WASHINGTON - The Municipal Securities Rulemaking Board has unveiled a raft of rule proposals and initiatives aimed at tightening its suitability requirements, promoting better price dissemination, and providing guidance on the sale of detachable call options.
One of the prime proposals would eliminate a provision in the board's Rule G-19, its so-called "suitability" rule, that currently permits a dealer to sell a bond to a customer who is reluctant to provide information about his finances, as long as the dealer has "no reasonable grounds to believe" the recommendation is unsuitable.
The provision, which was outlined in MSRB Reports, the board's quarterly notice to dealers that was mailed out over the weekend, has been the subject of numerous objections from Securities and Exchange Commission member Richard Roberts and the SEC's market regulation division, which oversees regulation of the municipal securities market.
The board also proposed wiping out a second provision in Rule G-19 that permits a dealer to sell bonds to a customer, even if the dealer has determined the bonds are unsuitable and informed the customer of that fact, but the customer still wants them.
The board said the provision was included in the rules to allow dealers to make recommendations to investors who want to invest in local municipal projects, knowing that they may not be suitable.
The introduction to the proposed rule clarifies that dealers must make suitability determinations for institutional accounts as well as noninstitutional buyers, although the dealer may have to make a less detailed inquiry about major buyers.
"In some cases, when the customer is a large and sophisticated financial institution, this requirement may be satisfied by the dealer's knowledge of the general nature of the institution and its investment objectives," the board said. The board noted that the amendments would not apply to unsolicited transactions.
The SEC's Roberts said the board's notices show "they are very active and they are exhibiting strong leadership. A quick read in terms of the [suitability] proposal leads me to believe they have responded satisfactorily to my concerns. I'm encouraged. I look forward to following the MSRB's future actions on these important issues."
The board's proposed rules must be cleared by the SEC.
To improve the dissemination of prices, the board proposed launching a one-year pilot system that would publish price information daily beginning in January 1995 for an average of 180 frequently traded interdealer transactions.
The board would make available five pieces of information about issues that trade frequently on any given day. They are: the CUSIP number and securities description; the total number of transactions in the security; the highest and lowest prices of transactions in the security; the number of transactions in the security involving par values between $100,000 and $1 million, inclusive; and the average price of those transactions.
Trading would be considered frequent if four or more transactions of an issue are reported as compared by a clearing firm on a given day. Based on recent levels of market activity, the board anticipates that the daily list of frequently traded issues normally, will range between 80 and 350 issues, with an average of about 180 issues each day.
The board also would report general price-related information daily, including total par value traded; the total number of compared transactions; and the total number of issues traded, meaning the number of different CUSIP numbers that were involved in compared transactions on that day.
"The size and composition of the list obviously would vary from day to day, depending upon market activity in specific issues," the board said.
The board said it is proposing the $100,000 to $1 million "band" of par value to exclude transactions "that might be priced differently because of their large or small size."
"The board is proposing this because it hopes that the ~average price' will evolve over time to serve as an indicator of a ~typical' interdealer market price for a given issue on a given day, " the board's notice says.
Under the pilot, dealers merely would submit their interdealer transactions to a registered clearing agency for automated comparison. Since submission of interdealer transactions for automated comparison already is required under Board Rule G-12, the pilot program would not require dealers to undertake any additional action or costs beyond those that are currently required by that rule.
The board will collect and make available data on transactions as soon as the transactions are compared. The board currently is working with the National Securities Clearing Corp. on the technical requirements for such a system. The board said it may in the future consider collecting data on customer transactions as well as interdealer trades.
Comments are due Sept. 15 on the board's proposed pricing plan and its suitability amendments.
Also yesterday, the board issued an "educational notice" reminding dealers that board rules apply to bonds subject to detachable call features, particularly rules governing customer confirmations and fair dealing.
The board said it is continuing its review of detachable call rights and "may take additional related action at a later date."
In a detachable call option deal, the right to call the bonds moves from the issuer, where it traditionally rests, to any entity that might buy the right to call the bonds in the future. The bonds are a variation on "strip" securities, where the issuer can strip away the call option and sell it separately.
The board noted that the board's Rule G-15 requires customer confirmations to describe clearly whether the bonds are subject to redemption prior to maturity. And it requires that a legend appear on confirmations of callable securities noting that call features exist that could affect yield.
Rule G-17 bars dealers from "engaging in any deceptive, dishonest or unfair practice."
