Request for Comments on Draft Interpretive Guidance on Prevailing Market Prices and Mark-Up for Transactions in Municipal Securities

The Municipal Securities Rulemaking Board (the “MSRB”) is seeking comment on draft interpretive guidance, set forth below, on the requirements of its Rule G-30, on prices and commissions, with respect to the establishment of the prevailing market price and the calculation of mark-ups and mark-downs for municipal securities transactions effected by brokers, dealers or municipal securities dealers (“dealers”) in a principal capacity. Section (a) of Rule G-30 provides that a dealer shall not purchase municipal securities for its own account from a customer or sell municipal securities for its own account to a customer except at an aggregate price (including any mark-down or mark-up) that is fair and reasonable, taking into consideration all relevant factors. The prevailing market price of a municipal security forms the basis on which mark-ups and mark-downs are calculated in principal transactions, and compliance with the requirements of Rule G-30(a) requires both that the total transaction price to the customer be reasonably related to the market value of the security and that the mark-up or mark-down not exceed a fair and reasonable amount. 

The draft interpretive guidance is designed to harmonize the manner in which the prevailing market prices for municipal securities are determined with the manner established by the Financial Industry Regulatory Authority (“FINRA”) for purposes of other types of debt securities under NASD IM-2440-2, “Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities.” The draft interpretive guidance establishes the same baseline provisions as in the FINRA policy with regard to the presumptive use of contemporaneous cost for purposes of determining the prevailing market price, the circumstances under which such presumption may be rebutted, and the alternate bases for determining prevailing market price when contemporaneous cost is not used. In addition, the draft interpretive guidance provides guidance on how the basic elements of the harmonized approach to calculating prevailing market price would be applied in the context of municipal securities transactions and includes a series of specific examples of the application of these principles in particular circumstances.

The MSRB seeks comment on all aspects of the draft interpretive guidance. In particular, the MSRB seeks comment on whether the principles laid out in the draft interpretive guidance represent the appropriate approach to establishing prevailing market prices for municipal securities. If commentators believe the draft interpretive guidance does not appropriately provide for the determination of prevailing market prices of municipal securities in particular circumstances or in general, commentators should provide specific examples of the circumstances or factors that would support taking a different approach to the determination of prevailing market prices for municipal securities as compared to other debt securities. Any such comments also should provide specific suggestions as to alternative approaches that would both provide reasonable assurance to investors that the prices of their municipal securities transactions are fair and reasonable and provide dealers with a consistent manner of determining such fair and reasonable prices that is fully documented and subject to examination by dealers’ compliance departments and the relevant regulatory agencies. 

Comments on the draft interpretive guidance are due by no later than June 4, 2010 and should be directed to Ernesto A. Lanza, General Counsel. Written comments will be posted on the MSRB web site.  Comments are posted without change and personal identifying information, such as name or e-mail addresses, will not be edited from submissions. Therefore, commentators should submit only information that they wish to make available publicly. 

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INTERPRETIVE GUIDANCE ON PREVAILING MARKET PRICES AND MARK-UPS FOR TRANSACTIONS IN MUNICIPAL SECURITIES

MSRB Rule G-30(a), on prices in connection with principal transactions, provides, in part, that a broker, dealer or municipal securities dealer (“dealer”) shall not purchase municipal securities for its own account from a customer or sell municipal securities for its own account to a customer except at an aggregate price (including any mark-down or mark-up) that is fair and reasonable, taking into consideration all relevant factors. Two fundamental principles of fair pricing are embodied in the requirement for a “fair and reasonable” price. The first principle is that the customer’s price must be reasonably related to the market value of the municipal securities in the transaction.[1] The second principle is that the mark-up or mark-down on a transaction must not exceed a fair and reasonable amount.[2]

Mark-ups and mark-downs represent compensation to dealers for effecting transactions in a principal capacity with customers. Mark-ups and mark-downs are calculated from the “prevailing market price,” which represents the inter-dealer market value of the securities at the time of the customer transaction. A “mark-up” is the difference between the aggregate price paid by a customer for securities and the (lower) prevailing market price. A “mark-down” is the difference between the aggregate price paid to the customer for securities and the (higher) prevailing market price. The mark-up or mark-down charged by a dealer directly affects the customer’s aggregate price. The requirement for a fair and reasonable price cannot be met if the mark-up or mark-down on the transaction exceeds an amount that is fair and reasonable, after taking into account all relevant factors.[3]

The MSRB has determined to provide interpretive guidance on the requirements of Rule G-30(a) with respect to the establishment of the prevailing market price and the calculation of mark-ups and mark-downs for municipal securities transactions. The MSRB has sought to harmonize its approach for municipal securities transactions with those set forth by the Financial Industry Regulatory Authority (“FINRA”) in IM-2440-2 for other debt securities and to provide guidance on the applicability of specific elements of such approach to the unique characteristics of the municipal securities market. In particular, the MSRB has sought to ensure that this interpretive guidance establishes principles that result in the determination of appropriate prevailing market prices under the wide variety of circumstances that exist in the current municipal securities market, which is characterized by the large number of outstanding bonds (represented by over 1.3 million distinct CUSIP numbers), the prevalence of “buy and hold” investors, the infrequent secondary market trading in most issues, the existence of multiple market sectors, differing rules for tax treatment, differing credit structures, credit enhancements, and call and put features.

Prevailing Market Price

Contemporaneous Cost as Prevailing Market Price. A dealer that is acting in a principal capacity in a municipal securities transaction with a customer and is charging a mark-up or mark-down must mark-up or mark-down the transaction from the prevailing market price. Presumptively for purposes of this interpretation, the prevailing market price for a municipal security is established by referring to the dealer’s contemporaneous cost as incurred, or contemporaneous proceeds as obtained, consistent with MSRB Rule G-30(a).

When Countervailing Evidence of Prevailing Market Price May Be Considered.  When the dealer is selling the municipal security to a customer, countervailing evidence of the prevailing market price may be considered only where the dealer made no contemporaneous purchases in the security or can show that, in the particular circumstances, the dealer’s contemporaneous cost is not indicative of the prevailing market price. When the dealer is buying the municipal security from a customer, countervailing evidence of the prevailing market price may be considered only where the dealer made no contemporaneous sales in the security or can show that, in the particular circumstances, the dealer’s contemporaneous proceeds are not indicative of the prevailing market price.

Definition of Contemporaneous Cost. A dealer’s cost is considered contemporaneous if the transaction occurs close enough in time to the subject transaction that it would reasonably be expected to reflect the current market price for the municipal security. Where a mark-down is being calculated, a dealer’s proceeds would be considered contemporaneous if the transaction from which the proceeds result occurs close enough in time to the subject transaction that such proceeds would reasonably be expected to reflect the current market price for the municipal security.

The simplest case for determining the prevailing market price occurs in so-called “riskless principal transactions.” A riskless principal transaction refers to a transaction in which, after receiving an order from a customer, the dealer purchased the security from another person to offset a contemporaneous sale to such customer or, having received an order to sell from a customer, the dealer sold the security to another person to offset a contemporaneous purchase from such customer. Because in these cases the dealer takes compensation in the form of a mark-up or mark-down, fairness to the customer requires that evaluation of compensation be based on the dealer’s actual contemporaneous cost or proceeds, regardless of the identity of the counter-party.[4] Accordingly, the dealer’s contemporaneous cost or proceeds must be used as the prevailing market price when the mark-up or mark-down on such a transaction is calculated.  Under these types of riskless principal transactions, the dealer may not provide countervailing evidence of the prevailing market price.

Two illustrations of riskless principal transactions to which this principle would apply are provided below:

Illustration 1. A common market scenario involves a retail customer who wishes to sell municipal securities. A dealer working with the customer uses the services of a broker’s broker to solicit bids for the securities. After receiving information on the bids received by the broker’s broker, the dealer offers to buy securities from the customer on a principal basis. If the customer wishes to proceed with a transaction, the customer’s order is taken and the dealer executes simultaneous or near-simultaneous principal transactions with the customer and the broker’s broker. The dealer’s price on the broker’s broker transaction must be used as the prevailing market price for the purpose of calculating the mark-down.  

Illustration 2. In this scenario, a dealer is working with a retail customer who wishes to buy securities of a particular type, quantity and price. The dealer locates securities meeting the customer’s requirements among posted inter-dealer offerings or “bid-wanted lists.” After obtaining the customer’s commitment to effect a transaction in one of the securities located, the dealer takes the customer’s order and effects simultaneous or near-simultaneous principal transactions in which the securities are purchased in the market and sold to the customer. The dealer’s purchase price must be used as the prevailing market price for the purpose of calculating the mark-up.

Other than in the case of riskless principal transactions as described above, with limited exceptions described below, in a municipal securities transaction effected on a principal basis, prevailing market price means the price at which dealers trade with one another (i.e., the current inter-dealer market price). As a general rule, except as described below, the dealer’s contemporaneous cost or proceeds, as appropriate, of a transaction entered into by a dealer in a particular municipal security, near in time to a customer transaction in the same security (if such a transaction exists), is presumed to be the prevailing market price of the security in the absence of any countervailing evidence.

The use of inter-dealer market prices for determining the prevailing market price is illustrated below:

Illustration 3. A dealer acquires a large position in a municipal security through a series of transactions with other dealers in such security over a short period of time during a single day without having any customer orders for such security. Within minutes after the last purchase, the dealer receives a customer order for the security and sells the entire position in a single sale to the customer. Absent countervailing evidence as described below, the various purchase transactions would be considered contemporaneous transactions with respect to the sale transaction. All of the purchase transactions would be considered contemporaneous transactions pursuant to this notice and all such purchase transactions should be considered together for purposes of determining the prevailing market price.

Illustration 4. Dealer A buys and sells a particular municipal security from time to time. Dealer A acquires $100,000 of municipal securities from dealer B, and shortly thereafter purchases an additional $125,000 of the same municipal security from customer C. Within minutes after the purchase from customer C, dealer A receives an order from, and sells its entire $225,000 holding of such municipal securities, to customer D. Absent countervailing evidence of the prevailing market price, the prevailing market price for purposes of determining the mark-up on the sale of the municipal securities to customer D is established by referring to dealer A’s contemporaneous cost, which in this case would be based on its purchase from dealer B rather than its purchase from customer C. For purposes of determining the mark-down on the purchase of the municipal securities from customer C, dealer A would reference the contemporaneous proceeds from its sale of these municipal securities to another dealer, if any, if any such sale occurs close enough in time to dealer A’s purchase from customer C that the proceeds thereof would reasonably be expected to reflect the current market price for the municipal security. Absent such contemporaneous proceeds, dealer A would consider the types of other pricing information described below in this notice.

Evidence to Overcome Presumption of Contemporaneous Cost. A dealer that effects a transaction in municipal securities with a customer and identifies the prevailing market price using a measure other than the dealer’s own contemporaneous cost (or, in a mark-down, the dealer’s own proceeds) must be prepared to provide evidence that is sufficient to overcome the presumption that the dealer’s contemporaneous cost (or the dealer’s proceeds) provides the best measure of the prevailing market price. A dealer may be able to show that its contemporaneous cost is (or proceeds are) not indicative of prevailing market price, and thus overcome the presumption, in instances where: (i) interest rates or yields changed after the dealer’s contemporaneous transaction to a degree that such change would reasonably cause a change in municipal securities pricing; (ii) the credit quality of the municipal security changed significantly after the dealer’s contemporaneous transaction; or (iii) news was issued or otherwise distributed and known to the marketplace that had an effect on the perceived value of the municipal security after the dealer’s contemporaneous transaction.

The instances outlined in the preceding paragraph focus on changes in circumstances occurring between two substantially contemporaneous transactions in a municipal security. An illustration of this principle is provided below:

Illustration 5. A dealer acquires a large position in a municipal security through a series of transactions in such security over a short period of time during a single day. Within minutes after the last purchase, the dealer sells half of the entire position in a single sale to customer A, and 30 minutes later sells the second half of the position to customer B.  Neither sale is a riskless principal transaction. No material changes in interest rates, yields or credit quality occurred, no relevant news became known, and no other significant factors became operative between the time of the purchase transactions and the first sale transaction to customer A. Absent any other intervening transactions or any unusual circumstances, the purchase transactions would be used to establish the prevailing market price for the sale transaction to customer A. However, between the time of the sale transactions to customer A and customer B, a notice is submitted to the continuing disclosure service of the MSRB’s Electronic Municipal Market Access system (“EMMA”), and is published on the EMMA web portal and disseminated through the EMMA subscription service, disclosing for the first time that the municipal securities will be advance refunded. As a result, the dealer may be able to show that its contemporaneous costs of the earlier purchase transactions are not indicative of the prevailing market price as of the time of the sale transaction to customer B.

A dealer seeking to present evidence to overcome the presumption of contemporaneous cost as indicative of the prevailing market price must retain contemporaneously produced records of the facts and circumstances and such other evidence that support such position. 

Specified Pricing Information to Consider When Not Using Contemporaneous Cost. In instances where the dealer has established that the dealer’s cost is (or, in a mark-down, proceeds are) no longer contemporaneous, or where the dealer has presented evidence that is sufficient to overcome the presumption that the dealer’s contemporaneous cost (or proceeds) provides the best measure of the prevailing market price, such as those instances described above under the heading “Prevailing Market Price – Evidence to Overcome Presumption of Contemporaneous Cost,” the dealer must consider, in the order listed, the following types of pricing information to determine prevailing market price:

(A) Prices of any contemporaneous inter-dealer transactions in the municipal security in question;

(B) In the absence of transactions described in clause (A), prices of contemporaneous dealer purchases or sales in the municipal security in question from or to institutional accounts with which any dealer regularly effects transactions in the same municipal security; or

(C) In the absence of transactions described in clauses (A) and (B), for actively traded municipal securities, contemporaneous bid or offer quotations for the security in question made through an inter-dealer mechanism, through which transactions generally occur at the displayed quotations.

A dealer may consider a succeeding category of pricing information only when the prior category does not generate relevant pricing information (e.g., a dealer may consider pricing information under clause (B) only after the dealer has determined, after applying clause (A), that there are no contemporaneous inter-dealer transactions in the same municipal security, other than an isolated transaction as described below under the heading “Prevailing Market Price – Evidentiary Value of Isolated Transactions”). In reviewing the pricing information available within each category, the relative weight, for purposes of identifying prevailing market price, of such information (i.e., either a particular transaction price, or, in clause (C) above, a particular quotation) depends on the facts and circumstances of the comparison transaction or quotation (i.e., such as whether the dealer in the comparison transaction was on the same side of the market as the dealer is in the subject transaction and timeliness of the information).

Municipal securities transaction data is collected and disseminated by the MSRB and may be used to obtain relevant pricing information for purposes of determining the prevailing market price.[5] This type of data generally will assist in identifying the inter-dealer market prices as contemplated in clause (A) above.

Illustration 6. A dealer is selling to a customer a large round lot of municipal securities it has held in inventory for an extended period of time. The dealer has not entered into any contemporaneous transactions in such security but has noted through the MSRB’s transaction data that other dealers have sold the same security in different lot sizes over a relatively short period of time in various inter-dealer and customer transactions prior to the dealer’s sale transaction. Absent unusual circumstances, the inter-dealer transactions (and not the customer transactions) would be used to establish the prevailing market price for such dealer’s sale transaction.

Additional Factors to Consider When Specified Pricing Information is Not Available. In the event that, in particular circumstances, the above factors are not available, other factors that may be taken into consideration for the purpose of establishing the price from which a customer mark-up or mark-down may be calculated include but are not limited to:

• Prices of contemporaneous inter-dealer transactions in a “similar” municipal security, as defined below, or prices of contemporaneous dealer purchase or sale transactions in a “similar” municipal security with institutional accounts with which any dealer regularly effects transactions in the “similar” security with respect to customer mark-ups or mark-downs;
• Yields calculated from prices of contemporaneous inter-dealer transactions in “similar” municipal securities;
• Yields calculated from prices of contemporaneous dealer purchase or sale transactions with institutional accounts with which any dealer regularly effects transactions in “similar” municipal securities with respect to customer mark-ups or mark-downs; and
• Yields calculated from validated contemporaneous inter-dealer bid or offer quotations in “similar” municipal securities for customer mark-ups or mark-downs.

The relative weight, for purposes of identifying prevailing market price, of the pricing information obtained from the factors set forth above depends on the facts and circumstances surrounding the comparison transaction (i.e., whether the dealer in the comparison transaction was on the same side of the market as the dealer is in the subject transaction, timeliness of the information, and, with respect to the final factor listed above, the relative spread of the quotations in the similar municipal security to the quotations in the subject security).

Because of the lack of active trading in most municipal securities, it is not always possible to establish an inter-dealer transaction price for municipal securities based solely on reports of transactions or quotations in an issue and so transactions in “similar” securities often will need to be considered. Close examination will be needed with respect to the terms and features of the issue, credit quality, tax treatment and other factors and establishing the market value for inactively traded municipal securities may require a certain level of market knowledge and professional expertise. The circumstances of a particular transaction will determine which factors are most important in establishing the prevailing market value. In considering the weight of individual factors in specific transactions, the ultimate evidentiary issue is whether the factors will correctly reflect the prevailing market price.

Use of Models Where Other Information Not Available. Finally, if information concerning the prevailing market price of the subject municipal security cannot be obtained by applying any of the above factors, dealers and the agencies charged with enforcing MSRB rules may consider, as factors in assessing the prevailing market price of a municipal security, the prices or yields derived from economic models (e.g., discounted cash flow models) that take into account measures such as credit quality, interest rates, industry sector, time to maturity, call provisions and any other embedded options, coupon rate, and face value; and consider all applicable pricing terms and conventions (e.g., coupon frequency and accrual methods). Such models currently may be in use by bond dealers or may be specifically developed by the enforcement agencies for surveillance purposes.

Evidentiary Value of Isolated Transactions. Because the ultimate evidentiary issue is the prevailing market price, isolated transactions or isolated quotations generally will have little or no weight or relevance in establishing prevailing market price. Thus, if a dealer that is purchasing a municipal security from, or selling a municipal security to, a customer has executed a contemporaneous transaction in such municipal security, and such other transaction is isolated from other transactions in that security (such as where a single trade occurs in a municipal security that has not traded for a considerable period of time prior to that trade), the dealer may in very limited cases be able to show that in the particular circumstances such contemporaneous transaction is not indicative of the prevailing market price. For example, the obligations of Rule G-30(a) apply only with respect to transactions with customers, and therefore in some cases dealers may choose to effect transactions with one another at prices that may not reflect the then-current market price. The use of such an isolated off-market dealer trade for the purpose of calculating the mark-up or mark-down on a contemporaneous customer transaction could, in these circumstances, result in an inaccurate determination of the prevailing market price for the municipal security in connection with the customer trade. A dealer seeking to show that an isolated contemporaneous transaction is not indicative of the prevailing market price must retain contemporaneously produced records of the facts and circumstances and such other evidence that support such position, including sufficient evidence to support the prevailing market price otherwise determined for such transaction consistent with this notice.

Illustrations of the potential for an isolated transaction to reflect a price that is not indicative of the prevailing market price are provided below:

Illustration 7. Dealer A enters into a forward purchase agreement with another dealer to purchase municipal securities on a specified future date at an agreed-upon price. On the specified date, dealer A undertakes such purchase at the stated price and then sells the securities to several customers in contemporaneous transactions. Although the purchase and sale transactions may be contemporaneous, the facts and circumstances of the forward purchase based on a price established at a remote time suggests that the contemporaneous cost may not be indicative of the prevailing market price for purposes of the dealer A’s sales to customers. In this case, if dealer A has fully documented, on a contemporaneous basis, the facts and circumstances that led it to conclude that the purchase transaction is not indicative of the prevailing market price, dealer A may determine the prevailing market price based on prices of any contemporaneous inter-dealer transactions in the same municipal security, as described in clause (A) under the heading “Prevailing Market Price – Specified Pricing Information to Consider When Not Using Contemporaneous Cost,” or, if no relevant pricing information is generated pursuant to such inter-dealer transactions, based on the other types of pricing information as provided under this notice. Dealer A also must, on a contemporaneous basis, fully document the manner in which such prevailing market price is otherwise determined.

Illustration 8. Dealer A must sell its entire position in a municipal security on a Friday afternoon just prior to the close of business in order to raise capital to meet a capitalization requirement that day. Dealer B, who has not previously traded this issuer’s securities, agrees to purchase this position on Friday without having had an opportunity to undertake extensive research on the credit or to gauge interest in the securities from other dealers or investors. The following Monday morning, after having taken efforts to determine the value of the municipal securities, dealer B sells such securities to a number of its customers. If dealer B’s purchase transaction on the prior Friday was the only purchase of such securities by dealer B, then dealer B may be able to show that the purchase price from dealer A does not reflect the then-current inter-dealer market value of the securities for purposes of determining the prevailing market price applicable to the subsequent sales transactions. Dealer A must fully document, on a contemporaneous basis, the facts and circumstances that led it to conclude that the purchase transaction is not indicative of the prevailing market price and also must, on a contemporaneous basis, fully document the manner in which such prevailing market price is otherwise determined.

When a dealer is using the pricing information described above under the heading “Prevailing Market Price – Specified Pricing Information to Consider When Not Using Contemporaneous Cost” due to having appropriately established that its cost is (or, in a mark-down, proceeds are) no longer contemporaneous or presented evidence that is sufficient to overcome the presumption that its contemporaneous cost (or proceeds) provides the best measure of the prevailing market price, the dealer also may give due regard to whether such alternative pricing information is being derived from an isolated transaction. Thus, with regard to municipal securities for which transaction prices are reported only for isolated transactions (such as when a single inter-dealer trade occurs in a municipal security that has not traded for a considerable period of time prior to that trade), the dealer should consider the appropriate weight or relevance to give to such isolated transaction in establishing the prevailing market price in the security, consistent with the guidance provided herein. If, depending on the totality of the facts and circumstances, such isolated transaction (or if an isolated bid or offer) does not generate relevant pricing information for purposes of establishing the prevailing market price for the municipal security, the dealer may consider the succeeding category of pricing information, subject to the specific hierarchy described above under the heading “Prevailing Market Price – Specified Pricing Information to Consider When Not Using Contemporaneous Cost.”

In addition, in considering yields of “similar” municipal securities, except in extraordinary circumstances, dealers may not rely exclusively on isolated transactions or a limited number of transactions that are not fairly representative of the yields of transactions in “similar” municipal securities taken as a whole.

Dealers are cautioned that the mere characterization of a transaction as isolated is not sufficient to rebut the presumptions established in this notice or for any other purpose of this notice. Rather, any such characterization must have an objective basis existing and fully documented at the time of the transaction and such characterization is subject to subsequent review by the appropriate enforcement agencies in light of all the relevant facts and circumstances.

SMMPs Not Considered Customers. “Customer,” for purposes of this interpretation, shall not include a sophisticated municipal market professional (“SMMP”), as defined in Rule G-17 Interpretation – Interpretive Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals, April 30, 2002 (the “SMMP Notice”), that is purchasing or selling a non-investment grade municipal security when the dealer has determined, after considering the factors set forth in the SMMP Notice, that the SMMP has the capacity to evaluate independently the investment risk and in fact is exercising independent judgment in deciding to enter into the transaction. For purposes of this interpretation, “non-investment grade municipal security” means a municipal security that: (i) if rated by only one nationally recognized statistical rating organization (“NRSRO”), is rated lower than one of the four highest generic rating categories; (ii) if rated by more than one NRSRO, is rated lower than one of the four highest generic rating categories by any of the NRSROs; or (iii) if unrated, either was analyzed as a non-investment grade municipal security by the dealer and the dealer retains credit evaluation documentation and demonstrates to the agencies charged with enforcing MSRB rules (using credit evaluation or other demonstrable criteria) that the credit quality of the security is, in fact, equivalent to a non-investment grade municipal security.

“Similar” Municipal Securities

Reasonable Alternative Investment. A “similar” municipal security should be sufficiently similar to the subject security that it would serve as a reasonable alternative investment to the investor. At a minimum, the municipal security or securities should be sufficiently similar that a market yield for the subject security can be fairly estimated from the yields of the “similar” security or securities. Where a municipal security has several components, appropriate consideration may also be given to the prices or yields of the various components of the security.

Factors to Consider.  The degree to which a municipal security is “similar,” as that term is used in this interpretation, to the subject security may be determined by factors that include but are not limited to the following:

(A) Credit quality considerations, such as whether the municipal security is issued by the same or similar entity, bears the same or similar credit rating, or is supported by a similarly strong guarantee or collateral as the subject security (to the extent securities of other issuers are designated as “similar” securities, significant recent information of either issuer that is not yet incorporated in credit ratings should be considered (e.g., changes to ratings outlooks));

(B) The extent to which the spread (i.e., the spread over U.S. Treasury securities of a similar duration) at which the “similar” municipal security trades is comparable to the spread at which the subject security trades;

(C) General structural characteristics and provisions of the issue, such as coupon, maturity, duration, complexity or uniqueness of the structure, callability, the likelihood that the municipal security will be called, tendered or exchanged, and other embedded options, as compared with the characteristics of the subject security;

(D) Technical factors such as the size of the issue, the float and recent turnover of the issue, and legal restrictions on transferability as compared with the subject municipal security; and

(E) The extent to which the federal and/or state tax treatment of the “similar” municipal security is comparable to such tax treatment of the subject security.

Inapplicability to “Story” Bonds. When a municipal security’s value and pricing is based substantially on, and is highly dependent on, the particular circumstances of the issuer, including creditworthiness and the ability and willingness of the issuer to meet the specific obligations of the security, in most cases other securities will not be sufficiently similar, and therefore, other securities may not be used to establish the prevailing market price.

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