Municipal market participants said Tuesday that while they appreciate the Municipal Securities Rulemaking Board’s attempt to clarify underwriter disclosure requirements under its fair dealing rule, more guidance is needed before the rule can fulfill its intended purpose.
The MSRB released the new guidance Monday in the form of answers to frequently asked questions, after hearing complaints from issuers about overly-complex and legalistic disclosure letters from underwriters and underwriter concerns that issuers were unwilling to acknowledge receipt of the disclosures for fear of seeming to consent to them.
“These FAQs are a step in the right direction, but fall short in certain respects,” said David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association.
Cohen said underwriters might be putting more into the disclosures than is necessary in an effort to comply, so further clarification to dealers about what exactly they must disclose could actually benefit issuers.
“The dealers want to be in compliance,” Cohen said, adding that more guidance from the MSRB on exactly what conflicts of interest need to be disclosed could help reduce the “legalese” that has especially befuddled some of the smaller and infrequent issuers.
“We believe further clarification on the scope of the conflicts and recommended ‘complex’ municipal financing disclosures may help to simplify and improve the content of disclosure letters,” he said.
Bond Dealers of America chief executive Mike Nicholas agreed that the scope of the disclosures continues to remain an issue for dealers and may be leading to needless complexity in underwriters’ disclosures to issuers.
“BDA appreciates MSRB’s responsiveness in putting out FAQs for the benefit of market participants, but this particular document doesn’t shed light on our key concern — more disclosure isn’t always better; meaningful disclosure is better,” Nicholas said. “The MSRB hasn’t yet provided guidance to underwriters on what does and just as importantly does not need to be provided, creating the potential for confusion that becomes even more apparent when it comes to complex transactions.”
Municipal advisors, tasked with looking out for an issuer’s best interests in a transaction, also find the guidance wanting.
“It ought to be substantive disclosure,” said Robert Doty, an advisor who also owns his own private consulting firm. “Obviously the most effective disclosure is one that is tailored for the transaction at hand.”
National Association of Independent Public Finance Advisors president Jeanine Rodgers Caruso said the guidance leaves “several questions unanswered and raises additional questions.”
“If the issuer official, or its designated agent, acknowledges receipt of the underwriter’s proposal, is that sufficient acknowledgement of the conflicts disclosures contained therein?” she asked.
Rodgers Caruso said the FAQs also leave murky the distinction between the underwriter engagement and the execution of a commitment, as well as how issuer officials can make clear that are empowered to act for the issuer in the relationship with an underwriter.
Nathan R. Howard, an attorney at Kodner, Watkins & Kloecker, LC, who works with municipal advisors, said the FAQs do help clarify the role of syndicate managers and timing of disclosures, but agreed with Rodgers Caruso’s concerns.
In general, all issues relating to who is to receive the documents would have been addressed if the MSRB would have adopted NAIPFA’s proposed G-17 language, which would have required that disclosures be made either to the issuer official with actual authority to receive such documents or to the issuer’s governing body itself,” he said.