WASHINGTON — Market participants urged the Securities and Exchange Commission to reject or delay the Municipal Securities Rulemaking Board’s proposed interpretive guidance for Rule G-17 on fair dealing for underwriters, saying it would impose a fiduciary-like regimen of disclosure obligations that would only confuse issuers.
But in comment letters filed with the SEC last week, dealer and independent advisor groups differed on how to improve the board’s proposal.
Independent FAs said the board should amend the guidance to “take into consideration the needs of unsophisticated municipal issuers.”
A dealer group said the MSRB should only require underwriters to propose certain transactions’ material risks when they have reason to believe the issuer lacks experience in bond offerings.
“The SEC and the MSRB should not confuse the matter, and the parties, by imposing fiduciary-like duties on underwriters through G-17 and any disclosure requirements must be narrowly drawn to avoid conceptual and practical inconsistencies that would only confuse the parties as to their roles and responsibilities,” wrote Mike Nicholas. chief executive officer of Bond Dealers of America.
The remarks come as the SEC is weighing the board’s Rule G-17 proposal for underwriters, which the MSRB floated for comment earlier this year. Last month, the MSRB pulled five muni advisor rule proposals that had been pending before the SEC, including proposed guidance on G-17 for muni advisors. Comments on the G-17 underwriters’ proposal, which the board did not withdraw, were due Friday.
In its SEC comment letters, another dealer group urged the commission to delay acting on the G-17 underwriters’ guidance until after the commission finalizes its muni advisor registration scheme and definition, slated for release by late 2011.
The Securities Industry and Financial Markets Association told the SEC that “principles of fairness, reasonableness and efficiency” require the SEC to consider both G-17 proposals “in tandem.”
“We’re very concerned about the timing of this proposal,” Leslie Norwood, SIFMA’s managing director and co-head of the muni division, said in an interview.
SIFMA also told the SEC, in a 13-page comment letter, that the board’s G-17 underwriter proposal was “seriously flawed” and would benefit from “careful cost-benefit analysis.” Unlike many federal agencies, as a self-regulator, the MSRB is not required to perform cost-benefit analyses of proposed rules.
In its August notice, the MSRB said the proposed G-17 interpretive guidance would require underwriters in routine municipal financings to disclose in writing “material aspects” of a financing if the issuers “did not otherwise have knowledge or experience” about such deals. If an underwriter in a negotiated transaction recommended a complex financing, the MSRB said, Rule G-17 would require written disclosure of “all material risks, characteristics, incentives and conflicts of interest,” including payments received from a swap provider.
But market participants disagreed about whether the MSRB’s proposal went too far by requiring underwriters to disclose risks state and local governments already understand, or didn’t go far enough to protect small and infrequent issuers.
According to an independent FA group, the National Association of Independent Public Finance Advisors, the MSRB’s proposed G-17 guidance fell short.
Specifically, NAIPFA said, underwriters should be required to disclose that they are acting as an underwriter, not an advisor; they are not a fiduciary and so are not required to put the issuer’s interests ahead of their own; they represent the interests of investors or other counterparties; they seek to maximize their profits; and they have no continuing obligation to the issuer after the transaction.
The board also shouldn’t assume small and infrequent issuers understand typical fixed-rate offerings, NAIPFA said. Rather, underwriters should assess an issuer’s knowledge and understanding “on a case by case basis,” wrote NAIPFA president, Colette Irwin-Knott, a partner at H.J. Umbaugh & Associates LLP.
If an issuer has completed one or more public offerings within the last two years, or had more than $100 million of securities outstanding in the last five years, underwriters could conclude the issuer has the “requisite knowledge and understanding required to nullify the need for disclosures,” Irwin-Knott wrote.
SIFMA, by contrast, told the SEC the MSRB’s proposal was “overly broad” and would be costly and burdensome to underwriters, without benefiting issuers.
SIFMA said if an issuer has a financial advisor, underwriters “should be relieved of any obligation to provide written disclosure of all material risks.”
Norwood wrote: “any risk disclosure, whether written or oral,” should be made to the advisor and should relieve the underwriter of any “further duty to evaluate” the issuer’s knowledge and sophistication.
If an issuer has no FA, SIFMA wrote, an underwriter should make any required disclosures to the issuer’s finance staff and “should be permitted to assume without further inquiry” the finance staff will relay those disclosures to others as appropriate.
Finally, Norwood wrote, an underwriter should only disclose known material risks that are “reasonably foreseeable at the time of the disclosure.”
Both SIFMA and BDA noted the board’s proposed G-17 guidance for underwriters overlaps with proposed business conduct standards for swap dealers pending before SEC and the Commodity Futures Trading Commission. They urged the board to delay moving forward until after those rules are finalized, which would require swap dealers to have a reasonable basis to believe an issuer has an independent representative with sufficient knowledge who meets certain criteria of competence and independence.
The board’s G-17 guidance would “layer additional requirements” on swap dealers and could create “multiple, duplicative and potentially conflicting obligations,” Norwood wrote.
The Government Finance Officers Association called the G-17 proposal a “positive step.” In an interview, Eric Johansen, chairman of the debt-management committee, said GFOA would like underwriters to disclose that issuers can hire an FA in a negotiated transaction.
