“Broker’s brokers” are intermediaries between selling dealers and bidding dealers of municipal securities.  They provide secondary market liquidity in the municipal securities market, which helps ensure that retail investors receive fair and reasonable pricing of municipal securities. One way that broker’s brokers bring buyers and sellers together is through a “bid-wanted,” in which the broker’s broker seeks bids from dealers for a particular bond that another dealer wishes to sell.  The Municipal Securities Rulemaking Board (“MSRB”) has established a new rule designed to promote fairer results in these transactions.

Under the new rule, broker’s brokers are required to make reasonable efforts to obtain a fair and reasonable price for the selling dealer, in light of prevailing market conditions.  The broker’s broker must use the same care and diligence as if the transaction were being done for its own account.  Thus, it is required to disseminate a bid-wanted widely and make a reasonable effort to reach bidding dealers with specific knowledge of the issue or known interest in comparable securities.  There is a safe harbor:  if a broker’s broker conducts bid-wanteds in the manner described by the rule, it satisfies its pricing duties.

The rule also imposes new record-keeping requirements.  Broker’s brokers must keep records of bids, offers, changed bids and offers, time of notification to seller of high bid, policies and procedures concerning bid-wanteds and offerings, and any joint representation agreements of bidders and sellers.

The new rule becomes effective December 22, 2012.