ST. LOUIS – The Municipal Securities Rulemaking Board and muni issuers share concerns about practices in the primary offering of securities, including the disclosures underwriters provide to issuers at the beginnings of deals, and potential abuses of retail order periods.

MSRB chair Lucy Hooper and deputy executive director Mark Kim spoke about those topics with members of the Government Finance Officers Association’s Committee on Governmental Debt Management during that panel’s meeting here Saturday. The pair discussed current MSRB initiatives and feedback the board has received. That became a fulsome discussion of MSRB efforts to review guidance on underwriter disclosures to issuers under the board’s fair dealing rule and the board’s broader review of primary offering practices.

The MSRB agreed at its quarterly meeting late last month to publish a request for comment on the merits of any potential changes to 2012 guidance on its Rule G-17 on fair dealing covering duties owed by dealers to issuers when underwriting municipal securities. The guidance laid out a variety of disclosures underwriters are supposed to make to issuers at the beginning of a transaction, including the disclosure that underwriters are not fiduciaries and not required to act in the best interests of issuers. The MSRB said it has concerns that those disclosures aren’t working as intended.

“What we’re hearing is that issuers are receiving the same document from multiple people in an underwriting,” Hooper said, meaning that issuers are being served the same disclosure document from multiple participants in the deal. “So that’s overkill, maybe.”

Hooper said she had spoken to a large issuer that complained about boilerplate language in those disclosures, which could make them difficult to read.

An advisor to the committee said that firms serving as co-managers on deals are contributing to this problem by providing lengthy disclosures even though they may not be required to. MSRB rules allow underwriters to rely on the lead firm’s disclosure unless they have a conflict of interest, which then needs to be disclosed. The boilerplate language also makes it difficult to find whatever conflict is being disclosed, the advisor added.

The MSRB representatives also discussed some concerns about retail order periods, which the board is exploring as part of its broad request for market feedback on primary offering practices. Retail order periods are specific timeframes when issuers seek to sell bonds to retail rather than larger institutional investors, sometimes giving priority to local purchasers. But Kim said there have been some issues anecdotally with underwriters not adhering to issuer definitions of retail, and several committee members said they have experienced instances of institutional investors using creative means to circumvent issuer wishes. One committee member said she had seen several instances of the same order being broken up through separate dealers to get around order size restrictions in the retail period.

MSRB chair Lucy Hooper
MSRB chair Lucy Hooper

Kim told the committee that it is the issuer’s responsibility to see that underwriters are adhering to the rules set by the issuer.

Ben Watkins, director of the Florida Division of Bond Finance, told the MSRB that issuers want to communicate and work collaboratively with the board, but have concerns about regulatory creep. Hooper had earlier expressed that she was surprised by the negative reaction to the MSRB’s April issue brief on the regulatory framework for muni market swaps and other derivatives, which issuers and some other market participants had complained was outside the MSRB’s purview.

“What you’re going to hear is we want you to stay in your lane,” Watkins said. “Most of the time we’re going to be on the same page,” he added. “When you wade into those issues we’re struggling with ourselves, it makes it challenging.”

Watkins said issuers would like the MSRB to be very clear on why it feels it needs to wade into issues outside its statutory authority and to explain clearly who it is attempting to communicate with.

“That will relieve our angst,” Watkins said.

Hooper said the MSRB does its best to articulate those things in its public communications.

The GFOA’s conference concludes May 9.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is the Deputy Washington Bureau Chief of The Bond Buyer. He covers securities law, regulation, and enforcement.