WASHINGTON -- The Public Securities Association yesterday voiced strong support for a controversial set of revised sales practice rules for government securities dealers.
The draft rules proposed by the National Association of Securities Dealers have come under fire from state and local government finance officials, who say they would give too much protection to dealers. Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce subcommittee on telecommunications and finance, has also raised concerns about the rules.
The central issue is whether dealers are meeting their obligation to make suitable recommendations to institutional customers of government securities under the industry 's fair practice rules. The dealers also proposed a set of standards for marking up government securities.
The changes are the result of the Government Securities Act Amendments of 1993.
In a comment letter fled with the dealers' association, the PSA said the proposed suitability and markup rules provide "useful guidance to dealers" that will help them in recommending bond transactions to institutional customers.
Contrary to what has been suggested by some critics, the proposed rules do not automatically relieve dealers of their obligations to make suitable recommendations to institutional customers, including state and local governments, said Marianna Maffucci, senior vice president and general counsel at the PSA.
The NASD, which issued the sales practice guidelines in August, recommended two tests for applying suitability standards for dealers in handling institutional accounts. Such accounts are defined as including banks, investment advisers, and others with assets of at least $50 million.
First. there may be cases where institutional customers have the ability to make their own independent investment decisions. Second, the NASD said, there must also be grounds to believe the customer is not relying on the dealer's recommendations for a particular market or product.
One reason for the qualifications is that dealers believe there are cases where they have sophisticated customers with professional staff and market information that enable them to make their own investment decisions. In other cases, the customers only use the dealers to test the markets or to execute a trade.
Given such situations, the PSA said, the proposed rules recognize "that institutional customers are in the best position to monitor compliance with their own investment policies."
Pen Pendleton, a spokesman for the PSA, said the proposed rules would not absolve dealers of their obligation to make suitable recommendations to sophisticated customers.
"You have to continue to determine on an ongoing basis whether they're relying on your recommendation, irregardless of whether they're $51) million or $150 million," said Pendleton. "Sophistication is just one thing you look at, but you have to look at a whole bunch of things, and if they are clearly unable to understand the risks, then you shouldn't be selling to it to them."
