State and local governments issuing bonds will now receive more information regarding the risks involved with complex financial transactions along with potential conflicts of interest from municipal securities underwriters.
The Municipal Securities Rulemaking Board (MSRB) has set down new regulations for underwriters designed to make sure state and local governments have the necessary information to make good decisions with securities transactions.
Underwriters for negotiated offerings of municipal securities must now disclose to clients that are state and local governments the risks of complex financial transactions, along with potential conflicts of interest and compensation received from third-party derivatives and investments providers.
The new rules, effective Aug. 2, 2012, are outlined in the MSRB’s interpretive notice that the Securities and Exchange Commission approved in May. Underwriters were previously prohibited by MSRB rules from any deceptive, dishonest or unfair practice related to the issuing of municipal securities. The new requirements substantially clarify the various roles, responsibilities and relationships of financial professionals in such bond deals. The risks and characteristics of municipal financings are highlighted for state and local governments.
Here are the basic principles of the new rules.
• Robust disclosures are required of the underwriter as to his or her role and compensation, along with any actual or potential material conflicts of interest.
• All representations made by underwriters to state and local governments must be truthful and accurate, and may not misrepresent or omit material facts.
• Underwriters who advise complicated municipal securities transactions or products must disclose all material financial risks and characteristics, and any underwriter incentives and conflicts of interest regarding such transactions or products.
• A reasonable basis for the representations made to state or local government extends to representations involved with the state or local government’s preparation of its disclosure documents.
• Treating state and local governments fairly includes that the price an underwriter pays to a state or local government is fair and reasonable, and accounts for all relevant factors.
• Underwriters need to disclose potential conflicts of interest, including third-party payments, values, or credits made or received, and profit-sharing arrangements with investors. The issuance or purchase of credit default swaps for which the underlying reference is the state or local government whose securities are being underwritten, must also be disclosed.
• Underwriters should not neglect the state and local governments’ rules for retail order periods by accepting or placing orders that do not satisfy the state and local governments’ “retail” definitions.
For more information:
• See MSRB webinar explaining the changes to MSRB Rule G-17.