MSRB to Talk Order Priority

WASHINGTON — At a meeting today and tomorrow in Philadelphia, the Municipal Securities Rulemaking Board plans to discuss proposed rule changes that would dictate the priority of retail and other customer orders in primary offerings, as well as where the board stands on its push to provide rating changes over its EMMA site.

MSRB executive director Lynnette Hotchkiss said there is “widespread agreement” by the 15-member board on the priority of orders proposal, which aims to ensure there is broad distribution of an issuer’s securities and that dealers honor an issuer’s definition of  the retail order period.

At the same time, the proposal, which is pending before the Securities and Exchange Commission, would give dealers flexibility to get the best price for issuers while imposing record-keeping requirements “to allow an auditor to go in to reverse-engineer the deal and nail people if they didn’t abide by priority of orders or issuers’ desires or didn’t have appropriate disclosures,” Hotchkiss said in a brief interview this week.

“It’s a very complicated issue … but I don’t think the controversy is on the main substantive points,” she said. “Sometimes the board is simply arguing about the fact that this sentence doesn’t look quite right.”

Market participants who asked not to be identified contend that the proposed record-keeping requirements are crucial because the Financial Industry Regulatory Authority had to abandon an informal inquiry into abusive “flipping” last year when its investigators found there were no records to review.

Flipping generally occurs when dealers or institutional investors purchase bonds and then immediately resell them to retail investors at higher prices. Industry groups generally panned the proposal in comments filed with the SEC earlier this year, though some are seeking clarification of specific provisions.

The board also will receive an update from staff on the progress it has made on putting rating changes up on its Electronic Municipal Market Access site. Hotchkiss said the initiative is progressing along two tracks — an “IT track” to assess the best and most cost-efficient means of placing ratings on the site, and a “legal track” that would eventually entail sending a filing to the SEC asking for permission to post the ratings.

Issuers currently are required to report rating changes on their securities in material event notices filed with EMMA but have complained they are never formally notified of the changes by the rating ­agencies.

The board is in negotiations with the three major rating agencies, and market participants said that Moody’s Investors Service and Fitch Ratings are open to the idea of feeding ratings directly to EMMA. Standard & Poor’s, however, has some concerns.

Standard & Poor’s spokesman Edward Sweeney would say only that the rating agency is in discussions with the MSRB.

But sources said the firm is insisting that it must be compensated when its intellectual property is inserted into another group’s products.

According to the first-quarter earnings report that the McGraw-Hill Cos., the agency’s parent company, released Tuesday, subscriptions to rating products were an “important contributor” to the rating division’s improved performance during the first quarter.

Meanwhile, Hotchkiss said the staff is going to seek board permission to discontinue a public access site that is part of its Municipal Securities Information Library and allows members of the public to visit the board’s Alexandria, Va., offices and print copies of bond documents.

Demand for the facility has waned as the documents have become available online for free through EMMA, supplanting the need for a physical location, according to staff.

The board also plans to consider possible changes to its professional qualifications exam, known as Series 52, as well as discuss financial regulatory reform legislation that is pending in Congress.

 The legislation is expected to require that the board become a majority-public self-regulatory organization. While 10 of its 15 seats are currently filled by dealers and bank officials, no more than six seats would be able to be held by them under a Senate proposal and legislation the House approved late last year.

In addition, the bill approved by the Senate Banking Committee Democrats last month would require non-dealer financial advisers to be registered with the SEC and subject to MSRB rules. It is unclear if that section will survive if a bipartisan agreement is hammered out in the Senate. Senate Republicans generally favor language in the House bill that would give the SEC oversight over non-dealer FAs.

The MSRB yesterday released its second annual municipal bond trading Fact Book, which shows that the par amount of municipal debt traded in 2009 decreased 31% from 2008 while the number of trades decreased 6% during the same period.

Total par traded debt was $3.8 trillion in 2009, compared with $5.5 trillion in 2008, according to the book, while the total number of trades fell to 10.361 million from 10.977 million in 2008.

Most of the decrease in the par volume of traded debt was attributable to a 52% decrease in variable-rate securities — typically variable-rate demand obligations and auction-rate securities. Trading of fixed-rate securities also decreased 11% in the same period.

The emergence of taxable Build America Bonds is reflected in the trading patterns, as trading of tax-exempt bonds fell 31% while the trading of taxable securities increased by 3%.

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