CHICAGO - Warning that there may be problems in retail trades of speculative bonds, the Municipal Securities Rulemaking Board will call next week for broad industry input on the adequacy of three of its customer protection rules.

"The board has received reports that problems have arisen with respect to retail transactions in municipal securities with speculative elements, such as unrated and conduit bonds," the board will say according to a draft of its quarterly report, MSRB Reports, being mailed to dealers.

The draft notice says the MSRB is launching a comprehensive review of three rules: Rule G-17, requiring that brokers deal fairly with customers and make appropriate disclosures; Rule G-19, requiring dealers to sell suitable securities to customers; and Rule G-30, requiring fair and reasonable pricing.

"At the conclusion of the review the board intends to take appropriate action to address any deficiencies that are discovered," the draft notice says.

The announcement comes at a pivotal point as the board has recently launched its primary market repository and laid most of the groundwork for its secondary market pilot system, both of which give it time to begin a new phase in its oversight of the market.

The broad review also comes amid growing pressure from the Securities and Exchange Commission for the MSRB to tackle such tough issues as pricing and suitability of conduit sales. The issues have surfaced continuously in speeches by SEC Commissioner Richard Roberts. And William Heyman, the SEC's market regulation chief, recently called for a review of the suitability question.

The draft notice, which the board describes as the first of several on the issues, discusses the board's current customer protection rules and raises questions for "all interested parties." Later notices may include proposals to address any problems, such as new rules, new enforcement measures, and dealer education efforts, the draft says.

The MSRB also plans to publish a notice seeking comment on the future role of the confirmation, which document brokers routinely send to investors at the end of a deal, according to the draft.

"The board is aware that, in recent years, there have been a number of defaults of municipal securities issues, including some defaults in unrated and conduit bonds," the draft says. "To the extent that there may be a disproportionate occurrence of defaults in certain types of issues, the board wishes to ensure that customer protection measures for those issues are adequate.

The notice will pose some general questions, asking what kinds of customer protection problems exist, how widespread they are whether they are limited to specific securities such as high yield, unrated, or conduit securities, and what the nature of the, problems are.

Further, the notice win include a long list of questions about what dealers disclose to their customers, asking to what extent credit ratings are relied on to disclose credit risks.

The notice asks whether sales personnel are required to review official statements for new issues before selling them. It also asks whether final official statements are generally received by buyers of new issues before settlement, as required the board's Rule G-32.

The draft asks whether dealers always receive official statements in time to deliver them to customers prior to settlement. And to the extent that disclosures are made orally by sales personnel, it asks, how are these disclosure monitored by supervisors?

Concerning suitable sales, the MSRB will ask whether certain types of municipal securities are generally not suitable for retail accounts below a certain net worth.

The draft notice also asks, "Are dealers routinely obtaining information for each customer account reflecting the net worth, income level and investment objectives of the customer.?" And the board wants to know when the information is obtained, at the opening of the customer's account or before the first transaction.

The draft also asks whether firms are complying with the MSRB's Rule G-8(a), which requires them to record routinely all customer financial information.

The draft asks whether dealers update customers' financial information each time a recommendation is made and whether special measures are taken for those buying unrated or conduit bonds. Specifically, the board wants to know whether minimum liquid net worth are levels required for recommendations of certain risky bonds.

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