WASHINGTON — In an effort to prevent a recurrence of past abuses by broker's brokers, the Municipal Securities Rulemaking Board has issued a new draft rule that details what they must do to comply with pricing, fair-dealing, and transaction rules.

The new draft Rule G-43, issued Thursday in an eight-page release, is similar to draft guidance the board issued last September, sparking criticism from industry groups. They warned the guidance was inconsistent with the limited roles that broker's brokers play and would impede the efficiency of the interdealer market.

But the MSRB noted in its release on the draft rule that the SEC and the Financial Industry Regulatory Authority have brought several enforcement actions highlighting broker's brokers activities that violate MSRB rules. The board said that while it recognizes some broker's brokers make considerable efforts to comply with the rules, the enforcement actions indicate MSRB rulemaking is warranted.

The board asked for public comments on the draft rule, as well as on proposed amendments to G-8 and G-9 books and record-keeping rules and G-18 on transactions. It set an April 21 deadline for the comments.

Broker's brokers generally execute transactions with broker-dealers. About 15 to 18 broker's brokers firms exist, depending on whether electronic trading firms are included, sources said.

In its release, the MSRB asked whether there should be specific broker's brokers rules for electronic trading systems. It also asked whether broker's brokers should be allowed to have non-dealer customers, such as institutional investors. Some broker's brokers currently have institutional investor-clients.

The MSRB release dismissed most of the industry's concerns about the previously issued guidance and had, at times, harsh words for SIFMA.

For example, the board said a broker's broker means "a dealer, or a separately operated and supervised division or unit of a dealer, that principally effects transactions for other dealers or that holds itself out as a broker's broker." A broker's broker could be a separate company or part of a larger company, the MSRB said.

SIFMA objected to the definition, warning it did not sufficiently define what a broker's broker is or the limited nature of its activities. The group pushed instead for a function-based definition that would say, among other things, that a broker's broker "does not participate in the decision to buy or sell securities or exercise discretion as to the price at which a transaction is executed."

But MSRB rejected SIFMA's proposed definition, warning it would "make it easy for a firm to escape classification as a broker's broker and, accordingly, avoid application of the rules for broker's brokers."

However, the board did make one key change from the earlier proposed guidance because of industry concerns. The draft rule no longer addresses whether broker's broker trades are principal or agency trades.

This is significant because broker's brokers engaging in principal trades would be subject to stricter requirements, such as being barred from buying or selling securities at prices that are not fair or reasonable. In a principal trade, a firm buys or sells securities for one dealer-client and then sells or purchases them for another. The firm owns the securities at one point, and bears the risk of holding them.

The MSRB draft rule contains several overall requirements for broker's brokers. They would have to make reasonable efforts to obtain prices for dealers that are fair and reasonable in relation to prevailing market conditions. They would have to use the same level of care and diligence as if executing transactions for their own accounts.

Broker's brokers would be barred from taking any action that works against the client's interest to receive advantageous pricing. In offerings, they could represent both the potential seller and the bidders.

But in a bid-wanted — where the selling dealer asks the broker's broker to obtain the best bid that it can find for certain muni securities without specifying a desired price or yield — the broker's broker client would be presumed to be the potential seller. The broker's broker could not represent both the potential seller and the bidders unless it disclosed this prominently and the parties agreed to it in writing.

Another requirement that seemed to particularly irk the industry was that if a broker's broker believes the highest bid received in a bid-wanted or offering does not represent a fair and reasonable price in relation to prevailing market conditions, within a reasonable degree of accuracy, the broker's broker must disclose this to its client or clients. It must also obtain the client's acknowledgement of the disclosure in writing in order for the trade to occur.

SIFMA argued that this requirement would harm the secondary market. It said dealers would be discouraged from committing capital, especially to lower-rated securities, retail-sized blocks, and any security in a volatile market.

But the MSRB called the argument "exaggerated and perilous."

"SIFMA's main objection seems to be that [the notice and acknowledge requirement] would slow down trading and discourage the purchase of retail blocks of securities because dealers might have to do their own research to determine fair market value," the board said. "The MSRB believes that most retail customers would prefer a better price to a speedy trade."

Many of the draft rule's requirements focus on bid-wanteds, because they appeared to present the most opportunity for abuse in the enforcement cases.

The MSRB said a broker's broker would have to disseminate a bid-wanted widely to obtain exposure to multiple dealers with possible interest in the block of securities. If the securities are of limited interest, perhaps because they are small issues with credit problems, then the broker's broker must reach dealers with specific knowledge of the issue or that type of security, the board said.

A broker's broker may not encourage off-market bids and may not give bidders preferential information, such as a warning that their bid is a lot higher than other bids.

If a broker's broker has imposed a precise deadline for accepting bids, it should not accept bids afterwards, the board said.

A broker's broker also may not contact a bidder in a bid-wanted about its bid price before the conclusion of the auction process, unless the broker's broker believes the bid has been submitted in error and takes certain steps, such as receiving permission from the client, to make the contact.

The board also said that a broker's broker may not adjust a bid without the bidder's written instruction, must not fail to inform the selling dealer of the highest bid, and must check the results of the bid-wanted process against other objective data, such as trade prices on the MSRB's EMMA system.

The draft rule also requires a broker's broker to adopt policies and procedures that prohibit it from maintaining any muni securities in proprietary or other accounts and from participating in syndicates or similar accounts for the purchase of munis.

The MSRB also proposed amendments to its Rules G-8 and G-9 to require broker's brokers to maintain records of all muni bids they receive, together with the times of receipt.