MSRB Files a Partial Amendment With the SEC Related to the MSRB’S Underwriter Fair Dealing Rule Proposal

November 07, 2011


On Nov. 3, 2011, the Municipal Securities Rulemaking Board (“MSRB”) filed a partial amendment to its self-described “groundbreaking” proposal that seeks Securities and Exchange Commission approval to establish detailed obligations for municipal securities underwriters to disclose risks and conflicts of interest to state and local government clients (the “Notice”).1 See Groundbreaking Proposal by MSRB Relating to Municipal Securities Underwriters’ Obligations to State and Local Government Clients (Aug. 15, 2011) As noted in the prior Bingham alert, the MSRB Notice, which proposes a new Interpretation to Rule G-17, will establish new obligations for underwriters of municipal securities to their state and local government clients.

The Partial Amendment

Importantly, in the partial amendment, the MSRB states that the Notice concerns the duties of underwriters only to municipal entity issuers of municipal securities, not to obligated persons (such as private entities that may be obligated in municipal securities transactions). Also, the Notice applies to underwriters but does not apply to selling group members. Finally, unless otherwise noted, the Notice only applies to negotiated underwritings, not competitively bid underwritings.

In a nutshell, the partial amendment seeks to clarity, among other things, the risk disclosure part of the Notice including disclosures from underwriters to state and local government issuers regarding the underwriter’s role, compensation and actual or potential conflicts of interest. Indeed, in seeking to inform underwriters of their obligations with respect to these aspects, the MSRB states that the required disclosures would build on the present G-23 interpretive notice approved by the SEC this year.2

Timing of Risks Disclosures

The partial amendment further addresses the timing of the required disclosures. Generally, disclosures will be required to be made at the time the underwriter is engaged to provide underwriting services and to be made to an official of the issuer with the power to bind the issuer by contract with the underwriter. However, the disclosures concerning the arm’s-length nature of the underwriter-issuer relationship would continue to be required to be made at the earliest stages of the underwriter-issuer relationship as required by the G-23 interpretative notice.

With respect to the required disclosures triggered by recommendations as to particular financings, these would continue to be required to be provided in sufficient time before the execution of a contract with the underwriter to allow the official to evaluate the recommendation.

Notably, the MSRB informs underwriters that the conflict disclosures required in the amended Notice are not new. Instead, the MSRB stated that these were simply included in the list of required disclosures “so that underwriters reviewing the Notice would only need to look to one place to see all the required conflicts disclosures. ” Furthermore, the MSRB states that if the issuer fails to provide the written acknowledgement related to the required disclosure after the underwriters attempt to obtain it, then the underwriter should document that fact.

Disclosure Requirements for Routine vs. Complex Financings

In what appears to be an attempt to be responsive to comments filed by market participants, the partial amendment attempts to provide further guidance on the issue of the required disclosures for “routine financings” vs. “complex financings. ”

The amendment informs underwriters that the disclosures required to be made to routine financings would be based on the underwriter’s “reasonable belief” that issuer personnel lack knowledge or experience with such structures and be linked to whether the underwriter had recommended the routine financing. Nonetheless, underwriters will continue to struggle with determining whether the particular financing is truly “routine.”

With respect to swaps, disclosures will only be required for swaps recommended by underwriters. As a result, underwriters will have no disclosure obligation in those instances where the issuer decided to accept the recommendation of a swap provider other than the underwriter. In those instances where disclosure is required, the underwriter will have to disclose examples of the material financial characteristics of a swap. Underwriters will have to inform the issuer that there might be accounting, legal or other risks associated with the swap and that the issuer should consult with other professionals concerning those risks.

There were no changes to the required notices for complex financings. However, the amendment limits the disclosure for complex financings to only those material financial risks that are known to the underwriter or reasonably foreseeable at the time of the disclosure. As for the characteristics of a financing, underwriters also would only have to make disclosures concerning material financial characteristics.

With respect to third-party payments and credit default swaps (“CDS”), underwriters will be required to disclose the existence of third-party payments, but not the amounts of those payments. Also, the particular transactions in CDS will not be required to be disclosed under the Notice. The MSRB believes that these disclosures will draw the attention of issuers to such payments and CDS activity, leaving the issuer to request more information from the underwriters.


The MSRB’s amendment provides some clarification on a few issues raised by commenters as a result of the Notice filing. However, underwriters will still be left with many unanswered questions when it comes to ensuring they can adequately comply with the disclosure obligations associated with their role, conflicts of interest, and compensation.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


1See Proposed Rule Change Concerning the Application of Rule G-17 on Conduct of Municipal Securities and Municipal Advisory Activities, to Underwriters of Municipal Securities, (SR-MSRB-2011-09 (Aug. 22, 2011) (refiled to make non-substantive changes, original filed Aug. 2, 2011; second filing made on Aug. 12, 2011).
2See MSRB Notice 2011-29 (May 31, 2011) “Guidance on the Prohibition of Underwriting Issues of Municipal Securities for Which a Financial Advisory Relationship Exists Under Rule G-23” (the “G-23 Interpretative Notice”).

This article was originally published by Bingham McCutchen LLP.