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Securities Law

Underwriter Disclosures to Issuers Still Causing Confusion

Underwriter disclosure letters required under the Municipal Securities Rulemaking Board’s fair dealing rule continue to cause confusion and apprehension among issuers, members of the Government Finance Officer’s Association’s debt committee said at a meeting on Saturday.

Two months after the MSRB issued guidance on what its August 2012 interpretive notice on Rule G-17 requires, GFOA debt committee members said issuer officials remain frequently confused and concerned about letters from underwriters that disclose the arm’s length nature of their relationships.

But GFOA debt committee members and representatives of dealer groups said they are working on ways to minimize the concerns.

The interpretative release requires an underwriter to disclose to an issuer such things as its relationship to the issuer, and the key terms and risks of complex transactions. The underwriter is supposed to make clear that it has no fiduciary responsibility to put the issuer’s best interests before its own, and is to disclose any other potential conflicts of interest at the earliest stages of the relationship.

“The purpose of the rule makes perfect sense,” said Ben Watkins, the committee’s chair.   “What’s happened is that the disclosures are long and complicated.”

Underwriters are required to try to get issuers to acknowledge that they received the disclosures, but bond lawyers have said that issuer clients are spooked by multi-page documents that frequently contain legalese. They worry that they may be giving up their rights if they sign the documents or even acknowledge receiving them.

Laura Lockwood-McCall, director of debt management for the state of Oregon, said her office responds to underwriter disclosures with a single line acknowledging receipt of the letter.

“The bigger issuers, you already know that they don’t have a fiduciary responsibility to you,” Lockwood-McCall said, adding that smaller issuers might find themselves “flummoxed” by what several participants characterized as “legalese” in the disclosure letters.

“There is a lot of legalese in some of them,” agreed one advisor to the committee. The advisor added that many underwriter letters to issuers include disclosures not required by the rule, potentially obscuring the important and required information issuers are supposed to get.

“To me that’s the most useless part of the disclosure, if there’s a conflict that gets buried in that disclosure,” the advisor told the committee.

The committee has prepared draft model language that could be used to respond to the disclosures. Watkins reminded the group they are not required by the rule to send it if they so choose. The draft model language acknowledges receipt of the underwriter’s letter, but disclaims any agreement with, or consent to, its contents.

But officials representing smaller issuers said they still have some concerns. One committee member said presenting such a response letter to the necessary person, which varies from local government to local government, could cause a “panic and a tizzy” for an official or group of officials not intimately familiar with G-17 and its requirements.

MSRB executive director Lynnette Kelly told the group the rule is an important part of issuer protection, a responsibility that the board took on after the 2010 passage of the Dodd-Frank Act. She added, however, that there is some smoothing out to do.

“We’ll be the first to say the implementation hasn’t worked out as we’d hoped,” she said. “We are working hard on the implementation issues.”

The Securities Industry and Financial Markets Association has a model underwriter disclosure letter available on its website that the committee advisor said is much more streamlined than some overwrought letters some firms have sent out.

Leslie Norwood and Michael Decker, co-heads of municipal securities at SIFMA, told the committee that their group is looking at further ways to improve the guidance. They said SIFMA also is concerned about the timeliness of disclosures. Some committee members had said the disclosure letters arrive very late, even right up to the day of a pricing.

“It was a difficult process,” Norwood said.  “As the rule is written now, this is what we’ve come up with.”

Kelly said further work would come after the SEC finalizes its definition of municipal advisor, which is expected to be later this year.

“Once the definition of municipal advisor is released by the SEC we plan to provide additional guidance on implementation and clarify other disclosure obligations that professionals must provide to their issuer clients,” Kelly told the group.

Decker said that although SIFMA’s guidance is publicly available, even SIFMA member firms are not required to follow it to the letter and can choose their own templates.

“It’s up to each individual dealer on their own,” he said.

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