Implementation Guidance Issued for Municipal Bond Underwriters on Extensive New Written Disclosures Required for State and Local Governments

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[authors: Paul S. Maco, Shawn W. Cloonan, and Patrick K. Craine]

An update to our client alert on May 9, 2012

"How To" Guidance from the Regulators at the MSRB

The Municipal Securities Rulemaking Board, a body created by Congress to regulate the brokers and dealers who buy and sell bonds issued by state and local governments, now interprets its "fair dealing rule," Rule G-17, to require underwriters of a bond issue to make specific disclosures in writing to an official of the state or local government issuing the bonds before the sale of the bonds. As we described in our prior alert, the interpretation does not cover the obligations of underwriters to obligated persons and it only applies to negotiated sales, not competitively bid transactions unless specifically mentioned. Finally it applies to members of an underwriting syndicate, but not selling group members.

Now, the MSRB has issued the 15 page Guidance to Underwriters on Implementation of New Obligations to State and Local Governments1 (the Implementation Guidance) and published a four-part Webinar on Interpretive Notice to MSRB Rule G-17,  in addition to the Notice described in our previous client alert.

Transition Guidance and the August 2,  2011 Effective Date

The Notice is effective Thursday August 2, 2012. For transactions with schedules that straddle the effective date, the reference point is the day the bond purchase agreement is signed. If a bond purchase agreement is signed before August 2, 2012 and no material terms of the financing remain to be negotiated after August 2, 2012, the specific disclosures are not yet required to be given. If the bond purchase agreement is signed on or after that date, the specific disclosures identified by the guidance must be provided. The MSRB has provided transition guidance for transactions surrounding the effective date.

Mission to Protect State and Local Governments

While the MSRB had interpreted Rule G-17 to require underwriters to treat issuers fairly as early as 1997, the Dodd-Frank Act amended the statute creating the MSRB to expressly direct it to protect municipal entities and regulate Municipal Advisors. The Notice is part of the MSRB’s new mission to protect State and local governments and intends to (1) clarify the relationship of an underwriter to its clients; (2) create affirmative obligations for underwriters to issuers; and (3) require an underwriter to disclose important information to an issuer to help the issuer assess proposed financial transactions before they are pursued.

The MSRB states it has published the Implementation Guidance to assist dealers in revising their written supervisory procedures, as required by MSRB Rule G-27(c) as part of their overall supervisory systems, to ensure continued full compliance with their fair practice obligations under Rule G-17 on and after August 2, 2012, and to clarify certain aspects of the Notice.  

Reminder to Update Written Supervisory Procedures

Although the MSRB states it intends the Implementation Guidance to assist dealers in revising their written supervisory procedures,  it provides no specific instruction on revisions. It does present a summary of "the key provisions of the Notice in the context of broader dealer regulatory responsibilities" and provide comments throughout, identified as " 'practical considerations' on the manner in which the MSRB expects the provisions of the Notice to be implemented by dealers."  As to supervisory procedures, it simply states:

Under MSRB Rule G-27(b), each dealer is required to establish and maintain a system, including written supervisory procedures, to supervise the municipal securities activities of each registered representative, registered principal and associated person that is reasonably designed to achieve compliance with applicable MSRB rules, as well as with other securities laws and regulations applicable to the dealer’s municipal securities activities. Thus, each dealer’s written supervisory procedures must, among other things, establish procedures for monitoring compliance with all applicable rules and supervising the municipal securities representative activities of the dealer’s associated persons as required under Rule G-27(c)(i)(A). These supervisory procedures must be tested and verified by the dealer through appropriate supervisory control policies and procedures pursuant to Rule G-27(f). Dealers are reminded to update their written supervisory procedures to reflect the provisions of the Notice and to provide appropriate training to ensure compliance with such revised procedures.

Additional Guidance from Industry Groups

Additional guidance is available from two organizations representing municipal dealers and underwriters, the Securities Industry and Financial Markets Association (SIFMA) and Bond Dealers of America, each of which has prepared detailed guidance and forms for use by underwriters. The materials are accessible to members of each organizations on their respective websites.

The Implementation Guidance is available through the following link: http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2012/2012-38.aspx

The MSRB Webinar is available through the following link: Available at: http://www.msrb.org/News-and-Events/Past-Webinars/Rule-G-17-Webinar.aspx

For questions about regulatory compliance or SEC and FINRA enforcement of the interpretation and MSRB and SEC Rules generally, please contact Paul Maco or Patrick Craine.