[authors: John C. Grugan, Bradley D. Patterson, Tesia N. Stanley]

Effective today, underwriters are subject to newly adopted Municipal Securities Rulemaking Board (MSRB) regulations governing “fair dealing” under MSRB Rule G-17. The MSRB’s new Rule G-17 interpretation specifically identifies conduct that violates fair dealing requirements, including, among other violations, an underwriter’s failure to make certain disclosures to state and local government issuers regarding the underwriter’s role and potential conflicts of interest with the issuer. Ballard Spahr discussed these requirements in a previous legal alert.

Many underwriters involved in municipal securities transactions initiated before and continuing after August 2, 2012, have already begun to comply with the requirements prior to today's effective date. This early compliance is necessitated by the interpretation’s requirement that underwriters make certain disclosures at the outset of the issuer-underwriter relationship. The Securities Industry and Financial Markets Association (SIFMA) has provided model initial disclosures to assist underwriters with compliance. While these model disclosures will likely serve as the industry’s baseline for compliance, underwriters must consider whether unique aspects of a particular transaction require additional disclosure.

As the heightened disclosure requirements for underwriters recommending a complex municipal securities financing depend not only on the uniqueness of a transaction’s structure, but also on the sophistication of issuer personnel, we anticipate that underwriters will generally err on the side of caution by disclosing to an issuer all material financial risks and characteristics of the municipal securities transaction, regardless of the sophistication of the issuer and/or the level of complexity of the transaction.

SIFMA has provided model risk disclosures for the following types of “complex” transactions:

• Fixed Rate Bonds (if the issuer or issuer personnel is inexperienced)
• Variable Rate Demand Obligations
• Clarifying Statements for Municipal Securities Underwriters

SIFMA also plans to develop model disclosures for transactions involving floating rate notes and swaps.

Recently, the MSRB publicly stated that the interpretation will “assist enforcement agencies in assessing an underwriter’s compliance with this expectation [of fairness].” While the principle of “fair dealing” is abstract, the interpretation provides enforcement authorities with specific requirements against which compliance can be more easily measured. MSRB rules are enforced by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and federal bank regulators. The Dodd-Frank Wall Street Reform and Consumer Protection Act recently increased coordination between the MSRB, the SEC, and FINRA regarding the enforcement of MSRB Rules, including the interpretation.