In a letter to the SEC, the MSRB identified areas of concern that could have an adverse impact on retail investors. The letter was released in response to a request from the SEC Office of the Investor Advocate.

The MSRB highlighted the following:

  • Market practices. The MSRB identified two concerning market practices: (i) Last-Look (or pennying), in which a dealer will compile bids in the market for a retail client's "bid-wanted" and then place a bid "nominally" higher than the high bid to buy the bonds for its own trading account. The MSRB raised concerns that this practice will dissuade market participation in the bid process in the long term. (ii) Filtering (or screening), in which a dealer uses alternative trading systems to identify and block bids from certain dealers. While there may be legitimate reasons to block certain counterparties, the MSRB cautioned that adequate policies and procedures must be in place to govern the use of filters.
  • Disclosure practices. The MSRB expressed concern that retail investors may not fully understand an issuer's debt profile for bank loans undertaken by the issuers of municipal securities (when certain information is not voluntarily disclosed through EMMA). The MSRB encouraged the SEC to enhance disclosure requirements to allow retail investors to make better-informed decisions when engaging in municipal securities transactions.
  • Price fairness and transparency. The MSRB pointed to improving price transparency as an essential tool for ensuring market fairness for retail investors, and highlighted several recent efforts to improve upon current transparency. The MSRB said that current pretrade transparency in the market is insufficient, and committed to assessing what types of reporting data will aid retail investors.

Commentary

The MSRB is clearly signaling rule amendments that are likely to be proposed soon. Market participants should be prepared to consider and comment on the proposals. In this regard, market participants should consider what effect any proposals are likely to have on the market and to consider how to evidence any potential concerns.

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