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In a comment letter filed with the Securities and Exchange Commission, the Securities Industry and Financial Markets Association (SIFMA) expresses its support for the interpretive notice issued by the Municipal Securities Rulemaking Board (MSRB) on priority of orders in a primary offering. SIFMA does not, however, support the accompanying amendments proposed by the MSRB, as it believes they would disrupt the orderly distribution of securities and create unintended consequences on the municipal securities industry.
“The MSRB’s interpretive notice applies the principles of fair dealing without regulating the very fluid process by which securities are allocated,” said Leon Bijou, managing director and associate general counsel at SIFMA. “SIFMA has worked for years to enhance the public’s trust and confidence in the municipal markets and, therefore, we are sympathetic to institutional investors whose orders are not fulfilled. These proposals, however, not only fail to address the MSRB’s concerns over phantom orders and front running and may be harmful to investors and issuers but would also have a detrimental impact on that process.”
In its letter, SIFMA notes that in allocating securities there will always be unfilled orders as a result of a variety of permissible activities undertaken by parties that are not members of the syndicate. These include the price being offered by an investor not being uncompetitive with the offers of other investors, a desire of an investor to purchase non-callable bonds the issuer does not want to sell, and the tranches of securities the investor wants to purchase not fitting in with the overall plan of distribution.
SIFMA also highlights the need for syndicate managers to balance the needs of their issuer clients to get the widest possible distribution of securities at the lowest borrowing costs with the demands of their investor clients’ for securities. MSRB Rule G-11 provides discretion to the syndicate managers and allows them, on a case-by-case basis, to allocate securities in a manner that is different from the priority provisions. The Rule also requires accountability to the issuer client. The proposals would interfere with the discretion granted to syndicate members, requiring them to comply with a regulatory priority.
SIFMA also cautions that by imposing restrictions on syndicate members, their affiliates and related accounts, the proposed amendments would isolate a very large group of active investors in the municipal securities market and subordinate them to other investors. Creating a tier of second-class investors would decrease the number of buyers and reduce competition for securities, which could result in issuers paying higher borrowing costs.
Finally, SIFMA notes that the proposals do not address concerns over phantom orders and front running, which are both prohibited under existing MSRB Rule G-17. SIFMA urges Financial Industry Regulatory Authority to vigorously enforce existing laws and regulations to prevent front running and any and all other deceptive, dishonest or unfair practices.
The full comment letter is available at the following link: http://www.sifma.org/assets/0/232/234/124802/14e3718a-7a8e-4432-8902-bddad6ff6c84.pdf
