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