MSRB Proposes Rule Changes, Guidance on Retail Order Periods

WASHINGTON — The Municipal Securities Rulemaking Board on Tuesday proposed rule changes and interpretive guidance aimed at ensuring that underwriters and dealers comply with an issuer’s instructions to sell bonds to retail investors during retail order periods.

The board has set an April 13 deadline for public comments on the proposals, which would create new reporting requirements for dealers, underwriters, and syndicate members.

MSRB executive director Lynnette Kelly said the proposed changes are an effort to protect both issuers and retail investors and were written to have minimal impact on market liquidity.

“It is absolutely necessary that the wishes of the issuers are honored,” she said. “We feel that we struck the right balance between honoring the goals of the issuer and requiring record-keeping on the part of the underwriters and syndicate members, to demonstrate that they did comply with the issuer’s directive.”

Kelly said the proposals are partly a response to reports of manipulation of the retail order process.

“There have been reports of bonds that have been purchased during a recent order period and then sold a day later. It is a situation that came to a head,” she said. “The board has been concerned for a while about making sure that the wishes of the issuer are honored.”

The notice said, “Over the last two years, the MSRB has been concerned about disregard by certain dealers of terms and conditions required by issuers for retail order periods to all dealers, and whether retail order periods result in fair pricing to retail investors.”

Enforcement agencies requested the MSRB adopt additional record-keeping requirements for retail order periods to help them enforce MSRB rules, according to the notice.

The MSRB is proposing to amend its Rule G-11 on primary offering practices to define such terms as “going away order,” “selling group” and “retail order period,” making clear that it is the issuer’s prerogative to establish its own definition of retail.

The rule changes would require syndicate managers to give selling-group members written copies of issuers’ terms and conditions, including retail order requirements and other documents, as well as any subsequent changes. Any dealer placing an order during a retail order period would have to report in writing to the syndicate manager information such as whether the order met the issuer’s definition of retail, among other things.

The MSRB also is proposing to amend its Rule G-8 on books and records, to require senior syndicate managers to maintain records of information related to retail orders.

The board also wants to change its Rule G-32 on primary offering disclosures to require that underwriters report to the board, through the EMMA system, whether a primary offering included a retail order period and when the period was held.

In addition to the proposed amendments, the MSRB released a proposed interpretive notice addressing the actions of dealers who place orders during retail periods.

The notice says issuers can reasonably expect dealers will deal fairly with them by meeting their retail period requirements. It also reminds dealers they have fair-practice obligations to other dealers, so if a dealer submits a retail order it knows does not meet the issuer’s requirements, it would be violating G-17 on fair dealing.

The notice would require syndicate members to notify dealers on a timely basis about issuers’ terms and conditions for retail order periods. It also reminded dealers of previous guidance that made clear that large differences between institutional and individual prices — those that exceed normal “price-yield variances” in the primary market — could provide evidence “that the duty of fair pricing to individual clients may not have been met.”

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said his group is “pleased” that the MSRB is clarifying the retail order process. “The things they are doing are definitely good,” he said.

But Cohen said SIFMA is concerned that the board’s proposed interpretive guidance on Rule G-17 “may oversimplify the pricing process, which is complex and multifaceted.” He declined to provide further details.

Mike Nicholas, chief executive of Bond Dealers of America, said in a statement that his group supports “retail order periods being operated in a way that is fair to all parties involved.”

“We recognize that there is value in retail order periods for both issuers and investors and we commend the MSRB for ensuring that the rules set by each issuer are followed,” he said.

Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said any measure designed to strengthen investor protection is a “reasonable goal,” but declined to comment on the MSRB’s proposal, which his office had not yet reviewed.

But Dresslar noted that the California treasurer’s office already operates a successful retail bond sale program.

“We run probably the most aggressive, high-profile, successful retail operation in the country,” he said. “We believe we have worked well with underwriters to ensure our interests are protected and conditions are met.” Dresslar said Lockyer’s office recently took a “qualitative leap forward” in advertising of muni retail order periods; the office now runs ads on the radio and in print publications such as the Los Angeles Times and San Francisco Chronicle.

Dresslar said the website, www.buycaliforniabonds.com, provides resources for retail investors, including descriptions of retail order periods, bond sale information, answers to frequently asked questions, and copies of preliminary official statements, Dresslar said. “We would consider ourself a good model if you are interested in beefing up your retail sales,” he said.

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