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Notice 2012-64 - Informational Notice
Publication date:
Interpretive Guidance - Interpretive Notices
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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 http://www.finra.org/Newsroom/NewsReleases/2004/P011465.

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

Bank Dealers, Dealers, Municipal Advisors

Rule Number:


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 2012-62 - Informational Notice
Publication date:
Notice 2012-61 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

Rule Number:


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 2012-60 - Informational Notice
Publication date:
Notice 2012-59 - Request for Comment
Publication date: | Comment due:
Information for:

Bank Dealers, Dealers

Rule Number:

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 2012-57 - Informational Notice
Publication date:
Information for:

Bank Dealers, Dealers

Rule Number:

Rule G-3

Notice 2012-53 - Informational Notice
Publication date:
Information for:

Bank Dealers, Dealers

Rule Number:

Notice 2012-54 - Informational Notice
Publication date:
Notice 2012-52 - Informational Notice
Publication date:
Notice 2012-51 - Informational Notice
Publication date:
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 2012-49 - Informational Notice
Publication date:
Information for:

Bank Dealers, Dealers

Rule Number:

Compliance Resource
Publication date:
Notice 2012-48 - Informational Notice
Publication date:
Notice 2012-47 - Informational Notice
Publication date:
Notice 2012-46 - Informational Notice
Publication date:
Notice 2012-45 - Informational Notice
Publication date:
Information for:

Bank Dealers, Dealers

Rule Number:

Notice 2012-44 - Informational Notice
Publication date:
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 2012-42 - Informational Notice
Publication date:
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