What Does The Expanded MSRB Rule G-17 Mean For You?

Understanding Your Relationship With Your Underwriter In Negotiated Transactions

On May 4, 2012, the Securities and Exchange Commission approved the Municipal Securities Rulemaking Board (MSRB) Notice 2012-25 providing interpretive guidance on how Rule G-17 applies to underwriters in municipal securities transactions.  The expanded G-17 means that when working with an underwriter in a negotiated sale, you can expect increased disclosures that clarify the nature of the transaction as well as the relationship between you and your underwriter.  The underwriter has an obligation of fair dealing with the issuer.  It has the duty to negotiate in good faith and it is not permitted to recommend that an issuer not retain a financial advisor. 

As of August 2, 2012, underwriters have an affirmative duty to disclose certain specific information as set forth below.

First and foremost, and this isn’t really new, underwriters must clarify that their primary role is to purchase securities in an arm’s length commercial transaction. The underwriters are balancing the needs of the issuer, market demand, reasonable and appropriate prices for investors and their profit margin. Although the underwriter is working closely with the municipality to create a good deal, underwriters do not have a fiduciary duty to the municipality to act in the best interest of the issuer.  

Second, in working on a negotiated transaction, any underwriter making a recommendation about a financing structure needs to provide disclosures on key features of the financing.  Such disclosures need to be tailored to the level of expertise of the issuer.  In complex financings, underwriters must explain the material financial characteristics of the financing and the material risks.  Moreover, any such disclosures must be given significantly in advance of the execution of a purchase agreement to allow for thought and evaluation. 

Finally, disclosures made to the municipality must be in writing, to an official with the authority to bind the issuer, and in a manner that is clear and sets forth the issues involved.  

In addition to the above, G-17 requires that the price the underwriter pays the issuer and compensation it receives be fair and reasonable considering all relevant factors. The rule identifies several factors used to evaluate compensation such as the credit quality of the issue, size of the issue, market conditions at time of pricing, length of time spent structuring the issue and whether the underwriter is paying any additional fees.  

A good relationship with your underwriter will mean a better transaction for all parties. This rule sets up the framework for the flow of consistent and clear information that will contribute to a successful market transaction from all perspectives. 

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