The Bond Buyer covered the new MSRB rule G-43 intended to protect retail muni investors from predatory broker's brokers' practices. Broker's brokers are one of several intermediaries in the muni bond industry characterized, in part, by the so called bid-wanted auctions. Rule G-43, in part, is intended to police this activity and not dis-similarly to the corporate market involves a somewhat arbitrary notion of a roughly reasonable price.
That is because in sourcing interest for bonds broker's brokers will sometimes contact individuals who bid prior to the conclusion of the auction, even without informing the seller of this contact. To limit the nefarious possibilities arising from this sort of communication, rule G-43 lays down criteria under which this communication may take place. Incidentally it also makes other demands, including reasonable dissemination of the bid-wanted lists:
Unless otherwise directed by the seller, a broker’s broker must make a reasonable effort to disseminate a bid-wanted widely (including, but not limited to, the underwriter of the issue and prior known bidders on the issue) to obtain exposure to multiple dealers with possible interest in the block of securities, although no fixed number of bids is required.Here, however, is where the notion of a roughly reasonable bid enters:
If the high bid received in a bid-wanted is above or below the predetermined parameters of the broker’s broker and the broker’s broker believes that the bid may have been submitted in error, the broker’s broker may contact the bidder prior to the deadline for bids to determine whether its bid was submitted in error, without having to obtain the consent of the seller. If the high bid is within the predetermined parameters but the broker’s broker believes that the bid may have been submitted in error, the broker’s broker must receive the oral or written permission of the seller before it may contact the bidder to determine whether its bid was submitted in error.
If the high bid received in a bid-wanted is below the predetermined parameters of the broker’s broker, the broker’s broker must disclose that fact to the seller, in which case the broker’s broker may still effect the trade, if the seller acknowledges such disclosure either orally or in writing.Thus the rules related to communication with bidders come down to an internal determination of whether bids were above or below a given threshold. It would seem that an independent, third party estimate may be the preferable criteria.