Broker-dealers are not obligated to conduct Internet searches about a particular municipal security before selling it to customers in the secondary market, the Municipal Securities Rulemaking Board said Wednesday.
The board's guidance comes more than a year after the Financial Industry Regulatory Authority, which enforces the MSRB's rules, floated a secondary market checklist setting forth a step-by-step disclosure regimen for registered representatives who sell munis.
The checklist, which a FINRA official said was a model firms could use voluntarily, specified topics brokers should discuss with muni customers, including the existence of continuing disclosures and event notices, and whether the bond's rating has recently changed.
Industry and dealer groups balked at the checklist, including a provision that said broker-dealers should identify any information sources, such as Internet search engines, they used before a customer sale.
The board said it issued its most recent guidance in response to questions from dealers about the FINRA checklist, as well as companion FINRA and MSRB reminder notices, on dealers' sales practice obligations in the secondary market. They were all issued on Sept. 20, 2010.
The board's notice, which also applies to primary market transactions, specifies that dealers are not "obligated" to use search engines or other Internet tools in their material information inquiries, but they may choose to do so.
The board said dealers should also check other information sources, such as rating agency reports, the board's EMMA website, and information vendors.
Under MSRB Rule G-17 on fair dealing, broker-dealers must disclose, at or before the sale of munis to a customer, all material information about the transaction known by the dealer, as well as material information about the security that is reasonably accessible to the market.
Separately, the board said dealers may draw on fewer information sources to disclose all material information about a triple-A rated general obligation bond than for an unrated conduit issue. The board also said broker-dealers might need to consult a "broader range of information sources" before executing transactions in certain securities, such as one that has a complex structure or rapidly changing credit quality.
"Each dealer must determine the range of information sources it will use to obtain material information regarding a particular municipal security," the board said.
An industry group hailed the board's move. "We appreciate that the needle appears to have moved here, and the regulators clearly have taken some of our comments into consideration," said Leslie Norwood, managing director and co-head of the municipal securities division of the Securities Industry and Financial Markets Association.
On Sept. 12, SIFMA sent an 18-page letter to FINRA's chairman and chief executive, Richard Ketchum, outlining its concerns about the checklist and the notice on secondary market sales practice obligations.
SIFMA wrote that by directing dealers to Internet search engines without limitation or qualification, FINRA led them to a "potentially bottomless pit of untested and unreliable information, and a compliance task without any meaningful limitation of reasonableness."
