Groups Applaud NRO Proposal; Firms Question and Oppose It

WASHINGTON — Municipal issuer and bond dealer groups support the Municipal Securities Rulemaking Board's proposal to bar underwriters from using the "not reoffered" or "NRO" designation for new bonds without including price or yield information, but have suggested enhancements.

An independent financial advisor group also likes the proposal, but a broker-dealer is raising questions about it and a bank opposes it.

The Government Finance Officers Association said it is "very pleased" with the proposed changes to the board's Rule G-34 on new issues.

"Many issuers have been concerned that dealers have assigned the NRO designation to maturities of new issues without accompanying yield and pricing information," the GFOA told the MSRB. "This opaque practice — that has existed far too long in our market — hinders market efficiency and needs to be rectified."

However, the GFOA recommended that the board go further.

First, it said the MSRB is proposing that underwriters provide yield or pricing data, when they should provide both.

Second, under the proposal, underwriters would have to make the yield and pricing information available by the end of the day, the GFOA said, adding, "We suggest that this information be submitted as promptly as possible,"

Bond Dealers of America said the proposal "is a step in the right direction" of creating a more efficient, transparent market, but that the MSRB's "initiative of incorporating [New Issue Information Dissemination Service] data into the EMMA system would better address the problems that gave rise to the need to eliminate the NRO designation." NIIDS is operated by the Depository Trust and Clearing Corp.

The National Association of Independent Public Finance Advisors also applauded the MSRB's proposal. But Oppenheimer & Co. raised some concerns.

First, it said, for new-issue bond syndicates, the first two maturities often go out with sealed bids, meaning the underwriter is bidding a net yield, at its cost, that will be marked up in price afterwards.

"The syndicate member isn't allowed to bid a yield and concession under the terms of sealed bidding," the firm said. "To comply with the proposals, the syndicate member should be required to give his or her reoffering yield/price afterward."

The firm also said most notes are issued as "NRO" and that the intended reoffered price should be the one the underwriter gives to the bond counsel for IRS Form 8038 when the bonds are awarded.

Finally, a firm that buys bonds or notes for inventory cannot definitively state the final sale price because that is determined in the future, Oppenheimer said.

UMB Bank NA also weighed in. "Dealers should not be required to release their [yield] scales until they have received the official award" to prevent inaccurate scales from being circulated, it said.

UMB also worried that if it was bidding on comparable issues the same day, it would lose its competitiveness by releasing its winning scale before the award of the bonds.

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