The Municipal Securities Rulemaking Board issued a notice yesterday urging broker-dealers executing trades of insured municipal bonds to review the MSRB’s rules on fair-dealing, suitability, fair pricing, and confirmation disclosure in the wake of credit rating agency reviews and rating downgrades for some insurers.

The board’s notice came on the first business day after Fitch Ratings on Friday lowered the insurer financial strength rating on Ambac Assurance Corp. to AA from AAA. Also last week, Moody’s Investors Service put its Ambac and MBIA Insurance Corp. ratings on watch for possible downgrade, and Standard & Poor’s put Ambac on negative watch.

In the notice, the board said dealers should particularly review the MSRB’s Rule G-17 on fair dealing, as well as its April 2002 guidance on sophisticated municipal market professionals, “to ensure compliance ... in the changing environment for bond insurance companies.”

“In addition, dealers may wish to review how transactions in insured securities are being recommended, priced, and confirmed to customers to ensure compliance with other MSRB investor protection rules,” the board said, apparently referring to its Rule G-19 on suitability, G-30 on fair pricing, and G-15(a) on confirmation disclosures to customers.

The board’s rule on fair dealing requires a trader to ensure that, before executing a trade with a customer, he or she informs the customer orally or in writing of all material facts concerning the transaction, including a complete description of the security.

“As applied to customer transactions in insured municipal securities, the disclosures required under Rule G-17 include a description of the securities and identification of any bond insurance as well as material facts that relate to the credit rating of the issue,” the board said in the notice. These disclosures, it added, “also may include material facts about the credit enhancement applicable to the issue.”

The notice reminded dealers that, in March 2002 interpretative guidance, the board said a dealer is responsible for disclosing any material fact that has been made available through sources, such as the nationally recognized municipal securities information repositories, the board’s real time transaction reporting system, and rating agency reports.

“It follows that, where the issue’s credit rating is based in whole or in part on bond insurance, the credit rating of the insurance company, or information from the rating agency about potential rating actions with respect to the bond insurance company, may be material information about the transaction,” the board said in its notice yesterday.

Dealers also must take into account information about any underlying credit ratings, or ratings that are independent from credit enhancement such as bond insurance, that may have been assigned to muni bonds, the board said.

However, if a trader executing a non-recommended, secondary market transaction, determines the customer is an institutional investor and a “sophisticated municipal market professional,” then the trader does not have to disclose material facts already disclosed by established industry sources such as the NRMSIRs and rating agencies, the board said, referring to guidance it issued in April 2002.

The board said its suitability rule would require a trader selling an insured bond to a customer that only wants to purchase triple-A rated securities to take into account any information from the rating agencies that indicates the triple-A rating may be changed.

The board’s Rule G-15(a) details the information that must be included on confirmations of trades sent to customers. “For securities with additional credit backing, such as bond insurance, the rule requires the confirmation to state ‘the name of any company or other person in addition to the issuer obligated directly or indirectly, with respect to debt service,’ ” the board said.

While, the rule does not require that credit agency ratings be included on customer confirmations, “if credit ratings are given on the confirmation, the ratings must be correct,” the MSRB notice said.


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