Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Instituting Proceedings to Determine Whether to Disapprove Proposed Rule Change, as Modified by Amendment No. 2, Consisting of Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters of Municipal Securities, 77865-77877 [2011-32087]
Download as PDF
Federal Register / Vol. 76, No. 240 / Wednesday, December 14, 2011 / Notices
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–NASDAQ–
2011–166 and should be submitted on
or before January 4, 2012.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
No. SR–NASDAQ–2011–166 on the
subject line.
mstockstill on DSK4VPTVN1PROD with NOTICES
The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest.
Specifying 30% as the Designated
Percentage for rights and warrants in
Rule 4613(a)(2)(D) would restore the
Market Maker quoting obligations that
existed prior to the recent inclusion and
subsequent exclusion of rights and
warrants from the single-stock circuit
breaker pilot program. Allowing the
change to be operative upon filing
should minimize investor confusion on
how Rule 4613(a)(2)(D) will operate for
rights and warrants in light of the recent
exclusion of rights and warrants from
Rule 4120(a)(11). For this reason, the
Commission designates the proposed
rule change as operative upon filing
with the Commission.14
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File No.
SR–NASDAQ–2011–166. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
14 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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[FR Doc. 2011–32000 Filed 12–13–11; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–65899A; File No. SR–FICC–
2008–01]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Allow the Mortgage-Backed Securities
Division To Provide Guaranteed
Settlement and Central Counterparty
Services; Correction
Securities and Exchange
Commission.
ACTION: Notice; correction.
AGENCY:
The Securities and Exchange
Commission published a document in
the Federal Register of December 12,
2011, concerning a Self-Regulatory
Organizations; Fixed Income Clearing
Corporation; Notice of Filing of
Proposed Rule Change to Allow the
Mortgage-Backed Securities Division to
Provide Guaranteed Settlement and
Central Counterparty Services. The
document contained improper timing
SUMMARY:
15 17
PO 00000
CFR 200.30–3(a)(12).
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77865
requirements. Because this filing was
received by the Securities and Exchange
Commission prior to amendments to
Section 19(b) of the Securities Exchange
Act (through the Dodd-Frank Wall
Street Reform and Consumer Protection
Act), the operative timing requirements
for the Securities and Exchange
Commission’s action with respect to the
filing are different from the amended
timing requirements. However, the
release was sent to the Federal Register
reflecting the amended and
consequently improper timing
requirements.
FOR FURTHER INFORMATION CONTACT:
Joseph Horn, Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549, (202) 551–5765.
Correction
In the Federal Register of December
12, 2010, in FR Doc. 2011–31762, on
page 77296, in the thirty-second line of
the third column, correct the paragraph
to read ‘‘Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
As the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
shall: (a) By order approve such
proposed rule change or (b) institute
proceedings to determine whether the
proposed rule change should be
disapproved.’’
Dated: December 12, 2011.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32164 Filed 12–12–11; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65918; File No. SR–MSRB–
2011–09]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Order Instituting Proceedings
to Determine Whether to Disapprove
Proposed Rule Change, as Modified by
Amendment No. 2, Consisting of
Interpretive Notice Concerning the
Application of MSRB Rule G–17 to
Underwriters of Municipal Securities
December 8, 2011.
I. Introduction
On August 22, 2011, the Municipal
Securities Rulemaking Board (‘‘MSRB’’
or ‘‘Board’’) filed with the Securities
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and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and
Rule 19b–4 thereunder,2 a proposal
consisting of an interpretive notice
concerning the application of MSRB
Rule G–17 (Conduct of Municipal
Securities and Municipal Advisory
Activities) to underwriters of municipal
securities (‘‘Notice’’). The proposed rule
change was published for comment in
the Federal Register on September 9,
2011.3 The Commission received five
comment letters on the proposed rule
change.4 On October 11, 2011, the
MSRB extended the time period for
Commission action to December 7,
2011. On November 3, 2011, the MSRB
filed Amendment No. 1 to the proposed
rule change. On November 10, 2011, the
MSRB withdrew Amendment No. 1,
responded to comments,5 and filed
Amendment No. 2 to the proposed rule
change. The proposed rule change, as
modified by Amendment No. 2, was
published in the Federal Register on
November 21, 2011.6 The Commission
received eight comment letters on the
proposed rule change, as modified by
Amendment No. 2, and a response from
the MSRB.7 On December 6, 2011, the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 65263
(September 6, 2011), 76 FR 55989.
4 See Letters from Joy A. Howard, Principal, WM
Financial Strategies, dated September 30, 2011
(‘‘WM Letter’’); Mike Nicholas, Chief Executive
Officer, Bond Dealers of America, dated September
30, 2010 (‘‘BDA Letter’’); Colette J. Irwin-Knott,
CIPFA, President, National Association of
Independent Public Finance Advisors, dated
September 30, 2011 (‘‘NAIPFA Letter’’); Leslie M.
Norwood, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets
Association, dated September 30, 2011 (‘‘SIFMA
Letter’’); and Susan Gaffney, Director, Federal
Liaison Center, Government Finance Officers
Association, dated October 3, 2011 (‘‘GFOA
Letter’’).
5 See Letter from Margaret C. Henry, General
Counsel, Market Regulation, MSRB, to Elizabeth M.
Murphy, Secretary, Commission, dated November
10, 2011 (‘‘Response Letter I’’).
6 See Securities Exchange Act Release No. 65749
(November 15, 2011), 76 FR 72013.
7 See Letters from Colette J. Irwin-Knott, CIPFA,
President, National Association of Independent
Public Finance Advisors, dated November 30, 2011
(‘‘NAIPFA Letter II’’); E. John White, Chief
Executive Officer, Public Financial Management,
Inc., dated November 30, 2011 (‘‘PFM Letter’’);
Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and
Financial Markets Association, dated November 30,
2011 (‘‘SIFMA Letter II’’); Joy A. Howard, Principal,
WM Financial Strategies, dated November 30, 2011
(‘‘WM Letter II’’); Michael Nicholas, CEO, Bond
Dealers of America, dated December 1, 2011 (‘‘BDA
Letter II’’); Susan Gaffney, Director, Federal Liaison
Center, Government Finance Officers Association,
dated December 1, 2011 (‘‘GFOA Letter II’’); Robert
Doty, AGFS, dated December 1, 2011 (‘‘AGFS
Letter’’); and Peter C. Orr, CFA, President, Intuitive
Analytics LLC, dated December 7, 2011 (‘‘IA
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2 17
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MSRB extended the time period for
Commission action to December 8,
2011.
This order institutes proceedings
under Section 19(b)(2)(B) of the Act to
determine whether to disapprove the
proposed rule change.
II. Description of the Proposal
MSRB proposes to adopt an
interpretive notice with respect to
MSRB Rule G–17, which states that
‘‘[i]n the conduct of its municipal
securities or municipal advisory
activities, each broker, dealer,
municipal securities dealer, and
municipal advisor shall deal fairly with
all persons and shall not engage in any
deceptive, dishonest, or unfair
practice.’’
The scope of the Notice would apply
to underwriters and their duty to
municipal entity 8 issuers of municipal
securities in negotiated underwritings
(except as set forth otherwise), but
would not apply to selling group
members or when a dealer is serving as
an advisor to a municipal entity. The
Notice includes the following sections:
(1) Basic Fair Dealing Principle; (2) Role
of the Underwriter/Conflicts of Interest;
(3) Representations to Issuers; (4)
Required Disclosures to Issuers; (5)
Underwriter Duties in Connection with
Issuer Disclosure Documents; (5)
Underwriter Compensation and New
Issue Pricing; (6) Conflicts of Interest;
(7) Retail Order Periods; and (8) Dealer
Payments to Issuer Personnel.
A. Basic Fair Dealing Principle
The Notice would specify that an
underwriter must not misrepresent or
omit the facts, risks, potential benefits,
or other material information about
municipal securities activities
undertaken with a municipal entity
issuer. The Notice would also state that
MSRB Rule G–17 establishes a general
duty of a dealer to deal fairly with all
persons (including, but not limited to,
issuers of municipal securities), even in
the absence of fraud.
Letter’’). See Letter from Margaret C. Henry, General
Counsel, Market Regulation, MSRB, to Elizabeth M.
Murphy, Secretary, Commission, dated December 7,
2011 (‘‘Response Letter II’’).
8 The Notice defines the term ‘‘municipal entity’’
as that term is defined by Section 15B(e)(8) of the
Exchange Act: ‘‘any State, political subdivision of
a State, or municipal corporate instrumentality of
a State, including—(A) any agency, authority, or
instrumentality of the State, political subdivision,
or municipal corporate instrumentality; (B) any
plan, program, or pool of assets sponsored or
established by the State, political subdivision, or
municipal corporate instrumentality or any agency,
authority, or instrumentality thereof; and (C) any
other issuer of municipal securities.’’ See proposed
Notice endnote 1.
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B. Role of the Underwriter/Conflicts of
Interest
Under the Notice, MSRB Rule G–17’s
duty to deal fairly with all persons
would require the underwriter to make
certain disclosures to the issuer of
municipal securities to clarify the
underwriter’s role in an issuance of
municipal securities and the actual or
potential material conflicts of interest
with respect to such issuance.
1. Disclosures Concerning the
Underwriter’s Role
The Notice would require an
underwriter to disclose the following
information to an issuer: (A) MSRB Rule
G–17 requires an underwriter to deal
fairly at all times with both municipal
issuers and investors; (B) the
underwriter’s primary role is to
purchase securities with a view to
distribution in an arm’s-length
commercial transaction with the issuer
and it has financial and other interests
that differ from those of the issuer; (C)
unlike a municipal advisor, the
underwriter does not have a fiduciary
duty to the issuer under the federal
securities laws and is not required by
federal law to act in the best interest of
the issuer without regard to the
underwriter’s own financial or other
interests; (D) the underwriter has a duty
to purchase securities from the issuer at
a fair and reasonable price, but must
balance that duty with its duty to sell
municipal securities to investors at
prices that are fair and reasonable; and
(E) the underwriter will review the
official statement for the issuer’s
securities in accordance with, and as
part of, its responsibilities to investors
under the federal securities laws, as
applied to the facts and circumstances
of the transaction. Moreover, the Notice
would state that the underwriter must
not recommend that the issuer not
retain a municipal advisor.
2. Disclosure Concerning the
Underwriter’s Compensation
The Notice would require an
underwriter to disclose to an issuer
whether its underwriting compensation
will be contingent on the closing of a
transaction. The underwriter must also
disclose that compensation that is
contingent on the closing of a
transaction or the size of a transaction
presents a conflict of interest, because it
may cause the underwriter to
recommend a transaction that it is
unnecessary or to recommend that the
size of the transaction be larger than is
necessary.
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3. Other Conflicts Disclosures
The Notice would require an
underwriter to disclose other potential
or actual material conflicts of interest,
including, but not limited to, the
following: (A) Any payments described
below in Section II (G)(1) ‘‘Conflicts of
Interest—Payments to or from Third
Parties’’; (B) any arrangements described
below in Section II (G)(2) ‘‘Conflicts of
Interest—Profit-Sharing with Investors’’;
(C) the credit default swap disclosures
described below in Section II (G)(3)
‘‘Conflicts of Interest—Credit Default
Swaps’’; and (D) any incentives for the
underwriter to recommend a complex
municipal securities financing and other
associated conflicts of interest described
below in Section II (D) ‘‘Required
Disclosures to Issuers’’.
The Notice would permit disclosures
concerning the role of the underwriter
and the underwriter’s compensation to
be made by a syndicate manager on
behalf of other syndicate members. The
Notice would require other conflicts
disclosures to be made by the particular
underwriters subject to such conflicts.
mstockstill on DSK4VPTVN1PROD with NOTICES
4. Timing and Manner of Disclosures
The Notice would require that all of
the disclosures be made in writing to an
official of the issuer that the underwriter
reasonably believes has the authority to
bind the issuer by contract with the
underwriter and that, to the knowledge
of the underwriter, is not a party to a
disclosed conflict. The Notice would
specify that the disclosures must be
made in a manner designed to make
clear to such official the subject matter
of the disclosures and their implications
for the issuer.
The Notice would specify when the
disclosures must be made. First,
disclosure concerning the arm’s-length
nature of the underwriter-issuer
relationship must be made in the
earliest stages of the underwriter’s
relationship with the issuer, for
example, in a response to a request for
proposals or in promotional materials
provided to an issuer. Other disclosures
concerning the role of the underwriter
and the underwriter’s compensation
generally must be made when the
underwriter is engaged to perform
underwriting services, for example, in
an engagement letter, not solely in a
bond purchase agreement. Moreover,
conflicts disclosures must be made at
the same time, except with regard to
conflicts discovered or arising after the
underwriter has been engaged. For
example, a conflict may not be present
until an underwriter has recommended
a particular financing. In that case, the
disclosure must be provided in
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sufficient time before the execution of a
contract with the underwriter to allow
the official to evaluate the
recommendation, as described below in
Section II (D) ‘‘Required Disclosures to
Issuers’’.
5. Acknowledgement of Disclosures
The Notice would require an
underwriter to attempt to receive
written acknowledgement (other than by
automatic email receipt) by the official
of the issuer of receipt of the foregoing
disclosures. If the official of the issuer
agrees to proceed with the underwriting
engagement after receipt of the
disclosures but will not provide written
acknowledgement of receipt, the
underwriter may proceed with the
engagement after documenting with
specificity why it was unable to obtain
such written acknowledgement.
C. Representations to Issuers
The Notice would require all
representations made by underwriters to
issuers of municipal securities in
connection with municipal securities
undertakings, whether written or oral, to
be truthful and accurate and not
misrepresent or omit material facts.
Underwriters must have a reasonable
basis for the representations and other
material information contained in
documents they prepare and must
refrain from including representations
or other information they know or
should know is inaccurate or
misleading. For example, in connection
with a certificate signed by the
underwriter that will be relied upon by
the issuer or other relevant parties to an
underwriting, for example, an issue
price certificate, the dealer must have a
reasonable basis for the representations
and other material information
contained therein.
In addition, an underwriter’s response
to an issuer’s request for proposals or
qualifications must fairly and accurately
describe the underwriter’s capacity,
resources, and knowledge to perform
the proposed underwriting as of the
time the proposal is submitted and must
not contain any representations or other
material information about such
capacity, resources, or knowledge that
the underwriter knows or should know
to be inaccurate or misleading. Matters
not within the personal knowledge of
those preparing the response, for
example, pending litigation, must be
confirmed by those with knowledge of
the subject matter. An underwriter must
not represent that it has the requisite
knowledge or expertise with respect to
a particular financing if the personnel
that it intends to work on the financing
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Fmt 4703
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77867
do not have the requisite knowledge or
expertise.
D. Required Disclosures to Issuers
The Notice would require that
disclosures be tailored to the personnel
of the issuer if knowledge or experience
is lacking with a particular type of
structure. While many municipal
securities are issued using financing
structures that are routine and well
understood by the typical municipal
market professional, including most
issuer personnel that have the lead
responsibilities in connection with the
issuance of municipal securities, the
underwriter must provide disclosures
on the material aspects of structures
when the underwriter reasonably
believes issuer personnel lacks
knowledge or experience with such
structures that it recommends.
In cases where the issuer personnel
responsible for the issuance of
municipal securities would not be well
positioned to fully understand or assess
the implications of a financing in its
totality, because the financing is
structured in an unique, atypical, or
otherwise complex manner, the
underwriter in a negotiated offering that
recommends such complex financing
has an obligation to make more
particularized disclosures than
otherwise required in a routine
financing.9 Examples of complex
financings include variable rate demand
obligations and financings involving
derivatives such as swaps. The
underwriter must disclose the material
financial characteristics of the complex
financing, as well as the material
financial risks of the financing that are
known to the underwriter and
reasonably foreseeable at the time of the
disclosure.10 The underwriter must also
9 The Notice would state that if a complex
municipal securities financing consists of an
otherwise routine financing structure that
incorporates a unique, atypical or complex element
and the issuer personnel have knowledge or
experience with respect to the routine elements of
the financing, the disclosure of material risks and
characteristics may be limited to those relating to
such specific element and any material impact such
element may have on other features that would
normally be viewed as routine. See proposed Notice
endnote 6.
10 The Notice would provide an example that an
underwriter that recommends variable rate demand
obligations should inform the issuer of the risk of
interest rate fluctuations and material risks of any
associated credit or liquidity facilities (for example,
the risk that the issuer might not be able to replace
the facility upon its expiration and might be
required to repay the facility provider over a short
period of time). As an additional example, if the
underwriter recommends that the issuer swap the
floating rate interest payments on the variable rate
demand obligations to fixed rate payments under a
swap, the underwriter must disclose the material
financial risks (including market, credit,
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mstockstill on DSK4VPTVN1PROD with NOTICES
disclose any incentives to recommend
the financing and other associated
conflicts of interest.11 These disclosures
must be made in a fair and balanced
manner based on principles of fair
dealing and good faith.
The Notice would dictate that the
level of required disclosure may vary
according to the issuer’s knowledge or
experience with the proposed financing
structure or similar structures,
capability of evaluating the risks of the
recommended financing, and financial
ability to bear the risks of the
recommended financing, in each case
based on the reasonable belief of the
underwriter.12 In all events, the
underwriter must disclose any
incentives for the underwriter to
recommend the complex municipal
securities financing and other associated
conflicts of interest.
The Notice would require that this
disclosure be made in writing to an
official of the issuer whom the
underwriter reasonably believes has the
authority to bind the issuer by contract
with the underwriter in (A) sufficient
time before the execution of a contract
with the underwriter to allow the
operational, and liquidity risks) and material
financial characteristics of the recommended swap
(for example, the material economic terms of the
swap, the material terms relating to the operation
of the swap, and the material rights and obligations
of the parties during the term of the swap), as well
as the material financial risks associated with the
variable rate demand obligation.
Such disclosure should be sufficient to allow the
issuer to assess the magnitude of its potential
exposure as a result of the complex municipal
securities financing. The underwriter must also
inform the issuer that there may be accounting,
legal, and other risks associated with the swap and
that the issuer should consult with other
professionals concerning such risks. If the
underwriter’s affiliated swap dealer is proposed to
be the executing swap dealer, the underwriter may
satisfy its disclosure obligation with respect to the
swap if such disclosure has been provided to the
issuer by the affiliated swap dealer or the issuer’s
swap or other financial advisor that is independent
of the underwriter and the swap dealer, as long as
the underwriter has a reasonable basis for belief in
the truthfulness and completeness of such
disclosure. If the issuer decides to enter into a swap
with another dealer, the underwriter is not required
to make disclosures with regard to that swap.
Dealers that recommend swaps or security-based
swaps to municipal entities may also be subject to
rules of the Commodity Futures Trading
Commission or those of the Commission. See
proposed Notice endnote 7.
11 The Notice would provide an example that a
conflict of interest may exist when the underwriter
is also the provider of a swap used by an issuer to
hedge a municipal securities offering or when the
underwriter receives compensation from a swap
provider for recommending the swap provider to
the issuer. See proposed Notice endnote 8.
12 The Notice would state that even a financing
in which the interest rate is benchmarked to an
index that is commonly used in the municipal
marketplace, such as LIBOR or SIFMA, may be
complex to an issuer that does not understand the
components of that index or its possible interaction
with other indexes. See proposed Notice endnote 9.
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official to evaluate the recommendation
and (B) a manner designed to make clear
to such official the subject matter of
such disclosures and their implications
for the issuer. The complex financing
disclosures must address the specific
elements of the financing and cannot be
general in nature. Finally, the Notice
would require the underwriter to make
additional efforts reasonably designed to
inform the official of the issuer if the
underwriter does not reasonably believe
that the official is capable of
independently evaluating the
disclosures.
E. Underwriter Duties in Connection
With Issuer Disclosure Documents
The Notice would note that
underwriters often play an important
role in assisting issuers in the
preparation of disclosure documents,
such as preliminary official statements
and official statements.13 These
documents are critical to the municipal
securities transaction, in that investors
rely on the representations contained in
the documents in making their
investment decisions. Investment
professionals, such as municipal
securities analysts and ratings services,
rely on the representations in forming
an opinion regarding the credit.
The Notice would provide that a
dealer’s duty to have a reasonable basis
for the representations it makes, and
other material information it provides,
to an issuer and to ensure that such
representations and information are
accurate and not misleading extends to
representations and information
provided by the underwriter in
connection with the preparation by the
13 The Notice would state that underwriters that
assist issuers in preparing official statements must
remain cognizant of the underwriters’ duties under
federal securities laws. With respect to primary
offerings of municipal securities, the SEC has noted,
‘‘By participating in an offering, an underwriter
makes an implied recommendation about the
securities.’’ See Securities Exchange Act Release
No. 34–26100 (September 22, 1988), 53 FR 37778
(September 28, 1998) (proposing Exchange Act Rule
15c2–12) at text following note 70. The SEC has
stated that ‘‘this recommendation itself implies that
the underwriter has a reasonable basis for belief in
the truthfulness and completeness of the key
representations made in any disclosure documents
used in the offerings.’’ Furthermore, pursuant to
SEC Rule 15c2–12(b)(5), an underwriter may not
purchase or sell municipal securities in most
primary offerings unless the underwriter has
reasonably determined that the issuer or an
obligated person has entered into a written
undertaking to provide certain types of secondary
market disclosure and has a reasonable basis for
relying on the accuracy of the issuer’s ongoing
disclosure representations. Securities Exchange Act
Release No. 34–34961 (November 17, 1994), 59 FR
59590 (November 10, 1994) (adopting continuing
disclosure provisions of Exchange Act Rule 15c2–
12) at text following note 52. See proposed Notice
endnote 10.
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Fmt 4703
Sfmt 4703
issuer of its disclosure documents, for
example, cash flows.
F. Underwriter Compensation and New
Issue Pricing
1. Excessive Compensation
The Notice states that an
underwriter’s compensation for a new
issue (including both direct
compensation paid by the issuer and
other separate payments, values, or
credits received by the underwriter from
the issuer or any other party in
connection with the underwriting), in
certain cases and depending upon the
specific facts and circumstances of the
offering, may be so disproportionate to
the nature of the underwriting and
related services performed as to
constitute an unfair practice with regard
to the issuer that it is a violation of
MSRB Rule G–17. The Notice would
look at factors such as the credit quality
of the issue, the size of the issue, market
conditions, the length of time spent
structuring the issue, and whether the
underwriter is paying the fee of the
underwriter’s counsel or any other
relevant costs related to the financing.
2. Fair Pricing
The Notice states that the duty of fair
dealing under MSRB Rule G–17
includes an implied representation that
the price an underwriter pays to an
issuer is fair and reasonable, taking into
consideration all relevant factors,
including the best judgment of the
underwriter as to the fair market value
of the issue at the time it is priced.14 In
general, a dealer purchasing bonds in a
competitive underwriting for which the
issuer may reject any and all bids will
be deemed to have satisfied its duty of
fairness to the issuer with respect to the
purchase price of the issue as long as
the dealer’s bid is a bona fide bid as
defined in MSRB Rule G–13 15 that is
based on the dealer’s best judgment of
14 The Notice would state that the MSRB has
previously observed that whether an underwriter
has dealt fairly with an issuer for purposes of MSRB
Rule G–17 is dependent upon all of the facts and
circumstances of an underwriting and is not
dependent solely on the price of the issue. The
Notice refers to MSRB Notice 2009–54 and Rule G–
17 Interpretive Letter—Purchase of new issue from
issuer, MSRB interpretation of December 1, 1997.
See proposed Notice endnote 11.
15 The Notice would refer to MSRB Rule G–
13(b)(iii), which provides: ‘‘For purposes of
subparagraph (i), a quotation shall be deemed to
represent a ‘‘bona fide bid for, or offer of, municipal
securities’’ if the broker, dealer or municipal
securities dealer making the quotation is prepared
to purchase or sell the security which is the subject
of the quotation at the price stated in the quotation
and under such conditions, if any, as are specified
at the time the quotation is made.’’ See proposed
Notice endnote 12.
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the fair market value of the securities
that are the subject of the bid.
In a negotiated underwriting, the
underwriter has a duty under MSRB
Rule G–17 to negotiate in good faith
with the issuer. This duty would
include the obligation of the dealer to
ensure the accuracy of representations
made during the course of such
negotiations, including representations
regarding the price negotiated and the
nature of investor demand for the
securities, for example, the status of the
order period and the order book. If, for
example, the dealer represents to the
issuer that it is providing the ‘‘best’’
market price available on the new issue,
or that it will exert its best efforts to
obtain the ‘‘most favorable’’ pricing, the
dealer may violate MSRB Rule G–17 if
its actions are inconsistent with such
representations.16
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G. Conflicts of Interest
1. Payments To or From Third Parties
The Notice would state that in certain
cases, compensation received by the
underwriter from third parties, such as
the providers of derivatives and
investments (including affiliates of the
underwriters), may color the
underwriter’s judgment and cause it to
recommend products, structures, and
pricing levels to an issuer when it
would not have done so absent such
payments. The MSRB would view the
failure of an underwriter to disclose to
the issuer the existence of payments,
values, or credits received by the
underwriter in connection with its
underwriting of the new issue from
parties other than the issuer, and
payments made by the underwriter in
connection with such new issue to
parties other than the issuer (in either
case including payments, values, or
credits that relate directly or indirectly
to collateral transactions integrally
related to the issue being underwritten),
to be a violation of the underwriter’s
obligation to the issuer under MSRB
Rule G–17.
For example, the MSRB would
consider it to be a violation of MSRB
Rule G–17 for an underwriter to
compensate an undisclosed third party
in order to secure municipal securities
business. Similarly, the MSRB would
consider it to be a violation of MSRB
Rule G–17 for an underwriter to receive
undisclosed compensation from a third
party in exchange for recommending
that third party’s services or products to
an issuer, including business related to
16 The Notice would refer to Rule G–17
Interpretive Letter—Purchase of new issue from
issuer, MSRB interpretation of December 1, 1997.
See proposed Notice endnote 13.
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municipal securities derivative
transactions. The Notice does not
require that the amount of such third
party payments be disclosed.
In addition, the underwriter must
disclose to the issuer whether the
underwriter has entered into any thirdparty arrangements for the marketing of
the issuer’s securities.
2. Profit-Sharing With Investors
The Notice would state that
arrangements between the underwriter
and an investor purchasing new issue
securities from the underwriter
(including purchases that are contingent
upon the delivery by the issuer to the
underwriter of the securities) according
to which profits realized from the resale
by such investor of the securities are
directly or indirectly split or otherwise
shared with the underwriter would,
depending on the facts and
circumstances (including, in particular,
if such resale occurs reasonably close in
time to the original sale by the
underwriter to the investor), constitute
a violation of the underwriter’s fair
dealing obligation under MSRB Rule
G–17. Such arrangements could also
constitute a violation of MSRB Rule G–
25(c), which precludes a dealer from
sharing, directly or indirectly, in the
profits or losses of a transaction in
municipal securities with or for a
customer.17
3. Credit Default Swaps
The issuance or purchase by a dealer
of credit default swaps for which the
reference is the issuer for which the
dealer is serving as underwriter, or an
obligation of that issuer, may pose a
conflict of interest, because trading in
such municipal credit default swaps has
the potential to affect the pricing of the
underlying reference obligations, as well
as the pricing of other obligations
brought to market by that issuer. The
Notice would require a dealer to
disclose the fact that it engages in such
activities to the issuers for which the
dealer serves as underwriter.
The Notice would not require
disclosures for activities with regard to
credit default swaps based on baskets or
indexes of municipal issuers that
include the issuer or its obligations,
unless the issuer or its obligations
represents more than 2% of the total
notional amount of the credit default
swap or the underwriter otherwise
17 MSRB Rule D–9 defines the term ‘‘customer’’
as: ‘‘Except as otherwise specifically provided by
rule of the Board, the term ‘‘Customer’’ shall mean
any person other than a broker, dealer, or municipal
securities dealer acting in its capacity as such or an
issuer in transactions involving the sale by the
issuer of a new issue of its securities.’’
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caused the issuer or its obligations to be
included in the basket or index.
H. Retail Order Periods
The Notice would require an
underwriter that has agreed to
underwrite a transaction with a retail
order period to honor such agreement.18
The Notice would require a dealer that
wishes to allocate securities in a manner
that is inconsistent with an issuer’s
requirements to obtain the issuer’s
consent.
The Notice would require an
underwriter that has agreed to
underwrite a transaction with a retail
order period to take reasonable
measures to ensure that retail clients are
bona fide. An underwriter that
knowingly accepts an order that has
been framed as a retail order when it is
not, for example, a number of small
orders placed by an institutional
investor that would otherwise not
qualify as a retail customer, would
violate MSRB Rule G–17 if its actions
are inconsistent with the issuer’s
expectations regarding retail orders.
Moreover, a dealer that places an order
that is framed as a qualifying retail order
but in fact represents an order that does
not meet the qualification requirements
to be treated as a retail order, for
example, an order by a retail dealer
without ‘‘going away’’ orders 19 from
retail customers when such orders are
not within the issuer’s definition of
‘‘retail,’’ would violate its MSRB Rule
G–17 duty of fair dealing.
The Notice specifies that the MSRB
will continue to review activities
relating to retail order periods to ensure
that they are conducted in a fair and
orderly manner consistent with the
intent of the issuer and the MSRB’s
investor protection mandate.
I. Dealer Payments to Issuer Personnel
The Notice would state that dealers
are reminded of the application of
MSRB Rule G–20 on gifts, gratuities,
and non-cash compensation, and MSRB
Rule G–17, in connection with certain
18 The Notice refers to MSRB Interpretation on
Priority of Orders for Securities in a Primary
Offering under Rule G–17, MSRB interpretation of
October 12, 2010, reprinted in the MSRB Rule Book.
The Notice would remind underwriters of previous
MSRB guidance on the pricing of securities sold to
retail investors and refer to Guidance on Disclosure
and Other Sales Practice Obligations to Individual
and Other Retail Investors in Municipal Securities,
MSRB Notice 2009–42 (July 14, 2009). See proposed
Notice endnote 15.
19 The Notice would state that a ‘‘going away’’
order is an order for new issue securities for which
a customer is already conditionally committed and
cites Securities Exchange Act Release No. 62715
(August 13, 2010), 75 FR 51128 (August 18, 2010)
(File No. SR–MSRB–2009–17). See proposed Notice
endnote 16.
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payments made to, and expenses
reimbursed for, issuer personnel during
the municipal bond issuance process.20
The Notice would further state that the
rules are designed to avoid conflicts of
interest and to promote fair practices in
the municipal securities market.
The Notice would alert dealers to
consider carefully whether payments
they make in regard to expenses of
issuer personnel in the course of the
bond issuance process, including in
particular, but not limited to, payments
for which dealers seek reimbursement
from bond proceeds or issuers, comport
with the requirements of MSRB Rule G–
20. For example, the Notice provides
that a dealer acting as a financial
advisor or underwriter may violate
MSRB Rule G–20 by paying for
excessive or lavish travel, meal, lodging
and entertainment expenses in
connection with an offering such as may
be incurred for rating agency trips, bond
closing dinners, and other functions,
that inure to the personal benefit of
issuer personnel and that exceed the
limits or otherwise violate the
requirements of the rule.21
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III. Comment Letters and the MSRB’s
Responses
As noted earlier, the Commission
received five comments 22 on the
proposed rule change as originally
proposed and eight comments 23 on the
proposed rule change, as modified by
Amendment No. 2.24 The MSRB filed
two letters responding to the
comments.25 A summary of the
20 The Notice would cite to MSRB Rule G–20
Interpretation—Dealer Payments in Connection
With the Municipal Securities Issuance Process,
MSRB interpretation of January 29, 2007, reprinted
in the MSRB Rule Book. See proposed Notice
endnote 17.
21 The Notice cites to In the Matter of RBC Capital
Markets Corporation, SEC Rel. No. 34–59439 (Feb.
24, 2009) (settlement in connection with brokerdealer alleged to have violated MSRB Rules G–20
and G–17 for payment of lavish travel and
entertainment expenses of city officials and their
families associated with rating agency trips, which
expenditures were subsequently reimbursed from
bond proceeds as costs of issuance); In the Matter
of Merchant Capital, L.L.C., SEC Rel. No. 34–60043
(June 4, 2009) (settlement in connection with
broker-dealer alleged to have violated MSRB rules
for payment of travel and entertainment expenses
of family and friends of senior officials of issuer and
reimbursement of the expenses from issuers and
from proceeds of bond offerings). See proposed
Notice endnote 18.
22 See supra note 4.
23 See supra note 7.
24 One commenter stated that the amended Notice
is a significant improvement over the original
Notice. See PFM Letter. Another commenter stated
that it supports the changes made in the Notice, as
modified by Amendment No. 2, such as the limits
on negotiated offerings, disclosures based on
reasonable beliefs, and nondisclosure of third-party
payment amounts. See GFOA Letter II.
25 See supra notes 5 and 7.
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comments and the MSRB’s responses
are set forth below.
A. Basic Fair Dealing Principle
Commenters generally supported the
principle of fair dealing in MSRB Rule
G–17,26 but some commenters believed
that the principle of fair dealing should
not be interpreted to impose a fiduciary
duty on underwriters to issuers,27 while
other commenters believed that
underwriters have such a duty if they
engage in certain activities.28 In
Response Letter I, the MSRB responded
that the Notice does not impose a
fiduciary duty on underwriters and that
the duties imposed by the Notice on
underwriters are no different in many
cases from the duties already imposed
on them by MSRB rules with respect to
customers. Further, the MSRB stated
that an underwriter is not required to
act in the best interest of an issuer
without regard to the underwriter’s own
financial and other interests and is not
required to consider all reasonably
feasible alternatives to the proposed
financings. Rather, the MSRB stated that
one purpose of the Notice is to eliminate
issuer confusion about the role of the
underwriter.
B. Role of the Underwriter/Conflicts of
Interest
1. Disclosures Concerning the
Underwriter’s Role
Some commenters suggested
additional disclosures with respect to
the role of underwriters.29 For example,
commenters suggested that the MSRB
require an underwriter to state: (1) That
the underwriter does not have a
fiduciary duty to the issuer and is a
counterparty at arm’s length; 30 (2) that
the issuer may choose to engage a
26 See
SIFMA Letter I.
SIFMA Letter I; NAIPFA Letter I; BDA
Letter I. Both NAIPFA Letter I and BDA Letter I
noted that the imposition of a fiduciary duty would
confuse municipal issuers on the role of
underwriters. One commenter disagreed with the
imposition of a fiduciary duty and noted that
municipal issuers often do not understand the
disclosures that they are provided and municipal
issuers do not benefit from complex disclosures
from firms that are not acting in a fiduciary
capacity. See WM Letter I (stating its belief that the
proposal will not improve transparency in the
municipal market).
28 See, e.g., PFM Letter. The commenter stated
that advice given by brokers in their promotion of
themselves to become underwriters makes them
municipal advisors.
29 One commenter stated that it supports the
proposal but believes that additional changes would
be required to protect infrequent and/or small and
unsophisticated issuers. See NAIPFA Letter I.
30 See GFOA Letter I and NAIPFA Letter I. One
commenter stated its belief that a simple disclosure
from an underwriter to the issuer that the
underwriter is not acting as financial advisor and
that the issuer should consult with a financial
advisor would be sufficient. See WM Letter I.
27 See
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financial advisor to represent its
interests; 31 (3) that the underwriter is
not acting as an advisor; 32 (4) that the
underwriter has conflicts with issuers
because the underwriter represents the
interests of investors and other
parties; 33 (5) that the underwriter seeks
to maximize profitability; 34 and (6) that
the underwriter has no continuing
obligation to the issuer after the
transaction.35
In Response Letter I, the MSRB noted
that the Notice, as modified by
Amendment No. 2, incorporates many
of the recommendations suggested by
the commenters, such as requiring
underwriters to provide issuers with
disclosure that underwriters do not have
a fiduciary duty to issuers. In addition,
the MSRB noted that the Notice, as
modified by Amendment No. 2, requires
disclosure regarding the underwriter’s
role compared to a municipal advisor,36
and prohibits an underwriter from
recommending that the issuer not retain
a municipal advisor.37 The MSRB also
31 See GFOA Letter I and NAIPFA Letter I
(requesting a disclosure that an underwriter is no
replacement for a municipal advisor and stating
that when an issuer engages a municipal advisor,
the underwriter disclosures should not overlap with
areas covered by the role of municipal advisor).
Other commenters stated their belief that in a
negotiated sale, when the issuer of municipal
securities engages a registered municipal advisor,
disclosures should be reduced. See NAIPFA Letter
II; SIFMA Letter II; and WM Letter II (stating that
the exemption from some of the disclosures
required by the rule for underwriters engaged in a
competitive sale should be extended to all
transactions in which a financial advisor has been
retained). In Response Letter II, the MSRB noted its
disagreement because it believes that more
disclosure would empower, rather than confuse,
issuers.
32 See NAIPFA Letter I.
33 See NAIPFA Letter I. One commenter objected
to the required disclosure that an underwriter must
balance a fair and reasonable price for issuers with
a fair and reasonable price for investors. See BDA
Letter II. The commenter stated its belief that there
exists a reasonable price for both issuers and
investors, and recommended that the disclosure be
modified to reflect that statement. In Response
Letter II, the MSRB stated its belief that it is
appropriate to characterize the underwriter’s duties
of fair pricing as a balance between the interests of
the issuer and investors.
34 See NAIPFA Letter I.
35 See NAIPFA Letter I.
36 One commenter stated that the requirement for
an underwriter to compare its obligations with
others, such as a municipal advisor, should be
eliminated. See BDA Letter II. In Response Letter
II, the MSRB noted that it has determined to take
the approach suggested by another commenter
(GFOA) and, therefore, has not changed this
provision of the proposal but will monitor
disclosure practices under the proposal and will
engage in a dialogue with industry participants and
the Commission to determine whether sufficient
improvements have occurred in the flow of
disclosures to decision-making personnel of issuers
or whether additional steps should be taken.
37 One commenter agreed with the MSRB that an
underwriter should not recommend that an issuer
not retain a municipal advisor. See BDA Letter II.
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stated that it does not believe that it is
necessary for underwriters to disclose
that they seek to maximize profitability
and have no continuing obligation to the
issuer after the transaction.
One commenter suggested that the
MSRB require underwriters to disclose
pending litigation that may affect the
underwriter’s municipal securities
business, departure of experts that the
issuer relied upon, and transactional
risk including a comparison of different
forms of financings.38 In Response
Letter I, the MSRB disagreed that
underwriters should disclose different
types of financings that may be
applicable to an issuer’s particular
situation because that is under the
domain of the municipal advisor, and
noted that pending litigation and expert
departures do not rise to the level of
conflicts, but could be required by
issuers as the issuers deem appropriate.
One commenter stated its belief that
the Notice should require underwriters
to educate issuers to better understand
underwriting pricing and fees.39 In
Response Letter I, the MSRB noted it is
in the process of developing education
materials for issuers as suggested by the
commenter.
Another commenter stated that
underwriters should not be required to
provide generalized role and
compensation disclosures or written
risk disclosures to large and frequent
issuers unless requested by such
issuers.40 In Response Letter II, the
MSRB noted its disagreement and stated
its belief that additional disclosure
would empower, rather than confuse,
issuers and, therefore, no further
modifications to these provisions are
warranted.
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2. Disclosure Concerning the
Underwriter’s Compensation
One commenter requested additional
conflicts of interest disclosures
regarding underwriter compensation,
such as how the underwriter is
compensated.41 In Response Letter I, the
MSRB stated that it believes that the
Notice, as modified by Amendment No.
2, would incorporate the commenter’s
recommendation, such as disclosure
regarding contingent fee compensation
as a conflict of interest.
Another commenter stated its belief
that the underwriter should be required
However, the commenter stated that it is concerned
that municipal advisors are not subject to
professional standards, continuing education,
licensing or other requirements, or a prohibition
against making political contributions.
38 See GFOA Letter I. See also GFOA Letter II.
39 See GFOA Letter I.
40 See SIFMA Letter II.
41 See GFOA Letter I.
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to disclose to an issuer, and obtain its
informed consent in writing, that the
form of the underwriter’s compensation
creates a conflict of interest, because
underwriter compensation is based
primarily on the size and type of
issuance.42 The commenter later stated
that contingent fees should be
disclosed.43 Another commenter
objected to the characterization of
contingent fee arrangements as resulting
in a conflict of interest with issuers.44
The commenter stated that such
arrangements do not necessarily result
in a conflict, and recommended that
disclosure should state that such
disclosure ‘‘may’’ present a conflict or
‘‘may have’’ the potential for a
conflict.45
In Response Letter II, the MSRB stated
that it believes that it has accurately
characterized compensation
arrangements contingent on closing or
on the size of the transactions as
creating a conflict of interest—it may be
that other factors on which an
underwriter and the issuer have a
coincidence of interests may outweigh
the conflicting interests resulting from
the contingent arrangement, but that
does not change the fact that such
arrangement itself represents a conflict.
Further, given the transaction-based
nature of the typical relationship
between underwriters and issuers, the
MSRB stated that it believes that the
proposal’s requirements regarding
disclosure of compensation conflicts,
together with the other conflicts
disclosures included in the proposal,
adequately address concerns that may
arise in cases where potential conflicts
may arise under less typical
compensation scenarios.
One commenter stated that it would
be more beneficial to issuers to require
underwriters to disclose the amount of
compensation at the outset and
conclusion of the transaction.46 In
Response Letter II, the MSRB stated that
the provisions relating to these
disclosures are appropriate given the
transaction-based nature of the typical
relationship between underwriters and
issuers. The MSRB stated its belief that
the proposal’s requirements regarding
disclosure of compensation conflicts,
together with the other conflicts
disclosures included in the proposal,
adequately address concerns that may
arise in cases where potential conflicts
NAIPFA Letter I.
NAIPFA Letter II.
44 See BDA Letter II.
45 See id.
46 See NAIPFA Letter II.
43 See
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may arise under less typical
compensation scenarios.
3. Other Conflicts Disclosures
One commenter requested additional
conflicts of interest disclosures such as
the duty the underwriter has to
investors.47 In Response Letter I, the
MSRB stated that it believes that the
Notice, as modified by Amendment No.
2, would incorporate the commenter’s
recommendation, such as by requiring
disclosure of an underwriter’s other
actual or potential material conflicts of
interest.
One commenter stated that when
there is a syndicate of underwriters, an
underwriter whose participation level is
below 10% should be exempted from
the disclosure requirements.48 Another
commenter stated that, with respect to
underwriter syndicates, underwriters
who do not have a role in the
development or implementation of the
financing structure or other aspects of
the issue should not be subject to the
disclosures.49 In Response Letter II, the
MSRB declined to create any such
exemption since not all conflicts or
other concerns that arise in the context
of an underwriting are necessarily
proportionate to the size of participation
of an underwriter. The MSRB noted,
however, that with respect to
disclosures about the material financial
characteristics and risks of an
underwriting transaction recommended
by underwriters, where such
recommendation is made by the
syndicate manager on behalf of the
underwriting syndicate, the Notice does
not prohibit syndicate members from
delegating to the syndicate manager
(through, for example, the agreement
among underwriters) the task of
delivering such disclosure in a full and
timely manner on behalf of the
syndicate members, although each
syndicate member would remain
responsible for providing disclosures
with respect to conflicts specific to such
member.
4. Timing and Manner of Disclosures
With respect to the disclosure
process, one commenter stated its belief
that underwriters should be subject to a
process similar to the proposed
municipal advisors’ more rigorous
process under the municipal advisor
portion of proposed MSRB Rules G–17
and G–36.50 The commenter stated its
47 See
GFOA Letter I.
SIFMA Letter II.
49 See BDA Letter II.
50 See NAIPFA Letter I. The Commission notes
that these proposals were subsequently withdrawn
by the MSRB. See Securities Exchange Act Release
48 See
42 See
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belief that providing disclosures is
inadequate; rather, underwriters should
be required to obtain informed consent
from issuers. Moreover, the commenter
stated its belief that disclosures should
be made to officials of the municipal
entity with the power to bind the
issuer.51 The commenter also stated that
the Notice should be amended to
prohibit the giving of disclosures based
on a reasonable belief standard and
instead require underwriters to have
actual knowledge whether an official
has the power to bind the issuer by
contract.
In Response Letter I, the MSRB stated
that it believes that it is not necessary
for underwriters to obtain consent from
the issuer’s governing body when the
issuer finance officials have been
delegated the ability to contract with the
underwriter. The MSRB stated that it is
not necessary for a contract to have been
executed in order for an underwriter to
have a reasonable belief that an issuer
official has the requisite power to bind
the issuer.
Another commenter stated its belief
that disclosure should be made to an
official that the underwriter reasonably
believes ‘‘has or will have’’ the requisite
authority, instead of the standard that
the underwriter believes ‘‘has’’ the
authority to bind the issuer by
contract.52 The commenter stated that
due to the nature of these transactions,
at the time of disclosures, there may not
be an official with such authority as the
authority may not be granted until later.
In Response Letter II, the MSRB noted
that an official, such as a finance
director, who is expected to receive the
delegation of authority from the
governing body to bind the issuer could
reasonably be viewed as an acceptable
recipient of disclosures for purposes of
the proposal so long as such expectation
remains reasonable.
Another commenter stated that the
Notice should state that the disclosure
must be made in a response to a request
for proposals or in promotional
materials provided to an issuer, rather
than the proposed ‘‘at the earliest
stages’’ standard, because the
commenter believes that the proposed
standard is vague and ambiguous.53
Another commenter requested
clarification regarding the meaning of
Nos. 65397 (September 26, 2011), 76 FR 60955
(September 30, 2011) (withdrawing proposed MSRB
Rule G–36 and interpretive guidance concerning
MSRB Rule G–36); and 65398 (September 26, 2011),
76 FR 60958 (September 30, 2011) (withdrawing
proposed interpretive notice concerning MSRB Rule
G–17).
51 See NAIPFA Letter I and NAIPFA Letter II.
52 See BDA Letter II.
53 See id.
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‘‘execution of a contract’’ with respect to
the timing of the required risk
disclosures.54 The commenter stated
that execution of the purchase
agreement should be the appropriate
measurement. In Response Letter II, the
MSRB clarified that, other than the
disclosure with regard to the arm’slength nature of the relationship, the
remaining disclosures regarding the
underwriter’s role, underwriter’s
compensation and other conflicts of
interest all must be provided when the
underwriter is engaged to perform
underwriting services (such as in an
engagement letter), not solely in the
bond purchase agreement.
One commenter suggested that the
underwriter make its disclosures to the
issuer, in plain English, to ensure that
the issuer understands such
disclosures.55 In Response Letter II, the
MSRB stated that it agrees that
reasonable efforts must be made to make
the disclosures understandable, that
disclosures must be made in a fair and
balanced manner and, if the underwriter
does not reasonably believe that the
official to whom the disclosures are
addressed is capable of independently
evaluating the disclosures, the
underwriter must make additional
efforts reasonably designed to inform
the issuer or its employees or agent.
One commenter stated that it remains
concerned that to provide disclosure to
an official of the issuer that the
underwriter reasonably believes has
authority to bind the issuer would not
provide the issuer with sufficient
knowledge of any existing conflicts.56
The commenter recommended that
underwriters make disclosure to the
issuer’s governing body and require
underwriters to have actual knowledge,
instead of a reasonable belief knowledge
standard, as to whether the official
being presented with disclosures has the
power to bind the issuer by contract. In
Response Letter II, the MSRB responded
that underwriters must document the
failure to receive acknowledgement, as
well as what actions were taken to
attempt to obtain the acknowledgement,
in order for the underwriter to fulfill its
54 See SIFMA Letter II. The same commenter also
requested clarification in situations where the
financing terms are determined in a short period of
time, such as within a 24-hour window, and how
underwriters would satisfy the disclosure
requirements. In Response Letter II, the MSRB
stated that the timeframe set out in the proposal,
which matches the timeframe for this same
disclosure under guidance provided in connection
with recent amendments to MSRB Rule G–23, on
activities of financial advisors, is appropriate and
should not be changed.
55 See GFOA Letter II.
56 See NAIPFA Letter II.
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obligation to document why it was
unable to obtain the acknowledgement.
5. Acknowledgement of Disclosures
One commenter stated its belief that
the provision of the Notice requiring
issuer written acknowledgement of
disclosures would be helpful, but in
situations where written
acknowledgement is not received from
the issuer, the commenter urged the
MSRB to require underwriters to put
forth some level of effort to obtain the
written acknowledgement of the
issuer.57 Another commenter stated that
it believes that an underwriter should
not be required to document why an
official of the issuer does not
acknowledge in writing that disclosures
were received.58 Instead, the commenter
recommended that the Notice require
the underwriter to document that
disclosures were made and whether
acknowledgement was received.
In Response Letter II, the MSRB
clarified that if an issuer does not
provide the underwriter with a written
acknowledgement of receipt of
disclosures, the failure to receive such
acknowledgement must be documented,
as well as what actions were taken to
attempt to obtain the acknowledgement,
in order for the underwriter to fulfill its
obligation to document why it was
unable to obtain the acknowledgement.
C. Representations to Issuers
Under the Notice, an underwriter
would be required to have a reasonable
basis for providing representations and
material information in a certificate that
will be relied upon by the municipal
entity issuer or other relevant parties to
an underwriting. One commenter stated
that one example of such a certificate
used by the MSRB in the Notice is
already regulated by tax laws and does
not need additional regulation by the
MSRB.59 In Response Letter I, the MSRB
stated that it does not believe the
disclosure requirement imposes an
additional regulatory burden on
underwriters.
D. Required Disclosures to Issuers
One commenter stated that the
disclosure requirements, especially for
routine transactions, should only be
imposed when the underwriter has
reason to believe that the issuer does not
have the knowledge or experience
available to understand the
transaction.60 Moreover, the commenter
57 See
NAIPFA Letter I.
BDA Letter II.
59 See SIFMA Letter I.
60 See BDA Letter I. One commenter suggested
factors to determine routine financings when
disclosures would not be necessary. See NAIPFA
58 See
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stated that the proposal should be
clarified as to when the underwriter is
required to provide disclosures on the
material aspects of the financing
structures. The commenter also noted
that ‘‘issuer personnel responsible for
the issuance of municipal securities’’
and ‘‘an official of the issuer whom the
underwriter reasonably believes has the
authority to bind the issuer by contract
with the underwriter’’ are not the
same.61 Thus, the commenter stated its
belief that clarification should be
provided that these regulatory
requirements are imposed on the
underwriter only if the underwriter has
reason to believe that issuer personnel
do not have the requisite knowledge or
experience, regardless of whether the
particular official that the underwriter
reasonably believes to have the legal
authority to contractually bind the
issuer can be reasonably thought to have
the requisite knowledge and experience.
Another commenter stated that the
Notice should be amended to take into
consideration the needs of
unsophisticated municipal issuers, and
underwriters should be required to
assess the knowledge and
understanding of municipal issuers on a
case-by-case basis.62 In Response Letter
I, the MSRB stated that it does not
consider it unreasonable to require that
an underwriter evaluate the level of
knowledge and sophistication of the
Letter I. In Response Letter I, the MSRB stated that
while the factors are helpful, they do not address
the particular issuer personnel’s experience and
knowledge, which are more relevant to the Notice.
The MSRB stated that it would take the comment
under advisement. Another commenter stated that
in a routine financing, the Notice should require an
underwriter to disclose, in writing, information
regarding the transaction, should the issuer make
such a request. See GFOA Letter II. The commenter
stated that additional information on routine
financings would be helpful. In Response Letter II,
the MSRB stated its belief that the provisions
relating to this disclosure are appropriate for the
reasons described in Response Letter I and,
therefore, no further modification is warranted.
61 Another commenter noted that to require an
underwriter to determine who should be considered
‘‘issuer personnel’’ is an issue worth more
consideration and discussion. See GFOA Letter II.
In Response Letter II, the MSRB noted that it would
monitor disclosure practices and would engage in
a dialogue with industry participants and the
Commission to determine whether sufficient
improvements have occurred in the flow of
disclosures to decision-making personnel of issuers
or whether additional steps should be taken.
62 See NAIPFA Letter I and NAIPFA Letter II. The
commenter reiterated that the proposal requires
additional changes in order to protect over 50,000
infrequent and/or small, unsophisticated issuers of
municipal bonds. See NAIPFA Letter II. Another
commenter stated that there are many
unsophisticated issuers who will benefit from the
disclosures. See AGFS Letter. The commenter
stated that issuers should rely upon advice from
advisors who owe the issuers a fiduciary duty,
instead of underwriters who may be in an
adversarial position.
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issuer, particularly considering that
under the Notice, as amended by
Amendment No. 2, the underwriter
need only have a reasonable basis for its
evaluation.
One commenter stated its belief that
the written risk disclosures imposed on
underwriters related to the financings
(including complex financings) are too
broad and vague and do not take into
account the role of the issuer’s
municipal advisor, if any.63 Other
commenters stated that the underwriter
should not have disclosure
requirements when the issuer has
engaged a financial advisor.64 Another
commenter stated that the underwriter
should not be required to evaluate
issuer personnel when the issuer has
retained a municipal advisor.65 In
Response Letter I, the MSRB stated that
underwriters are in the best position to
understand the material terms and risks
associated with recommended
financings, and the burden should not
be solely on municipal advisors to
ascertain such terms and risks.
One commenter noted that if written
risk disclosures are to be required, then
additional guidance and clarity is
needed on the following: (1) References
to ‘‘atypical or complex’’ financings; 66
(2) references to ‘‘all material risks and
characteristics of the complex
municipal securities financing’’; 67 (3)
which issuer personnel must have the
requisite level of knowledge and
sophistication; 68 (4) if the issuer does
not have a financial advisor or internal
personnel acting in a similar role, then
the issuer’s finance staff’s knowledge
and experience should be assessed by
underwriters; and (5) only material risks
that are known to the underwriter and
reasonably foreseeable at the time of the
disclosure should be required.69
In Response Letter I, the MSRB stated
that it does not consider it appropriate
to provide a more precise definition of
‘‘complex municipal securities
financing’’ since the Notice already
63 See
SIFMA Letter I.
BDA Letter I and WM Letter I.
65 See SIFMA Letter I.
66 The commenter stated that these additional
written disclosures may require detailed review by
counsel, which would be costly. The commenter
urged the Commission to carefully consider the
costs relative to the potential benefits.
67 The commenter stated that this reference
should be limited to financial risks and
characteristics since the underwriter should not
have to provide disclosures on legal issues.
68 The commenter stated that if the issuer has a
financial advisor or internal personnel serving the
same role then no underwriter written disclosures
should be required. The commenter further stated
that underwriters may satisfy their disclosure
requirements by communicating the disclosures to
the financial advisor or issuer internal personnel.
69 See SIFMA Letter I.
64 See
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77873
provides examples of complex
financings, such as those involving
variable rate demand obligations and
swaps. The MSRB stated that it does not
consider it appropriate to require an
issuer to inform the underwriter that the
issuer lacks knowledge or experience
with a financing. The MSRB stated its
belief that it is reasonable to require the
underwriter to evaluate the level of
knowledge and sophistication of the
issuer. The Notice, as modified by
Amendment No. 2, would only require
the underwriter to have a reasonable
basis for its evaluation. Further, the
MSRB stated that it agrees with the
commenter that disclosure on complex
financings should be limited to material
financial risks that are known to the
underwriter and reasonably foreseeable.
The MSRB stated that the Notice, as
modified by Amendment No. 2, shows
such change. The Notice, as modified by
Amendment No. 2, would also require
disclosures of the characteristics of a
financing that are limited to the material
financial characteristics and would
provide examples in the case of swaps.
One commenter disagreed with the
MSRB that the level of disclosure
should vary based on the issuer’s
financial ability to bear the risks of the
recommended financing.70 The
commenter stated its belief that a
municipal entity with taxing power,
who would be able to bear more risks
of a financing, should not be ineligible
for advice that is competent and
unimpaired by the broker’s own
interests simply because the government
can tax the citizens to restore any loss.
In Response Letter II, the MSRB
conceded that the financial ability to
bear the risks of a recommended
financing would not normally be a
sufficient basis, by itself, for
determining the level of disclosure to
provide. The MSRB noted, however, the
proposal states three distinct factors that
should be considered together in
coming to this determination.
Other commenters noted that
disclosure regarding derivatives is
premature since there are pending
rulemakings with the Commodity
Futures Trading Commission (‘‘CFTC’’)
and the Commission that will apply to
dealers recommending swaps or
security-based swaps to municipal
entities.71 One commenter urged the
MSRB to work together with SEC and
CFTC to ensure that one set of
70 See
71 See
PFM Letter.
SIFMA Letter I; BDA Letter I; GFOA, Letter
I.
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definitions and rules apply to the
municipal securities market.72
In Response Letter I, the MSRB noted
that it is aware of the ongoing
rulemaking by the Commission and
CFTC and has taken care to ensure that
any requirements of the Notice are
consistent with such rulemaking. In
Response Letter II, the MSRB disagreed
with the commenter that the proposal is
premature for the reasons described in
Response Letter I.
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E. Underwriter Duties in Connection
With Issuer Disclosure Documents
Under the Notice, the underwriter
must have a reasonable basis for its
representations and information
provided to issuers in connection with
the preparation by the issuer of its
disclosure documents. One commenter
stated its belief that the reasonable basis
requirement is unreasonably broad.73
The commenter stated that the Notice
should be revised to clarify that an
underwriter may limit its responsibility
for information provided by disclosing
to the issuer any limitations on the
scope of the underwriter’s analysis and
factual verification it performed. The
commenter further stated that such duty
should extend only to material
information. In Response Letter I, the
MSRB stated that it disagrees with the
commenter and believes that an
underwriter should have a reasonable
basis for its own representations set
forth in the official statement, as well as
a reasonable basis for the material
information it provides to the issuer in
connection with the preparation of the
official statement.
One commenter also stated its belief
that when an underwriter intends to
assist in the preparation of an official
statement, that a disclosure should be
made to the issuer stating that the
underwriter can only be held liable
where it can be shown that it did not act
with a reasonable belief that the
information presented was truthful and
complete.74 In Response Letter I, the
MSRB noted that the Notice would
provide that an underwriter must have
‘‘a reasonable basis for the
representations it makes, and other
material information it provides, to an
issuer and to ensure that such
representations and information are
accurate and not misleading.’’
F. Underwriter Compensation and New
Issue Pricing
1. Excessive Compensation
One commenter requested that, in the
absence of disclosure and informed
consent, underwriters be prohibited
from seeking reimbursements from bond
proceeds for expenditures made on
behalf of the issuer for any expenses
incurred by the underwriter.75 In
Response Letter I, the MSRB noted that
it disagrees with the commenter and
that MSRB Rule G–20 already precludes
underwriters from seeking
reimbursement for lavish expenditures,
especially from bond proceeds. Further,
in Response Letter I, the MSRB noted
that state law would govern whether
such reimbursements are permissible.
2. Fair Pricing
With respect to the representation that
the price an underwriter pays in a
negotiated sale be fair and reasonable,
one commenter stated its belief that
such representation should be altered so
that the price the underwriter pays is
‘‘not unreasonable.’’ 76 In Response
Letter I, the MSRB stated that the fair
and reasonable pricing standard is no
different in many cases than the duties
already imposed on underwriters by
MSRB rules with respect to
underwriters’ customers and that it
believes the approach in the Notice
would require more robust disclosures
by underwriters to issuers. In the
alternative, the commenter
recommended that the disclosure
should be changed to state that the
pricing is not necessarily the best
pricing.77 In Response Letter II, the
MSRB stated that it believes that the
provisions relating to these disclosures
are appropriate for the reasons
described in Response Letter I and,
therefore, no further modifications to
these provisions are warranted.
One commenter urged the
Commission to require underwriters to
expressly represent in writing to the
issuer that the price paid for the issuer’s
debt is fair, and specify the facts that
support the representation.78 In
Response Letter II, the MSRB stated that
its view is that, even if an underwriter
provides a fair price to an issuer for its
new issue offering, its fair practice
duties under Rule G–17 are not thereby
discharged because, among other things,
the many principles laid out in the
proposal also must be addressed.
Conversely, an underwriter cannot
75 See
id.
NAIPFA Letter I and NAIPFA Letter II.
77 See NAIPFA Letter II.
78 See PFM Letter.
72 See
GFOA Letter I.
73 See id.
74 See NAIPFA Letter I.
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justify under Rule G–17 an unfair price
to an issuer by balancing that unfair
price with the fact that it may otherwise
have been fair to the issuer under the
other fairness principles enunciated in
the proposal.
G. Conflicts of Interest
1. Payments To or From Third Parties
One commenter stated that
disclosures with respect to third-party
arrangements for the marketing of the
issuer’s securities should be clarified as
to the level of details.79 Further, the
commenter stated its belief that
payments to and from affiliates of the
underwriters are not third-party
payments since those payments would
not cloud a party’s judgment when the
parties are related to each other, unlike
third parties. In Response Letter I, the
MSRB noted that the Notice, as
modified by Amendment No. 2, would
require only the disclosure of thirdparty marketing arrangements, not the
particular terms. Moreover, while the
MSRB disagreed with the commenter
that payments from affiliates do not
raise risks, the MSRB noted that the
Notice, as modified by Amendment No.
2, would not require the disclosure of
the amounts of such payments.
Another commenter stated that the
payment amount is an important
variable for the issuer to consider and
would encourage its members to further
question the underwriter about any
relevant third-party relationships and
payments, which provides better
transparency for the transaction.80 In
Response Letter II, the MSRB stated its
agreement that such further inquiries
can be made. In addition, the MSRB
clarified that the third-party payments
to which the disclosure requirement
under the Notice would apply are those
that give rise to actual or potential
conflicts of interest and typically would
not apply to third-party arrangements
for products and services of the type
that are routinely entered into in the
normal course of business, so long as
any specific routine arrangement does
not give rise to an actual or potential
conflict of interest.
2. Profit-Sharing With Investors
One commenter sought clarification
that legitimate trading, such as when an
79 See SIFMA Letter I. See also IA Letter. The
commenter cited examples where an underwriter
would outsource certain routine tasks related to the
financing transactions, and sought clarification
whether the Notice would encompass such
payments for services rendered. The Commission
received the IA Letter after the MSRB filed
Response Letter II, and thus, the MSRB has not
specifically responded to the commenter.
80 See GFOA Letter II.
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underwriter sells a bond and later
repurchases the bond from a purchaser,
is not included in the disclosure for
profit sharing arrangements.81 In
Response Letter II, the MSRB stated its
belief that the language of the proposal
appropriately reflects that the disclosure
applies in cases where there exists an
arrangement to split or share profits
realized by an investor upon resale.
3. Credit Default Swaps
One commenter stated that it believes
that underwriters should not be
required to disclose hedging and risk
management strategies and activities
when the underwriter, in its role as a
dealer, issues or purchases credit
default swaps that reference the
obligations of the municipal issuer.82
The commenter noted that should these
disclosures be required, a general
disclosure to the issuers that the
underwriters may engage in such
activities should be sufficient. The
commenter objected to any provisions
that would require underwriters to
provide specific disclosures that may
reveal identities of counterparties and
the underwriters’ hedging and risk
management strategies. In Response
Letter I, the MSRB stated that it does not
believe that the disclosure requirement
would compromise counterparty
relationships or deter the use of credit
default swaps for legitimate risk
management purposes. In addition, the
MSRB noted that the Notice would only
require that a dealer that engages in the
issuance or purchase of a credit default
swap for which the underlying reference
is an issuer for which the dealer is
serving as underwriter, or an obligation
of that issuer, must disclose the fact that
it does so to the issuer, not the terms of
the particular trades.83
H. Retail Order Periods
One commenter recommended that
the Notice use a single standard of
requiring that the underwriter not
81 See
BDA Letter II.
SIFMA Letter I.
83 One commenter noted that the Notice provides
that if a dealer issues or purchases credit default
swaps for which the reference obligor is the issuer
to which the dealer is serving as an underwriter, the
underwriter must disclose that fact to the issuer.
See SIFMA Letter II. The commenter requested
clarification that, in the case of a conduit issuer that
issues bonds for multiple obligors or on a specific
project, whether disclosures need to be made to the
obligor(s) to satisfy the disclosure requirements. See
SIFMA Letter II. In Response Letter II, the MSRB
stated that the proposal only requires that credit
default swap disclosures be made to the issuers of
the municipal securities and not to any conduit
borrowers or other obligors. However, the MSRB
stated that it would take under advisement the
question of whether such disclosure should be
extended to any applicable obligors other than the
issuer.
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82 See
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knowingly accept orders that do not
meet the requirements of the retail order
period.84 In Response Letter II, the
MSRB stated that it believes that the
commenter has misunderstood these
provisions. The MSRB stated that the
Notice provides that an underwriter that
knowingly accepts an order that has
been framed as a retail order when it is
not, would violate MSRB Rule G–17 if
its actions are inconsistent with the
issuer’s expectations regarding retail
orders, but also provides that a dealer
that places an order that is framed as a
qualifying retail order but in fact
represents an order that does not meet
the qualification requirements to be
treated as a retail order, violates its duty
of fair dealing. The MSRB stated that
these two provisions are entirely
consistent and appropriate, since in the
first provision an underwriter is
receiving an order framed by a third
party, whereas in the second provision,
a dealer (not limited to an underwriter)
is itself placing and framing the order.
Therefore, the MSRB noted that it has
not modified these provisions.
I. Timing and Consistency
One commenter noted that
underwriters that may also be municipal
advisors will not be able to properly
evaluate the Notice until rules with
respect to municipal advisors have been
approved and adopted by the
Commission and MSRB.85 The
commenter noted that many
underwriters may be classified as
municipal advisors under these yet-tobe-adopted rules and questioned how
the underwriters’ obligations under the
Notice may relate to these rules. The
commenter stated that many interested
parties are abstaining from commenting
on the proposal due to this uncertainty.
The commenter stated its belief that, at
a minimum, the portion of the proposal
addressing an underwriter’s obligation
to provide written risk disclosures
should be withdrawn and refiled at a
later time.
One commenter stated that a 90-day
implementation period is too short and
requested a period no less than six
months.86 In Response Letter I, the
MSRB stated that it believes that 90
days is an adequate time period for
underwriters to develop the required
disclosures.
J. Miscellaneous Comments
Some commenters raised issues that
are outside the scope of the proposal.
For example, commenters asked the
84 See
BDA Letter II.
85 See SIFMA Letter I and SIFMA Letter II.
86 See SIFMA Letter I.
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MSRB to provide clarity on the
definition of ‘‘flipping’’ 87 and the
application of the suitability standard to
transactions proposed by an underwriter
to an issuer.88
With respect to ‘‘flipping,’’ the MSRB
stated in Response Letter II that it would
reach out to other regulators and the
Commission in an attempt to develop a
shared understanding of what such
‘‘flipping’’ activities entail and potential
concerns regarding the implications of
these activities. The MSRB noted that,
to the extent these activities could be
characterized as arrangements between
the underwriter and an investor
purchasing new issue securities from
the underwriter according to which
profits realized from the resale by such
investor of the securities are directly or
indirectly split or otherwise shared with
the underwriter, these activities may
already be subject to the proposal’s
disclosure obligation with respect to
profit-sharing with investors.
In Response Letter II, the MSRB noted
that although the suitability comment is
outside the scope of the proposal, the
MSRB will keep this suggestion under
advisement.
Another commenter urged further
consideration of the costs of disclosures
and weighing the costs against the
potential benefits.89 In Response Letter
II, the MSRB noted its disagreement that
it did not weigh the costs and benefits,
and that the proposal in fact recognizes
that many of the disclosures required
under the proposal can be tailored, and
in some cases are not required at all,
based on a number of relevant factors
set out in the proposal and described in
greater detail in Response Letter I. Most
across-the-board disclosure provisions
in the proposal either require
transaction-specific or underwriterspecific disclosures of relevant conflicts
of interest or consist of standardized
educational disclosures with respect to
which, underwriters most likely would
realize greater cost-effectiveness and
reduced regulatory risk by making such
disclosures globally rather than on a
case-by-case basis. The MSRB stated
that providing more information to
issuers would empower and provide
considerable benefits to issuers. Further,
the MSRB stated that it concedes that
some underwriters may bear up-front
costs in creating basic frameworks for
the required disclosures for the various
types of products they may offer their
issuer clients, but the on-going burden
should thereafter be considerably
87 See GFOA Letter I; GFOA Letter II and NAIPFA
Letter II.
88 See GFOA Letter I and GFOA Letter II.
89 See SIFMA Letter II.
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reduced and the preparation of written
disclosures would become an interrelated component of the necessary
documentation of the transaction.
One commenter sought clarification
that the proposal would not apply to
private placement agents.90 In Response
Letter II, the MSRB responded that
while the Notice would not apply to
private placement agents, parties relying
on this exception should be cautious in
its application because the term ‘‘private
placement’’ is often used to describe
transactions that are not recognized as
private placements for purposes of
MSRB rules and other applicable law.
IV. Proceedings To Determine Whether
To Disapprove SR–MSRB–2011–09 and
Grounds for Disapproval Under
Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 91 to determine
whether the proposed rule change
should be disapproved. Institution of
such proceedings appears appropriate at
this time in view of the legal and policy
issues raised by the proposal, as
discussed below. Institution of
disapproval proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, as
described in greater detail below, the
Commission seeks and encourages
interested persons to comment on the
proposed rule change to inform the
Commission’s analysis whether to
approve or disapprove the proposed
rule change.
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. In particular, Section
15B(b)(2)(C) of the Act 92 requires,
among other things, that the rules of the
MSRB shall be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons
facilitating transactions in municipal
securities and municipal financial
products, to remove impediments to and
perfect the mechanism of a free and
open market in municipal securities and
municipal financial products, and, in
general, to protect investors, municipal
entities, obligated persons, and the
public interest.
The MSRB’s proposal would interpret
the application of MSRB Rule G–17
applicable to dealers acting in the
capacity of underwriters in negotiated
90 See
SIFMA Letter II.
U.S.C. 78s(b)(2)(B).
92 15 U.S.C. 78o–4(b)(2)(C).
91 15
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underwritings of municipal securities
transactions (except as specified in the
Notice). The Notice would impose
disclosures on underwriters regarding,
among other things, their role,
compensation arrangements, conflicts of
interest, and representations made to
issuers of municipal securities.
Commenters that represent issuers and
financial advisors generally support the
proposal and urge additional
disclosures, while commenters that
represent dealers and underwriters
believe the proposal should be
disapproved or required disclosures be
modified to ease the requirements for
dealers. Based on the comments, the
Commission believes that the proposal
raises concerns, among other things, as
to whether the disclosures are
appropriate and, if so, whether the
disclosures are sufficiently balanced to
protect investors and municipal entities
by assisting issuers and their advisors in
evaluating underwriters and the
transactions proposed by the
underwriters without being overly
burdensome for underwriters.
The Commission believes these
concerns raise questions as to whether
the MSRB’s proposal is consistent with
the requirements of Section 15B(b)(2)(C)
of the Act, including whether the
disclosures outlined in the notice would
prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade, foster
cooperation and coordination with
persons facilitating transactions in
municipal securities and municipal
financial products, remove impediments
to and perfect the mechanism of a free
and open market in municipal securities
and municipal financial products, and,
in general, protect investors, municipal
entities, obligated persons, and the
public interest. The Commission
believes the issues raised by the
proposed rule change can benefit from
additional consideration and evaluation
in light of the requirements of Section
15B(c)(2)(C) of the Act.
V. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the concerns
identified above, as well as any others
they may have with the proposal. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change is inconsistent with Section
15B(b)(2)(C) or any other provision of
the Act, or the rules and regulation
thereunder. Although there do not
appear to be any issues relevant to
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
approval or disapproval which would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b-4, any request for an
opportunity to make an oral
presentation.93
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change should be
disapproved by January 30, 2012. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by February 13, 2012.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–MSRB–2011–09 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–MSRB–2011–09. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
93 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Pub. L. 94–29
(June 4, 1975), grants the Commission flexibility to
determine what type of proceeding—either oral or
notice and opportunity for written comments—is
appropriate for consideration of a particular
proposal by a self-regulatory organization. See
Securities Act Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
E:\FR\FM\14DEN1.SGM
14DEN1
Federal Register / Vol. 76, No. 240 / Wednesday, December 14, 2011 / Notices
also will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MSRB–
2011–09 and should be submitted on or
before January 30, 2012. Rebuttal
comments should be submitted by
February 13, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.94
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32087 Filed 12–13–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65917; File No. SR–Phlx–
2011–143]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Withdrawal of Proposed Rule Change
To Modify Commentary .01 to Rule
1009 Regarding Criteria for Listing an
Option on an Underlying Covered
Security
December 8, 2011.
On October 24, 2011, NASDAQ OMX
PHLX LLC (‘‘Phlx’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 1 and
Rule 19b–4 thereunder 2 to amend
Commentary .01 to Rule 1009 to modify
the criteria for listing options on an
underlying covered security. Notice of
the proposed rule change was published
in the Federal Register on November 14,
2011.3 The Commission received two
comment letters on the proposed rule
change.4 On December 2, 2011, Phlx
withdrew the proposed rule change
(SR–Phlx–2011–143).
94 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 65706
(November 8, 2011), 76 FR 70520.
4 See letters to Elizabeth M. Murphy, Secretary,
Commission, from Jenny L. Klebes, Senior Attorney,
Legal Division, Chicago Board Options Exchange,
dated November 25, 2011; and Janet McGinness,
Senior Vice President—Legal & Corporate Secretary,
Legal & Government Affairs, NYSE Euronext, dated
December 1, 2011.
mstockstill on DSK4VPTVN1PROD with NOTICES
1 15
VerDate Mar<15>2010
15:14 Dec 13, 2011
Jkt 226001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.5
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2011–32067 Filed 12–13–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65911; File No. SR–EDGA–
2011–40]
Self-Regulatory Organizations; EDGA
Exchange, Inc.; Notice of Filing of
Proposed Rule Change To Amend
EDGA Rule 11.9
December 8, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
2, 2011, the EDGA Exchange, Inc.
(‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
certain existing routing options
contained in Rule 11.9 to provide
Users 3 with more flexible routing
options. The text of the proposed rule
change is available on the Exchange’s
Web site at https://www.directedge.com,
at the Exchange’s principal office and at
the Public Reference Room of the
Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
self-regulatory organization has
prepared summaries, set forth in
Sections A, B and C below, of the most
significant aspects of such statements.
5 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 As defined in Rule 1.5(cc).
1 15
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
77877
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange’s current list of routing
options are codified in Rule 11.9(b)(3).
In this filing, the Exchange proposes to
amend several routing options
contained in Rule 11.9(b)(3) to allow
Users more discretion if shares remain
unexecuted after routing. In particular,
Rule 11.9(b)(3) is proposed to be
amended to provide that Users may
elect that any remainder of an order be
posted to the EDGX Exchange, Inc.
(‘‘EDGX’’) for any of the routing options
listed in the rule, except those in
paragraphs (a) and (n)–(q) 4.
Currently, Rule 11.9(b)(3)(d) provides
that the INET routing strategy checks
the System for available shares and then
is sent to Nasdaq. If shares remain
unexecuted after routing, they are
posted on the Nasdaq book. The
Exchange proposes to modify this
language to subject this posting to
Nasdaq to a User instruction as
proposed in the introductory paragraph
of Rule 11.9(b)(3). This User instruction
would thus enable the remainder to post
to EDGX instead of Nasdaq.
Currently, Rule 11.9(b)(3)(j) provides
that the ROLF routing strategy checks
the System for available shares and then
is sent to LavaFlow ECN. The Exchange
proposes to modify this strategy to state
that any remainder will be posted to
LavaFlow ECN, unless otherwise
instructed by the User. This User
instruction would thus enable the User
to direct the remainder to post to EDGX
instead of LavaFlow ECN.
Rule 11.9(b)(3)(m) provides that the
IOCT routing option checks the System
for available shares and then is sent
sequentially to destinations on the
System routing table. If shares remain
unexecuted after routing, they are sent
as an immediate or cancel (IOC) 5 order
to EDGX. If shares further remain
unexecuted, they are posted on the
EDGA Book, unless otherwise instructed
by the User. The Exchange proposes to
modify this strategy to delete the phrase
‘‘sent as an IOC order’’ since a Day
Order 6 or an IOC order could be sent to
EDGX. This change would thus enable
4 Routing options listed in Rules 11.9(b)(3)(a) and
(n)–(q) are not altered as a result of this amendment.
The routing option in Rule 11.9(b)(3)(a) already
posts to EDGX and no amendment to the rule is
needed as no discretion is provided to the User. The
routing options in Rules 11.9(b)(3)(n)–(q) do not
have the option to post the remainder of an order
to EDGX.
5 As defined in Rule 11.5(b)(1).
6 As defined in Rule 11.5(b)(2).
E:\FR\FM\14DEN1.SGM
14DEN1
Agencies
[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]
[Notices]
[Pages 77865-77877]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32087]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65918; File No. SR-MSRB-2011-09]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Instituting Proceedings to Determine Whether to Disapprove
Proposed Rule Change, as Modified by Amendment No. 2, Consisting of
Interpretive Notice Concerning the Application of MSRB Rule G-17 to
Underwriters of Municipal Securities
December 8, 2011.
I. Introduction
On August 22, 2011, the Municipal Securities Rulemaking Board
(``MSRB'' or ``Board'') filed with the Securities
[[Page 77866]]
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposal consisting of an
interpretive notice concerning the application of MSRB Rule G-17
(Conduct of Municipal Securities and Municipal Advisory Activities) to
underwriters of municipal securities (``Notice''). The proposed rule
change was published for comment in the Federal Register on September
9, 2011.\3\ The Commission received five comment letters on the
proposed rule change.\4\ On October 11, 2011, the MSRB extended the
time period for Commission action to December 7, 2011. On November 3,
2011, the MSRB filed Amendment No. 1 to the proposed rule change. On
November 10, 2011, the MSRB withdrew Amendment No. 1, responded to
comments,\5\ and filed Amendment No. 2 to the proposed rule change. The
proposed rule change, as modified by Amendment No. 2, was published in
the Federal Register on November 21, 2011.\6\ The Commission received
eight comment letters on the proposed rule change, as modified by
Amendment No. 2, and a response from the MSRB.\7\ On December 6, 2011,
the MSRB extended the time period for Commission action to December 8,
2011.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 65263 (September 6,
2011), 76 FR 55989.
\4\ See Letters from Joy A. Howard, Principal, WM Financial
Strategies, dated September 30, 2011 (``WM Letter''); Mike Nicholas,
Chief Executive Officer, Bond Dealers of America, dated September
30, 2010 (``BDA Letter''); Colette J. Irwin-Knott, CIPFA, President,
National Association of Independent Public Finance Advisors, dated
September 30, 2011 (``NAIPFA Letter''); Leslie M. Norwood, Managing
Director and Associate General Counsel, Securities Industry and
Financial Markets Association, dated September 30, 2011 (``SIFMA
Letter''); and Susan Gaffney, Director, Federal Liaison Center,
Government Finance Officers Association, dated October 3, 2011
(``GFOA Letter'').
\5\ See Letter from Margaret C. Henry, General Counsel, Market
Regulation, MSRB, to Elizabeth M. Murphy, Secretary, Commission,
dated November 10, 2011 (``Response Letter I'').
\6\ See Securities Exchange Act Release No. 65749 (November 15,
2011), 76 FR 72013.
\7\ See Letters from Colette J. Irwin-Knott, CIPFA, President,
National Association of Independent Public Finance Advisors, dated
November 30, 2011 (``NAIPFA Letter II''); E. John White, Chief
Executive Officer, Public Financial Management, Inc., dated November
30, 2011 (``PFM Letter''); Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated November 30, 2011 (``SIFMA Letter II''); Joy A.
Howard, Principal, WM Financial Strategies, dated November 30, 2011
(``WM Letter II''); Michael Nicholas, CEO, Bond Dealers of America,
dated December 1, 2011 (``BDA Letter II''); Susan Gaffney, Director,
Federal Liaison Center, Government Finance Officers Association,
dated December 1, 2011 (``GFOA Letter II''); Robert Doty, AGFS,
dated December 1, 2011 (``AGFS Letter''); and Peter C. Orr, CFA,
President, Intuitive Analytics LLC, dated December 7, 2011 (``IA
Letter''). See Letter from Margaret C. Henry, General Counsel,
Market Regulation, MSRB, to Elizabeth M. Murphy, Secretary,
Commission, dated December 7, 2011 (``Response Letter II'').
---------------------------------------------------------------------------
This order institutes proceedings under Section 19(b)(2)(B) of the
Act to determine whether to disapprove the proposed rule change.
II. Description of the Proposal
MSRB proposes to adopt an interpretive notice with respect to MSRB
Rule G-17, which states that ``[i]n the conduct of its municipal
securities or municipal advisory activities, each broker, dealer,
municipal securities dealer, and municipal advisor shall deal fairly
with all persons and shall not engage in any deceptive, dishonest, or
unfair practice.''
The scope of the Notice would apply to underwriters and their duty
to municipal entity \8\ issuers of municipal securities in negotiated
underwritings (except as set forth otherwise), but would not apply to
selling group members or when a dealer is serving as an advisor to a
municipal entity. The Notice includes the following sections: (1) Basic
Fair Dealing Principle; (2) Role of the Underwriter/Conflicts of
Interest; (3) Representations to Issuers; (4) Required Disclosures to
Issuers; (5) Underwriter Duties in Connection with Issuer Disclosure
Documents; (5) Underwriter Compensation and New Issue Pricing; (6)
Conflicts of Interest; (7) Retail Order Periods; and (8) Dealer
Payments to Issuer Personnel.
---------------------------------------------------------------------------
\8\ The Notice defines the term ``municipal entity'' as that
term is defined by Section 15B(e)(8) of the Exchange Act: ``any
State, political subdivision of a State, or municipal corporate
instrumentality of a State, including--(A) any agency, authority, or
instrumentality of the State, political subdivision, or municipal
corporate instrumentality; (B) any plan, program, or pool of assets
sponsored or established by the State, political subdivision, or
municipal corporate instrumentality or any agency, authority, or
instrumentality thereof; and (C) any other issuer of municipal
securities.'' See proposed Notice endnote 1.
---------------------------------------------------------------------------
A. Basic Fair Dealing Principle
The Notice would specify that an underwriter must not misrepresent
or omit the facts, risks, potential benefits, or other material
information about municipal securities activities undertaken with a
municipal entity issuer. The Notice would also state that MSRB Rule G-
17 establishes a general duty of a dealer to deal fairly with all
persons (including, but not limited to, issuers of municipal
securities), even in the absence of fraud.
B. Role of the Underwriter/Conflicts of Interest
Under the Notice, MSRB Rule G-17's duty to deal fairly with all
persons would require the underwriter to make certain disclosures to
the issuer of municipal securities to clarify the underwriter's role in
an issuance of municipal securities and the actual or potential
material conflicts of interest with respect to such issuance.
1. Disclosures Concerning the Underwriter's Role
The Notice would require an underwriter to disclose the following
information to an issuer: (A) MSRB Rule G-17 requires an underwriter to
deal fairly at all times with both municipal issuers and investors; (B)
the underwriter's primary role is to purchase securities with a view to
distribution in an arm's-length commercial transaction with the issuer
and it has financial and other interests that differ from those of the
issuer; (C) unlike a municipal advisor, the underwriter does not have a
fiduciary duty to the issuer under the federal securities laws and is
not required by federal law to act in the best interest of the issuer
without regard to the underwriter's own financial or other interests;
(D) the underwriter has a duty to purchase securities from the issuer
at a fair and reasonable price, but must balance that duty with its
duty to sell municipal securities to investors at prices that are fair
and reasonable; and (E) the underwriter will review the official
statement for the issuer's securities in accordance with, and as part
of, its responsibilities to investors under the federal securities
laws, as applied to the facts and circumstances of the transaction.
Moreover, the Notice would state that the underwriter must not
recommend that the issuer not retain a municipal advisor.
2. Disclosure Concerning the Underwriter's Compensation
The Notice would require an underwriter to disclose to an issuer
whether its underwriting compensation will be contingent on the closing
of a transaction. The underwriter must also disclose that compensation
that is contingent on the closing of a transaction or the size of a
transaction presents a conflict of interest, because it may cause the
underwriter to recommend a transaction that it is unnecessary or to
recommend that the size of the transaction be larger than is necessary.
[[Page 77867]]
3. Other Conflicts Disclosures
The Notice would require an underwriter to disclose other potential
or actual material conflicts of interest, including, but not limited
to, the following: (A) Any payments described below in Section II
(G)(1) ``Conflicts of Interest--Payments to or from Third Parties'';
(B) any arrangements described below in Section II (G)(2) ``Conflicts
of Interest--Profit-Sharing with Investors''; (C) the credit default
swap disclosures described below in Section II (G)(3) ``Conflicts of
Interest--Credit Default Swaps''; and (D) any incentives for the
underwriter to recommend a complex municipal securities financing and
other associated conflicts of interest described below in Section II
(D) ``Required Disclosures to Issuers''.
The Notice would permit disclosures concerning the role of the
underwriter and the underwriter's compensation to be made by a
syndicate manager on behalf of other syndicate members. The Notice
would require other conflicts disclosures to be made by the particular
underwriters subject to such conflicts.
4. Timing and Manner of Disclosures
The Notice would require that all of the disclosures be made in
writing to an official of the issuer that the underwriter reasonably
believes has the authority to bind the issuer by contract with the
underwriter and that, to the knowledge of the underwriter, is not a
party to a disclosed conflict. The Notice would specify that the
disclosures must be made in a manner designed to make clear to such
official the subject matter of the disclosures and their implications
for the issuer.
The Notice would specify when the disclosures must be made. First,
disclosure concerning the arm's-length nature of the underwriter-issuer
relationship must be made in the earliest stages of the underwriter's
relationship with the issuer, for example, in a response to a request
for proposals or in promotional materials provided to an issuer. Other
disclosures concerning the role of the underwriter and the
underwriter's compensation generally must be made when the underwriter
is engaged to perform underwriting services, for example, in an
engagement letter, not solely in a bond purchase agreement. Moreover,
conflicts disclosures must be made at the same time, except with regard
to conflicts discovered or arising after the underwriter has been
engaged. For example, a conflict may not be present until an
underwriter has recommended a particular financing. In that case, the
disclosure must be provided in sufficient time before the execution of
a contract with the underwriter to allow the official to evaluate the
recommendation, as described below in Section II (D) ``Required
Disclosures to Issuers''.
5. Acknowledgement of Disclosures
The Notice would require an underwriter to attempt to receive
written acknowledgement (other than by automatic email receipt) by the
official of the issuer of receipt of the foregoing disclosures. If the
official of the issuer agrees to proceed with the underwriting
engagement after receipt of the disclosures but will not provide
written acknowledgement of receipt, the underwriter may proceed with
the engagement after documenting with specificity why it was unable to
obtain such written acknowledgement.
C. Representations to Issuers
The Notice would require all representations made by underwriters
to issuers of municipal securities in connection with municipal
securities undertakings, whether written or oral, to be truthful and
accurate and not misrepresent or omit material facts. Underwriters must
have a reasonable basis for the representations and other material
information contained in documents they prepare and must refrain from
including representations or other information they know or should know
is inaccurate or misleading. For example, in connection with a
certificate signed by the underwriter that will be relied upon by the
issuer or other relevant parties to an underwriting, for example, an
issue price certificate, the dealer must have a reasonable basis for
the representations and other material information contained therein.
In addition, an underwriter's response to an issuer's request for
proposals or qualifications must fairly and accurately describe the
underwriter's capacity, resources, and knowledge to perform the
proposed underwriting as of the time the proposal is submitted and must
not contain any representations or other material information about
such capacity, resources, or knowledge that the underwriter knows or
should know to be inaccurate or misleading. Matters not within the
personal knowledge of those preparing the response, for example,
pending litigation, must be confirmed by those with knowledge of the
subject matter. An underwriter must not represent that it has the
requisite knowledge or expertise with respect to a particular financing
if the personnel that it intends to work on the financing do not have
the requisite knowledge or expertise.
D. Required Disclosures to Issuers
The Notice would require that disclosures be tailored to the
personnel of the issuer if knowledge or experience is lacking with a
particular type of structure. While many municipal securities are
issued using financing structures that are routine and well understood
by the typical municipal market professional, including most issuer
personnel that have the lead responsibilities in connection with the
issuance of municipal securities, the underwriter must provide
disclosures on the material aspects of structures when the underwriter
reasonably believes issuer personnel lacks knowledge or experience with
such structures that it recommends.
In cases where the issuer personnel responsible for the issuance of
municipal securities would not be well positioned to fully understand
or assess the implications of a financing in its totality, because the
financing is structured in an unique, atypical, or otherwise complex
manner, the underwriter in a negotiated offering that recommends such
complex financing has an obligation to make more particularized
disclosures than otherwise required in a routine financing.\9\ Examples
of complex financings include variable rate demand obligations and
financings involving derivatives such as swaps. The underwriter must
disclose the material financial characteristics of the complex
financing, as well as the material financial risks of the financing
that are known to the underwriter and reasonably foreseeable at the
time of the disclosure.\10\ The underwriter must also
[[Page 77868]]
disclose any incentives to recommend the financing and other associated
conflicts of interest.\11\ These disclosures must be made in a fair and
balanced manner based on principles of fair dealing and good faith.
---------------------------------------------------------------------------
\9\ The Notice would state that if a complex municipal
securities financing consists of an otherwise routine financing
structure that incorporates a unique, atypical or complex element
and the issuer personnel have knowledge or experience with respect
to the routine elements of the financing, the disclosure of material
risks and characteristics may be limited to those relating to such
specific element and any material impact such element may have on
other features that would normally be viewed as routine. See
proposed Notice endnote 6.
\10\ The Notice would provide an example that an underwriter
that recommends variable rate demand obligations should inform the
issuer of the risk of interest rate fluctuations and material risks
of any associated credit or liquidity facilities (for example, the
risk that the issuer might not be able to replace the facility upon
its expiration and might be required to repay the facility provider
over a short period of time). As an additional example, if the
underwriter recommends that the issuer swap the floating rate
interest payments on the variable rate demand obligations to fixed
rate payments under a swap, the underwriter must disclose the
material financial risks (including market, credit, operational, and
liquidity risks) and material financial characteristics of the
recommended swap (for example, the material economic terms of the
swap, the material terms relating to the operation of the swap, and
the material rights and obligations of the parties during the term
of the swap), as well as the material financial risks associated
with the variable rate demand obligation.
Such disclosure should be sufficient to allow the issuer to
assess the magnitude of its potential exposure as a result of the
complex municipal securities financing. The underwriter must also
inform the issuer that there may be accounting, legal, and other
risks associated with the swap and that the issuer should consult
with other professionals concerning such risks. If the underwriter's
affiliated swap dealer is proposed to be the executing swap dealer,
the underwriter may satisfy its disclosure obligation with respect
to the swap if such disclosure has been provided to the issuer by
the affiliated swap dealer or the issuer's swap or other financial
advisor that is independent of the underwriter and the swap dealer,
as long as the underwriter has a reasonable basis for belief in the
truthfulness and completeness of such disclosure. If the issuer
decides to enter into a swap with another dealer, the underwriter is
not required to make disclosures with regard to that swap. Dealers
that recommend swaps or security-based swaps to municipal entities
may also be subject to rules of the Commodity Futures Trading
Commission or those of the Commission. See proposed Notice endnote
7.
\11\ The Notice would provide an example that a conflict of
interest may exist when the underwriter is also the provider of a
swap used by an issuer to hedge a municipal securities offering or
when the underwriter receives compensation from a swap provider for
recommending the swap provider to the issuer. See proposed Notice
endnote 8.
---------------------------------------------------------------------------
The Notice would dictate that the level of required disclosure may
vary according to the issuer's knowledge or experience with the
proposed financing structure or similar structures, capability of
evaluating the risks of the recommended financing, and financial
ability to bear the risks of the recommended financing, in each case
based on the reasonable belief of the underwriter.\12\ In all events,
the underwriter must disclose any incentives for the underwriter to
recommend the complex municipal securities financing and other
associated conflicts of interest.
---------------------------------------------------------------------------
\12\ The Notice would state that even a financing in which the
interest rate is benchmarked to an index that is commonly used in
the municipal marketplace, such as LIBOR or SIFMA, may be complex to
an issuer that does not understand the components of that index or
its possible interaction with other indexes. See proposed Notice
endnote 9.
---------------------------------------------------------------------------
The Notice would require that this disclosure be made in writing to
an official of the issuer whom the underwriter reasonably believes has
the authority to bind the issuer by contract with the underwriter in
(A) sufficient time before the execution of a contract with the
underwriter to allow the official to evaluate the recommendation and
(B) a manner designed to make clear to such official the subject matter
of such disclosures and their implications for the issuer. The complex
financing disclosures must address the specific elements of the
financing and cannot be general in nature. Finally, the Notice would
require the underwriter to make additional efforts reasonably designed
to inform the official of the issuer if the underwriter does not
reasonably believe that the official is capable of independently
evaluating the disclosures.
E. Underwriter Duties in Connection With Issuer Disclosure Documents
The Notice would note that underwriters often play an important
role in assisting issuers in the preparation of disclosure documents,
such as preliminary official statements and official statements.\13\
These documents are critical to the municipal securities transaction,
in that investors rely on the representations contained in the
documents in making their investment decisions. Investment
professionals, such as municipal securities analysts and ratings
services, rely on the representations in forming an opinion regarding
the credit.
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\13\ The Notice would state that underwriters that assist
issuers in preparing official statements must remain cognizant of
the underwriters' duties under federal securities laws. With respect
to primary offerings of municipal securities, the SEC has noted,
``By participating in an offering, an underwriter makes an implied
recommendation about the securities.'' See Securities Exchange Act
Release No. 34-26100 (September 22, 1988), 53 FR 37778 (September
28, 1998) (proposing Exchange Act Rule 15c2-12) at text following
note 70. The SEC has stated that ``this recommendation itself
implies that the underwriter has a reasonable basis for belief in
the truthfulness and completeness of the key representations made in
any disclosure documents used in the offerings.'' Furthermore,
pursuant to SEC Rule 15c2-12(b)(5), an underwriter may not purchase
or sell municipal securities in most primary offerings unless the
underwriter has reasonably determined that the issuer or an
obligated person has entered into a written undertaking to provide
certain types of secondary market disclosure and has a reasonable
basis for relying on the accuracy of the issuer's ongoing disclosure
representations. Securities Exchange Act Release No. 34-34961
(November 17, 1994), 59 FR 59590 (November 10, 1994) (adopting
continuing disclosure provisions of Exchange Act Rule 15c2-12) at
text following note 52. See proposed Notice endnote 10.
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The Notice would provide that a dealer's duty to have a reasonable
basis for the representations it makes, and other material information
it provides, to an issuer and to ensure that such representations and
information are accurate and not misleading extends to representations
and information provided by the underwriter in connection with the
preparation by the issuer of its disclosure documents, for example,
cash flows.
F. Underwriter Compensation and New Issue Pricing
1. Excessive Compensation
The Notice states that an underwriter's compensation for a new
issue (including both direct compensation paid by the issuer and other
separate payments, values, or credits received by the underwriter from
the issuer or any other party in connection with the underwriting), in
certain cases and depending upon the specific facts and circumstances
of the offering, may be so disproportionate to the nature of the
underwriting and related services performed as to constitute an unfair
practice with regard to the issuer that it is a violation of MSRB Rule
G-17. The Notice would look at factors such as the credit quality of
the issue, the size of the issue, market conditions, the length of time
spent structuring the issue, and whether the underwriter is paying the
fee of the underwriter's counsel or any other relevant costs related to
the financing.
2. Fair Pricing
The Notice states that the duty of fair dealing under MSRB Rule G-
17 includes an implied representation that the price an underwriter
pays to an issuer is fair and reasonable, taking into consideration all
relevant factors, including the best judgment of the underwriter as to
the fair market value of the issue at the time it is priced.\14\ In
general, a dealer purchasing bonds in a competitive underwriting for
which the issuer may reject any and all bids will be deemed to have
satisfied its duty of fairness to the issuer with respect to the
purchase price of the issue as long as the dealer's bid is a bona fide
bid as defined in MSRB Rule G-13 \15\ that is based on the dealer's
best judgment of
[[Page 77869]]
the fair market value of the securities that are the subject of the
bid.
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\14\ The Notice would state that the MSRB has previously
observed that whether an underwriter has dealt fairly with an issuer
for purposes of MSRB Rule G-17 is dependent upon all of the facts
and circumstances of an underwriting and is not dependent solely on
the price of the issue. The Notice refers to MSRB Notice 2009-54 and
Rule G-17 Interpretive Letter--Purchase of new issue from issuer,
MSRB interpretation of December 1, 1997. See proposed Notice endnote
11.
\15\ The Notice would refer to MSRB Rule G-13(b)(iii), which
provides: ``For purposes of subparagraph (i), a quotation shall be
deemed to represent a ``bona fide bid for, or offer of, municipal
securities'' if the broker, dealer or municipal securities dealer
making the quotation is prepared to purchase or sell the security
which is the subject of the quotation at the price stated in the
quotation and under such conditions, if any, as are specified at the
time the quotation is made.'' See proposed Notice endnote 12.
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In a negotiated underwriting, the underwriter has a duty under MSRB
Rule G-17 to negotiate in good faith with the issuer. This duty would
include the obligation of the dealer to ensure the accuracy of
representations made during the course of such negotiations, including
representations regarding the price negotiated and the nature of
investor demand for the securities, for example, the status of the
order period and the order book. If, for example, the dealer represents
to the issuer that it is providing the ``best'' market price available
on the new issue, or that it will exert its best efforts to obtain the
``most favorable'' pricing, the dealer may violate MSRB Rule G-17 if
its actions are inconsistent with such representations.\16\
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\16\ The Notice would refer to Rule G-17 Interpretive Letter--
Purchase of new issue from issuer, MSRB interpretation of December
1, 1997. See proposed Notice endnote 13.
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G. Conflicts of Interest
1. Payments To or From Third Parties
The Notice would state that in certain cases, compensation received
by the underwriter from third parties, such as the providers of
derivatives and investments (including affiliates of the underwriters),
may color the underwriter's judgment and cause it to recommend
products, structures, and pricing levels to an issuer when it would not
have done so absent such payments. The MSRB would view the failure of
an underwriter to disclose to the issuer the existence of payments,
values, or credits received by the underwriter in connection with its
underwriting of the new issue from parties other than the issuer, and
payments made by the underwriter in connection with such new issue to
parties other than the issuer (in either case including payments,
values, or credits that relate directly or indirectly to collateral
transactions integrally related to the issue being underwritten), to be
a violation of the underwriter's obligation to the issuer under MSRB
Rule G-17.
For example, the MSRB would consider it to be a violation of MSRB
Rule G-17 for an underwriter to compensate an undisclosed third party
in order to secure municipal securities business. Similarly, the MSRB
would consider it to be a violation of MSRB Rule G-17 for an
underwriter to receive undisclosed compensation from a third party in
exchange for recommending that third party's services or products to an
issuer, including business related to municipal securities derivative
transactions. The Notice does not require that the amount of such third
party payments be disclosed.
In addition, the underwriter must disclose to the issuer whether
the underwriter has entered into any third-party arrangements for the
marketing of the issuer's securities.
2. Profit-Sharing With Investors
The Notice would state that arrangements between the underwriter
and an investor purchasing new issue securities from the underwriter
(including purchases that are contingent upon the delivery by the
issuer to the underwriter of the securities) according to which profits
realized from the resale by such investor of the securities are
directly or indirectly split or otherwise shared with the underwriter
would, depending on the facts and circumstances (including, in
particular, if such resale occurs reasonably close in time to the
original sale by the underwriter to the investor), constitute a
violation of the underwriter's fair dealing obligation under MSRB Rule
G-17. Such arrangements could also constitute a violation of MSRB Rule
G-25(c), which precludes a dealer from sharing, directly or indirectly,
in the profits or losses of a transaction in municipal securities with
or for a customer.\17\
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\17\ MSRB Rule D-9 defines the term ``customer'' as: ``Except as
otherwise specifically provided by rule of the Board, the term
``Customer'' shall mean any person other than a broker, dealer, or
municipal securities dealer acting in its capacity as such or an
issuer in transactions involving the sale by the issuer of a new
issue of its securities.''
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3. Credit Default Swaps
The issuance or purchase by a dealer of credit default swaps for
which the reference is the issuer for which the dealer is serving as
underwriter, or an obligation of that issuer, may pose a conflict of
interest, because trading in such municipal credit default swaps has
the potential to affect the pricing of the underlying reference
obligations, as well as the pricing of other obligations brought to
market by that issuer. The Notice would require a dealer to disclose
the fact that it engages in such activities to the issuers for which
the dealer serves as underwriter.
The Notice would not require disclosures for activities with regard
to credit default swaps based on baskets or indexes of municipal
issuers that include the issuer or its obligations, unless the issuer
or its obligations represents more than 2% of the total notional amount
of the credit default swap or the underwriter otherwise caused the
issuer or its obligations to be included in the basket or index.
H. Retail Order Periods
The Notice would require an underwriter that has agreed to
underwrite a transaction with a retail order period to honor such
agreement.\18\ The Notice would require a dealer that wishes to
allocate securities in a manner that is inconsistent with an issuer's
requirements to obtain the issuer's consent.
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\18\ The Notice refers to MSRB Interpretation on Priority of
Orders for Securities in a Primary Offering under Rule G-17, MSRB
interpretation of October 12, 2010, reprinted in the MSRB Rule Book.
The Notice would remind underwriters of previous MSRB guidance on
the pricing of securities sold to retail investors and refer to
Guidance on Disclosure and Other Sales Practice Obligations to
Individual and Other Retail Investors in Municipal Securities, MSRB
Notice 2009-42 (July 14, 2009). See proposed Notice endnote 15.
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The Notice would require an underwriter that has agreed to
underwrite a transaction with a retail order period to take reasonable
measures to ensure that retail clients are bona fide. An underwriter
that knowingly accepts an order that has been framed as a retail order
when it is not, for example, a number of small orders placed by an
institutional investor that would otherwise not qualify as a retail
customer, would violate MSRB Rule G-17 if its actions are inconsistent
with the issuer's expectations regarding retail orders. Moreover, a
dealer that places an order that is framed as a qualifying retail order
but in fact represents an order that does not meet the qualification
requirements to be treated as a retail order, for example, an order by
a retail dealer without ``going away'' orders \19\ from retail
customers when such orders are not within the issuer's definition of
``retail,'' would violate its MSRB Rule G-17 duty of fair dealing.
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\19\ The Notice would state that a ``going away'' order is an
order for new issue securities for which a customer is already
conditionally committed and cites Securities Exchange Act Release
No. 62715 (August 13, 2010), 75 FR 51128 (August 18, 2010) (File No.
SR-MSRB-2009-17). See proposed Notice endnote 16.
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The Notice specifies that the MSRB will continue to review
activities relating to retail order periods to ensure that they are
conducted in a fair and orderly manner consistent with the intent of
the issuer and the MSRB's investor protection mandate.
I. Dealer Payments to Issuer Personnel
The Notice would state that dealers are reminded of the application
of MSRB Rule G-20 on gifts, gratuities, and non-cash compensation, and
MSRB Rule G-17, in connection with certain
[[Page 77870]]
payments made to, and expenses reimbursed for, issuer personnel during
the municipal bond issuance process.\20\ The Notice would further state
that the rules are designed to avoid conflicts of interest and to
promote fair practices in the municipal securities market.
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\20\ The Notice would cite to MSRB Rule G-20 Interpretation--
Dealer Payments in Connection With the Municipal Securities Issuance
Process, MSRB interpretation of January 29, 2007, reprinted in the
MSRB Rule Book. See proposed Notice endnote 17.
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The Notice would alert dealers to consider carefully whether
payments they make in regard to expenses of issuer personnel in the
course of the bond issuance process, including in particular, but not
limited to, payments for which dealers seek reimbursement from bond
proceeds or issuers, comport with the requirements of MSRB Rule G-20.
For example, the Notice provides that a dealer acting as a financial
advisor or underwriter may violate MSRB Rule G-20 by paying for
excessive or lavish travel, meal, lodging and entertainment expenses in
connection with an offering such as may be incurred for rating agency
trips, bond closing dinners, and other functions, that inure to the
personal benefit of issuer personnel and that exceed the limits or
otherwise violate the requirements of the rule.\21\
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\21\ The Notice cites to In the Matter of RBC Capital Markets
Corporation, SEC Rel. No. 34-59439 (Feb. 24, 2009) (settlement in
connection with broker-dealer alleged to have violated MSRB Rules G-
20 and G-17 for payment of lavish travel and entertainment expenses
of city officials and their families associated with rating agency
trips, which expenditures were subsequently reimbursed from bond
proceeds as costs of issuance); In the Matter of Merchant Capital,
L.L.C., SEC Rel. No. 34-60043 (June 4, 2009) (settlement in
connection with broker-dealer alleged to have violated MSRB rules
for payment of travel and entertainment expenses of family and
friends of senior officials of issuer and reimbursement of the
expenses from issuers and from proceeds of bond offerings). See
proposed Notice endnote 18.
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III. Comment Letters and the MSRB's Responses
As noted earlier, the Commission received five comments \22\ on the
proposed rule change as originally proposed and eight comments \23\ on
the proposed rule change, as modified by Amendment No. 2.\24\ The MSRB
filed two letters responding to the comments.\25\ A summary of the
comments and the MSRB's responses are set forth below.
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\22\ See supra note 4.
\23\ See supra note 7.
\24\ One commenter stated that the amended Notice is a
significant improvement over the original Notice. See PFM Letter.
Another commenter stated that it supports the changes made in the
Notice, as modified by Amendment No. 2, such as the limits on
negotiated offerings, disclosures based on reasonable beliefs, and
nondisclosure of third-party payment amounts. See GFOA Letter II.
\25\ See supra notes 5 and 7.
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A. Basic Fair Dealing Principle
Commenters generally supported the principle of fair dealing in
MSRB Rule G-17,\26\ but some commenters believed that the principle of
fair dealing should not be interpreted to impose a fiduciary duty on
underwriters to issuers,\27\ while other commenters believed that
underwriters have such a duty if they engage in certain activities.\28\
In Response Letter I, the MSRB responded that the Notice does not
impose a fiduciary duty on underwriters and that the duties imposed by
the Notice on underwriters are no different in many cases from the
duties already imposed on them by MSRB rules with respect to customers.
Further, the MSRB stated that an underwriter is not required to act in
the best interest of an issuer without regard to the underwriter's own
financial and other interests and is not required to consider all
reasonably feasible alternatives to the proposed financings. Rather,
the MSRB stated that one purpose of the Notice is to eliminate issuer
confusion about the role of the underwriter.
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\26\ See SIFMA Letter I.
\27\ See SIFMA Letter I; NAIPFA Letter I; BDA Letter I. Both
NAIPFA Letter I and BDA Letter I noted that the imposition of a
fiduciary duty would confuse municipal issuers on the role of
underwriters. One commenter disagreed with the imposition of a
fiduciary duty and noted that municipal issuers often do not
understand the disclosures that they are provided and municipal
issuers do not benefit from complex disclosures from firms that are
not acting in a fiduciary capacity. See WM Letter I (stating its
belief that the proposal will not improve transparency in the
municipal market).
\28\ See, e.g., PFM Letter. The commenter stated that advice
given by brokers in their promotion of themselves to become
underwriters makes them municipal advisors.
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B. Role of the Underwriter/Conflicts of Interest
1. Disclosures Concerning the Underwriter's Role
Some commenters suggested additional disclosures with respect to
the role of underwriters.\29\ For example, commenters suggested that
the MSRB require an underwriter to state: (1) That the underwriter does
not have a fiduciary duty to the issuer and is a counterparty at arm's
length; \30\ (2) that the issuer may choose to engage a financial
advisor to represent its interests; \31\ (3) that the underwriter is
not acting as an advisor; \32\ (4) that the underwriter has conflicts
with issuers because the underwriter represents the interests of
investors and other parties; \33\ (5) that the underwriter seeks to
maximize profitability; \34\ and (6) that the underwriter has no
continuing obligation to the issuer after the transaction.\35\
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\29\ One commenter stated that it supports the proposal but
believes that additional changes would be required to protect
infrequent and/or small and unsophisticated issuers. See NAIPFA
Letter I.
\30\ See GFOA Letter I and NAIPFA Letter I. One commenter stated
its belief that a simple disclosure from an underwriter to the
issuer that the underwriter is not acting as financial advisor and
that the issuer should consult with a financial advisor would be
sufficient. See WM Letter I.
\31\ See GFOA Letter I and NAIPFA Letter I (requesting a
disclosure that an underwriter is no replacement for a municipal
advisor and stating that when an issuer engages a municipal advisor,
the underwriter disclosures should not overlap with areas covered by
the role of municipal advisor). Other commenters stated their belief
that in a negotiated sale, when the issuer of municipal securities
engages a registered municipal advisor, disclosures should be
reduced. See NAIPFA Letter II; SIFMA Letter II; and WM Letter II
(stating that the exemption from some of the disclosures required by
the rule for underwriters engaged in a competitive sale should be
extended to all transactions in which a financial advisor has been
retained). In Response Letter II, the MSRB noted its disagreement
because it believes that more disclosure would empower, rather than
confuse, issuers.
\32\ See NAIPFA Letter I.
\33\ See NAIPFA Letter I. One commenter objected to the required
disclosure that an underwriter must balance a fair and reasonable
price for issuers with a fair and reasonable price for investors.
See BDA Letter II. The commenter stated its belief that there exists
a reasonable price for both issuers and investors, and recommended
that the disclosure be modified to reflect that statement. In
Response Letter II, the MSRB stated its belief that it is
appropriate to characterize the underwriter's duties of fair pricing
as a balance between the interests of the issuer and investors.
\34\ See NAIPFA Letter I.
\35\ See NAIPFA Letter I.
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In Response Letter I, the MSRB noted that the Notice, as modified
by Amendment No. 2, incorporates many of the recommendations suggested
by the commenters, such as requiring underwriters to provide issuers
with disclosure that underwriters do not have a fiduciary duty to
issuers. In addition, the MSRB noted that the Notice, as modified by
Amendment No. 2, requires disclosure regarding the underwriter's role
compared to a municipal advisor,\36\ and prohibits an underwriter from
recommending that the issuer not retain a municipal advisor.\37\ The
MSRB also
[[Page 77871]]
stated that it does not believe that it is necessary for underwriters
to disclose that they seek to maximize profitability and have no
continuing obligation to the issuer after the transaction.
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\36\ One commenter stated that the requirement for an
underwriter to compare its obligations with others, such as a
municipal advisor, should be eliminated. See BDA Letter II. In
Response Letter II, the MSRB noted that it has determined to take
the approach suggested by another commenter (GFOA) and, therefore,
has not changed this provision of the proposal but will monitor
disclosure practices under the proposal and will engage in a
dialogue with industry participants and the Commission to determine
whether sufficient improvements have occurred in the flow of
disclosures to decision-making personnel of issuers or whether
additional steps should be taken.
\37\ One commenter agreed with the MSRB that an underwriter
should not recommend that an issuer not retain a municipal advisor.
See BDA Letter II. However, the commenter stated that it is
concerned that municipal advisors are not subject to professional
standards, continuing education, licensing or other requirements, or
a prohibition against making political contributions.
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One commenter suggested that the MSRB require underwriters to
disclose pending litigation that may affect the underwriter's municipal
securities business, departure of experts that the issuer relied upon,
and transactional risk including a comparison of different forms of
financings.\38\ In Response Letter I, the MSRB disagreed that
underwriters should disclose different types of financings that may be
applicable to an issuer's particular situation because that is under
the domain of the municipal advisor, and noted that pending litigation
and expert departures do not rise to the level of conflicts, but could
be required by issuers as the issuers deem appropriate.
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\38\ See GFOA Letter I. See also GFOA Letter II.
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One commenter stated its belief that the Notice should require
underwriters to educate issuers to better understand underwriting
pricing and fees.\39\ In Response Letter I, the MSRB noted it is in the
process of developing education materials for issuers as suggested by
the commenter.
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\39\ See GFOA Letter I.
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Another commenter stated that underwriters should not be required
to provide generalized role and compensation disclosures or written
risk disclosures to large and frequent issuers unless requested by such
issuers.\40\ In Response Letter II, the MSRB noted its disagreement and
stated its belief that additional disclosure would empower, rather than
confuse, issuers and, therefore, no further modifications to these
provisions are warranted.
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\40\ See SIFMA Letter II.
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2. Disclosure Concerning the Underwriter's Compensation
One commenter requested additional conflicts of interest
disclosures regarding underwriter compensation, such as how the
underwriter is compensated.\41\ In Response Letter I, the MSRB stated
that it believes that the Notice, as modified by Amendment No. 2, would
incorporate the commenter's recommendation, such as disclosure
regarding contingent fee compensation as a conflict of interest.
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\41\ See GFOA Letter I.
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Another commenter stated its belief that the underwriter should be
required to disclose to an issuer, and obtain its informed consent in
writing, that the form of the underwriter's compensation creates a
conflict of interest, because underwriter compensation is based
primarily on the size and type of issuance.\42\ The commenter later
stated that contingent fees should be disclosed.\43\ Another commenter
objected to the characterization of contingent fee arrangements as
resulting in a conflict of interest with issuers.\44\ The commenter
stated that such arrangements do not necessarily result in a conflict,
and recommended that disclosure should state that such disclosure
``may'' present a conflict or ``may have'' the potential for a
conflict.\45\
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\42\ See NAIPFA Letter I.
\43\ See NAIPFA Letter II.
\44\ See BDA Letter II.
\45\ See id.
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In Response Letter II, the MSRB stated that it believes that it has
accurately characterized compensation arrangements contingent on
closing or on the size of the transactions as creating a conflict of
interest--it may be that other factors on which an underwriter and the
issuer have a coincidence of interests may outweigh the conflicting
interests resulting from the contingent arrangement, but that does not
change the fact that such arrangement itself represents a conflict.
Further, given the transaction-based nature of the typical relationship
between underwriters and issuers, the MSRB stated that it believes that
the proposal's requirements regarding disclosure of compensation
conflicts, together with the other conflicts disclosures included in
the proposal, adequately address concerns that may arise in cases where
potential conflicts may arise under less typical compensation
scenarios.
One commenter stated that it would be more beneficial to issuers to
require underwriters to disclose the amount of compensation at the
outset and conclusion of the transaction.\46\ In Response Letter II,
the MSRB stated that the provisions relating to these disclosures are
appropriate given the transaction-based nature of the typical
relationship between underwriters and issuers. The MSRB stated its
belief that the proposal's requirements regarding disclosure of
compensation conflicts, together with the other conflicts disclosures
included in the proposal, adequately address concerns that may arise in
cases where potential conflicts may arise under less typical
compensation scenarios.
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\46\ See NAIPFA Letter II.
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3. Other Conflicts Disclosures
One commenter requested additional conflicts of interest
disclosures such as the duty the underwriter has to investors.\47\ In
Response Letter I, the MSRB stated that it believes that the Notice, as
modified by Amendment No. 2, would incorporate the commenter's
recommendation, such as by requiring disclosure of an underwriter's
other actual or potential material conflicts of interest.
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\47\ See GFOA Letter I.
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One commenter stated that when there is a syndicate of
underwriters, an underwriter whose participation level is below 10%
should be exempted from the disclosure requirements.\48\ Another
commenter stated that, with respect to underwriter syndicates,
underwriters who do not have a role in the development or
implementation of the financing structure or other aspects of the issue
should not be subject to the disclosures.\49\ In Response Letter II,
the MSRB declined to create any such exemption since not all conflicts
or other concerns that arise in the context of an underwriting are
necessarily proportionate to the size of participation of an
underwriter. The MSRB noted, however, that with respect to disclosures
about the material financial characteristics and risks of an
underwriting transaction recommended by underwriters, where such
recommendation is made by the syndicate manager on behalf of the
underwriting syndicate, the Notice does not prohibit syndicate members
from delegating to the syndicate manager (through, for example, the
agreement among underwriters) the task of delivering such disclosure in
a full and timely manner on behalf of the syndicate members, although
each syndicate member would remain responsible for providing
disclosures with respect to conflicts specific to such member.
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\48\ See SIFMA Letter II.
\49\ See BDA Letter II.
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4. Timing and Manner of Disclosures
With respect to the disclosure process, one commenter stated its
belief that underwriters should be subject to a process similar to the
proposed municipal advisors' more rigorous process under the municipal
advisor portion of proposed MSRB Rules G-17 and G-36.\50\ The commenter
stated its
[[Page 77872]]
belief that providing disclosures is inadequate; rather, underwriters
should be required to obtain informed consent from issuers. Moreover,
the commenter stated its belief that disclosures should be made to
officials of the municipal entity with the power to bind the
issuer.\51\ The commenter also stated that the Notice should be amended
to prohibit the giving of disclosures based on a reasonable belief
standard and instead require underwriters to have actual knowledge
whether an official has the power to bind the issuer by contract.
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\50\ See NAIPFA Letter I. The Commission notes that these
proposals were subsequently withdrawn by the MSRB. See Securities
Exchange Act Release Nos. 65397 (September 26, 2011), 76 FR 60955
(September 30, 2011) (withdrawing proposed MSRB Rule G-36 and
interpretive guidance concerning MSRB Rule G-36); and 65398
(September 26, 2011), 76 FR 60958 (September 30, 2011) (withdrawing
proposed interpretive notice concerning MSRB Rule G-17).
\51\ See NAIPFA Letter I and NAIPFA Letter II.
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In Response Letter I, the MSRB stated that it believes that it is
not necessary for underwriters to obtain consent from the issuer's
governing body when the issuer finance officials have been delegated
the ability to contract with the underwriter. The MSRB stated that it
is not necessary for a contract to have been executed in order for an
underwriter to have a reasonable belief that an issuer official has the
requisite power to bind the issuer.
Another commenter stated its belief that disclosure should be made
to an official that the underwriter reasonably believes ``has or will
have'' the requisite authority, instead of the standard that the
underwriter believes ``has'' the authority to bind the issuer by
contract.\52\ The commenter stated that due to the nature of these
transactions, at the time of disclosures, there may not be an official
with such authority as the authority may not be granted until later. In
Response Letter II, the MSRB noted that an official, such as a finance
director, who is expected to receive the delegation of authority from
the governing body to bind the issuer could reasonably be viewed as an
acceptable recipient of disclosures for purposes of the proposal so
long as such expectation remains reasonable.
---------------------------------------------------------------------------
\52\ See BDA Letter II.
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Another commenter stated that the Notice should state that the
disclosure must be made in a response to a request for proposals or in
promotional materials provided to an issuer, rather than the proposed
``at the earliest stages'' standard, because the commenter believes
that the proposed standard is vague and ambiguous.\53\ Another
commenter requested clarification regarding the meaning of ``execution
of a contract'' with respect to the timing of the required risk
disclosures.\54\ The commenter stated that execution of the purchase
agreement should be the appropriate measurement. In Response Letter II,
the MSRB clarified that, other than the disclosure with regard to the
arm's-length nature of the relationship, the remaining disclosures
regarding the underwriter's role, underwriter's compensation and other
conflicts of interest all must be provided when the underwriter is
engaged to perform underwriting services (such as in an engagement
letter), not solely in the bond purchase agreement.
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\53\ See id.
\54\ See SIFMA Letter II. The same commenter also requested
clarification in situations where the financing terms are determined
in a short period of time, such as within a 24-hour window, and how
underwriters would satisfy the disclosure requirements. In Response
Letter II, the MSRB stated that the timeframe set out in the
proposal, which matches the timeframe for this same disclosure under
guidance provided in connection with recent amendments to MSRB Rule
G-23, on activities of financial advisors, is appropriate and should
not be changed.
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One commenter suggested that the underwriter make its disclosures
to the issuer, in plain English, to ensure that the issuer understands
such disclosures.\55\ In Response Letter II, the MSRB stated that it
agrees that reasonable efforts must be made to make the disclosures
understandable, that disclosures must be made in a fair and balanced
manner and, if the underwriter does not reasonably believe that the
official to whom the disclosures are addressed is capable of
independently evaluating the disclosures, the underwriter must make
additional efforts reasonably designed to inform the issuer or its
employees or agent.
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\55\ See GFOA Letter II.
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One commenter stated that it remains concerned that to provide
disclosure to an official of the issuer that the underwriter reasonably
believes has authority to bind the issuer would not provide the issuer
with sufficient knowledge of any existing conflicts.\56\ The commenter
recommended that underwriters make disclosure to the issuer's governing
body and require underwriters to have actual knowledge, instead of a
reasonable belief knowledge standard, as to whether the official being
presented with disclosures has the power to bind the issuer by
contract. In Response Letter II, the MSRB responded that underwriters
must document the failure to receive acknowledgement, as well as what
actions were taken to attempt to obtain the acknowledgement, in order
for the underwriter to fulfill its obligation to document why it was
unable to obtain the acknowledgement.
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\56\ See NAIPFA Letter II.
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5. Acknowledgement of Disclosures
One commenter stated its belief that the provision of the Notice
requiring issuer written acknowledgement of disclosures would be
helpful, but in situations where written acknowledgement is not
received from the issuer, the commenter urged the MSRB to require
underwriters to put forth some level of effort to obtain the written
acknowledgement of the issuer.\57\ Another commenter stated that it
believes that an underwriter should not be required to document why an
official of the issuer does not acknowledge in writing that disclosures
were received.\58\ Instead, the commenter recommended that the Notice
require the underwriter to document that disclosures were made and
whether acknowledgement was received.
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\57\ See NAIPFA Letter I.
\58\ See BDA Letter II.
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In Response Letter II, the MSRB clarified that if an issuer does
not provide the underwriter with a written acknowledgement of receipt
of disclosures, the failure to receive such acknowledgement must be
documented, as well as what actions were taken to attempt to obtain the
acknowledgement, in order for the underwriter to fulfill its obligation
to document why it was unable to obtain the acknowledgement.
C. Representations to Issuers
Under the Notice, an underwriter would be required to have a
reasonable basis for providing representations and material information
in a certificate that will be relied upon by the municipal entity
issuer or other relevant parties to an underwriting. One commenter
stated that one example of such a certificate used by the MSRB in the
Notice is already regulated by tax laws and does not need additional
regulation by the MSRB.\59\ In Response Letter I, the MSRB stated that
it does not believe the disclosure requirement imposes an additional
regulatory burden on underwriters.
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\59\ See SIFMA Letter I.
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D. Required Disclosures to Issuers
One commenter stated that the disclosure requirements, especially
for routine transactions, should only be imposed when the underwriter
has reason to believe that the issuer does not have the knowledge or
experience available to understand the transaction.\60\ Moreover, the
commenter
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stated that the proposal should be clarified as to when the underwriter
is required to provide disclosures on the material aspects of the
financing structures. The commenter also noted that ``issuer personnel
responsible for the issuance of municipal securities'' and ``an
official of the issuer whom the underwriter reasonably believes has the
authority to bind the issuer by contract with the underwriter'' are not
the same.\61\ Thus, the commenter stated its belief that clarification
should be provided that these regulatory requirements are imposed on
the underwriter only if the underwriter has reason to believe that
issuer personnel do not have the requisite knowledge or experience,
regardless of whether the particular official that the underwriter
reasonably believes to have the legal authority to contractually bind
the issuer can be reasonably thought to have the requisite knowledge
and experience. Another commenter stated that the Notice should be
amended to take into consideration the needs of unsophisticated
municipal issuers, and underwriters should be required to assess the
knowledge and understanding of municipal issuers on a case-by-case
basis.\62\ In Response Letter I, the MSRB stated that it does not
consider it unreasonable to require that an underwriter evaluate the
level of knowledge and sophistication of the issuer, particularly
considering that under the Notice, as amended by Amendment No. 2, the
underwriter need only have a reasonable basis for its evaluation.
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\60\ See BDA Letter I. One commenter suggested factors to
determine routine financings when disclosures would not be
necessary. See NAIPFA Letter I. In Response Letter I, the MSRB
stated that while the factors are helpful, they do not address the
particular issuer personnel's experience and knowledge, which are
more relevant to the Notice. The MSRB stated that it would take the
comment under advisement. Another commenter stated that in a routine
financing, the Notice should require an underwriter to disclose, in
writing, information regarding the transaction, should the issuer
make such a request. See GFOA Letter II. The commenter stated that
additional information on routine financings would be helpful. In
Response Letter II, the MSRB stated its