WASHINGTON — Industry groups and municipal market professionals are urging the Municipal Securities Rulemaking Board to modify proposed rules aimed at ensuring underwriters and dealers comply with issuers’ so-called retail-order periods.
In comment letters filed with the MSRB, Bond Dealers of America described the board’s proposal as heavy handed, and predicted it could lead to increased costs and unreasonable administrative burdens.
“We believe that it is crucial for the MSRB to take into consideration the additional burden that it is imposing on dealers with its rulemaking,” BDA said in its two-page letter, submitted to the board Friday. “Imposing this new absolute requirement to deliver this information in connection with each retail order simply goes too far.”
In an eight-page letter, the Securities Industry and Financial Markets Association expressed concern about duplicative reporting requirements and asked the board to clarify definitions of some terms. The letter said SIFMA supports other aspects of the proposal, including protections for dealers that follow issuers instructions.
The BDA and SIFMA comments were among a handful of letters the MSRB received by late Friday — the last day of the comment period — in response to a March proposal to create new retail-order requirements for dealers, underwriters and syndicate members. The proposal, and a related interpretive notice, apply to new muni offerings when issuers request that the bonds, or a percentage of them, be sold first to retail investors.
The board said the proposal came in response to reports of dealers disregarding retail-order periods, or ROPs, the terms of which are set by issuers. Those reports raised concerns that retail investors had not received fair prices, the MSRB said.
The proposal would change Rule G-8 on books and records, Rule G-11 on primary offering practices and Rule G-32 on primary offering disclosures. It would define terms like “going-away order,” “selling group” and “retail-order period,” but let issuers to define “retail.”
The proposal would also require syndicate managers to maintain records and to give selling-group members written copies of issuers’ terms. In addition, dealers that submit orders during a retail-order period would need to report a variety of information in writing, including whether the order meets the issuer’s definition of “retail.” Underwriters would have to report on EMMA, the online Electronic Municipal Market Access platform, whether a primary offering included an ROP, and if so, when it was held.
The MSRB also issued a related interpretive notice in March, warning dealers they must treat issuers and other dealers fairly or risk violating Rule G-17. It also said large differences between institutional and individual prices — those that exceed normal “price-yield variances” in the primary market — could be evidence of fair-pricing violations.
In its response letter, Bond Dealers of America expressed concern with the range of information dealers and brokers would be required to file. The group called the reporting requirements a “costly and unreasonable burden.” It said the “voluminous information” dealers will be required to file will “discourage the practice of retail-order periods altogether.”
The group suggested that, at most, dealers be required to “document or represent that they have complied with retail-order period requirements.”
BDA also asked the MSRB to clarify what characteristics of securities of the same maturity justify differences in pricing. SIFMA said it generally supports the proposal, at least to the extent it protects dealers, clarifies terms, and helps syndicate and selling groups receive timely notices.
But the group added that retail-order period concerns could probably be addressed with enforcement or regulatory notices, and it called the proposed reporting requirements for syndicate managers duplicative and “not warranted.”
SIFMA suggested the interpretive notice be clarified to include a “safe harbor” for senior syndicate managers. Reliance on co-managers and selling group members for information about retail-order period trades should satisfy senior managers’ fair-dealing obligations, the group wrote.
Firms and individuals also submitted comments.
Three portfolio managers at Santa Fe, N.M.-based Thornburg Investment Management Inc., urged the MSRB in their letter to let mutual funds purchase bonds during retail-order periods.
The letter, signed by Thornburg staffers John Gonze, Chris Ryon and Chris Ihlefeld, said mutual funds are “effectively” shut out of buying many newly-issued bonds “since many new deals are fully sold during” the ROP.
“This is counter to the purpose of the [retail-order period], since our mutual funds represent true retail investors,” said the letter.
Bill Mullally, president of Walnut Creek, Calif-based Alamo Capital, wrote that the board’s proposal would create more paperwork, increase costs and force firms to hire additional administrators.
In a telephone interview, Mullally said more regulation will give the Financial Industry Regulatory Authority more opportunities to “come in and sue you, and have a three-month audit and charge a fine, and turn around and [pay] bigger bonuses to their top [employees.]”
Mullally’s letter called retail-order periods a “publicity mechanism” that likely does not benefit investors. He added that investors can often buy bonds at cheaper prices in the secondary market.
Richard Li, a city finance employee in Milwaukee., urged the board to define “retail order,” and allow issuers to customize that definition.
Li’s comments were personal; he said he was not speaking for his employer.
He said a standard definition would provide a “starting point” to determine what constitutes a retail order, and would allow standardized reporting, which could ensure orders meet issuers’ terms.
Li also suggested senior managers be required to disclose information about “going away orders,” such as which orders are from buy-and-hold investors, and which are from non-brokers with a history of holding securities for short periods.
Underwriters should also disclose to issuers all sales within seven days of the end of the underwriting period, which would promote fair dealing and help issuers identify tax-related problems, according to Li.
MSRB spokeswoman Jennifer Galloway said the board will review the comments and could make changes to the proposal or interpretive notice before filing a proposed rule change with the Securities and Exchange Commission.