MSRB Looking at Pension Disclosure

WASHINGTON — The Municipal Securities Rulemaking Board is exploring state public pension laws to see if there are common types of disclosures they could encourage issuers to submit to its Electronic Municipal Market Access site, MSRB officials told reporters Monday.

The board’s incipient initiative comes at a time when there is unprecedented concern about the viability of public pensions and no regulator is compiling and disseminating information about pensions on a systematic basis.

“It gets down to would an investor want to know the funding status of a pension plan and how it would impact the likelihood of their bonds being paid off or affect the credit quality of bonds that they’ve bought,” MSRB chairman Michael ­Bartolotta, the vice chairman of First Southwest Co., said in a conference call with reporters Monday to highlight the results of last week’s board meeting in San Diego.

But market participants warned that the MSRB is straying beyond its jurisdiction in considering enhanced pension disclosures.

The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the MSRB’s mission to include issuer protection, on top of its existing mandate to protect investors.

 Under Dodd-Frank, the MSRB also can regulate muni advisers, including third-party solicitors and placement agents to public pensions. But the board has no actual authority over issuers, market participants stressed.

In addition, they noted that without Congress amending the securities laws, any plan to promote pension disclosures would have to be voluntary.

That is because the second portion of the two-pronged Tower Amendment restricts the MSRB from directly or indirectly requiring issuers to make any filings with it before or after a bond sale. The amendment was added in 1975 to the Securities Exchange Act of 1934.

“The issue is whether there’s any legal basis here for them to do this,” and there isn’t, said one bond attorney who asked not to be named.

For their part, MSRB officials said that they are in the early stages of learning more about public pensions, which they discussed both at their quarterly meeting last week in San Diego and at a roundtable with other regulators two weeks ago.

“There’s many different types of municipal pensions out there and some of them have different types of disclosure requirements under state law, so we’re trying to figure out if there’s a common ground of information that could be disclosed through EMMA,” Bartolotta said. “But that’s preliminary discussion at this time.”

MSRB executive director Lynnette Hotchkiss, who also was on the conference call, said: “We’re in the very preliminary stages of learning a lot more about this business. Obviously to the extent that we can promote disclosures, we want to do that, but we’re really at the very first step.”

Issuer groups have cautioned the MSRB against any move to oversee public pensions.

Frank Hoadley, Wisconsin’s capital finance director and a member of the Government Finance Officers Association, said “it’s a real stretch” for the MSRB to get into pensions.

“It’s difficult for me to see where the MSRB, with its present array of board member expertise, has the specific knowledge of pension funds to be able to contribute meaningfully to some sort of a new information model,” he said. “I think their plate’s awful full with other undertakings that they’ve got to get moving before they undertake this.”

Separately on Monday, the MSRB announced that it plans to seek public comment on a series of new rules and interpretive guidance in the next four to six weeks, most of which stem from its new oversight of muni advisers.

The MSRB plans to propose a new fiduciary duty rule for advisers, Rule G-36, as well as a draft interpretive notice to address disclosure of conflicts of interest, conflict waivers with client’s informed consent, and circumstances under which conflicts may not be waived.

The interpretive guidance also would explain what it means for an adviser to have a duty of care to its clients.

The rule will elaborate on the federal fiduciary duty imposed on all muni advisers by the Dodd-Frank law, which was enacted in July.

It gave the MSRB oversight of muni advisers beginning Oct. 1.

The board plans to propose two separate pieces of interpretive guidance related to its Rule G-17 on fair dealing.

The first will detail the rule’s implications for muni advisers after the Securities and Exchange Commission agreed in December that the rule would apply to them.

The second piece of guidance will apply to dealers and set out basic duties of fairness they owe issuers in the process of underwriting new issues.

In a press release, the board said both pieces of interpretive guidance will require that dealers and advisers disclose to clients “all material terms and risks of proposed transactions as well as any incentives and conflicts of interest.”

Separately, the MSRB plans to issue draft interpretive guidance on its Rule G-23 explaining when a dealer-financial adviser is serving as an underwriter and not an adviser. The guidance must be finalized before it and related changes to the rule can be submitted to the SEC for final approval.

The G-23 changes and guidance, which the SEC asked for last spring, would prohibit dealers from initially serving as financial advisers and then later becoming underwriters in the same transaction. However, dealers would be considered underwriters if they just advise on the timing and structure of a transaction, Bartolotta said.

Bartolotta said the guidance revolves around “how you hold yourself out.” A dealer-FA acting as a fiduciary who then changes into an arms-length role as an underwriter, would be engaging in a banned conflict.

But dealers who hold themselves out as an underwriter throughout a transaction, “should be OK,” he said.

G-23 currently allows dealer-FAs to become underwriters in negotiated transactions if they disclose possible conflicts of interest stemming from their role switch to an issuer, disclose their expected compensation, and obtain the issuer’s consent. In competitive deals, dealer-FAs must obtain the issuer’s written consent before bidding on the bonds.

In other action, the MSRB voted to draft a new rule, G-43, on the role of brokers’ brokers, in lieu of draft interpretive guidance it issued in the fall.

Hotchkiss suggested that the rule would offer little substantive changes from the draft guidance.

The board also voted to extend its Rule G-20 on gifts and gratuities to muni advisers and to seek SEC permission to establish an historical subscription service for the market data and disclosures it collects.

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