WASHINGTON - The Municipal Securities Rulemaking Board released a proposal Thursday aimed at increasing protection for retail investors who trade municipal bonds online.

The proposal, if adopted, would apply to firms that operate "electronic brokerage systems" like Fidelity Brokerage Services LLC, TD Ameritrade, Charles Schwab & Co., Scottrade and E*Trade Financial Corp.

Under the proposal, these firms would have to give individual investors opening online accounts educational materials that include information about the common features and risks of municipal securities.

The firms also would be required to collect investment profile information for new retail customers, including their financial and tax status, age, income, risk tolerance and investment objectives.

A muni securities principal would have to approve each new online account opened by an individual before any transaction.

In addition, firms would have to establish written procedures for delivering material information to investors and how they fulfill their pricing obligations.

Firms would also need to define the circumstances under which a transaction would constitute a recommendation for a particular security. The MSRB asked market participants to provide feedback on the proposal by Sept. 21.

"We want to hear from market participants as to whether the proposal to strengthen account opening and supervisory practices of dealers would help protect individual investors without imposing an undue burden on dealers," MSRB executive director Lynnette Kelly said in a release.

The board said new rules could help ensure online traders adequately understand muni bonds and make purchases suited for their financial goals and risk tolerance.

Firms operating the systems offer a "variety of complex municipal securities" for sale online without regard to traders' financial circumstances or investment experience, the board said.

For example, an elderly investor with a fixed income can "open an electronic brokerage account and purchase the most complex and risky municipal securities without a meaningful analysis of the suitability of the transaction," the MSRB said.

Some firms restrict which bonds can be traded online, and many provide access to material information. But the lack of uniformity means investors may have inadequate protection, the MSRB said.

Mike Nicholas, chief executive of Bond Dealers of America, said his group appreciates "the board's goal of enhancing protection for investors without harming liquidity or imposing an undue burden on dealers."

He noted that retail customers have become some of the largest muni investors.

The MSRB began a review of electronic brokerage systems last year and has studied systems operated by some of the largest firms. It sought to evaluate firms' compliance with rules on fair dealing, pricing and commissions, and suitability.

The MSRB said use of the systems by retail investors has increased recently, driven partly by low transaction costs.

Market-wide statistics are scarce because the board's EMMA system does not distinguish online trades from others. But executives at Charles Schwab told The Bond Buyer in May that 58% of the firm's muni and corporate bond trades occurred online last year, compared to roughly 40% a few years ago.

TMC Bonds LLC chief executive Tom Vales said at the time that online retail muni trading increased more than 30% in 2011 from 2010. TMC's clients include large electronic brokerage firms.

Regulators have long raised concerns about the lack of protection for investors using online systems. The Securities and Exchange Commission issued a report in 1999 that raised suitability concerns and questioned whether the electronic transfer of investment information to customers constitutes a recommendation.

The SEC in 2001 issued another report recommending online brokers enhance education programs, review objectivity of advertising, establish best-execution procedures and review security measures.

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