17548 Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 

37 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were solicited 

or received with respect to the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number SR–NYSEARCA–2012–18 on 

the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NYSEARCA–2012–18. This 

file number should be included on the 

subject line if email is used. 

To help the Commission process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NYSEARCA–2012–18, and should be 

submitted on or before April 16, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.37

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–7134 Filed 3–23–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66625; File No. SR–MSRB– 

2012–04] 

Self-Regulatory Organizations; 

Municipal Securities Rulemaking 

Board; Notice of Filing of Proposed 

Rule G–43, on Broker’s Brokers; 

Proposed Amendments to Rule G–8, 

on Books and Records, Rule G–9, on 

Record Retention, and Rule G–18, on 

Execution of Transactions; and a 

Proposed Interpretive Notice on the 

Duties of Dealers That Use the 

Services of Broker’s Brokers 

March 20, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on March 5, 2012, the Municipal 

Securities Rulemaking Board (‘‘Board’’ 

or ‘‘MSRB’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the MSRB. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The MSRB is filing with the SEC a 

proposed rule change consisting of (i) 

proposed MSRB Rule G–43 governing 

the municipal securities activities of 

broker’s brokers and certain alternative 

trading systems (‘‘Proposed Rule G– 

43’’), (ii) proposed amendments to 

MSRB Rule G–8 (on recordkeeping by 

broker’s brokers and certain alternative 

trading systems), MSRB Rule G–9 (on 

record retention), and MSRB Rule G–18 

(on agency trades and trades by broker’s 

brokers) (collectively, the ‘‘Proposed 

Amendments’’); and (iii) a proposed 

interpretive notice on the duties of 

brokers, dealers, and municipal 

securities dealers (‘‘dealers’’) that use 

the services of broker’s brokers (the 

‘‘Proposed Notice’’). The MSRB requests 

that the proposed rule change be made 

effective six months after approval by 

the Commission. 

The text of the proposed rule change 

is available on the MSRB’s Web site at 

www.msrb.org/Rules-andInterpretations/SEC-Filings/2012- 

Filings.aspx, at the MSRB’s principal 

office, and at the Commission’s Public 

Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

MSRB included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. The MSRB has 

prepared summaries, set forth in 

Sections A, B, and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The MSRB decided to consider 

additional rulemaking concerning 

broker’s brokers and the dealers that use 

their services due to the important role 

that broker’s brokers play in the 

provision of secondary market liquidity 

for retail investors in municipal 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 17549 

3MSRB Notice 2004–3 (January 26, 2004). 

4 FINRA v. Associated Bond Brokers, Inc. Letter 

of Acceptance, Waiver and Consent No. 

E052004018001 (November 19, 2007) (settlement in 

connection with alleged violation of Rule G–17 by 

broker’s broker due to lowering the highest bids to 

prices closer to the cover bids without informing 

either bidders or sellers); FINRA v. Butler Muni, 

LLC Letter of Acceptance, Waiver and Consent No. 

2006007537201 (May 28, 2010) (settlement in 

connection with alleged violation of Rule G–17 by 

broker’s broker due to failure to inform the seller 

of higher bids submitted by the highest bidders); D. 

M. Keck & Company, Inc. d/b/a Discount 

Munibrokers, et al., Exchange Act Release No. 

56543 (September 27, 2007) (settlement in 

connection with alleged violation of Rules G–13 

and G–17 by broker’s broker for dissemination of 

fake cover bids to both seller and winning bidder; 

also settlement in connection with alleged violation 

of Rules G–14 and G–17 by broker’s broker due to 

payment to seller of more than highest bid on some 

trades in return for a price lower than the highest 

bid on other trades, in each case reporting the 

fictitious trade prices to the MSRB’s Real-Time 

Trade Reporting System); Regional Brokers, Inc. et 

al., Exchange Act Release No. 56542 (September 27, 

2007) (settlement in connection with alleged 

violation of Rules G–13 and G–17 by broker’s broker 

for dissemination of fake cover bids to both seller 

and winning bidder; broker’s broker allegedly 

violated Rule G–17 by accepting bids after bid 

deadline); SEC v. Wolfe & Hurst Bond Brokers, Inc. 

et al., Exchange Act Release No. 59913 (May 13, 

2009) (settlement in connection with alleged 

violation of Rule G–17 by broker’s broker for 

dissemination of fake cover bids to both seller and 

winning bidder and for lowering of the highest bids 

to prices closer to the cover bids without informing 

either bidders or sellers). These cases also involved 

violations of Rules G–8, G–9, and G–28. 

5The duties of a broker’s broker to any customers 

(as defined in Rule D–9) it may have are addressed 

under Rule G–18 (in the case of agency 

transactions) and Rule G–30 (in the case of 

principal transactions). 

6Under Proposed Rule G–43(d)(ix), ‘‘seller’’ 

would mean the selling dealer, or potentially selling 

dealer, in a bid-wanted or offering and would not 

include the customer of a selling dealer. 

7A broker’s broker that did not avail itself of the 

safe harbor in section (b) would still be subject to 

sections (a), (c), and (d) of Proposed Rule G–43. 

securities. In 2004,3 the MSRB issued a 

notice that, among other things, 

addressed the role of broker’s brokers in 

large intra-day price differentials in the 

sale of retail size blocks of securities. 

‘‘Transaction Chains’’ 

A frequent scenario in large intra-day price 

differentials occurs when a single block of 

securities moves through a ‘‘chain’’ of 

transactions during the day. The securities 

involved in these scenarios often are 

infrequently traded issues with credits that 

are relatively unknown to most market 

participants. In a typical case, the transaction 

chain starts with a dealer buying securities 

from a customer, usually in a ‘‘retail’’ size 

block of $5,000 to $100,000. The securities 

are then sold through a broker’s broker. Two 

or more inter-dealer transactions follow, with 

a final sale of the securities being made by 

a dealer to a customer. In certain cases, the 

difference between the price received by the 

selling customer and the price received by 

the purchasing customer is abnormally large, 

exceeding 10% or more. In reviewing such 

transaction chains, it often appears that the 

two dealers effecting trades with customers at 

each end of the chain—one dealer purchasing 

from a customer and the other selling to a 

customer—did not make excessive profits on 

their trades. Instead, the abnormally large 

intra-day price differentials can be attributed 

in major part to the price increases found in 

the inter-dealer trading occurring after the 

broker’s broker’s trade. 

The MSRB deferred its rulemaking on 

the subject of broker’s brokers until the 

completion of Commission and 

Financial Industry Regulatory Authority 

(‘‘FINRA’’) enforcement actions, which 

subsequently highlighted broker’s 

broker activities that constitute clear 

violations of MSRB rules.4

The MSRB recognizes that some 

broker’s brokers make considerable 

efforts to comply with MSRB rules. 

However, given the nature of the rule 

violations brought to light by 

Commission and FINRA enforcement 

actions and the important role of 

broker’s brokers in the provision of 

secondary market liquidity for retail 

investors, the MSRB determined that 

additional guidance and/or rulemaking 

concerning the activities of broker’s 

brokers was warranted. 

Summary of Proposed Rule G–43 

The role of the broker’s broker is that 

of intermediary between selling dealers 

and bidding dealers. Proposed Rule G– 

43(a) would set forth the basic duties of 

a broker’s broker to such dealers.5

Proposed Rule G–43(a)(i) would 

incorporate the same basic duty 

currently found in Rule G–18. That is, 

a broker’s broker would be required to 

make a reasonable effort to obtain a 

price for the dealer that was fair and 

reasonable in relation to prevailing 

market conditions. The broker’s broker 

would be required to employ the same 

care and diligence in doing so as if the 

transaction were being done for its own 

account. 

Proposed Rule G–43(a)(ii) would 

provide that a broker’s broker that 

undertook to act for or on behalf of 

another dealer in connection with a 

transaction or potential transaction in 

municipal securities could not take any 

action that would work against that 

dealer’s interest to receive advantageous 

pricing. Under Proposed Rule G– 

43(a)(iii), a broker’s broker would be 

presumed to act for or on behalf of the 

seller 6 in a bid-wanted, unless both the 

seller and bidders agreed otherwise in 

writing in advance of the bid-wanted. 

Proposed Rule G–43(b) would create a 

safe harbor. The safe harbor would 

provide that a broker’s broker that 

conducted bid-wanteds in the manner 

described in Proposed Rule G–43(b) 

would satisfy its pricing duty under 

Proposed Rule G–43(a)(i).7 The 

provisions of the safe harbor are 

designed to increase the likelihood that 

the highest bid in the bid-wanted is fair 

and reasonable. 

Proposed Rule G–43(b)(i) and (ii) 

would require a broker’s broker to 

disseminate a bid-wanted widely and, 

in the case of securities of limited 

interest, to make a reasonable effort to 

reach dealers with specific knowledge 

of the issue or known interest in 

comparable securities. 

Proposed Rule G–43(b)(iii) would 

require that each bid-wanted have a 

deadline for the acceptance of bids to 

assist in measuring compliance with the 

safe harbor. 

Proposed Rule G–43(c)(i)(F) would 

require broker’s brokers that availed 

themselves of the safe harbor to use 

predetermined parameters designed to 

identify possible off-market bids in the 

conduct of bid-wanteds. For example, 

the predetermined parameters could be 

based on yield curves, pricing services, 

recent trades reported to the MSRB’s 

Real-Time Trade Reporting System 

(RTRS), or bids submitted to a broker’s 

broker in previous bid-wanteds or 

offerings. Broker’s brokers would be 

required to test the predetermined 

parameters periodically to see whether 

they were achieving their designed 

purpose. 

Proposed Rule G–43(b)(iv) would 

permit a broker’s broker that availed 

itself of the safe harbor to contact the 

high bidder in a bid-wanted about its 

bid price prior to the deadline for bids 

without the seller’s consent, if the bid 

was outside of the predetermined 

parameters described above and the 

broker’s broker believed that the bid 

might have been submitted in error. If 

the high bid was within the 

predetermined parameters, yet the 

broker’s broker believed it might have 

been submitted in error (e.g., because it 

significantly exceeded the cover bid), 

the broker’s broker would be required to 

obtain the seller’s consent before 

contacting the bidder. In all events, 

under Proposed Rule G–43(c)(i)(D), the 

broker’s broker would be required to 

notify the seller if the high bidder’s bid 

or the cover bid had been changed prior 

to execution and provide the seller with 

the original and changed bids. 

Under Proposed Rule G–43(b)(v), a 

broker’s broker would be required to 

notify the seller if the highest bid 

received in a bid-wanted was below the 

predetermined parameters and receive 

the seller’s oral or written consent 


tkelley on DSK3SPTVN1PROD with NOTICES
17550 Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 

8Such an excepted alternative trading system 

would not be subject to the provision of Proposed 

Rule G–43(c)(i)(C) concerning compensation. It 

would also not be subject to the requirements of 

Proposed Rule G–43(c)(i)(D) and (E) in recognition 

of the fact that much of the municipal securities 

trading conducted on alternative trading systems is 

computerized and it would be difficult for 

alternative trading systems to satisfy those 

requirements. 

before proceeding with the trade. This 

required notice would have the effect of 

notifying the selling dealer that the high 

bid in a bid-wanted might be off-market. 

The selling dealer would then need to 

satisfy itself that the high bid was, in 

fact, fair and reasonable, if it wished to 

purchase the securities from its 

customer at that price as a principal. 

Proposed Rule G–43(c) is designed to 

ensure that bid-wanteds and offerings 

are conducted in a fair manner. Many of 

the requirements of Proposed Rule G– 

43(c) would address behavior that 

would also be a violation of Rule G–17 

(e.g., the prohibitions on providing 

bidders with ‘‘last looks,’’ encouraging 

off-market bids, engaging in self-dealing, 

changing bid or cover prices without 

permission, and failing to inform the 

seller of the highest bid), although the 

requirements of Proposed Rule G–43(c) 

would not supplant those of Rule G–17. 

Other requirements of Proposed Rule G– 

43(c) are designed to notify sellers and 

bidders of the manner in which bidwanteds and offerings will be conducted 

and disclosing potential conflicts of 

interest on the part of broker’s brokers 

(e.g., when a broker’s broker has its own 

customers or when it allows an affiliate 

to enter bids). Proposed Rule G–43(c) 

would apply to the conduct of all bidwanteds and offerings by broker’s 

brokers, regardless of whether the 

broker’s broker had elected to satisfy its 

Proposed Rule G–43(a)(i) pricing duty 

for bid-wanteds by means of the 

Proposed Rule G–43(b) safe harbor. A 

broker’s broker would be required by 

Proposed Rule G–43(c)(i)(G) to describe 

the manner in which it would satisfy its 

Proposed Rule G–43(a)(i) pricing 

obligation in the case of offerings and in 

the case of bid-wanteds not subject to 

the Proposed Rule G–43(b) safe harbor. 

Proposed Rule G–43(d) would contain 

the definitions of terms used in 

Proposed Rule G–43. Under Proposed 

Rule G–43(d)(iii), the term ‘‘broker’s 

broker’’ would mean a dealer, or a 

separately operated and supervised 

division or unit of a dealer, that 

principally effects transactions for other 

dealers or that holds itself out as a 

broker’s broker, whether a separate 

company or part of a larger company. 

Certain alternative trading systems 

would be excepted from the definition 

of ‘‘broker’s broker.’’ To be excepted, the 

alternative trading system would be 

required, with respect to its municipal 

securities activities, to utilize only 

automated and electronic means to 

communicate with bidders and sellers 

in a systematic and non-discretionary 

fashion (with certain limited 

exceptions), limit any customers to 

sophisticated municipal market 

professionals, and operate in accordance 

with most of the provisions of Proposed 

Rule G–43(c). In essence, an alternative 

trading system qualifying for the 

exception from the definition of 

‘‘broker’s broker’’ would be subject to 

most 8 of the requirements of Proposed 

Rule G–43 except the Proposed Rule G– 

43(a)(i) pricing obligation. 

Summary of Proposed Amendments 

The proposed amendments to Rule G– 

8 would require recordkeeping designed 

to assist in the enforcement of Proposed 

Rule G–43. Records would be required 

to be kept of bids, offers, changed bids 

and offers, the time of notification to the 

seller of the high bid, the policies and 

procedures of the broker’s broker 

concerning bid-wanteds and offerings, 

and any agreements by which bidders 

and sellers agreed to joint representation 

by the broker’s broker. 

Proposed Rule G–8(a)(xxv)(D) would 

require broker’s brokers to keep the 

following records of communications 

with bidders and sellers regarding 

possibly erroneous bids: The date and 

time of the communication; whether the 

bid deviated from the predetermined 

parameters and, if so, the amount of the 

deviation; the full name of the person 

contacted at the bidder; the full name of 

the person contacted at the seller, if 

applicable; the direction provided by 

the bidder to the broker’s broker 

following the communication; the 

direction provided by the seller to the 

broker’s broker following the 

communication, if applicable; and the 

full name of the person at the bidder, or 

seller, if applicable, who provided that 

direction. 

Under Proposed Rule G–8(a)(xxv)(E), 

the broker’s broker would be required to 

keep records of the date and time it 

notified the seller that the high bid was 

below the predetermined parameters; 

the amount by which the bid deviated 

from the predetermined parameters; the 

full name of the person contacted at the 

seller; the direction provided by the 

seller to the broker’s broker following 

the communication; and the full name 

of the person at the seller who provided 

that direction. 

Proposed Rule G–8(a)(xxv)(J) would 

require that each broker’s broker keep a 

record of its predetermined parameters, 

its analysis of why those predetermined 

parameters were reasonably designed to 

identify most bids that might not 

represent the fair market value of 

municipal securities that were the 

subject of bid-wanteds to which the 

parameters were applied, and the results 

of the periodic tests of such 

predetermined parameters required by 

Proposed Rule G–43(c)(i)(F). 

Proposed Rule G–8(a)(xxvi) would 

impose comparable recordkeeping 

requirements on alternative trading 

systems. 

In the case of broker’s brokers or 

alternative trading systems that are 

separately operated and supervised 

divisions of other dealers, separately 

maintained or separately extractable 

records of the municipal securities 

activities of the broker’s broker or 

alternative trading system would be 

required to be maintained to assist in 

enforcement of Proposed Rule G–43. 

The proposed amendments to Rule G– 

9 would provide for the retention of the 

records described above for six years. 

The proposed amendment to Rule G– 

18 would eliminate duplication, as the 

deleted text would be moved to 

Proposed Rule G–43(a)(i). 

Summary of Proposed Notice 

The Proposed Notice would discuss 

the duties of dealers that use the 

services of broker’s brokers. 

Under the Proposed Notice, selling 

dealers would be reminded that the high 

bid obtained in a bid-wanted or offering 

is not necessarily a fair and reasonable 

price and that such dealers have an 

independent duty under Rule G–30 to 

determine that the prices at which they 

purchase municipal securities as a 

principal from their customers are fair 

and reasonable. Selling dealers would 

be cautioned that any direction they 

provided to broker’s brokers to ‘‘screen’’ 

other dealers from their bid-wanteds or 

offerings could affect whether the high 

bid represented a fair and reasonable 

price and should be limited to valid 

business reasons, not anti-competitive 

behavior. Selling dealers would be 

urged not to assume that their customers 

needed to liquidate their securities 

immediately without inquiring as to 

their customers’ particular 

circumstances and discussing with their 

customers the possible improved 

pricing benefit associated with taking 

additional time to liquidate their 

securities. The Proposed Notice also 

would provide that, depending upon the 

facts and circumstances, the use of bidwanteds by selling dealers solely for 

price discovery purposes, without any 

intention of selling the securities 

through the broker’s brokers might be an 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 17551 

9MSRB Notice 2011–50 (September 8, 2011). 

unfair practice within the meaning of 

Rule G–17. 

Under the Proposed Notice, bidding 

dealers that submitted bids to broker’s 

brokers that they believed were below 

the fair market value of the securities or 

that submitted ‘‘throw-away’’ bids to 

broker’s brokers would violate MSRB 

Rule G–13. The Proposed Notice would 

provide that, while Rule G–30 provides 

that bidders are entitled to make a 

profit, Rule G–13 does not permit them 

to do so by ‘‘picking off’’ other dealers 

at off-market prices. 

2. Statutory Basis 

The MSRB believes that the proposed 

rule change is consistent with Section 

15B(b)(2) of the Securities Exchange Act 

(‘‘Exchange Act’’), which provides that: 

The Board shall propose and adopt rules to 

effect the purposes of this title with respect 

to transactions in municipal securities 

effected by brokers, dealers, and municipal 

securities dealers and advice provided to or 

on behalf of municipal entities or obligated 

persons by brokers, dealers, municipal 

securities dealers, and municipal advisors 

with respect to municipal financial products, 

the issuance of municipal securities, and 

solicitations of municipal entities or 

obligated persons undertaken by brokers, 

dealers, municipal securities dealers, and 

municipal advisors. 

Section 15B(b)(2)(C) of the Exchange 

Act, provides that the rules of the MSRB 

shall: 

be designed to prevent fraudulent and 

manipulative acts and practices, to promote 

just and equitable principles of trade, to 

foster cooperation and coordination with 

persons engaged in regulating, clearing, 

settling, processing information with respect 

to, and facilitating transactions in municipal 

securities and municipal financial products, 

to remove impediments to and perfect the 

mechanism of a free and open market in 

municipal securities and municipal financial 

products, and, in general, to protect 

investors, municipal entities, obligated 

persons, and the public interest. 

The proposed rule change is 

consistent with Sections 15B(b)(2) and 

15B(b)(2)(C) of the Exchange Act for the 

following reasons. Enforcement agencies 

have informed the MSRB that they 

continue to observe the same kinds of 

series of transactions in municipal 

securities that prompted the MSRB’s 

2004 pricing guidance. They have also 

informed the MSRB about their 

observations of other trading patterns 

that indicate some market participants 

may misuse the role of the broker’s 

broker in the provision of secondary 

market liquidity and may cause retail 

customers who liquidate their 

municipal securities by means of 

broker’s brokers to receive unfair prices. 

Proposed Rule G–43 is designed to 

improve pricing in the secondary 

market for retail investors in municipal 

securities by increasing the likelihood 

that bid-wanteds and offerings made 

through broker’s brokers will result in 

fair and reasonable prices. It would do 

that by encouraging the wide 

dissemination of bid-wanteds to those 

who are likely to have interest in the 

securities, drawing potential below 

market prices to the attention of selling 

dealers, and discouraging the type of 

fraudulent and unfair conduct that may 

result in prices that are lower than they 

would otherwise have been. At the same 

time, Proposed Rule G–43 is structured 

in a manner that should not impede the 

operation of the secondary market for 

municipal securities. The MSRB has 

worked extensively with broker’s 

brokers and other dealers to refine the 

proposed rule so that it targets abuses 

without reducing liquidity. The 

proposed amendments to Rules G–8 and 

G–9 would assist the Commission and 

FINRA in the enforcement of Rule G–43. 

The proposed amendment to Rule G–18 

would eliminate unnecessary 

duplication as the broker’s brokers 

pricing obligation would be transferred 

to Proposed Rule G–43. The Proposed 

Notice would remind dealers that use 

the services of broker’s brokers of their 

own pricing obligations, as sellers and 

as bidders. In order for retail investors 

to receive fair and reasonable prices for 

their municipal securities, all dealers in 

the secondary market (whether sellers, 

broker’s brokers, or bidders) must satisfy 

their pricing obligations. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The MSRB does not believe that the 

proposed rule change would impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act, since it 

would apply equally to all broker’s 

brokers and all alternative trading 

systems would have the opportunity to 

qualify for the exception from the 

definition of ‘‘broker’s broker.’’ The 

MSRB notes that alternative trading 

systems that have voice brokerage 

components would be subject to all of 

the provisions of Proposed Rule G–43 

and would not be given a competitive 

advantage over voice brokers. The 

MSRB also does not believe that the 

provisions of the proposed rule change 

would be unduly burdensome to 

broker’s brokers or would have the 

effect of reducing the number of broker’s 

brokers. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

On September 8, 2011, the MSRB 

requested comment on a draft of the 

proposed rule change.9 Comments were 

received from Bond Dealers of America 

(‘‘BDA’’); Tom Dolan (‘‘Mr. Dolan’’); 

Hartfield, Titus & Donnelly, LLC 

(‘‘Hartfield Titus’’); Knight BondPoint; 

Regional Brokers, Inc. (‘‘RBI’’); 

Securities Industry and Financial 

Markets Association (‘‘SIFMA’’); TMC 

Bonds L.L.C. (‘‘TMC’’); Vista Securities, 

Inc. (‘‘Vista Securities’’); and Wolfe & 

Hurst Bond Brokers, Inc. (‘‘Wolfe & 

Hurst’’). Summaries of those comments 

and the MSRB’s responses follow. 

References in this section to ‘‘Draft 

Rule G–43’’ and ‘‘Draft Rule G– 

8(a)(xxv)’’ are to the draft version of 

Proposed Rule G–43 and the draft 

amendments to Rule G–8 upon which 

comment was requested in MSRB 

Notice 2011–50. The underlined rule 

text in this section does not reflect 

amendments agreed to by the MSRB’s 

Board that are now included in the 

proposed rule change. This text has 

been included in this filing for the 

convenience of the reader because a 

number of the sections of the draft rule 

were reordered in the proposed rule 

change, although not substantively 

changed. 

Draft Rule G–43(a)(i): Each dealer 

acting as a ‘‘broker’s broker’’ with 

respect to the execution of a transaction 

in municipal securities for or on behalf 

of another dealer shall make a 

reasonable effort to obtain a price for 

the dealer that is fair and reasonable in 

relation to prevailing market conditions. 

The broker’s broker must employ the 

same care and diligence in doing so as 

if the transaction were being done for its 

own account. 

Comments: Wolfe & Hurst argued that 

‘‘it is not feasible for a broker’s broker 

to determine fair market value nor is 

this the role of a broker’s broker.’’ It 

further argued that the clients of a 

broker’s broker, broker-dealers and bank 

dealers, are in a better position to make 

a determination as to fair market value 

and should therefore be responsible for 

making this determination, not broker’s 

brokers. 

MSRB Response: The pricing duty of 

a broker’s broker under Draft Rule G– 

43(a)(i) is not new. It is the same duty 

as that found in existing Rule G–18. In 

view of the important role that a 

broker’s broker plays in arriving at a fair 

and reasonable price for a retail investor 


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in the secondary market, the MSRB 

considers it important to reemphasize 

that duty by including it in a rule 

directed solely to broker’s brokers. Draft 

Rule G–43 clearly spells out the duties 

of broker’s brokers and the conduct in 

which they may not engage. However, 

the MSRB also has proposed the 

companion notice on the duties of 

dealers using the services of broker’s 

brokers because it agrees that both 

sellers and bidders also play an 

important role in the achievement of a 

fair and reasonable price for retail 

investors. 

Draft Rule G–43(a)(iii): A broker’s 

broker will be presumed to act for or on 

behalf of the seller in a bid-wanted or 

offering, unless both the seller and 

bidders agree otherwise in writing in 

advance of the bid-wanted or offering. 

Comments: SIFMA requested that the 

reference to offerings in Draft Rule G– 

43(a)(iii) be removed. In the conduct of 

offerings, it said that there is not, in 

practice, a presumption that the broker’s 

broker is working for the seller of bonds. 

It agreed that the presumption is 

accurate in the case of bid-wanteds. 

SIFMA also requested that ‘‘the 

requirement to obtain prior written 

authorization from buyers and sellers 

should be clarified to reflect that the 

authorization is not intended to be 

required on a transaction-by-transaction 

basis, and that it may be included in a 

customer agreement or similar terms-ofuse agreement for electronic systems.’’ If 

a transaction-by-transaction scheme was 

envisioned, SIFMA requested the MSRB 

to reconsider such an approach, as 

obtaining written consents in this 

manner would be unworkable in 

practice. 

Hartfield Titus also suggested 

restricting this section to bid-wanteds. It 

said that broker’s broker activity in 

offerings is not consistent with the 

requirement of Draft Rule G–43(a)(iii). It 

said that a broker’s broker works for 

either the seller or buyer in the 

negotiation, depending on which side 

initiates the negotiation. 

RBI said that Draft Rule G–43(a)(iii) 

should be revised to indicate the 

difference between ‘‘bid-wanteds’’ and 

‘‘offerings.’’ It agreed that the broker’s 

broker represents the seller in the 

operation of a bid-wanted auction, but 

did not agree that the broker’s broker 

will always work for the seller in an 

‘‘offering’’ as it represents the bidder 

and seller equally. 

Wolfe & Hurst said that a broker’s 

broker is a ‘‘dual-agent for the seller and 

the buyer of securities.’’ It stated that it 

is not practicable to require a broker’s 

broker to get written consent from both 

the buyer and seller in advance of the 

bid-wanted or offering. Wolfe & Hurst 

suggested that the definition of a 

broker’s broker be revised to reflect the 

dual nature of their business. If not 

modified, it suggested that the provision 

clarify that ‘‘the clients of a broker’s 

broker could consent to a dual-agency 

relationship either through an initial 

service agreement or through Terms of 

Use on the firm’s Web site.’’ 

MSRB Response: The MSRB agrees 

with the comments concerning the role 

of a broker’s broker in an offering and 

has modified Proposed Rule G–43(a)(iii) 

to remove references to ‘‘offerings’’ and 

to clarify that a broker’s broker may 

obtain the requisite agreement in a 

customer agreement. 

Draft Rule G–43(b)(i): Unless 

otherwise directed by the seller, a 

broker’s broker must make a reasonable 

effort to disseminate a bid-wanted or 

offering widely (including, but not 

limited to, the underwriter of the issue 

and prior known bidders on the issue) 

to obtain exposure to multiple dealers 

with possible interest in the block of 

securities, although no fixed number of 

bids is required. 

Comments: Hartfield Titus suggested 

restricting this section to bid-wanteds. It 

said that offerings are displayed by 

dealers on many systems and through 

many broker’s brokers, unlike bidwanteds, which are usually given to one 

broker’s broker. Therefore the 

requirement for disseminating an 

offering widely is not necessary. In bidwanteds, there is an obligation to find 

the buyer, but there is no such 

obligation for an offering. If any such an 

obligation does exist, it is with the 

seller. 

SIFMA noted that, in offerings, a 

broker’s broker will typically approach 

a dealer with known interest in the 

securities being offered or comparable 

securities, rather than reaching out to a 

wide universe of dealers. 

MSRB Response: The MSRB has 

modified the safe harbor of Rule G–43(b) 

so that it applies to bid-wanteds, but not 

offerings, in view of the fact that most 

offerings are the subject of negotiations 

among a limited number of parties, 

unlike bid-wanteds, which are generally 

distributed widely. 

Draft Rule G–43(b)(iii), (iv), (vii), and 

(viii): 

(iii) A broker’s broker may not 

encourage bids that do not represent the 

fair market value of municipal securities 

that are the subject of a bid-wanted or 

offering. 

(iv) A broker’s broker may not give 

preferential information to bidders in 

bid-wanteds or offerings, including 

where they currently stand in the 

bidding process (including, but not 

limited to, ‘‘last looks,’’ directions to a 

specific bidder that it should ‘‘review’’ 

its bid or that its bid is ‘‘sticking out’’); 

provided, however, that after the 

deadline for bids has passed, bidders 

may be informed whether their bids are 

the high bids (‘‘being used’’) in the bidwanteds or offerings. 

(vii) A broker’s broker may not change 

a bid without the bidder’s permission or 

change an offered price without the 

seller’s permission. 

(viii) A broker’s broker must not fail 

to inform the seller of the highest bid in 

a bid-wanted or offering. 

Comments: SIFMA said Draft Rule G– 

43(b) includes both safe harbor 

provisions and anti-fraud provisions for 

which the failure to adhere likely would 

constitute violations of Rule G–17. 

SIFMA thus requested that Draft Rule 

G–43(b)(iii), (iv), (vii), and (viii) be 

removed and either be published as 

interpretations under G–17, or moved to 

G–43(c). 

SIFMA agreed with Draft Rule G– 

43(b)(iv), which prohibits broker’s 

brokers from giving preferential 

treatment to bidders during a bidwanted. However, it suggested that 

broker’s brokers be allowed to inform a 

bidder whether their bid is being used 

before a bid-wanted is completed. Wolfe 

& Hurst agreed with SIFMA. 

Hartfield Titus suggested restricting 

Draft Rule G–43(b)(iv) to bid-wanteds. It 

said that offerings are traded through 

negotiation rather than an auction. It 

also suggested that broker’s brokers ‘‘be 

allowed to give a bidder information on 

whether their bid is being used and 

subsequently prohibit them from any 

further bidding on the item.’’ 

TMC noted that Draft Rule G–43, by 

its definition, includes all of the 

electronic trading platforms. It said that 

Draft Rule G–43(b)(vii) would be 

meaningless as all alternative trading 

systems would be required to inform 

every registered firm that every price 

they post will be changed, and in 

multiple ways, as each recipient firm 

defines its own matrix. Current 

guidelines already prohibit unfair 

dealing. TMC suggested that Draft Rule 

G–43(b)(vii) be removed or modified to 

accommodate private label Web sites 

that allow customers and registered reps 

to view inventory. 

MSRB Response: The MSRB agrees 

that Draft Rule G–43(b)(iii), (iv), (vii), 

and (viii) should be applicable whether 

or not the safe harbor is availed of by 

a broker’s broker and has moved these 

provisions to Proposed Rule G–43(c). 

The MSRB is sensitive to the need to 

maintain liquidity in the secondary 

market for municipal securities and has, 


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accordingly, modified the draft rule to 

permit a broker’s broker to tell a bidder 

whether its bid is being used before a 

bid-wanted is completed. Nevertheless, 

to protect against gaming of the bidwanted process, bidders would not be 

permitted to change their bids (other 

than to withdraw them) or resubmit bids 

for the same bid-wanted after receiving 

a comment. This portion of the draft 

rule has been moved to Proposed Rule 

G–43(c), so that it is applicable whether 

or not the safe harbor is used. As noted 

above, the MSRB has removed 

references to offerings in Proposed Rule 

G–43(b) and in the comparable text 

moved to Proposed Rule G–43(c). 

The MSRB does not agree with TMC’s 

comment. Under the proposal, a seller’s 

consent would be required before an 

offered price could be changed by a 

broker’s broker. The same would be true 

for alternative trading systems excepted 

from the rule. However, that consent 

could be obtained in advance (e.g., in a 

customer agreement). 

Draft Rule G–43(b)(v): 

Notwithstanding subsection (a)(ii) of 

this rule, each bid-wanted or offering 

must have a deadline for the acceptance 

of bids, after which the broker’s broker 

must not accept bids or changes to bids. 

That deadline may be either a precise 

(or ‘‘sharp’’) deadline or an ‘‘around 

time’’ deadline that ends when the high 

bid has been provided (or ‘‘put up’’) to 

the seller. 

Comments: SIFMA agreed that bidwanteds must have identifiable 

deadlines, but disagreed that the 

deadline for ‘‘around time’’ bid-wanteds 

should be based on when the bids are 

‘‘put up’’ to the seller. SIFMA suggested 

that the deadline for ‘‘around time’’ bidwanteds should be defined to occur at 

the time the seller informs the broker’s 

broker that the bonds should be sold to 

the high bidder (when the bonds are 

‘‘marked for sale’’), or when the seller 

informs the broker’s broker that the 

bonds will not be sold in that bidwanted (that the bonds ‘‘will not 

trade’’). If neither of these events occurs 

in an ‘‘around time’’ bid-wanted, it 

should be deemed to terminate at the 

end of the trading day. SIFMA said that 

the rule as currently drafted would have 

a ‘‘detrimental effect on liquidity, 

especially for retail customers of the 

broker-dealer.’’ 

Hartfield Titus suggested restricting 

Draft Rule G–43(b)(v) to apply only to 

bid-wanteds and not to offerings. It said 

that current industry practices have no 

time limits on offerings. Hartfield Titus 

agreed with SIFMA that ‘‘the deadline 

for accepting bids on an ‘around time’ 

item be when the bonds are marked 

‘FOR SALE’.’’ 

RBI said that the imposition of a 

deadline could drastically deny the 

retail customer from receiving the 

highest bid available. RBI also noted 

that, in MSRB Notice 2011–18 (February 

24, 2011), the MSRB stated that it 

‘‘believes that most retail customers 

would prefer a better price to a speedy 

trade.’’ RBI agreed with this and said the 

imposition of an arbitrary ‘‘deadline’’ 

does the opposite. ‘‘RBI believes that 

any deadline that is imposed upon its 

ability to accept bids, especially on oddlot bid-wanted items that are being 

advertised as an ‘around time’, will be 

vastly detrimental to the ability of 

broker’s brokers to provide the best 

price, and therefore the best execution, 

for the retail seller who is trying to get 

the best price for their municipal 

bonds.’’ RBI also commented that the 

MSRB has not provided guidelines 

regarding the procedures that should be 

taken when late, high bids are returned 

to the broker’s broker that cannot be 

reported to the seller because of this 

‘‘deadline.’’ Like SIFMA and Hartfield 

Titus, RBI proposed that instead of the 

bid deadline ending at the time that a 

bid is ‘‘put up’’ to the seller, that the bid 

deadline should end when the bonds 

are marked ‘‘for sale.’’ 

Wolfe & Hurst objected to Draft Rule 

G–43(b)(v). It said that the rule currently 

applies to both ‘‘sharp’’ and ‘‘around 

time’’ deadlines. It argued that the 

‘‘requirement restricts the broker’s 

broker from getting the best bid for its 

client, which will ultimately have a 

negative impact on smaller retail clients 

and the market as a whole. Wolfe & 

Hurst suggested that the ‘‘rule be 

modified in the case of ‘around time’ 

bid-wanteds only. Specifically, where a 

selling dealer requests an ‘around time’ 

deadline, the broker’s broker should be 

permitted to accept and change bids up 

until the point that the trade is marked 

for sale. Prohibiting modification at the 

point where the high bid is ‘put up’ to 

the seller is restricting liquidity in the 

market. This rule change would be 

detrimental to the industry.’’ 

MSRB Response: The MSRB’s 

principal reason for proposing Rule G– 

43 was to improve the pricing received 

by retail investors in the secondary 

market. Accordingly, the MSRB has 

modified the deadline provisions of the 

safe harbor to increase the likelihood of 

the receipt of higher prices. Under the 

revision, an ‘‘around time’’ deadline 

would end upon the earliest of: (1) the 

time the seller directs the broker’s 

broker to sell the securities to the 

current high bidder, (2) the time the 

seller informs the broker’s broker that 

the bonds will not be sold in that bidwanted, or (3) the end of the trading day 

as publicly posted by the broker’s broker 

prior to the bid-wanted. Additionally, 

the deadline provisions would apply 

only to bid-wanteds. 

Draft Rule G–43(b)(vi): If the high bid 

received in a bid-wanted is above or 

below the predetermined parameters of 

the broker’s broker and the broker’s 

broker believes that the bid may have 

been submitted in error, the broker’s 

broker may contact the bidder prior to 

the deadline for bids to determine 

whether its bid was submitted in error, 

without having to obtain the consent of 

the seller. If the high bid is not above 

or below the predetermined parameters 

but the broker’s broker believes that the 

bid may have been submitted in error, 

the broker’s broker must receive the 

permission of the seller before it may 

contact the bidder to determine whether 

its bid was submitted in error. In all 

events, if a bid has been changed, the 

broker’s broker must disclose the change 

to the seller prior to execution and 

provide the seller with the original and 

changed bids. 

Comments: Hartfield Titus suggested 

that there was no need to notify the 

seller of all changes in bids under the 

safe harbor and that to do so would only 

delay the process. It stated that such a 

requirement should apply only when 

the safe harbor was not being used. 

TMC said, ‘‘The requirement of a 

broker’s broker to contact a seller for 

permission to contact a bidder, when 

the bid itself is within the parameters of 

the safe harbor is neither practical nor 

realistic. A selling dealer, who is acting 

in the best interest of its selling client, 

is not likely to give such approval.’’ 

TMC also said that ‘‘the requirement to 

document the communication, the 

original bid, and the changed bid is 

superfluous and an added regulatory 

burden.’’ 

BDA expressed concern that ‘‘if a 

broker’s broker set the parameters too 

broadly on the upper end, erroneous 

bids would not be identified, the bidder 

would not be notified and might, in 

future dealings with that broker’s 

broker, bid more conservatively or not at 

all. The result would be reduced 

liquidity in the market and lower prices 

for investors. Similarly, if the broker’s 

broker set the parameters too narrowly 

on the lower end, the selling broker 

would receive a notice and quite likely 

not go through with the trade, or risk 

litigation if it did.’’ 

Wolfe & Hurst objected to the use of 

predetermined parameters for bidwanteds. It said that erroneous bids 

typically occur due to human error and 

should not be permitted to reach the 

marketplace as they do not reflect an 

accurate bid. Wolfe & Hurst also said 


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10EMMA® is a registered trademark of the MSRB. 

that ‘‘requiring a broker’s broker to 

obtain written permission from the 

seller prior to contacting the owner of 

an erroneous bid may result in a 

distortion of the market.’’ It suggested 

that broker’s brokers be allowed to 

inform a bidder of ‘‘a clearly erroneous 

bid without the consent of the seller and 

without providing the same opportunity 

for modification to all bidders.’’ 

MSRB Response: By definition, 

‘‘predetermined parameters’’ must be 

designed to identify off-market bids. 

Broker’s brokers currently compare bids 

to where securities have traded before 

with them and where they have traded 

most recently, as displayed on the 

MSRB’s Electronic Municipal Market 

Access (EMMA®) System.10 Some also 

subscribe to pricing services. Many 

broker’s brokers already notify sellers 

and bidders if they think bids may be 

off-market. The requirement that they 

establish pre-determined parameters 

and use them to alert sellers and bidders 

to possible off-market bids simply 

incorporates current business practice 

in many cases. As markets move over 

time, the predetermined parameters of a 

broker’s broker may cease to be effective 

in identifying off-market bids. That is 

the purpose of the periodic testing 

requirement. 

The concept of ‘‘predetermined 

parameters’’ has two purposes. First, if 

the high bid in a bid-wanted is below 

the predetermined parameters, a 

broker’s broker using the safe harbor 

must notify the seller of that fact, thus 

alerting the seller that the bid may be off 

market. Second, if the high bid is 

outside of the parameters, the broker’s 

broker may inquire of the bidder 

whether its bid was in error. 

Considerable abuse has occurred 

previously when some broker’s brokers 

signaled to bidders that they could 

lower their bids to be closer to cover 

bids. This practice resulted in less 

favorable prices for retail investors. 

Cover bids are, therefore, under the 

proposal not permitted to be taken into 

account in the pricing parameters of a 

broker’s broker. 

The MSRB has modified Proposed 

Rule G–43(b)(vi) to clarify that a 

broker’s broker need only inform the 

seller of changes in the winning high 

bidder’s bids and in cover bids, rather 

than changes to other bids. 

Additionally, the MSRB has clarified 

that the permission of a seller to contact 

a bidder need not be in writing, 

although a broker’s broker must keep a 

written record of such communication. 

Draft Rule G–43(b)(ix): If the highest 

bid received in a bid-wanted is below 

the predetermined parameters of the 

broker’s broker, the broker’s broker must 

disclose that fact to the seller, in which 

case the broker’s broker may still effect 

the trade, if the seller acknowledges 

such disclosure either orally or in 

writing. 

Comments: TMC acknowledged the 

MSRB’s desire to limit the number of 

off-market trades that result from the 

bid-wanted process, but said that the 

attempt to add written communication 

and/or oral confirmation will greatly 

reduce the efficiency and accuracy of 

the electronic market. TMC stated that 

‘‘(t)he fallacy of the proposal lies in the 

belief that a single model will be 

sufficient for determining 

reasonableness.’’ TMC also noted that 

Draft Rule G–43(b)(ix) ‘‘still proposes 

that the broker’s broker provide a fair 

price, but the Board has relaxed the 

requirement to include a price band.’’ 

TMC responded that ‘‘its tools are 

designed to help with a user’s valuation 

process, not to replace the decision 

maker.’’ TMC said that ‘‘recognizing that 

volatile periods will generate the most 

exceptions with any model, the burdens 

placed on participants to record and 

acknowledge price levels will be 

unbearable.’’ TMC suggested that ‘‘a 

standard of reasonable care for broker’s 

brokers should include ‘reasonable’ 

tools to help with the decision process, 

but the construction of a scheme to 

establish value in a fragmented and 

diffuse market seems to be more 

appropriate for a position taker than for 

an intermediary.’’ 

BDA also said that it is not a function 

of a broker’s broker to determine a fair 

price or a range of fair prices. It also 

noted a practical problem if the draft 

rule is applied to alternative trading 

systems (‘‘ATSs’’). BDA suggested that 

‘‘the Proposal should not be applied to 

ATSs, which allow for the wide and 

impartial distribution of bids.’’ 

MSRB Response: The MSRB believes 

that the exception for certain alternative 

trading systems from the definition of 

‘‘broker’s broker’’ in the revised rule 

should address TMC’s and BDA’s 

concerns. 

Draft Rule G–43(c)(i)(F): [A broker’s 

broker must adopt and comply with 

policies and procedures pertaining to 

the operation of bid-wanteds and 

offerings, which at a minimum:] subject 

to the provisions of section (b) of this 

rule, if applicable, prohibit the broker’s 

broker from providing any person other 

than the seller (which may receive all 

bid prices) and the winning bidder 

(which may receive only the price of the 

cover bid) with information about bid 

prices, until the bid-wanted or offering 

has been completed, unless the broker’s 

broker makes such information 

available to all market participants on 

an equal basis at no cost, together with 

disclosure that any bids may not 

represent the fair market value of the 

securities, and discloses publicly that it 

will make such information public. 

Comments: SIFMA said Draft Rule G– 

43(c)(i)(F) should not apply to offerings. 

It also requested clarification regarding 

when a transaction has been completed. 

It suggested the appropriate point in 

time for the purposes of this provision 

should be the time at which both the 

purchase and sale sides of the 

transaction have been executed. 

Hartfield Titus suggested restricting 

Draft Rule G–43(c)(i)(F) to apply only to 

bid-wanteds. It said that offer and bid 

information on offerings should be 

made available to interested parties 

throughout the negotiation process. 

Hartfield Titus also suggested that a 

definition of when a bid-wanted is 

‘‘completed’’ be any of the following: 

‘‘1) the item traded, i.e., the sell is 

executed and the buy is executed; 2) the 

item is ‘Traded Away’ (it was traded by 

the seller to another dealer or customer); 

and 3) the item is identified as ‘No 

Trade’ (we are told by the seller that the 

item will not trade).’’ 

MSRB Response: In response to this 

comment, the MSRB has removed the 

reference to offerings in this section of 

the rule and proposed a definition of 

when a bid-wanted will be considered 

‘‘completed’’ that is consistent with 

Hartfield Titus’ request. 

Draft Rule G–43(c)(i)(G): [A broker’s 

broker must adopt and comply with 

policies and procedures pertaining to 

the operation of bid-wanteds and 

offerings, which at a minimum:] if a 

broker’s broker has customers, provide 

for the disclosure of that fact to both 

sellers and bidders in writing and 

provide for the disclosure to the seller if 

the high bid in a bid-wanted or offering 

is from a customer of the broker’s 

broker. 

Comments: Hartfield Titus suggested 

that generally disclosing that it has 

customers would be a sufficient way to 

inform its clients instead of telling them 

on a transaction-by-transaction basis. A 

general statement would help the 

broker’s broker keep anonymity in its 

brokering services while informing its 

clients that it also brokers with 

sophisticated municipal market 

professionals. 

TMC supported the notion that 

brokers’ brokers should prominently 

disclose the types of firms that 

constitute its client base but does not 

agree with disclosing to a seller 

information about the buyer of an item 

at the time of trade stating this to be 


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‘‘unfair and against the anonymous 

nature of the broker’s market.’’ TMC 

said that ‘‘[a]nonymity is an extremely 

important component of the utility of an 

intermediary (either a voice broker or an 

ATS) in the municipal market.’’ It said 

that ‘‘[a]ny regulatory requirement that 

would serve to compromise anonymity 

would be a negative development for a 

market that has always given 

participants ways to protect their 

identities.’’ 

MSRB Response: The role of the 

broker’s broker has traditionally been 

that of an intermediary, and the MSRB 

has previously said that a broker’s 

broker has a special relationship with 

other dealers. Therefore, the MSRB 

continues to be of the view that a 

broker’s broker should make it known to 

a seller if it has customers and if the 

high bid in a bid-wanted or offering is 

from a customer of the broker’s broker. 

The MSRB has, however, modified the 

draft rule to clarify that the broker’s 

broker need not disclose the name of its 

customer. The MSRB believes that the 

same concerns would exist if an affiliate 

of a broker’s broker could bid in a bidwanted or offering and has added 

comparable provisions concerning 

affiliates. 

Draft Rule G–43(c)(i)(H): [A broker’s 

broker must adopt and comply with 

policies and procedures pertaining to 

the operation of bid-wanteds and 

offerings, which at a minimum:] if the 

broker’s broker wishes to conduct a bidwanted in accordance with section (b) of 

this rule, require the broker’s broker to 

adopt predetermined parameters for 

such bid-wanted, disclose such 

predetermined parameters in advance 

of the bid-wanted in which they are 

used, and periodically test such 

predetermined parameters to determine 

whether they have identified most bids 

that did not represent the fair market 

value of municipal securities that were 

the subject of bid-wanteds to which the 

predetermined parameters were 

applied. 

Comments: BDA said that the 

requirement that the parameters be 

tested periodically is problematic. It 

stated that Draft Rule G–43(c)(i)(H) is 

not clear regarding what constitutes a 

successful test. ‘‘If no bids exceeded the 

parameters, is that an indication that the 

parameters are correct? Or that they are 

too broadly set? Or does it say 

something about the bids.’’ 

TMC said that ‘‘providing users with 

useful market and security specific tools 

should suffice to satisfy the Board’s 

desire to improve bid quality. If a firm 

uses the same systematic approach for 

each posted bid-wanted and has a set of 

tools that helps traders establish value, 

then there should be no need for a safe 

harbor.’’ 

MSRB Response: If many trades were 

occurring at prices outside the 

parameters, that would be an indication 

that the parameters should be adjusted. 

A broker’s broker could adjust its 

predetermined parameters as frequently 

as it considered necessary to adapt to 

changing markets, as long as the new 

parameters were disclosed in advance of 

use and not made applicable to bidwanteds already under way. 

Draft Rule G–43(d)(iii): ‘‘Broker’s 

broker’’ means a dealer, or a separately 

operated and supervised division or unit 

of a dealer, that principally effects 

transactions for other dealers or that 

holds itself out as a broker’s broker. A 

broker’s broker may be a separate 

company or part of a larger company. 

Comments: Knight BondPoint 

requested that the draft definition of a 

broker’s broker be revised to clarify that 

‘‘ATS operators whose platforms 

operate in a manner in which 

subscribers electronically disseminate 

their bids and offers broadly to other 

subscribers and electronically interact 

with such bids and offers to 

consummate transactions, and which 

offer subscribers an automated, 

systematic and non-discretionary 

platform to conduct their bids wanted 

auctions—are not broker’s brokers for 

purposes of this rule.’’ 

BDA argued that the inclusion of 

ATSs within the definition of broker’s 

broker is not warranted. 

Wolfe & Hurst suggested a more 

detailed definition of broker’s broker to 

include the nature and role of a broker’s 

broker as well as the duties and 

responsibilities of a broker’s broker. It 

argued that this would eliminate the 

need to include the phrase, ‘‘or that 

holds itself out as a broker’s broker’’ in 

Draft Rule G–43(d)(iii). 

TMC said that the language in Draft 

Rule G–43(d)(iii) on whether a firm 

‘‘holds itself out as a broker’s broker’’ 

discourages dealers from competitive 

(‘‘in-comp’’) bidding. TMC requested 

clarification regarding the following 

questions: (1) As a dealer’s business is 

not usually ‘‘principally effecting 

transactions for other dealers’’ but for its 

client, would a broker-dealer be exempt 

from the definition or is acting like a 

broker’s broker the equivalent of ‘‘holds 

itself out as a broker’s broker?’’ (2) Many 

dealers post the same bid-wanted with 

multiple broker’s brokers. Does the use 

of multiple broker’s brokers create an 

unfair practice with respect to G–17? (3) 

If a dealer uses multiple brokers, should 

that be disclosed to the broker so that 

the broker can disclose that fact to 

potential bidders? (4) If the same bond 

is out for the bid with multiple broker’s 

brokers, and the bond can only trade 

once, would that be viewed negatively 

by the regulators, barring disclosure to 

the marketplace? (5) If a broker’s broker 

receives a bid-wanted that has been 

posted to multiple firms, does the 

broker need to use the same level of care 

as if the item were for its own account? 

MSRB Response: This proposal would 

not require selling dealers to keep any 

records or discourage competitive 

bidding. It also would not prevent a 

selling dealer from posting bid-wanteds 

with multiple firms. The portion of the 

Proposed Notice on price discovery 

concerns a practice of some dealers of 

using broker’s brokers to gauge the 

market price of securities so that they 

themselves may purchase the securities 

rather than trading them at the high bids 

obtained by broker’s brokers. The 

pricing duty of a broker’s broker does 

not depend upon whether the selling 

dealer has posted the bid-wanted with 

multiple broker’s brokers. 

The MSRB continues to be of the view 

that a function-based definition of 

‘‘broker’s broker’’ is appropriate, rather 

than a detailed list such as that 

proposed by Wolfe & Hurst. 

The MSRB has determined that it is 

appropriate to except certain alternative 

trading systems from the definition of 

‘‘broker’s broker,’’ because they do not 

engage in the types of voice 

communications that have led to abuses 

in the past. Nevertheless, in order to 

qualify for the exception, under 

Proposed Rule G–43(d)(iii) such systems 

would be subject to the same 

prohibitions on abusive behavior to 

which a broker’s broker would be 

subject. 

Miscellaneous 

Comments: SIFMA said that the 

restrictions on control of bid-wanteds by 

the selling dealers in the draft 

interpretive notice are unreasonably 

restrictive. It suggested that ‘‘an 

appropriate standard would be to allow 

selling dealers discretion to control this 

aspect of bid-wanteds so long as they 

could demonstrate that any restrictions 

imposed were intended to benefit the 

selling customer, and were not intended 

to solely benefit the selling dealer.’’ 

MSRB Response: The MSRB is 

concerned that the standard for 

permissible screening suggested by 

SIFMA would be difficult to employ 

and to enforce. It also has the potential 

for resulting in a less favorable price for 

the customer than had the screening not 

occurred. Moreover, if a selling dealer’s 

customer were to request expressly that 

the dealer screen certain bidders from 

the bid-wanted or offering for its 


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17556 Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 

securities, such screening would not be 

requested for competitive reasons. 

Comments: Mr. Dolan asked whether 

a broker-dealer using an electronic 

platform is permitted to screen its 

competitor’s bonds from the platform, 

thereby encouraging its customers to 

purchase securities from the dealer’s 

inventory (i.e., whether the MSRB had 

a best execution rule). 

MSRB Response: The MSRB is 

concerned that certain dealers may be 

refusing to show their customers 

municipal securities offered by their 

competitors at more favorable prices 

than those the dealers place on the same 

securities in their inventory. At this 

time, the MSRB has no best execution 

rule comparable to that of the Financial 

Industry Regulatory Authority. As long 

as the price paid by the customer is fair 

and reasonable, there is no requirement 

under MSRB rules that a dealer seek out 

the most favorable price for its 

customer. The MSRB will take this 

comment under advisement as it 

continues to review its rules. 

Comments: Vista Securities asked, ‘‘If 

there is a material change in the 

description of a bond being advertised 

for the bid, * * * is not the item as 

incorrectly advertised simply invalid 

and any bids null and void? As opposed 

to the broker’s broker not being 

‘prohibited’ from notifying all bidders 

about material changes in a bid-wanted 

item, should not the broker’s broker be 

obliged to notify all bidders that the 

item was incorrectly described, all bids 

are void, and have the seller resubmit 

the item for the bid if the seller so 

chooses? Can a potential buyer of any 

security, municipal or otherwise, be 

held to his/her bid if the security is 

advertised incorrectly in a material 

way? If an intermediary in the 

transaction becomes aware of the 

problem, should not the intermediary be 

obliged to halt the process?’’ 

MSRB Response: If a broker’s broker 

learned of material changes in a bidwanted item it would be required by 

MSRB Rule G–17 to notify all bidders 

and accept changed bids. 

Draft Rule G–8(a)(xxv)(A): [A broker’s 

broker (as defined in Rule G–43(d)(iii)) 

shall maintain the following records:] 

(A) All bids to purchase municipal 

securities, and offers to sell municipal 

securities, that it receives, together with 

the time of receipt. 

Comments: SIFMA said that the 

requirements under Draft Rule G– 

8(a)(xxv)(A) are not workable or 

necessary for offerings. It said that 

applying this requirement will impose a 

significant recordkeeping burden on 

broker’s brokers, and is not warranted. 

It requested clarification if Draft Rule G– 

8(a)(xxv)(A) is intended to apply only to 

the initial time an offering is given to a 

broker’s broker. 

Hartfield Titus said that the majority 

of negotiations on municipal offerings 

are performed through ‘‘voice 

brokering.’’ Price may change many 

times. It suggested that the time and 

price record be limited to when the 

offering is first received, when it is 

updated for display or distribution, and 

displaying the offering as it was given 

to the brokers’ broker or updated, by the 

seller. Hartfield Titus also said that 

there should be no requirement to 

record the reason. 

RBI agreed that the requirements are 

reasonable for bid-wanteds, but said 

they are not workable or necessary for 

offerings. Negotiated offerings involve 

back and forth communications between 

a potential buyer and seller, not always 

resulting in a trade. RBI said the 

requirement would impose a significant 

recordkeeping burden on broker’s 

brokers while adding no significant 

compliance benefits. 

MSRB Response: The MSRB agrees 

with the comments concerning records 

of offers and has amended the rule to 

require that a broker’s brokers’ records 

concerning offers must include the time 

of first receipt and the time the offering 

has been updated for display or 

distribution. 

Draft Rule G–8(a)(xxv)(E)–(F): [A 

broker’s broker (as defined in Draft Rule 

G–43(d)(iii)) shall maintain the 

following records:] 

(E) For all changed bids, the full name 

of the person at the bidder firm that 

authorized the change; the reason given 

for the change in bid; and the full name 

of the person at the broker’s broker at 

whose direction the change was made; 

(F) For all changed offers, the full 

name of the person at the seller firm 

that authorized the change; the reason 

given for the change in offering price; 

and the full name of the person at the 

broker’s broker at whose direction the 

change was made. 

Comments: Wolfe & Hurst said that 

the ‘‘recordkeeping requirements as set 

forth in the draft rule are overly 

burdensome to broker’s brokers and 

would cause unnecessary delay and 

inefficiency in the market.’’ 

TMC said that ‘‘[r]equiring brokers’ 

brokers to document price changes 

would be of no value to the market, as 

traders know that offering prices are 

always subject to change.’’ It also added 

that ‘‘documenting tens of thousands of 

price changes on a daily basis would be 

cost prohibitive.’’ 

MSRB Response: The requirement 

that a record of the reason for a change 

in bid or offering price has been 

eliminated. However, the remaining 

recordkeeping requirements have not 

been modified. Many were suggested by 

broker’s brokers themselves, and good 

records are essential for enforcement of 

Proposed Rule G–43. 

The MSRB issued two other requests 

for comment on the regulation of 

broker’s brokers prior to the request for 

comment described above. On 

September 9, 2010, the MSRB published 

‘‘Request for Comment on MSRB 

Guidance on Broker’s Brokers’’ (‘‘MSRB 

Notice 2010–35’’). In MSRB Notice 

2010–35, the MSRB requested comment 

on an interpretive notice reviewing the 

fair pricing requirements of MSRB Rules 

G–18 and G–30 and the fair practice 

requirements of MSRB Rule G–17 as 

they applied to transactions effected by 

broker’s brokers. It also proposed to 

discuss the recordkeeping and record 

retention requirements for broker’s 

brokers. On February 24, 2011, the 

MSRB published ‘‘Request for Comment 

on Draft Broker’s Brokers Rule (Rule G– 

43) and Associated Recordkeeping and 

Transaction Amendments’’ (‘‘MSRB 

Notice 2011–18’’). In MSRB Notice 

2011–18, the MSRB requested comment 

on the original version of Draft Rule G– 

43 (on broker’s brokers), as well as 

associated draft amendments to Rule G– 

8 (on books and records), G–9 (on 

records preservation), and G–18 (on 

execution of transactions). Copies of 

MSRB Notices 2010–35 and 2011–18 

and associated comment letters are 

included in Attachment 2 hereto. Each 

subsequent request for comment has 

included a summary of the comments 

received on the previous request for 

comment, as well as the MSRB’s 

responses to those comments. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 58 / Monday, March 26, 2012 / Notices 17557 

11 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 66309 

(February 2, 2012), 77 FR 6615. 

4Rule G–14 RTRS Procedures are included in the 

text of MSRB Rule G–14, and the RTRS Users 

Manual is available on the MSRB Web site at 

www.msrb.org. The RTRS Users Manual will be 

revised as necessary to reflect the changes made by 

the proposed rule change. 

change is consistent with the Exchange 

Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number SR–MSRB–2012–04 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–MSRB–2012–04. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Web site (http://www.sec.gov/rules/ 

sro.shtml). Copies of the submission, all 

subsequent amendments, all written 

statements with respect to the proposed 

rule change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the MSRB’s offices. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–MSRB–2012–04 and should 

be submitted on or before April 16, 

2012. 

For the Commission, by the Division 

of Trading and Markets, pursuant to 

delegated authority.11

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–7133 Filed 3–23–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66622, File No. SR–MSRB– 

2012–01] 

Self-Regulatory Organizations; 

Municipal Securities Rulemaking 

Board; Order Granting Approval of 

Amendments to Rule G–14, on Reports 

of Sales or Purchases, Including the 

Rule G–14 RTRS Procedures, and 

Amendments to the Real-Time 

Transaction Reporting System 

March 20, 2012. 

I. Introduction 

On January 20, 2012, the Municipal 

Securities Rulemaking Board (‘‘MSRB’’) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’),1 and Rule 19b–4 

thereunder,2 a proposed rule change 

consisting of amendments to Rule G–14, 

Reports of Sales or Purchases, including 

the Rule G–14 RTRS Procedures, and 

amendments to the Real-Time 

Transaction Reporting System. The 

proposed rule change was published for 

comment in the Federal Register on 

February 8, 2012.3 The Commission 

received no comments on the proposed 

rule change. This order approves the 

proposed rule change. 

II. Background and Description of 

Proposal 

The proposed rule change consists of 

amendments to Rule G–14, Reports of 

Sales or Purchases, including the Rule 

G–14 RTRS Procedures, and 

amendments to the Real-Time 

Transaction Reporting System (‘‘RTRS’’) 

information system and subscription 

service (the ‘‘RTRS Facility’’; 

collectively, ‘‘proposed rule change’’). 

The proposed changes to Rule G–14 

would remove certain outdated 

information. The proposed changes to 

the RTRS Facility would (A) remove 

certain outdated information and amend 

certain definitions to reflect current 

system operating hours and business 

days; (B) add an RTRS-calculated yield 

to the information disseminated for 

inter-dealer transactions; (C) remove 

certain infrequently used data reporting 

requirements; (D) require dealers to 

submit dollar prices for certain trades; 

and (E) reduce the number of customer 

trades suppressed from dissemination 

because of potentially erroneous price/ 

yield calculations. The MSRB proposes 

that the proposed rule change be 

implemented in three phases, as further 

described herein. 

Amendments to Rule G–14, on 

Reports of Sales or Purchases, and Rule 

G–14 RTRS Procedures. MSRB Rule G– 

14 requires brokers, dealers, and 

municipal securities dealers 

(collectively, ‘‘dealers’’) to report certain 

information about each purchase and 

sale transaction effected in municipal 

securities to RTRS. Such transaction 

information is made available to the 

public, the SEC, the Financial Industry 

Regulatory Authority (‘‘FINRA’’) and 

certain federal bank regulatory agencies 

to assist in the inspection for 

compliance with and enforcement of 

MSRB rules. The reporting requirements 

are further outlined in Rule G–14 RTRS 

Procedures and the RTRS Users 

Manual.4

The proposed rule change would 

amend Rule G–14 and the Rule G–14 

RTRS Procedures to update certain 

references (such as references to the 

National Association of Securities 

Dealers, the predecessor of FINRA); 

eliminate certain provisions that are no 

longer relevant (such as provisions 

relating to testing during the original 

RTRS start-up period) or that, by their 

original terms, have expired; and 

conform terms in certain definitions. 

Amendments to the RTRS Facility. 

The RTRS Facility provides for the 

collection and dissemination of 

information about transactions 

occurring in the municipal securities 

market, and requires dealers to submit 

information about each purchase and 

sale transaction effected in municipal 

securities. The proposed rule change 

would (A) remove certain outdated 

information and reporting requirements 

and amend certain definitions to reflect 

current system operating hours and 

business days; (B) modify RTRS 

specifications to perform certain yield 

calculations for inter-dealer 

transactions; (C) remove certain 

infrequently used data reporting 

requirements; (D) require dealers to 

submit dollar prices for certain trades; 

and (E) modify RTRS specifications to 

reduce the number of trades suppressed 

from dissemination because of 

erroneous price and yield calculations. 

Remove certain outdated information 

and conform definitions to reflect 

current system operating hours and 

business days. The proposed rule 


tkelley on DSK3SPTVN1PROD with NOTICES