November 2, 2011
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street
Alexandria, VA 22314
Re: MSRB Notice 2011-50: Request for Comment on MSRB Draft
Rule G-43 and Associated Amendments to Rules G-8, G-9, and G18, and Draft Interpretive Notice on the Obligations of Dealers
that use the Services of Broker’s Brokers
Dear Mr. Smith:
The Securities Industry and Financial Markets Association (“SIFMA”)1
appreciates this opportunity to respond to Notice 2011-502 (the “Notice”) issued by
the Municipal Securities Rulemaking Board (the “MSRB”) in which the MSRB
requests comment on draft Rule G-43, and associated amendments to Rules G-8, G9, and G-18 (the “Proposed Rule”), and the Draft Notice to Dealers that use the
Services of Broker’s Brokers (the “Draft Notice”) regarding municipal securities
broker’s brokers (“MSBBs”). The concepts embodied in the Proposed Rule were
first proposed by the MSRB in September 20103 (the “Proposed Guidance”), and
were later re-proposed in February 20114 (the “Initial Rule Proposal”).
SIFMA supports effective and efficient regulation of the municipal
securities markets that helps to aid market liquidity in a manner consistent with
customer protection. We are gratified that the Proposed Rule has been significantly
1
The Securities Industry and Financial Markets Association (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). For more information, visit www.sifma.org.
2
MSRB Notice 2011-50 (Sept. 8, 2011).
3
MSRB Notice 2010-35 (Sept. 9, 2010).
4
MSRB Notice 2011-18 (Feb. 24, 2011).
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
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 2 of 6
modified from the Initial Rule Proposal. The changes reflected in the Proposed
Rule address many of the most problematic aspects of the Proposed Guidance and
Initial Rule Proposal, striking a much better balance between the important goals of
customer protection and market liquidity. That being said, we believe that there are
certain aspects of the Proposed Rule that the MSRB should consider revising, in
order to ensure that the final rule adopted will be as useful and effective as possible.
I.
Revisions to the Proposed Rule
The following comments set forth our principal proposed revisions to the
Proposed Rule. In order to provide context to our suggestions below, we note that
the municipal securities secondary market is characterized by an extremely large
number of issuers, many of whom issue securities on an infrequent basis. On any
given day, a retail dealer active in the market can have between 2,000 to 5,000
items to potentially bid upon. It will therefore review, and may eventually bid upon
hundreds of these items. That same retail dealer also could have a number of items
out for bid, to which it will need to devote additional attention. Therefore, we
believe that any impediments to trading in what is already a labor-intensive market
must be carefully reviewed to ensure that the burdens to liquidity are justified.
A.
G-43(a)
We request that paragraph (a)(iii) be both modified and clarified. First, we
believe that the reference to offerings should be removed, because in the conduct of
offerings, there is not, in practice, a presumption that the MSBB is working for the
seller of bonds. While we do not have specific statistics on this point, our informal
fact gathering leads us to believe that MSBBs represent buyers in more than half of
the offerings in which they participate. We agree that the presumption is accurate
in the case of bid-wanteds.
We also request that the requirement to obtain prior written authorization
from buyers and sellers should be clarified to reflect that the authorization is not
intended to be required on a transaction-by-transaction basis, and that it may be
included in a customer agreement or similar terms-of-use agreement for electronic
systems. If a transaction-by-transaction scheme was envisioned, we strongly urge
the MSRB to reconsider such an approach, as obtaining written consents in this
manner will prove to be unworkable in practice.
B.
G-43(b)
Paragraph G-43(b) should apply only to bid-wanteds, and not to offerings.
In a bid-wanted, the MSBB is conducting an auction, and the bidders and sellers
expect the MSBB to play the role of auctioneer. In that context, and subject to our
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 3 of 6
specific comments set forth below, G-43(b) may, as a practical matter, be applied to
bid-wanteds. In offerings, on the other hand, the MSBB is working on behalf of a
party that has indicated the price it is seeking, and the MSBB is expected to try to
broker a transaction to achieve that price. For example, if a seller offers an item
with a price of 95 and the MSBB contacts one purchaser who is willing to pay 95,
that transaction would be executed.
In the transaction described above, the MSBB would not have complied
with subparagraphs (i), (ii) and (v). The MSBB would have complied with
subparagraphs (iii), (iv), (vii) and (viii), but as we argue below, these are really antifraud provisions with which all transactions must comply, to the extent applicable
to the specific facts of a transaction. The remaining subparagraphs apply by their
terms only to bid-wanteds. We do not see the benefit of including offerings in a
rule, even one designed as a safe harbor, when even in their simplest form they do
not comply with the rule’s terms.
We noted above that paragraph (b) is intended to act as a safe harbor,5 so
that a failure to adhere to it would not, in and of itself, constitute a rule violation.
However, paragraph (b) includes both safe harbor provisions and anti-fraud
provisions for which the failure to adhere likely would constitute violations of Rule
G-17. In the interest of clarity, we request that subparagraphs (iii), (iv), (vii) and
(viii) be removed from paragraph (b), and either be published as interpretations
under Rule G-17, or moved to paragraph (c) of Rule G-43.
Subparagraph (iv) prohibits MSBBs from giving preferential treatment to
bidders during a bid-wanted, and we agree that such practices should be prohibited.
However, we reiterate our belief that letting a bidder know whether their bid is
being used should not be included within this prohibition. We believe that the
benefit to market liquidity of letting bidders know whether they are being used –
without any additional information, and on the condition that they may not change
their bid – allows bidders to more effectively deploy their capital throughout the
trading day, to the benefit of all market participants. We do not believe that this
information should be restricted until the time for receiving bids has passed.
We agree that bid-wanteds must have identifiable deadlines, as set forth in
subparagraph (v), but we do not believe that the deadline for “around time” bidwanteds should be based on when the bids are “put up” to the seller. Rather, the
deadline for “around time” bid-wanteds should be defined to occur at the time the
seller informs the MSBB that the bonds should be sold to the high bidder (when the
5
Notice, p. 2.
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 4 of 6
bonds are “marked for sale”), or when the seller informs the MSBB that the bonds
will not be sold in that bid-wanted (that the bonds “will not trade”). If neither of
these events occurs in an “around time” bid-wanted, it should be deemed to
terminate at the end of the trading day. While this appears to be a subtle distinction,
it has significant practical effect on not only industry members but on the market as
a whole. In a bid-wanted that has been set with an “around time” deadline, the
seller should have the ability to decide to leave an auction open to see if additional
bids will be received. We also do not believe that using “marked for sale” as the
cutoff time disadvantages bidders, as they are aware at the start of the bid-wanted
that there is not a specific time when the auction will close. The rule as currently
drafted would ultimately have a detrimental effect on liquidity, especially for retail
customers of the broker-dealer.
C.
G-43(c)
We do not believe that subparagraph (i)(F) should apply to offerings. Imposing
these restrictions on communications between the parties involved in an offering is
antithetical to the very purpose of an offering. For example, if a seller puts an item
out for an offering at a price of 98, a bidder contacted by the MSBB may respond
that it is willing to buy at 97.50. Both the buyer and seller fully expect that the
MSBB will convey this information to the seller, so that the seller can decide to sell
or not, or to counter at a price between 97.50 and 98. This communication process
would continue until the parties determine if they can reach a mutually satisfactory
price. Thus, prohibitions on price communication cannot work in offerings.
We also believe that subparagraph (i)(F) should be revised to clarify at what point a
transaction has been completed. We believe that the appropriate point in time for
the purposes of this provision should be the time at which both the purchase and
sale sides of the transaction have been executed. It is at this point that the MSBB
would know with certainty that a sale has been completed.
D.
G-8(a)
Subparagraph (xxv)(A) requires that all bids to purchase and offers to sell
municipal securities, and their time of receipt, be recorded and maintained. While
we agree these requirements are reasonable for bid-wanteds, we do not believe that
they are workable or necessary for offerings. As just described, a negotiated
offering could have multiple iterations of communications between buyer and
seller. And many of these negotiations may not even lead to an executed
transaction. Applying this requirement will impose a significant recordkeeping
burden on MSBBs, and we respectfully submit that it is not warranted. If this
subparagraph is intended to apply only to the initial time an offering is given to an
MSBB, we ask that this point be clarified.
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 5 of 6
Subparagraph (xxv)(F) requires that, for all changed offers in an offering,
MSBBs make a record of “the full name of the person at the seller firm that
authorized the change; the reason given for the change in offering price; and the full
name of the person at the [MSBB] at those direction the change was made[.]”
These requirements are analogous to the subparagraph (xxv)(E), which apply to
changed bids in bid-wanteds. For the reasons described in the first paragraph of the
immediately preceding section, applying these requirements to offerings is
impractical. Trying to document in writing the back-and-forth process of an
offering, with many potential changes to the offering price in each offering, is
unworkable. In addition, many offerings may be made with the price tied to an
index, which can result in constantly changing prices.
II.
Draft Notice to Dealers that use the Services of Broker’s Brokers
We believe that the Draft Notice will, in concept, be helpful to the dealer
community, although we are aware that some dealers may have concerns about
some of its specific aspects. Because of this, although we are only commenting on
one specific aspect of the Draft Notice, we request that this not be taken as an
endorsement of the remainder of its content.
We believe that the restrictions on the control of bid-wanteds by the selling
dealers are unreasonably restrictive. As currently drafted, this section of the Draft
Notice gives the impression that the only acceptable reasons for restricting the
dissemination of bid-wanteds are for credit, legal or regulatory concerns. We
believe that there are other acceptable business and trading concerns – separate and
apart from competitive concerns – that would support such restrictions. For
example, a selling dealer may instruct an MSBB to exclude a certain dealer from a
bid-wanted because if the second dealer was included, it would be able to ascertain
the identity of the customer selling the bonds, to the detriment of the customer. We
believe that an appropriate standard would be to allow selling dealers discretion to
control this aspect of bid-wanted so long as they could demonstrate that any
restrictions imposed were intended to benefit the selling customer, and were not
intended to solely benefit the selling dealer.
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 6 of 6
*
*
*
We wish to thank the MSRB and its staff for their work in developing the
Proposed Rule and for this opportunity to comment on it. We would be pleased to
discuss any of these comments in greater detail, or to provide any other assistance
that would help facilitate your review of the Proposed Rule. If you have any
questions, please do not hesitate to contact the undersigned at (212) 313-1130.
Sincerely yours,
Leslie M. Norwood
Managing Director and
Associate General Counsel
cc:
Municipal Securities Rulemaking Board
Lynnette Kelly Hotchkiss, Executive Director
Peg Henry, General Counsel, Market Regulation
Ernesto A. Lanza, Deputy Executive Director and Chief Legal Officer