:
(i) - (vii) No change.
(viii) Records Concerning Primary Offerings.
(A) For each primary offering for which a syndicate has been formed
for the purchase of municipal securities, records shall be maintained
by the syndicate manager showing the description and aggregate
par value of the securities; the name and percentage of participation
of each member of the syndicate; the terms and conditions
governing the formation and operation of the syndicate; a statement
of all terms and conditions required by the issuer (including whether
there was a retail order period and the issuer's definition of "retail," if
applicable); all orders received for the purchase of the securities
from the syndicate and selling group, if any; the information
required to be submitted pursuant to Rule G-11(k); all allotments
of securities and the price at which sold; those instances in which
the syndicate manager allocated securities in a manner other than in
accordance with the priority provisions, including those instances in
which the syndicate manager accorded equal or greater priority
over other orders to orders by syndicate members for their own
accounts or their respective related accounts; and the specific
reasons for doing so; the date and amount of any good faith deposit
made to the issuer; the date of settlement with the issuer; the date
of closing of the account; and a reconciliation of profits and
expenses of the account.
(B) No change.
(ix) – (xxiv) No change.
(b) – (g) No change.
*****
TEXT OF PROPOSED AMENDMENT TO RULE G-32
Rule G-32: Disclosures in Connection with Primary Offerings
(a) Customer Disclosure Requirements.
(i) No broker, dealer or municipal securities dealer shall sell, whether as
[principal or agent,] an underwriter or otherwise, any offered municipal
securities to a customer unless such broker, dealer or municipal securities
dealer delivers to the customer by no later than the settlement of the
transaction a copy of the official statement or, if an official statement is not
being prepared, a written notice to that effect together with a copy of a
preliminary official statement, if any. (ii) – (v) No change.
(b) Underwriter Submissions to EMMA.
(i) – (iv) No change.
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(v) Underwriting Syndicate. In the event a syndicate or similar account has
been formed for the underwriting of a primary offering, the managing
underwriter shall take the actions required under the provisions of this rule
[and comply with the recordkeeping requirements of Rule G-8(a)(xiii)(B)].
(vi) Procedures for Submitting Documents and Form G-32 Information.
(A) - (B) No change.
(C) The underwriter in any primary offering of municipal securities for
which a document or information is required to be submitted to
EMMA under this section (b) shall submit such information in a
timely and accurate manner as follows:
(1) Form G-32 information submissions pursuant to
paragraph (b)(i)(A) hereof with respect to a primary offering
shall be:
(a) initiated on or prior to the date of first execution
with the submission of CUSIP numbers (except if
such CUSIP numbers are not required under Rule
G-34 and have not been assigned), initial offering
prices or yields (including prices or yields for
maturities designated as not reoffered), if
applicable, the expected closing date, [and]
whether the issuer or other obligated persons have
agreed to undertake to provide continuing
disclosure information as contemplated by
Securities Exchange Act Rule 15c2-12, and if
there was a retail order period (as defined in
Rule G-11(a)(vii)) as part of a primary offering,
the information indicating whether a retail
order period was conducted and each date it
was conducted, together with such other items of
information as set forth in Form G-32 and the
EMMA Dataport Manual; and
(b) No change.
(2) - (4) No change.
(D) No change.
(c) No change.
(d) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i) - (xiii) No change.
(xiv)[(xiii)] The term "obligated person" shall mean an obligated person
defined in Securities Exchange Act Rule 15c2-12(f)(10).
(e) No change.
*****
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TEXT OF PROPOSED INTERPRETIVE NOTICE
Interpretive Notice Concerning the Application of MSRB Rules G-17 and
G-30 to Retail Order Periods
MSRB Rule G-17 (on conduct of municipal securities and municipal
advisory activities) provides that, in the conduct of its municipal
securities activities, each broker, dealer and municipal securities dealer
(“dealer”) shall deal fairly with all persons and shall not engage in any
deceptive, dishonest or unfair practice. MSRB Rule G-30 (on prices and
commissions) provides that a dealer purchasing or selling municipal
securities from a customer as a principal must do so at an aggregate
price (including any mark-down or mark-up) that is fair and reasonable,
taking into consideration all relevant factors, including the best
judgment of the dealer as to the fair market value of the securities at
the time of the transaction. This interpretive notice expands upon
guidance on the application of MSRB Rules G-17 and G-30 to retail
order periods previously provided by the MSRB.
Issuer Terms and Conditions for Retail Order Periods
The Board has previously provided guidance to underwriters regarding
the Rule G-17 fair practice obligations of underwriters to issuers when
conducting retail order periods. Among other things, the Board has
stated that an underwriter may not disregard an issuer’s definition of
“retail” or any other terms and conditions imposed by an issuer
regarding “retail” orders or retail order periods.[1]
Not all orders placed during retail order periods are placed by
underwriters. In some cases, issuers also permit other dealers (e.g.,
selling group members (as defined in Rule G-11)) to submit orders. In
such cases, under Rule G-17, issuers may reasonably expect that such
other dealers will deal fairly with them by abiding by the terms and
conditions established by the issuers for the retail order periods,
including but not limited to the issuers’ respective definitions of
“retail.” A dealer that places an order framed as a qualifying retail
order during a retail order period that it knows does not meet the terms
and conditions for the order period established by the issuer would
violate Rule G-17.
Misrepresentations Regarding “Retail” Orders
Issuers sometimes rely on syndicate managers to ensure that orders
submitted by other dealers during retail order periods satisfy the
issuers’ terms and conditions. The Board is concerned that some
dealers may be misrepresenting their orders as “retail” when
communicating with syndicate managers. The MSRB reminds dealers
that the obligation to deal fairly with all persons applies not only to a
dealer’s conduct with issuers and customers but also to
communications with other dealers. MSRB Rule G-11 (on primary
offering practices) now requires that dealers that submit orders during
retail order periods provide certain information, in writing, which may
be electronic, including whether an order submitted during a retail
order period meets the issuer’s definition of “retail,” whether an order is
a “going away” order and supporting materials (i.e., in the case of
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The provision of this information by a dealer constitutes a
representation to the senior syndicate manager and if a dealer’s Rule
G-11 representations were not accurate, a dealer could, depending
upon the facts and circumstances, also violate Rule G-17.
Notice of Retail Order Periods
The Board is concerned that certain dealers permitted by issuers to
place orders during retail order periods, including, but not limited to,
members of a selling group, may not receive adequate and timely
notice of retail order periods from syndicate managers, which has the
practical effect of precluding them from placing orders during the retail
order period. Rule G-11(f) has been amended to require the senior
syndicate manager to furnish in writing to the other members of the
syndicate and to members of the selling group, if any, a written
statement of the issuer’s terms and conditions for the retail order
period, the priority provisions and any subsequent changes to those
terms and conditions and priority provisions. That statement is
required to be provided to members of the selling group, if any, when
the senior syndicate manager provides syndicate members with the
issuer’s terms and conditions and priority provisions as required under
Rule G-11, but no later than the beginning of the retail order period. In
addition, syndicate managers that withhold information regarding retail
order periods to provide an advantage to themselves or their
customers, or to disadvantage other dealers or their customers, may
also violate Rule G-17, depending upon the facts and circumstances.
Retail Order Period Pricing
The MSRB has previously reminded dealers that an issuer’s use of a
retail order period based on a perception that the retail order period will
improve pricing of the new issue for the issuer does not create a safe
harbor for dealers to engage in pricing that violates the fair pricing
obligation under Rule G-30.[2] At the same time, the duty of fair
dealing under Rule G-17 includes an implied representation that the
price an underwriter pays to an issuer is fair and reasonable, taking
into consideration all relevant factors, including the best judgment of
the underwriter as to the fair market value of the issue at the time it is
priced. Underwriters must balance the competing interests of issuers
and customers when pricing a new issue of securities generally, but in
particular when pricing securities that will be sold to retail customers.
During a retail order period, an issuer may require underwriters to make
a bona fide public offering to retail customers at the initial offering
price for the securities, either directly or through other dealers. This
directive may benefit retail customers because dealer compensation for
such sales is typically in the form of an agreed upon takedown, which is
negotiated and paid by the issuer, rather than a mark-up paid by the
customer. The Board emphasizes that the duty of fair dealing under
Rule G-17 requires that dealers must follow the issuer’s instructions for
retail order periods and, if directed to do so by the issuer, make a bona
fide public offering of the securities to retail customers at their initial
offering prices.
As the MSRB has noted, large differences between institutional and
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individual prices that exceed the price/yield variance that normally
applies to transactions of different sizes in the primary market provide
evidence that the duty of fair pricing to individual clients may not have
been met.[3] The Board is aware that in some cases, an issue may have
two CUSIPS for the same maturity, one of which is marketed exclusively
to retail customers and the other to institutional customers. If there are
significant differences between the price paid by institutional customers
and the price paid by retail customers related to the two securities of
the same maturity (and the price paid by retail customers is higher),
this may suggest that the underwriter’s duty of fair pricing to retail
customers under Rule G-30 may not have been met unless the
difference in the price is fairly attributable to the actual characteristics
of the securities.
________________________
[1] See Interpretation on Priority of Orders for Securities in a Primary
Offering under Rule G-17 (October 12, 2010).
[2] See Guidance on Disclosure and Other Sales Practice Obligations to
Individual and Other Retail Investors in Municipal Securities (July 14,
2009).
[3] Id.
[1] Comments are posted on the MSRB website without change. Personal identifying
information such as name, address, telephone number, or email address will not be
edited from submissions. Therefore, commenters should submit only information that
they wish to make available publicly.
[2] EMMA® is a registered trademark of the MSRB.
[3] The proposed change to Rule G-32(a)(i) is not related to retail order periods but
would emphasize the long-standing requirement that all dealers (not just underwriters)
are subject to the official statement delivery requirement of the rule during the primary
offering disclosure period.
[4] Underlining indicates additions and brackets indicate deletions.
©2013 Municipal Securities Rulemaking Board. All Rights Reserved.
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Alphabetical List of Comment Letters on MSRB Notice 2012-13 (March 6, 2012)
1. Alamo Capital: E-mail from Bill Mullally dated March 9, 2012
2. Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated
April 13, 2012
3. CFA Institute: Letter from Kurt N. Schacht, Managing Director, Standards and Financial
Market Integrity, and James C. Allen, Head, Capital Markets Policy, dated April 13, 2012
4. Edward D. Jones & Co., L.P.: Letter from David E. Fischer-Lodike, Capital Markets and
Operations Compliance, dated April 13, 2012
5. Full Life Financial LLC: Letter from Keith Newcomb, Portfolio Manager, dated April 13,
2012
6. Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal
Liaison Center, dated April 13, 2012
7. Investment Company Institute: Letter from Dorothy Donohue, Deputy General CounselSecurities Regulation, dated April 13, 2012
8. Li, Richard: Letter dated March 7, 2012
9. Melton, Chris: E-mail dated April 13, 2012
10. National Association of Independent Public Finance Advisors: Letter from Colette J. IrwinKnott, President, dated April 13, 2012
11. Securities Industry and Financial Markets Association: Letter from David L. Cohen,
Managing Director, Associate General Counsel, dated April 13, 2012
12. Thornburg Investment Management: Letter from Josh Gonze, Chris Ryon, and Chris
Ihlefeld, Co-Portfolio Managers, dated March 12, 2012
13. Vanguard: Letter from Christopher Alwine, Head of Municipal Bond Group, dated April 13,
2012
14. Wells Fargo Advisors: Letter from Ronald C. Long, Director of Regulatory Affairs, dated
April 13, 2012
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Comment on Notice 2012-13
from Bill Mullally, Alamo Capital
on Friday, March 09, 2012
Comment:
I see now way that the Retail Order Period rule change will make the world a better place. In my mind the Retail
Order Period is a publicity mechanism. It will create another layer of paper work and new compliance jobs. This
could be costly and not really enhance the Order Period function.
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April 13, 2012
VIA ELECTRONIC MAIL
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
RE: MSRB Notice: 2012-13: Request for Comment on Proposed Rule
Amendments and Interpretive Notice on Retail Order Periods
Dear Mr. Smith:
The Bond Dealers of America (BDA) is pleased to submit this letter in
response to the Municipal Securities Rulemaking Board’s (MSRB) Notice: 2012-13
(the “Notice”), which solicits comments in connection with proposed amendments
concerning retail order periods to MSRB Rules G-11 (on primary offering practices),
G-8 (on books and records), and G-32 (on disclosures in connection with primary
offerings), and a proposed interpretive notice (Interpretative Notice) concerning the
application of MSRB Rules G-17 and G-30 to retail order periods. BDA is the only
DC based group representing the interests of securities dealers and banks focused on the
U.S. fixed income markets. We welcome this opportunity to state our position.
Our most significant concern with the Notice is the addition of subparagraph (k)
to Rule G-11 in which each broker, dealer, or municipal securities dealer (Dealer) would
be required to provide specific representations and disclosures in connection with each
retail order during retail order periods. We believe that this will impose a costly and
unreasonable burden on Dealers, particularly in cases in which the Dealer obtains large
numbers of retail orders during retail order periods. The entire premise of the Notice is
that Dealers should comply with the requirements that issuers impose on Dealers during
retail order periods. The addition of subparagraph (k) unnecessarily changes course on
this premise and imposes an absolute and specific requirement on Dealers to deliver
voluminous information in connection with each bond issuance in which there is a retail
order period. Instead, at most, the MSRB should simply provide that Dealers should
comply with requirements of issuers to document or represent that they have complied
with retail order period requirements. This would allow issuers to fashion for themselves
how they want Dealers to document their efforts and the requirements will be able to take
into consideration the specific circumstances in which this is done.
We believe that it is crucial for the MSRB to take into consideration the additional
burden that it is imposing on Dealers with its rulemaking. We understand that the intent
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of the Notice is to curtail the failures of some Dealers to comply with the retail order
period requirements of issuers and we think that this is a valuable effort. But imposing
this new absolute requirement to deliver this information in connection with each retail
order simply goes too far. As we and others have repeatedly told the MSRB, it is
important that the MSRB weigh the burden it is imposing on Dealers with the true
damage that the targeted abuse is creating. For the MSRB to impose this absolute
requirement for dealers to deliver such voluminous information imposes far more
regulation and burden than is justified or valuable. As we have explained before, these
kinds of burdens on dealers have unintended consequences for everyone. When dealers
need to produce such voluminous materials in connection with retail order periods, this
can discourage the practice of retail order periods altogether and this can hurt issuers and
retail investors.
We also believe that the last paragraph of the Interpretative Notice needs to
clarify how different coupons can impact the yield calculation and what characteristics of
securities of the same maturity justify differences in pricing. If a retail order is priced at
par and the institutional order is priced at a premium, then the yield to the first call date
may be the same in both the retail and institutional orders but the yields to maturity will
be different. Under these circumstances, the municipal markets would not consider this
to be an unfair treatment of the retail purchaser because the yields on which the bonds
were priced were the same. Another clarification that the MSRB should make to this last
paragraph of the Interpretative Notice is to provide some specific characteristics of
securities that would legitimately justify differences in pricing. For example, transactions
frequently include securities of the same maturity that have different redemption
provisions and this can produce differences in pricing. We believe that it is important for
the MSRB to specifically identify this and other circumstances in which Dealers are
justified in selling the same securities at different prices.
Thank you again for the opportunity to submit these comments.
Sincerely,
Michael Nicholas
Chief Executive Officer
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13 April 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Re: Proposed Rule Amendments and Interpretive Notice on Retail Order
Periods—MSRB Notice 2012-13
Dear Mr. Smith:
CFA Institute1 appreciates the opportunity to comment to the Municipal Securities
Rulemaking Board (the “Board”) with regard to its proposed rule amendments (the
“Rules”) and interpretative notice (the “Notice”) with regard to retail order periods
(collectively, the “Proposals”). CFA Institute represents the views of investment
professionals before standard setters, regulatory authorities, and legislative bodies
worldwide on issues that affect the practice of financial analysis and investment
management, education and licensing requirements for investment professionals,
and on issues that affect the integrity and accountability of global financial markets.
Executive Summary
In general we support both the Rule proposals and the Notice proposal as necessary
improvements to hold dealers more accountable during the sale of municipal
securities. At the same time, we do not support giving issuers the authority to define
“retail” for each offering of securities, as doing so creates confusion for all parties,
including, potentially, courts of law who may hear appeals for related enforcement
actions.
Most importantly, we are concerned that the dealer actions that have prompted the
need for this Proposal will continue without firm enforcement actions on the part of
the Board. We would support inclusion in the Proposal of sanctions that would be
1
CFA Institute is a global, not-for-profit professional association of more than 108,000 investment analysts, advisers,
portfolio managers, and other investment professionals in 139 countries, of whom nearly 99,000 hold the Chartered
®
®
Financial Analyst (CFA ) designation. The CFA Institute membership also includes 135 member societies in 58
countries and territories.
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Re: Proposed Rule Amendments and Interpretive Notice on Retail Order Periods
13 April 2012
Page 2
imposed against dealers engaged in such abusive activities, including sanctions that
prohibit the dealers from participating in any part of future municipal offerings for
an extended period of time. We also would support sanctions against individuals
engaged in such abusive behaviour, and alerting the Financial Regulatory Authority
about such sanctions to those individuals.
Discussion
Rule Amendments
CFA Institute supports the various goals of the Proposals. In particular, we support
the need for better and honest communications between various parties involved in
the initial sale of municipal securities to investors as proposed in the amendments
to Rule G-11. We believe the more inclusive definitions for “selling group” to include
all dealers and not just syndicate members, together with the definition for “going
away order”—an order from a customer who already is conditionally committed to
buying the securities will provide clarity for dealers, issuers and the courts when it
comes time to enforce these rules.
We are less supportive of giving the issuer authority to establish the definition for
“retail” as it relates to determination of the duration and timing of a retail order
period. Such flexibility in “definitions” leads to confusion on the part of all parties
and makes it more difficult for the Board to enforce its own rulings without threat of
having those enforcement actions overturned by a court of law. We suggest that the
Board devise a standard definition for retail and apply it in all cases.
Interpretive Notice
We support the goals of the Notice, which provides that issuers should be able to
rely upon all dealers to deal fairly with them, in particular during retail order
periods. The Notice also warns dealers that false indications of retail orders that are
given to other dealers will be considered a violation of the fair practice
requirements of Rule G-17. Finally, the Notice provides that dealers must balance
their duties of fair pricing to issuers with those duties owed to retail customers.
If candour and honesty are not present in the dealings among dealers in the sale of
municipal securities, we can expect that such qualities also will be missing in their
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Re: Proposed Rule Amendments and Interpretive Notice on Retail Order Periods
13 April 2012
Page 3
dealings with retail customers. We believe the proposed Notice, in conjunction with
the disclosure requirements imposed by the Rules, will clarify what underwriters
and other dealers must do. We also believe that these new obligations will make it
easier for the Board to detect false indications of retail orders and retail order
periods.
As noted, we support the goals and purpose of the Proposals. At the same time, we
are concerned that the behavior of dealers that created the need for this Proposal
may not be stemmed by the Rules or the Notice. It is apparent that dealers have
been abusing the rules already in place, and that they have not paid a penalty for
having done so.
We support the Proposals, in part, as they would reduce the legal scope in which
dealers might engage in abusive activities with regard to retail orders and retail
order periods. Unless these rules are firmly enforced with sufficient penalties
against firms found in violation to them, however, we fear that they will have little
benefit for issuers, investors or ethical underwriters of municipal securities.
To increase the chance of success for this Proposal, we suggest the Board add to the
Notice that any dealer and underwriter found violating the Rules or the spirit of the
Notice would be prohibited from participating in the underwriting or advisory
services for municipal securities offerings for an extended period. We also suggest
that the Board hold the individuals engaged in such activities accountable for their
actions by imposing a ban on their participation in such offerings for periods based
on the extent of their involvement, including permanent bans in some cases. We also
encourage the Board to alert the Financial Industry Regulatory Authority to such
fraudulent activities and to prohibit firms dealing in municipal securities to hire
such individuals.
Conclusion
As noted above, we support the Proposals and the goals they seek to achieve. We
believe that for the Proposals to succeed, however, they must be matched with
corresponding and tough enforcement actions that indicate to all dealers that such
behavior will not be tolerated in the future.
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Re: Proposed Rule Amendments and Interpretive Notice on Retail Order Periods
13 April 2012
Page 4
We appreciate the opportunity to comment on the Proposed Rule Amendments and
Interpretative Notice on Retail Order Periods. Should you have any questions about
our positions, please do not hesitate to contact Kurt N. Schacht, CFA at
kurt.schacht@cfainstitute.org or 212.756.7728; or James C. Allen, CFA at
james.allen@cfainstitute.org or 434.951.5558.
Sincerely,
/s/ Kurt N. Schacht
/s/ James C. Allen
Kurt N. Schacht, CFA
Managing Director, Standards and
Financial Market Integrity
CFA Institute
James C. Allen, CFA
Head, Capital Markets Policy
CFA Institute
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Full Life Financial LLC
604 Georgetown Drive
Nashville, TN 37205
615-356-4164 Direct
866-356-4164 Toll Free
www.FullLifeFinancial.com
keithnewcomb@FullLifeFinancial.com
Keith Newcomb CMT, AIF®, CFP®
Portfolio Manager
April 13, 2012
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, Virginia 22314
RE:
MSRB NOTICE 2012-13 (MARCH 6, 2012)
REQUEST FOR COMMENT ON PROPOSED RULE AMENDMENTS AND
INTERPRETIVE NOTICE ON RETAIL ORDER PERIODS
Dear Mr. Smith:
Full Life Financial appreciates the opportunity to respond to the Municipal Securities
Rulemaking Board's (MSRB's) request for comment on proposed rule amendments and
interpretive notice on retail order periods described in MSRB Notice 2012-13. Full Life Financial
is a registered investment adviser serving primarily families and individual investors.
We support the proposals in principle. In particular, we believe that requiring syndicate
managers to disseminate timely notice of issuer requirements regarding retail order periods to
all dealers including selling group members will support the fulfillment of issuer objectives and
intentions with respect to distribution of its securities. We also note that the proposed
amendments and interpretive guidance require such notice be delivered no later than the start
of the retail order period. Under such immediate notice conditions, it would serve the spirit of
the proposal to require a minimum time length of retail order period sufficient to fulfill issuer
intent, and afford a genuine opportunity for retail investor participation.
We also strongly support the provisions of the proposed interpretive notice reminding dealers of
their duty of fair pricing to customers under Rule G-30(a), especially with regard to securities
sold to retail investors. We welcome clear guidance discouraging differences in prices
extended to institutional versus retail investors. Where secondary transactions are involved, it is
rational to price large transactions differently than small ones. However, in the new issue
market, it seems reasonable to price all essentially like securities identically, regardless of the
type of account doing the buying. This is especially true given recent improvements in order
gathering efficiencies gained through technology such as electronic order entry.
We understand that another source of conflict of interest between dealers and retail investors in
connection with primary offerings stems from the customary practice of dealers to retain a
greater portion of the take-down with respect to institutional orders, as compared to retail
orders. We would support the addition of interpretive guidance discouraging consideration of
Full Life Financial LLC is a registered investment adviser
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April 13, 2012; Comments of Full Life Financial Regarding MSRB Notice 2012-13; Page 2 of 2
this disparity as a factor in determining the degree to which dealers exert effort toward retail
investor solicitation of primary offerings of municipal securities.
MSRB requested comment regarding the fact Rule G-11 would leave the definition of "retail" up
to issuers, and whether a standard definition should be created, and if so, what it should be.
We believe that allowing issuers to define "retail" and associated order priority according to their
distribution intentions and other aspects of their situation is appropriate. We also recognize that
a standardized definition of "retail" which issuers could use "as-is" or with modifications to adapt
the definition to their wishes could improve efficiency by allowing a common language all
participants in the marketplace can understand. We do not believe a par amount of the order
criterion is necessarily an effective way to hew to the spirit of the proposals at hand.
Some institutional municipal market participants have suggested that some mutual funds cater
to retail investors and on that basis should be allowed to participate in retail order periods. This
suggestion is absurd. These players already enjoy substantial benefits from institutional pricing
differentials and the power than comes from significant ongoing trading relationships with
dealers. If active institutional municipal market participants such as mutual funds were allowed
to participate in retail order periods, there might as well not be a retail order period as they
would effectively crowd out smaller retail investors whom issuers intend to involve through retail
order periods in the first place. Such a course would undermine the intent of the proposals
under consideration.
Finally, we support MSRB's proposed amendment to Rule G-32 information submissions,
requiring underwriters to include whether or not a retail order period was required by the issuer,
and when it was conducted, in that it provides the opportunity for regulatory oversight essential
to fostering administration of bona fide retail order periods that actually result in retail
participation.
In conclusion, we support MSRB's efforts to enhance fairness and transparency in municipal
securities markets, and believe the proposals contained in Notice 2012-13 will have beneficial
effects for both issuers, whose intentions will more likely be fulfilled, and retail investors, who
will be afforded a more genuine opportunity to participate in primary offerings at prices that are
reasonable and fair, through appropriately conducted retail order periods.
Full Life Financial appreciates the opportunity to comment on MSRB's proposed rule
amendments and interpretive notice on retail order periods in primary offerings of municipal
securities. I would welcome any questions on 615-356-4164.
Sincerely,
Keith Newcomb, CMT, AIF®, CFP®
Portfolio Manager
Full Life Financial LLC is a registered investment adviser
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Government Finance Officers Association
1301 Pennsylvania Avenue, NW Suite 309
Washington, D.C. 20004
202.393.8020 fax: 202.393.0780
April 13, 2012
Mr. Ronald W. Smith
Corporate Secretary, Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
RE:
MSRB Notice 2012-13 - Request for Comment on Proposed Rule Amendments and
Interpretive Notice on Retail Order Periods
Dear Mr. Smith:
Thank you for the opportunity to comment on MSRB Notice 2012-13. Many GFOA members who sell
bonds through negotiated sales engage in retail order periods, and are very interested in the regulatory
framework related to these types of sales. The Notice proposes to change numerous MSRB rules to
ensure that the terms and conditions set by the issuer in a retail order period are executed correctly by
bond dealers, a concept we fully support.
It is important to note that with current rules and proposed rules, adequate enforcement is needed to
ensure compliance and best practices in the marketplace. There may be areas where some of the proposed
rules may be in-part duplicative of current rules, and as with all proposed rules with the MSRB, GFOA
believes that the MSRB should evaluate whether current rules are being enforced and whether the
stronger enforcement of current rules would preclude the need for modifying current or developing new
rules. Notwithstanding the above, some of our comments below speak to areas where we believe changes
should be made to the proposed rule changes.
Please note that leadership from the GFOA’s Governmental Debt Management Committee assisted with
the development of these comments. Below are GFOA’s comments on the changes to each of the
proposed rules.
G-8
GFOA supports new record keeping requirements on syndicate managers related to retail order periods.
G-11
We support the additional requirements on dealers to provide in writing to members of the underwriting
syndicate the issuer’s terms and conditions and order priority provisions. Additionally, we support
having the senior manager provide new detailed information about each order. We would also like to
ensure that if the issuer has additional requirements on the retail order period (e.g., zip code of investor),
that this information also be provided in writing by the dealer. Furthermore, the issuer should be the
party responsible for establishing the deadline for submitting any additional information that it chooses to
require from dealers.
We do have a concern related to requiring the issuer to provide a definition of “retail” for a particular sale.
Infrequent issuers that do not engage the services of a financial advisor may not have the internal
expertise to properly develop this term for their sale, and may depend on other parties that do not have a
fiduciary responsibility to the issuer, to assist with establishing this definition. In order for the rule be
most beneficial to infrequent issuers, we request that the MSRB develop a boilerplate definition of
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“retail” for issuers to use – if they so choose. However, this should not preclude any issuer and its
financial advisor from altering the boilerplate language or developing their own definition of retail.
G-17
We appreciate and support the proposed changes to Rule G-17 that would call on dealers to deal fairly
with issuers and to their dealer colleagues. This is especially true regarding the requirement to have the
syndicate manager provide to all dealers the issuers’ terms and conditions for the retail order period. The
MSRB may wish to consider setting a specific time frame in which the syndicate manager must provide
this information to other dealers.
G-30
The changes to Rule G-30, related to fair pricing practices, have drawn the most scrutiny from our
members. While it is important to ensure fair pricing standards are practiced in retail order periods (and
all other phases of pricing process), and highlighting the need for dealers to balance their duty to both
issuers and investors, the proposed changes could interfere with current retail order period practices.
There are many reasons why the pricing for retail investors may differ from institutional sales. Setting a
retail order period is done for many reasons, one of which is to ensure that citizens of the entity’s
jurisdiction have an opportunity to purchase bonds first hand, rather than waiting to purchase them in the
secondary market. Having to wait until the bonds are available in the secondary market may be less
inviting to retail investors, and potentially more expensive than if they purchased the bonds during a retail
order period.
Regarding fair pricing standards, there may be numerous reasons why bonds price differently between the
retail order period and the institutional order period, even when one maturity has two or more coupons
requiring separate CUSIPs. The proposed changes state that the underwriter may be failing its fair pricing
duty to retail customers unless “the difference in the price is fairly attributable to the actual characteristics
of the securities.” Depending on the amount and type of information that would need to be reviewed if
the pricing is different for the retail and institutional investors, this may hurt the issuer’s ability to
establish a retail order period for the reasons they determine are best for entity. We would urge the
MSRB to recognize that there are various reasons why there may be pricing differences between the retail
order period and the sale to institutional investors, including the difference in coupon preferences between
institutional and retail investors. Also, it should be noted that the reason for some price differences may
not be in the control of the issuer or the underwriter, especially since retail orders are submitted one or
even two days prior to the institutional order period, often in a very different market conditions.
G-32
We support changes to the applicable forms as noted in the proposed changes to Rule G-32.
Again, thank you very much for the opportunity to comment on MSRB Notice 2012-13.
Sincerely,
// sg //
Susan Gaffney
Director, Federal Liaison Center
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Richard Li
200 E Wells St, #404
Milwaukee, WI 53202
March 7, 2012
Ronald W. Smith, Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
RE:
Proposed Rule Change on Retail Order Period
Dear Mr. Smith:
I am responsible for the issuance of debt for a municipality. I do not have authority to speak on my
employer’s behalf, so these are my personal comments.
Most Issuers infrequently access the municipal market, resulting in the ultimate definition of a “retail
order” to be skewed towards the distribution ability of the Senior Managing Underwriter. It would be
helpful if the MSRB defines a standard “retail order”, and the Issuer could define “retail order” as
changes from the standard definition. There should be no discouragement of the Issuer
customizing the definition with changes.
A standard definition of retail order would have the following benefits:
1) Provide a reasonable starting point to establish what constitutes a retail order.
2) Retail Order would have a standard meaning for co-managers and Salespersons. It is
easier to review changes than an entire definition.
3) A standard definition would permit standardizing the reporting of more detail to justify the
representation that an order meets the issuer’s definition. Possibly allowing the Senior
Manager to require the standard details be communicated during the order process (not just
afterwards as the rule requires) in order to prevent inadvertent misrepresentations.
4) Patterns of an Underwriter’s inappropriate influence on Issuers in establishing the definition
of Retail Order could be more easily identified.
The proposed rule also creates a definition of “going away order” and uses the term “customer”. I
could not find a definition of “customer”. I envision a “going away order” as an order to someone
who plans on holding the bond. A hedge fund that intends to flip the security (and thus cause me
problems with the IRS when they investigate Issue Price) should not be a “customer” for “going
away order” purposes.
I would like to see the term “going away order” to have a more expansive use. Upon request of the
Issuer, the Senior Manager shall disclose to the Issuer which orders are going away to buy and
hold investors, which orders are to non-broker investors with a history of holding securities for a
short period of time (3 months or less?), and which orders are to other brokers.
Finally, while you are changing the rules, a rule requiring Underwriters to disclose to Issuers all
sales for a period of time (7 days?) after the end of the underwriting period, would be helpful. This
would help to ensure fair dealing with the issuer vs customers, fair dealing between customers
who bought during the underwriting vs. customers who bought afterwards, and early identification
to the Issuer of possible IRS Issue Price problems.
Very truly yours,
Richard Li
82 of 153
Comment on Notice 2012-13
from Chris Melton,
on Friday, April 13, 2012
Comment:
Thank you for the opportunity to comment on proposed changes to Rule G-11 et al related to retail order
periods. It would appear that the Board is being inconsistent in permitting issuers to define "retail" and then
setting the requirements for the documentation required to accept an order as having been entered by a party that
meets the definition. This is further complicated by the fact that privacy cvonsiderations must have dictated that
the Board require dealers to identify customers without identifying them, or at least without providing a name or
social security number. Is this completely necessary to address the problem created by firms that abuse issuer
intent during retail order periods?
83 of 153
National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
April 13, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Suite 600
Alexandria, VA 22314
Re:
MSRB Notice 2012-13
The National Association of Independent Public Finance Advisors (“NAIPFA”) appreciates the
opportunity to provide comments on Municipal Securities Rulemaking Board (“MSRB”) Notice
2012-13 (the “Notice”) and, in particular, the proposed amendments to MSRB Rule G-11 (“G11” or the “Rule”). NAIPFA’s comments are provided in the spirit that the rule being established
will ensure that issuers can rely on receiving unbiased advice and that the issuer remains in
control of their debt issuance process.
NAIPFA believes that the MSRB’s proposed addition of section (k) to Rule G-11 (“Section K”)
will be beneficial to issuers. However, NAIPFA is concerned that the proposed amendments to
G-11(a) will not be beneficial to issuers and, in fact, may result in issuers having to make higher
interest payments. NAIPFA, however, would welcome an amendment that puts in place a
uniform definition of the term “retail”. In addition, given the current language contained within
G-11(f), NAIPFA questions the rationale behind the proposed amendments and believes that the
MSRB’s concerns will not be alleviated through either the imposition of more regulations or
arbitrary alteration of the current rule. Instead, the MSRB’s concerns would be better addressed
through more rigorous enforcement of the current rule.
I.
Proposed Addition of G-11(k)
NAIPFA fully supports the addition of Section K. It is NAIPFA’s understanding that this
proposed change will likely result in increased market transparency and will allow issuers to
better assess the effectiveness of their underwriter both in terms of the underwriter’s ability to
sell the issuer’s securities as well as the underwriter’s adherence to the issuer’s desires.
In addition, NAIPFA believes that the proposed addition of Section K may help curtail the
detrimental practice known as “flipping” through the additional disclosure obligations outlined in
section G-11(k)(iii). In this regard, NAIPFA would like to reiterate its prior comments and state
that it is supportive of virtually any rule curtailing the practice of “flipping”, as the use of this
practice is generally an indication that the issuer has received less than fair market value for their
securities.
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
II.
Proposed Amendments to G-11(a) & (f)
NAIPFA understands that the inclusion of a definition of the term “retail order period” is
necessary to facilitate the other proposed changes to G-11. However, NAIPFA has serious
concerns regarding the requirement under G-11(a)(vii) that obligates an issuer to define the term
“retail”, and NAIPFA is unclear as to how this proposed amendment will achieve the MSRB’s
stated goals. Further, NAIPFA is also concerned that proposed Rule G-11(a)(vii) could
ultimately be harmful to issuers. In addition, NAIPFA believes that current rule G-11(f) is
sufficient to achieve the MSRB’s stated goals if proper enforcement efforts are put forth.
A) Issuers will be unable or unwilling to define the term “retail”
NAIPFA believes that issuers and, in particular, small infrequent and less sophisticated issuers
may not have the knowledge or ability to define the term “retail” for the purpose of defining the
“retail order period”, and those who do wish to develop a definition may not have the expertise
to do so effectively. This lack of knowledge, ability or desire on the part of issuers may cause
them to turn to whoever is assisting them with the issuance process, be it their municipal advisor
or their underwriter. In such a scenario, the role of the municipal advisor is clear; the municipal
advisor will be obligated to provide the issuer with advice that is in the issuer’s best interest with
regard to the retail order period. However, what is less clear is the role of the underwriter in such
a scenario. For example, if the issuer is unable to develop a definition of “retail” or develops a
definition of “retail” that is not appropriate, is the underwriter under any obligation to advise the
issuer with regard to these matters? Regardless, if the underwriter does advise the issuer on
these matters, does the underwriter have any duties to the issuer regarding the advice they
provide to the issuer with respect to the issuer’s definition of “retail”? In other words, does an
underwriter have any obligations to the issuer to disclose that the advice that it is providing with
regard to the definition of “retail” may not be consistent with the issuer’s best interest?
NAIPFA believes that such a scenario places the underwriter and the issuer in an untenable
situation. On the one hand, the underwriter must engage in fair dealing and cannot mislead the
issuer by providing the issuer with advice that is overtly harmful to the issuer’s interests while
simultaneously balancing the interests of its investors. On the other hand, the issuer will be
relying upon the advice that it receives from its underwriter and will invariably believe that the
advice being provided is in their best interest, since it is unlikely that an issuer would willingly
seek advice from an entity when it knows that the advice provided is likely to be not in their best
interest.
Under the foregoing scenario NAIPFA is concerned that if an issuer is not provided any
affirmative underwriter disclosures regarding the advice it receives relating to the definition of
the term “retail”, underwriters could easily cross the line into becoming fiduciaries to the issuer
as a result of the issuer’s undue reliance on this advice. Alternatively, in the event that
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
underwriters do not obtain fiduciary duties, the issuer will likely be harmed by the advice they
receive from the underwriter because the advice they receive from the underwriter cannot be in
their best interest due to the underwriter’s duty to balance the interests of their investors. For
example, if it is in the issuer’s best interest to conduct a three day retail order period because this
will generate the lowest interest rates for the issuer, the issuer could be harmed by an underwriter
whose clientele is comprised primarily of institutional investors and who recommends a one day
retail order period because the interests of the underwriter’s institutional investor clients will not
be properly balanced if a three day order period is utilized.
In such a scenario, NAIPFA believes that it is imperative for the issuer to be apprised of these
facts prior to accepting the advice of their underwriter. Such disclosures would allow the issuer
to make a thoughtful determination as to (a) whether their underwriter is going to be able to
effectively sell their securities, and (b) whether the issuer should adopt its own definition of retail
in light of these disclosures.
Among the concerns put forth by the MSRB as the rationale for these proposed amendments was
that market participants have expressed concern that broker-dealers have been using the “retail
order periods to achieve yields that may be below market.” NAIPFA is concerned that the lack
of affirmative disclosure requirements contained within the proposed amendments will not
alleviate this concern and may in fact exacerbate the problem; underwriters will now be relied
upon even more than in the past by issuers, as issuers will now be forced to perform a task that
they will either be unable or unwilling to accomplish without the direct assistance of another
individual, which in many cases will be their underwriter. Issuer’s will place an undue amount
of trust in their underwriter as a result of this rule, underwriters will not be able to provide advice
that is in the issuer’s best interest, and the rates/yields that will be achieved will likely be higher
than market as a result.
B) The Current Rule is Sufficient But For Lack of Enforcement
The MSRB has premised its proposed amendments, at least in part, upon concerns raised by
market participants. These concerns range from a “disregard by brokers, dealers, and municipal
securities dealers of terms and conditions required by issuers for retail order periods” to the
failure by syndicate managers to “disseminate timely notice of issuer terms and conditions
regarding retail order periods to all dealers”, to broker-dealers use the retail order period to
“achieve yields that may be below market.” In response to these concerns, the MSRB has (a)
increased underwriter disclosure obligations with regard to sales data, which NAIPFA supports,
and (b) put forth a definition of the term “retail order period” that requires issuers to define the
term “retail”. By and large, however, the amendments to the rule will not alleviate the MSRB
concerns.
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
NAIPFA believes that neither increasing trade data disclosures nor forcing issuers to define the
term “retail” will cause broker-dealers to not disregard an issuer’s terms and conditions, nor will
such measures cause some broker-dealers to conduct more effective retail order periods.
Conversely, NAIPFA believes that more scrutiny and enforcement actions under the current rule
would curtail these practices. Currently, Rule G-11(f) reads as follows:
Communications Relating to Issuer Syndicate Requirements, Priority Provisions and
Order Period. Prior to the first offer of any securities by a syndicate, the senior
syndicate manager shall furnish in writing to the other members of the syndicate (i) a
written statement of all terms and conditions required by the issuer, (ii) the priority
provisions, (iii) the procedure, if any, by which such priority provisions may be
changed, (iv) if the senior syndicate manager or managers are to be permitted on a
case-by-case basis to allocate securities in a manner other than in accordance with
the priority provisions, the fact that they are to be permitted to do so, and (v) if there
is to be an order period, whether orders may be confirmed prior to the end of the
order period. Any change in the priority provisions shall be promptly furnished in
writing by the senior syndicate manager to the other members of the syndicate.
Syndicate members shall promptly furnish in writing the information described in this
section to others, upon request. If the senior syndicate manager, rather than the
issuer, prepares the written statement of all terms and conditions required by the
issuer, such statement shall be provided to the issuer.
The proposed changes to G-11(f) will be inconsequential to this provision’s effectiveness. The
proposed changes will not accomplish the MSRB’s stated rationale for amending the current rule.
NAIPFA believes that if the MSRB’s stated purpose is to be achieved, the only way to
accomplish this objective is through increased enforcement of the current rule. Yet, the Notice
fails in this regard.
C) Proposed Rule G-11(a)(vii) Shifts the Burden to the Issuer
As noted above, the MSRB’s stated purpose is to, in part, ensure that broker-dealers are not
taking advantage of the issuer by way of the retail order period and to cause broker-dealers to
comply with an issuer’s stated desires. As noted above, however, the current rule would
accomplish this stated purpose if proper enforcement were to take place. Conversely, the
proposed amendments to the Rule will not address the MSRB’s stated purpose and will instead
merely act as a mechanism for shifting the responsibility of the retail order period’s effectiveness
onto the issuer.
Under the current rule, if a retail order period were to occur, the issuer has two options, do
nothing or provide directives to the underwriter. If the issuer chooses to do nothing, the
underwriter will conduct the retail order period however it sees fit. In the event that the retail
order period is ineffective or does not achieve the desired rates for the issuer, the issuer can hold
the underwriter accountable for its failure. The current approach gives issuers the choice of
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
whether to take responsibility for the retail order period. If the issuer does not have specific
desires relating to the retail order period, the issuer can sit back and do nothing, whereas an
issuer who seeks to control of the retail order period has the ability to do so. Thus, an issuer who
provides directives to the underwriter is less likely to be able to hold an underwriter accountable
in the event a retail order period does not go as planned.
Conversely, under proposed Rule G-11, issuers will be forced to define the term “retail” and thus
will be forced to take responsibility for the outcome of the retail order period. Both large
frequent issuers, and small unsophisticated and infrequent issuers will be saddled with
obligations relating to the retail order period that they may not fully appreciate and, as discussed
above, may cause decisions to be made by the issuer with regard to the retail order period that
may not be in their best interest. NAIPFA is concerned that such an approach is contrary to the
MSRB’s mandate of protecting the interests of municipal issuers and could in fact be harmful to
their interests. NAIPFA cannot see how requiring unsophisticated infrequent issuers who do not
generally understand the municipal marketplace to define the term “retail” will be beneficial to
their interests. The most likely outcome of the proposed amendments is not going to be the
achievement of the MSRB’s stated objectives, but will instead be an increased reliance by
municipal issuers on underwriters who will likely be unable to provide advice that is in the
issuer’s best interest.
What is more, NAIPFA believes that the G-11(a)(vii) mandate may actually cause issuers to pay
higher interest rates. For example, if an issuer defines the term “retail” as being all individuals
located within the limits of the municipality, it is extremely unlikely that an underwriter would
be able to achieve that result. Thereafter, the underwriter would have to inform the issuer of the
unsuccessful retail order period. But, rather than stating that the retail order period was
ineffective as a result of the issuer’s definition of “retail”, the underwriter will likely state that
the rates/yields utilized were insufficient to generate enough interest in the issuer’s securities.
The underwriter would likely then inform the issuer that it will have to increase the issuer’s
rates/yields in order to get the issue sold, potentially at levels above what would be considered
fair market value, although not necessarily unreasonable in light of the circumstances.
Currently, under the proposed amendments underwriters will be under no obligation to inform
the issuer that their definition is inconsistent with industry norms or that it may negatively
impact the rates that they ultimately receive for their securities. NAIPFA is concerned that this
may result in the artificial inflation of the issuer’s interest rates as a result of a failed retail order
period conducted in accordance with the issuer’s instructions, a result that is not in the issuer’s
best interest.
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
D) The MSRB Should Adopt a Uniform Definition of Retail
The definition of “retail” is widely understood among non-issuer market participants. The
MSRB itself understands that the term “retail” generally means something other than
“institutional” and generally includes “individual investors and small organizations”.1 Based
upon this general understanding of the term “retail”, NAIPFA can find no rational basis for
requiring issuers to develop their own definition.
Instead, NAIPFA believes that proposed Rule G-11 should simply be amended to include the
generally accepted definition of the term “retail” for purposes of defining the “retail order
period” along with the inclusion of a provision that allows issuers to change the definition,
voluntarily, if they so desire. NAIPFA believes that a uniform definition of retail, amendable by
the issuer, coupled with the current dictates of G-11(f) as well as increased enforcement efforts,
will achieve the MSRB’s stated goal of curtailing broker-dealer disregard for issuer mandated
terms and conditions. Further, this approach will prevent a shifting of the burden of the retail
order period’s effectiveness onto an issuer unless the issuer desires to carry that burden.
Conclusion
NAIPFA hopes these comments provide insight into our concerns with regard to MSRB Notice
2012-13. We believe a large number of issuers are infrequent and/or small issuers. NAIPFA
remains very concerned that these issuers will not be adequately protected in light of the
apparent lack of enforcement of the current rule and the apparent shifting of burdens the
proposed rule will achieve. NAIPFA is also concerned that the proposed rule will result in
issuers continuing to place an undue amount of trust in underwriters as a result of the advice that
is being provided to them, which will likely be perceived by the issuer as having been provided
with their best interest in mind. Conversely, the suggested amendments detailed in these
comments would provide the needed additional protection to municipal entities, and would
accomplish the MSRB’s stated goals.
Sincerely,
Colette J. Irwin-Knott, CIPFA
President, National Association of Independent Public Finance Advisors
1
See “Retail Customer” and “Retail Sale”, Glossary of Municipal Securities Terms, Second Edition (January
2004), http://msrb.org/msrb1/glossary/glossary_db.asp?sel=r (last visited April 4, 2012).
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
cc:
The Honorable Mary L. Schapiro, Chairman
The Honorable Elisse B. Walter, Commissioner
The Honorable Luis A. Aguilar, Commissioner
The Honorable Troy A. Paredes, Commissioner
The Honorable Daniel M. Gallagher, Commissioner
Liban Jama, Counsel to Commissioner Aguilar
Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
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April 13, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Alexandria, VA 22314
Re:
MSRB Notice 2012-13 (March 6, 2012): Request for Comment on
Proposed Rule Amendments and Interpretive Notice on Retail Order
Periods
Dear Mr. Smith:
The Securities Industry and Financial Markets Association (“SIFMA”)1
appreciates the opportunity to comment on the Municipal Securities Rulemaking
Board’s (“MSRB”) Request for Comment on Proposed Rule Amendments and
Interpretive Notice on Retail Order Periods (the “Proposal”)2 which proposes
amendments to MSRB Rules G-11 (on primary offering practices), G-8 (on books and
records), and G-32 (on disclosures in connection with primary offerings), as well as an
interpretive notice concerning the application of MSRB Rules G-17 and G-30 to retail
order periods.
I.
Executive Summary
SIFMA supports the historical practice of municipal securities issuers
designating, if they so desire, that a specific amount or specific maturities of new bonds
be placed with retail investors, resulting in bonds being offered and sold to retail
investors prior to institutional investors. Our members also support the MSRB’s view
that it is the responsibility of a municipal securities issuer to define what it means by
1
SIFMA brings together the shared interests of hundreds of securities firms, banks and asset
managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital
formation, job creation and economic growth, while building trust and confidence in the financial markets.
SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global
Financial Markets Association (GFMA).
2
MSRB Notice 2012-13 (March 6, 2012).
New York | Washington
120 Broadway, 35th Floor | New York, NY 10271-0080 | P: 212.313.1200 | F: 212.313.1301
www.sifma.org
91 of 153
Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 2 of 8
“retail investor”. While we believe that the concerns raised in Notice 2012-13 could be
addressed through the enforcement of existing principles based rules, or a clarifying
regulatory notice, we support the proposed rule changes to the extent they would protect
dealers that follow issuers’ instructions, clarify issuer terms and conditions, and require
timely notice of retail order period terms and conditions (and any amendments thereto)
to all syndicate and selling group members. We recommend that the proposed
interpretive notice clarify that a safe harbor exists for senior syndicate managers, in
satisfying their own fair dealing obligation to the issuer, when the senior manager relies
on representations made to them by co-managers or selling group members, that any
order submitted were indeed qualified retail orders.
II.
Terminology
Prior to the Proposal, neither “retail order period” nor “going away order” were
defined under MSRB rules. However, the MRSB Glossary3 includes the following
definitions:
ORDER PERIOD –[sic] In some offerings, a “retail order period” may be designated
during which orders will be accepted solely for retail customers (or, in some cases, small
orders for any type of customers). See: PRIORITY PROVISIONS; RETAIL
CUSTOMER.
RETAIL CUSTOMER – Any customer other than an institutional customer. Retail
customers generally include individual investors and small organizations. Compare:
INSTITUTIONAL CUSTOMER.
INSTITUTIONAL CUSTOMER – A term that generally refers to banks, financial
institutions, bond funds, insurance companies or other business organizations that
possess or control considerable assets for large scale investing. Compare:
INSTITUTIONAL ACCOUNT; RETAIL CUSTOMER.
INSTITUTIONAL ACCOUNT – For purposes of MSRB rules, the account of (i) a
bank, savings and loan association, insurance company, or registered investment
company; (ii) an investment adviser registered either with the SEC under the Investment
Advisers Act of 1940 or with a state securities commission (or any agency or office
performing like functions); or (iii) any other entity (whether a natural person,
corporation, partnership, trust, or otherwise) with total assets of at least $50 million. The
term is sometimes used more generally to refer to an institutional customer. 4 Compare:
INSTITUTIONAL CUSTOMER.
3
MSRB Glossary of Municipal Securities Terms (Second Edition 2004) available at
http://msrb.org/msrb1/glossary/default.asp.
4
See also MSRB Rule G-8 (a)(xi). MSRB Rule G-8(a)(xi)defines institutional account as “the
account of (i) a bank, savings and loan association, insurance company, or registered investment company;
(ii) an investment adviser registered either with the Commission under Section 203 of the Investment
Advisers Act of 1940 or with a state securities commission (or any agency or office performing like
functions); or (iii) any other entity (whether a natural person, corporation, partnership, trust, or otherwise)
with total assets of at least $50 million.”
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 3 of 8
GOING AWAY – An indication that an order for securities (usually new issue
municipal securities) is from an investor, rather than from a broker-dealer seeking to
purchase the securities for trading inventory.
With “retail customer” being defined in the MSRB Glossary as broadly as “any
customer other than an institutional customer”, SIFMA believes that continuing
clarification by issuers of their definition of “retail” on each transaction would be
beneficial to all market participants.
III.
Market Practice
a. Public Policy Supporting Retail Order Periods
Retail order periods developed as a means for issuers to provide individual retail
investors, and in particular citizens residing within the issuer’s jurisdiction, the
opportunity to participate in the offering of the issuer’s bonds. The mechanism
generally allows individuals to place orders in advance of institutional investors and to
get priority in allotments. Over time the manner in which individuals invest in
municipal securities has evolved to include a variety of entities purchasing bonds on
behalf of individuals. These entities are sometimes described as “professional retail” or
“institutional retail” because the purchasing entities are typically purchasing in block
size and then allocating bonds in smaller amounts to separately managed accounts
(“SMAs”) that are held by individual investors. Issuers do not employ a uniform
definition of retail, the result of which is that certain “professional retail” orders may or
may not be eligible for a specific issue’s retail order period.
While there is no single source from which to calculate holdings of municipal
bonds by individual investors, it has been estimated that “professional retail” or
“institutional retail” separately managed accounts (“SMAs”) holding of municipal bonds
has increased from $170 billion at the end of 2008 to $210 billion at the end of 2009 and
$250 billion at the end of 2010.5 At year end 2010, individual (non-SMA Households)
holdings of municipal bonds were estimated to be $1.5 trillion.6 7
5
See Citigroup Global Markets Municipal Market Comment, June 3, 2011.
6
See Citigroup Global Markets Municipal Market Comment, June 3, 2011.
7
While the Federal Reserve does not further breakdown the “Household sector”, it estimates the
Household sector owned $1.95 trillion of municipal securities at year end 2010 and $1.87 trillion at year
end 2011. Mutual Funds’ holdings of municipal bonds at year end 2011 were estimated to be $542.8
billion. See Flow of Funds Accounts of the United States (March 8, 2012) available at
http://www.federalreserve.gov/releases/z1/current/. See also Flow of Funds Accounts of the United States
(December 8, 2011) (due to a change in data source revising upwards the estimate of household holdings
of municipal securities and loans by about $840 billion, on average, from 2004 forward) available at
http://www.federalreserve.gov/releases/z1/20111208/z1r-1.pdf.
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 4 of 8
b. RFP Process Emphasizes Retail Distribution
For negotiated underwritings, issuers commonly request proposals for
underwriting services from various dealers. These Request for Proposals (“RFPs”),
specify the selection criteria that form the basis of evaluating the proposal. Among
other things, an RFP often requests information on the firm's experience with
underwriting the type of issue being considered, resumes of key personnel and their time
commitment for the proposed issuance, management fees and estimated expenses, list of
anticipated services, and preliminary ideas about the structure of the deals.
Additionally, issuers frequently ask for a description of the firm’s retail distribution
capabilities; the number of registered representatives and local offices in the issuers’
jurisdiction or state; details of retail order fulfillment on past primary offerings; as well
as a description of the firm’s marketing strategy to meet retail and institutional demand.
Issuers are indicating through these questions that a firm’s retail distribution capabilities
are taken into account in issuers’ evaluation of proposals which puts pressure on firms
seeking current or future business with those issuers to increase their retail participation.
IV.
Proposed Rule Changes
a. Rule G-11: Primary offering Practices
SIFMA generally supports the proposed changes to Rule G-11, including
defining “retail order period” as “an order period during which orders will be solicited
solely from customers that meet the issuer’s definition of ‘retail’”8. Our members
support an issuer’s prerogative to determine whether there should be a retail order period
and to define, on a transaction by transaction basis, what types of purchasers qualify for
placing an order, as well as to set the economics for each priority of orders. Some of our
members are also concerned that leaving the definitions of the different types of
accounts that might together constitute “retail” entirely up to each issuer would make it
difficult to comply with the MSRB’s requirements to ensure that only qualifying orders
are placed and to maintain adequate records.
With respect to the proposed definition of a “going away order”, we are aware of
at least three different definitions of “going away” with differing nuances:
1) Current Rule Proposal: “an order for which a customer is already
conditionally committed.”9
8
MSRB Rule D-9 defines customer as “Except as otherwise specifically provided by rule of the
Board, the term "customer" shall mean any person other than a broker, dealer, or municipal securities
dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new
issue of its securities.”
9
MSRB Notice 2012-13 (March 6, 2012), Text of Proposed Amendment to Rule G-11(a)(xii).
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 5 of 8
2) MSRB Glossary: “an order for securities (usually new issue municipal
securities) [that] is from an investor, rather than from a broker-dealer seeking
to purchase the securities for trading inventory.”10
3) The Municipal Bond Handbook: “the sale of bonds to long-term investors
who plan to hold the bonds rather than trade them quickly for a short-term
profit”.11
We request the MSRB clarify the type of conduct it intended to define in this section of
the proposed rule amendment, and perhaps harmonize the current rule proposal
definition with the MSRB Glossary definition of “going away”. The current rule
proposal is similar, but not identical, to the MSRB Glossary definition to the extent a
customer or potential customer has been identified to purchase the new issue. Regarding
The Municipal Bond Handbook definition of “going away”, dealers have no control over
future trading activity of its customers, and accordingly, it should be beyond the scope
of the conduct the MSRB is seeking to define (and have dealers or selling group
members represent) as “going away” in this manner. SIFMA believes the conduct
covered by The Municipal Handbook’s definition of “going away” is outside the scope
of the Proposal. We believe the intent of the MSRB’s proposed definition of “going
away” orders is to have dealers or selling group members only submit bona fide
customer orders.
Additionally, as for the proposed definition of “selling group”12, we are
concerned that this definition is overly broad, and arguably would apply to every dealer
that assisted in the distribution of a new issue of municipal securities for the issuer but
was not members of the syndicate. SIFMA suggests that the definition of “selling group”
be limited to those dealers that sign a selling group agreement13, or substantially similar
agreements, for a particular new issue of municipal securities.
We are also supportive of the proposed amendments to Rule G-11(f), requiring
the syndicate manager, prior to the first offer of any securities by a syndicate, to furnish
in writing to the other members of the syndicate and to members of the selling group, if
any, a written statements of all terms and conditions required by the issuer – including
any retail order requirements. This would necessarily include the issuer’s definition of
“retail”, any limitations, as well as the time parameters for which the retail order period
will be conducted. The dissemination and receipt of timely and adequate is a critical
10
See MSRB Glossary, supra note 3.
11
See Fabozzi, Fedstein, Pollack, and Zarb The Municipal Bond Handbook (1983) at 200.
12
MSRB Notice 2012-13 (March 6, 2012), Text of Proposed Amendment to Rule G-11(a)(xiii).
13
See SIFMA’s Model Selling Group Agreement available at
http://www.sifma.org/services/standard-forms-and-documentation/municipal-securities-markets/.
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Municipal Securities Rulemaking Board
Page 6 of 8
underpinning of fair dealing.14 This is especially important to dealers contacting
customers with non-discretionary accounts that might be interested in purchasing some
of the new issue, which necessarily results in taking more time to submit an order.
Finally, with regard to proposed Rule G-11(k) Retail Order Period
Representations and Required Disclosures, our members feel strongly that the
representation that an order meets the issuer’s definition of “retail” is more appropriate
for the Master Agreement Among Underwriters15 and that it is not necessary for the
representation to be made separately for each order submitted during a retail order
period. This change would also clarify that such disclosures are to be made by comanagers to the senior manager of the syndicate. With respect to requiring dealers that
submit an order during the retail order period to provide in writing, presumably to the
senior manager of the syndicate, the proposed representations in proposed Rule G11(k)(ii) – (vi), we suggest that this new requirement is a duplication of order detail
record keeping requirements that are currently maintained by co-managers and selling
group members. It is more appropriate (and should be sufficient for record keeping and
enforcement purposes) for these customer order details to remain with the dealer with
the customer relationships – the dealer with the duty of care and confidentiality to the
customer. If co-managers and selling group members are required to provide such
information to the senior syndicate manager, proposed Rule G-11(k)(iv) should also
specify that any identifying information required by the issuer may not include customer
account numbers, names or Taxpayer Identification numbers.
b. Rule G-8: Books and Records
As discussed above, since SIFMA believes it is not warranted to require comanagers and selling group members to share customer specific information with the
syndicate managers (information that the co-manager or selling group member is
required to maintain), SIFMA further believes that the proposed amendments to Rule
G-8 (requiring the syndicate manager to keep such records) are not warranted as they
would be duplicative of record keeping requirements already imposed upon dealers and
selling group members.
14
The proposed Interpretive Notice accompanying this proposed rule change also obligates the
senior syndicate manager to disseminate any subsequent changes to those conditions in a timely manner.
The senior syndicate manager, depending on the facts and circumstances, may violate Rule, G-17, if they
“withhold information regarding retail order periods to provide an advantage to themselves or their
customers, or to disadvantage other dealers r their customers.”
15
See SIMFA’s Master Agreement Among Underwriters (2002), available at
http://www.sifma.org/services/standard-forms-and-documentation/municipal-securities-markets/
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Page 7 of 8
c. Rule G-32: Disclosures in Connection with Primary Offerings
SIFMA supports the proposed amendments to Rule G-32 which would require a
managing underwriter to report to the MSRB’s Electronic Municipal Market Access
(EMMA) system whether a primary offering of securities included a retail order period
and when the retail order period was conducted.
V.
Proposed Interpretive Notice
SIFMA generally supports of the text of the proposed interpretive notice as it is
primarily a restatement of prior guidance to underwriters regarding Rule G-17 fair
practice obligations of underwriters to issuers when conducting retail order periods. The
proposed notice would recognize that in some cases issuers also allow dealers that are
not underwriters (i.e. selling group members) to submit orders during retail order periods
and would extend the fair practice obligations of dealers placing orders in retail order
periods to other dealers. A dealer that places an order framed as a qualifying retail order
during a retail order period that it knows does not meet the terms and conditions for the
order period established by the issuer would violate Rule G-17. In the same vein,
SIFMA believes that senior managers should be able to rely on representations made by
co-managers that such co-manager (or selling group member) has made to them
pursuant to proposed Rule G-11(k) to satisfy their own fair dealing obligation to the
issuer. Accordingly, we suggest that the proposed interpretive notice be revised to
explicitly reflect such a safe harbor.
VI.
Conclusion
SIFMA sincerely appreciates this opportunity to comment upon the Proposal.
Subject to the proposed refinements suggested above, SIFMA supports the proposed rule
changes as they would protect dealers that follow issuers’ instructions, clarify issuer
terms and conditions, and require timely notice of retail order period terms and
conditions to all syndicate and selling group members.
Please do not hesitate to contact me with any questions at (212) 313-1265.
Sincerely yours,
David L. Cohen
Managing Director
Associate General Counsel
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 8 of 8
cc:
Municipal Securities Rulemaking Board
Lynnette Kelly, Executive Director
Ernesto Lanza, Deputy Executive Director and Chief Legal Officer
Peg Henry, General Counsel – Market Regulation
Lawrence P. Sandor, Senior Associate General Counsel
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P.O. Box 2600
Valley Forge, PA 19482-2600
April 13, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Suite 600
Alexandria, VA 22314
Re:
Request for Comment on Proposed Rule Amendments and
Interpretive Notice on Retail Order Periods (MSRB Notice 2012-13)
Dear Mr. Smith:
Vanguard1 appreciates the opportunity to submit comments to the Municipal Securities Rulemaking
Board (“MSRB”) on its Request for Comment on Proposed Rule Amendments and Interpretive Notice on
Retail Order Periods (the “Proposal”). Vanguard is one of the mutual fund industry’s largest holders of
municipal securities. As of March 31, 2012, Vanguard municipal bond and money market funds held
approximately $120 billion in municipal assets. We commend the MSRB for its efforts to address
concerns regarding the retail order period as part of its new mandate to protect both investors in, and
issuers of, municipal securities. Vanguard is a strong advocate of proposals that will improve investor
access to primary offerings of municipal securities on the best available terms.
We believe, however, that the “retail order period,” as currently implemented in the municipal market and
as contemplated by the Proposal, will prevent many bona fide retail investors from accessing this market.
Retail mutual funds – which generally have very low investment criteria – generally may not submit
orders during the retail order period, while “professional retail” separately-managed accounts (SMAs) –
which may invest on behalf of individuals but carry higher investment minimums – typically may
participate. This result contravenes the intent of the retail order period, which purports to allow retail
investors to purchase bonds before institutional investors. Further, entire bond issues are often allocated
to individual retail investors and SMAs prior to the submission of “institutional” orders by mutual funds
and others, effectively limiting the access of millions of underlying retail investors to the primary market.
This also results in issuers failing to see the total demand – retail and institutional – for their securities,
which may result in incomplete price discovery. Because the Proposal leaves the determination of the
definition of “retail” for the purposes of a particular offering exclusively to an issuer, we believe these
issues will persist if the Proposal is adopted.
As of March 31, 2012, Vanguard offered more than 170 U.S. mutual funds with approximately $1.5 trillion in
U.S. assets under management, serving approximately 9 million shareholders.
1
Mr. Ronald W. Smith
April 13, 2012
Page 2 of 3
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The ideal solution to the issues raised in the Proposal would be to permit all interested investors to submit
orders for primary market municipal securities during a combined order period. This approach would
fulfill the MSRB’s mandate to protect investors and issuers by providing market access to the millions of
retail shareholders of municipal mutual funds while assisting issuers in determining the best price for their
securities. Alternatively, Vanguard supports the Proposal provided that the MSRB adopts a uniform
definition of “retail” for the purposes of the retail order period. This definition should recognize the role
of mutual funds as an investment vehicle for retail investors and allow for their participation on at least
the same level of priority as “professional retail” purchasers such as SMAs. We believe that our proposed
alternatives – a combined order period and a standard definition of “retail” – are consistent with the
MSRB’s mandate, as expanded under the Dodd-Frank Act, to protect both municipal issuers and investors.
A Combined Order Period Would Provide Retail Investors with Access to Municipal Securities
and Provide Issuers with More Accurate Price Discovery
As noted, mutual funds currently may not place orders during a retail order period for primary offerings
of municipal securities, even though their investors may be primarily retail. The Vanguard municipal
bond and money market funds, for example, require a minimum investment of $3,000. This low
investment threshold provides hundreds of thousands of retail investors, who otherwise would not be able
to place individual orders during a retail order period,2 with access to a diversified portfolio of municipal
securities. SMAs, on the other hand, frequently place orders during the retail order period even though
the average investment minimum for an SMA is generally much higher. In many primary offerings,
bonds are fully allocated during the retail order period, effectively shutting out retail investors that invest
in municipal bonds via mutual funds.
In addition to shutting out these retail investors, the retail order period may prevent issuers from seeing
the total demand for a particular bond. Many issuers hold retail order periods for a particular offering
because they believe that filling a primary offering during this period will allow them to obtain the most
advantageous pricing for their bonds. If all of the bonds are allocated to “retail” orders, however, an
issuer will not benefit from knowing what the institutional level of demand is for that issue. We believe
that discovery of the best price for an issue should result from an evaluation of the total market demand
for that security. Otherwise, the potential economic benefit of the retail order period may inure only to
intermediaries who may place retail orders for bonds which are then immediately sold to institutional
investors such as mutual funds, a practice known as “flipping.”
We believe that the ideal solution would be to consolidate all orders in a single order period with no
priority given to a retail order. This would allow for the submission of orders by all prospective
purchasers, including those retail investors that access the municipal market via mutual funds. In addition,
issuers would be able to evaluate the total demand for the bond issue and price bonds accordingly. The
advantages of a combined order period would be more likely to produce an outcome consistent with the
MSRB’s mandate to protect investors and issuers.
In a primary offering, municipal securities are typically sold in minimum denominations of at least $5,000.
Frequently, the retail investors that invest in municipal bond and money market mutual funds do not have the
necessary assets to purchase enough individual bond issues to assemble a diversified portfolio, or may be less
sophisticated than the “professional retail” investors that invest through SMAs.
2
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Mr. Ronald W. Smith
April 13, 2012
Page 3 of 3
If the Retail Order Period is Retained, the MSRB Should Adopt a Uniform Definition of Retail
That Accurately Reflects Retail Participants in Primary Offerings of Municipal Securities
Vanguard believes that the MSRB should define “retail” for purposes of the retail order period if the
MSRB decides not to pursue a combined order period. If left to the exclusive determination of issuers, it
is likely that the definition of retail will continue to vary from offering to offering. For example, some
issuers currently define retail orders as those placed for the account of an individual, bank trust, or
investment advisor with a maximum of $1 million3, while other issuers may allow retail orders up to a
maximum that differs from offering to offering. Further, issuers often have varying definitions for orders
that may be submitted by eligible “Retail,” “National Retail,” “Professional Retail,” and other types of
purchasers.
In order to avoid investor confusion and inconsistencies across the primary market, a standardized
definition should be adopted. This standard definition of “retail” should, at a minimum, give equal
priority to the orders of “true” individual retail investors, such as those that invest via mutual funds with
low investment criteria, as orders submitted by “professional retail” purchasers, such as SMAs. If the
MSRB does not adopt a standard definition of retail, and instead leaves this determination to the exclusive
discretion of the issuer, then we would suggest that offerings of bonds during the retail order period be
limited to par coupon bonds. If the issuer truly chooses to favor the retail investor order, the par coupon
structure is the preferred structure for these investors. Issuing par coupon bonds during the retail order
period may also discourage flipping, as institutional investors would be generally less interested in these
bonds.
*
*
*
*
*
We commend the MSRB for addressing concerns regarding the retail order period and appreciate the
opportunity to comment on the Proposal. If you have any questions about Vanguard’s comments or
would like any additional information, please contact me at 610-669-6345.
Sincerely,
/s/ Christopher Alwine
Christopher Alwine
Head of Municipal Bond Group
Vanguard
cc:
3
Lynette Kelly, Executive Director
Municipal Securities Rulemaking Board
See, e.g., California Early Order Period, available at: http://www.buycaliforniabonds.com/bcb/rop.asp
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Regulatory Affairs
1 North Jefferson Ave
St. Louis, MO 63103
HO004-11D
314-955-6851 (t)
314-955-4308 (f)
April 13, 2012
Via E-mail to http://www.msrb.org/CommentForm.aspx
Ronald W. Smith, Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Re:
MSRB 2012-13 Request for Comment on Proposed Rule Amendments and Interpretive
Notice on Retail Order Periods
Dear Mr. Smith:
Wells Fargo Advisors (“WFA”) appreciates this opportunity to comment briefly on Municipal
Securities Rulemaking Board Notice 2012-13 concerning “Retail Order Periods.” WFA is fully
supportive of efforts to bring some clarity to retail order periods and improve record keeping
related to those retail orders. We file this brief comment letter to highlight certain issues that
MSRB should consider modifying.
WFA consists of brokerage operations that administer almost $1.1 trillion in client assets. It
accomplishes this task through 15,263 full-service financial advisors in 1,100 branch offices in
all 50 states and 3,548 licensed financial specialists in 6,610 retail bank branches in 39 states.1
1
WFA is a non-bank affiliate of Wells Fargo & Company (“Wells Fargo”), a diversified financial services company
providing banking, insurance, investments, mortgage, and consumer and commercial finance across the United
States of America and internationally. Wells Fargo has $1.1 trillion in assets and more than 278,000 team members
across 80+ businesses. Wells Fargo’s brokerage affiliates also include First Clearing LLC, which provides clearing
services to 98 correspondent clients and WFA. For the ease of discussion, this letter will use WFA to refer to all of
those brokerage operations.
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Ronald W. Smith
Page 2
April 13, 2012
WFA offers numerous fixed income solutions to its clients, including countless municipal
securities offerings.
MSRB Should Define “Retail Customer”
MSRB explains that the rule proposals and interpretive notice is a direct result of concerns
including the disregard of certain market participants to the conditions related to retail order
periods and the need for more recordkeeping so that enforcement of abuses of retail order
periods can be enhanced. To that end, MSRB proposes amending Rule G-11 to define “retail
order period” as the time during which orders will only be sought from those the issuer defines
as “retail customers.” Other amendments to Rule G-11 would require a senior syndicate
manager to advise the selling group in writing of the issuer’s terms and conditions related to
retail order periods and other matters. G-11 will also require that for each order placed during
the retail order period the dealer provide certain information, including among other things key
identifying information for the customer and whether the order met the definition of retail.
MSRB’s proposed amendments to Rule G-8 and Rule G-32 enhance the recordkeeping related to
retail orders and alerting all that retail order periods exist.
In general, MSRB’s effort to bring clarity to retail order period will help investors, issuers and
dealers navigate the shoals of municipal offerings. One issue in the amendments to Rule G-11 is
the discretion the rule leaves to municipal issuers to define “retail customer” on an issue-by-issue
basis. Simply put, the appearance of flexibility actually will serve to create increased complexity
for firms participating in municipal offerings on a nationwide basis. It will be unwieldy for firms
to create a compliance structure that: 1) properly determines who fits an issuer’s retail definition;
2) adequately polices sales to determine if purchasers fit that very specific definition of retail;
and 3) reasonably insures that even if the issuer’s definition is met, it is in fact a bona fide
purchase as opposed to some artifice established to meet the retail definition. A uniform
definition of retail would create a better system for issuers, investors, intermediaries and
regulators. MSRB could use this comment process to determine which entities are proper
candidates for the definition of “retail customer.” WFA would contend that the definition should
be as narrow as possible, primarily limiting retail orders to those who are natural persons or a
trust department or registered investment advisor acting on behalf of a specifically identifiable
natural person. Although mutual funds often are comprised of an aggregation of natural persons,
mutual funds should not fit this uniform definition of “retail customer.”
With a uniform definition of “retail customer,” firms will be able to establish structures that
make surveillance and compliance less costly than the rule as proposed. Even though the
proposal has increased some of the books and records requirements for those submitting
municipal securities retail orders, the uniformity of a definition will make compliance with the
record keeping simpler and more effective. Removing from issuers the discretion to decide
which persons qualify as retail customers should do no appreciable harm to the issuers. To the
contrary, allowing that flexibility actually would harm clients and investors as the variability of
the definition of retail customer could create confusion such that sometimes an eligible
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Ronald W. Smith
Page 3
April 13, 2012
individual may fail to act during the retail order period as a definition has changed from a similar
offering or creates confusion on the eligibility of that customer. From a cost benefit standpoint,
it is almost certain that MSRB will find that costs of allowing issuers to define “retail” far
outweigh the benefits of a uniform definition.
Retail and Institutional Pricing Should Not Differ
In addition to making rule amendments, MSRB Notice 2012-13 has a proposed interpretive
notice concerning pricing of municipal securities when conducting retail order periods. The
notice states in part that:
“[L]arge differences between institutional and individual prices that exceed the
price/yield variance that normally applies to transactions of different sizes in the primary
market provide evidence that the duty of fair pricing to individual clients may not have
been met. The Board is aware that in some cases, an issue may have two CUSIPS for the
same maturity, one of which is marketed exclusively to retail customers and the other to
institutional customers. If there are significant differences between the price paid by
institutional customers and the price paid by retail customers related to the two securities
of the same maturity (and the price paid by retail customers is higher), this may suggest
that the underwriter’s duty of fair pricing to retail customers under Rule G-30 may not
have been met unless the difference in the price is fairly attributable to the actual
characteristics of the securities.” 2
While this recitation of MSRB guidance is probably accurate, it misses the opportunity to
provide a clear standard for municipal market participants. It once creates a compliance and
surveillance nightmare for firms, making almost any pricing difference subject to the whims and
vagaries of which person is viewing the pricing and its fairness. A much simpler and fairer
solution is to have it be established that when there is a retail offering period, retail and
institutional orders shall not receive different pricing. Underwriters and issuers would then
actually have the benefit of using all available information to make a realistic pricing decision.
A single price eliminates most fair dealing concerns during a retail order period, and gives a
measure of predictability benefits all participants in the municipal securities issuance process.
Even though where there are two CUSIPS for the same maturity, the reality that there could still
be exposure to the underwriter for differential pricing actually makes uniform pricing a major
benefit those responsible for pricing municipal securities. The entire interpretive notice becomes
less important if there was uniform pricing.
2
Municipal Securities Rulemaking Board Notice 2012-13 at page 8 (http://msrb.org/Rules-andInterpretations/Regulatory-Notices/2012/2012-13.aspx?n=1).
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Ronald W. Smith
Page 4
April 13, 2012
Conclusion
WFA applauds MSRB for addressing industry concerns about the retail order period. With some
modifications as discussed herein, it is likely the regulatory changes proposed will improve the
municipal securities purchasing experience for natural persons and other investors. If you have
any questions regarding this comment letter, please do not hesitate to contact me.
Sincerely,
Ronald C. Long
Director of Regulatory Affairs
Notice · MSRB.org
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MSRB NOTICE 2012-50 (OCTOBER 2, 2012)
REQUEST FOR COMMENT ON REVISED DRAFT RULE
AMENDMENTS AND A REVISED DRAFT INTERPRETIVE
NOTICE ON RETAIL ORDER PERIODS
The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on a
revised draft proposal concerning retail order periods under MSRB Rules G-11 (on
primary offering practices), G-8 (on books and records) and G-32 (on disclosures in
connection with primary offerings), and a draft interpretive notice concerning the
application of MSRB Rules G-17 and G-30 to retail order periods (the “Revised Draft
Proposal”). As described below, the MSRB previously sought comment on an initial
draft proposal on retail order periods and the Revised Draft Proposal reflects certain
modifications made to such initial draft proposal based on the comments received from
industry participants, as discussed below.
Comments should be submitted no later than November 2, 2012, and may be
submitted in electronic or paper form. Comments may be submitted electronically by
clicking here. Comments submitted in paper form should be sent to Ronald W. Smith,
Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite
600, Alexandria, VA 22314. All comments will be available for public inspection on
the MSRB’s website.[1]
Questions about this notice should be directed to Kathleen Miles, Associate General
Counsel, at 703-797-6600.
INITIAL DRAFT PROPOSAL
On March 6, 2012, the MSRB published MSRB Notice 2012-13 in which it requested
comment on draft amendments to Rules G-11, G-8 and G-32, as well as on a draft
interpretive notice concerning the application of MSRB Rules G-17 and G-30 to retail
order periods (the “Initial Draft Proposal”).
The Initial Draft Proposal sought to ensure that brokers, dealers and municipal
securities dealers (“dealers”) acting as underwriters for new issues in which the issuer
seeks to conduct a retail order period in fact honor the expectations and requirements
of issuers with respect to how such retail order period is conducted. Under the Initial
Draft Proposal, Rule G-11(a) would have been amended to define a “retail order
period” as an order period during which orders are solicited solely from customers
meeting the issuer’s definition of “retail,” making it clear that it is the prerogative of the
issuer to establish the definition of “retail” for that purpose.
Under the Initial Draft Proposal, Rule G-11(a) also would have been amended to
define a “selling group” as a group of dealers that assist in the distribution of a new
issue of municipal securities for the issuer but are not members of the syndicate
because certain provisions of the Initial Draft Proposal would have been extended to
also apply in cases where a selling group participates in the distribution of a new
issue of municipal securities. Thus, Rule G-11(f) would have been amended to
require a senior syndicate manager to furnish in writing to members of the selling
group, if any, a written statement of the issuer’s terms and conditions, the priority
provisions, and any subsequent changes to those terms and conditions and priority
provisions, just as such information currently is required to be provided to syndicate
members. The amended rule would provide explicitly that any applicable retail order
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period requirements would be included in the issuer’s terms and conditions that must
be furnished under the rule.
Finally, Rule G-11 would have been amended to add a new section (k), which would
require that any dealer placing an order during a retail order period provide, in writing
(which could be electronic), the following information regarding each order submitted
during the retail order period: (i) whether the order met the issuer’s definition of
“retail”; (ii) whether the order was a going away order, which would have been defined
under amended Rule G-11(a)(xii) as an order for which a customer is already
conditionally committed; (iii) whether the dealer placed more than one order from a
single customer for a security for which the same CUSIP number has been assigned;
(iv) for any customer who was a natural person, any identifying information required by
the issuer in connection with such retail order (but not including customer names or
social security numbers); (v) the par amount of the order; and (vi) for any order from a
trust department, investment advisor, or firm representing customers with separately
managed accounts, the par amount and any identifying information required by the
issuer in connection with such retail order (but not including the name or social
security number of each natural person to whose account the securities were
designated).
The draft amendments to Rule G-8 would have required that the senior syndicate
manager maintain a record of the information related to retail orders required by Rule
G-11, along with the other information required under existing Rule G-8(a)(viii) relating
to syndicate or other primary offering transaction records.
Rule G-32(b)(vi)(C)(1)(a) would have been amended to require an underwriter to
report to the MSRB’s Electronic Municipal Market Access (EMMA®)[2] system whether
a primary offering of securities included a retail order period and when the retail order
period was conducted.[3]
The draft interpretive notice would have addressed the duties of all dealers placing
orders in retail order periods, not just underwriters. The notice would have provided
that, under Rule G-17, issuers may reasonably expect that all dealers will deal fairly
with them by abiding by the terms and conditions established by the issuers for the
retail order periods, including the issuers’ respective definitions of “retail.” The notice
would also have remind dealers that they have fair practice obligations to other
dealers, so that any dealer that submitted an order as a “retail” order when it knew
that it was not, or violated any of the other retail order period provisions of Rule G-11,
would also violate the fair practice requirements of Rule G-17. Under the draft notice,
Rule G-17 would also have required syndicate managers to provide adequate and
timely notice of issuers’ terms and conditions for the retail order period to all dealers
permitted by issuers to place orders during retail order periods. For example, it might
be a violation of Rule G-17 if a syndicate manager withheld information regarding
retail order periods to provide an advantage to itself or its customers, or to
disadvantage other dealers or their customers.
The draft interpretive notice also would have provided that dealers must balance their
duty of fair pricing to issuers under Rule G-17 with their duty of fair pricing to
customers under Rule G-30(a), when pricing a new issue of securities generally, but
in particular when pricing securities that will be sold to retail customers. It would have
reminded dealers of previous MSRB guidance that large differences between
institutional and individual prices that exceed the price/yield variance that normally
applies to transactions of different sizes in the primary market provide evidence that
the duty of fair pricing to individual clients may not have been met.
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REVISED DRAFT PROPOSAL
The Board received comments on the Initial Draft Proposal from 14 commenters.
After reviewing the comments, the MSRB decided to request further comment in the
form of the Revised Draft Proposal. The Revised Draft Proposal modifies certain draft
provisions of Rule G-11, Rule G-8, and the draft interpretive notice under the Initial
Draft Proposal but does not further revise the draft provisions of Rule G-32 under the
Initial Draft Proposal. The modifications to the Initial Draft Proposal are summarized
below, together with discussions of certain matters raised by the commenters.[4]
Definition of “Retail.” Many commenters recommended that the MSRB establish a
definition of “retail” that would be used if an issuer determined to conduct a retail order
period or, in the alternative, create a standard definition of “retail” with the option
provided to issuers to create their own definition in lieu of the standard. The MSRB
has declined to make this change, in part because it is concerned that if it defined
“retail” it may unduly influence certain issuers’ decision as to what should be included
in, or excluded from, the definition. Rather, the MSRB believes that an issuer, in
conjunction with its financial advisor, should have the flexibility to define “retail” on an
issue-by-issue basis so that it selects the definition that suits its unique
circumstances. The MSRB would consider producing educational materials that may
benefit those issuers who do not have sufficient expertise or who do not engage a
financial advisor.
Selling Group Definition. One commenter suggested that the definition of selling
group in the Initial Draft Proposal is overly broad. The MSRB has revised the term to
refer to a group of dealers that would be formed to assist in the distribution of a new
issue of municipal securities. Under Revised Draft Rule G-11(a)(xiii), the term “selling
group” would mean, for purposes of this rule, a group of dealers formed to assist in
the distribution of a new issue of municipal securities for the issuer other than
members of the syndicate. Communication of Information to Syndicate and Selling Group Members. One
commenter suggested that pricing terms should also be communicated to the
syndicate before the beginning of the retail order period. The MSRB agrees that
pricing information is meaningful and should be made available to syndicate and any
selling group members prior to the marketing of any securities. Revised Draft Rule G11(f) would provide that a senior syndicate manager would be required to
communicate all pricing information to other members of the syndicate and to
members of the selling group. The MSRB believes that underwriters that have entered into so-called “distribution
agreements” or “marketing arrangements” to support their distribution capabilities
should be required to disseminate the information provided to them to the dealers with
whom they have contracted, and that such dissemination should be the obligation of
the underwriter having such arrangement rather than the senior syndicate manager
because senior syndicate managers may not be aware of or familiar with the
provisions contained in these agreements. Accordingly, under Revised Draft Rule G11(f), an underwriter would be required to furnish in writing to any other dealer with
which such underwriter has an arrangement to market municipal securities that
includes the issuer’s new issue, all of the information provided to it from the senior
syndicate manager as required by Rule G-11(f).
Some commenters recommended that the MSRB consider setting a specific time
frame in which the syndicate manager must provide issuer terms and conditions for
the retail order period to other dealers and the MSRB also establish a minimum time
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length for the retail order period. The MSRB has declined to do so based on
concerns that establishing a fixed time frame could give rise to issues in the context of
offerings that must come to market quickly and that a one-size-fits-all approach to the
length of the retail order period may not address the specific needs and objectives of
an issuer. The issuer should be in the best position to determine how the retail order
period should be conducted and whether its objectives have been fulfilled.[5]
Customer Information. One commenter does not think it is warranted to require
dealers to share customer specific information regarding each order submitted during
the retail order period with syndicate managers. The MSRB has not made any
changes to the information dealers would be required to provide, although the draft
rule language has been simplified in the Revised Draft Proposal and modified to
recognize that senior syndicate managers may sometimes assist issuers in
determining what information is required. The MSRB would not specify or limit the
type of identifying information that either an issuer, or senior syndicate manager on
behalf of the issuer, may require (other than customer names or social security
numbers) in order to verify whether retail orders are bona fide. Revised Draft Rule G11(l)(iv)[6] would require that each dealer that submits an order during the retail order
period would also provide, in connection with such retail order, any identifying
information required by the issuer, or the senior syndicate manager on the issuer’s
behalf.
One commenter suggested that the MSRB create a safe harbor for senior syndicate
managers so that senior managers would satisfy their own fair dealing obligations to
the issuer when relying on representations made to them by other dealers that orders
they submitted are retail orders. The MSRB agrees that, subject to certain exceptions,
senior syndicate managers may be permitted to rely on representations made to them
by other dealers. Revised Draft Rule G-11(l) would provide that the senior syndicate
manager may rely on the information furnished by each dealer placing orders during a
retail order period unless the senior syndicate manager knows, or has reason to know,
that the information is not true, accurate or complete.
Recordkeeping. One commenter sought clarification as to whether the recordkeeping
requirements included in the Initial Draft Proposal were intended to apply to a sole
managed deal. The MSRB agrees that the requirement to maintain records of the
customer information provided in a retail order period should apply to an underwriting
that included a syndicate as well as to a sole managed underwriting, and the Revised
Draft Proposal would include a draft amendment to Rule G-8(a)(viii)(B) to this effect. In addition, the draft amendments to Rule G-8(a)(viii)(A) would be revised to also
require that the syndicate manager (in the case of a primary offering for which a
syndicate has been formed) maintain records of all pricing information required to be
distributed pursuant to Revised Draft Rule G-11(f). One commenter suggested that the recordkeeping requirements included in the Initial
Draft Proposal would be duplicative of recordkeeping requirements already imposed
upon dealers. MSRB Rule G-8(a)(vii) (dealer records for transactions as a principal)
provides that the dealer keep a record of the customer’s order, but only in the event of
a purchase or sale of municipal securities (i.e., if the order is filled). The Initial Draft
Proposal would require that the records of all orders received be maintained by the
syndicate manager (regardless of whether an order is filled) including information that
would be required by Draft Rule G-11 (l).
Draft Interpretive Notice. The MSRB has determined to revise the draft interpretive
notice to limit its focus to retail order period pricing, in light of other guidance provided
by the MSRB[7] and the revisions made to the draft amendments described above.
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REQUEST FOR COMMENTS
The MSRB requests comments on the Revised Draft Proposal. In addition, the MSRB
seeks comments on the following specific matters:
Should a dealer who may seek to assist the issuer in formulating a definition of
retail be required to disclose any interests or motivations on the part of such
dealer related to such definition? Should a dealer have any obligation to advise
an issuer if the dealer believes that the issuer’s definition of retail is not
appropriate for the issuer?
Would the Revised Draft Proposal effectively further the MSRB’s objective of
protecting issuers and retail investors?
Would any aspects of the Revised Draft Proposal have a negative effect on the
protection of issuers, retail investors or the public interest, or on the fair and
efficient operation of the municipal securities market?
What would be the incremental additional burden, if any, to dealers resulting from
the Revised Draft Proposal beyond the existing burden of compliance with Rule
G-11?
Are there alternative methods the MSRB should consider to providing the
protections sought under the Revised Draft Proposal that would be more effective
and/or less burdensome?
October 2, 2012
*****
TEXT OF REVISED DRAFT AMENDMENTS TO RULE G-11[8]
Rule G-11: Primary Offering Practices
(a) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i)-(vi) No change.
(vii) The term “retail order period” means an order period during which
orders will be solicited solely from customers that meet the issuer’s
definition of “retail.”
(viii)-(xi) No change.
(xii) The term “going away order” means an order for which a
customer is already conditionally committed.
(xiii) The term “selling group” means, for purposes of this rule, a group
of brokers, dealers, or municipal securities dealers formed for the
purpose of assisting in the distribution of a new issue of municipal
securities for the issuer other than members of the syndicate.
(b)-(e) No change.
(f) Communications Relating to Issuer Syndicate Requirements, Priority Provisions
and Order Period. Prior to the first offer of any securities by a syndicate, the senior
syndicate manager shall furnish in writing to the other members of the syndicate and
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to members of the selling group, if any, (i) a written statement of all terms and
conditions required by the issuer (including any retail order period requirements),
(ii) the priority provisions, (iii) the procedure, if any, by which such priority provisions
may be changed, (iv) if the senior syndicate manager or managers are to be permitted
on a case-by-case basis to allocate securities in a manner other than in accordance
with the priority provisions, the fact that they are to be permitted to do so, and (v) if
there is to be an order period, whether orders may be confirmed prior to the end of
the order period, and (vi) all pricing information. Any change in the priority
provisions or pricing information shall be promptly furnished in writing by the senior
syndicate manager to the other members of the syndicate and the selling group, if
any. Syndicate and selling group members shall promptly furnish in writing the
information described in this section to others, upon request. If the senior syndicate
manager, rather than the issuer, prepares the written statement of all terms and
conditions required by the issuer, such statement shall be provided to the issuer. An
underwriter shall promptly furnish in writing to any other broker, dealer, or
municipal securities dealer with which such underwriter has an arrangement to
market municipal securities that includes the issuer’s new issue, all of the
information provided to it from the senior syndicate manager as required by this
section.
(g) No change.
(h) Disclosure of Syndicate Expenses and Other Information. At or before the final
settlement of a syndicate account, the senior syndicate manager shall furnish to the
other members of the syndicate:
(i) an itemized statement setting forth the nature and amounts of all actual
expenses incurred on behalf of the syndicate. Notwithstanding the foregoing,
any such statement may include an item for miscellaneous expenses,
provided that the amount shown under such item is not disproportionately
large in relation to other items of expense shown on the statement and
includes only minor items of expense which cannot be easily categorized
elsewhere in the statement. The amount of discretionary Discretionary
fees for clearance costs to be imposed by a syndicate manager and the
amount of management fees shall be disclosed to syndicate members prior
to the submission of a bid, in the case of a competitive sale, or prior to the
execution of a purchase contract with the issuer, in the case of a negotiated
sale. For purposes of this section, the term "management fees" shall include,
in addition to amounts categorized as management fees by the syndicate
manager, any amount to be realized by a syndicate manager, and not shared
with the other members of the syndicate, which is attributable to the
difference in price to be paid to an issuer for the purchase of a new issue of
municipal securities and the price at which such securities are to be delivered
by the syndicate manager to the members of the syndicate; and
(ii) No change.
(i)-(j) No change.
(k) [Reserved]
(l) Retail Order Period Representations and Required Disclosures. At the end
of the retail order period but no later than the Time of Formal Award (as defined
in Rule G-34(a)(ii)(C)(1)(a)), each broker, dealer, or municipal securities dealer
that submits an order during a retail order period shall provide, in writing, which
may be electronic, the following information relating to each order submitted
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during a retail order period:
(i) whether the order meets the issuer’s definition of “retail”;
(ii) whether the order is a going away order;
(iii) whether the broker, dealer, or municipal securities dealer has
received more than one order from a single customer for a security for
which the same CUSIP number has been assigned;
(iv) any identifying information required by the issuer, or the senior
syndicate manager on the issuer’s behalf, in connection with such retail
order (but not including customer names or social security numbers);
and
(v) the par amount of the order.
The senior syndicate manager may rely on the information furnished by each
broker, dealer, or municipal securities dealer that provided the information
required by (i)-(v) unless the senior syndicate manager knows, or has reason to
know, that the information is not true, accurate or complete.
*****
TEXT OF REVISED DRAFT AMENDMENTS TO RULE G-8
Rule G-8: Books and Records to be Made by Brokers, Dealers and Municipal
Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise
specifically indicated in this rule, every broker, dealer and municipal securities dealer
shall make and keep current the following books and records, to the extent applicable
to the business of such broker, dealer or municipal securities dealer:
(i)-(vii) No change.
(viii) Records Concerning Primary Offerings.
(A) For each primary offering for which a syndicate has been
formed for the purchase of municipal securities, records shall be
maintained by the syndicate manager showing the description and
aggregate par value of the securities; the name and percentage of
participation of each member of the syndicate; the terms and
conditions governing the formation and operation of the syndicate;
a statement of all terms and conditions required by the issuer
(including whether there was a retail order period and the issuer's
definition of "retail," if applicable); all orders received for the
purchase of the securities from the syndicate and selling group, if
any; the information required to be submitted pursuant to Rule
G-11(l); all pricing information required to be distributed
pursuant to Rule G-11(f); all allotments of securities and the price
at which sold; those instances in which the syndicate manager
allocated securities in a manner other than in accordance with the
priority provisions, including those instances in which the syndicate
manager accorded equal or greater priority over other orders to
orders by syndicate members for their own accounts or their
respective related accounts; and the specific reasons for doing so;
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the date and amount of any good faith deposit made to the
issuer; the date of settlement with the issuer; the date of closing of
the account; and a reconciliation of profits and expenses of the
account.
(B) For each primary offering for which a syndicate has not been
formed for the purchase of municipal securities, records shall be
maintained by the sole underwriter showing the description and
aggregate par value of the securities; all terms and conditions
required by the issuer (including whether there was a retail order
period and the issuer's definition of "retail," if applicable); all orders
received for the purchase of the securities from the underwriter; the
information required to be submitted pursuant to Rule G-11(l);
all allotments of securities and the price at which sold; those
instances in which the underwriter accorded equal or greater priority
over other orders to orders for its own account or its related
accounts, and the specific reasons for doing so; the date and
amount of any good faith deposit made to the issuer; and the date of
settlement with the issuer. (ix)-(xxiv) No change.
(b)-(g) No change.
*****
TEXT OF DRAFT AMENDMENTS TO RULE G-32
Rule G-32: Disclosures in Connection with Primary Offerings
(a) Customer Disclosure Requirements.
(i) No broker, dealer or municipal securities dealer shall sell, whether as an
underwriter or otherwise, principal or agent, any offered municipal securities
to a customer unless such broker, dealer or municipal securities dealer
delivers to the customer by no later than the settlement of the transaction a
copy of the official statement or, if an official statement is not being prepared,
a written notice to that effect together with a copy of a preliminary official
statement, if any.
(ii)-(v) No change.
(b) Underwriter Submissions to EMMA.
(i)-(iv) No change.
(v) Underwriting Syndicate. In the event a syndicate or similar account has
been formed for the underwriting of a primary offering, the managing
underwriter shall take the actions required under the provisions of this rule
and comply with the recordkeeping requirements of Rule G-8(a)(xiii)(B).
(vi) Procedures for Submitting Documents and Form G-32 Information.
(A)-(B) No change.
(C) The underwriter in any primary offering of municipal securities
for which a document or information is required to be submitted to
EMMA under this section (b) shall submit such information in a
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timely and accurate manner as follows:
(1) Form G-32 information submissions pursuant to
paragraph (b)(i)(A) hereof with respect to a primary offering
shall be:
(a) initiated on or prior to the date of first
execution with the submission of CUSIP numbers
(except if such CUSIP numbers are not required
under Rule G-34 and have not been assigned),
initial offering prices or yields (including prices or
yields for maturities designated as not reoffered), if
applicable, the expected closing date, and whether
the issuer or other obligated persons have agreed
to undertake to provide continuing disclosure
information as contemplated by Securities
Exchange Act Rule 15c2-12, and if there was a
retail order period (as defined in Rule G11(a)(vii)) as part of a primary offering, the
information indicating whether a retail order
period was conducted and each date it was
conducted, together with such other items of
information as set forth in Form G-32 and the
EMMA Dataport Manual; and
(b) No change.
(2)-(4) No change.
(D) No change.
(c) No change.
(d) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i) - (xiii) No change.
(xiv) (xiii) The term "obligated person" shall mean an obligated person
defined in Securities Exchange Act Rule 15c2-12(f)(10).
(e) No change.
* * * * * TEXT OF REVISED DRAFT INTERPRETIVE NOTICE
Interpretive Notice Concerning the Application of MSRB Rules G-17 and
G-30 to Retail Order Periods
MSRB Rule G-17 (on conduct of municipal securities and municipal
advisory activities) provides that, in the conduct of its municipal
securities activities, each broker, dealer and municipal securities dealer
(“dealer”) shall deal fairly with all persons and shall not engage in any
deceptive, dishonest or unfair practice. MSRB Rule G-30 (on prices and
commissions) provides that a dealer purchasing or selling municipal
securities from a customer as a principal must do so at an aggregate
price (including any mark-down or mark-up) that is fair and reasonable,
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taking into consideration all relevant factors, including the best
judgment of the dealer as to the fair market value of the securities at
the time of the transaction. This interpretive notice expands upon
guidance on the application of MSRB Rules G-17 and G-30 to retail
order periods previously provided by the MSRB.
Retail Order Period Pricing
The MSRB has previously reminded dealers that an issuer’s use of a
retail order period based on a perception that the retail order period will
improve pricing of the new issue for the issuer does not create a safe
harbor for dealers to engage in pricing that violates the fair pricing
obligation under Rule G-30.[1] At the same time, the duty of fair
dealing under Rule G-17 includes an implied representation that the
price an underwriter pays to an issuer is fair and reasonable, taking
into consideration all relevant factors, including the best judgment of
the underwriter as to the fair market value of the issue at the time it is
priced. [2] Underwriters must balance the competing interests of issuers
and customers when pricing a new issue of securities generally, but in
particular when pricing securities that will be sold to retail customers.
During a retail order period, an issuer may require underwriters to make
a bona fide public offering to retail customers at the initial offering
price for the securities, either directly or through other dealers. This
directive may benefit retail customers because dealer compensation for
such sales is typically in the form of an agreed upon takedown, which is
negotiated and paid by the issuer, rather than a mark-up paid by the
customer. The MSRB emphasizes that the duty of fair dealing under
Rule G-17 requires that dealers must follow the issuer’s instructions for
retail order periods and, if directed to do so by the issuer, make a bona
fide public offering of the securities to retail customers at their initial
offering prices.
As the MSRB has noted, large differences between institutional and
individual prices that exceed the price/yield variance that normally
applies to transactions of different sizes in the primary market provide
evidence that the duty of fair pricing to individual clients may not have
been met.[3] The MSRB is aware that in some cases, an issue may
have two CUSIPS for the same maturity, one of which is marketed
exclusively to retail customers and the other to institutional customers. If there are significant differences between the price paid by
institutional customers and the price paid by retail customers related to
the two securities of the same maturity (and the price paid by retail
customers is higher), this may suggest that the underwriter’s duty of
fair pricing to retail customers under Rule G-30 may not have been met
unless the difference in the price is fairly attributable to the actual
characteristics of the securities.
Among the different characteristics of securities that may fairly result in
different prices are different coupons (e.g., institutional customers may
prefer to purchase bonds at a premium). As a general rule, the MSRB
does not consider that there is a Rule G-30 violation simply if the yield
to call is the same for both securities sold to retail and institutional
customers, even though the yields to maturity on the securities are
different. In addition, some legitimate pricing differences may result
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from different market conditions particularly in the case of retail order
submissions one or two days prior to the institutional order period.
________________________
[1] See Guidance on Disclosure and Other Sales Practice Obligations to
Individual and Other Retail Investors in Municipal Securities (July 14,
2009) (“Sales Practice Notice”).
[2] See Interpretive Notice Concerning the Application of MSRB Rule G17 to Underwriters of Municipal Securities (August 2, 2012).
[3] See Sales Practice Notice at note 1.
[1] Comments are posted on the MSRB website without change. Personal identifying
information such as name, address, telephone number, or email address will not be
edited from submissions. Therefore, commenters should submit only information that
they wish to make available publicly.
[2] EMMA is a registered trademark of the MSRB.
[3] The Initial Draft Proposal also would have amended Rule G-32(a)(i) to emphasize
the MSRB’s long-standing requirement that all dealers (not just underwriters) are
subject to the official statement notification/delivery requirement of the rule during the
primary offering disclosure period, amended Rule G-32(b)(v) to eliminate an
unnecessary cross-reference, and amended Rule G-32(d) to correct erroneous
subsection numbering.
[4] The comments received by the MSRB on the Initial Draft Proposal are available
here.
[5] The MSRB also would revise Rule G-11(h)(i) in the Revised Draft Proposal to
emphasize the long-standing requirement that the syndicate manager is required to
disclose to syndicate members the amount of the discretionary fees for clearance
costs and the amount of management fees prior to submission of a bid or prior to
execution of a purchase contract.
[6] The provisions of draft section (l) of Revised Draft Rule G-11 formerly appeared in
section (k) of Draft Rule G-11. Section (k) has been reserved for new draft rule
language under a different regulatory proposal. See MSRB Notice 2012-36 (July 5,
2012).
[7] See MSRB Notice 2012-25 (May 7, 2012).
[8] Marked to show changes from existing Rules G-11, G-8 and G-32. Underlining
indicates new language; strikethrough denotes deletions.
©2013 Municipal Securities Rulemaking Board. All Rights Reserved.
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Alphabetical List of Comment Letters on MSRB Notice 2012-50 (October 2, 2012)
1. Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated
November 2, 2012
2. Dorsey & Company, Inc.: Letter from Steven Rueb, Vice President, dated November 14,
2012
3. Edward D. Jones & Co., L.P.: Letter from David Fischer-Lodike, Capital Markets &
Operations Compliance, dated November 2, 2012
4. Financial Planning Association: Letter from David A. Cohen, Assistant Director Government Relations, dated November 2, 2012
5. Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal
Liaison Center, dated November 5, 2012
6. Investment Company Institute: Letter from Dorothy Donohue, Deputy General Counsel Securities Regulation, dated November 2, 2012
7. National Association of Independent Public Finance Advisors: Letter from Jeanine Rodgers
Caruso, President, dated November 2, 2012
8. Rhode Island Health and Educational Building Corporation: Letter from Robert E. Donovan,
Executive Director, dated October 15, 2012
9. Securities Industry and Financial Markets Association: Letter from David L. Cohen,
Managing Director, Associate General Counsel, dated November 2, 2012
10. Vanguard: Letter from Christopher Alwine, Head of Municipal Bond Group, dated
November 2, 2012
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November 2, 2012
VIA ELECTRONIC MAIL
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
RE: MSRB Notice: 2012-50: Request for Comment on Revised Draft Rule Amendments and a
Revised Draft Interpretive Notice on Retail Order Periods
Dear Mr. Smith:
The Bond Dealers of America (BDA) is pleased to submit this letter in response to the Municipal
Securities Rulemaking Board’s (MSRB) Notice: 2012-50 (the “Notice”), which solicits
comments in connection with a revised draft proposal concerning retail order periods under
MSRB Rules G-11 (on primary offering practices), G-8 (on books and records) and G-32 (on
disclosures in connection with primary offerings), and a draft interpretive notice concerning the
application of MSRB Rules G-17 and G-30 to retail order periods (the “Revised Draft
Proposal”). BDA is the only DC based group representing the interests of securities dealers and
banks focused on the U.S. fixed income markets. We welcome this opportunity to state our
position.
We appreciate several of the changes that the MSRB has made to its retail order period proposal.
In particular, we support the MSRB’s clarification in the Revised Draft Interpretative Notice that
refines the interpretative guidance around the duty of fair pricing. We believe that the
interpretative guidance now provides helpful discussion of how prices and yields may
legitimately differ on sales of the same security.
While we are generally supportive of the Revised Draft Interpretative Notice, we strongly
reiterate our concerns in our comment letter dated April 13, 2012 in response to MSRB Notice
2012-13 (Request for Comment on Proposed Rule Amendments and Interpretive Notice on Retail
Order Periods). We remain concerned with subparagraph (l) of Rule G-11 of the revised draft
rule, in that we believe it will impose a costly, unreasonable and unnecessary burden on Dealers.
There is no reason for the Rule to unconditionally require the delivery of potentially voluminous
amounts of information to issuers who should have the freedom to determine the specific
requirements of the retail order period for themselves. We believe that what issuers really need
from the MSRB is the legal umbrella under which to customize those requirements. However,
the additional step the MSRB has taken to proscribe the requirements here will likely have
unintended consequences for Dealers. Therefore, we would like to reiterate our suggestion that
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the MSRB eliminate the requirement that Dealers provide specific information relating to each
order submitted during a retail order period, particularly in cases in which the Dealer obtains
large numbers of orders during retail order periods.
Finally, to the extent the MSRB is considering providing educational materials to assist issuers
who do not have sufficient expertise or who do not engage a financial advisor, we would
recommend that the MSRB include specific guidance practices that these issuers should consider
in formulating effective retail order period rules. To that end, we would recommend that the
MSRB include in any educational material it produces, a recommended practice that issuers
reserve the right to conduct an audit of compliance by the syndicate of retail order period rules.
This is because the issuer will be limited in its capacity to determine whether the syndicate has
actually complied with the issuer’s retail order period rules. That being said, we also discourage
the MSRB from recommending to issuers that they must conduct audits as this can lead to highly
inefficient offerings. The ultimate goal in preserving the right to audit would be to ensure
compliance with the requirements of the retail order period.
Thank you again for the opportunity to submit these comments.
Sincerely,
Michael Nicholas
Chief Executive Officer
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DORSEY
&
COMPANY
INC.
WEALTH MANAGEMENT  INVESTMENTS
511 GRAVIER ST.  NEW ORLEANS, LA 70130-2726
(504) 524-5431 FAX (504) 592-3252 (800) 375-5431
WWW.DORSEYCO.COM
STEVEN F. RUEB
VICE-PRESIDENT
DIRECT (504) 592-3240
SRUEB@DORSEYCO.COM
November 14th 2012 Ronal W. Smith Corporate Secretary Municipal Securities Rulemaking Board 1900 Duke Street Alexandria, VA 22314 Re: MSRB Notice 2012‐50 (October 2, 2012) Request for Comment on Proposed Rule Amendments and Interpretive Notice on Retail Order Periods. Dorsey & Company appreciates the opportunity to comment on the Municipal Securities Rulemaking Board’s (“MSRB”) Request for Comment on Revised Draft Rule Amendments and a Revised Draft Interpretive Notice on Retail Order Periods. (the “Revised Draft Proposal”) Dorsey commends the MSRB on its effort to protect and enhance the fairness of all market participants in the Municipal new issue process, especially in addressing an important constituent who cannot collectively represent themselves, the Retail Investor. Dorsey strongly agrees with the MSRB draft “Primary Offering Practice” that defines the order period as “solely from customers that meet the issuer definition of “retail”” and further we recommend an order period of sufficient duration to properly and thoroughly give opportunity for retail investors to participate. Specifically, the syndicate should specify a time reasonably sensible in length and should include pricing structure (maturities up and down the ladder, coupon and price) which would allow retail investors time to consider the alternatives, such that a “book” of orders can be assembled. We have experienced situations where order periods are too short resulting in insufficient time to allow retail investors time to react and effectively eliminate their participation. Furthermore, retail investor demand is significantly enhanced with bonds priced at, or near par value. To maximize investor demand, we advocate a bifurcated coupon structure which allows both retail and institutional interest to be captured. We also believe that the most effective “retail” definition would give the highest priority to “in‐state” retail investors (local investors) whose participation bring additional advantages to the issuers as described below and should be afforded the highest priority, as has often been the case in many new issue underwriting around the country. Additionally, we do support a maximum order quantity of $500,000 which helps to insure a wider distribution amongst retail investors and therefore a bigger favorable audience of investors’ awareness of the issuer. 121 of 153
Dorsey’s experience is that with these requisite features, many individual retail investors prefer participation in new issues over indirect ownership. Individual retail investors have reiterated time and again their preference as to specific issuers, select maturities and a desire to avoid the added cost associated with indirect ownership. We have further experienced strong retail demand at less price (yield) sensitivity given a sufficient marketing period with bonds priced at or near par value which resulted in lower borrowing cost to the issuer, an outcome that should be welcomed by the issuer and underwriters alike. Competition and transparency always add to market integrity. Retail Investor = more competition Increased demand=lower interest costs to issuer Order period pricing, duration and structure = greater transparency & access While the MSRB has indicated that it will leave the definition of “retail” to the determination of an issuer, Dorsey strongly advocates that a standard retail investor definition be established giving highest priority to “local retail”. As an example Louisiana ACT 444 has provided definition; [“Louisiana retail purchase” shall mean a direct purchase by an individual resident of Louisiana or a company domiciled in Louisiana or a trust department, investment advisor, or money manager acting on behalf of a resident of Louisiana or a company domiciled in Louisiana and shall not include a purchase by an institutional customer.] Furthermore, allowing individual taxpayer’s preferential access to the local public debt their tax dollars support would seem fundamentally sound. In our 50 years of underwriting local municipal issues around our state, we have seen that in‐state retail investors (who are very often influential members of the community) will step forward to purchase their local communities’ debt when they have an opportunity to participate as a purchaser and where the underwriter has time to inform them and provide access to the bonds. These local constituents who have a stake in their communities become informed supporters of the financing priorities of their communities, and then tend to be significantly more loyal investors than institutions during times of financial stress. Finally, access would provide market protection from large, influential institutions who may attempt to dominate access to new issues in the public market in order to advance their agenda. Dorsey supports and reaffirms the required disclosure of zip codes for retail priority as adequate and ought to be adopted as industry standard practice. We thank you for the opportunity to address our concerns regarding the Revised Draft Proposal. If you have any questions or would like any additional information, please contact me at 504 524‐5431. Regards, Steven Rueb Vice President Dorsey & Company, Inc. 122 of 153
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1901 Pennsylvania Ave., N.W., Suite 303
Washington, D.C. 20006
Voice: 202.449.6342/ 800.322.4237
Fax: 202.659.0190
E-mail: david.cohen@fpanet.org
Web site: www.fpanet.org
November 2, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Re:
MSRB Notice 2012-50
Request for Comment on Revised Draft Rule Amendments and a Revised Draft
Interpretative Notice on Retail Order Periods
Dear Mr. Smith:
The Financial Planning Association® (FPA®)1 welcomes the opportunity to comment on
the Municipal Securities Rulemaking Board’s proposed Revised Draft Rule Amendments and a
Revised Draft Interpretative Notice on Retail Order Periods. We appreciate your continuing
efforts to improve the offering process for investors and we support, in principle, the proposed
changes.
Since all of our members agree to act as a fiduciary when advising their clients or
customers, we support efforts to increase the dissemination of timely and accurate information
to all parties in securities transactions. Timely dissemination of accurate information allows
investors to make the informed decisions that are necessary for a well-functioning market.
We support the proposed changes that would require that the terms set by the issuer be
followed by the brokers, dealers, and municipal securities dealers acting as underwriters. While
we also agree that there is no reason for the MSRB to create a uniform definition of “retail” we
understand the appeal of a uniform base definition that could be modified by the issuer. If the
MSRB were to choose this option we would oppose any effort to extend the definition to include
mutual funds. Extending the definition as some institutional investors responsible for managing
mutual funds have suggested will make it impossible for individual investors to have access to
these offerings during any retail order period. We strongly believe that any such definition of
retail investor should include the retail clients of registered investment adviser firms, and the
retail clients of brokerage firms alike. We believe that the distinction between a mutual fund
1
The Financial Planning Association is the largest membership organization for personal financial planning experts in
the U.S. and includes professionals from all backgrounds and business models. Most are affiliated with investment
adviser firms registered with the Securities and Exchange Commission or state securities administrators, and
approximately 58 percent hold insurance licenses. FPA is incorporated in Washington, D.C., where it maintains an
advocacy office, with headquarters in Denver, Colorado.
DENVER · W ASHINGTON, D.C.
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buying an offering for itself and an investment adviser representative of a registered investment
adviser or a registered representative of a broker-dealer buying for a retail client’s separate
account is real and meaningful.
We support the requirement that the underwriter promptly furnish information it receives
from the senior syndicate manager to any other broker, dealer or municipal securities dealer.
We also support expanding the requirement that the senior syndicate manager promptly provide
all information it receives to include providing that information to any selling group members.
Finally, we support efforts to create a meaningful retail offering period. There must be
sufficient time given for an individual investor to make an informed decision. This requires that
there be enough time for an investment adviser representative or registered representative to to
have read the offering documents and review the anticipated pricing, contact their client or
customer to present the opportunity and solicit indications of interest, gather and report them to
the syndicate, and critically, a realistic amount of time for them to notify their client or customer
of final pricing and secure or confirm permission from the client or customer to place their order
to purchase the investment.
Thank you for the opportunity to comment on this rule proposal. If you have any
comments or questions regarding this comment letter, please do not hesitate to contact the
undersigned.
Sincerely
/s/ David A. Cohen
David A. Cohen
Assistant Director-Government Relations
.
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Government Finance Officers Association
1301 Pennsylvania Avenue, NW Suite 309
Washington, D.C. 20004
202.393.8020 fax: 202.393.0780
November 5, 2012
Mr. Ronald W. Smith
Corporate Secretary, Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
RE:
MSRB Notice 2012-50 - Request for Comment on Revised Draft Rule Amendments and
Revised Draft Interpretive Notice on Retail Order Periods
Dear Mr. Smith:
Thank you for the opportunity to comment once again on the important topic of the rules and interpretive
notice related to retail order periods. This is a topic of interest to many of our members, and we support
MSRB’s efforts to ensure that the terms and conditions set by the issuer in a retail order period are
executed correctly by bond dealers.
Members of the GFOA’s Governmental Debt Management Committee assisted with the development of
these comments, which are similar to those we presented in April of this year. Rules related to retail
orders, we believe, help implement the MSRB’s mission to protect issuers of municipal securities. This
can be done by putting into place clear rules for dealers to follow, and more importantly to allow for
enforcement measures to occur when rules are violated. There are a couple of areas where we believe the
rulemaking could be enhanced, in order to better protect issuers as outlined below.
Record Keeping Requirements
GFOA continues to support new record keeping requirements on syndicate managers related to retail
order periods.
Definition and Execution of Retail Order
We appreciate the MSRB’s discussion and decision allowing the issuer to be the party responsible for
establishing terms and conditions and order priority provisions. An issuer should provide this information
to the dealer in writing, who will then distribute the information accordingly to syndicate managers.
While the revised draft rule seeks to assist issuers by possibly undertaking educational efforts related to
defining a retail order, we think that the MSRB can do more to help issuers in this regard. Specifically,
some issuers would benefit from a baseline definition of retail order within the Rule that they can rely
upon or alter to meet their specific needs, when they may not have the experience to develop their own
definition of a retail order. This is especially true when an issuer chooses not to engage the services of a
financial advisor. Setting a baseline definition, but not requiring its use, would go a long way to give
issuers a starting point, so that they do not have to completely rely on dealers, who do not have a fiduciary
duty to the issuer. While the GFOA recommends that issuers do engage the services of a financial
advisor, many issuers may not do so, and having the MSRB establish a safety net (so to speak) by
developing a definition of a retail order would be very helpful. The MSRB’s plan to develop educational
materials is certainly positive, but we believe the Board should go a step further and develop – but not
require the definition be used or have it implicated as a de facto standard – this definition within the rule.
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Fair Dealing
We continue to support the proposed interpretation of Rule G-17, in order to ensure that dealers act fairly
with issuers and their dealer colleagues.
Fair Pricing
Many governments chose to hold a retail order period for a variety of reasons including the desire to
allow their citizens to have the opportunity to purchase bonds first hand, rather than in the secondary
market – where the bonds are likely to be more expensive. It is therefore important that the MSRB should
not engage in any rulemaking that would discourage governments from holding a retail order period. As
we commented in April, changes to Rule G-30, related to fair pricing practices, continue to be of concern
to our members. Fair pricing standards are important in this arena as in all others, yet the proposed
changes could interfere with current retail order practices.
The revised interpretative release correctly notes that there are various reasons why bonds may price
differently during a retail order period than they do during an institutional order period. This is especially
the case as the Notice states that pricing differences may result from different market conditions. The
proposed changes suggest that the underwriter may be failing its fair pricing duty to retail customers
unless the pricing differences may result from different market conditions, particularly in the case of retail
orders submitted one or two days prior to the institutional order period. However, it is unclear – and we
would argue it would always be fluid – as to the interpretation of how different market conditions may
affect the pricing of the two types of sales, and what would constitute a significant difference between the
price paid by the retail investor and the price paid by the institutional investor. We again ask the MSRB
to recognize that there are various reasons why there may be pricing differences between the retail order
period and the sale to institutional investors, that the reason for some price differences may not be in the
control of the issuer or the underwriter, and that the application of fair pricing rules need to be carefully
considered and exercised in this area. We therefore urge the MSRB to expressly state that price
differences between the retail order period day and the later institutional order day do not per se create an
assumption of lack of fair dealing, for the reasons stated in the letter.
Forms
We again support changes to the applicable forms as noted in the proposed changes to Rule G-32.
Other Request for Comments
We noted earlier that we especially concerned in cases where an issuer does not engage the services of a
financial advisor, yet holds a retail order period and receives advise from a dealer whose judgment could
be clouded due to their dual duties to deal fairly with both the issuer and the investor. It is because of
this, that we encourage the MSRB to develop a baseline definition of retail order. Additionally, we think
that the dealer should disclose any interests or motivations related to the assistance it provides the issuer
when developing criteria for the retail order period. If the dealer does not believe that the criteria used by
the issuer for a retail order period is not appropriate for the issuer, it should voice this opinion.
The MSRB could also seek to establish some type of protocol or system so that the issuer can have some
comfort that the retail orders – which could number in the hundreds –meet the preset criteria set by the
issuer. In some cases it would be difficult for the issuer to be able to review such a large volume of
orders, and therefore some type of system or procedures could be imposed on dealers to ensure
compliance.
Thank you again for the opportunity to comment on MSRB Notice 2012-50.
Sincerely,
Susan Gaffney
Director, Federal Liaison Center
2
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
November 2, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Suite 600
Alexandria, VA 22314
Re:
MSRB Notice 2012-50
Dear Mr. Smith:
The National Association of Independent Public Finance Advisors (“NAIPFA”) appreciates the
opportunity to provide comments on Municipal Securities Rulemaking Board (“MSRB”) Notice
2012-50 (the “Notice”) and, in particular, the proposed amendments to MSRB Rule G-11.
NAIPFA’s comments are provided in the spirit that the rule being established will ensure that
issuers can receive and rely upon unbiased advice and that issuers remain in control of their debt
issuance process.
In the MSRB’s initial release, MSRB Notice 2012-13, the MSRB expressed two primary
concerns in developing its proposed amendments to Rules G-8, G-11, and G-32, which are: (1)
adherence, or lack thereof, by underwriters to issuer retail order period specifications and
requests; and (2) broker, dealer, and municipal securities dealer utilization of the retail order
period to achieve yields that may be “below market”.
To address these concerns, the MSRB has proposed defining the terms “retail order period”,
“going away order”, and “selling group”, and specifying additional underwriter obligations when
a retail order period is conducted. The MSRB, however, has declined to define the term “retail”.
NAIPFA is concerned that these amendments will cause issuers to place an undue amount of
trust and reliance on advice provided by their underwriter. In turn, issuers will likely perceive
this advice to have been provided with their best interest in mind. In such a situation,
underwriters will cause issuers to design a retail order period that best meets the underwriter’s
business model and selling ability since underwriters cannot be expected to provide advice to an
1
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
issuer that would be detrimental to the underwriter’s interests. As a result, issuers’ interests will
not be served, and neither will the interests of retail customers1, or the public interest.
In this regard, please consider the following comments in response to the Notice:
Dealer Advice to Issuers Regarding Definition of “Retail”
By providing advice to issuers with respect to the definition of retail, underwriters risk being
deemed Municipal Advisors and creating an unmanageable conflict of interest. Further, and by
way of background, not all underwriting firms have the business model or structure to conduct an
effective bona fide retail order period.2
As such, allowing underwriters to give advice to issuers regarding the retail order period,
including advice with respect to the definition of the term “retail”, will effectively grant
underwriters the ability to gain an undue level of influence over the issuer’s decision making in a
manner which may ultimately have a negative impact on the issuer’s True Interest Cost. This is
of particular concern when the underwriter lacks the capacity, capability or desire to conduct an
effective bona fide retail order period consistent with the issuer’s stated desires. NAIPFA
believes that this illustrates what the MSRB has described as an unmanageable conflict of
interest and which will cause an underwriter to be deemed a Municipal Advisor for purposes of
MSRB Rules G-17 and G-23.
Further, a broker-dealer cannot be permitted to provide advice regarding the definition of the
term “retail” within its capacity as an underwriter in the absence of a standard definition of the
term retail, even where the broker-dealer believes that the issuer’s definition is not appropriate to
serve the issuer’s interest. This is because even though a particular underwriter may find the
issuer’s definition to be inappropriate, this analysis is subjective; what may seem inappropriate to
one underwriter with little retail capacity, capability or desire, may be appropriate to an
underwriter with a great deal of desire and capability. As a result, a less capable/willing
underwriter may unduly influence the issuer and negatively impact the issuer’s financial position
solely to improve its own remuneration as well as that of its investors who may or may not be
retail customers.
1
For purposes of this comment letter, the term “retail customer” is synonymous with the MSRB Glossary definition
of the term “retail customer”, which is defined as: “Any customer other than an institutional customer. Retail
customers generally include individual investors and small organizations.”
2
For purposes of this comment letter, the term “bona fide retail order period” is to mean an order period whereby
securities are offered solely to retail customers.
2
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
Rather than allowing underwriters to provide advice to issuers regarding the definition of
“retail”, potentially creating an unmanageable conflict of interest violative of MSRB Rules G-17
and G-23, the MSRB should instead require underwriters to disclose their lack of capacity to the
issuer at the time the underwriter first becomes aware of the issuer’s retail order period desires.
Once acknowledged in writing by the issuer, the underwriter may then engage in an arm’s length
negotiation with the issuer to determine a retail order period consistent with the underwriter’s
retail capabilities and the issuer’s desires. However, such arm’s length negotiations will only be
possible if a standard definition of “retail” is put forth and underwriters are required to accurately
disclose their ability, or lack thereof, to comply with the issuer’s desires relating thereto.
Proposed Amendments’ Effect on Issuers, Retail Customers, the Public Interest, and
Market Fairness and Efficiency
The MSRB’s proposal would have a negative impact on retail customers and a negative impact
on municipal issuers. With respect to retail customers, NAIPFA anticipates that in the short-term
they are likely to experience a bump in yields; however, over the long-term NAIPFA is
concerned that retail customers will likely be squeezed out of the municipal market place.
The challenge for the MSRB is developing a regulatory regime that balances the competing
interests of a wide group of market participants. As such, NAIPFA believes that the MSRB’s
best chance of successfully balancing the equities of municipal entities, investors, broker-dealers,
Municipal Advisors, and the public interest is to focus on making the market as fair and efficient
as possible. Such a focus will cause: (i) retail customers to have a fair shake, while maintaining
the integrity of the retail order period; (ii) municipal entities to not be saddled with arbitrary
interest rate increases; and (iii) the public interest to be protected.
With respect to the development of a standard definition of the term “retail”, but for one
commenter, each and every commenter, including broker-dealers, Municipal Advisors,
investment advisors, mutual funds, and municipal issuer representatives, agreed that in order to
encourage a fair and efficient market, the MSRB must develop a standard definition of retail. 3
Developing a standard definition of the term “retail” would:
3
The following commenters recommended that the MSRB develop of a uniform definition of “retail”: (i) Wells
Fargo & Company; (ii) Edward Jones & Co.; (iii) Vanguard; (iv) GFOA; (v) CFA Institute; (vi) Full Life Financial;
(vii) Investment Company Institute; (viii) NAIPFA; and (ix) Richard Li. The following commenter recommended
that the MSRB not develop a uniform definition of retail: SIFMA.
3
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
•
Give issuers a basic understanding of the term retail and would provide a foundation with
which to deviate from. This would place issuers in a position to rely less on their
underwriter for advice and would place the issuer in a stronger bargaining position with
respect to their underwriter.
•
Help underwriters avoid the imposition of fiduciary responsibilities, that is, so long as the
underwriter continued to maintain its arm’s length relationship with the issuer.
•
Benefit retail customers by reducing the likelihood that issuers will be unduly influenced
by their underwriter to conduct a retail order designed to benefit the underwriter’s “retail”
clientele.
•
Ensure that whatever taxes are being paid by the public to finance municipal debt, are
being paid in the most efficient manner possible by diminishing the likelihood that
municipal issuers will be influenced by their underwriter to undertake a course of conduct
which is inconsistent with the issuer’s interests.
NAIPFA is concerned that through the MSRB’s warnings regarding the rates obtained by retail
customers and the potential liability facing underwriters, underwriters will increase yields paid to
retail customers rather than lower the yields paid to institutional investors. This will have a
positive impact on retail customers, at least in the short-term. However, it will have an equally
negative impact on municipal issuers and tax payers who will bear the burden of paying higher
interest costs. In addition, any financial advantages currently benefiting issuers and the public as
a result of conducting retail order periods will likely be diminished as retail and institutional
investors’ yields will track towards equilibrium.
Ironically, however, over the long-term these amendments will likely force retail customers out
of the municipal securities marketplace.4 As discussed above, there are underwriters who simply
do not have the capability or desire to conduct an effective bona fide retail order period. As a
result, these underwriters are likely to utilize a very expansive definition of “retail”, which may
include certain entities that may not be thought of as retail customers. As retail investors are
squeezed out of the market, yields achieved during the retail order period will increase, resulting
in a corollary increase in issuer interest payments.
4
Letter from Keith Newcomb, Full Life Financial LLC, MSRB Notice 2012-13 (April 13, 2012).
4
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
The proposed amendments do not serve the public interest and will instead negatively impact it.
The proposed amendments will increase issuer interest payments as a result of the higher yields
achieved during the retail order period. NAIPFA believes that, unfortunately, the most likely
effects of these proposed amendments are to be tax increases and cuts to public services, while
bona fide retail customers will see their influence in the municipal market diminish.
Therefore, to effectively balance the competing interests of the various market participants with
respect to the retail order period, the MSRB should look solely to improving fairness and
efficiency in the market, which in this case can be achieved through the development of a
standard definition of the term “retail”.
Communication of Information to Syndicate and Selling Group Members
The MSRB received comments recommending that it consider setting a specific minimum length
of time for the duration of the retail order period.
The Notice states that the MSRB has declined to set any fixed time frames because this could
give rise to issues in the context of offerings that must come to market quickly. The MSRB has
also stated that a one-size-fits-all approach to the length of the retail order period may not
address the specific needs and objectives of an issuer.
However, NAIFPA acknowledges that developing a fixed time frame(s) may present challenges.
However, NAIPFA finds the MSRB’s rationale for not developing a fixed time frame troubling.
As part of the rationale for developing these amendments, the MSRB expressed concerns that
issuers’ desires with respect to retail order periods were not being fulfilled. Conversely, the
MSRB’s rationale for not developing a fixed time frame for retail order periods appears to
acknowledge that in certain instances an underwriter may appropriately disregard the issuer’s
desires for a retail order period based upon the need to “come to market quickly”.
Ultimately, the issuer retains control over the issuance process, regardless of the existence of a
fixed retail order period time frame. As such, if the market were rapidly shifting and the
determination is made to go to market more quickly, the issuer retains the ability to waive either
a particular facet(s) of the retail order period (e.g., length of time) or the entire period. NAIPFA
believes that any amendments should reflect the issuer’s control over the issuance process and
should require underwriters who wish to deviate from the issuers desires to obtain a written
acknowledgment from the issuer prior to doing so that must reflect the specific deviations that
will occur as well as a quantifiable basis for such a deviation(s).
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National Association of Independent
Public Finance Advisors
P.O. Box 304
Montgomery, Illinois 60538.0304
630.896.1292 • 209.633.6265 Fax
www.naipfa.com
NAIPFA believes that the establishment of a minimum timeframe with regard to the duration of
the retail order period will have a net positive impact on the market as it ensures that issuers will
be afforded an order period of at least a certain duration. As such, NAIPFA requests that the
MSRB consider establishing such a timeframe in order to create a more fair and efficient market
that will allow the MSRB to effectively balance the competing interests of the various market
participants that will be impacted by these amendments.
Sincerely,
Jeanine Rodgers Caruso, CIPFA
President, National Association of Independent Public Finance Advisors
cc:
The Honorable Mary L. Schapiro, Chairman
The Honorable Elisse B. Walter, Commissioner
The Honorable Luis A. Aguilar, Commissioner
The Honorable Troy A. Paredes, Commissioner
The Honorable Daniel M. Gallagher, Commissioner
Liban Jama, Counsel to Commissioner Aguilar
Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
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October 15, 2012
Mr. Ronald W. Smith, Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Re:
MSRB Notice 2012-50 Revised Draft Interpretive Notice on Retail
Dear Mr. Smith,
In regard to the revised proposal of draft amendments to Rules G-11, G-8 and G-32 and the
application of MSRB Rules G-17 and G-30 to retail order periods, the revisions provide some
necessary clarifications without diminishing the important principal that an issuer’s decisions
concerning retail and retail order priorities must be respected by the underwriter.
Provided below, are additional matters the MSRB sought comments on.
Dealers Disclosures and Assistance
In the absence of a financial advisor representing the issuer, the dealer is the most knowledgeable
about the market and investors interests and requirements.
Since the dealer is hired by the dealer to execute the best sale possible of the bonds, a dealer
would be abducting their responsibility if they allowed an incorrect assumption by the issuer of
what constitutes “retail” to structure the financing.
In terms of the disclosures by a dealer for using a particular definition of retail and the
underlying motives, it should hopefully become a more common understanding by issuers that
the dealer provides service to both the issuer and investor and they represent in a transaction their
own interest.
There have already been rules issued by the MSRB about disclosing the role of the dealer in a
transaction. As long as this is disclosed to the issuer at the start, then any definition of retail
should be viewed by the issuer with that understanding.
The MSRB should however realize that while there may be agreements on the definition of retail
in a transaction, pricing of the transaction by the dealer can effectively negate the intent of the
issuer’s definition of retail.
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Protection of Issuers and Retail Investors; Dealer’s Burden
Any increase in the disclosure of the terms and definitions used in a transaction clearly benefit
the issuer and investor. The proposed rules do not negatively impact the municipal securities
market or its efficient operation. Also, they do not place any additional burden on a dealer, but
those they are required to perform if they want to insure the proper sale of a bond issue.
As an active issuer, the Corporation already requires much of the same information contained in
the proposed Section (K) of Rule G-11 in order for it to judge the performance of the senior
manager and co-managers.
While there may be claims of the proposed rules creating some additional burdens, it is far
outweighed by the benefit to an open, fair and efficient municipal marketplace.
Thank you for the opportunity to provide comments.
Sincerely,
Robert E. Donovan
Executive Director
RIHEBC
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November 2, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Alexandria, VA 22314
Re:
MSRB Notice 2012-50 (October 2, 2012): Request for Comment on
Revised Draft Rule Amendments and a Revised Draft Interpretive
Notice on Retail Order Periods
Dear Mr. Smith:
The Securities Industry and Financial Markets Association (“SIFMA”)1
appreciates the opportunity to comment on the Municipal Securities Rulemaking
Board’s (“MSRB”) Request for Comment on Revised Draft Rule Amendments and
Revised Draft Interpretive Notice on Retail Order Periods (the “Proposal”)2 which
proposes amendments to MSRB Rules G-11 (on primary offering practices), G-8 (on
books and records), and G-32 (on disclosures in connection with primary offerings), as
well as an interpretive notice concerning the application of MSRB Rules G-17 and G-30
to retail order periods. This letter expands up upon comments previously submitted3 by
SIFMA to the MSRB in response to MSRB Notice 2012-13 (March 6, 2012).
1
SIFMA brings together the shared interests of hundreds of securities firms, banks and asset
managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital
formation, job creation and economic growth, while building trust and confidence in the financial markets.
SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global
Financial Markets Association (GFMA).
2
MSRB Notice 2012-50 (October 2, 2012).
3
See Letter from David Cohen, SIFMA, to Ronald Smith, MSRB, dated April 13, 2012,
available at http://www.sifma.org/issues/item.aspx?id=8589938319
New York | Washington
120 Broadway, 35th Floor | New York, NY 10271-0080 | P: 212.313.1200 | F: 212.313.1301
www.sifma.org | www.investedinamerica.org
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 2 of 6
I.
Executive Summary
SIFMA supports the historical practice of municipal securities issuers in
negotiated underwritings designating, if they so desire, that a specific amount or specific
maturities of new bonds be placed with retail investors, resulting in bonds being offered
and sold to retail investors prior to institutional investors. Our members also support the
MSRB’s view that it is the responsibility of a municipal securities issuer to define what
it means by “retail investor”. After all it is the issuers who are responsible for selecting
and determining the composition of negotiated underwriting syndicates and determining
the distribution channels through which they would like to have their bonds distributed.
While SIFMA believes that the concerns raised in Notices 2012-13 and 2012-50 have
now been addressed through a clarifying regulatory notice4, which should ease the
enforcement of existing MSRB rules and fair dealing obligations, we support the
proposed rule changes to the extent they would protect dealers that follow issuers’
instructions, clarify issuer terms and conditions, and require timely notice of retail order
period terms and conditions (and any amendments thereto) to all syndicate and selling
group members.
II.
August 2, 2012 Interpretive Notice
SIFMA’s members believe that the conduct the MSRB is trying to regulate
through the Proposal, in furtherance of its efforts to protect issuers and investors, is more
than sufficiently covered in its August 2, 2012 Interpretive Notice regarding the
application of MSRB Rule G-17 to underwriters of municipal securities. Regarding
retail order periods the Notice states:
Rule G-17 requires an underwriter that has agreed to underwrite a transaction with a retail order
period to, in fact, honor such agreement. A dealer that wishes to allocate securities in a manner
that is inconsistent with an issuer’s requirements must not do so without the issuer’s consent. In
addition, Rule G-17 requires an underwriter that has agreed to underwrite a transaction with a
retail order period to take reasonable measures to ensure that retail clients are bona fide. An
underwriter that knowingly accepts an order that has been framed as a retail order when it is not
(e.g., a number of small orders placed by an institutional investor that would otherwise not
qualify as a retail customer) would violate Rule G-17 if its actions are inconsistent with the
issuer’s expectations regarding retail orders. In addition, a dealer that places an order that is
framed as a qualifying retail order but in fact represents an order that does not meet the
qualification requirements to be treated as a retail order (e.g., an order by a retail dealer without
4
See MSRB Interpretive Notice Concerning the Application of MSRB Rule G-17 to
Underwriters of Municipal Securities (August 2, 2012) (the “August 2, 2012 Notice”), available at
http://msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G-17.aspx?tab=2#_D54ECAF72CE6-4ED9-BB05-3C9B32FB7BF4
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 3 of 6
“going away” orders from retail customers, when such orders are not within the issuer’s
definition of “retail”) violates its Rule G-17 duty of fair dealing. The MSRB will continue to
review activities relating to retail order periods to ensure that they are conducted in a fair and
orderly manner consistent with the intent of the issuer and the MSRB’s investor protection
mandate.
The Proposal does not expand upon these explicit fair dealing obligations, nor does it
propose to cover any activity regarding a retail order period that does not fall within the
“four corners” of this Notice.
III.
Proposed Rule Changes
a. Rule G-11: Primary Offering Practices
i. Definitions
SIFMA generally supports the proposed changes to Rule G-11, including
defining “retail order period” as “an order period during which orders will be solicited
solely from customers that meet the issuer’s definition of ‘retail’”5 and that definition is
reduced to writing prior to the commencement of the retail order period. Our members
support an issuer’s prerogative to determine whether there should be a retail order period
and to define, on a transaction by transaction basis, what types of purchasers qualify for
placing an order, as well as to set the economics for each priority of orders6.
With respect to the proposed definition of a “going away order”, see our
discussion in Section III. a. ii., below, proposing an alternative construct obviating the
need to define a “going away order”.
As for the proposed definition of “selling group”, we are concerned that this
definition continues to be overly broad. SIFMA suggests that the definition of “selling
5
MSRB Rule D-9 defines customer as “Except as otherwise specifically provided by rule of the
Board, the term "customer" shall mean any person other than a broker, dealer, or municipal securities
dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new
issue of its securities.”
6
Some of our members are concerned that leaving the definitions of the different types of
accounts that might together constitute “retail” entirely up to each issuer would make it difficult to comply
with the MSRB’s requirements to ensure that only qualifying orders are placed and to maintain adequate
records. Examples of different types of accounts include but are not limited to: individual, joint, trust,
custodial, conservator, estate, family office, partnership, corporate, other non-corporate entities, and tax
advantaged accounts.
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 4 of 6
group” be limited to those dealers that sign a selling group agreement7, or substantially
similar written agreement, for a particular new issue of municipal securities.
We are also supportive of the proposed amendments to Rule G-11(f), requiring
the syndicate manager, prior to the first offer of any securities by a syndicate, to furnish
in writing to the other members of the syndicate and to members of the selling group, if
any, a written statement of all terms and conditions required by the issuer – including
any retail order requirements. This would necessarily include the issuer’s definition of
“retail”, any limitations, as well as the time parameters for which the retail order period
will be conducted. The dissemination and receipt of timely information about the retail
order period is a critical underpinning of fair dealing. This is especially important to
dealers contacting customers with non-discretionary accounts who might be interested in
purchasing some of the new issue, which process necessarily requires more time to
submitting an order than for a discretionary account.
ii. Representations and Disclosures
With regard to proposed Rule G-11(l) Retail Order Period Representations and
Required Disclosures, we suggest an alternative construct for this part of the proposed
Rule regarding representations to be made (i), (ii), and (iii); and disclosures (iv) and (v).
As for representations, we believe that the Rule should be constructed in a way so that
by virtue of submitting an order during the retail order period, the submitting dealer
would represent that: 1) such order meets the issuer’s definition of “retail”; 2) such order
is a bona fide8customer order; and 3) such order is not duplicative. In addition, such
representation could be made in either the Master Agreement Among Underwriters9 or
the Selling Group Agreement and therefore is not necessary for these representations to
be made separately for each order submitted during a retail order period.
We appreciate the MSRB including in the Proposal a safe harbor for senior
managers that rely on representations made by co-managers that such co-manager (or
7
See SIFMA’s Model Selling Group Agreement available at
http://www.sifma.org/services/standard-forms-and-documentation/municipal-securities-markets/.
8
SIFMA’s members continue to believe that what qualifies as a “going away order”, however
defined, is confusing and that the policy goal of this requirement is to make clear that only the submission
of bona fide customer orders are permissible. Accordingly, we suggest deleting proposed Rule G-11
(a)(xii).
9
See SIFMA’s Master Agreement Among Underwriters (2002), available at
http://www.sifma.org/services/standard-forms-and-documentation/municipal-securities-markets/
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 5 of 6
selling group member) has made to them pursuant to proposed Rule G-11(l) to satisfy
their own fair dealing obligation to the issuer.
b. Rule G-32: Disclosures in Connection with Primary Offerings
SIFMA supports the proposed amendments to Rule G-32 which would require a
managing underwriter to report to the MSRB’s Electronic Municipal Market Access
(EMMA) system whether a primary offering of securities included a retail order period
and when the retail order period was conducted. We suggest that the information
furnished to EMMA include the date(s) and time of the retail order period.
IV.
Proposed Interpretive Notice
SIMFA supports limiting the interpretive notice accompanying the proposed rule
changes to retail order pricing and notes most of this language is not new: it is
consolidated from prior Notices10. With respect to the final paragraph of the proposed
interpretive notice, we suggest the following revisions to include additional examples of
characteristics that may result in different prices, as well as clarifying language that such
specific examples are not exhaustive of characteristics that may result in different prices
(additions underlined, deletions struck through):
Some of Among the different characteristics of securities that may fairly result in different prices
are, but not limited to, different coupons (e.g., institutional customers may prefer to purchase
bonds at a premium), as well as different call features or sinking fund redemptions. As a general
rule, the MSRB does not consider that there is a Rule G-30 violation simply if the yield to call is
the same for both securities sold to retail and institutional customers, even though the yields to
maturity on the securities are different. In addition, some legitimate pricing differences may
result from different market conditions particularly in the case of retail order submissions one or
two days prior to the institutional order period, as well as an intra-day shift in interest rates.
V.
Conclusion
SIFMA sincerely appreciates this opportunity to comment upon the Proposal.
Subject to the proposed refinements suggested above, SIFMA supports the proposed rule
10
See Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other
Retail Investors in Municipal Securities (July 14, 2009), available at http://www.msrb.org/Rules-andInterpretations/MSRB-Rules/General/Rule-G-17.aspx?tab=2#_DA15225F-907A-43CC-A31926F55EFFDECE. See also supra Note 4, the August 2, 2012 Notice.
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Mr. Ronald W. Smith
Municipal Securities Rulemaking Board
Page 6 of 6
changes as they would protect dealers that follow issuers’ instructions, clarify issuer
terms and conditions, and require timely notice of retail order period terms and
conditions to all syndicate and selling group members.
Please do not hesitate to contact me with any questions at (212) 313-1265.
Sincerely yours,
David L. Cohen
Managing Director
Associate General Counsel
cc:
Municipal Securities Rulemaking Board
Lynnette Kelly, Executive Director
Ernesto Lanza, Deputy Executive Director
Gary L. Goldsholle, General Counsel
Kathleen Miles, Associate General Counsel
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P.O. Box 2600
Valley Forge, PA 19482-2600
610-669-6000
November 2, 2012
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Suite 600
Alexandria, VA 22314
Re:
Request for Comment on Revised Draft Rule Amendments and
Revised Draft Interpretive Notice on Retail Order Periods (MSRB Notice 2012-50)
Dear Mr. Smith:
Vanguard1 appreciates the opportunity to submit comments to the Municipal Securities Rulemaking
Board (“MSRB”) on its Request for Comment on Revised Draft Rule Amendments and Revised Draft
Interpretive Notice on Retail Order Periods (the “Revised Draft Proposal”). Vanguard previously
submitted a comment letter2 in response to the MSRB’s initial draft proposal on retail order periods (the
“Initial Draft Proposal”).
As one of the mutual fund industry’s largest holders of municipal securities 3, Vanguard is a strong
advocate of proposals that will improve investor access to primary offerings of municipal securities on the
best available terms. For the same reasons we stated in our comment letter to the Initial Draft Proposal,
however, we believe that if the Revised Draft Proposal is adopted as proposed, many bona fide retail
investors that invest in municipal securities through mutual funds will continue to be shut out of this
market. As a result, we wish to reiterate our previous comments and request that the MSRB either: (i)
consider a combined order period, which we believe would provide all retail investors with sufficient
access to municipal securities and provide issuers with more accurate price discovery, or (ii) if the retail
order period is retained, that the MSRB adopt a uniform definition of “retail” that accurately reflects the
universe of retail participants in primary offerings of municipal securities.
A Combined Order Period Would Provide Retail Investors with Access to Municipal Securities and
Provide Issuers with More Accurate Price Discovery
Vanguard continues to believe that the ideal solution to the issues raised in both the Initial Draft and
Revised Draft Proposals would be to permit all interested investors to submit orders for primary market
As of September 30, 2012, Vanguard offered more than 170 U.S. mutual funds with approximately $1.9 trillion in
U.S. assets under management, serving approximately 9 million shareholders.
2
See Letter from Christopher Alwine, dated April 13, 2012, regarding the MSRB’s Request for Comment on
Proposed Rule Amendments and Interpretive Notice on Retail Order Periods (MSRB Notice 2012-13).
3
As of September 30, 2012, Vanguard municipal bond and money market funds held approximately $135 billion in
municipal assets.
1
Mr. Ronald W. Smith
November 2, 2012
Page 2 of 3
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municipal securities during a combined order period. This approach would fulfill the MSRB’s mandate
to protect investors and issuers by providing market access to the millions of retail shareholders of
municipal mutual funds while assisting issuers in determining the best price for their securities. We note
that the MSRB did not address these comments in the Revised Draft Proposal.
Retail mutual funds – which generally have very low shareholder investment minimums 4 – generally may
not submit orders during the retail order period, while “professional retail” separately-managed accounts
(SMAs) – which may invest on behalf of individuals but carry higher investment minimums – typically
may participate. This result contravenes the intent of the retail order period, which purports to allow
retail investors to purchase bonds before institutional investors. In fact, data from the Federal Reserve
indicates that, since the first quarter of 2011, household ownership of individual municipal bonds has
steadily declined. Over the same period, non-money market municipal mutual funds have experienced
steady asset growth, indicating that retail investors may be seeking to benefit from the low investment
minimums, diversification, and professional management offered by municipal mutual funds.5 This trend
reinforces the notion that a combined order period would provide crucial access to the primary market for
millions of bona fide retail investors.
Further, municipal bond issues are often allocated to individual retail investors and SMAs prior to the
submission of “institutional” orders by mutual funds and others, effectively limiting the access of millions
of underlying retail investors to the primary market. In addition to precluding retail investors from
accessing this market, this results in issuers failing to see the total demand – retail and institutional – for
their securities, which may result in incomplete price discovery. A combined order period would permit
issuers to evaluate the total demand for the bond issue and price bonds accordingly.
If the Retail Order Period is Retained, the MSRB Should Adopt a Uniform Definition of Retail
That Accurately Reflects Retail Participants in Primary Offerings of Municipal Securities
In the Initial Draft Proposal, the MSRB noted concerns expressed by market participants that issuers were
defining “retail” for purposes of retail order periods inconsistently. In response to these concerns, the
MSRB specifically requested comment on whether it should adopt a uniform definition of “retail” for
purposes of its retail order period rules. The MSRB received fourteen comment letters on the Initial Draft
Proposal, with over half of those submitting comments, including Vanguard, advocating in favor of a
standardized definition of “retail.”6
In the Revised Draft Proposal, however, the MSRB has indicated that it will leave the determination of
the definition of “retail” for the purposes of a particular offering exclusively to the determination of an
issuer. Vanguard believes that this result will only serve to perpetuate the concerns regarding the
definition of “retail” that the MSRB itself noted when it specifically asked for comment on this issue. If
left to the exclusive determination of issuers, it is likely that the definition of retail will continue to vary
from offering to offering.
Vanguard continues to believe and would like to reiterate that in order to avoid investor confusion and
inconsistencies across the primary market, a standardized definition of “retail” should be adopted by the
MSRB. This standard definition of “retail” should, at a minimum, give equal priority to the orders of
“true” individual retail investors, such as those that invest via mutual funds with low investment
For example, the Vanguard municipal bond and money market funds require an investment minimum of $3,000.
See Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, September
20, 2012, at 99.
6
See, e.g., Comment Letters of Vanguard, Wells Fargo Advisors, and the Investment Company Institute.
4
5
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Mr. Ronald W. Smith
November 2, 2012
Page 3 of 3
minimums, as orders submitted by “professional retail” purchasers, such as SMAs. If the MSRB does not
adopt a standard definition of retail, and instead leaves this determination to the exclusive discretion of
the issuer, then we would again suggest that offerings of bonds during the retail order period be limited to
par coupon bonds. If the issuer truly chooses to favor the retail investor order, the par coupon structure is
the preferred structure for these investors. Issuing par coupon bonds during the retail order period may
also discourage flipping, as institutional investors would be generally less interested in these bonds.
*
*
*
*
*
Vanguard believes that these proposed alternatives – a combined order period or a standard definition of
“retail” – are consistent with the MSRB’s mandate, as expanded under the Dodd-Frank Act, to protect
both municipal issuers and investors. We commend the MSRB for seeking to address concerns regarding
the retail order period and appreciate the opportunity to comment on the Revised Draft Proposal. If you
have any questions about Vanguard’s comments or would like any additional information, please contact
me at 610-669-6345.
Sincerely,
/s/ Christopher Alwine
Christopher Alwine
Head of Municipal Bond Group
Vanguard
cc:
Lynette Kelly, Executive Director
Municipal Securities Rulemaking Board
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Modifications to Form G-32
EXHIBIT 3
Check here if a retail order period was conducted.
Begin Date:
Begin Time:
End Date:
End Time:
+ Click here to add an additional retail order period
Does not reflect final user interface design.
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EXHIBIT 5
Rule G-11: Primary Offering Practices
(a) Definitions. For purposes of this rule, the following terms have the following meanings:
(i) - (vi) No change.
(vii) [**Reserved for future use**] The term “retail order period” means an order period
during which solely going away orders will be solicited solely from customers that meet the
issuer’s designated eligibility criteria.
(viii) - (xi) No change.
(xii) The term “going away order” means an order for which a customer is already
conditionally committed.
(xiii) The term “selling group” means, for purposes of this rule, a group of brokers,
dealers, or municipal securities dealers formed for the purpose of assisting in the distribution of a
new issue of municipal securities for the issuer other than members of the syndicate.
(b) - (e) No change.
(f) Communications Relating to Issuer [Syndicate] Requirements, Priority Provisions and Order
Period. Prior to the first offer of any securities by a syndicate, the senior syndicate manager
shall furnish in writing to the other members of the syndicate and to members of the selling
group, if any, (i) a written statement of all terms and conditions required by the issuer, (ii) a
written statement of all of the issuer’s retail order period requirements, if any, (iii) the priority
provisions, (iv[iii]) the procedure, if any, by which such priority provisions may be changed,
([i]v) if the senior syndicate manager or managers are to be permitted on a case-by-case basis to
allocate securities in a manner other than in accordance with the priority provisions, the fact that
they are to be permitted to do so, [and] (vi) if there is to be an order period, whether orders may
be confirmed prior to the end of the order period, and (vii) all pricing information. Any change in
the priority provisions or pricing information shall be promptly furnished in writing by the senior
syndicate manager to the other members of the syndicate and the selling group, if any. Syndicate
and selling group members shall promptly furnish in writing the information described in this
section to others, upon request. If the senior syndicate manager, rather than the issuer, prepares
the written statement of all terms and conditions required by the issuer, such statement shall be
provided to the issuer for its approval. An underwriter shall promptly furnish in writing to any
other broker, dealer, or municipal securities dealer with which such underwriter has an
arrangement to market municipal securities that includes the issuer’s new issue, all of the
information provided to it from the senior syndicate manager as required by this section.
(g) No change.
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(h) Disclosure of Syndicate Expenses and Other Information. At or before the final settlement of
a syndicate account, the senior syndicate manager shall furnish to the other members of the
syndicate:
(i) an itemized statement setting forth the nature and amounts of all actual expenses
incurred on behalf of the syndicate. Notwithstanding the foregoing, any such statement may
include an item for miscellaneous expenses, provided that the amount shown under such item is
not disproportionately large in relation to other items of expense shown on the statement and
includes only minor items of expense which cannot be easily categorized elsewhere in the
statement. The amount of d[D]iscretionary fees for clearance costs, if any, to be imposed by a
syndicate manager and the amount of management fees, if any, shall be disclosed to syndicate
members prior to the submission of a bid, in the case of a competitive sale, or prior to the
execution of a purchase contract with the issuer, in the case of a negotiated sale. For purposes of
this section, the term "management fees" shall include, in addition to amounts categorized as
management fees by the syndicate manager, any amount to be realized by a syndicate manager,
and not shared with the other members of the syndicate, which is attributable to the difference in
price to be paid to an issuer for the purchase of a new issue of municipal securities and the price
at which such securities are to be delivered by the syndicate manager to the members of the
syndicate; and
(ii) No change.
(i) - (j) No change.
(k) Retail Order Period Representations and Required Disclosures. From the end of the retail
order period but no later than the Time of Formal Award (as defined in Rule G34(a)(ii)(C)(1)(a)), each broker, dealer, or municipal securities dealer that submits an order
during a retail order period to the senior syndicate manager or sole underwriter, as applicable,
shall provide, in writing, which may be electronic (including, but not limited to, an electronic
order entry system), the following information relating to each order submitted during a retail
order period:
(i) whether the order is from a customer that meets the issuer’s eligibility criteria for
participation in the retail order period;
(ii) whether the order is a going away order;
(iii) whether the broker, dealer, or municipal securities dealer has received more than one
order from such retail customer for a security for which the same CUSIP number has been
assigned;
(iv) any identifying information required by the issuer, or the senior syndicate manager
on the issuer’s behalf, in connection with such retail order (but not including customer names or
social security numbers); and
(v) the par amount of the order.
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The senior syndicate manager may rely on the information furnished by each broker, dealer, or
municipal securities dealer that provided the information required by (i)-(v) unless the senior
syndicate manager knows, or has reason to know, that the information is not true, accurate or
complete.
*****
Rule G-8: Books and Records to be Made by Brokers, Dealers and Municipal Securities
Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically
indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep
current the following books and records, to the extent applicable to the business of such broker,
dealer or municipal securities dealer:
(i) - (vii) No change.
(viii) Records Concerning Primary Offerings.
(A) For each primary offering for which a syndicate has been formed for the
purchase of municipal securities, records shall be maintained by the syndicate manager
showing the description and aggregate par value of the securities; the name and
percentage of participation of each member of the syndicate; the terms and conditions
governing the formation and operation of the syndicate; a statement of all terms and
conditions required by the issuer (including, [whether there was a retail order period and
the issuer's definition of "retail,"] those of any retail order period, if applicable); all orders
received for the purchase of the securities from the syndicate and selling group, if any;
the information required to be submitted pursuant to Rule G-11(k); all pricing
information required to be distributed pursuant to Rule G-11(f); all allotments of
securities and the price at which sold; those instances in which the syndicate manager
allocated securities in a manner other than in accordance with the priority provisions,
including those instances in which the syndicate manager accorded equal or greater
priority over other orders to orders by syndicate members for their own accounts or their
respective related accounts; and the specific reasons for doing so; the date and amount of
any good faith deposit made to the issuer; the date of settlement with the issuer; the date
of closing of the account; and a reconciliation of profits and expenses of the account.
(B) For each primary offering for which a syndicate has not been formed for the
purchase of municipal securities, records shall be maintained by the sole underwriter
showing the description and aggregate par value of the securities; all terms and
conditions required by the issuer (including, [whether there was a retail order period and
the issuer’s definition of “retail,”] those of any retail order period, if applicable); all
orders received for the purchase of the securities from the underwriter; the information
required to be submitted pursuant to Rule G-11(k); all allotments of securities and the
price at which sold; those instances in which the underwriter accorded equal or greater
priority over other orders to orders for its own account or its related accounts, and the
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specific reasons for doing so; the date and amount of any good faith deposit made to the
issuer; and the date of settlement with the issuer.
(ix) - (xxvi) No change.
(b) - (g) No change.
*****
Rule G-32: Disclosures in Connection with Primary Offerings
(a) Customer Disclosure Requirements.
(i) No broker, dealer or municipal securities dealer shall sell, whether as [principal or
agent,] an underwriter or otherwise, any offered municipal securities to a customer unless such
broker, dealer or municipal securities dealer delivers to the customer by no later than the
settlement of the transaction a copy of the official statement or, if an official statement is not
being prepared, a written notice to that effect together with a copy of a preliminary official
statement, if any.
(ii) - (v) No change.
(b) Underwriter Submissions to EMMA.
(i) - (iv) No change.
(v) Underwriting Syndicate. In the event a syndicate or similar account has been formed
for the underwriting of a primary offering, the managing underwriter shall take the actions
required under the provisions of this rule [and comply with the recordkeeping requirements of
Rule G-8(a)(xiii)(B)].
(vi) Procedures for Submitting Documents and Form G-32 Information.
(A) - (B) No change.
(C) The underwriter in any primary offering of municipal securities for which a
document or information is required to be submitted to EMMA under this section (b)
shall submit such information in a timely and accurate manner as follows:
(1) Form G-32 information submissions pursuant to paragraph (b)(i)(A)
hereof with respect to a primary offering shall be:
(a) initiated on or prior to the date of first execution with the
submission of CUSIP numbers (except if such CUSIP numbers are not
required under Rule G-34 and have not been assigned), initial offering
prices or yields (including prices or yields for maturities designated as not
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reoffered), if applicable, the expected closing date, and whether the issuer
or other obligated persons have agreed to undertake to provide continuing
disclosure information as contemplated by Securities Exchange Act Rule
15c2-12, and if there was a retail order period (as defined in Rule G11(a)(vii)) as part of a primary offering, information indicating whether a
retail order period was conducted, each date and each time (beginning and
end) it was conducted, together with such other items of information as set
forth in Form G-32 and the EMMA Dataport Manual; and
(b) No change.
Specific items of information required by Form G-32 shall be submitted at
such times and in such manners as set forth in the EMMA Dataport
Manual.
(2) - (4) No change.
(D) No change.
(c) - (e) No change.