The Municipal Securities Rulemaking Board (“MSRB”) adopted an Interpretive Notice on the fair practice duties that brokers, dealers and municipal securities dealers (“dealers”), acting as underwriters, owe to issuers of municipal securities. The Interpretive Notice became effective August 2, 2012. To assist underwriters in complying with the obligations imposed by the Interpretive Notice, the MSRB issued Implementation Guidance. The following FAQs address certain operational concerns that have arisen in connection with the Interpretive Notice and Implementation Guidance.
- Q. What disclosures may be effected by a syndicate manager on behalf of the co-managers?
A. In general, disclosures that are standardized are most easily effected by the syndicate manager. These disclosures include those: (i) addressing the role of the underwriter, (ii) relating to underwriting compensation, and (iii) made in connection with routine and complex municipal securities financings. With respect to (i), sample disclosures concerning the underwriter’s role are provided in Exhibit A. The disclosures in (ii) and (iii) typically will not vary from dealer to dealer with respect to a particular transaction (unless a syndicate member is providing a swap or other component of the financing). A syndicate manager may commit to provide these disclosures on behalf of co-managers by written agreement, including the agreement among underwriters, and may confirm compliance with such undertakings in one or more written communications to the syndicate (which may include syndicate wires).
The disclosures concerning the arm’s length nature of the issuer-underwriter relationship are generally not capable of being provided by a syndicate manager because this disclosure must be made at the earliest stages of a relationship, often before a syndicate has been formed. However, if a dealer becomes a co-manager after the syndicate has been formed, the prior delivery by the syndicate manager can satisfy the newly added co-manager’s delivery obligation.
In general, disclosures of dealer-specific conflicts of interest cannot be satisfied by disclosures made by the syndicate manager because such disclosures are, by their nature, not uniform, and must be prepared by each dealer. However, nothing in the Interpretive Notice or Implementation Guidance would preclude a syndicate manager from delivering each of the dealer-specific conflicts to the issuer as part of a single package of disclosures.
The Interpretive Notice does not require an underwriter to notify an issuer if it has determined that it does not have an actual or potential conflict of interest subject to disclosure. However, underwriters are reminded that the obligation to disclose actual or potential conflicts of interest includes conflicts arising after the time of engagement with the issuer, as noted below.
- Q. When must the Rule G-17 disclosures to an issuer be made?
- A. The Interpretive Notice and the Implementation Guidance provide the following timing and delivery requirements:
- Arm’s length nature of relationship: At the earliest stages of the relationship, generally at or before a response to a request for proposals or promotional materials are delivered to an issuer.
Other role disclosures; underwriter’s compensation: At or before the time the underwriter has been engaged to perform underwriting services.
Dealer-specific conflicts of interest known at time of engagement: At or before the time the dealer has been engaged to serve as underwriter. Co-managers joining a syndicate after its formation are required to deliver their applicable dealer-specific disclosures at that time.
Dealer-specific conflicts of interest discovered or arising after engagement: As soon as practicable after discovered and with sufficient time for the issuer to evaluate the conflict and its implications.
Conflicts of interest arising in connection with recommendations in a complex financing: Before the execution of a commitment by the issuer (which may include a bond purchase agreement) relating to such recommendation, and with sufficient time to allow the issuer to evaluate the conflict and its implications.
Material aspects of a routine financing: Before the execution of a commitment by the issuer (which may include a bond purchase agreement) relating to the financing, and with sufficient time to allow the issuer to evaluate the features of the financing.
Material financial risks and characteristics of a complex financing: Before the execution of a commitment by the issuer (which may include a bond purchase agreement) relating to the financing, and with sufficient time to allow the issuer to evaluate the features of the financing.
Use of Omnibus Disclosure Documents; Updates
- Q. May an underwriter deliver an omnibus disclosure document containing all material elements of routine and/or complex financings?
A. Yes; unless directed otherwise by an issuer, an underwriter may use an omnibus set of disclosures containing detailed descriptions of the material elements of a routine financing or the material financial characteristics and risks for various complex municipal securities financing structures or products; however, the underwriter must identify with sufficient clarity and ease of review the applicable portions of such omnibus document to a particular transaction. The underwriter also must make an independent assessment that such disclosures are appropriately tailored to the issuer’s level of sophistication.
- Q. May “updates” to disclosures be provided through additions or deletions to previously delivered disclosures?
A. Yes; unless directed otherwise by an issuer, an underwriter may update selected portions of disclosures previously provided so long as such updates clearly identify the additions or deletions and are capable of being read independently of the prior disclosures.
Authorized Issuer Official
- Q. May an underwriter rely on a representation from an issuer official that he or she has the authority to bind the issuer by contract with the underwriter?
A. Absent red flags, an underwriter may reasonably rely on a written representation from an issuer official in, among other things, the issuer’s request for proposals that he or she has the ability to bind the issuer by contract with the underwriter. Moreover, the underwriter may reasonably rely on a written statement from such person that he or she is not a party to a disclosed conflict.
- Q. May an underwriter rely on an authorized issuer official’s delegation to another issuer official to receive and provide written acknowledgement of receipt of the required disclosure?
A. Absent red flags, and subject to the foregoing question, an underwriter may reasonably rely on a written delegation by an authorized issuer official in, among other things, the issuer’s request for proposals to another issuer official to receive and acknowledge receipt of the required disclosures.
- Q. Must an underwriter receive written acknowledgment of receipt of the disclosures required by the Interpretive Notice before proceeding with an engagement?
A. An underwriter must attempt to receive written acknowledgment (other than by automatic e-mail receipt) from an authorized issuer official before proceeding with an underwriting transaction. If an authorized issuer official agrees to proceed with the underwriting after receipt of the disclosures but will not provide a written acknowledgment, an underwriter must document specifically why it was unable to obtain such written acknowledgment.
- Q. What if an issuer is restricted under state law from acknowledging disclosed conflicts?
A. The Interpretive Notice requires an underwriter to attempt to receive written acknowledgment of receipt of the disclosures but does not specify the particular form of acknowledgement. Accordingly, an underwriter may proceed with a receipt of acknowledgment that includes an issuer’s reservation of rights or other self-protective language.
- Q. What if the issuer official does not respond to requests for acknowledgment?
A. An underwriter must be able to produce evidence that required disclosures were delivered with sufficient time for evaluation by the issuer before proceeding with the transaction. An issuer’s written acknowledgment of the receipt of disclosure is not dispositive of whether such disclosures were made with an appropriate amount of time. The analysis of whether disclosures were provided with sufficient time for an issuer’s review is based on the totality of the facts and circumstances.
Disclosures Concerning the Underwriter’s Role
(i) Municipal Securities Rulemaking Board Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors;
(ii) the underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer and it has financial and other interests that differ from those of the issuer;
(iii) unlike a municipal advisor, the underwriter does not have a fiduciary duty to the issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of the issuer without regard to its own financial or other interests;
(iv) the underwriter has a duty to purchase securities from the issuer at a fair and reasonable price, but must balance that duty with its duty to sell municipal securities to investors at prices that are fair and reasonable; and
(v) the underwriter will review the official statement for the issuer’s securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.
March 25, 2013