MSRB decides to forgo boilerplate disclosures

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The Municipal Securities Rulemaking Board has asked the Securities and Exchange Commission to approve a new standard that would streamline the disclosures underwriters provide to issuers at the beginning of a deal.

The proposed changes to Rule G-17 guidance provides that an underwriter’s potential material conflict of interest must be disclosed to an issuer, but only if, that potential conflict is “reasonably likely” to mature into an actual material conflict of interest during the course of that specific transaction.

The filing is largely the same as the one the MSRB sought comment on late last year.

In past comment letters, municipal market participants said that disclosures required by the 2012 interpretive guidance to G-17 had become too long and boilerplate, creating a burden for dealers to prepare them. It also made it difficult for issuers to assess which conflicts, risks and other matters were most significant.

The guidance was part of the MSRB's ongoing retrospective review and with the new change, will make the so-called “G-17 letters” more useful to issuers and less burdensome to underwriters, the MSRB hopes.

“Streamlining information that underwriters provide in these disclosures is a win-win,” said MSRB President and Chief Executive Officer Lynnette Kelly. “Underwriters will not have the burden of drafting and delivering long boilerplate disclosures, and issuers will save time and resources by not having to sift through pages of legalese to identify the most significant conflicts and risks.”

The change could give issuers more actionable information, though it wouldn’t necessarily mean less disclosure, just a difference in timing of when some material conflicts of interest would be disclosed.

The MSRB believes the amendment would benefit issuers and underwriters by reducing the volume of disclosure to more concrete and probable disclosures. Underwriters will no longer have to draft and deliver longer disclosures to describe unlikely hypothetical conflicts. On the flip side, issuers will not have to review and analyze longer-form disclosures, allowing for more time to focus on present material conflicts of interest.

The proposed rule change would not diminish an underwriter’s fair dealing obligation to update its dealer-specific disclosures in circumstances when a previously undisclosed potential conflict of interest arises to become an actual conflict of interest.

The MSRB asked in November 2018 for comments on the proposed amendments to its 2012 interpretive guidance. The 2012 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 Securities Industry and Financial Markets Association asked the MSRB to amend the guidance to require that only actual rather than potential conflicts of interest be discloses to issuers before a new issuance, while the city of San Diego wrote that it was important for issuers to be advised of potential material conflicts up front.

The MSRB is also keeping with a change to shift responsibility for providing disclosure on behalf of an underwriting syndicate to the syndicate manager. Currently, a syndicate manager could choose to provide the disclosures on behalf of the group. With the new interpretive guidance, the syndicate manager would be responsible for providing both standard and transaction-specific disclosures.

The MSRB chose not to create different disclosure tiers, nor allow issuers to opt-out of receiving disclosures. The amendments would require disclosures on a transaction-by-transaction basis.

The guidance would also allow for email read receipts to serve as issuer acknowledgment of receipt of the disclosures. In the past, underwriters have complained that obtaining confirmation of receipt was sometimes challenging because issuers are not responsive.

The guidance would still need to be approved by the SEC. After, the MSRB will publish a regulatory notice within 90 days of the publication of approval. The notice will specify the compliance date for the amendments described in the proposed rule change.

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