The Securities and Exchange Commission’s municipal securities chief warned dealers yesterday to be careful to comply with a Municipal Securities Rulemaking Board rule that sets forth certain conditions for a dealer-financial adviser to switch roles and become underwriter in the same transaction. Martha Mahan Haines cautioned that under MSRB’s Rule G-23, dealers should ensure that an issuer understands what their role is in the transaction, stressing that dealers who switch hats in the middle of a bond deal may confuse issuers with inexperienced staff.“Sometimes it’s really in your best interest to make the fact that you’re no longer responsible for taking care of the issuers’ best interests clearly understood,” Haines said, speaking at the Securities Industry and Financial Markets Association’s annual Fixed Income Legal and Compliance Conference in New York. She also advised issuers to be sophisticated enough to understand that “they are the seller, the underwriter is the buyer, and like any other sales transaction, the buyer is not representing the seller.”Haines’ comments on Rule G-23 compliance comes about a month after the National Association of Independent Public Finance Advisors sent the MSRB a letter and memo asking it to make three specific changes to the rule, claiming the current version is “materially misleading,” runs counter to a recent SEC enforcement ruling, and makes no sense given ongoing muni investigations by the Justice Department and the SEC. Diane Klinke, the MSRB’s general counsel who also spoke at the SIFMA conference, promised that the MSRB board would consider the matter, though she declined to say when. “Anytime anyone asks anything it goes to the board, [but] I don’t have a time for you,” Klinke said.The NAIPFA letter and memo marks the second time that the group has asked the board to amend the rule to require a dealer-FA contemplating such a role switch to: disclose to the issuer that conflicts of interest do exist; obtain explicitly formal consent from the issuer’s policy makers that the role switch and conflicts of interest are acceptable; and completely terminate its FA role with the issuer once it becomes underwriter, unless the issuer contemporaneously employs more than one FA. The MSRB decided not to amend the rule in February 2006, after finding no systemic problems that warranted changing it.“That was the wrong decision for the integrity of our market and the public’s perception of it,” NAIPFA officials told the MSRB in a recent memo, warning, “Rule G-23 represents a severe policy lapse in the municipal securities market.”NAIPFA charged that the MSRB’s refusal to amend the rule runs counter to the SEC’s decision last year that former muni underwriter, Dolphin & Bradbury and its executive Robert Bradbury, violated securities fraud laws by failing to disclose in bond documents that the main tenant of a building to be purchased with bonds was about to leave the building. The SEC made the finding even though the bond documents disclosed that the tenants’ leases would expire before the bonds matured and that there was no guarantee that the leases would be renewed. Haines discussed the importance of the SEC’s ruling in that case, apart from her remarks on G-23, at the SIFMA conference. She said the case, which is on appeal before the U.S. Court of Appeals for the District of Columbia Circuit, is significant because it emphasizes that dealers do not fulfill their disclosure responsibilities by making general statements when they are aware of something more specific that would affect the bonds. “I often hear sometimes bankers or lawyers saying, 'Well, you know, we don’t have to give the details, just a general warning,’ and this enforcement action makes it clear that no you can’t, you really have to give the facts,” she said.
