Wolfe & Hurst Bond Brokers, Inc.
30 Montgomery Street
Jersey City, New Jersey 07302
November 3, 2011
Via electronic mail
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, Virginia 22314
Re:
MSRB Notice 2011-50, Request for Comment on Revised Draft
Rule G-43 on Broker’s Brokers and Associated Amendments
Dear Mr. Smith:
Please accept this letter as the response of Wolfe & Hurst Bond Brokers Inc. (hereinafter
“WHBBI”) to the Municipal Securities Rulemaking Board’s (hereinafter “MSRB”) Notice 201150: Request for Comment on Revised Draft Rule G-43 on Broker’s Brokers, dated September 8,
2011. WHBBI also supports the comment letter submitted by the Securities Industry and
Financial Markets Association (hereinafter “SIFMA”). While WHBBI appreciates the
modifications made by the MSRB in re-drafting Rule G-43, there remain provisions of serious
concern.
I.
Rule G-43
Safe Harbor
Specifically, WHBBI is most disconcerted by Revised Draft Rule G-43(b). In this
provision, the MSRB has developed a so-called “safe harbor” for broker’s brokers. Although not
directly required by the rule, this safe harbor effectively constitutes a mandate as to the way bidwanteds and offerings are to be conducted. Rule G-43(b) directs the use of “predetermined
parameters” to satisfy the fair pricing requirement of a broker’s broker. Essentially, through the
use of predetermined parameters, the provision requires that broker’s brokers make a
determination as to fair market value of a given bond. This is evidenced more clearly in Rule G43(d)(vii) which indicates that the predetermined parameters are meant to identify most bids that
may not represent the fair market value of securities. As noted in previous comment letters by
WHBBI and various other broker’s brokers and broker-dealers, it is not feasible for a broker’s
broker to determinate fair market value nor is this the role of a broker’s broker.
Broker’s brokers should not be in any way responsible for making a determination as to
fair market value. The comments to Revised Draft Rule G-43(b) provide that, “the
predetermined parameters could be based on yield curves, pricing services, recent trades reported
to the MSRB’s RTRS System, or bids submitted to a broker’s broker in previous bid-wanteds or
offerings.” Utilizing historical data, such as bids previously submitted, however, is not reflective
of the fair market value of a security in the present. Moreover, many of the bonds which are the
subject of bid-wanteds are infrequently traded, making the RTRS System an ineffective tool for
determining the price of a security. Additionally, many bonds are not rated (unlike equities),
which eliminates the option of utilizing or relying on rating services.
As previously stated by WHBBI and several others through comment letters to Draft
Rule G-43, it is the broker-dealer who should be responsible for determining whether a bid
obtained by a broker’s broker represents the fair market value for that security at a given time. It
is the client of the broker’s broker who has the tools and resources with which to determine fair
and reasonable pricing for any given security. Moreover, the broker-dealer client does not
expect a broker’s broker to make such a determination. Indeed, imposing this obligation on a
broker’s broker completely alters the nature of the business. Since the clients of a broker’s
broker, broker-dealers and dealer portions of banks, are in a better position to make a
determination as to fair market value, this responsibility should be solely imposed on them.
Deadlines
WHBBI strongly disagrees with Revised Draft Rule G-43(b)(v) which mandates that
there be “…a deadline for acceptance of bids, after which the broker’s broker must not accept
bids or changes to bids.” As written, this mandate applies to both “sharp” and “around time”
deadlines. Such a requirement restricts the broker’s broker from getting the best bid for its
client, which will ultimately have a negative impact on the smaller retail clients and the market
as a whole. Liquidity in the municipal bond market is not constant and the new rule should be
flexible to accommodate the way the bond market actually functions.
This rule should be modified in the case of “around time” bid-wanteds only. Specifically,
where a selling dealer requests an “around time” deadline, the broker’s broker should be
permitted to accept and change bids up until the point that the trade is marked for sale.
Prohibiting modification at the point where the high bid is “put up” to the seller is restricting
liquidity in the market. This rule change would be detrimental to the industry.
Client
WHBBI also find section G-43(a)(iii) problematic. This provision presumes that the
client of a broker’s broker is only the seller and imposes inefficient requirements for covering
both the rule and the reality. A broker’s broker is a dual-agent for the seller and the buyer of
securities. It is not practical to require a broker’s broker to get written consent from both the
buyer and seller in advance of the bid-wanted or offering. This issue could be more easily
resolved through a more thorough definition of a broker’s broker which includes the dual-nature
of their business.
If not modified as set forth above, this provision should at the very least clarify that the
client’s of a broker’s broker could consent to a dual-agency relationship either through an initial
service agreement or through Terms of Use on the firm’s website.
Encouraging Bids
Rule G-43(b)(iii) restricts a broker’s broker from “…encourage[ing] bids that do not
represent the fair market value of municipal securities that are the subject of a bid-wanted or
offering.” Again, a broker’s broker cannot be required to determine what represents the fair
market value of a security. With that being said, the broker’s broker does not “encourage” or
coerce any bid. It is not the role of a broker’s broker in a bid-wanted situation to suggest a price,
but rather to simply obtain all bids and provide the client with the highest bid received. It is the
responsibility of the broker-dealer to determine whether the bid reflects fair market value and
whether or not to continue with the transaction.
Preferential Information
Revised Draft Rule G-43(b)(iv) prohibits broker’s brokers from giving preferential
information to bidders. WHBBI understand that preferential information cannot be given to
bidders, except in the case of errors. However, restricting the broker’s broker from advising a
bidder when their low bid is clearly not being used has a greater negative impact on the market.
Under the proposed rule, if a broker’s broker is requested to advise an inquiring low bidder
where they stand only after the deadline for bids has passed, this severely limits that brokerdealer’s ability to use capital elsewhere. This significantly restricts liquidity in the market and
will ultimately have a negative impact on the small retail customers the MSRB is purporting to
protect. Thus, the public policy should favor allowing broker’s brokers to notify an inquiring
client whether their bid is being used prior to the deadline of a bid-wanted. A broker’s broker
should be permitted to advise a broker-dealer if their bid is not being used prior to the
completion of a bid-wanted or offering.
Erroneous Bids
As noted above, WHBBI objects to the use of predetermined parameters for bid-wanteds.
An erroneous bid submission in a bid-wanted is generally quite obvious to the broker’s broker
conducting the “auction.” These mistaken bids most often occur as a result of human error and
should not be permitted to reach the marketplace as they do not reflect an accurate bid.
Setting aside the predetermined parameters for a bid-wanted, WHBBI maintains the
position that requiring a broker’s broker to obtain written permission from the seller prior to
contacting the owner of an erroneous bid may result in a distortion of the market. This
requirement may force the broker’s broker to accept the clearly erroneous bid if the seller denies
consent which in turn may result in an extreme price to the ultimate customer. This price will
also be published and therefore impact the market for similar securities. If the broker’s broker is
forced to accept a clearly erroneous bid, it is practicing unfair trading and creating dishonesty in
the market. Simultaneously, the broker’s broker would be damaging important relationships
with the client who submitted the erroneous bid.
Broker’s brokers should be permitted to notify a bidder of a clearly erroneous bid without
the consent of the seller and without providing the same opportunity for modification to all
bidders. This would foster the ultimate goals of a fair, transparent and efficient market.
Definition
WHBBI notes that replacing existing draft rule G-43(d)(iii) with a more detailed
definition of a broker’s broker would have several benefits. Specifically, the definition would
put market participants on notice of the nature and role of a broker’s broker. It would also
disclose the duties and responsibilities of a broker’s broker. Given this type of definition, as
elaborated more fully upon in WHBBI’s April 25, 2011 comment letter, there would be no
reason to include the phrase, “or that holds itself out as a broker’s broker” in Rule G-43.
II.
Rules G-8 and G-9
MSRB Rules G-8 and G-9 should be amended to reflect the changes to Rule G-43 as
discussed above. The recordkeeping requirements as set forth in the revised draft rule are overly
burdensome to broker’s brokers and would cause unnecessary delay and inefficiency in the
market.
Sincerely,
/s/ O. Gene Hurst, Esq.
O. Gene Hurst
President