
[Federal Register Volume 76, Number 224 (Monday, November 21, 2011)]
[Notices]
[Pages 72013-72015]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29970]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65749; File No. SR-MSRB-2011-09]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment No. 2, Consisting of Proposed Interpretive Notice Concerning 
the Application of MSRB Rule G-17, on Conduct of Municipal Securities 
and Municipal Advisory Activities, to Underwriters of Municipal 
Securities

November 15, 2011.
    On August 22, 2011, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of a proposed 
interpretive notice concerning the application of MSRB Rule G-17 (on 
conduct of municipal securities and municipal advisory activities to 
underwriters of municipal securities). The proposed rule change was 
published for comment in the Federal Register on September 9, 2011.\3\ 
The Commission received 5 comment letters.\4\ On October 11, 2011, the 
MSRB extended the time period for Commission action to December 7, 
2011. On November 3, 2011, MSRB filed Amendment No. 1 to the proposed 
rule change. On November 10, 2011, MSRB withdrew Amendment No. 1, 
responded to comments in a letter,\5\ and filed Amendment No. 2 to the 
proposed rule change. The proposed rule change, as modified by 
Amendment No. 2, is described in Items I and II below, which items have 
been prepared by MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as modified by Amendment 
No. 2, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 65263 (September 6, 
2011), 76 FR 55989.
    \4\ See Letters from Joy A. Howard, Principal, WM Financial 
Strategies, dated September 30, 2011 (``Howard Letter''); Mike 
Nicholas, Chief Executive Officer, Bond Dealers of America, dated 
September 30, 2010 (``BDA Letter''); Colette J. Irwin-Knott, CIPFA, 
President, National Association of Independent Public Finance 
Advisors, dated September 30, 2011 (``NAIPFA Letter''); Leslie M. 
Norwood, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association, dated September 30, 2011 
(``SIFMA Letter''); and Susan Gaffney, Director, Federal Liaison 
Center, Government Finance Officers Association, dated October 3, 
2011 (``GFOA Letter'').
    \5\ See letter from Margaret C. Henry, General Counsel, Market 
Regulation, MSRB, to Elizabeth M. Murphy, Secretary, Commission, 
dated November 10, 2011.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the SEC the Amendment to File No. SR-MSRB-
2011-09, originally filed on August 22, 2011 (the ``original proposed 
rule change''). The Amendment amends and restates the original proposed 
rule change consisting of a proposed interpretive notice (the 
``Notice'') concerning the application of MSRB Rule G-17 (on conduct of 
municipal securities and municipal advisory activities) to underwriters 
of municipal securities (as amended, the ``proposed rule change''). A 
detailed description of the provisions of the Notice is set forth 
below. The MSRB has requested that the proposed rule change be made 
effective 90 days after approval by the Commission.
    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (a) With the passage of the Dodd-Frank Act, the MSRB was expressly 
directed by Congress to protect municipal entities. Accordingly, the 
MSRB is proposing to provide additional interpretive guidance that 
addresses how Rule G-17 applies to dealers in the municipal securities 
activities described below.
Scope of Notice
    As clarified by the Amendment, the Notice would concern the duties 
of underwriters to municipal entity issuers of municipal securities 
(``issuers''). It would not address the duties of underwriters to 
obligated persons. The Notice would not apply to selling group members 
and, unless otherwise specified, the Notice would apply only to 
negotiated underwritings and not to competitive underwritings.
Role of the Underwriter/Conflicts of Interest
    The Amendment would add a new section to the Notice, which would 
provide for robust disclosure by an underwriter as to its role, its 
compensation, and actual or potential material conflicts of interest. 
The disclosure would build on the disclosure already required by the 
Rule G-23 interpretive notice approved by the Commission in May of this 
year.\6\ Certain of the required disclosures could be made by a 
syndicate manager on behalf of other syndicate members. The Notice 
would also prohibit an underwriter from recommending that the issuer 
not retain a municipal advisor.
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    \6\ See SEC Release No. 34-64564, File No. SR-MSRB-2011-03 (May 
27, 2011).
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    The required disclosures would generally be required to be made at 
the time the underwriter is engaged to provide underwriting services 
and to be made to an official of the issuer with the power to bind the 
issuer by contract with the underwriter. The disclosure concerning the 
arm's-length nature of the underwriter-issuer relationship would 
continue to be required to be made at the earliest stages of the 
underwriter-issuer relationship, as required by the Rule G-23 
interpretive notice. In the case of disclosures triggered by 
recommendations as to particular financings, as under the original 
proposed rule change, the disclosures would be required to be provided 
in sufficient time before the execution of a contract with the 
underwriter to allow the official to evaluate the recommendation. The 
disclosures required in the Notice under ``Role of the Underwriter/
Conflicts of Interest/Other Conflicts Disclosures'' were included in 
the original proposed rule change. Pursuant to the Amendment, they 
would simply be included in the list of required disclosures, so that 
underwriters reviewing the Notice would only need to look to one place 
to see all the required conflicts disclosures. The underwriter would be 
required to attempt to obtain the written acknowledgement of the issuer 
to the required disclosures and, if the issuer would not provide such

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acknowledgement, to document that fact.
    Representations to Issuers. The Notice would provide that all 
representations made by underwriters to issuers of municipal securities 
in connection with municipal securities underwritings (e.g., issue 
price certificates and responses to requests for proposals), whether 
written or oral, must be truthful and accurate and may not misrepresent 
or omit material facts.
    Required Disclosures to Issuers. As clarified by the Amendment, the 
Notice would provide that an underwriter of a negotiated issue that 
recommends a complex municipal securities transaction or product (e.g., 
a variable rate demand obligation with a swap) to an issuer has an 
obligation under Rule G-17 to disclose all financial material risks 
(e.g., in the case of a swap, market, credit, operational, and 
liquidity risks) known to the underwriter and reasonably foreseeable at 
the time of the disclosure, financial characteristics (e.g., the 
material economic terms of the swap, the material terms relating to the 
operation of the swap, and the material rights and obligations of the 
parties during the term of the swap), incentives, and conflicts of 
interest (e.g., payments received from a swap provider) regarding the 
transaction or product. Underwriters would also be required to inform 
the issuer that there might be accounting, legal, and other risks 
associated with a swap and that the issuer should consult with other 
professionals concerning such risks. Such disclosure would be required 
to be sufficient to allow the issuer to assess the magnitude of its 
potential exposure as a result of the complex municipal securities 
financing. Disclosures concerning swaps would also be required to be 
made only as to the swaps recommended by underwriters. If an issuer 
decided to accept the recommendation of a swap provider other than the 
underwriter, the underwriter would have no disclosure obligation with 
regard to that other provider's swap.
    In the case of routine financing structures, underwriters would be 
required to disclose the material aspects of the structures if the 
issuer personnel did not otherwise have knowledge or experience with 
respect to such structures. The Amendment would clarify that any 
disclosures required to be made with respect to routine financings 
would be based on the underwriter's ``reasonable belief'' that issuer 
personnel lack knowledge or experience with such structures and be 
linked to whether the underwriter had recommended the routine 
financing.
    The disclosures would be required to be made in writing to an 
official of the issuer whom the underwriter reasonably believed had the 
authority to bind the issuer by contract with the underwriter (i) in 
sufficient time before the execution of a contract with the underwriter 
to allow the official to evaluate the recommendation and (ii) in a 
manner designed to make clear to such official the subject matter of 
such disclosures and their implications for the issuer. If the 
underwriter did not reasonably believe that the official to whom the 
disclosures were addressed was capable of independently evaluating the 
disclosures, the underwriter would be required to make additional 
efforts reasonably designed to inform the official or its employees or 
agent.\7\
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    \7\ Section 4s(h)(5) of the Commodity Exchange Act requires that 
a swap dealer with a special entity client (including states, local 
governments, and public pension funds) must have a reasonable basis 
to believe that the special entity has an independent representative 
that has sufficient knowledge to evaluate the transaction and its 
risks, as well as the pricing and appropriateness of the 
transaction. Section 15F(h)(5) of the Exchange Act imposes the same 
requirements with respect to security-based swaps.
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    Underwriter Duties in Connection with Issuer Disclosure Documents. 
The Notice would provide that a dealer's duty to have a reasonable 
basis for the representations it makes, and other material information 
it provides, to an issuer and to ensure that such representations and 
information are accurate and not misleading, as described above, 
extends to representations and information provided by the underwriter 
in connection with the preparation by the issuer of its disclosure 
documents (e.g., cash flows).
    New Issue Pricing and Underwriter Compensation. The Notice would 
provide that the duty of fair dealing under Rule G-17 includes an 
implied representation that the price an underwriter pays to an issuer 
is fair and reasonable, taking into consideration all relevant factors, 
including the best judgment of the underwriter as to the fair market 
value of the issue at the time it is priced. The Notice distinguishes 
the fair pricing duties of competitive underwriters (submission of bona 
fide bid based on dealer's best judgment of fair market value of 
securities) and negotiated underwriters (duty to negotiate in good 
faith). The Notice would provide that, in certain cases and depending 
upon the specific facts and circumstances of the offering, the 
underwriter's compensation for the new issue (including both direct 
compensation paid by the issuer and other separate payments or credits 
received by the underwriter from the issuer or any other party in 
connection with the underwriting) may be so disproportionate to the 
nature of the underwriting and related services performed, as to 
constitute an unfair practice that is a violation of Rule G-17.
    Conflicts of Interest. The Notice would require disclosure by an 
underwriter of potential conflicts of interest, including the existence 
of third-party payments, values, or credits made or received, profit-
sharing arrangements with investors, and the issuance or purchase of 
credit default swaps for which the underlying reference is the issuer 
whose securities the dealer is underwriting or an obligation of that 
issuer. The Amendment would clarify that the provisions of the Notice 
concerning disclosures of third-party payments and credit default swaps 
would require disclosure of the existence of third-party payments, but 
not the amount, and that particular transactions in credit default 
swaps would not be required to be disclosed under the Notice. These 
disclosures would draw the attention of issuers to such payments and 
credit default swap activity, and the issuers could choose to request 
more information from the underwriters.
    Retail Order Periods. The Notice would remind underwriters not to 
disregard the issuers' rules for retail order periods by, among other 
things, accepting or placing orders that do not satisfy issuers' 
definitions of ``retail.''
    Dealer Payments to Issuers. Finally, the Notice would remind 
underwriters that certain lavish gifts and entertainment, such as those 
made in conjunction with rating agency trips, might be a violation of 
Rule G-17, as well as Rule G-20.
    (b) The MSRB believes that the proposed rule change is consistent 
with Section 15B(b)(2) of the Securities Exchange Act (``Exchange 
Act''), which provides that:

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
municipal securities dealers, and municipal advisors.
    Section 15B(b)(2)(C) of the Exchange Act, provides that the 
rules of the MSRB shall: Be designed to prevent fraudulent and 
manipulative acts and practices, to promote

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just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating 
transactions in municipal securities and municipal financial 
products, to remove impediments to and perfect the mechanism of a 
free and open market in municipal securities and municipal financial 
products, and, in general, to protect investors, municipal entities, 
obligated persons, and the public interest.

    The proposed rule change is consistent with Section 15B(b)(2) of 
the Exchange Act because it will protect issuers of municipal 
securities from fraudulent and manipulative acts and practices and 
promote just and equitable principles of trade, while still emphasizing 
the duty of fair dealing owed by underwriters to their customers. Rule 
G-17 has two components, one an anti-fraud prohibition, and the other a 
fair dealing requirement (which promotes just and equitable principles 
of trade). The Notice would address both components of the rule. The 
sections of the Notice entitled ``Representations to Issuers,'' 
``Underwriter Duties in Connection with Issuer Disclosure Documents,'' 
``Excessive Compensation,'' ``Payments to or from Third Parties,'' 
``Profit-Sharing with Investors,'' ``Retail Order Periods,'' and 
``Dealer Payments to Issuer Personnel'' primarily would provide 
guidance as to conduct required to comply with the anti-fraud component 
of the rule and, in some cases, conduct that would violate the anti-
fraud component of the rule, depending on the facts and circumstances. 
The sections of the Notice entitled ``Role of the Underwriter/Conflicts 
of Interest,'' ``Required Disclosures to Issuers,'' ``Fair Pricing,'' 
and ``Credit Default Swaps'' primarily would provide guidance as to 
conduct required to comply with the fair dealing component of the rule.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, since it would apply 
equally to all underwriters of municipal securities.

C. Self-Regulatory Organization's Statement on Comments Received on the 
Proposed Rule Change Received From Members, Participants, or Others

    The MSRB has separately filed a comment letter with the Commission 
in which it discusses the responses to comment letters received by the 
Commission in response to the notice for comment on the original 
proposed rule change published in the Federal Register.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    By December 7, 2011 (which is the date that is 90 days after the 
date the notice of the original proposed rule change was published in 
the Federal Register) the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2011-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2011-09. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MSRB-2011-09 and should be 
submitted on or before December 1, 2011.\8\
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    \8\ The Commission believes that a 10-day comment period is 
reasonable, given the date for Commission action is December 7, 
2011. The 10-day comment period will provide adequate time for 
comment.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-29970 Filed 11-18-11; 8:45 am]
BILLING CODE 8011-01-P


