Overview of Duties of
Underwriters to Issuers
MSRB Notice 2012-25 on the duties of underwriters to issuers of municipal securities was approved
by the Securities and Exchange Commission on May 4, 2012. On August 2, 2012, this interpretive
notice to MSRB Rule G-17 on fair dealing becomes part of federal securities law and underwriters
are required to comply with its provisions. This document provides only a summary of the
interpretive notice. Underwriters must refer to the full interpretive notice on www.msrb.org for the
complete new guidance and additional educational information.
Goals of the Notice
• Clarifies the relationship of an underwriter to its
clients
•
Creates affirmative obligations for underwriters
•
Requires an underwriter to disclose important
information to an issuer to help the issuer assess
proposed financial transactions
Duties of Underwriters to Issuers
Fair practice duties outlined in the notice fall into three
broad areas:
•
Statements and representations to issuers
•
Disclosures to issuers
•
Financial aspects of underwriting transactions
Statements and Representations
All provisions in the interpretive notice arise from the
same fundamental duty of fairness to an issuer already
required under MSRB Rule G-17. However, the interpretive
notice more clearly articulates the specific nature of an
underwriter’s fair dealing obligations.
Requirements apply to representations made in
documents such as responses to requests for proposals,
issue price certificates and materials used in official
statements.
The notice provides more detailed direction on an
underwriter’s obligation to honor an issuer’s retail order
period.
The underwriter also must not recommend that the issuer
not retain a municipal advisor.
Required Disclosures
Under the interpretive notice to Rule G-17, underwriters
have new, defined disclosure requirements. An
underwriter must disclose information regarding its role,
including that:
•
MSRB 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
•
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
All representations made in writing or orally by
underwriters to issuers must:
•
Be truthful and accurate
•
Not misrepresent or omit material facts
•
Not be misleading
•
Have a reasonable basis
•
Not misrepresent knowledge or expertise
www.msrb.org | http://emma.msrb.org
© 2012 Municipal Securities Rulemaking Board
2012.1.0
An underwriter is also required to disclose all actual or
potential conflicts of interest, including:
•
Conflicts related to the existence, but not the value,
of any third-party payments made or received in
connection with underwriting the new issues
•
Any profit-sharing arrangements with investors
•
Whether the underwriter issues, purchases or
otherwise trades credit default swaps for which the
issuer or its securities is a reference
•
Transaction-specific conflicts, such as the existence
of incentives for the underwriter to recommend a
complex municipal securities financing
•
Whether the underwriter’s compensation is contingent
on closing the transaction and that compensation
contingent on closing or the size of transaction
presents a conflict of interest because it may cause the
underwriter to recommend an unnecessary transaction
or a larger transaction than necessary
Required Disclosures for Complex Financings
The notice requires an underwriter in a negotiated offering
making a recommendation about a complex municipal
securities financing to provide disclosures to issuers on
certain key features of the financing.
A municipal securities financing is “complex” if it is
structured in a unique, atypical or otherwise complex
manner. Examples of complex financings include, but
are not limited to, variable rate demand obligations and
financings involving derivatives (such as swaps).
The underwriter must disclose the material financial
characteristics of the complex municipal securities
financing, as well as the material financial risks of
the financing that are known to the underwriter and
reasonably foreseeable at the time of the disclosure.
These disclosures must address the specific elements of
the financing rather than being general in nature.
If an underwriter does not reasonably believe issuer
personnel are capable of independently evaluating
disclosures, the underwriter must make additional
efforts to inform the official or its employees or agent of
characteristics and risks.
Determination of an issuer’s level of expertise and ability
to bear financial risk will dictate whether disclosures may
be abbreviated or must be more fulsome.
Manner and Timing of Disclosures
Disclosures required by the notice must be made to
issuers:
•
In writing
•
In a manner that makes the subject and implications
clear to the issuer
•
To an official with appropriate authority to bind issuer
by contract
Conflicts of interest disclosures cannot be made to an
official who is party to such conflicts.
An underwriter must request written acknowledgment
of receipt of disclosures from issuer and document any
failure to receive such acknowledgement.
Syndicate managers may provide disclosure on behalf of
other syndicate members except in the case of conflicts
disclosures, which must be made by the particular
underwriters subject to such conflicts.
Disclosure of arm’s-length nature of underwriting
transaction must be made at earliest stage of the
underwriter’s relationship with the issuer.
Disclosures concerning role of underwriter, compensation
and conflicts of interests must be made when underwriter
is formally brought into transaction. Such disclosures may
not be made later in process, such as at the signing of a
bond purchase agreement.
Disclosures concerning material financial characteristics
and risks of complex financings and applicable routine
financings, and newly identified conflicts of interest, must
be made prior to execution of bond purchase agreement.
Financial Aspects of Underwriting Transactions
The MSRB does not establish specific compensation
standards for underwriters; however, an underwriter’s
compensation for a new issue must not be so
disproportionate as to constitute unfair practice under
Rule G-17.
Compensation includes both direct compensation paid by
issuer and separate payments from issuers or third parties
in connection with underwriting.
Pricing of a new issue is one, but not the exclusive, factor
in determining whether an underwriter has treated the
issuer fairly.
Underwriters may also need to disclose information about
more routine financings depending upon the expertise of
the issuer.
www.msrb.org | emma.msrb.org
© 2012 Municipal Securities Rulemaking Board
2012.1.0