There have been important developments and discussions over the past few years about Securities and Exchange Commission Rule 15c2-12.
First it was the Municipal Continuing Disclosure Cooperation Initiative, and then amendments to 15c2-12 itself.
A recent NABL webinar, “Living with the 15c2-12 Amendments,” reminded the market that municipal advisors can face scrutiny and liability under the anti-fraud provisions of the Securities Exchange Act.
The NABL presentation and associated materials, citing the SEC’s 1988 Release for then Proposed Rule 152c-12, provided, in part:
"The SEC has asserted that, when a financial advisor participates in a competitive offering, it has duties to inquire into the accuracy and completeness of disclosure that are “comparable” to the duties of underwriters in negotiated offerings, when the financial advisor also has access to issuer information, participates in drafting the OS, and publicly associates itself with the offering. Living with the 15c2-12 Amendments, Section V, C, 2 citing SEC Rel. No. 34-26100, note 92."
At a recent meeting of market participants, representatives from the SEC’s Office of Municipal Securities and the Municipal Securities Rulemaking Board offered insights and perspectives on these issues. The discussion reminded us that when the MA takes on the obligation of drafting the Official Statement, they can be held primarily liable for fraudulent disclosure — just like an underwriter. This is the reference back to footnote 92 in the 1988 Release. The context here is important: The footnote references a competitive deal and the type of role the MA took as they prepared the OS.
There are steps an MA can take to protect themselves, including clearly defining, in writing, the scope of services to be provided under their engagement with an issuer and abiding by the same. MSRB Rule G-42 specifically provides that the MA needs to define the scope of the advisory activities they will perform and any limitations on the scope of the engagement. Importantly, the MA must adhere to the scope of services provided or excluded. If a questionable issue arises, the investigating party will likely look at the actual course of dealing — if the MA acted differently than as contractually narrowed, then the “narrowing” can be ignored.
What about contributing to or reviewing the OS? Can that expose the MA to scrutiny or worse? The answer is maybe.
Where the MA contributes to the OS, Rule G-42 provides they must have a reasonable basis for that contribution. In the situation where the MA reviews the OS (drafted by another deal participant), the determination will be based on the “facts and circumstances.” A simple review for “red flags” will likely not expose the MA, but if the review is more substantive, perhaps so. A fact-intensive review of the circumstances or inquiry may be warranted – how much information did the MA have? What portions of the OS did they review? Were the comments substantive and did the MA have a reasonable basis for the same?
Where the MA takes on the responsibility of drafting the OS or substantively contributing to one, the MA should consider, among other things, conducting an in-depth review of continuing disclosure obligations against filings actually made (the same analysis underwriters perform they are working with an issuer on negotiated deals). Unless the MA is experienced in conducting such analyses, the MA may want to consider engaging a third party to do so. Further, where the MA also serves as the dissemination agent, they should consider using an independent third party to avoid what some see as a potential conflict of interest.
The potential for liability for an MA under the anti-fraud provisions of the Securities Exchange Act is not new and it has increased with the MA rule. That said, there are simple steps an MA can take to protect themselves and avoid liability.
