Responding to SEC and FINRA disciplinary actions over violations by broker's brokers, the Municipal Securities Rulemaking Board has decided to republish its Review of Broker’s Brokers Responsibilities;  it was last published in 2004.  But first, MSRB is requesting comments on the proposed guidance. 

    “Broker’s broker” Defined.   A broker, dealer, or municipal securities dealer that principally effects transactions for other brokers, dealers, and municipal securities dealers (“dealers”), or that holds itself out as a broker’s broker.  A broker’s broker may be a separate business or part of a larger business.  The proposed guidance is drafted in the form of a notice, but parts of it may eventually be incorporated into a proposed rule change or changes.  The MSRB also is considering rulemaking that would provide that broker’s brokers must adopt procedures incorporating this guidance, disclose them to sellers and bidders in writing at least annually, post them in a prominent position on their websites, and follow them.  Among other things, such procedures would require that a broker’s broker disclose the nature of its undertaking for the client.

    About the Guidance in 2004.   The MSRB issued guidance that year after noting the role of some broker’s brokers in large intra-day price differentials of infrequently traded muni securities - with credits that were relatively unknown to most market participants, especially in the case of “retail” size blocks of $5K to $100K.  In certain cases, differences between the prices received by the selling customers as a result of a broker’s broker bid-wanted auction (“bid-wanted”) and the prices paid by the ultimate purchasing customers on the same day were 10% or more.  After the securities were purchased from the broker’s broker, they were sold to other dealers in a series of transactions until they eventually were purchased by other customers.  The abnormally large intra-day price differentials were attributed in major part to the price increases found in the inter-dealer market occurring after the broker’s brokers’ trades.  

    About the Guidance in 2010.   Much of today's proposed guidance relates to the conduct of bid-wanteds.  Broker’s brokers also make “offerings” of municipals on behalf of other dealers.  In a typical offering - aka a “situation” - the selling dealer specifies a desired price or yield for the security and the broker’s broker negotiates between the selling dealer and potential bidders to arrive at transaction terms that can be agreed to by the seller and another party. 

In contrast, a selling dealer in a typical bid-wanted asks the broker’s broker to obtain the best bid it can, without specifying a desired price or yield.  Bid-wanteds tend to involve smaller, retail size blocks of bonds and relatively infrequently traded securities.  Situations tend to involve much larger blocks of bonds and more frequently traded securities.  Most of the abuses observed by the SEC and FINRA in their publicly announced enforcement actions have occurred in bid-wanteds. However, unless otherwise specified, the proposed guidance would apply to all types of broker’s broker activities.  

For further details, click onto:   [ MSRB Notice 10-35, 9/9 ]

    Cited SEC, FINRA Disciplinary Actions.  

• FINRA v. Associated Bond Brokers, Inc.  November 2007, broker’s broker violated Rule G-17 by lowering the highest bids to prices closer to the cover bids without informing either bidders or sellers.
• FINRA v. Butler Muni, LLC.   May 2010, broker’s broker violated Rule G-17 by failing to inform the seller of higher bids submitted by the highest bidders.
• D. M. Keck & Company, Inc. d/b/a Discount Munibrokers, et al.  September 2007, broker’s broker violated Rules G-13 and G-17 by disseminating fake cover bids to both seller and winning bidder; broker’s broker violated Rules G-14 and G-17 by paying seller 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 RTTRS.
• Regional Brokers, Inc. et al.  September 2007, broker’s broker violated Rules G-13 and G-17 by disseminating fake cover bids to both seller and winning bidder; broker’s broker violated Rule G-17 by accepting bids after bid deadline.
• SEC v. Wolfe & Hurst Bond Brokers, Inc. et al.  May 2009, broker’s broker violated Rule G-17 by disseminating fake cover bids to both seller and winning bidder and by lowering the highest bids to prices closer to the cover bids without informing either bidders or sellers.
• These cases also found violations of Rules G-8, G-9, and G-28.