MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers

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Terence James
5 years ago
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1 MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers Webinar Part 2: Required Disclosure of Role, Obligations and Conflicts of Interest

Required Underwriter Disclosures to Issuers Under MSRB Notice 2012-25 on Rule G-17, underwriters have new, defined disclosure requirements that are effective August

2 Required Underwriter Disclosures to Issuers Under MSRB Notice on Rule G-17, underwriters have new, defined disclosure requirements that are effective August 2, 2012 Disclosure requirements set out types of information an underwriter must provide to the issuer, and include the manner and timing of providing such disclosures 1

3 Required Underwriter Disclosures to Issuers As of August 2, 2012, an underwriter must make specific disclosures to an issuer regarding: Nature of the underwriter s legal obligations and relationship with an issuer; Existence of any conflicting interests that, without disclosure, could leave issuers with inaccurate impression of an underwriter s impartiality in dealings with issuers; and Material financial terms and risks of underwriting transactions recommended by an underwriter 2

4 Required Underwriter Disclosures to Issuers An underwriter may acquire securities either by negotiation with an issuer or by competitive bidding process Much, but not all, of the notice is limited to negotiated offerings rather than competitive bids An underwriter in a negotiated offering must disclose its role and legal obligations to the issuer to clarify the differing roles of underwriters and municipal advisors for state and local governments 3

5 Required Disclosure of Underwriter s Role and Related Obligations Required disclosures include that: Rule G-17 requires an underwriter to deal fairly at all times with both municipal issuers and investors; An underwriter s primary role is to purchase securities with a view to the distribution of those securities in an arm s-length commercial transaction Unlike municipal advisors, an underwriter does not have a federal fiduciary duty to issuers and is not required to act in the issuer s best interests without regard to its own financial or other interests 4

6 Required Disclosure of Underwriter s Role and Related Obligations An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price but must balance that duty with a duty to sell municipal securities to investors at fair and reasonable prices An underwriter reviews official statements in accordance with, and as part of, its responsibilities to investors under federal securities laws 5

7 Required Disclosure of Underwriter s Conflicts of Interest An underwriter is required to disclose all actual or potential conflicts of interest to allow an issuer to evaluate the impartiality of the underwriter and its recommendations Regarding compensation, an underwriter in a negotiated offering must disclose: Whether its underwriting compensation will be contingent on closing of transaction, and That compensation contingent on closing or size of transaction presents conflict of interest because it may cause underwriter to recommend unnecessary, or larger than necessary, transactions 6

8 Required Disclosure of Underwriter s Conflicts of Interest Some scenarios that can give rise to actual or potential conflicts of interest that underwriters must disclose include: Third-party payments Profit-sharing arrangements with investors Issuer-related credit default swap activity Other transaction-specific incentives 7

9 Required Disclosure of Third-Party Payments An underwriter must disclose all potential or actual conflicts of interest related to the existence, but not the value, of any third-party payments made or received in connection with underwriting of new issues Disclosure also required for payments in connection with collateral transactions such as swaps or reinvestment of bond proceeds Disclosure also required for third-party marketing arrangements 8

10 Required Disclosure of Profit-Sharing Arrangements An underwriter must disclose any profit-sharing arrangements with investors Such arrangements include any agreement to directly or indirectly split or share profits from resale by the investor of securities sold to it by an underwriter Formal written agreement not necessary for such arrangement to be inferred 9

11 Required Disclosure of Credit Default Swap Activity An underwriter for a new issue must disclose whether it issues, purchases or otherwise trades credit default swaps (CDS) for which the issuer or its securities is a reference Trading in CDS related to a state or local government or one of its specific issues of securities can affect pricing of such issuer s securities Disclosure about value or specifics of such CDS activities is not required Disclosure about CDS based on baskets or indexes is limited 10

12 Required Disclosure of Deal-Related Incentives An underwriter must disclose transaction-specific conflicts, such as existence of incentive for underwriter to recommend complex municipal securities financing Example: An underwriter provides a swap used by an issuer to hedge an offering or an underwriter receives compensation from a swap provider for recommending that swap provider to an issuer 11

13 MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers Webinar Part 2: Required Disclosure of Role, Obligations and Conflicts of Interest

MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers

MSRB Rule G-17: Interpretive Notice on Duties of Underwriters to Issuers Webinar Part 4: Required Manner and Timing of Disclosures, and Financial Aspects of Underwriting Transactions Required Manner of