MSRB Rule G-17 has been interpreted by the MSRB as requiring a broker or dealer (“broker”) to  disclose to its customer, at or prior to the time of trade of a municipal security, all material information about the transaction known by the broker, as well as material information about the security that is reasonably accessible to the market.  On February 11, 2013, the MSRB issued a notice of its proposal to consolidate some, but not all, of its multiple interpretive notices relating to the Rule G-17 “time of trade disclosure obligation” in a new Rule G-47.

The proposed rule is not intended to alter the substance of a broker’s time of trade disclosure obligation, merely to make it easier to locate that substance in rule form rather than by reviewing a collection of G-17 interpretive notices previously issued by the MSRB, some of which deal with unrelated topics, as G-17 is a fair dealing rule of wide scope.  Facilitating the finding and reviewing of applicable legal requirements is a sensible goal, and it seems unlikely that there will be significant opposition to MSRB’s objective in proposing the “new” rule.

As is generally the case with any attempt to consolidate or summarize, comments on the proposed rule, which are due by March 12, 2013, are likely to focus on what is left out of the rule and on requests for clarification of items that have been unclear under the G-17 interpretations and remain unclear under the proposed rule.

A few preliminary observations on potential improvements to the proposed rule:

  • The Rule G-47 disclosure obligation would apply to purchases and sales between a broker and its customer, whether unsolicited or recommended, and whether in a primary offering or secondary market transaction.  However, prior interpretations deem the time of trade disclosure obligation automatically satisfied if the customer is a “sophisticated municipal market professional” or “SMMP”.  This important exception deserves to be called up from the minor leagues of interpretation to the major leagues of the new rule.
  • Rule G-47 provides a non-exhaustive list of potentially material information that must be disclosed by a broker at or prior to sale or purchase, but, beyond noting that such information may be provided “orally or in writing”, appears deliberately vague about permissible mechanisms for delivering material information.  Rule G-47 indicates that the public availability of material information through EMMA or other established industry sources does not relieve brokers of their obligation to make the required time of trade disclosures to a customer, and that a broker may not satisfy its disclosure obligation by directing a customer to an established industry source.  Though unstated in the proposed rule, presumably a broker can satisfy its obligation to disclose material features of the security by providing a copy of the official statement for the security, which is the primary source of such information, versus by attempting to synthesize, reword or isolate “material” information from immaterial information.  In circumstances where an official statement would include all available material information (which may be the case if there has been no material change to the basic features of the security or credit profile since the date of the official statement), it is unclear whether the Rule is intended to spare the customer the trouble of going to EMMA to review such material disclosure by forcing a broker to provide such disclosure directly to the customer, or whether the Rule’s wording is merely intended to differentiate a generalized statement by the broker that “you can find all material information on EMMA” from a broker-provided link or links to specific EMMA disclosure for the applicable security that the broker has determined contains all required material information.  The MSRB might consider clarifying in the rule whether the provision that “a broker may not satisfy its disclosure obligation by directing a customer to an established industry source” is intended to require the broker to determine whether an established industry source such as EMMA in fact contains all material information at the time of trade (and, if not, to require the broker to supplement EMMA by providing missing material information available from other public sources), or whether it is a complete ban on use of any time of trade disclosure mechanism that does not create a record of whether the customer actually accessed the publicly available information to which the customer was referred by the broker.
  • Proposed Rule G-47 lists 15 specific items that may be material in certain scenarios for purposes of the time of trade disclosure obligation.  This non-exhaustive list focuses primarily on technical features of the security, with the only listed “material” item relating to the underlying credit being item c, “[t]he credit rating or lack thereof, credit rating changes, credit risk of the municipal security, and any underlying credit rating or lack thereof.”  Although the specified items are consolidated from prior notices intended to emphasize the MSRB’s view that such items are or may be material, and are not intended to constitute a compendium of the most frequently material items, when assembled as a list in the proposed rule they highlight the incompleteness of the list.  It seems odd, for example, to list “the investment of bond proceeds” as a potentially material item, while omitting, for example, items such as whether the security is a general obligation, revenue or conduit bond, whether the interest is an AMT preference item and whether a conduit bond is secured by a mortgage and/or gross receipts lien.  The MSRB will need to consider whether half a list is better than none.


Since August 2, 2012, investment banking firms retained to act as underwriters on municipal finance transactions have been required to provide written disclosure to issuers concerning the relationship between issuers and underwriters, possible conflicts of interest and certain other matters under Municipal Securities Rulemaking Board (MSRB) Rule G-17 (Rule G-17) and MSRB Notice 2012-25 (the “Interpretive Notice“).  .  The Securities Industry and Financial Markets Association (SIFMA) has provided a model for such disclosure letters (the “SIFMA Model“).

The following are some thoughts on the form of the SIFMA Model and on sample disclosure letters received to date by certain issuers represented by this firm:

  • The sections of the disclosure letters concerning the underwriters’ role and underwriters’ compensation will likely quickly become boilerplate using the SIFMA Model language, which closely parallels the Interpretive Notice.  Many underwriters have been including a section in their form bond purchase agreements to address the role of the underwriters in light of Rule G-17.
  • The section of the disclosure letters concerning “additional conflicts disclosures” is more problematic.  While the Interpretive Notice and the SIFMA Model appear to contemplate that underwriters either state that they have not identified “any additional potential or actual material conflicts that require disclosure” or provide a listing on the particular conflicts, most underwriters appear to be taking the approach of listing the various products and services they provide which may give rise to conflicts without actually identifying any conflicts.  This approach of not specifying any particular conflict beyond those inherent in the services provided raises issues, discussed in the next paragraph, regarding the issuer acknowledgment of the disclosure. 
  • The SIFMA Model contains the following paragraph: “It is our understanding that you have the authority to bind the Issuer by contract with us, and that you are not a party to any conflict of interest relating to the subject transaction. If our understanding is incorrect, please notify the undersigned immediately.”  This language varies from the Interpretive Notice and from comment 4 to the SIFMA Model itself, which reads: “All of the disclosures must be made in writing to an official of the Issuer that the underwriter reasonably believes has the authority to bind the Issuer by contract with the underwriter and that, to the knowledge of the underwriter, is not a party to a disclosed conflict.”  Asking the recipient of a disclosure letter to acknowledge s/he has authority to bind the issuer is not required by the Interpretive Notice but may not be an unreasonable request.  The second part concerning conflicts is more troublesome given that, as noted above, the pattern in disclosure letters appears to be that underwriters are not disclosing any specific conflicts.  The SIFMA Model language, by asking the recipient to acknowledge s/he is not party to any conflict relating to the transaction, arguably shifts to the issuer the burden of making the determination that no conflict exists.  
  • Because of these wording concerns, we are seeing some issuers take the approach of acknowledging receipt of the disclosure letter while specifically stating that the acknowledgement is only as to receipt and not an acceptance, confirmation or consent to the contents of such letters.

At this point, it seems unlikely that individual underwriters will deviate very far from the SIFMA Model letter.  It is likely that SIFMA will review the form and comments received from issuers and underwriters and may incorporate changes to address any concerns raised by issuers as to the language regarding conflicts or otherwise.


The MSRB has put out for comment a proposed interpretive notice designed to eliminate or reduce instances in which underwriters of new bonds issued under a parity indenture or bond resolution consent to amendments to such instrument on the issuance date of the new bonds during the brief period in which the underwriter owns the bonds prior to their resale to the underwriter’s customers.  According to the MSRB’s request for comment: “While underwriters may technically be bondholders during the period between the time they purchase an issuer’s bonds and the time they distribute the bonds to investors, they are still underwriters while they hold bonds with a view to distribution.  As such, they will not be negatively affected by the amendments to which they consent.  In fact, they may have a monetary incentive to consent to the amendments and, accordingly, a conflict of interest.”

The proposed interpretive release would characterize such underwriter consents to amendments  as a potential violation of MSRB Rule G-17, which requires broker-dealers to “deal fairly with all persons in the conduct of their municipal securities activities.”   The notice does not impose a blanket prohibition on such consents, and declines to establish any standard (such as amendments that are materially adverse to existing bondholders) for what might constitute an unfair consent by an underwriter.  The notice does provide, as an example of an underwriter consent that could be deemed a violation of MSRB Rule G-17, a consent to amendments that would reduce the security for existing bondholders (e.g., eliminating or reducing a debt service reserve requirement, releasing collateral or loosening additional indebtedness tests.) 

The notice provides that such underwriter consents would not constitute a duty of fair dealing violation if (i) the indenture or resolution expressly provide that an underwriter can provide bondholder consent and (ii) the offering documents for the outstanding previously issued bonds disclosed that bondholder consents could be provided by underwriters of other securities issued under the indenture or resolution.  The voting of bonds acquired by a broker-dealer without an intent to distribute also would be exempted, as would underwriter consents to amendments to the terms of variable rate demand obligations at the time of their mandatory tender.   .

The notice is interesting in that it interprets a broker-dealer’s fair dealing duty as applying literally to “all persons”, including prior bondholders with which it has no relationship.  The notice does not address other techniques used by issuers to facilitate indenture amendments, such as disclosure in offering documents that purchasers of newly offered bonds will be “deemed” to have consented to specified amendments.  Such other techniques may not raise the same concerns, as they typically involve new bondholders that will actually have long-term exposure to the amended security provisions.  In any event, to the extent such other techniques do not involve action by the underwriter, the MSRB has no jurisdiction to regulate such techniques.     

The MSRB’s release indicates that the interpretive notice, when finalized, will have prospective application only.  Comments are due to the MSRB by March 6, 2012.