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Interpretive Guidance - Interpretive Notices
Publication date:
Notice to Dealers That Use the Services of Broker’s Brokers
Rule Number:

Rule G-13, Rule G-43

Introduction 

In view of the important role that broker’s brokers play in the provision of secondary market liquidity for municipal securities owned by retail investors, MSRB Rule G-43 sets forth particular rules to which broker’s brokers are subject.  Rule G-43(a)(i) provides:

Each dealer acting as a "broker’s broker"[1] with respect to the execution of a transaction in municipal securities for or on behalf of another dealer shall make a reasonable effort to obtain a price for the dealer that is fair and reasonable in relation to prevailing market conditions.  The broker’s broker must employ the same care and diligence in doing so as if the transaction were being done for its own account.[2]

In guidance on broker’s brokers issued in 2004,[3] the MSRB noted the role of some broker’s brokers in large intra-day price differentials of infrequently traded municipal securities with credits that were relatively unknown to most market participants, especially in the case of “retail” size blocks of $5,000 to $100,000.  In certain cases, differences between the prices received by the selling customers as a result of a broker’s broker bid-wanted and the prices paid by the ultimate purchasing customers on the same day were 10% or more.  After the securities were purchased from the broker’s broker, they were sold to other dealers in a series of transactions until they eventually were purchased by other customers.  The abnormally large intra-day price differentials were attributed in major part to the price increases found in the inter-dealer market occurring after the broker’s brokers’ trades.

Rule G-43 addresses the role of broker’s brokers, including their role in such a series of transactions.  It is the role of the broker’s broker to conduct a properly run bid-wanted or offering and thereby satisfy its duty to make a reasonable effort to obtain a price for the dealer that is fair and reasonable in relation to prevailing market conditions.  The MSRB believes that a bid-wanted or offering conducted in the manner provided in Rule G-43 will be an important element in the establishment of a fair and reasonable price for municipal securities in the secondary market.  This notice addresses the roles of other transaction participants, specifically the brokers, dealers, and municipal securities dealers (“dealers”) that sell, and bid for, municipal securities in bid-wanteds and offerings conducted by broker’s brokers.  Those selling dealers (“sellers”) and bidding dealers (“bidders”) also have pricing duties under MSRB rules and their failure to satisfy those duties could negate the reasonable efforts of a broker’s broker to achieve fair pricing.

Duties of Bidders

Rule G-13(b)(i) provides that, in general, “no broker, dealer or municipal securities dealer shall distribute or publish, or cause to be distributed or published, any quotation relating to municipal securities, unless the quotation represents a bona fide bid[4] for, or offer of, municipal securities by such broker, dealer or municipal securities dealer.”  Rule G-13(b)(ii) provides that “[n]o broker, dealer or municipal securities dealer shall distribute or publish, or cause to be distributed or published, any quotation relating to municipal securities, unless the price stated in the quotation is based on the best judgment of such broker, dealer or municipal securities dealer of the fair market value of the securities which are the subject of the quotation at the time the quotation is made.”

Dealers that submit bids to broker’s brokers that they believe are below the fair market value of the securities or that submit “throw-away” bids to broker’s brokers do so in violation of Rule G-13.  While bidders are entitled to make a profit, Rule G-13 does not permit them to do so by “picking off” other dealers at off-market prices.  Throw-away bids, by definition, violate Rule G-13, because throw-away bids are arrived at without an analysis by the bidder of the fair market value of the municipal security that is the subject of the bid.  A conclusion by the bidder that a security must be worth “at least that much,” without any knowledge of the security or comparable securities and without any effort to analyze the security’s value is not based on the best judgment of such bidder of the fair market value of the securities within the meaning of Rule G-13(b)(ii).  When the MSRB first proposed Rule G-13, it explained in a February 24, 1977 letter from Frieda Wallison, Executive Director and General Counsel, MSRB, to Lee Pickard, Director, Division of Market Regulation, Securities and Exchange Commission that, among the activities that Rule G-13 was designed to prevent was the placing of a bid that is “pulled out of the air,” which is another way to describe a throw-away bid.

Furthermore, when a dealer’s bid is accepted and a transaction in the securities is executed, that transaction price (and accordingly the bid itself) will be disseminated within the meaning of Rule G-13(a)(i) on the MSRB’s Electronic Municipal Market Access (EMMA®) platform within 15 minutes after the time of trade.  At that point, if the bid is off-market, it will create a misperception in the municipal marketplace of the true fair market value of the security.  The fact that the bid price that wins a bid-wanted or offering may well not represent the true fair market value of the security is evidenced by the trade activity observed by enforcement agencies following such auctions.  Enforcement agencies have informed the MSRB that they continue to observe the same kinds of series of transactions in municipal securities that prompted the MSRB’s 2004 pricing guidance.  They have also informed the MSRB about their observations of other trading patterns that indicate some market participants may misuse the role of the broker’s broker in the provision of secondary market liquidity and may cause retail customers who liquidate their municipal securities by means of broker’s brokers to receive unfair prices.

Duties of Sellers

Dealers that use the services of broker’s brokers to sell municipal securities for their customers also have significant fair pricing duties under Rule G-30 when they act as a principal.  As the MSRB noted in its request for comment on Draft Rule G-43,[5]

the information about the value of municipal securities provided to a selling dealer by a broker’s broker is only one factor that the dealer must take into account in determining a fair and reasonable price for its customer.  In fact, in 2004, the National Association of Securities Dealers (“NASD”) announced that it had fined eight dealers for relying solely on prices obtained in bid-wanteds conducted by broker’s brokers, which the NASD found to be significantly below fair market value.[6]  In that same year, the MSRB said that “particularly when the market value of an issue is not known, a dealer . . . may need to check the results of the bid wanted process against other objective data to fulfill its fair pricing obligations . . . .”

Under those circumstances where broker’s brokers seeks to satisfy their fair pricing obligations in bid-wanteds conducted pursuant to Rule G-43(b), Rule G-43(b)(v) provides for notice by broker’s brokers to sellers when bids in bid-wanteds are below predetermined parameters that are designed to identify possible off-market bids (e.g., those based on yield curves, pricing services, recent trades reported to the MSRB’s RTRS System, or bids received by broker’s brokers in prior bid-wanteds or offerings).  Once a seller has received such notice, it must direct the broker’s broker as to whether to execute the trade at that price.  That notice by the broker’s broker and required action on the part of the seller should put the seller on notice that it must take additional steps to ascertain whether the high bid provided to it by the broker’s broker is, in fact, a fair and reasonable price for the securities.  Rule G-30 mandates that the seller, if acting as a principal, must not buy municipal securities from its customer at a price that is not fair and reasonable (taking any mark-down into account), taking into consideration all relevant factors, including those listed in the rule.

The MSRB notes that Rule G-8(a)(xxv)(E) requires broker’s brokers to keep records when they have provided the seller with the notice described in Rule G-43(b)(v).  Among the required records are the full name of the person at the seller who received the notice, the direction given by the seller firm following the notice, and the full name of the person at the seller who provided that direction.

Rule G-43(b)(i) permits a broker’s broker to limit the audience for a bid-wanted at the selling dealer’s direction, a practice sometimes referred to as “screening” or “filtering,” because the MSRB recognizes that there may be legitimate reasons for this practice.  However, the MSRB notes that such screening may reduce the likelihood that the high bid represents a fair and reasonable price.  Selling dealers should, therefore, be able to demonstrate a reason that is not anti-competitive (e.g., credit, legal, or regulatory concerns), rather than trying to eliminate access by a competitor, for directing broker’s brokers to screen certain bidders from the receipt of bid-wanteds or offerings.  For example, a selling dealer might maintain a list of the firms it would be unwilling to accept as a counterparty and the reasons why.

The MSRB recognizes that there may be circumstances under which customers may need to liquidate their municipal securities quickly and that there are limitations on the ability of a bid-wanted or offering to achieve a price that is comparable to recent trade prices under certain circumstances, particularly in view of its timing and the presence or absence of regular buyers in the marketplace.  Nevertheless, the MSRB urges sellers not to assume that their customers need to liquidate their securities immediately without inquiring as to their customers’ particular circumstances and discussing with their customers the possible improved pricing benefit associated with taking additional time to liquidate the securities.

Rule G-17 requires dealers, in the conduct of their municipal securities activities, to deal fairly with all persons and to not engage in any deceptive, dishonest, or unfair practice.  Broker’s brokers have informed the MSRB that many dealers place bid-wanteds and offerings with broker’s brokers with no intention of selling the securities through the broker’s brokers.  Some have noted that shortly thereafter they see the same securities purchased by dealers for their own accounts at prices that exceed the high bid obtained by the broker’s brokers by only a very small amount.  Other dealers have told the MSRB that they are skeptical of many of the bid-wanteds they see, because they think the bid-wanteds are only being used for price discovery by the selling dealers and are not real.  Accordingly, in many cases, they do not bid.  This use of broker’s brokers solely for price discovery purposes harms the bid-wanted and offering process by reducing bidders, thereby reducing the likelihood that the high bid in a bid-wanted will represent the fair market value of the securities.  Additionally, it causes broker’s brokers to work without reasonable expectation of compensation.  For those reasons, depending upon the facts and circumstances, the use of bid-wanteds solely for price discovery purposes may be an unfair practice within the meaning of Rule G-17.


[1] Rule G-43(d)(iii) defines a “broker’s broker” as “a dealer, or a separately operated and supervised division or unit of a dealer, that principally effects transactions for other dealers or that holds itself out as a broker’s broker.” Certain alternative trading systems are excepted from the definition of “broker’s broker.”
 
[2] A bid-wanted conducted in accordance with Rule G-43(b) will satisfy the pricing obligation of a broker’s broker.
 
 
[4] Rule G-13(b)(iii) provides that:

a quotation shall be deemed to represent a "bona fide bid for, or offer of, municipal securities" if the broker, dealer or municipal securities dealer making the quotation is prepared to purchase or sell the security which is the subject of the quotation at the price stated in the quotation and under such conditions, if any, as are specified at the time the quotation is made.

[5] MSRB Notice 2011-18 (February 24, 2011).

[6] See https://www.finra.org/Newsroom/NewsReleases/2004/P011465.

Notice 2012-63 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers, Municipal Advisors


1.  American Council of Engineering Companies: Letter from David A. Raymond, President and CEO, dated February 7, 2013

2.  Cooperman Assoc.: E-mail from Josh Cooperman dated December 18, 2012

3.  Financial Information Forum: Letter from Arsalan Shahid, Program Director, dated February 19, 2013

4.  Financial Services Institute: Letter from David T. Bellaire, Executive Vice President and General Counsel, dated February 19, 2013

5.  FirstSouthwest: Letter from Hill A. Feinberg, Chairman and Chief Executive Officer, and Michael Bartolotta, Vice Chairman, dated February 19, 2013

6.  Government Finance Officers Association: Letter from Dustin McDonald, Director, Federal Liaison Center, dated March 5, 2013

7.  Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated February 19, 2013

8.  McCarthy, Thomas: E-mail dated December 27, 2012

9.  National Association of Bond Lawyers: Letter from Scott R. Lilienthal, President, dated February 22, 2013

10.  National Federation of Municipal Analysts: Letter from William Oliver, Industry & Media Liaison, dated March 6, 2013

11.  Sanderlin Securities: Letter from Dan Mayfield

12.  Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director, Associate General Counsel, dated February 19, 2013

13.  Sutherland Asbill & Brennan LLP: Letter from Michael Koffler dated February 19, 2013

14.  Vanguard: Letter from John C. Heywood, Principal, Retail Investor Group, dated February 19, 2013

15.  Wells Fargo Advisors, LLC: Letter from Robert J. McCarthy, Director of Regulatory Policy, dated February 19, 2013

16.  Wells Fargo Securities: Letter from Gerald K. Mayfield, Senior Counsel, dated February 19, 2013

Notice 2012-61 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers


1.  Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated February 8, 2013

2.  Government Finance Officers Association: Letter from Dustin McDonald, Director, Federal Liaison Center, dated February 13, 2013

3.  Investment Company Institute: Letter from Dorothy Donohue, Deputy General Counsel - Securities Regulation, dated February 8, 2013

4.  National Association of Independent Public Finance Advisors: Letter from Jeanine Rodgers Caruso, President, dated February 8, 2013

5.  National Federation of Municipal Analysts: Letter from William Oliver, Industry and Media Liaison, dated February 4, 2013

6.  Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director, Associate General Counsel, dated February 8, 2013

Notice 2012-59 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

1. Coalition of Mutual Fund Investors: Letter from Niels Holch, Executive Director, dated December 21, 2012

2. College Savings Foundation: Letter from Roger Michaud, Chairman, dated December 21, 2012

3. College Savings Plans Network: Letter from Hon. Michael L. Fitzgerald, Treasurer of Iowa and Chairman, College Savings Plans Network, dated December 21, 2012

4. College Savings Plans of Maryland: Letter from Joan Marshall, Executive Director, dated December 20, 2012

5. Financial Research Corporation: Letter from Paul Curley, Director of College Savings Research, dated December 17, 2012

6. Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated December 20, 2012

7. Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director and Associate General Counsel, dated December 21, 2012

8. Utah Educational Savings Plan: Letter from Lynne N. Ward, Executive Director, dated December 19, 2012

Notice 2012-58 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

Rule Number:

Rule G-11

1. Municipal Electric Authority of Georgia: Letter from James E. Fuller, Senior Vice President and Chief Financial Officer, dated December 21, 2012

2. National Association of Independent Public Finance Advisors: Letter from Jeanine Rodgers Caruso, President, dated December 21, 2012

Notice 2012-50 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers, Municipal Advisors


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

Notice 2012-43 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

Rule Number:

Rule G-8, Rule G-37


1.  Barclays: Letter from Robert Taylor, Managing Director, Head of Municipal Finance, dated September 17, 2012

2.  California Association of County Treasurers and Tax Collectors: Letter from Wayne Hammar, President, dated September 13, 2012

3.  Center for Competitive Politics: Letter from Allen Dickerson, Legal Director, dated September 17, 2012

4.  Government Financial Strategies Inc.: Letter from Robert W. Doty, General Counsel, dated September 17, 2012

5.  Magis Advisors: Letter from Timothy J. Schaefer, President/Principal Owner, dated September 14, 2012

6.  Morgan Stanley: Letter from Stratford Shields, Managing Director, dated September 17, 2012

7.  National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated September 17, 2012

8.  Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated September 17, 2012

Notice 2012-41 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers


1.  Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated September 21, 2012

2.  Charles Schwab & Co. Inc.: Letter from Bari Havlik, Senior Vice President and Chief Compliance Officer, dated September 21, 2012

3.  Cooley, Bruce: Letter

4.  Fidelity Investments: Letter from David A. Forman, Vice President and General Counsel, dated September 21, 2012

5.  Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated September 21, 2012

6.  Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director and Associate General Counsel, dated September 21, 2012

7.  TD Ameritrade, Inc.: Letter from John S. Markle, Deputy General Counsel, dated September 26, 2012

8.  Wells Fargo Advisors: Letter from Ronald C. Long, Director of Regulatory Affairs, dated September 21, 2012

Notice 2012-40 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers, Municipal Fund Securities


1.  College Savings Plans Network and College Savings Foundation: Letter from Hon. Michael L. Fitzgerald, Treasurer of Iowa and Chairman, College Savings Plans Network, and Roger Michaud, Chairman, College Savings Foundation, dated September 14, 2012

2.  College Savings Plans of Maryland: Letter from Joan Marshall, Executive Director, dated September 14, 2012

3.  Financial Research Corporation: Letter dated August 29, 2012

4.  Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated September 14, 2012

5.  Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director and Associate General Counsel, dated September 14, 2012

6.  Sutherland Asbill & Brennan LLP: Letter from Michael Koffler, dated September 14, 2012

7.  Utah Educational Savings Plan: Letter from Lynne N. Ward, Executive Director, dated September 14, 2012

Notice 2012-36 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

Rule Number:

Rule G-11


1.  Investment Company Institute: Letter from Dorothy Donohue, Deputy General Counsel - Securities Regulation, dated August 10, 2012

2.  Municipal Electric Authority of Georgia: Letter from James E. Fuller, Senior Vice President and Chief Financial Officer, dated August 13, 2012

3.  National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated August 13, 2012

4.  National Federation of Municipal Analysts: Letter from Lisa Good, Executive Director, dated July 30, 2012

5.  New York City Municipal Water Finance Authority: Letter from Thomas G. Paolicelli, Executive Director, dated July 24, 2012

6.  Nuveen Asset Management: Letter from Cadmus Hicks, Managing Director, dated August 7, 2012

7.  Rhode Island Health and Educational Building Corporation: Letter from Robert E. Donovan, Executive Director, dated July 24, 2012

8.  Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated August 13, 2012

9.  Standish Mellon Asset Management: E-mail from David Belton dated August 9, 2012

Notice 2012-29 - Request for Comment
Publication date: | Comment due:


1.  Benchmark Solutions: Letter from Jim Toffey, Chief Executive Officer, dated June 7, 2012

2.  Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated July 2, 2012

3.  Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal Liaison Center, dated July 2, 2012

4.  Investment Company Institute: Letter from Dorothy Donohue, Deputy General Counsel-Securities Regulation, dated June 29, 2012

5.  Securities Industry and Financial Markets Association: Letter from Michael Decker, Managing Director and Co-Head of Municipal Securities, dated June 29, 2012

6.  Stifel Nicolaus & Company, Incorporated: Letter from Kenneth E. Williams, Executive Vice-President, Director of Municipal Finance Group, dated June 27, 2012

Notice 2012-28 - Request for Comment
Publication date: | Comment due:


1.  American Bankers Association and ABA Securities Association: Letter from Cristeena G. Naser, Associate General Counsel, dated August 16, 2012

2.  Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated July 30, 2012

3.  Bondview.com, LLC: Letter from Robert Kane, Chief Executive Officer, dated June 15, 2012

4.  First Southwest: Letter from Robert Coulter, Senior Vice President and Chief Administrative Officer, dated July 24, 2012

5.  Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal Liaison Center, dated August 1, 2012

6.  Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated July 30, 2012

7.  Monument Group: Letter from Molly M. Diggins, General Counsel, dated July 31, 2012

8.  National Association of Bond Lawyers: Letter from Kristin H.R. Franceschi, President, dated July 31, 2012

9.  National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated July 31, 2012

10.  Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated July 31, 2012

Notice 2012-19 - Request for Comment
Publication date: | Comment due:
Rule Number:

Rule G-32, Rule G-34


1.  Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood, Managing Director and Associate General Counsel, dated May 8, 2012

2.  TD Securities (USA) LLC: E-mail from Frank Alessandro dated May 8, 2012

Notice 2012-14 - Request for Comment
Publication date: | Comment due:
Rule Number:

Rule G-34


1.  Bond Dealers of America: Letter from Michael Nicholas, Chief Executive Officer, dated April 10, 2012

2.  Full Life Financial LLC: Letter from Keith Newcomb, Portfolio Manager, dated April 14, 2012

3.  Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal Liaison Center, dated April 6, 2012

4.  Kious and Co.: E-mail from Michael Kious dated March 13, 2012

5.  M. E. Allison & Co., Inc.: Letter from Christopher R. Allison, Chief Financial Officer, dated March 13, 2012

6.  McGuirk, Hugh: E-mail dated March 14, 2012

7.  National Association of Independent Public Finance Advisors: Letter from Colette J. Irwin-Knott, President, dated April 9, 2012

8.  Oppenheimer & Co. Inc.: Letter from Allison F. Fleitas II, Managing Director, Municipal Capital Markets Group

9.  UMB Bank, N.A.: E-mail from Kristin Koziol dated March 30, 2012

Notice 2012-13 - Request for Comment
Publication date: | Comment due:

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 Counsel-Securities 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. Irwin-Knott, 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

Notice 2012-10 - Request for Comment
Publication date: | Comment due:


1.  Broadridge Financial Solutions, Inc.: Letter from Charles V. Callan, Chief Regulatory Officer, dated April 2, 2012

2.  College Savings Foundation: Letter from Roger Michaud, Chairman, dated April 2, 2012

3.  College Savings Plans Network: Letter from Michael L. Fitzgerald, Chair, College Savings Plans Network, & State Treasurer of Iowa, dated April 2, 2012

4.  Commonwealth Financial Network: Letter from Brendan Daly, Legal and Compliance Counsel, dated March 30, 2012

5.  Consumer Federation of America: Letter from Barbara Roper, Director of Investor Protection, dated May 7, 2012

6.  Investment Company Institute: Letter from Tamara K. Salmon, Senior Associate Counsel, dated April 2, 2012

7.  Securities Industry and Financial Markets Association: Letter from David L. Cohen, Managing Director and Associate General Counsel, dated April 2, 2012

8.  Sutherland Asbill & Brennan LLP: Letter from Michael Koffler dated April 2, 2012

9.  T. Rowe Price Associates, Inc.: Letter from David Oestreicher, Chief Legal Counsel, and Regina M. Watson, Senior Associate Counsel, dated April 2, 2012

10.  Utah Educational Savings Plan: Letter from Lynne N. Ward, Executive Director, dated April 2, 2012

11.  Virginia College Savings Plan: Letter from Mary G. Morris, Chief Executive Officer, dated April 2, 2012

Notice 2012-04 - Request for Comment
Publication date: | Comment due:
Rule Number:

Rule G-17

1.  BondView: Letter from Robert Kane, CEO, dated March 5, 2012

2.  Government Finance Officers Association: Letter from Susan Gaffney, Director, Federal Liaison Center, dated March 9, 2012

3.  Haynsworth Sinkler Boyd, P.A.: Letter from Kathleen Crum McKinney and Theodore B. DuBose, dated March 5, 2012

4.  Ice Miller LLP: Letter from Philip C. Genetos dated March 6, 2012

5.  Indiana Housing & Community Development Authority: Letter from Blake A. Blanch, Chief Financial Officer

6.  Indianapolis Airport Authority: Letter from Joseph R. Heerens, Chief Legal Officer, dated March 6, 2012

7.  Los Angeles County Metropolitan Transportation Authority: Letter from Michael J. Smith, Assistant Treasurer

8.  National Association of Bond Lawyers: Letter from Kristin H.R. Franceschi, President, dated March 8, 2012

9.  National Federation of Municipal Analysts: Letter from Lisa Good, Executive Director, dated March 26, 2012

10.  Squire Sanders LLP: Letter dated March 6, 2012

Interpretive Guidance - Interpretive Notices
Publication date:
Syndicate Expenses: Per Bond Fee for Bookrunning Expenses
Rule Number:

Rule G-11, Rule G-17

Board rule G-11, concerning syndicate practices, 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. In addition, the rule requires that the manager provide certain accounting information to syndicate members. In particular, 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 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.[1] The purpose of this provision is to provide information useful to syndicate members in determining whether to participate in a syndicate account. The rule also requires that the senior syndicate manager, at or before final settlement of a syndicate account, furnish to the syndicate members "an itemized statement setting for the nature and amount of all actual expenses incurred on behalf of the syndicate." One of the purposes of this section is to render managers accountable for their handling of syndicate funds.

The Board has received inquiries regarding the appropriateness of a per-bond fee for the bookrunning expenses or management fees of the senior syndicate manager. Discretionary fees for clearance costs and management fees may be expressed as a per-bond charge. These expenses, however, must be disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract with the issuer; for example, in the Agreement Among Underwriters. The itemized statement setting forth a detailed breakdown of actual expenses incurred on behalf of the syndicate, such as advertising, printing, legal, computer services, etc., must be disclosed to syndicate members at or before final settlement of the syndicate account. With respect to these fees, the Board has previously noted that managers who assess a per-bond charge for designated sales may be acting in violation of rule G-17 if the expenses charged to members bear no relation to or otherwise overstate the actual expenses incurred on behalf of the syndicate. [2] The Board believes a per-bond fee creates the appearance that it is not an actual expense related to and incurred on behalf of the syndicate.

The Board is concerned about the charging of syndicate expenses and compliance with rule G-11. Managers should exercise care in accounting for syndicate funds, and any charge that has not been disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract may be charged to syndicate members only if it is an actual expense incurred on behalf of the syndicate. The Board will continue to monitor syndicate practices and will notify the appropriate enforcement agency of any complaints it receives in this area. Syndicate members are encouraged to notify directly the appropriate enforcement agency of any violations of these provisions.


 

[1] The rule defines management fees to 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."

[2] Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985), [reprinted in MSRB Reports, Vol. 7, No. 2 (March 1987) at 5].

Interpretive Guidance - Interpretive Notices
Publication date:
Transactions in Municipal Securities with Non-Standard Features Affecting Price/Yield Calculations

Rule G-15(a) generally requires that confirmations of municipal securities transactions with customers state a dollar price and yield for the transaction. Thus, for transactions executed on a dollar price basis, a yield must be calculated; for transactions executed on a yield basis, a dollar price must be calculated. Rule G-33 provides the standard formulae for making these price/yield calculations.

It has come to the Board’s attention that certain municipal securities have been issued in recent years with features that do not fall within any of the standard formulae and assumptions in rule G-33, nor within the calculation formulae available through the available settings on existing bond calculators. For example, an issue may have first and last coupon periods that are longer than the standard coupon period of six months.

With respect to some municipal securities issues with non-standard features, industry members have agreed to certain conventions regarding price/yield calculations. For example, one of the available bond calculator setting might be used for the issue, even though the calculator setting does not provide a formula specifically designed to account for the non–standard feature. In such cases, anomalies may result in the price/yield calculations. The anomalies may appear when the calculations are compared to those using more sophisticated actuarial techniques or when the calculations are compared to those of other securities that are similar, but that do not have the non–standard feature.

The Board reminds dealers that, under rule G-17, dealers have the obligation to explain all material facts about a transaction to a customer buying or selling a municipal security. Dealers should take particular effort to ensure that customers are aware of any non-standard feature of a security. If price/yield calculations are affected by anomalies due to a non-standard feature, this may also constitute a material fact about the transaction that must be disclosed to the customer.

Interpretive Guidance - Interpretive Letters
Publication date:
Campaign for federal office
Rule Number:

Rule G-37

Campaign for federal office. This is in response to your letter dated May 5, 1995, concerning the application of the Board's rule G-37 to a campaign for President of the United States. You ask specifically about the application of rule G-37 to contributions to Governor [name deleted] presidential campaign. The Board reviewed your letter at its May 18-19, 1995 meeting and has authorized this response.

 

As you know, rule G-37, among other things, prohibits any broker, dealer or municipal securities dealer (dealer) from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer; (ii) any municipal finance professional associated with such dealer; or (iii) any political action committee controlled by the dealer or any municipal finance professional. The only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. Rule G-37(g)(i) defines the term "contribution" as any "gift, subscription, loan, advance, or deposit of money or anything of value made: (A) for the purpose of influencing any election for federal, state or local office..."

The Board previously has clarified that rule G-37 does not encompass all contributions to candidates for federal office. Rather, for federal office, the rule encompasses only those contributions to a current issuer official who is seeking election to federal office.[1]

You ask whether the Governor of [a state] is an "official of an issuer" for purposes of rule G-37. Rule G-37(g)(vi) defines the term "official of an issuer" as "any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or of any political subdivision, which office has authority to appoint any official(s) of an issuer..." as defined above. The Board has not provided any exemptions from, or exception to, the definition "official of an issuer" as set forth in rule G-37.

The Board does not make determinations concerning whether a particular individual meets the definition of "official of an issuer." The Board believes that because such determinations may involve particular issues of fact, such decisions must generally be the dealer's responsibility. The Board has, however, provided guidance in this area by recommending that dealers review the scope of authority conferred upon the particular office (and not the individual) to determine whether the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a dealer for municipal securities business.[2] For example, a state may have certain issuing authorities whose boards of directors are appointed by the governor. In such circumstances, the Board previously has stated that it intended to include the governor as an official of the issuer.a [3]

 

You ask whether rule G-37 applies to candidates for President of the United States. As noted above, the term "contribution" as defined in rule G-37(g)(i) includes payments "for the purpose of influencing any election for federal, state or local office." [Emphasis added]. Thus, rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the House of Representatives, the Senate or the Presidency.

You ask whether rule G-37 unfairly impinges upon Governor [name deleted] equal protection and freedom of speech and association rights in the context of the Presidential election since he is, at this time, the only candidate with respect to whom those covered by the rule face "disqualification" from municipal securities business for making contributions. You also state that rule G-37 violates the First Amendment rights of association or speech by limiting the ability of municipal finance professionals to contribute to Governor [name deleted] presidential campaign. In its order approving rule G-37, the Securities and Exchange Commission stated that:

any resulting hardship to candidates for federal office who are currently local officials is not a reason for eliminating these requirements. The MSRB cannot overlook potential conflicts of interest solely because there are candidates for the same federal office who do not face the same conflicts. In any event, the resulting burden to current local officials does not appear to be significant.[4]

The Board believes that rule G-37 is not the product of governmental action and is not subject to Constitutional review. However, as you may be aware, these issues currently are pending before the D.C. Court of Appeals.

You ask whether the creation of the District of Columbia Financial Responsibility and Management Assistance Authority means that the President of the United States is an "official of an issuer" and that all candidates for President now fall under rule G-37. Rule G-37(g)(vi) defines "official of an issuer" as "any person ... who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or political subdivision, which office has authority to appoint any official(s) of an issuer." [Emphasis added]. The President does not hold an elective office of an "issuer" of municipal securities. In addition, the President is not, and would not become, an issuer official by virtue of his authority to appoint members to the D.C. Financial Responsibility and Management Assistance Authority because the Presidency is not an elective office of a state or political subdivision.

You ask a number of questions concerning what activities are permissible by those individuals covered by the rule. You ask whether the $250 de minimis contribution exception in rule G-37 applies to Presidential candidates. As noted previously, the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, the municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.[5]

[Two paragraphs deleted.][6]

You ask whether an individual covered by rule G-37 may raise money from others on behalf of Governor [name deleted]. Rule G-37(c) provides that no dealer or any municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. A violation of rule G-37(c) does not trigger a two-year ban on engaging in municipal securities business with an issuer; however, if the appropriate enforcement agency finds that a violation of rule G-37(c) has occurred, the enforcement agency will determine the appropriate sanction.[7] You ask whether the de minimis exception applies to solicited and bundled contributions of $250 and less. Solicitations of contributions are prohibited by the rule (for those covered); therefore, there is no de minimis exception.

You ask whether a covered individual may hold a party in his home for a Presidential candidate if contributions are raised at the party. The Board has stated that rule G-37 is not intended to restrict municipal finance professionals from engaging in personal volunteer work.[8] Personal expenses incurred by the municipal finance professional in the conduct of such volunteer work, which expenses are purely incidental to such work and unreimbursed by the dealer (e.g., cab fares and personal meals), would not constitute a contribution. However, the expenses incurred for hosting a party to solicit contributions would be viewed as a contribution.[9] The Board also has stated that if a dealer's or a municipal finance professional's name appears on fundraising literature for an issuer official for which the dealer is engaging or seeking to engage in municipal securities business then there is a presumption that such activity is a solicitation by the dealer or municipal finance professional in violation of section (c) of the rule.[10] 

Finally, you ask whether spouses and eligible children of covered personnel may contribute to a Presidential candidate. The Board has stated that contributions to issuer officials by municipal finance professionals' spouses and household members are not covered by rule G-37 unless these contributions are directed by the municipal finance professional, which is prohibited by section (d) of the rule.[11] MSRB interpretation of May 31, 1995.
__________

[1] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 14.

[2] Id.

[3] See MSRB Reports, Vol. 14, No. 4 (August 1994) at 24.

[4] See Securities Exchange Act Release No. 33868 (April 7, 1994) at 41-42; 59 FR 17621.

[5] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 13.

[6] An interpretation on determining whether a municipal finance professional is "entitled to vote" for an issuer official was withdrawn by the Board in January 1996. The Board has issued a revised interpretation of "entitled to vote" which states that a municipal finance professional is "entitled to vote" for an issuer official if the municipal finance professional's principal residence is in the locality in which the issuer official seeks election. In such instances, a municipal finance professional is able to make a de minimis contribution without resulting in a ban on municipal securities business. For example, if an issuer official is a governor running for re-election, anyone residing in that state may make a de minimis contribution to the official without causing a ban on municipal securities business with that issuer. In the example of an issuer official running for President, anyone in the country can contribute the de minimis amount to the official's Presidential campaign. The Securities and Exchange Commission approved this revision on February 16, 1996. See MSRB Reports, Vol. 16. No. 1 (January 1996) at 31-34.

[7] The enforcement agencies are: for securities firms, the National Association of Securities Dealers; and for bank dealers, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or the Office of the Comptroller of the Currency.

[8] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 15.

[9] Id.

[10] See MSRB Reports, Vol. 14, No. 5 (December 1994) at 17.

[11] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 15.