MSRB Concept Release – Should Dealers and Municipal Advisors Disclose Financial Incentives Given or Received From Third-Parties on MSRB’s EMMA Website?

June 11, 2012

The Municipal Securities Rulemaking Board (“MSRB”) issued a Concept Release on May 31, 2012 (the “Concept Release”),1 seeking comment on a possible proposal to require dealers and municipal advisors to disclose whether they have made or received certain payments in connection with new issues of municipal securities. The MSRB asks whether to require those disclosures be made on its Electronic Municipal Market Access website (“EMMA”). The MSRB seeks public comment on the Concept Release by July 31, 2012.


Throughout the years, the MSRB has adopted rules addressing potential conflicts of interest, including MSRB Rules G-37 and 38 concerning political contributions and use of solicitors to obtain municipal securities business. Recently the SEC approved MSRB’s interpretive guidance relating to the fair practice duties of underwriters to issuers of municipal securities, which will require underwriters to make conflict-related disclosures to issuers.2  In the Concept Release, the MSRB notes that undisclosed third-party payments allegedly contributed to the largest municipal bankruptcy in U.S. history in Jefferson County, Ala.3

As a result, the MSRB is considering whether to require dealers and municipal advisors to submit to the MSRB, for public display through the EMMA website, disclosures regarding certain payments and receipts by dealers and municipal advisors that could potentially represent conflicts of interest.4 The Concept Release provides examples of the types of disclosures that could be required to be made by underwriters and municipal advisors.

Underwriter Disclosures

In the Concept Release, the MSRB states that disclosures of payments and receipts by underwriters would be designed to make transparent any potential financial incentives that may have an impact on the substantial and long-term commitments undertaken by municipal entities. To that end, the MSRB suggests the following disclosures could be required to be made by underwriters:

  • Any financial incentives received by the underwriter from any third-party payor for recommending a municipal securities financing; any closely-related transaction (together, a “new issue transaction”) to the municipal entity or an obligated person, or for recommending the participation of any third-party to undertake a role in connection with such new issue transaction;
  • Any other financial incentives received by the underwriter from any third-party payor in connection with a new issue transaction; and
  • Any financial incentives paid by the underwriter to any third-party recipient in connection with a new issue transaction, including, but not limited to, financial incentives paid for the purpose of obtaining or retaining any such new issue transaction.5

The scope of the potential disclosures for underwriters is broad as set forth in the Concept Release. It is unclear whether the MSRB would expect underwriters to include payments that are done in the normal course of the business (i.e., rating agency and CUSIP fees or other typical fees).6

Municipal Advisor Disclosures

Similar to the underwriter disclosures, the MSRB suggests in the Concept Release that municipal advisors should be required to disclose any payments or receipts by third parties in connection with advised transactions. Again, the goal would be to make transparent any potential financial incentives that may have an impact on the substantial and long-term commitments undertaken by municipal entities.

With respect to municipal advisor disclosures, it appears the MSRB may be putting the cart before the horse. The SEC has not yet completed its pending rulemaking on the definition of municipal advisors required to register, so many individuals and entities do not yet know whether they will be considered municipal advisors under those rules. The MSRB previously withdrew other proposals requiring municipal advisors to make disclosures to issuers pending final SEC rulemaking to define exactly who is a municipal advisor subject to registration.

MSRB Seeks Comment on Disclosures

The Concept Release also identifies a baker’s dozen of questions on which the MSRB seeks comment.7 Some of the questions relate to whether the disclosures would benefit or negatively impact issuers, investors, the public, and fair and
efficient markets.  Other questions include:

  • The Concept Release suggests that the required disclosures would be limited to payments made to, and received from third parties. The MSRB would like to know whether it is beneficial for other disclosures such as underwriter’s or municipal advisor’s fees and scope of work to be made public on EMMA.
  • Because the Concept Release indicates that disclosure of payments related to “closely related” transactions would be included (i.e., a swap transaction or bond proceeds investment occurring contemporaneously with a new issue), the MSRB seeks comment on what, if any, other examples of transactions should be considered “closely related” transactions. The MSRB also seeks comment on whether there are objective standards that could be used in creating a more precise definition of the term.
  • The MSRB asks whether there should be exceptions for commercially reasonable payments to third parties that provide standard services to the underwriter or municipal advisor in the normal course of business.

In the Concept Release, the MSRB states that the list of questions are not exhaustive and that it is interested in receiving other comments on the concept proposal.


Because dealers will be required to disclose to issuers all material conflicts of interest starting in August, when the G-17 guidance takes effect, it is unclear what additional benefit exists in having them disclose the information on EMMA. Indeed, there is nothing to suggest that the instances cited as a basis for this possible proposal (i.e., Jefferson County and other SEC enforcement actions involving municipal issuers) would have been prevented by a requirement that the conflicts of interest be disclosed on EMMA. If firms are willing to make undisclosed third-party payments as part of fraudulent activities relating to municipal securities offerings and closely-related transactions, it is hard to understand how an EMMA disclosure requirement is supposed to prevent the fraudulent activity. Dealers and municipal advisors (whoever they are — the term is not yet defined) should carefully review the Concept Release and consider commenting before any additional burdens are placed upon them related to already existing or proposed disclosure requirements.

*This alert was co-authored by Paul Tyrrell, Elizabeth Baird and W. Hardy Callcott.


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:


1. See MSRB Notice 2012-28, Request for Comment on Concept Proposal to Provide for Public Disclosure of Financial Incentives Paid or Received by Dealers and Municipal Advisors Representing Potential Conflicts of Interest, May 31, 2012.

2.  SEC Release No. 34-66927 (May 4, 2012). See also Bingham Alert, May 16, 2012, “SEC Approves MSRB’s New Underwriter Disclosure Requirements.”  In the Concept Release, the MSRB also notes that it proposed a series of rule changes relating to the fiduciary obligations and fair practice duties of municipal advisors, which would require municipal advisors to make conflict-related disclosures to municipal entities and obligated persons.  However, as the MSRB notes, this series of proposed rules were withdrawn by the MSRB pending final rulemaking by the SEC regarding the definition and registration of municipal advisors.  See MSRB Notices 2011-48 (Aug. 23, 2011); MSRB Notice 2011-49 (Aug. 24, 2011); and MSRB Notice 2011-51 (Sept. 2, 2011).

3.  See Concept Release at 2.

4.   Id.

5.  An example might be a situation in which one potential underwriter paid another potential underwriter to submit a sham bid for a competitively bid transaction, thereby creating the illusion of competition.

6.  In the Concept Release, the MSRB points out that “[w]hile Rule G-38 currently bans any such payments by dealers to unaffiliated third-parties to obtain or retain municipal securities business, this disclosure would include permitted payments made to affiliates for such purposes in addition to any third-party payments made in violation of Rule G-38.”  See Concept Release at fn. 10.

7.  The Concept Release provides that “[i]f the MSRB determines to proceed with rulemaking in this area after reviewing the comments received on this concept release, it would publish one or more requests for comment seeking further industry input on specific requirements intended to achieve the goals enunciated herein before making a final decision whether to file such a proposal with the SEC for its approval.” See Concept Release at 3.

This article was originally published by Bingham McCutchen LLP.