WASHINGTON — Market participants slammed the Municipal Securities Rulemaking Board’s new draft Rule G-43 for broker’s brokers, calling it everything from irresponsible to anti-competitive.
In particular, they blasted the MSRB’s request for comments on whether the board should craft different rules for traditional broker’s brokers and electronic trading systems that qualify as broker’s brokers.
“With the current marketplace losing liquidity anyway through the pain of the financial crisis of the last few years, having the regulators choosing winners and losers through special exemptions must negatively impact liquidity and we wonder loudly how this is good for the general public, let alone the legality of such one-sided rulemaking,” wrote Thomas Shaw, president of Seidel & Shaw LLC in New York. “Further, to institute these types of rules in the municipal sector, considering the budgetary and political volatility of the times, would seem to be the height of irresponsibility.”
In comment letters, broker-dealers, traders, and dealer groups urged the MSRB to rethink its approach to draft Rule G-43, which outlines what broker’s brokers must do to comply with pricing, fair-dealing, and transaction rules. They warned that the board’s draft, first issued as proposed guidance last fall, would create inefficiencies in the muni market and adversely impact investors. They also said it failed to reflect the limited role of broker’s brokers, who generally execute transactions with broker-dealers.
“Our business is not as dishonest as [your] regulatory response seems to suggest,” wrote Andy Jackson of Stifel, Nicolaus & Co. in St. Louis. “Go after the few offenders individually rather than make the entire business an unprofitable, broken model because of overburdensome regulation.”
In its February release of G-43 and request for comments, the MSRB noted that the Securities and Exchange Commission and the Financial Industry Regulatory Authority had brought several enforcement actions pegged to broker’s brokers activities that violated MSRB rules. Given the nature of the violations, the board said, rulemaking was warranted.
Draft G-43 would require broker’s brokers to make reasonable efforts to obtain prices for dealers that are fair and reasonable under prevailing market conditions. They would have to use the same level of care and diligence as if executing transactions for their own accounts and would be barred from taking any action that undermines the client’s interest in receiving advantageous pricing.
In offerings, broker’s brokers could represent both the potential seller and the bidders. But in a bid-wanted — where the selling dealer asks the broker’s broker to obtain the best bid that it can find for certain municipal securities without specifying a desired price or yield — the rule would prohibit a broker’s broker from representing both parties unless it disclosed its dual role and both sides agreed to it in writing. Many of these provisions spawned a barrage of criticism last fall, when the MSRB first proposed them.
In the February release, the it went a step farther, inquiring about how to police electronic trading systems. Specifically, the MSRB asked whether the board should permit dual-agency trading in bid-wanteds without securing written consent from the bidders and seller; and whether the board should permit electronic trading systems to provide notice of a potentially erroneous bid through an automatically generated electronic missive saying the bid deviated from the most recently reported trades by more than a pre-determined amount. Several broker’s brokers denounced the MSRB’s request, calling it anti-competitive.
“Such a double standard would surely reduce competition in the market by providing electronic trading systems an unfair advantage to the demise of the traditional broker’s broker,” Gene Hurst, president of Wolfe & Hurst Bond Brokers Inc. in Jersey City, wrote in a comment letter dated April 25. “Creating different standards for electronic trading systems would result in market manipulation forced by the regulatory bodies.”
Another broker’s broker agreed, urging the MSRB to provide a “detailed explanation” of how excluding electronic trading systems from draft G-43 would benefit the muni market and the investing public.
“Providing competitive advantage to one type of market participant through regulation should always be avoided, as it violates the principle of a level playing field,” added Mark Epstein, president and chief executive officer of Hartfield, Titus & Donnelly LLC in Jersey City.
Electronic trading systems, meanwhile, said they do not operate as broker’s brokers and should be exempt from draft G-43 altogether. Otherwise, wrote Thomas Vales, chief executive officer of TheMuniCenter LLC, a registered broker-dealer and alternative trading system, “the movement towards electronic trading and the regulatory support of exchange trading will be impaired.”
With respect to dual agency, Vales said, electronic platforms should be permitted to act as agents of the buyer and the seller in unsolicited bid-wanteds without securing written consent from both parties.
In traditional broker’s brokers trades, Vales reasoned, the seller typically contacts the buyer’s broker, who often defines many characteristics of the auction, such as timing, duration, and the order in which client firms learn of the bids wanted. During an electronic process, he said, participants receive “the same information at the same time,” minimizing “many of the abuses” the MSRB is concerned about.
Similarly, in a comment letter dated April 21, Marshall Nicholson, managing director at Knight BondPoint, an SEC-registered alternative trading system, said the MSRB should clarify “the exact nature of firms that qualify for consideration as a broker’s broker.”
Knight BondPoint is a “strictly electronic platform that does not provide voice brokerage or voice-assisted trading,” he said. Rather, broker-dealers and institutional investors electronically post offerings in fixed-income securities, submit requests for quotes, place orders, and execute trades.
Comments on draft Rule G-43 were due April 21. The MSRB must submit whatever rule it proposes to the SEC, which will then seek public comments on it.
