Rulemaking board requiring bond market disclosures

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission (SEC) of a notice that would establish detailed obligations of underwriters of municipal securities to their state and local government clients covering clear disclosure of risks and conflicts of interest, among other things. The proposal is a key piece of the MSRB’s rulemaking initiatives to protect issuers in the municipal market, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“This proposal is a groundbreaking effort in ensuring the interests of state and local government bonds issuers are further protected in their transactions with underwriters of municipal securities,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “Dodd-Frank explicitly requires the MSRB to protect municipal entities. This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds.”

While MSRB rules already prohibit an underwriter from engaging in any deceptive, dishonest or unfair practice with an issuer of municipal securities, today’s proposed notice further addresses disclosure required by underwriters to issuers. For example, underwriters in a negotiated offering of municipal securities recommending a complex municipal securities financing—such as a variable rate demand obligation with a swap—to an issuer would have an obligation under the MSRB’s guidance to disclose all material risks and characteristics associated with the financing, as well as any incentives to recommend the financing and other conflicts of interest.

The notice also would require that all representations by underwriters, whether written or oral, to issuers be truthful and accurate. For example, an underwriter may not represent that it has the requisite knowledge or expertise with respect to a particular financing if its personnel that it intends to work on the financing do not have that expertise.

The MSRB’s proposed notice addresses conflicts of interest in municipal securities transactions by requiring underwriters to disclose to issuers compensation received from third-party providers of derivatives and investments. With respect to credit default swaps, underwriters would have to disclose the issuance or purchase by the dealer of swaps for which the reference is either the issuer or the issuer’s obligations, thereby reducing a potential conflict of interest that can affect the pricing of an issuer’s securities.

The proposal also would prohibit excessive compensation of underwriters, determined by the specific facts and circumstances of the offering, and would require that the price paid by an underwriter for an issuer’s bonds is fair and reasonable.

The MSRB has proposed that the notice be effective 90 days after approval by the SEC.

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