SIFMA Blasts Order-Priority Proposal

WASHINGTON — A Municipal Securities Rulemaking Board proposal on priority of orders in new-issue retail periods would impose new standards on dealers that are confusing or contradictory and could lead to higher borrowing costs for issuers, the Securities Industry and Financial Markets Association warned.

The group issued the warning in comments filed with the Securities and Exchange Commission last week.

In separate comments, the Regional Bond Dealers Association also raised concerns about the proposal and asked the MSRB to clarify that syndicate mangers and lone underwriters can refuse orders they believe originate from “an opportunistic purchaser,” or flipper. Flipping generally occurs when dealers or institutional investors purchase bonds and then immediately resell them to retail investors at higher prices.

In contrast to the critical comments from the two industry groups, the Investment Company Institute, which represents institutional investors, welcomed the proposed changes, and asked the MSRB to go further by conducting a review of the concept of a retail order period and by defining the term “retail” for these periods.

The MSRB’s proposed rule changes, drafted in August and filed with the SEC in November, generally would require a new-issue underwriting manager of a syndicate, “unless otherwise agreed to with the issuer,” to give priority to customer orders over orders for its own account, affiliated accounts, or for other members of the syndicate.

The underwriter or syndicate manager also would be able, on a case-by-base basis, to allocate the securities in another manner than the priority provisions if such action was “in the best interests of the syndicate.” Comments on the measure were to have been filed with the SEC by Dec. 31 and dealer groups used the opportunity to reiterate strong objections that they originally aired when the board first proposed them.

The proposed rule changes stem from complaints by institutional investors that, while their orders for muni bonds were not filled during primary offerings, some of the bonds became available soon after in the secondary market at higher prices, according to the MSRB.

The institutional investors posed two possible causes for this. One is that dealers are, in essence, placing so-called phantom orders during retail periods without having any actual retail investors lined up to buy the bonds and then flipping them at higher prices in sales to investors. The other is that syndicate members or their affiliates are front-running the bonds and buying them for their own or affiliated accounts before filling orders from investors.

Though a number of market participants claim the proposed rule changes are in fact an attempt to curtail flipping, board and SEC officials have said they are meant to ensure broad distribution of the bonds to investors as many issuers have come to rely more on retail order periods to sell their bonds.

But in its letter, SIFMA called the proposal a “regulatory muddle,” owing to a perceived lack of clarity from the SEC and the board on precisely what the proposal is intended to address.

In addition, SIFMA questioned why, if the goal is to expand the distribution of munis, the proposal refers instead to “an orderly distribution” of the ­securities. The association also asked whether it is even within the province of the MSRB to ­determine the preferred order of ­distributing securities.

The industry group said there are three different, and possibly conflicting, standards a dealer must take into account under the proposed changes without any guidance on how to balance them, making it difficult to determine what would be permissible.

Under two of the proposed standards, dealers would have to establish and follow priority provisions “to the extent feasible and consistent with the orderly distribution of securities in the offering,” or they would have to follow priority provisions otherwise agreed to with the issuer, SIFMA said.

The third proposed standard — that a syndicate manager could, on a case-by-case basis, allocate securities other than in accordance with the priority provisions, if such action is determined to be in the best interests of the syndicate — is inartfully drafted, the group complained.

SIFMA warned the proposed changes would have the effect of isolating “a very large group” of muni investors that are affiliated with or related to the syndicate manager, effectively subordinating them to other investors.

But at least one market participant disputed that characterization, at least in the context of retail investors trying to purchase bonds through syndicate managers or their affiliates during the retail order period.

The market participant noted that the syndicate manager or underwriter could enter so-called going-away orders for these retail customers, which would allow them to purchase the bonds and sell them immediately to the customers without the bonds entering their inventories. Such going-away orders would not be considered to be tied the account of the syndicate manager, the market participant said.

For reprint and licensing requests for this article, click here.
Washington
MORE FROM BOND BUYER