The Municipal Securities Rulemaking Board (MSRB) seeks to amend the duties of underwriters to state and local government issuers under the MSRB’s “fair dealing” rule.  As proposed, the amended rule would establish, for the first time, detailed obligations of underwriters of municipal securities to their state and local government clients, as they pertain to clear disclosure of risks and conflicts of interest, among other things. MSRB's amendments, which in part address comments received from market participants, would require certain enhanced disclosures from underwriters, as well as clarification of the risks disclosure part of the proposal.  Municipal underwriters would have to provide more robust disclosures to state and local government issuers regarding the underwriter’s role, compensation and actual or potential conflicts of interest. Among the required disclosures:   (i) a statement that, unlike a municipal advisor, the underwriter does not have a federal fiduciary duty to the issuer - although they have a duty to deal fairly with the issuer;  (ii) a disclosure as to whether its compensation is contingent upon the closing of the transaction, and an affirmative statement that contingent fee compensation presents a conflict of interest, as it may cause the underwriter to recommend a transaction that it is unnecessary or larger than necessary.

“It is important that state and local governments understand in very specific terms what to expect from their underwriters and the financial risks of the transactions underwriters recommend.  The disclosures required by the notice should help issuers make informed decisions about the transactions they enter into.” -- Lynnette Kelly Hotchkiss, MSRB Executive Director.

Comments about the proposal should be submitted to the SEC.   For further information, go to:   [MSRB News Release, 11/3/11]   and   [MSRB Rule Filing 11-61, 11/3/11] - which C-I discusses below. note: the rule proposal, below, is provided, even though it still is in progress ........ MSRB Rule Amendment Filing with SEC, #MSRB 11-61, 11/3/11. In its filing with the SEC, the MSRB submitted a partial amendment to its previous filing on the fair dealing obligations of underwriters to issuers of municipal securities.  The proposed rule change consists of a proposed interpretive notice (the “Notice”) concerning the application of MSRB Rule G-17 (on conduct of municipal securities and municipal advisory activities) to underwriters of municipal securities. Amendment No. 1 would clarify that the Notice impacts duties of underwriters to their clients, municipal entity issuers of municipal securities, not obligated persons.  It also would clarify that the Notice would not apply to selling group members and that, unless otherwise specified, the Notice would apply only to negotiated underwritings and not to competitive underwritings. Robust Disclosure Is Key. As proposed , the rule would require an underwriter as to its role, its compensation, and actual or potential material conflicts of interest.  The disclosure would build on the disclosure already required by the Rule G-23 interpretive notice approved earlier this year.  Certain of the required disclosures could be made by a syndicate manager on behalf of other syndicate members.  Amendment No. 1 also would prohibit an underwriter from recommending that the issuer not retain a municipal advisor. The required disclosures generally would be required to be made at the time the underwriter is engaged to provide underwriting services and to be made to an official of the issuer with the power to bind the issuer by contract with the underwriter.  The disclosure concerning the arm’s-length nature of the underwriter-issuer relationship would continue to be required to be made at the earliest stages of the underwriter-issuer relationship, as required by the Rule G-23 interpretive notice. In the case of disclosures triggered by recommendations as to particular financings, the disclosures would continue to be required to be provided in sufficient time before the execution of a contract with the underwriter to allow the official to evaluate the recommendation.  The disclosures required in the amended Notice under “Role of the Underwriter/Conflicts of Interest/ Other Conflicts Disclosures” are not new.  They would simply be added to the list of required disclosures - resulting in a single place for an underwriter to look fro all required conflicts disclosures. The underwriter would be required to attempt to obtain the written acknowledgement of the issuer to the required disclosures and, if the issuer would not provide such acknowledgement, to document that fact.

• Disclosures required for routine financings would be based on the underwriter’s “reasonable belief” that issuer personnel lack knowledge or experience with such structures and be linked to whether the underwriter had recommended the routine financing.

• Disclosures concerning swaps would also be required to be made only as to the swaps recommended by underwriters.  If an issuer decided to accept the recommendation of a swap provider other than the underwriter, the underwriter would have no disclosure obligation with regard to that other provider’s swap.

Amendment No. 1 would not eliminate ... any of the disclosures already required of underwriters under the Notice.  However, the requirement to disclose the risks of a complex municipal securities financing would be limited to those material financial risks that are known to the underwriter and reasonably foreseeable at the time of the disclosure.  Similarly, disclosures concerning the characteristics of a financing would be limited to material financial characteristics.  Examples of the material financial characteristics of a swap would be provided.  Underwriters would also be required to inform the issuer that there might be accounting, legal, and other risks associated with a swap and that the issuer should consult with other professionals concerning such risks. Amendment No. 1 would clarify the provisions of the Notice concerning disclosures of third-party payments and credit default swaps by providing that the Notice would require disclosure of the existence of 3rd-party payments, but not the amount, and that particular transactions in credit default swaps would not be required to be disclosed under the Notice.  These disclosures would draw the attention of issuers to such payments and credit default swap activity, and the issuers could choose to request more information from the underwriters. MSRB Contact. Direct questions to Peg Henry, General Counsel, Market Regulation, at (703) 797-6600.