Financial Regulatory Forum

Muni market may bolster protection for retail buyers

August 12, 2009

msrb-logo    WASHINGTON, Aug 11 (Reuters) – The U.S. Municipal Securities Rulemaking Board proposed on Tuesday creating protections for retail investors, highlighting concerns that have grown over the last year as individual buyers have come to dominate a larger share of the bond market.
   The changes would require issuers to define explicitly what constitutes a retail order, MSRB Executive Director Lynnette Kelly Hotchkiss said in a statement.
   “These changes would establish a true standard for priority of customer orders and ensure that underwriters understand and honor issuers’ wishes when it comes to retail customer orders,” she said. “We want to ensure that they are doing so in order to preserve investors’ access to new issues.” 
   At the end of 2008, the municipal market came to a standstill as the credit crunch worsened. Retail, or individual, investors helped revive demand, replacing the large institutions that had become market heavyweights, partly by using leveraged plays that turned unprofitable when bond insurers were downgraded.
   Individual investors buy bonds during what is known as the retail order period, which comes a few days before the sale of the municipal debt to institutions.
   But the MSRB has found that issuers differ over which investors can be considered retail buyers and who has the priority to buy during the order period.
   For example, New York City for years has tried to ensure that its debt is indeed placed with retail buyers.
   The city’s Transitional Finance Authority, an agency created to sidestep its cap on general obligation bonds, included a statement in the pricing wire for a $600 million primary offering that addressed the issue.
   “The authority’s intention is to have the bonds placed, without further sale, with retail buyers,” said the pricing wire.
   The “point is we want the bonds placed with real bona fide retail clients. Institutions can buy tomorrow,” an authority spokesman told Reuters by e-mail.
   About $200 million of the offering was sold during the first day of the retail order period, according to a source familiar with the issue.
   The MSRB is currently requesting comments on changing its rule on primary market offerings so that underwriters must give priority to customer orders over those from their own accounts.
   It is also seeking comment on when syndicates, or groups of underwriters who purchase debt from issuers and then resell it to the public, must settle their accounts.
   After it receives the comments, the board will tweak the proposal and then send it to the Securities and Exchange Commission. The board, which is made up of industry participants, writes the rules that the SEC enforces for muni dealers. (Reporting by Lisa Lambert and by Joan Gralla in New York; Editing by Dan Grebler) ((lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net)) Keywords: MUNICIPALS/INDIVIDUALS
  
Tuesday, 11 August 2009 22:28:53RTRS [nN11542253] {C}ENDS

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