WASHINGTON — The Municipal Securities Rulemaking Board has issued a concept release seeking public feedback about whether to require underwriters and municipal advisors to disclose third-party payments on the online EMMA system.
The MSRB said the disclosures could alert investors and market participants of conflicts of interest and give municipalities the information they need to select competent underwriters and municipal advisors. It asks for comments to be submitted by July 31.
In the concept release, the MSRB asked market participants if they think such disclosures would benefit issuers, investors, the public interest and a fair and efficient market, or if they would negatively effect them.
The board also wants to know how detailed disclosures should be and asks if underwriters or municipal advisors should disclose their fees and scope of work. It also asks if issuers should voluntarily disclose the fees of bond counsel, trustees and other transaction participants.
In addition, the board wants to know about any additional burdens that rules could create for dealers. It noted that the disclosures proposed in the concept release are similar to those under recently approved interpretive guidance to Rule G-17. The guidance, which requires underwriters disclose conflicts of interest to issuers, takes effect Aug. 2.
The concept release asks if underwriters should be required to disclose several types of payments, including payments they receive from third parties in exchange for recommending a financial transaction to an issuer, and payments they receive for recommending that a third-party participate in a transactions. It also asks if underwriters should disclose money they pay to third parties to obtain or retain work on a new-issue transaction.
The concept release asks if municipal advisors should disclose financial incentives received from third parties, including payments received in exchange for recommendations. The board asks whether advisors should disclose incentives they receive for soliciting business from an issuer, and incentives they pay to third parties.
The MSRB said third-party payments may have presented “significant challenges to the integrity of the municipal market.” Undisclosed third-party payments “allegedly occurred in connection with activities that may have contributed” to the 2011 bankruptcy of Jefferson County, Ala., it said.
Undisclosed third-party payments also have been at issue in several recent civil and criminal cases pursued by the Securities and Exchange Commission, the U.S. Justice Department and attorneys general over bid-rigging of muni reinvestment and other contracts.
Last month, three former staffers at a General Electric Co. affiliate were found guilty of rigging municipal bond contracts. The defendants had been accused of paying kickbacks in the form of inflated fees. And late last year, CDR Financial Products and founder David Rubin pleaded guilty to bid-rigging, with Rubin admitting to soliciting fees from other firms in exchange for manipulating bids.
Leslie Norwood, co-head of the muni division at the Securities Industry and Financial Markets Association, said her group is reviewing the release, but she fears it could encompass payments incurred by dealers in the “normal course of business,” such as printing, rating agency and CUSIP fees, and payments to the Depository Trust Co.
Norwood said SIFMA supports MSRB efforts to permit voluntary disclosures by issuers, and noted that dealers will be required to disclose conflicts of interest starting in August, when the G-17 guidance takes effect.
“We question what additional benefits would be created by requiring the dealers to also send this disclosure information to EMMA,” Norwood said.
Mike Nicholas, chief executive of Bond Dealers of America, said his group supports disclosure and a “level regulatory playing field.” But he said it is “important to note that municipal bond underwriters and affiliated financial advisors are making appropriate disclosures concerning potential conflicts of interest.”
He added that BDA believes it is essential that regulators also require that non-dealer muni advisors make similar disclosures, “so municipal bond issuers have access to all the facts when making their decisions.”
The MSRB proposed rules in 2011 that would have required advisors to disclose conflicts of interest, but later withdrew the rules pending the SEC’s release of a final definition of municipal advisor.