WASHINGTON - Underwriters of municipal securities will be required in August to comply with new disclosure and fair-dealing regulations designed to protect issuers of municipal bonds.
The new rules, proposed by the MSRB in August 2011 and approved by the Securities and Exchange Commission late Friday, will require that underwriters disclose to state and local issuers the risks associated with complex municipal bond transactions, as well as potential conflicts of interest and compensation underwriters receive from third-party providers of derivatives and other investments.
"These new rules are the biggest development in protection of the financial interests of state and local governments since the MSRB was established in 1975, said Alan Polsky, MSRB board chair in a statement Monday. "The new requirements, which have the force of federal law, will ensure that state and local governments have important information they need to make informed decisions about issuing bonds and related transactions."
Existing laws already require underwriters' communications with issuers be truthful and accurate, but the new rules include examples that show how underwriters can comply. For instance, underwriters may not falsely claim that they have expertise or knowledge about a financial product.
The rules, which evolved out of requirements in the Dodd Frank Act, prohibit underwriters of municipal bonds from engaging in practices that are "deceptive, dishonest or unfair," said the MSRB.
The regulations require underwriters to provide "robust disclosures" about compensation, conflicts of interest and their role in transactions. In addition, the rules prohibit underwriters from omitting material facts, and require that underwriters that recommend complex securities products disclose all financial risks.
The rules also require underwriters pay a fair and reasonable price for bonds, and prohibit excessive compensation for underwriters, based on the details of the offering, said the MSRB.
Underwriters must also disclose the existence of third-party payments, values, credits and profit-sharing arrangements, and they must tell issuers if they purchase credit default swaps tied to an issuers' securities.
