A group representing many large underwriters wants the Securities and Exchange Commission to rethink the Municipal Securities Rulemaking Board's decision not to propose a "tiered" system for disclosures required under its fair dealing rule.
The Securities Industry and Financial Markets Association made that pitch to the SEC in a letter dated Aug. 30, asking the SEC not to approve the proposal until some concerns were addressed. SIFMA and other groups wrote to the commission because the MSRB is seeking the SEC’s approval to revise interpretive guidance under its Rule G-17, with the aim of reducing the voluminous “boilerplate” disclosures issuers often receive from their underwriters.
“A highly sophisticated frequent issuer may not need the same disclosures as a less sophisticated infrequent issuer,” wrote Leslie Norwood, a managing director, associate general counsel, and head of municipals at SIFMA. “For example, it may not be necessary to send disclosures on variable rate demand obligations or floating rate notes to an issuer that frequently issues such securities. Such disclosures would, on the other hand, be useful for an issuer that had not previously accessed such markets.”
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Chief among the proposed changes is a provision that provides that an underwriter’s potential material conflicts of interest must be disclosed to an issuer 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 proposed changes would also shift more of the disclosure responsibility to syndicate managers, cutting down on the number of disclosures issuers receive.
The idea of a tiered disclosure system based on some combination of issuer size and sophistication got some support during the MSRB’s initial comment period, including from Ben Watkins, director of Florida’s Division of Bond Finance. The idea is that an experienced issuer might benefit from the reduced weight of disclosures it does not need, rather than having to receive them under a “one size fits all” approach.
The MSRB chose not to adopt that tier system, citing the difficulty in drawing such distinctions. Its proposed guidance would require that underwriters making certain transaction-specific disclosures “make an independent assessment that such disclosures are appropriately tailored to the issuer’s level of sophistication.”
Norwood told the SEC that underwriters need more guidance.
“SIFMA requests that the MSRB, either in a revised filing, or otherwise in a ‘frequently asked questions document’ or other implementation guidance, provide examples of concrete hypotheticals in order to provide clarity to regulated dealers regarding how the content of these transaction-based disclosures may potentially vary by issuer sophistication and still survive regulatory scrutiny,” Norwood wrote. “Otherwise, in the absence of regulatory clarity, a one size fits all approach in this instance is the most workable as evidenced by underwriter practices over the past eight years.”
SIFMA also took issue with the MSRB’s “reasonably likely” standard for potential conflicts of interest, urging the SEC to require only actual conflicts of interest be disclosed.
The National Association of Municipal Advisors told the group it supports the proposed changes, particularly new guidance that would make clear that underwriters must disclose to issuers that issuers have the right to hire a municipal advisor to act as the issuer’s fiduciary on the transaction. The group had been concerned that underwriters have tried “either directly or inferred” to deter issuers from hiring MAs, wrote NAMA Executive Director Susan Gaffney.
The SEC has final say, and could choose to require changes either suggested in comments or by its own staff. The SEC could also choose to approve the proposal as is.
