Peg Henry April 21, 2011 Deputy General Counsel Municipal Securities Rulemaking Board 1900 Duke Street, Suite 600, Alexandria, VA 22314 Dear Ms. Henry, Thank you for the opportunity to respond to the recent Request For Comment on Draft Rule G‐
43 and the other associated amendments to Rules G‐8, G‐9, and G‐18. Regional Brokers, Inc. supports the efforts of the Municipal Securities Rulemaking Board to establish guidelines within which Municipal Securities Broker’s Brokers may operate their business. However, RBI disagrees with several of the sections that the proposed Rule G‐43 would proscribe. RBI believes that the current rules of the SEC, FINRA, and the MSRB have shown themselves to be sufficient in enabling the SROs to enforce compliance within the market and that this new rule, as written, could cause stress to an industry that is already struggling to find liquidity. RBI also believes that its Written Supervisory Procedures currently fulfill the requirements of the existing rules, and believes that an MSBB operating in the marketplace today would be able to maintain a compliant business operation by following a similar set of WSPs. RBI would be glad to discuss its WSPs with the MSRB, FINRA, the SEC, and other members of the industry. RBI’s business model is very simple; to operate a fairly run auction, seek the best bids in the street that are available for the bonds on that day, and to report those bids to the potential Seller. Once the bid is reported to the Seller, it is RBI’s opinion that it is the Seller’s responsibility to determine whether or not that bond will trade at the price reported. RBI has no research department, does not commit its own capital in the marketplace, and lacks the information required to know whether a bid suits the needs of a seller. Because of these limitations, RBI has agreed with the direction of FINRA that, when a bid on an item is suspected to be mistaken (and therefore not bona fide, as required by MSRB Rule G‐13), it must be left to the Seller of the bonds to determine whether or not a call can be made to the Bidder in order to verify if it is correct. (RBI notes that this direction to allow only the Seller to determine whether a bid is bona fide will become part of Rule G‐43.) Rule G‐43, however, at the same time that it prevents RBI from determining on its own whether a bid is wrong (not bona fide), will change the responsibilities of RBI and make RBI responsible for reporting to the Seller whether or not a bid is “fair and reasonable”; this is in exact juxtaposition to the requirements that FINRA has imposed when it comes to determining if a mistake has been made on a bid. The following are RBI’s comments on how the Rule, if enacted, should be modified in order to bring standardization and compliance to the industry as opposed to creating obstacles to liquidity in an already distressed market. Rule G‐43 Broker’s Brokers Regarding (a)(iv): Must each bid that is put up to a Broker/Dealer be scrutinized as to whether it is a fair and reasonable bid? The Bid Wanted auction is a process by which bids are turned in randomly, based on a suggested time. If a Seller calls the MSBB to inquire whether or not any bids have been received on their item, the MSBB must report the current high bid [Proposed Rule G‐43 (c) (viii)] This will require the MSBB to analyze each bid that is “put up” to the Seller, whether or not it is a bid that the Seller would consider sufficient to trade the bonds. Also, what is the internal supervisory requirement of an MSBB to document that each of these bids has been reported to the Seller as possibly “not fair and reasonable”? The reference in (a) (iv) to “highest bid received” indicates that the consideration of whether or not a bid is fair and reasonable would only be necessary at the point where the Selling Broker/Dealer has received from the MSBB a bid that is sufficient to cause a decision as to whether or not to sell the bonds. Would then, the “fair and reasonable” discussion between the MSBB and the Selling Broker/Dealer occur only once, and only at the point when the bonds are marked for sale? And, is the written document the responsibility only of the Selling Broker/Dealer? Regarding (a) (iv): Will there be an expectation on the part of the MSBB that the customer of the Selling Broker/Dealer will be notified that the price received on their bond may not be fair and reasonable? Is there an expectation that the Selling Broker/Dealer’s customer is ultimately responsible for deciding if a bond will trade? An MSBB provides the best available price for that security on any given day; ultimately it’s the client’s decision to hold or sell. Regarding (c)(i): RBI would suggest that the wording of C (i) should be amended to “A broker’s broker must disseminate a bid wanted widely UNLESS REQUESTED TO OTHERWISE BY THE SELLER.” (An MSBB is often directed by a Broker/Dealer to work bonds “off the wire” or to stay away from a certain other Broker/Dealer, or to only go to a specific number of bidders or specific bidders, due to the Seller’s being in competition with other Broker/Dealers. As written, this section of the rule would prevent the Broker/Dealer from instructing the MSBB to operate the auction in the manner that the B/D would like.) Regarding (c)(ii): RBI would suggest that C (ii) securities of limited interest… must reach dealers with specific knowledge… should be amended to “ should attempt to reach” While an MSBB should attempt to reach dealers with specific knowledge, or the underwriter of the issue, the rule should be written to allow the MSBB the attempt but not the completion. Regarding (c)(iv): RBI believes that this rule is overly restrictive, and that it is common industry practice to comment to Broker/Dealers as to “where they currently stand”, at least as to whether or not their bid is currently being used on a bond. This type of comment is not considered to be preferential. Regarding (c) (vi): RBI suggests that C (vi) should be amended to allow an MSBB to contact a Bidding Broker/Dealer about their bid for various reasons, including a material change in the bid wanted item (such as a change in the amount), or a change in the description that was advertised (such as the addition of a sinking fund or a call). Also that the section stating “ must be limited to discussions about the characteristics…” should also add the ability of the MSBB to inform the Bidding Broker/Dealer whether or not their bid is being used. Broker/Dealers should be troubled by the restriction, as currently written, on comments that they may be given during a bid wanted auction. While RBI does not allow any coaching or backing off of bids, RBI does believe that Broker/Dealers should be able to garner information that they need in order to plan for their capital requirements, etc. Regarding (c)(vii): written instruction… should be changed to allow verbal instruction with both sides documenting the event, not having to exchange written correspondence. (Broker/Dealers should be required to document, internally, each change that they make to a bid entered with an MSBB.) RBI fully supports the documentation of all bids that are verified and changed in an MSBB’s system, but believes that as long as both sides of the trade are documented by the respected MSBB and Broker/Dealer, that this is sufficient. Regarding (d) (i) (F): Must the commission be disclosed at the point of each trade, or is a previously published suggested commission schedule adequate? Regarding Rule G‐8 (xxv) Broker’s Brokers… “shall maintain records of all bids for municipal securities that it receives, together with the time of receipt.” RBI would suggest that this be changed to reflect that all bids are entered into an MSBB’s bid wanted system in a timely manner, and maintained for the applicable period. Regarding possible exemptions for Electronic Brokers from this rule or parts of this rule: The MSRB is requesting comments on the question of whether or not ECNs should be able notify a Bidder of a mistake by means of an automatic transmission based on some sort of “grid”. First, RBI believes that there is not currently any sort of “grid” that is efficient enough to detect improper pricing, especially as regards to thinly traded issues. This inefficiency could have adverse implications on the market place. Second, any bid that is rejected by a pre‐determined “grid” would have the same effect as a voice broker’s changing a bid without informing the Selling Broker/Dealer of the change. All ECNs should be held to the same standards as other MSBBs, and should be made to provide documentation to the Selling Broker/Dealer, just as “voice” MSBBs will be required to do. Third, it would seem possible that a “grid” system could be “gamed” by a Broker/Dealer that constantly submitted high (or low) numbers until the “grid” finally accepted the bid‐ contrary to the desire of the MSRB that Bidders not be given information or help of this type. Keeping in mind that one of the reasons for the implementation of Rule G‐43 is to ensure that there is more scrutiny of bond prices, and an attempt to prevent bonds from being sold at “below market” prices, it would not seem to make sense to allow any platform to escape having to document a trade done at such a level. While there may be ECNs that have absolutely no human interaction with a Seller or Bidder, it would appear that a loophole could develop for trades to be transacted at unfair prices because traders would be aware that certain platforms would not require documentation. If the goal of the MSRB is to enlist the MSBB community in the effort to prevent bonds from trading at unfair prices, it would appear that trades done through ECNs, without notice to the seller that the bid might not be “fair and reasonable”, would be missing this important part of the safety net. And, for those MSBBs that advertise themselves to be ECNs but incorporate voice brokers as well, RBI sees little difference between its own business model and those of the so‐called “alternative trading systems”; both combine internet bidding platforms as well as voice brokers that are involved in conversations with the Seller and Bidder. In summary, RBI believes that the MSRB should focus on establishing industry standards as opposed to a new rule. RBI also firmly believes that the MSRB could achieve it’s goal of providing fairness in the market place and doing what is best for the retail customer within the boundaries of those rules that are already currently in effect, without further hurting the liquidity of the market. As always, RBI would be available to discuss its ideas further with the Board. Joseph A. Hemphill III H. Deane Armstrong CEO CCO