WASHINGTON — Dealers want the Municipal Securities Rulemaking Board to amend existing Rule G-17 interpretive guidance to require that only actual rather than potential conflicts of interest be disclosed to issuers before a new issuance.
The Securities Industry and Financial Markets Association called for that change as part of a response to the MSRB's draft amendments to interpretive guidance it issued on its fair dealing rule in 2012. The MSRB requested comment in November as part of a retrospective review of existing rules.
That 2012 guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.
The proposal would make several key changes, both in what disclosures are provided and in who must provide them. The current interpretive guidance requires that underwriters provide disclosure of both actual and potential conflicts of interest, but under the new proposal they would need to disclose only actual conflicts. Potential conflicts would be disclosable only if the dealer believed it likely that they would become actual conflicts during the term of the transaction.
“This concept of having to disclose potential conflicts of interest has created the voluminous disclosures where dealers feel that they need to disclose many potential conflicts, which may not rise to an actual conflict to avoid a compliance risk,” said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s muni division.
However, in the city of San Diego’s comment letter, the municipality told the board that it’s important for an issuer to be advised of potential material conflicts up front. The MSRB shouldn't set a conflict likelihood standard stricter than “reasonable foreseeability” because that could eliminate the disclosure of potential conflicts of interest that have a reasonable chance of occurring, even if they’re not highly likely to occur, the city said.
Norwood said SIFMA would be content with setting a standard of “highly likely” to be an actual conflict.
Other changes under the MSRB proposal would include having a syndicate manager provide both standard and transaction-specific disclosures on behalf of the rest of the syndicate, rather than each firm providing very similar disclosures. The proposal also included allowing an email receipt to serve as confirmation that the disclosures had been provided to the issuer.
As a frequent issuer, San Diego receives many notices. But it would still prefer to get disclosure letters from every underwriter involved in the transaction.
“We do receive notices from each syndicate member and we think it’s reasonable that each syndicate member be responsible for delivering disclosures because they’re involved in the transaction,” said Elizabeth Kelly, debt manager for the City of San Diego Debt Management Department.
The National Association of Municipal Advisors urged the MSRB not to apply the Rule G-42 "recommendations" standard to underwriters' G-17 disclosures because doing so would create "a false regulatory parity" that would end up not protecting issuers. Rule G-42 establishes standards of conduct for municipal advisors, who under federal law and MSRB rules owe municipal entity clients a fiduciary duty to put their clients' interests ahead of their own. .
Under the 2012 Guidance, the type of financing structure that an underwriter recommends to the issuer determines what transaction-specific disclosures it must provide. G-42 lays out a two-pronged analysis for determining whether advice is a "recommendation." In the draft guidance amendments, the MSRB said it believes that the same analysis, generally consisting of a call to action to proceed with a specific recommended financing structure, should apply.
“This new standard for disclosures regarding underwriter recommendations appears to be in opposition to MSRB’s statutory mandate to protect issuers,” Gaffney told the board, worrying that issuers might not be disclosed important information about the risks of a transaction if the underwriter did not recommend the actual transaction.
“We would oppose such action, and ask that the MSRB have underwriters disclose appropriate transaction information and risks for the client,” Gaffney wrote.
Mike Nicholas, CEO of Bond Dealers of America, asked the MSRB to cut back on what Nicholas said were some unnecessary additions in the draft guidance.
“Our members are concerned that, in the context of an examination, those unnecessary additions will be construed as imposing new compliance expectations as opposed to clarifications of existing requirements, which we believe is the MSRB’s intent,” Nicholas wrote.
For example, there is no need for the guidance to explicitly prohibit a dealer from discouraging an issuer from hiring a muni advisor because a dealer who did so would already be making a prohibited recommendation, Nicholas wrote.
The MSRB can choose to make changes to the draft guidance based on the comments it received. Once the MSRB is satisfied with the guidance, it will ask the Securities and Exchange Commission to approve it.
