Effective August 2, 2012, the Municipal Securities Rulemaking Board (MSRB) will require underwriters of municipal securities to provide additional disclosures to issuers (state and local governments) and abide by other requirements. The changes apply to negotiated underwritings, but not to competitive underwritings. An underwriter must disclose the following:
-Details regarding the underwriter’s role, including that the underwriter has different financial interests than the issuer and that the underwriter does not have a fiduciary duty to the issuer
-The conditions of the underwriter’s compensation
-Any actual or potential material conflicts of interest – the interpretive notice specifically identifies the following potential conflicts of interest: third-party payments, profit-sharing with investors, and credit default swaps
-If recommending complex municipal securities transactions/products, all associated material financial risks, characteristics, incentives, and conflicts of interest
Additional requirements are as follows:
-All representations to the issuer must be accurate, truthful, and complete, with no omission or misrepresentation of material information.
-When drafting any issuer disclosure documents, the underwriter must have a reasonable basis for any representations it makes.
-The underwriter must pay a fair and reasonable price to the issuer.
-The underwriter may not recommend that the issuer not retain a municipal advisor.
This Exam Alert applies to the Series 7 Exam.
Sources:
MSRB Establishes New Protections for State and Local Governments that Issue Bonds