WASHINGTON - The Municipal Securities Rulemaking Board is asking market participants to comment on whether and how it should amend existing guidance to its fair dealing rule, after complaints that it has led to lengthy, unhelpful disclosures from underwriters to issuers.

The MSRB announced the request Tuesday, following signals by MSRB president Lynnette Kelly that the board would be taking a look at the 2012 interpretive guidance to its Rule G-17 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 and risks of transactions recommended by the underwriters, among other information. The disclosures provided to issuers by underwriters, commonly called “G-17 letters,” have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

“The MSRB has received informal feedback from market participants that the disclosure requirements adopted in 2012 could more effectively and efficiently achieve their intended purpose of assisting issuers in making informed decisions when engaging the services of an underwriter,” Kelly said.

Complaints have included the fact that underwriters working on same transaction will provide the exact same disclosures to the issuer, and that underwriters serving frequent issuers must repeatedly provide disclosures that are in some cases identical to those that they already provided.

MSRB president Lynnette Kelly.
Lynnette Kelly, MSRB

In addition to being duplicative and burdensome for issuers to read, Kelly added, dealers have said certain disclosures are burdensome to provide and may not be fully justified by the informational value to issuers. Some market participants have said that the guidance should permit more tailored disclosures than are required currently.

“Soliciting formal public comment will help us consider whether and how to amend the guidance to improve its effectiveness and efficiency,” Kelly said.

The Securities Industry and Financial Markets Association produced model disclosure documents in 2012 that were five pages in length, but like all SIFMA model documents firms are free to modify and expand on them if they so choose.

Bond Dealers of America chief executive officer Mike Nicholas said his group appreciated the opportunity.

“The BDA applauds the MSRB for seeking comments on a retrospective review of the G-17 required disclosures from muni underwriters to issuers and addressing a number of potential issues such as different challenges for different types of issuers,” said Nicholas. “Proactively reviewing the current rulebook for efficiencies and best practice improvements — benefiting both issuers and underwriters — is always welcomed and appreciated by the middle market and regional bond dealers represented by the BDA. The BDA looks forward to filing comments and continuing our working relationship with the MSRB.”

Leslie Norwood, co-head of the Securities Industry Financial Markets Association’s Municipal Securities Division, said the group's members "welcome the current review of the 2012 G-17 guidance, and hope that more narrowly tailored and effective disclosures, produced by the most appropriate party, will be the result. SIFMA looks forward to submitting a response to today’s request for comment.”

The request for comment poses a number of questions, many of them seeking information on how the disclosure process has worked on a practical basis. It asks, for example, what the process is for the underwriter to deliver the disclosures, and whether syndicate members are often utilizing the option provided in the guidance of allowing the manager to make the disclosure for the group. When a syndicate makes that choice, individual firms are still responsible for individually disclosing potential conflicts of interest unique to them.

The MSRB also wants to know whether the disclosure requirements should be different for different classes of issuers, whether all issuers should be able to opt out of receiving disclosures, and what the costs and burdens of the 2012 guidance have been, among others.

Comments are due by Aug. 6.

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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.