The MSRB today proposed changes to Rule G-17 that would establish detailed obligations on underwriters of municipal securities to their state and local government clients.  The rule change would entail an Interpretive Notice concerning the application of MSRB Rule G-17 (on conduct of municipal securities and municipal advisory activities) to underwriters of municipal securities, and becomes effective 90 days after approval by the SEC.  

Proposed New Representations.   The Interpretive Notice would provide that all representations made by underwriters to issuers of municipal securities in connection with municipal securities underwritings - e.g., issue price certificates and responses to requests for proposals - whether written or oral, must be truthful and accurate and may not misrepresent or omit material facts. 

- e.g., an underwriter may not represent that it has the requisite knowledge or expertise with respect to a particular financing if its personnel that it intends to work on the financing do not have that expertise.

Proposed New Disclosures.   An underwriter of a negotiated issue that recommends a complex municipal securities financing - e.g., a variable rate demand obligation with a swap - to an issuer has an obligation under Rule G-17 to disclose all material risks, characteristics, incentives, and conflicts of interest - e.g., payments received from a swap provider - regarding the complex municipal securities financing. 

Such disclosure must be sufficient to allow the issuer to assess the magnitude of its potential exposure as a result of the complex municipal securities financing.   For routine financing structures, underwriters would have to disclose the material aspects of the structures if the issuers did not otherwise have knowledge or experience with respect to such structures.  The disclosures would be required to be made in writing to an official of the issuer whom the underwriter reasonably believed had the authority to bind the issuer by contract with the underwriter:

• in sufficient time before the execution of a contract with the underwriter to allow the official to evaluate the recommendation; and
• in a manner designed to make clear to such official the subject matter of such disclosures and their implications for the issuer.  
• if the underwriter did not reasonably believe that the official to whom the disclosures were addressed was capable of independently evaluating the disclosures, the underwriter would be required to make additional efforts reasonably designed to inform the official or its employees or agent.

Statement From MSRB Executive Director.  MSRB Executive Director Lynnette Kelly Hotchkiss said this about today's rule filing: 

“This proposal is a groundbreaking effort in ensuring the interests of state and local government bonds issuers are further protected in their transactions with underwriters of municipal securities.  Dodd-Frank explicitly requires the MSRB to protect municipal entities. This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds.”

For further details, go to:   [MSRB Notice 11-36, 8/2/11]   and   [MSRB News Release, 8/2/11]