Municipal securities underwriters will be subject to newly adopted Municipal Securities Rulemaking Board (MSRB) regulations governing “fair dealing” beginning in August 2012. The MSRB adopted the new disclosure and other requirements as part of its efforts to protect issuers of municipal securities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under Rule G-17, the MSRB’s “fair dealing” rule, underwriters must “deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.” A recent interpretation of that rule adopted by the MSRB on May 4, 2012, requires underwriters in negotiated transactions to make specific disclosures to issuers. Those disclosures include, among others, informing the issuer that:

  • The underwriter has a fair-dealing duty to both issuers and investors
  • The transaction is an arm’s length one with the issuer
  • The underwriter does not owe a fiduciary duty to the issuer
  • The underwriter must purchase the issuer’s securities at a fair and reasonable price

The interpretation advises that the “fair and reasonable” price must be determined by the underwriter after “taking into consideration all relevant factors, including the best judgment of the underwriter as to the fair market value of the issue.” It also provides that an underwriter is prohibited from recommending that the issuer not hire a municipal advisor.

With respect to compensation, the underwriter in a negotiated underwriting must disclose whether its compensation is contingent on the transaction’s closing, as the MSRB advises that contingent compensation “may cause the underwriter to recommend a transaction that is unnecessary or…larger than is necessary.” Underwriters are also generally prohibited from charging excessive compensation considering the “specific facts and circumstances of the offering.”

The MSRB’s interpretation mandates that underwriters disclose to issuers information about activities the MSRB has deemed to create actual or potential material conflicts of interest. Those include third-party payments and profit-sharing arrangements with investors, as well as the issuance or purchase of credit default swaps for which the underlying reference is the issuer for whom the dealer is serving as underwriter.

The disclosure requirements are further heightened by the MSRB for an underwriter recommending “complex municipal securities financings,” such as a variable-rate demand obligation with a swap. In such instances, the underwriter must disclose the material financial risks and characteristics of the transaction to the issuer as well as any incentives for the underwriter to recommend the transaction.

The MSRB’s interpretation becomes effective August 2, 2012. View the new regulations from the MSRB Home Page.

For more information, please contact Darci L. Stephens at 801.531.3056 or, Tesia N. Stanley at 801.517.6825 or, or any other member of Ballard Spahr’s Public Finance Group. 

Copyright © 2012 by Ballard Spahr LLP.
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