March 5, 2012:


What is a broker’s broker?  What duties do broker’s brokers owe to one another?  How, if at all, does this relationship affect the secondary market for retail customers?  What are some of the things that go on behind the scene in the secondary municipal bond markets?   

To begin to answer these questions, please review the following release from the Municipal Securities Rulemaking Board (MSRB) wherein the MSRB today requested approval from the Securities and Exchange Commission (SEC) to put in place a new rule that would establish specific obligations for firms that provide secondary market liquidity for retail investors in municipal securities. The proposed regulations would also increase the duties of dealers that use these firms, called broker’s brokers.

“Most retail investors are unaware of what broker’s brokers are” said MSRB Executive Director Lynnette Kelly. “But broker’s brokers play a critical role in providing secondary market liquidity for retail investors by acting as intermediaries between selling and bidding dealers. Our proposed rules would ensure investors receive fair prices when buying and selling municipal securities.”

In recent years, a number of regulatory enforcement actions against broker’s brokers made it clear to the MSRB that in some cases the actions of broker’s brokers were resulting in unfair pricing of municipal securities transactions conducted on behalf of retail investors. Today’s rule proposal would affirm a broker’s brokers’ duty to make a reasonable effort to obtain a fair and reasonable price for municipal securities. It would also remind selling and bidding dealers of their fair pricing obligations.

Broker’s brokers engage in transactions called “bid-wanteds,” an important source of secondary market liquidity for municipal securities retail investors. The new rule would remind selling dealers that the high bid received in a bid-wanted is not necessarily a fair and reasonable price. Selling dealers would be cautioned against “screening” other dealers from their bid-wanteds or offering for anti-competitive reasons and against assuming customers need to liquidate their securities immediately.

Today’s proposed rules also would prohibit bidding dealers from submitting “throw-away” bids and from attempting to profit by “picking off” other dealers at off-market prices.

For dealers that use the services of broker’s brokers, the new rules would address concerns that their failure to price securities fairly could negate efforts of a broker’s broker to achieve fair pricing.

The MSRB’s proposed rule includes policies and procedures requirements designed to result in a fair process consistent with the special role of the broker’s broker as an intermediary between two dealers. Broker’s brokers would be required to disclose these policies and procedures to sellers and bidders, in writing, and to post its policies and procedures in a prominent position on its website. Related amendments to existing MSRB rules would expressly require broker’s brokers to retain records for six years of all of the bids for municipal securities they receive.

The MSRB is requesting that the new rules become effective six months after approval by the SEC.