WASHINGTON - The Municipal Securities Rulemaking Board, growing increasingly concerned that some brokers may be selling unsuitable bonds to small investors, will soon launch a major study to determine whether new rules are needed, a board official said yesterday.

"The board is concerned about practices in the area and is beginning a wide-ranging study," said Christopher Taylor, executive director of the MSRB, which voted to conduct the study at a quarterly meeting in Santa Fe, N.M., late last week.

"There is enough going on in the industry and enough question being raised to suggest in would be worthwhile," he said. The board will shortly publish a notice to broker-dealers that will make "very clear" that the board has concerns and wants extensive comment from market participants on the issue, he added.

"One hates to make rules on the basis of a limited number of examples or a limited sample," he said.

The MSRB plan comes on the heels of a series of speeches by Securities and Exchange Commissioner Richard Roberts beginning in February, in which the commissioner recommended that broker-dealers be required at the time of sale to put in writing why they think their recommendations to retail investors to buy unrated or conduit bonds are suitable.

William Heyman, the SEC's market regulation chief, followed up with a letter to the board this summer asking it to review the issue.

Broker-dealers currently are required by MSRB rules to determine that the bonds they sell investors are suitable for their needs, but they do not have to put those determinations in writing.

Mr. Roberts said recently that requiring dealers to record such determinations would focus their attention on their investors' goals. And it would help federal enforcement staffs detect problems before investors are burned, he said.

The proposal has the backing of investor groups, but regional dealers contacted recently almost unanimously opposed a written suitably standard. They warned that such a rule would impose a tremendous paperwork burden on firms and expose them to extensive litigation from disgruntled investors, despite firms' best efforts to evaluate their clients' need.

But some dealers say that while they do not favor written suitability determinations, they do already take formal precautions. Some interviewed recently said they put prominent warnings on some purchase confirmations that the higher-yield bonds could be risky.

One industry official appeared relieved that the MSRB will take the lead in the review rather than the SEC. "I certainly think it's the correct way to proceed with this," said Ronald Thomas, principal with Crestar Investment Bank and immediate past president of the Bond Club of Virginia, which hosted Mr. Roberts recently for a speech on the issue. "The MSRB has more of the hands-on knowledge to come up with a proposal that works and that makes sense to the customer and to the industry.

Donald Robinson, a partner with Orrick, Herrington & Sutcliffe in New York, supported the board's decision to seek comment on the issue and said a requirement for brokers to put suitability determinations in writing "may be appropriate" in some cases.

Mr. Robinson has long asserted that secondary market disclosure would improve considerable if regulators simply enforced the MSRB's existing rule requiring brokers to make only suitable recommendations to clients. But regulators say enforcement dollars are limited.

Mr. Robinson said written suitability determinations may be appropriate where certain "facts and circumstances" exists "For example," he said, "if you live in smalltown New Jersey and you buy a bond of that municipality, you are going to know a great deal about what's going on with the town budget. But if you live in New Jersey and someone from Arizona sells you am improvement district bond with no indication that there is going to be forthcoming information, how can you keep abreast of the value of the security?"

Dean Pope, an attorney with Hunton & Williams in Richmond, said, "Everyone in the industry should welcome a study of the effectiveness of suitability requirements."

He added, "Most of the complaints that people have cited have involved the sale of high risk, unrated bonds to customers who claim they were told they were buying the functional equivalent of safe bonds with high ratings."

But Mr. Pope said he suspects that a study will find that the violations now occurring can be handled through existing boards rules, which he said are not "toothless of narrow."

"I would rather see bond salesmen filled with a little healthy fear of vigorous enforcement of" board rules, he added, "than bogged down in the difficult task of trying to draft suitability statements that are simultaneously acceptable to their lawyers and comprehensive to their customers."

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