On January 22, 2008, the Municipal Securities Rulemaking Board (MSRB) issued a notice to clarify the obligations of broker/dealers and other municipal bond dealers in regard to investor protection rules as applied to transactions in insured municipal securities (the Notice). In summary, those broker/dealers and others who effect transactions in insured municipal bonds need to consider actual and potential rating actions on issuers of bond insurance when making recommendations to anyone other than a "Sophisticated Municipal Bond Professional" as defined in the MSRB's notice dated April 30, 2002.

The financial markets have taken, and continue to take, particular notice of the condition of the insurers of municipal bonds. Recent rapid and adverse effects of sub-prime mortgages and other sub-prime financial instruments on the creditworthiness of bond insurers may often not be reflected in market data and bond descriptions provided by market sources to broker/dealers and others. As such, the Notice specifically states that since "rating agency reports" are to be utilized in making suitability determinations concerning insured municipal bonds, independent market information concerning the creditworthiness of bond insurers "may be material information about the transaction." More importantly, broker/dealers who deal in insured municipal bonds are instructed to consider both the actual rating actions and any "potential rating actions" that may affect the credit rating and status of the insurers of the municipal bonds they offer and sell. They must consider it not only from a suitability standpoint for the underlying bond itself, but also from a fair pricing standpoint.

The Notice states that broker/dealers and municipal bond dealers should: (a) pay increased attention to the facts and circumstances concerning transactions in insured municipal bonds; (b) review past MSRB notices concerning disclosure requirements and other MSRB notices concerning suitability determinations; and (c) review how transactions in insured municipal bonds are being recommended, priced and confirmed to customers to insure protection under the MSRB's investor protection rules.

These new obligations for broker/dealers and municipal bond dealers markedly increase the burden upon market participants to ascertain information concerning the creditworthiness of bond insurers. Broker/dealers and municipal bond dealers should review their written supervisory procedures regarding suitability determinations, and also determine whether their service providers can assist them in obtaining the information needed to comply with these recent directives from the MSRB. For example, those who introduce trades to clearing firms should verify whether their service providers are taking steps to ensure that trade confirmations and statements contain the appropriate disclosures concerning credit ratings. Further, those broker/dealers and municipal bond dealers who rely on "bid sheets" and other descriptions of insured municipal bonds from others may wish to take steps to independently determine the accuracy and timeliness of the data provided to them. Finally, broker/dealers and municipal bond dealers should consider taking steps to educate individual registrants of their obligations under the Notice, including the identification of accurate secondary sources readily available to verify the creditworthiness of the insurers of the municipal bonds they offer and sell to those other than "Sophisticated Municipal Market Participants."