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MSRB Proposes G-23 Amendments to Prohibit Dealers from Advising, Underwriting Same Deal
This week the Municipal Securities Rulemaking Board (MSRB) announced it is seeking comment on a draft amendments to Rule G-23 that would prohibit dealers from underwriting new bond issues if they had also served as the financial advisor on the deal.
“The MSRB is considering these amendments in view of a request that it do so by the Securities and Exchange Commission (SEC) and upcoming changes to the MSRB’s enabling legislation relating to the regulation of municipal advisors (including but not limited to dealers acting as financial advisors to issuers) and the applicability of a federal fiduciary standard to their activities,” the MSRB said.
Comments on the proposal are due by Sept. 30 and will be considered at the MSRB’s October meeting, which will be made up the newly mandated “public majority.”
"The Securities and Exchange Commission requested that the MSRB reexamine the roles of dealers who act as financial advisors for new issue bonds," said MSRB Executive Director Lynnette Hotchkiss. "All financial advisors — dealers that act as advisors as well as independent advisors — will have a fiduciary duty to their issuer clients under the new federal financial reform law and removing any real or perceived conflicts of interest in new-issue transactions is more important than ever."
Michael Decker, Managing Director and Co-head of Municipal Securities Division, told the Bond Buyer: "We believe Rule G-23, in its current form, strikes an appropriate balance between providing bond issuers with low-cost service and protecting them from potential conflicts of interest. The rule has been effective, and no compelling case has been made for amending the rule in such a drastic manner. We hope the MSRB will reconsider its proposal."
Rule G-23 currently allows dealers that act as financial advisors on a new issue of muni securities to purchase the issue as principal or act as a placement agent or remarketing agent if they meet certain requirements, the MSRB said.
Under current rules, in a negotiated underwriting, a financial advisor that would like to underwrite the bonds must terminate their advisory role and disclose to the issuer the potential for a conflict of interest. The advisor must also disclose the source and anticipated amount of any compensation and the issuer must acknowledge receipt of the disclosure. In the case of a competitive underwriting, the issuer must provide express consent prior to the acquisition or participation in such issue.
The proposed changes to Rule G-23 would prohibit any such switching of roles except in the narrow circumstances of certain financing transactions with inter-governmental entities, such as local government bond banks, where a financial advisor may assist in placing an issuer’s note or bond with such entity in connection with such financing, the MSRB release said.
SEC Approves MSRB Priority of Orders Rule Changes
Meanwhile, on Friday, August 13, the SEC approved the MSRB’s proposed rule change on priority of orders in primary offerings. The rule change consists of amendments to MSRB Rules G-8, G-9, and G-11, as well as an interpretive notice under Rule G-17.
The measure seeks to improve distribution of new issues to the market by requiring that underwriters follow the priority provisions for the offering. It requires that underwriters give priority to customer orders over those for their own and related accounts, and also must clearly understand and follow an issuer’s wishes with respect to retail order periods. Underwriters that fail to follow issuers’ directions concerning retail order periods may violate Rule G-17, on fair dealing.
The amendments require syndicate managers and sole underwriters to keep records of: (i) whether there was a retail order period and the issuer’s definition of “retail,” if applicable and (ii) whether they deviated from the customer priority provisions and the reasons for doing so. The amended rule will also require that underwriters retain records for six years on all the orders, whether filled or unfilled.
The rule change is effective for new issues of municipal securities awarded after October 12.
Save the Dates
SIFMA Municipal Bond Summit, Sept. 27; California State Treasurer Bill Lockyer to Speak
SIFMA’s 2010 Municipal Bond Summit, being held on September 27 at the Marriott Marquis Hotel in New York, will focus on new developments in the municipal securities industry, from regulatory and legislative changes to credit quality and liquidity updates. An evening reception following the general session will be held as part of the Summit programming. Full program details will be available soon. We learned this week that California State Treasurer Bill Lockyer will serve as keynote speaker at the conference.
SIFMA, MSRB Compliance Seminars, Oct. 7 & 14
SIFMA and the MSRB will host two Regulatory and Compliance Seminars on Oct. 7 in New York City at SIFMA's Conference Center and Oct. 14 in Chicago at
the Hilton Suites Magnificent Mile. Both events will be held from 2 to 5 p.m. with a reception to follow.
More details will be announced as available.
Contact Us
SIFMA is dedicated to meeting the needs of its Municipal Division and we hope you find this weekly update to be helpful. SIFMA’s entire advocacy and lobbying team, both federal and state, are working to advance SIFMA’s municipal agenda. Please feel free to contact any of us:
- Leslie Norwood, Managing Director and Associate General Counsel, at lnorwood@sifma.org or at 212.313.1130.
- Michael Decker, Managing Director, at mdecker@sifma.org or at 202.962.7430.
- Ellen McCarthy, Managing Director, at emccarthy@sifma.org or 202.962.7333.
- Joe Vaughan, Vice President, at jvaughan@sifma.org or 202.962.7328.
- Marin Gibson, Managing Director and Counsel, at mgibson@sifma.org or 212.313.1317.
- Lynne Funk, Policy Analyst, at lfunk@sifma.org or 202.962.7448.
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