WASHINGTON — Both the Municipal Securities Rulemaking Board and the Securities Industry and Financial Markets Association on Wednesday released guidance to help underwriters comply with the MSRB’s interpretive release on its Rule G-17, which details their disclosure and other fair-dealing obligations to state and local governments issuing municipal bonds.
Bond Dealers of America released guidance for its members earlier this month.
The MSRB’s G-17 interpretative release, which the dealer community says will put in place a whole new regime for underwriters, was approved by the Securities and Exchange Commission on May 4 and takes effect on Aug. 2.
The MSRB’s 34-page notice on guidance for implementation provides the background of the release, who it applies to, and how it should be implemented, as well as “practical considerations” for underwriters to take into account in complying with it.
Rule G-17 is just one paragraph and basically states that municipal broker-dealers and advisors “shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.”
But the board has issued about 30 interpretative notices and letters pertaining to it. The MSRB adopted this latest interpretative release in line with its expanded mission, under the Dodd-Frank Act, to protect the interests of state and local issuers.
In its guidance, the MSRB notes that the interpretative release primarily applies to negotiated offerings of munis and that many of the disclosure obligations do not apply to placement agents or conduit borrowers.
An underwriter must disclose to the issuer, early on, perhaps when it is responding to a request for proposals, that its main role will be to purchase munis in an arm’s length commercial transaction with the issuer with the aim of distributing them. The underwriter must disclose that, unlike a financial advisor, it does not have a fiduciary duty to put the issuer’s interests first, above its own. It also must refrain from advising the issuer not to hire a financial advisor.
The underwriter must not misrepresent its qualifications or experience.
An underwriter also must disclose, perhaps through an engagement letter, information about its role in the transaction, the compensation received by it or third parties, and actual or potential conflicts of interest.
The underwriter must disclose whether its compensation is contingent on the closing or the size of the transaction, which could present a conflict of interest by causing the underwriter to recommend unnecessary or larger than necessary transactions.
If the underwriter recommends a negotiated complex transaction, it must disclose the key financial characteristics and risks of the financing. It may also need to disclose information about characteristics of a transaction typically not considered to be complex if issuer officials are inexperienced, according to the interpretative release.
Most of the disclosures must be made before the issuer signs the bond purchase agreement.
In its implementation guidance, the MSRB says by way of example, that as a practical consideration, an underwriter could be engaged in a profit sharing arrangement that would have to be disclosed as a conflict of interest, even if there is no formal written agreement for that arrangement.
The notice also warns underwriters that “page after page of complex jargon in small print” will not satisfy their disclosure obligations.
SIFMA is issuing a set of model documents to help underwriters comply with the MSRB’s G-17 interpretative release.
The model documents, some of which are to be released Wednesday and some next week, represent the culmination of two months of work by SIFMA to make sure underwriters will be able to meet the guidance, which takes effect on Aug. 2.
The guidance will require “a new way of doing business and we want to help underwriters be in full compliance on Aug. 2,” said David Cohen, a managing director and associate general counsel at SIFMA. “We’re trying to give underwriters a roadmap of all that they need to do to comply with the rule.”
SIFMA stressed that the model documents “are designed to be a starting point only” and encouraged underwriters to expand or modify them as necessary.
One of the documents released Wednesday is a model underwriter’s letter to an issuer providing disclosures about its role in any muni transaction, its compensation and actual or potential conflicts of interest.
The group is also releasing model risk disclosures for both fixed rate bonds, if issuer officials are inexperienced, and variable rate demand obligations.
Next week, SIFMA will release model policies and procedures, as well as model risk disclosures for floating rate notes and swaps.
The documents can be found on SIFMA’s Website: www.sifma.org.