How MSRB could improve underwriter disclosures

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WASHINGTON — The Municipal Securities Rulemaking Board should modify its existing guidance on its fair dealing rule to ensure underwriters don't file reams of repetitive disclosures to issuers, dealer groups told the MSRB on Monday.

The Securities Industry and Financial Markets Association and Bond Dealers of America made that suggestion in response to the MSRB’s request for feedback on its 2012 interpretive guidance to Rule G-17. The MSRB asked for comment on that guidance in June as part of a retrospective review of existing regulations.

That guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship, the risks of transactions recommended by the underwriters, and conflicts of interest, among other information.

These disclosures to issuers are commonly called “G-17 letters” that underwriters send issuers. But they have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

MSRB President and Chief Executive Officer Lynnette Kelly has expressed concern about the quality of G-17 disclosures, telling reporters that there is probably “room for improvement” in existing practices.

Both BDA and SIFMA said they believe in the value of the G-17 disclosures, but that the MSRB could amend the guidance to help keep it shorter and to prevent issuers from getting too many documents from the underwriting team.

SIFMA homed in on conflict of interest disclosure. The 2012 guidance requires underwriters in a negotiated offering to disclose “potential or actual material conflicts of interest.”

“While SIFMA and its members believe that meaningful disclosures to issuers of conflicts of interest on the part of underwriters is appropriate, we also believe that issuers in many cases are receiving excessive amounts of disclosures of potential and often remote conflicts that are of little or no practical relevance to issuers or the particular issuances and would benefit from more focused disclosure on conflicts that actually matter to them,” wrote Leslie Norwood, a managing director, associate general counsel, and co-head of the municipal securities division at SIFMA.

“Thus, we believe that the disclosure requirement should be limited to actual, and not merely potential, material conflicts of interest on the part of the underwriter,” Norwood added.

SIFMA believes that while underwriters should continue to specifically disclose actual conflicts of interest in its G-17 letters, the MSRB should consider allowing underwriters to rely on the independent registered municipal advisor exemption to satisfy other disclosures. The IRMA exemption allows underwriters to provide advice to issuers without crossing the line from underwriter to muni advisor, providing that the issuer has certified that it has its own municipal advisor and will rely on that advisor’s advice.

Further, issuers should be able to opt out of receiving disclosures beyond actual material conflicts of interest, Norwood told the MSRB.

BDA Chief Executive Officer Mike Nicholas wrote that firms who secure an IRMA exemption should not be required to deliver G-17 disclosures.

“The whole point of the Rule G-17 disclosures is to ensure that issuers understand the role and responsibilities of the underwriter, and ensuring that the issuer understands the role and responsibilities of the underwriter falls within the responsibilities of a municipal advisor,” wrote Nicholas.

BDA also said that the MSRB should modify the guidance to make clear that co-managers of an underwriting syndicate should not generally have to deliver G-17 disclosures separate from the senior manager unless they have a conflict unique to their firm.

“One of the reasons why large, frequent issuers receive so many Rule G-17 disclosures is that co-managers send entire Rule G-17 disclosures which frequently have exactly the same content as the Rule G-17 disclosures delivered by the senior manager,” Nicholas explained.

Issuers told the MSRB that opting out of disclosures should not be an option, and that regulators should hold underwriters to the existing requirement that they provide disclosures with “clarity.”

These disclosures should also be provided in a “plain English” manner versus legalese to maintain the spirit of the rulemaking to have the underwriter deal fairly with the issuer,” wrote Emily Brock, director of the Government Finance Officers Association’s Federal Liaison Center.

If the MSRB decides to make changes to the 2012 guidance, that responsibility would likely fall to the next fiscal year’s board of directors, who take their seats Oct. 1.

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Securities law MSRB rules Municipal disclosure Primary bond market BDA SIFMA GFOA MSRB Washington DC