The Municipal Securities Rulemaking Board Establishes New Procedures for Underwriters of State and Local Government Bonds

by Saul Ewing Arnstein & Lehr LLP


The Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board's notice on the application of MSRB Rule G-17 regarding the disclosure of certain information to state and local government clients by underwriters.

On May 4, 2012, the Securities and Exchange Commission approved the Municipal Securities Rulemaking Board's (the "MSRB") proposed interpretive notice on the application of MSRB Rule G-17 ("Rule G-17") to underwriters of municipal securities (the "Notice"). The Notice focuses on dealers acting in the capacity of underwriters in certain municipal securities transactions involving state and local governments. Except where a competitive underwriting is specifically mentioned, the Notice applies to negotiated underwritings only.

The disclosures discussed in the Notice are effective on August 2, 2012 and provide the following specific examples of how underwriters must fulfill their obligation under Rule G-17 to deal fairly with all persons and not engage in any deceptive, dishonest or unfair practice:

  • An underwriter is required to provide disclosures as to its role, its compensation and any actual or potential material conflicts of interest. The underwriter must not recommend that the issuer not retain a municipal advisor.
  • All representations made by underwriters to state and local governments must be truthful and accurate and may not misrepresent or omit material facts.
  • Underwriters of municipal bond issues that recommend complex municipal securities transactions (such as variable rate demand obligations) or products (such as swaps) are required to disclose all material financial risks and characteristics, incentives and conflicts of interest regarding the transactions or products. The disclosures concerning a complex municipal securities financing must address the specific elements of the financing, rather than being general in nature.
  • An underwriter's duty to have a reasonable basis for the representations it makes to a state or local government extends to representations made in connection with the preparation by the state or local government of its disclosure documents (preliminary official statements and official statements).
  • There is an implied representation that the price an underwriter is paid by a state or local government is fair and reasonable, taking into consideration all relevant factors. 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 Rule G-13).
  • Underwriters are required to disclose potential conflicts of interest, including the existence of third-party payments, values or credits made or received, profit-sharing arrangements with investors, and the issuance or purchase of credit default swaps for which the underlying reference is the state or local government whose securities are being underwritten.
  • Underwriters should keep in mind the state and local governments' rules for retail order periods and underwriters should not accept or place orders that do not satisfy the state and local governments' definitions of "retail."

Pursuant to the Notice, the disclosures discussed above must be made in writing to an official of the issuer that the underwriter reasonably believes has the authority to bind the issuer by contract. The underwriter must attempt to receive written acknowledgement by the official of the issuer of receipt of the 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.

The rules discussed in the Notice, and described in this Alert, include explicit and expanded requirements for underwriters. The MSRB chair has described the new rules as the "biggest development in protection of the financial interests of state and local governments since the MSRB was established in 1975." For more information on the Notice please contact George T. Magnatta (215.972.7126,, Chair of the Public Finance Practice of Saul Ewing LLP, or any other member of the Saul Ewing LLP Public Finance Practice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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