The Municipal Securities Rulemaking Board is proposing to create a new Rule G-47 that would codify current guidance on the obligations of dealers to disclose material information about municipal securities to customers at or before the time of purchase or sale.
Information is considered to be material if there is a substantial likelihood that an investor would want it before making an investment decision, the MSRB said, in a notice released Monday.
Dealers would have to disclose material information if they know it or if it is reasonably accessible through established industry sources such as the MSRB’s EMMA system or rating agency reports.
The new rule would not change the substantive obligations of the current guidance, which pertains to Rule G-17 on fair-dealing, the board said. Rather the proposal is part of the board’s effort to reorganize or eliminate certain interpretative guidance G-17 into new or revised easy-to-follow rules that highlight core principles.
G-17, as currently written, consists of one sentence and about 25 pages of interpretations of what that sentence means in connection with various issues or scenarios. The new proposed rule would consolidate the G-17 guidance on time of trade disclosures.
“Market participants have expressed concern regarding the difficulty of reviewing years of interpretative guidance to determine current obligations,” the MSRB said, adding, “ consolidating this guidance into rule language would ease the burden on dealers and other market participants who endeavor to understand, comply with and enforce the time of trade disclosure obligation.”
The board said this new proposed rule would eliminate three existing interpretative notices that appear in the MSRB’s Rule Book under G-17: one dated March 4, 1986 on call disclosures; another dated Jan. 30, 2002 on minimum denominations; and a third dated March 20, 2002 on the disclosure of material facts.
The MSRB asked for public comments, setting a March 12 deadline for receiving them.
The board asked commenters to respond to a key question: Will the proposal to consolidate the guidance, or create a new rule, impose any particular burden on dealers or provide any material benefit to them?
The new rule would apply to both primary and secondary market sales and purchases. It also would apply to broker-dealers operating electronic brokerage systems.
Broker-dealers would not be allowed to meet the disclosure requirements by directing customers to advertising materials or established industry sources, the board said.
Firms also would have to implement processes and procedures to comply with these disclosure requirements.
In its notice, the MSRB describe 15 examples of information that could be material in certain situations.
“This list is not exhaustive and other information may be material to a customer in these and other scenarios,” the board said.
For example, the MSRB said the credit rating or lack thereof, as well as rating changes, the credit risk of a security, and any underlying credit rating or the lack of one could be material.
Also possibly material would be the identity of a credit enhancer or liquidity provider, the terms of the credit or liquidity facility, and the credit rating of the provider, including potential rating actions.
The MSRB said a dealer may have to disclose if a security has been or will be insured, the credit rating of the insurer and information about potential rating changes faced by the insurer.
For variable rate demand obligations, the dealer should consider disclosing the basis on which periodic interest rates are determined and the role of the remarketing agent, the board said.
Similar interest rate reset information may have to be disclosed for auction rate securities, as well as the duration of the interest rate reset period, information on how the “all hold” and maximum rates are determined, any recent auction failures and other features of the ARS in bond documents.
Dealers may want to disclose the potential adverse effects on liquidity of a customer position if a customer purchases securities below minimum denominations, the board said.
They also may want to disclose information on the investment of bond proceeds, an issuer’s intent to prerefund bonds, or the fact that a muni may be redeemed prior to maturity, in-whole, in-part, or in extraordinary circumstances.
If price/yield calculations of securities could be affected by anomalies due to a non-standard feature, this could be material, MSRB said. Dealers may have to disclose when issuers fail to make filings under their continuing disclosure agreements,
The MSRB gave examples of possible material information for original issue discount bonds, bonds that prepay principal, put option and tender option bonds and stripped coupon securities.
Mike Nicholas, chief executive officer of Bond Dealers of America, said, “The BDA is pleased the MSRB is seeking to consolidate the existing time of trade disclosure obligations for dealers into one single, clear and concise rule which will hopefully provide the necessary clarity when implementing and enforcing the rule. We also look forward to the MSRB’s use of this new structure for its future rules, following the format which other SROs use, making the rules more flexible and easier for dealers to follow and understand.”
