WASHINGTON— The Municipal Securities Rulemaking Board asked the Securities and Exchange Commission Tuesday to approve interpretive guidance that would require underwriters to disclose potential conflicts of interests to state and local government borrowers.
The MSRB’s guidance on Rule G-17, which governs fair dealing, would apply only to underwriters and not to municipal advisers for now.
The notice, which the board filed with the SEC, would require underwriters in municipal securities transactions to disclose potential conflicts of interest, including third-party payments, and non-cash benefits or credits made or received, profit-sharing arrangements with investors, and the issuance or purchase of certain credit default swaps.
“This proposal is a groundbreaking effort in ensuring the interests of state and local government bond issuers are further protected in their transactions with underwriters of municipal securities,” MSRB executive director Lynnette Hotchkiss said in a statement. “This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds.”
In February, the MSRB floated two interpretive releases on Rule G-17, which would have extended the rule’s fair-dealing requirements to municipal advisers and underwriters. If approved by the SEC, the guidance filed Tuesday would be a final version of the earlier one proposed for underwriters.
Later this month, the board will file with the SEC Rule G-17 interpretive guidance for municipal advisers, according to Jennifer Galloway, an MSRB spokesperson.
As filed with the SEC, the MSRB’s proposed notice for underwriters would prohibit excessive compensation, determined by the specific facts and circumstances of an offering.
The proposal would require that an underwriter pay a fair and reasonable price for an issuer’s bonds.
It would also require an underwriter to be truthful and accurate in written and oral statements to an issuer related to an underwriting of muni securities. For example, an underwriter may not claim it has knowledge or expertise with respect to a particular financing unless the personnel who work on the deal actually have the claimed expertise, the board said.
The guidance issued by the MSRB Tuesday varies in a few key respects from the earlier proposed guidance.
In the version filed with the SEC, the MSRB clarifies that even in routine financings, underwriters must disclose “material aspects” about the transaction’s structure if the issuer lacks knowledge or experience with such deals.
In the earlier version, the MSRB required such disclosure only for complex transactions.
The board also added language clarifying that the level of disclosure required may vary according to the issuer’s knowledge or experience with the proposed financing, capability of evaluating the risks of the recommended financing, and financial ability to bear the risks of the recommended financing.
The SEC must approve the MSRB’s guidance before it becomes effective. The commission will release the guidance for another round of public comments.
An industry group did not welcome the MSRB’s decision to file the guidance with the SEC.
In an interview, Leslie Norwood, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said she was disappointed the board did not release the guidance for another round of public comments, adding that SIFMA would analyze the proposal and comment to the SEC on it.
In its filing, the MSRB requested that the guidance become effective within 90 days of SEC approval.
