Securities Law

MSRB Issues FAQs to Help Underwriters, Issuers Understand Fair-Dealing Guidance

WASHINGTON — The Municipal Securities Rulemaking Board has released guidance in response to confusion about underwriters’ disclosures to issuers under its fair-dealing rule.

The five-page document, in a frequently asked questions and answer format, seeks to clarify interpretative guidance the board issued last August to its Rule G-17 on fair dealing so that underwriters and issuers can more easily understand it, said Gary Goldsholle, the MSRB’s general counsel. The FAQ does not make any substantive changes to the earlier guidance, he stressed.

The board’s FAQ guidance comes as issuers are complaining that underwriters are sending them lengthy disclosure documents, stating in part that the underwriter has no fiduciary duty to put the issuer’s interests first before their own. Underwriters are complaining that issuers are refusing to acknowledge they have received the disclosure documents, fearing they are agreeing to everything in the documents, leaving underwriters uncertain about how to proceed.

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 underwriters are required to try to get the issuer to acknowledge that it received the disclosures.

But bond lawyers meeting earlier this month in San Francisco said issuer clients are sometimes wary of acknowledging the underwriters’ disclosures because they don’t want to implicitly accept the “arm’s length relationship” with them.

Leslie Norwood, co-head of municipal securities at the Securities Industry and Financial Markets Association, said this has been a nagging problem that forces underwriters to make repeated attempts to contact issuers so regulators can see they complied with the rule and attempted to make sure the issuer understands the nature of the underwriter-issuer relationship.

SIFMA has a model letter that has been available since last July designed to serve as a guide for the disclosures underwriters must make to issuers under Rule G-17.

“When you’re talking about regulatory compliance, the underwriters treat that very seriously,” she said.

But Ben Watkins, chairman of the Government Finance Officers Association’s governmental management committee and Florida’s bond finance director, said the reality is that underwriter disclosures have not been nearly as helpful as they were supposed to be, in theory.

“We’re completely supportive of the concept,” Watkins said. “In practice, you get these three- to five-page letters that have been all lawyered up and are chock full of legalese.”

Under the interpretative guidance to G-17, underwriters are supposed to tailor their disclosures to the level of sophistication of the issuer.

Watkins said that smaller and infrequent issuers are especially left scratching their heads, and might have more questions about the underwriter-issuer relationship than they did before the disclosures arrived.

“Why did I get this letter, and what does it mean if I sign it and send it back?” Watkins asked. “It defeats the whole purpose.”

Watkins said the GFOA is working on guidance for its members, which will detail how to acknowledge receipt of an underwriter letter without actually agreeing to everything the underwriter says.

Under the guidance, issuers could “acknowledge ... receipt [of the disclosures] but not any conflicts within, or anything else in the letter, for that matter,” Watkins said.

“That language would not be inconsistent with the requirements under the rule,” said Goldsholle.

He said that while one of the MSRB’s aims is to make sure the issuer understands the underwriter does not have a fiduciary duty to put its interests first  — which is what is meant by an arms-length relationship — the issuer does not have to agree with the underwriter’s disclosures. The board only wants to make sure the issuer receives the underwriter disclosures.

The FAQ makes clear that an underwriter need only attempt to obtain the issuer’s acknowledgement that it received the disclosures.

That acknowledgement cannot be in the form of an automatic email receipt.

The transaction can still go forward, even if the issuer chooses not to acknowledge the underwriter’s disclosures, as long as the underwriter documents why it was unable to get a written acknowledgement.

“An underwriter may proceed with a receipt of acknowledgement that includes an issuer’s reservation of rights or other self-protective language,” the MSRB wrote in the FAQ.

Jennifer Brown, director of budget and research in Sugar Land, Texas, and a member of the GFOA debt committee, said issuers need to be engaging financial advisors to protect them rather than attempting to deny the contents of the underwriter disclosure letter.

“Issuers need to understand that an underwriter does not serve them in the same capacity as a financial advisor,” Brown said. “The financial advisor’s role is to represent the best interest of the city, while the underwriter’s role is to relay the transaction to the market. We rely on our financial advisor to recommend underwriters for transactions where there would be no conflicts of interest.”

“I have no particular issue with acknowledging receipt of disclosure from an underwriter,” she added, “and if the disclosure causes me concern regarding the underwriter’s ability to conduct an arm’s length transaction for the issuer, then I would recommend that the issuer use a different underwriter.”

The FAQ also clarifies that an underwriting syndicate manager can handle most disclosures on behalf of the syndicate, and that updates to disclosures can be provided through additions or deletions to previously delivered disclosure documents. They also clarify which disclosures should be made at various points in the bond transaction.

For example, the MSRB said the underwriter must disclose it has an arm’s length relationship with the issuer “at the earliest stages of the relationship, generally at or before a response to a request for proposals or promotional materials are delivered to an issuer.”

However, the underwriter should disclose the characteristics and risks of a complex financing before the issuer commits to doing the transaction, such as before the issuer signs the bond purchase agreement.

“Nothing in these FAQs makes any substantive changes to the requirements,” Goldsholle said. “It’s simply to address some of the challenges we’ve seen parties have had in complying.”



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