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Securities Law

Market Groups Split Over MSRB Retail Order Proposal

WASHINGTON — Municipal market participants are split over whether the Municipal Securities Rulemaking Board's proposal to tighten oversight of retail-order periods should specify the types of orders that qualify as "retail."

In comment letters submitted in recent days, the Securities Industry and Financial Markets Association said the definition of retail should be left to issuers, while the National Association of Independent Public Finance Advisors urged the MSRB to write a standard definition.

The Government Finance Officers Association, which plans to submit comments in the coming days, in a previous letter urged the board to create a general definition that could be tailored by issuers.

The proposal, aimed at ensuring underwriters follow issuers' terms for ROPs, would amend rules G-11 on primary offering practices, G-8 on records, and G-32 on primary offering disclosures.

It would define terms like "going-away orders," "selling groups" and "retail-order periods," but let issuers define "retail" themselves.

The proposal would also require brokers who buy bonds during the ROP to report whether their order meets the issuer's ROP definition, as well as other information.

Senior syndicate managers would need to give selling-group and syndicate members pricing information and copies of the ROP terms and underwriters would need to give pricing information to dealers with which they have marketing agreements. In addition, underwriters would need to report on the EMMA system if a primary offering has a ROP, and when it occurred.

The proposal includes a draft interpretive notice warning dealers that large differences between prices paid by institutional and individual investors could be evidence of fair-pricing violations.

"Our members support an issuer's prerogative to determine whether there should be a retail-order period and to define, on a transaction-by-transaction basis, what types of purchasers qualify for placing an order," SIFMA managing director David Cohen said in a letter.

Cohen said more regulations aren't needed because the MSRB's Aug. 2 interpretive notice to Rule G-17 on fair-dealing already requires underwriters to meet issuers' requirements for ROPs. The notice requires underwriters make a host of new disclosures to issuers and says dealers may violate fair-dealing obligations if they knowingly accept orders that don't meet issuers' ROP terms.

SIFMA also recommended the MSRB not require dealers to report whether each order during an ROP meets the issuer's terms. Instead, dealers could attest to the terms in selling agreements, the group said.

Michael Nicholas, chief executive officer of Bond Dealers of America, agreed. He said in a letter that reporting requirements would be costly and unreasonably burdensome for dealers. He warned the proposed rule changes could require dealers submit "voluminous amounts" of information."

Nicholas also suggested that the MSRB remind issuers, in education materials, that they have the right to conduct an audit to ensure dealers met their ROP terms.

NAIPFA said in its letter that the MSRB could improve market fairness and efficiency by creating a standard definition.

The group said that without a standard definition, issuers could rely too heavily on advice from underwriters when creating ROP terms. The proposal could lead some underwriters to use an "expansive definition" of retail, which could include retail-focused mutual funds, said a lawyer for NAIPFA. If that happened, traditional retail investors could be squeezed from the market, which could boost yields and increase issuers' interest payments, NAIPFA said.

Susan Gaffney, director of GFOA's federal liaison center, said in an email that the group will soon submit comments addressing "the need for a baseline definition of a retail order that issuers could opt to use."

"GFOA supports the overall concept of having clear rules on retail order periods in order to ensure that dealers are following the direction of issuers," Gaffney said.

The group's letter is delayed because of Hurricane Sandy, but a GFOA letter submitted earlier this year said the MSRB should write a "boilerplate" definition of retail and allow issuers to modify it.

Gaffney said GFOA also has concerns about fair-pricing standards, noting there are many reasons why bonds price differently in retail-order periods than when institutional orders are placed.

David Fischer-Lodike, compliance executive at Edward Jones, said the MSRB could amend its proposal to include "size priority protections." For instance, the MSRB could require that orders of 100 bonds or less be given priority over larger orders. Such rules would give "buy and hold" retail investors a better shot at buying bonds at the initial offering price, he said.

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