It may get easier for retail investors to buy bonds

June 28, 2013

Muniland’s oversight organization, the Municipal Securities Rulemaking Board, has proposed some new rules to the SEC that may make it easier for retail investors to buy bonds that are newly brought to market.

The dealers who underwrite bond offerings tend to favor their institutional and high net worth clients, so typically retail investors have a difficult time getting an early part of the pie. In fact, the issuer would often prefer that their bonds be placed with retail investors, because they tend to be the most stable owners as buy-and-hold investors.

The MSRB’s new measures would strengthen the retail order period. The first would establish specific obligations on the senior syndicate manager to disseminate detailed information about the terms and conditions of any retail order period. Whatever terms the state or local government has set for retail investors to be able to buy bonds must be provided to all the dealers in the selling group (on a large deal this could be up to 15 or more dealers). It sounds simple, but it doesn’t always happen.

The proposed rules also require dealers to capture information on orders during the retail order period to ensure they are from bona fide retail customers. If you say that you are selling to a retail investor, prove it.

The MSRB also proposed to amend the form that dealers must file to Electronic Municipal Market Access (EMMA) when a retail order period is conducted. In other words, trust but verify. This means that if a government issuer instructs an underwriter to hold a retail order period, the dealer must make the process happen and document it. This is a win for retail investors, who will get a better chance to buy bonds when they are offered.

Kudos to the MSRB!

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