Municipal market participants are overall pleased with the Municipal Securities Rulemaking Board’s proposed changes to its fair dealing interpretive guidance, despite some worry that the amended guidance could be read as imposing new regulatory requirements.
In a filing to the Securities and Exchange Commission this week, the MSRB proposed amending the 2012 interpretive guidance to its Rule G-17 on fair dealing. The filing was subsequent to the MSRB's comment period, and the proposal submitted to the SEC includes changes based on comments the MSRB received. The changes are aimed at simplifying the disclosures underwriters make to issuers at the start of a deal.
“We agree with the MSRB's high level goals of making issuer disclosures more useful and constructive," said Mike Nicholas, CEO of the Bond Dealers of America. "However, we remain 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.”
Among the changes from the original August proposal is a requirement that an underwriter in a syndicate making recommendations to an issuer provide transaction-specific disclosures in complex financing structures. In the MSRB’s original proposal, only the syndicate manager would be required to make those disclosures.
In a comment letter filed during the MSRB's comment period, the Securities Industry and Financial Markets Association wanted the MSRB to clarify that the duty to provide transaction-specific disclosures should remain with the underwriter or dealer providing the recommendations, even after a syndicate is formed.
Under the amended guidance, if underwriters make a recommendation, they would have to deliver the disclosure related to that recommendation.
SIFMA also pointed out that in some situations when a complex transaction is being recommended with a derivative, someone other than the syndicate manager could be making the recommendation, leading to some ambiguity.
Leslie Norwood, SIFMA’s head of municipals, said Wednesday that her group will be commenting on the revised proposal and was happy to see the MSRB incorporate some of SIFMA's comments into it.
One of the MSRB’s goals for its retrospective rule review, which it has been undertaking in the past couple of years, was to slim down and eliminate duplicative disclosures, said David Hodapp, MSRB assistant general counsel.
“We feel like this amendment is consistent with that goal of eliminating duplicative disclosures because it will only be those underwriters who make the recommendation who will have to deliver the disclosures,” Hodapp said.
The MSRB also believes the amendment brings more issuer protections since before underwriters could make recommendations that were more risky or complex without needing to disclose, Hodapp said.
One of the other changes to the proposed guidance was excluding underwriters of 529 and ABLE plans from delivering standard disclosures in the guidance, but makes clear that those underwriters would still have a fair dealing obligation to issuers.
In a letter sent in a response to MSRB’s original guidance in August, the Investment Company Institute, which represents regulated funds such as mutual funds, asked for the guidance to be better tailored to 529 savings plans.
A 529 plan is similar to a mutual fund in that it has a single underwriter, and offerings of municipal fund securities are continuous and not for a fixed amount as in a bond offering.
In its letter, ICI noted that disclosures prescribed in the guidance were irrelevant to 529 plans and would be confusing when it comes to underwriters’ primary roles. Also, underwriters for 529 plans don’t purchase securities, so disclosure would be irrelevant, ICI said.
“We just wanted to make sure they clarified that you only had to provide the disclosure that’s really relevant to the business that you’re doing,” said Tamara Salmon, ICI associate general counsel. “We appreciate them hearing our concerns and revising the disclosure accordingly.”
The MSRB decided not to make changes to its “reasonably likely” standard after SIFMA asked them to only include disclosures of actual conflicts of interest rather than those likely to become conflicts at a later date.The MSRB said the standard would still reduce a dealer’s burden by narrowing dealer-specific disclosures from all potential material conflicts.
“...The MSRB continues to believe that the municipal securities market is best served by the underwriter providing advanced notification to the issuer of the likelihood of such material conflict of interest, rather than waiting to disclose the conflict until it has ripened into an actual conflict,” the MSRB wrote.
