Document ID: SEC-2012-0479-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2012-03-26T04:00Z

[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]
[Notices]
[Pages 17548-17557]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-7133]

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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-and-Interpretations/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

[[Page 17549]]

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.
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    \3\ MSRB Notice 2004-3 (January 26, 2004).
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``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\
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    \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.
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    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.
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    \5\ The 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).
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    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.
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    \6\ Under 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.
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    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.
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    \7\ A 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.
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    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

[[Page 17550]]

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 bid-wanteds 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 bid-wanteds 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.
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    \8\ Such 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.
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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 
bid-wanteds by selling dealers solely for price discovery purposes, 
without any intention of selling the securities through the broker's 
brokers might be an

[[Page 17551]]

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.
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    \9\ MSRB Notice 2011-50 (September 8, 2011).
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    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

[[Page 17552]]

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-of-use 
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 bid-wanteds, which 
are usually given to one broker's broker. Therefore the requirement for 
disseminating an offering widely is not necessary. In bid-wanteds, 
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 bid-wanteds 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 bid-
wanted. 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,

[[Page 17553]]

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 bid-wanted 
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 bid-wanteds 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'' bid-wanteds 
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 bid-wanted (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 
odd-lot 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 bid-wanted, 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 
bid-wanteds. 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

[[Page 17554]]

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[supreg]) 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.
---------------------------------------------------------------------------

    \10\ EMMA[supreg] is a registered trademark of the MSRB.
---------------------------------------------------------------------------

    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

[[Page 17555]]

``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 bid-wanted 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 bid-wanted 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 bid-wanteds 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

[[Page 17556]]

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 bid-wanted 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

[[Page 17557]]

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 rule-comments@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\
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    \11\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-7133 Filed 3-23-12; 8:45 am]
BILLING CODE 8011-01-P