
[Federal Register Volume 77, Number 91 (Thursday, May 10, 2012)]
[Notices]
[Pages 27509-27525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11268]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66927; File No. SR-MSRB-2011-09]


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

May 4, 2012.

I. Introduction

    On August 22, 2011, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change consisting of an 
interpretive notice concerning the application of MSRB Rule G-17 
(Conduct of Municipal Securities and Municipal Advisory Activities) to 
underwriters of municipal securities (``Interpretive Notice''). The 
proposed rule change was published for comment in the Federal Register 
on September 9, 2011.\3\ The Commission received five comment letters 
on the proposed rule change.\4\ On October 11, 2011, the MSRB extended 
the time period for Commission action to December 7, 2011. On November 
3, 2011, the MSRB filed Amendment No. 1 to the proposed rule change. On 
November 10, 2011, the MSRB withdrew Amendment No. 1, responded to 
comments,\5\ and filed Amendment No. 2 to the proposed rule change. The 
proposed rule change, as modified by Amendment No. 2, was published for 
comment in the Federal Register on November 21, 2011.\6\ The Commission 
received eight comment letters on the proposed rule change, as modified 
by Amendment No. 2, and a second response from the MSRB.\7\ On December 
6, 2011, the MSRB extended the time period for Commission action to

[[Page 27510]]

December 8, 2011. On December 8, 2011, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act to determine whether 
to approve or disapprove the proposed rule change.\8\ The Commission 
received five comment letters and two additional responses from the 
MSRB.\9\ On March 5, 2012, the MSRB extended the time period for 
Commission action to May 4, 2012. This order approves the proposed rule 
change, as modified by Amendment No. 2.
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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 (``Original Notice of Filing'').
    \4\ See letters from Joy A. Howard, Principal, WM Financial 
Strategies, dated September 30, 2011 (``WM Letter I''); Mike 
Nicholas, Chief Executive Officer, Bond Dealers of America, dated 
September 30, 2010 (``BDA Letter I''); Colette J. Irwin-Knott, 
CIPFA, President, National Association of Independent Public Finance 
Advisors, dated September 30, 2011 (``NAIPFA Letter I''); Leslie M. 
Norwood, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association, dated September 30, 2011 
(``SIFMA Letter I''); and Susan Gaffney, Director, Federal Liaison 
Center, Government Finance Officers Association, dated October 3, 
2011 (``GFOA Letter I'').
    \5\ See letter from Margaret C. Henry, General Counsel, Market 
Regulation, MSRB, dated November 10, 2011 (``Response Letter I'').
    \6\ See Securities Exchange Act Release No. 65749 (November 15, 
2011), 76 FR 72013 (``Amended Notice of Filing'').
    \7\ See letters from Colette J. Irwin-Knott, CIPFA, President, 
National Association of Independent Public Finance Advisors, dated 
November 30, 2011 (``NAIPFA Letter II''); E. John White, Chief 
Executive Officer, Public Financial Management, Inc., dated November 
30, 2011 (``PFM Letter I''); Leslie M. Norwood, Managing Director 
and Associate General Counsel, Securities Industry and Financial 
Markets Association, dated November 30, 2011 (``SIFMA Letter II''); 
Joy A. Howard, Principal, WM Financial Strategies, dated November 
30, 2011 (``WM Letter II''); Michael Nicholas, CEO, Bond Dealers of 
America, dated December 1, 2011 (``BDA Letter II''); Susan Gaffney, 
Director, Federal Liaison Center, Government Finance Officers 
Association, dated December 1, 2011 (``GFOA Letter II''); Robert 
Doty, AGFS, dated December 1, 2011 (``AGFS Letter''); and Peter C. 
Orr, CFA, President, Intuitive Analytics LLC, dated December 7, 2011 
(``IA Letter''). See letter from Margaret C. Henry, General Counsel, 
Market Regulation, MSRB, dated December 7, 2011 (``Response Letter 
II'').
    \8\ See Securities Exchange Act Release No. 65918 (December 8, 
2011), 76 FR 77865 (December 14, 2011).
    \9\ See letters from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated January 27, 2012 (``SIFMA Letter III''); Michael 
Nicholas, Chief Executive Officer, Bond Dealers of America, dated 
January 30, 2012 (``BDA Letter III''); Colette J. Irwin-Knott, 
CIPFA, President, National Association of Independent Public Finance 
Advisors, dated January 30, 2012 (``NAIPFA Letter III''); Susan 
Gaffney, Director, Federal Liaison Center, Government Finance 
Officers Association, dated January 30, 2012 (``GFOA Letter III''); 
and John H. Bonow, Chief Executive Officer, Public Financial 
Management, Inc., dated February 13, 2012 (``PFM Letter II''). See 
letters from Margaret C. Henry, General Counsel, Market Regulation, 
MSRB, dated January 30, 2012 (``Response Letter III'') and Margaret 
C. Henry, General Counsel, Market Regulation, MSRB, dated February 
13, 2012 (``Response Letter IV'').
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II. Description of the Proposal

    The MSRB proposes to adopt an interpretive notice with respect to 
MSRB Rule G-17, which states that ``[i]n the conduct of its municipal 
securities or municipal advisory activities, each broker, dealer, 
municipal securities dealer, and municipal advisor shall deal fairly 
with all persons and shall not engage in any deceptive, dishonest, or 
unfair practice.''
    The Interpretive Notice would apply to dealers acting as 
underwriters and their duty to municipal entity \10\ issuers of 
municipal securities in negotiated underwritings (except where the 
Interpretive Notice indicates that it also applies to competitive 
underwritings), but would not apply to selling group members or when a 
dealer is serving as an advisor to a municipal entity. The Interpretive 
Notice would include the following sections: (1) Basic Fair Dealing 
Principle; (2) Role of the Underwriter/Conflicts of Interest; (3) 
Representations to Issuers; (4) Required Disclosures to Issuers; (5) 
Underwriter Duties in Connection with Issuer Disclosure Documents; (6) 
Underwriter Compensation and New Issue Pricing; (7) Conflicts of 
Interest; (8) Retail Order Periods; and (9) Dealer Payments to Issuer 
Personnel.
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    \10\ The Interpretive Notice would define the term ``municipal 
entity'' as that term is defined by Section 15B(e)(8) of the 
Exchange Act: ``Any State, political subdivision of a State, or 
municipal corporate instrumentality of a State, including--(A) any 
agency, authority, or instrumentality of the State, political 
subdivision, or municipal corporate instrumentality; (B) any plan, 
program, or pool of assets sponsored or established by the State, 
political subdivision, or municipal corporate instrumentality or any 
agency, authority, or instrumentality thereof; and (C) any other 
issuer of municipal securities.'' See Interpretive Notice at endnote 
1.
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A. Basic Fair Dealing Principle

    The Interpretive Notice would interpret Rule G-17's duty to deal 
fairly with all persons as providing that an underwriter must not 
misrepresent or omit the facts, risks, potential benefits, or other 
material information about municipal securities activities undertaken 
with a municipal entity issuer. The Interpretive Notice would also 
state that MSRB Rule G-17 establishes a general duty of a dealer to 
deal fairly with all persons (including, but not limited to, issuers of 
municipal securities), even in the absence of fraud.

B. Role of the Underwriter/Conflicts of Interest

    The Interpretive Notice would state that MSRB Rule G-17's duty to 
deal fairly with all persons requires the underwriter to make certain 
disclosures to the issuer of municipal securities to clarify the 
underwriter's role in an issuance of municipal securities and the 
actual or potential material conflicts of interest with respect to such 
issuance, as described below.
1. Disclosures Concerning the Underwriter's Role
    An underwriter must disclose the following information to an 
issuer: (A) MSRB Rule G-17 requires an underwriter to deal fairly at 
all times with both municipal issuers and investors; (B) the 
underwriter's primary role is to purchase securities with a view to 
distribution in an arm's-length commercial transaction with the issuer 
and it has financial and other interests that differ from those of the 
issuer; (C) unlike a municipal advisor, the underwriter does not have a 
fiduciary duty to the issuer under the federal securities laws and is 
not required by federal law to act in the best interest of the issuer 
without regard to the underwriter's own financial or other interests; 
(D) the underwriter has a duty to purchase securities from the issuer 
at a fair and reasonable price, but must balance that duty with its 
duty to sell municipal securities to investors at prices that are fair 
and reasonable; and (E) the underwriter will review the official 
statement for the issuer's securities in accordance with, and as part 
of, its responsibilities to investors under the federal securities 
laws, as applied to the facts and circumstances of the transaction. 
Moreover, the Interpretive Notice would state that the underwriter must 
not recommend that the issuer not retain a municipal advisor.
2. Disclosure Concerning the Underwriter's Compensation
    An underwriter must disclose to an issuer whether its underwriting 
compensation will be contingent on the closing of a transaction. The 
underwriter must also disclose that compensation that is contingent on 
the closing of a transaction or the size of a transaction presents a 
conflict of interest, because it may cause the underwriter to recommend 
a transaction that is unnecessary or to recommend that the size of the 
transaction be larger than is necessary.
3. Other Conflicts Disclosures
    An underwriter must disclose other potential or actual material 
conflicts of interest, including, but not limited to, the following: 
(A) Any payments described below in Section II (G)(1) ``Conflicts of 
Interest--Payments to or from Third Parties''; (B) any arrangements 
described below in Section II (G)(2) ``Conflicts of Interest--Profit-
Sharing with Investors''; (C) the credit default swap disclosures 
described below in Section II (G)(3) ``Conflicts of Interest--Credit 
Default Swaps''; and (D) any incentives for the underwriter to 
recommend a complex municipal securities financing and other associated 
conflicts of interest described below in Section II (D) ``Required 
Disclosures to Issuers.''
    Disclosures concerning the role of the underwriter and the 
underwriter's compensation could be made by a syndicate manager on 
behalf of other syndicate members. Other conflicts disclosures must be 
made by the particular underwriters subject to such conflicts.
4. Timing and Manner of Disclosures
    All of the foregoing 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. The Interpretive Notice would specify that the disclosures 
must be made in a manner designed to make clear to such official the 
subject matter of the disclosures and their implications for the 
issuer.

[[Page 27511]]

    Disclosure concerning the arm's-length nature of the underwriter-
issuer relationship must be made in the earliest stages of the 
underwriter's relationship with the issuer, for example, in a response 
to a request for proposals or in promotional materials provided to an 
issuer. Other disclosures concerning the role of the underwriter and 
the underwriter's compensation generally must be made when the 
underwriter is engaged to perform underwriting services, for example, 
in an engagement letter, not solely in a bond purchase agreement. Other 
conflicts disclosures must be made at the same time, except with regard 
to conflicts discovered or arising after the underwriter has been 
engaged. For example, a conflict may not be present until an 
underwriter has recommended a particular financing. In that case, the 
disclosure must be provided in sufficient time before the execution of 
a contract with the underwriter to allow the official to evaluate the 
recommendation, as described below in Section II (D) ``Required 
Disclosures to Issuers.''
5. Acknowledgement of Disclosures
    An underwriter must attempt to receive written acknowledgement 
(other than by automatic email receipt) by the official of the issuer 
of receipt of the foregoing disclosures. If the official of the issuer 
agrees to proceed with the underwriting engagement after receipt of the 
disclosures but will not provide written acknowledgement of receipt, 
the underwriter may proceed with the engagement after documenting with 
specificity why it was unable to obtain such written acknowledgement.

C. Representations to Issuers

    All representations made by underwriters to issuers of municipal 
securities in connection with municipal securities underwritings, 
whether written or oral, must be truthful and accurate and not 
misrepresent or omit material facts. Underwriters must have a 
reasonable basis for the representations and other material information 
contained in the documents they prepare and must refrain from including 
representations or other information they know or should know is 
inaccurate or misleading. For example, in connection with a certificate 
signed by the underwriter that will be relied upon by the issuer or 
other relevant parties to an underwriting (e.g., an issue price 
certificate), the dealer must have a reasonable basis for the 
representations and other material information contained therein.
    In addition, an underwriter's response to an issuer's request for 
proposals or qualifications must fairly and accurately describe the 
underwriter's capacity, resources, and knowledge to perform the 
proposed underwriting as of the time the proposal is submitted and must 
not contain any representations or other material information about 
such capacity, resources, or knowledge that the underwriter knows or 
should know to be inaccurate or misleading. Matters not within the 
personal knowledge of those preparing the response, for example, 
pending litigation, must be confirmed by those with knowledge of the 
subject matter. An underwriter must not represent that it has the 
requisite knowledge or expertise with respect to a particular financing 
if the personnel that it intends to work on the financing do not have 
the requisite knowledge or expertise.

D. Required Disclosures to Issuers

    The Interpretive Notice would provide that while many municipal 
securities are issued using financing structures that are routine and 
well understood by the typical municipal market professional, including 
most issuer personnel that have the lead responsibilities in connection 
with the issuance of municipal securities, the underwriter must provide 
disclosures on the material aspects of structures that it recommends 
when the underwriter reasonably believes issuer personnel lacks 
knowledge or experience with such structures.
    In cases where the issuer personnel responsible for the issuance of 
municipal securities would not be well positioned to fully understand 
or assess the implications of a financing in its totality, because the 
financing is structured in a unique, atypical, or otherwise complex 
manner, the underwriter in a negotiated offering that recommends such 
complex financing has an obligation to make more particularized 
disclosures than otherwise required in a routine financing.\11\ 
Examples of complex financings include variable rate demand obligations 
and financings involving derivatives such as swaps. The underwriter 
must disclose the material financial characteristics of the complex 
financing, as well as the material financial risks of the financing 
that are known to the underwriter and reasonably foreseeable at the 
time of the disclosure.\12\ The underwriter must also disclose any 
incentives to recommend the financing and other associated conflicts of 
interest.\13\ These disclosures must be made in a fair and balanced 
manner based on principles of fair dealing and good faith.
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    \11\ The Interpretive Notice would state that if a complex 
municipal securities financing consists of an otherwise routine 
financing structure that incorporates a unique, atypical or complex 
element and the issuer personnel have knowledge or experience with 
respect to the routine elements of the financing, the disclosure of 
material risks and characteristics may be limited to those relating 
to such unique, atypical or complex element and any material impact 
such element may have on other features that would normally be 
viewed as routine. See Interpretive Notice at endnote 6.
    \12\ The Interpretive Notice would provide, as an example, that 
an underwriter that recommends variable rate demand obligations 
should inform the issuer of the risk of interest rate fluctuations 
and material risks of any associated credit or liquidity facilities 
(for example, the risk that the issuer might not be able to replace 
the facility upon its expiration and might be required to repay the 
facility provider over a short period of time). As an additional 
example, if the underwriter recommends that the issuer swap the 
floating rate interest payments on the variable rate demand 
obligations to fixed rate payments, the underwriter must disclose 
the material financial risks (including market, credit, operational, 
and liquidity risks) and material financial characteristics of the 
recommended swap (for example, 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), as well as the material financial risks associated 
with the variable rate demand obligations. Such disclosure should be 
sufficient to allow the issuer to assess the magnitude of its 
potential exposure as a result of the complex municipal securities 
financing. The underwriter must also inform the issuer that there 
may be accounting, legal, and other risks associated with the swap 
and that the issuer should consult with other professionals 
concerning such risks. If the underwriter's affiliated swap dealer 
is proposed to be the executing swap dealer, the underwriter may 
satisfy its disclosure obligation with respect to the swap if such 
disclosure has been provided to the issuer by the affiliated swap 
dealer or the issuer's swap or other financial advisor that is 
independent of the underwriter and the swap dealer, as long as the 
underwriter has a reasonable basis for belief in the truthfulness 
and completeness of such disclosure. If the issuer decides to enter 
into a swap with another dealer, the underwriter is not required to 
make disclosures with regard to that swap. Dealers that recommend 
swaps or security-based swaps to municipal entities may also be 
subject to rules of the Commodity Futures Trading Commission 
(``CFTC'') or those of the Commission. See Interpretive Notice at 
endnote 7.
    \13\ The Interpretive Notice would provide that, as an example, 
a conflict of interest may exist when the underwriter is also the 
provider of a swap used by an issuer to hedge a municipal securities 
offering or when the underwriter receives compensation from a swap 
provider for recommending the swap provider to the issuer. See 
Interpretive Notice at endnote 8.
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    The Interpretive Notice would provide that the level of required 
disclosure may vary according to the issuer's knowledge or experience 
with the proposed financing structure or similar structures, capability 
of evaluating the risks of the recommended financing, and financial 
ability to bear the risks of the recommended financing, in each case 
based on the reasonable

[[Page 27512]]

belief of the underwriter.\14\ In all events, the underwriter must 
disclose any incentives for the underwriter to recommend the complex 
municipal securities financing and other associated conflicts of 
interest.
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    \14\ The Interpretive Notice would state that even a financing 
in which the interest rate is benchmarked to an index that is 
commonly used in the municipal marketplace, such as LIBOR or SIFMA, 
may be complex to an issuer that does not understand the components 
of that index or its possible interaction with other indexes. See 
Interpretive Notice at endnote 9.
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    The Interpretive Notice would provide that this disclosure must be 
made in writing to an official of the issuer whom the underwriter 
reasonably believes has the authority to bind the issuer by contract 
with the underwriter in (A) sufficient time before the execution of a 
contract with the underwriter to allow the official to evaluate the 
recommendation and (B) a manner designed to make clear to such official 
the subject matter of such disclosures and their implications for the 
issuer. The complex financing disclosures must address the specific 
elements of the financing and cannot be general in nature. Finally, the 
Interpretive Notice would provide that the underwriter must make 
additional efforts reasonably designed to inform the official of the 
issuer if the underwriter does not reasonably believe that the official 
is capable of independently evaluating the disclosures.

E. Underwriter Duties in Connection With Issuer Disclosure Documents

    The Interpretive Notice would note that underwriters often play an 
important role in assisting issuers in the preparation of disclosure 
documents, such as preliminary official statements and official 
statements.\15\ These documents are critical to the municipal 
securities transaction, in that investors rely on the representations 
contained in the documents in making their investment decisions. 
Investment professionals, such as municipal securities analysts and 
ratings services, rely on the representations in forming an opinion 
regarding the credit.
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    \15\ The Interpretive Notice would state that underwriters that 
assist issuers in preparing official statements must remain 
cognizant of the underwriters' duties under federal securities laws. 
The Interpretive Notice would state that, with respect to primary 
offerings of municipal securities, the Commission has noted that 
``[b]y participating in an offering, an underwriter makes an implied 
recommendation about the securities'' and ``this recommendation 
itself implies that the underwriter has a reasonable basis for 
belief in the truthfulness and completeness of the key 
representations made in any disclosure documents used in the 
offerings.'' See Interpretive Notice at endnote 10 and Securities 
Exchange Act Release No. 26100 (September 22, 1988), 53 FR 37778, 
37787 (September 28, 1988) (proposing Exchange Act Rule 15c2-12). 
Further, the Interpretive Notice would state that, pursuant to 
Exchange Act Rule 15c2-12(b)(5), an underwriter may not purchase or 
sell municipal securities in most primary offerings unless the 
underwriter has reasonably determined that the issuer or an 
obligated person has entered into a written undertaking to provide 
certain types of secondary market disclosure and has a reasonable 
basis for relying on the accuracy of the issuer's ongoing disclosure 
representations. See Interpretive Notice at endnote 10 and 
Securities Exchange Act Release No. 34961 (November 10, 1994), 59 FR 
59590 (November 17, 1994) (adopting continuing disclosure provisions 
of Exchange Act Rule 15c2-12).
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    The Interpretive 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 extends 
to representations and information provided by the underwriter in 
connection with the preparation by the issuer of its disclosure 
documents, for example, cash flows.

F. Underwriter Compensation and New Issue Pricing

1. Excessive Compensation
    The Interpretive Notice would state that an underwriter's 
compensation for a new issue (including both direct compensation paid 
by the issuer and other separate payments, values, or credits received 
by the underwriter from the issuer or any other party in connection 
with the underwriting), in certain cases and depending upon the 
specific facts and circumstances of the offering, may be so 
disproportionate to the nature of the underwriting and related services 
performed as to constitute an unfair practice with regard to the issuer 
that it is a violation of MSRB Rule G-17. The Interpretive Notice would 
state that, among the factors relevant to whether an underwriter's 
compensation is disproportionate to the nature of the underwriting and 
related services performed, are the credit quality of the issue, the 
size of the issue, market conditions, the length of time spent 
structuring the issue, and whether the underwriter is paying the fee of 
the underwriter's counsel, or any other relevant costs related to the 
financing.
2. Fair Pricing
    The Interpretive Notice would state that the duty of fair dealing 
under MSRB 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.\16\ In general, a dealer purchasing bonds in a competitive 
underwriting for which the issuer may reject any and all bids will be 
deemed to have satisfied its duty of fairness to the issuer with 
respect to the purchase price of the issue, as long as the dealer's bid 
is a bona fide bid as defined in MSRB Rule G-13 \17\ that is based on 
the dealer's best judgment of the fair market value of the securities 
that are the subject of the bid.
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    \16\ The Interpretive Notice would state that the MSRB has 
previously observed that whether an underwriter has dealt fairly 
with an issuer for purposes of MSRB Rule G-17 is dependent upon all 
of the facts and circumstances of an underwriting and is not 
dependent solely on the price of the issue. The Notice would refer 
to MSRB Notice 2009-54 and MSRB Rule G-17 Interpretive Letter--
Purchase of New Issue From Issuer, MSRB interpretation of December 
1, 1997. See Interpretive Notice at endnote 11.
    \17\ The Interpretive Notice would refer to MSRB Rule G-
13(b)(iii), which provides: ``For purposes of subparagraph (i), a 
quotation shall be deemed to represent a `bona fide bid for, or 
offer of, municipal securities' if the broker, dealer or municipal 
securities dealer making the quotation is prepared to purchase or 
sell the security which is the subject of the quotation at the price 
stated in the quotation and under such conditions, if any, as are 
specified at the time the quotation is made.'' See Interpretive 
Notice at endnote 12.
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    In a negotiated underwriting, the underwriter has a duty under MSRB 
Rule G-17 to negotiate in good faith with the issuer. This duty would 
include the obligation of the dealer to ensure the accuracy of 
representations made during the course of such negotiations, including 
representations regarding the price negotiated and the nature of 
investor demand for the securities, for example, the status of the 
order period and the order book. If, for example, the dealer represents 
to the issuer that it is providing the ``best'' market price available 
on the new issue, or that it will exert its best efforts to obtain the 
``most favorable'' pricing, the dealer may violate MSRB Rule G-17 if 
its actions are inconsistent with such representations.\18\
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    \18\ The Interpretive Notice would refer to MSRB Rule G-17 
Interpretive Letter--Purchase of New Issue From Issuer, MSRB 
interpretation of December 1, 1997. See Interpretive Notice at 
endnote 13.
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G. Conflicts of Interest

1. Payments to or From Third Parties
    The Interpretive Notice would state that in certain cases, 
compensation received by the underwriter from third parties, such as 
the providers of derivatives and investments (including affiliates of 
the underwriters), may color the underwriter's judgment and cause it

[[Page 27513]]

to recommend products, structures, and pricing levels to an issuer when 
it would not have done so absent such payments. The MSRB would view the 
failure of an underwriter to disclose to the issuer the existence of 
payments, values, or credits received by the underwriter in connection 
with its underwriting of the new issue from parties other than the 
issuer, and payments made by the underwriter in connection with such 
new issue to parties other than the issuer (in either case including 
payments, values, or credits that relate directly or indirectly to 
collateral transactions integrally related to the issue being 
underwritten), to be a violation of the underwriter's obligation to the 
issuer under MSRB Rule G-17.
    For example, the MSRB would consider it to be a violation of MSRB 
Rule G-17 for an underwriter to compensate an undisclosed third party 
in order to secure municipal securities business. Similarly, the MSRB 
would consider it to be a violation of MSRB Rule G-17 for an 
underwriter to receive undisclosed compensation from a third party in 
exchange for recommending that third party's services or products to an 
issuer, including business related to municipal securities derivative 
transactions. The amount of such third party payments need not be 
disclosed.
    In addition, the underwriter must disclose to the issuer whether 
the underwriter has entered into any third-party arrangements for the 
marketing of the issuer's securities.
2. Profit-Sharing With Investors
    The Interpretive Notice would state that arrangements between the 
underwriter and an investor purchasing newly issued securities from the 
underwriter (including purchases that are contingent upon the delivery 
by the issuer to the underwriter of the securities) according to which 
profits realized from the resale by such investor of the securities are 
directly or indirectly split or otherwise shared with the underwriter 
would, depending on the facts and circumstances (including, in 
particular, if such resale occurs reasonably close in time to the 
original sale by the underwriter to the investor), constitute a 
violation of the underwriter's fair dealing obligation under MSRB Rule 
G-17. Such arrangements could also constitute a violation of MSRB Rule 
G-25(c), which precludes a dealer from sharing, directly or indirectly, 
in the profits or losses of a transaction in municipal securities with 
or for a customer.\19\
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    \19\ According to MSRB Rule D-9: ``Except as otherwise 
specifically provided by rule of the Board, the term `Customer' 
shall mean any person other than a broker, dealer, or municipal 
securities dealer acting in its capacity as such or an issuer in 
transactions involving the sale by the issuer of a new issue of its 
securities.''
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3. Credit Default Swaps
    The Interpretive Notice would state that the issuance or purchase 
by a dealer of credit default swaps for which the reference is the 
issuer for which the dealer is serving as underwriter, or an obligation 
of that issuer, may pose a conflict of interest, because trading in 
such municipal credit default swaps has the potential to affect the 
pricing of the underlying reference obligations, as well as the pricing 
of other obligations brought to market by that issuer. As such, a 
dealer must disclose the fact that it engages in such activities to the 
issuers for which the dealer serves as underwriter.
    The Interpretive Notice would provide that activities with regard 
to credit default swaps based on baskets or indexes of municipal 
issuers that include the issuer or its obligations need not be 
disclosed, unless the issuer or its obligations represents more than 2% 
of the total notional amount of the credit default swap or the 
underwriter otherwise caused the issuer or its obligations to be 
included in the basket or index.

H. Retail Order Periods

    The Interpretive Notice would provide that an underwriter that has 
agreed to underwrite a transaction with a retail order period must 
honor such agreement.\20\ The Interpretive Notice would provide that a 
dealer that wishes to allocate securities in a manner that is 
inconsistent with an issuer's requirements must obtain the issuer's 
consent.
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    \20\ The Interpretive Notice would refer to MSRB Interpretation 
on Priority of Orders for Securities in a Primary Offering under 
Rule G-17, MSRB interpretation of October 12, 2010, reprinted in the 
MSRB Rule Book. The Notice would remind underwriters of previous 
MSRB guidance on the pricing of securities sold to retail investors 
and refer to Guidance on Disclosure and Other Sales Practice 
Obligations to Individual and Other Retail Investors in Municipal 
Securities, MSRB Notice 2009-42 (July 14, 2009). See Interpretive 
Notice at endnote 15.
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    The Interpretive Notice would state that an underwriter that has 
agreed to underwrite a transaction with a retail order period must take 
reasonable measures to ensure that retail clients are bona fide. An 
underwriter that knowingly accepts an order that has been framed as a 
retail order when it is not, for example, a number of small orders 
placed by an institutional investor that would otherwise not qualify as 
a retail customer would violate MSRB Rule G-17 if its actions are 
inconsistent with the issuer's expectations regarding retail orders. 
Moreover, a dealer that places an order that is framed as a qualifying 
retail order but in fact represents an order that does not meet the 
qualification requirements to be treated as a retail order, for 
example, an order by a retail dealer without ``going away'' orders \21\ 
from retail customers when such orders are not within the issuer's 
definition of ``retail,'' would violate its MSRB Rule G-17 duty of fair 
dealing.
---------------------------------------------------------------------------

    \21\ The Interpretive Notice would state that a ``going away'' 
order is an order for newly issued securities for which a customer 
is already conditionally committed and cite Securities Exchange Act 
Release No. 62715 (August 13, 2010), 75 FR 51128 (August 18, 2010) 
(SR-MSRB-2009-17). See Interpretive Notice at endnote 16.
---------------------------------------------------------------------------

    The Interpretive Notice would specify that the MSRB will continue 
to review activities relating to retail order periods to ensure that 
they are conducted in a fair and orderly manner consistent with the 
intent of the issuer and the MSRB's investor protection mandate.

I. Dealer Payments to Issuer Personnel

    The Interpretive Notice would state that dealers are reminded of 
the application of MSRB Rule G-20 on gifts, gratuities, and non-cash 
compensation, and MSRB Rule G-17, in connection with certain payments 
made to, and expenses reimbursed for, issuer personnel during the 
municipal bond issuance process.\22\ The Interpretive Notice would 
further state that the rules are designed to avoid conflicts of 
interest and to promote fair practices in the municipal securities 
market.
---------------------------------------------------------------------------

    \22\ The Interpretive Notice would cite to MSRB Rule G-20 
Interpretation--Dealer Payments in Connection With the Municipal 
Securities Issuance Process, MSRB interpretation of January 29, 
2007, reprinted in the MSRB Rule Book. See Interpretive Notice at 
endnote 17.
---------------------------------------------------------------------------

    The Interpretive Notice would alert dealers to consider carefully 
whether payments they make in regard to expenses of issuer personnel in 
the course of the bond issuance process, including in particular, but 
not limited to, payments for which dealers seek reimbursement from bond 
proceeds or issuers, comport with the requirements of MSRB Rule G-20. 
For example, the Interpretive Notice would provide that a dealer acting 
as a financial advisor or underwriter may violate MSRB Rule G-20 by 
paying for excessive or lavish travel, meal, lodging and entertainment 
expenses in connection with an offering such as may be incurred for 
rating

[[Page 27514]]

agency trips, bond closing dinners, and other functions, that inure to 
the personal benefit of issuer personnel and that exceed the limits or 
otherwise violate the requirements of the rule.\23\
---------------------------------------------------------------------------

    \23\ The Interpretive Notice would cite to In the Matter of RBC 
Capital Markets Corporation, SEC Rel. No. 34-59439 (February 24, 
2009) (settlement in connection with broker-dealer alleged to have 
violated MSRB Rules G-20 and G-17 for payment of lavish travel and 
entertainment expenses of city officials and their families 
associated with rating agency trips, which expenditures were 
subsequently reimbursed from bond proceeds as costs of issuance); In 
the Matter of Merchant Capital, L.L.C., SEC Rel. No. 34-60043 (June 
4, 2009) (settlement in connection with broker-dealer alleged to 
have violated MSRB rules for payment of travel and entertainment 
expenses of family and friends of senior officials of issuer and 
reimbursement of the expenses from issuers and from proceeds of bond 
offerings). See Interpretive Notice at endnote 18.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
as modified by Amendment No. 2, the comment letters received, and the 
MSRB's responses, and finds that the proposed rule change, as modified 
by Amendment No. 2, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to the MSRB. 
Specifically, the Commission finds that the proposed rule change is 
consistent with the provisions of Section 15B(b)(2)(C) of the Act,\24\ 
which requires, among other things, that the rules of the MSRB be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons 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 sections below include a detailed description of 
the comments received, the MSRB's responses to the comments, and the 
Commission's findings.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

A. Basic Fair Dealing Principle

    Commenters generally supported the principle of fair dealing in 
MSRB Rule G-17.\25\ Some commenters expressed their belief that the 
principle of fair dealing should not be interpreted to impose a 
fiduciary duty on underwriters to issuers,\26\ while other commenters 
expressed their belief that underwriters have such a duty if they 
engage in certain activities.\27\ In Response Letter I, the MSRB stated 
that the Interpretive Notice does not impose a fiduciary duty on 
underwriters and that the duties imposed by the Interpretive Notice on 
underwriters are no different in many cases from the duties already 
imposed on them by MSRB rules with respect to other types of customers 
(e.g., individual investors). Further, the MSRB stated that an 
underwriter is not required to act in the best interest of an issuer 
without regard to the underwriter's own financial and other interests 
and is not required to consider all reasonably feasible alternatives to 
the proposed financings. Rather, the MSRB stated that one purpose of 
the Interpretive Notice is to eliminate issuer confusion about the role 
of the underwriter.
---------------------------------------------------------------------------

    \25\ See, e.g., SIFMA Letter I.
    \26\ See SIFMA Letter I; NAIPFA Letter I; and BDA Letter I. Two 
commenters noted that the appearance of the imposition of a 
fiduciary duty would confuse municipal issuers on the role of 
underwriters. See NAIPFA Letter I and BDA Letter I. One commenter 
opposed the appearance of the imposition of a fiduciary duty and 
noted that municipal issuers often do not understand the disclosures 
that they are provided and do not benefit from complex disclosures 
from firms that are not acting in a fiduciary capacity. See WM 
Letter I (stating its belief that the proposal will not improve 
transparency in the municipal market).
    \27\ See, e.g., PFM Letter I. This commenter stated that advice 
given by brokers in their promotion of themselves to become 
underwriters makes them municipal advisors.
---------------------------------------------------------------------------

    The Commission finds that the proposed provision regarding the 
basic fair dealing principle of MSRB Rule G-17 is consistent with the 
Act because it will help to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and, 
in general, to protect investors, municipal entities, and the public 
interest. For example, the Interpretive Notice specifies that MSRB Rule 
G-17 establishes a general duty to deal fairly with all persons, even 
in the absence of fraud. In addition, the Commission believes that the 
MSRB has adequately responded to the comments by, among other things, 
clarifying the level of the underwriter's duties toward an issuer.

B. Role of the Underwriter/Conflicts of Interest

1. Disclosures Concerning the Underwriter's Role
    Some commenters stated that it is important that issuers understand 
the different roles that underwriters and financial advisors play in a 
transaction.\28\ Other commenters suggested additional disclosures with 
respect to the role of underwriters.\29\ For example, commenters 
suggested that the MSRB require an underwriter to state: (1) That the 
underwriter does not have a fiduciary duty to the issuer and is a 
counterparty at arm's length; \30\ (2) that the issuer may choose to 
engage a financial advisor to represent its interests; \31\ (3) that 
the underwriter is not acting as an advisor; \32\ (4) that the 
underwriter has conflicts with issuers because the underwriter 
represents the interests of investors and other parties; \33\ (5) that 
the underwriter seeks to maximize profitability; \34\ and (6) that the 
underwriter has no continuing obligation to the issuer after the 
transaction.\35\
---------------------------------------------------------------------------

    \28\ See, e.g., GFOA Letter I and NAIPFA Letter III (stating 
that ``[a]doption of the Rule is crucial to the prevention of 
confusion and harm from occurring to municipal issuers'').
    \29\ One commenter stated that it supports the proposal but 
believes that additional changes would be required to protect 
infrequent and/or small and unsophisticated issuers. See NAIPFA 
Letter I and NAIPFA Letter II.
    \30\ See GFOA Letter I; NAIPFA Letter I; GFOA Letter II; and 
GFOA Letter III. One commenter stated that a simple disclosure from 
an underwriter to the issuer that the underwriter is not acting as 
financial advisor and that the issuer should consult with a 
financial advisor would be sufficient. See WM Letter I. Another 
commenter stated that the requirement for an underwriter to compare 
its obligations with others, such as a municipal advisor, should be 
eliminated. See BDA Letter II.
    \31\ See GFOA Letter I; GFOA Letter II; GFOA Letter III; and 
NAIPFA Letter I (requesting a disclosure that an underwriter is no 
replacement for a municipal advisor and stating that when an issuer 
engages a municipal advisor, the underwriter disclosures should not 
overlap with areas covered by the role of municipal advisor).
    \32\ See NAIPFA Letter I.
    \33\ See id.
    \34\ See id.
    \35\ See id.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB noted that the Interpretive Notice, 
as modified by Amendment No. 2, incorporates many of the 
recommendations suggested by commenters, such as requiring underwriters 
to provide issuers with disclosure that underwriters do not have a 
fiduciary duty to issuers. In addition, the MSRB noted that the 
Interpretive Notice, as modified by Amendment No. 2, requires 
disclosure regarding the underwriter's role as compared to that of a 
municipal advisor, and prohibits an underwriter from recommending that 
the issuer not retain a municipal advisor.\36\ The MSRB also stated 
that it

[[Page 27515]]

does not believe that it is necessary for underwriters to disclose that 
they seek to maximize profitability and have no continuing obligation 
to the issuer after the transaction.
---------------------------------------------------------------------------

    \36\ In Response Letter IV, the MSRB stated that the proposed 
provision that an underwriter must not recommend that the issuer not 
retain a municipal advisor is a stronger protection to issuers than 
a disclosure that an issuer may choose to engage an advisor because 
the proposed provision ``affirmatively restrains an underwriter from 
taking action to discourage the use of an advisor rather than simply 
informing an issuer of a choice it already has and has no reason to 
believe it does not have.'' See also Response Letter II. One 
commenter agreed with the MSRB that an underwriter should not 
recommend that an issuer not retain a municipal advisor. See BDA 
Letter II.
---------------------------------------------------------------------------

    One commenter suggested that the MSRB require underwriters to 
disclose pending litigation that may affect the underwriter's municipal 
securities business, departure of experts that the issuer relied upon, 
and transactional risks, including a comparison of different forms of 
financings.\37\ In Response Letter I, the MSRB disagreed that 
underwriters should disclose the different types of financings that may 
be applicable to an issuer's particular situation because that is under 
the domain of the municipal advisor. The MSRB also noted that pending 
litigation and expert departures that do not rise to the level of 
conflicts could be required by an issuer as the issuer deems 
appropriate.\38\
---------------------------------------------------------------------------

    \37\ See GFOA Letter I. See also GFOA Letter II.
    \38\ According to the Interpretive Notice, disclosures regarding 
pending litigation against the underwriter must be confirmed by 
those persons with knowledge of the subject matter.
---------------------------------------------------------------------------

    One commenter suggested that the MSRB develop and promote 
educational information for issuers and other market participants with 
respect to underwriting pricings and fees.\39\ This commenter also 
suggested that the MSRB develop educational materials for issuers with 
respect to the information that underwriters must disclose and the 
appropriate questions that issuers should ask their underwriters 
regarding a transaction, as well as with respect to the ``fair and 
reasonable'' standard for the amount that underwriters pay issuers for 
bonds.\40\ In Response Letter I, the MSRB noted that it is in the 
process of developing educational materials for issuers with respect to 
the duties owed them by their underwriters under MSRB rules, as 
suggested by the commenter.
---------------------------------------------------------------------------

    \39\ See GFOA Letter I.
    \40\ See id.
---------------------------------------------------------------------------

    One commenter stated that underwriters should not be required to 
provide generalized role and compensation disclosures or written risk 
disclosures to large and frequent issuers unless requested by such 
issuers.\41\ Another commenter stated that the Commission and the MSRB 
would create confusion by imposing fiduciary-like duties on 
underwriters through Rule G-17, and that any disclosure requirements 
must be narrowly drawn to avoid conceptual and practical 
inconsistencies that would only confuse the parties as to their roles 
and responsibilities.\42\ In Response Letter II, the MSRB noted its 
disagreement with the comments and stated that providing more 
information to issuers about the nature of the duties of the 
professionals they engage--regardless of the issuer's size, 
sophistication or frequency of accessing the market--can only serve to 
empower, rather than confuse, issuers. In Response Letter IV, the MSRB 
declined to modify the requirements for providing written disclosures 
to large and frequent issuers. The MSRB stated that such issuers may 
experience turnover in finance personnel, and that disclosures are 
required to be made to issuer representatives to inform them in their 
decision making.
---------------------------------------------------------------------------

    \41\ See SIFMA Letter II. See also SIFMA Letter III.
    \42\ See BDA Letter I. See also SIFMA Letter I; NAIPFA Letter I; 
and NAIPFA Letter II.
---------------------------------------------------------------------------

    The Commission finds that the proposed disclosures concerning the 
underwriter's role are consistent with the Act because they will help 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and, in general, to protect 
investors, municipal entities, and the public interest. In providing 
municipal issuers with written information regarding such things as the 
arm's-length nature of the underwriter-issuer relationship and the role 
of the underwriter, municipal issuers should be better informed to 
evaluate, among other things, potential risks in engaging a particular 
underwriter. The disclosures should also help issuers to better 
understand the role of the underwriter, as compared to that of a 
municipal advisor. In addition, the required disclosures should benefit 
issuers, investors, and the public interest, and provide issuers and 
their advisors with valuable information with which to evaluate 
underwriter recommendations. Further, the Commission believes that, by 
providing that an underwriter must not recommend that the issuer not 
retain a municipal advisor, the Interpretive Notice will help further 
protect municipal issuers. The Commission agrees with the MSRB that the 
proposed provision that an underwriter must not recommend that the 
issuer not retain a municipal advisor is a stronger protection to 
issuers than a disclosure that an issuer may choose to engage an 
advisor.\43\
---------------------------------------------------------------------------

    \43\ See supra note 36.
---------------------------------------------------------------------------

    The Commission also believes that the MSRB has adequately addressed 
the comments regarding the disclosure requirements. Specifically, the 
Commission notes that, in response to commenters' requests for 
additional disclosures, the MSRB modified the Interpretive Notice, as 
originally proposed, by including specific information that an 
underwriter must disclose to the issuer. In addition, in response to 
comments, the MSRB stated that it is in the process of developing 
certain educational materials for issuers with respect to the duties 
owed them by their underwriters to help further the aim of the required 
disclosures.\44\
---------------------------------------------------------------------------

    \44\ See Response Letter I.
---------------------------------------------------------------------------

2. Disclosure Concerning the Underwriter's Compensation
    One commenter requested additional conflicts of interest 
disclosures regarding underwriter compensation, such as the manner of 
such compensation and any associated conflicts of interest.\45\ In 
Response Letter I, the MSRB stated that the Interpretive Notice, as 
modified by Amendment No. 2, incorporates many of the commenters' 
recommendations, such as disclosure regarding the conflicts of interest 
raised by contingent fee compensation.
---------------------------------------------------------------------------

    \45\ See GFOA Letter I.
---------------------------------------------------------------------------

    Another commenter stated that the underwriter should be required to 
disclose to an issuer, and obtain its informed consent in writing, that 
the form of the underwriter's compensation creates a conflict of 
interest because the compensation is based primarily on the size and 
type of issuance.\46\ This commenter also stated that the amount of 
compensation should be disclosed.\47\ On the other hand, one commenter 
objected to the characterization of contingent fee arrangements as 
resulting in a conflict of interest with issuers.\48\ The commenter 
stated that such arrangements do not necessarily result in a conflict, 
and recommended that the disclosure should state that such compensation 
``may'' present a conflict or ``may have the potential'' for a 
conflict.\49\
---------------------------------------------------------------------------

    \46\ See NAIPFA Letter I and NAIPFA Letter III.
    \47\ See NAIPFA Letter II. This commenter also suggested that 
disclosures regarding non-contingent fees may be necessary.
    \48\ See BDA Letter II.
    \49\ See id.
---------------------------------------------------------------------------

    In Response Letter II, the MSRB stated that it has accurately 
characterized contingent compensation arrangements as creating a 
conflict of interest. The MSRB stated that there may be other factors 
on which an underwriter and the issuer have a coincidence of interests 
that may outweigh the conflicting interests resulting from the 
contingent arrangement, but that does not change the fact that such 
arrangement itself represents a conflict. Further, the MSRB stated 
that, given the transaction-based

[[Page 27516]]

nature of the typical relationship between underwriters and issuers, 
the proposal's requirements regarding disclosure of compensation 
conflicts, together with the other conflicts disclosures included in 
the proposal, adequately address concerns that may arise in cases where 
potential conflicts may arise under less typical compensation 
scenarios.
    The Commission finds that the proposed disclosure requirements for 
underwriter's compensation are consistent with the Act because they 
will help to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors, municipal entities, and the public interest. 
Specifically, written disclosures by underwriters regarding such things 
as whether the underwriter's compensation is contingent on the closing 
of the transaction, as well as other potential or actual conflicts of 
interest, should help ensure that municipal issuers are better informed 
in evaluating, among other things, potential risks of engaging a 
particular underwriter. Further, the Commission believes that the 
required disclosures should benefit issuers, investors, and the public 
interest, and provide issuers and their advisors with valuable 
information with which to evaluate underwriter recommendations.
    In addition, the Commission believes that the MSRB has adequately 
addressed the comments regarding the compensation disclosure 
requirements. Specifically, the Commission notes that, in response to a 
commenter's request for additional conflicts of interest disclosures 
regarding underwriter compensation, the MSRB modified the Interpretive 
Notice, as originally proposed, by providing that the underwriter must 
disclose whether its compensation is contingent, and that contingent 
compensation presents a conflict of interest.
3. Other Conflicts Disclosures
    One commenter stated that when there is a syndicate of 
underwriters, an underwriter whose participation level is below 10% 
should be exempted from the disclosure requirements.\50\ Another 
commenter stated that, with respect to underwriter syndicates, 
underwriters who do not have a role in the development or 
implementation of the financing structure or other aspects of the issue 
should not be subject to the disclosure requirements.\51\ In Response 
Letter II, the MSRB declined to adopt the suggested exemptions and 
stated that not all conflicts or other concerns that arise in the 
context of an underwriting are necessarily proportionate to the size of 
participation of an underwriter.\52\ The MSRB noted, however, that with 
respect to disclosures about the material financial characteristics and 
risks of an underwriting transaction recommended by underwriters, where 
such recommendation is made by the syndicate manager on behalf of the 
underwriting syndicate, the Interpretive Notice does not prohibit 
syndicate members from delegating to the syndicate manager (through, 
for example, the agreement among underwriters) the task of delivering 
such disclosure in a full and timely manner on behalf of the syndicate 
members, although each syndicate member would remain responsible for 
providing disclosures with respect to conflicts specific to such 
member.
---------------------------------------------------------------------------

    \50\ See SIFMA Letter II. See also SIFMA Letter III.
    \51\ See BDA Letter II.
    \52\ See also Response Letter IV.
---------------------------------------------------------------------------

    As discussed in further detail below in Sections III.D. and III.G., 
the Commission finds that disclosures concerning other conflicts of 
interest are consistent with the Act because they will help to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors, 
municipal entities, and the public interest. The Commission also 
believes that it is consistent with the Act to not provide the 
exemptions from the disclosure requirements suggested by commenters. As 
the MSRB noted, not all conflicts or other concerns that arise in the 
context of an underwriting are necessarily proportionate to the size of 
an underwriter's participation.\53\
---------------------------------------------------------------------------

    \53\ See Response Letter II.
---------------------------------------------------------------------------

4. Timing and Manner of Disclosures
    With respect to the disclosure process, one commenter stated that 
underwriters should be subject to a process similar to the more 
rigorous process for municipal advisors under the municipal advisor 
portion of proposed MSRB Rules G-17 and G-36.\54\ The commenter stated 
that providing disclosures is inadequate; rather, underwriters should 
be required to obtain informed consent from issuers. Moreover, the 
commenter stated that disclosures should be made to officials of the 
municipal entity with the power to bind the issuer, such as to the 
issuer's governing body.\55\ Alternatively, the commenter stated that 
the Interpretive Notice should be amended to prohibit the giving of 
disclosures based on a reasonable belief standard and instead require 
underwriters to have actual knowledge of whether an official has the 
power to bind the issuer by contract.\56\ On the other hand, one 
commenter suggested that disclosures should be made to an official that 
the underwriter reasonably believes ``has or will have'' the authority 
to bind the issuer by contract, instead of an official that the 
underwriter believes ``has'' the requisite authority.\57\ The commenter 
stated that due to the nature of these transactions, at the time of 
disclosure, there may not be an official with such authority as the 
authority may not be granted until later.
---------------------------------------------------------------------------

    \54\ See NAIPFA Letter I. The Commission notes that these 
proposals were subsequently withdrawn by the MSRB. See Securities 
Exchange Act Release Nos. 65397 (September 26, 2011), 76 FR 60955 
(September 30, 2011) (SR-MSRB-2011-14) (withdrawing proposed MSRB 
Rule G-36 and interpretive guidance concerning MSRB Rule G-36); and 
65398 (September 26, 2011), 76 FR 60958 (September 30, 2011) (SR-
MSRB-2011-15) (withdrawing proposed interpretive notice concerning 
MSRB Rule G-17).
    \55\ See NAIPFA Letter I and NAIPFA Letter II. One commenter 
stated its disagreement with the commenters who would require 
underwriters to make disclosures to the issuer's governing body. See 
SIFMA Letter III.
    \56\ See NAIPFA Letter I and NAIPFA Letter II. But see SIFMA 
Letter III (stating that underwriters should not be required to have 
actual knowledge that the official receiving the disclosures has the 
power to bind the issuer by contract).
    \57\ See BDA Letter II.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB stated that it is not necessary for 
underwriters to obtain consent from the issuer's governing body when 
the issuer finance officials have been delegated the ability to 
contract with the underwriter. The MSRB stated that it is not necessary 
for a contract to have been executed in order for an underwriter to 
have a reasonable belief that an issuer official has the requisite 
power to bind the issuer. Further, in Response Letter II, the MSRB 
noted that an official, such as a finance director, who is expected to 
receive the delegation of authority from the governing body to bind the 
issuer, could reasonably be viewed as an acceptable recipient of 
disclosures provided such expectation remains reasonable.
    One commenter stated that the Interpretive Notice should provide 
that the disclosure regarding the arm's-length nature of the 
underwriter-issuer relationship must be made in a response to a request 
for proposals or in promotional materials provided to an issuer, rather 
than ``at the earliest stages'' of the relationship as proposed, 
because the proposed standard is vague and ambiguous.\58\ This 
commenter also requested clarification with respect to when ``other 
conflicts'' disclosures must be made. Another commenter requested

[[Page 27517]]

clarification regarding the meaning of ``execution of a contract'' with 
respect to the timing of the risk disclosures.\59\ This commenter 
stated that execution of the bond purchase agreement should be the 
appropriate measurement. In Response Letter II, the MSRB clarified 
that, other than the disclosure with respect to the arm's-length nature 
of the relationship, the remaining disclosures regarding the 
underwriter's role, compensation and other conflicts of interest all 
must be provided when the underwriter is engaged to perform 
underwriting services (such as in an engagement letter), not solely in 
the bond purchase agreement. The MSRB also clarified that the 
``contract'' with respect to the timing of the risk disclosures is the 
bond purchase agreement.\60\
---------------------------------------------------------------------------

    \58\ See id.
    \59\ See SIFMA Letter II. This commenter also requested 
clarification with respect to how underwriters would satisfy the 
disclosure requirements in situations where the financing terms are 
determined in a short period of time, such as within a 24-hour 
window. See SIFMA Letter II and SIFMA Letter III. In Response Letter 
II, the MSRB stated that ``if an underwriter is asking an issuer to 
bind itself to the terms of a complex financing, it is unreasonable 
for the underwriter to expect the issuer to do so without having an 
opportunity to fully understand the nature of its commitment.'' See 
also Response Letter IV.
    \60\ See also Response Letter IV.
---------------------------------------------------------------------------

    One commenter suggested that the underwriter make its disclosures 
to the issuer in plain English to ensure that the issuer understands 
such disclosures.\61\ In Response Letter II, the MSRB stated that it 
agrees that reasonable efforts must be made to make the disclosures 
understandable, that disclosures must be made in a fair and balanced 
manner and, if the underwriter does not reasonably believe that the 
official to whom the disclosures are addressed is capable of 
independently evaluating the disclosures, the underwriter must make 
additional efforts reasonably designed to inform the issuer or its 
employees or agent.\62\
---------------------------------------------------------------------------

    \61\ See GFOA Letter II and GFOA Letter III.
    \62\ See also Response Letter IV.
---------------------------------------------------------------------------

    The Commission finds that the proposed timing and manner of 
disclosure are consistent with the Act because they will help to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors, municipal entities, and the public interest. Specifically, 
the Commission believes that the proposed timing and manner of 
disclosure will help to ensure that municipal issuers are fully and 
timely informed of the underwriter's role and any potential or actual 
conflicts of interest. Further, as noted by the MSRB, such provisions 
would provide guidance as to conduct required to comply with the fair 
dealing component of Rule G-17.\63\
---------------------------------------------------------------------------

    \63\ See Amended Notice of Filing, supra note 6 at 72015 
(stating that ``[t]he 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''). See also Response Letter III.
---------------------------------------------------------------------------

    In addition, the Commission believes that the MSRB has adequately 
addressed the comments regarding the timing and manner of disclosure. 
The Commission notes that, in response to comments, the MSRB modified 
the Interpretive Notice, as originally proposed, by specifically 
setting forth near the beginning of the Interpretive Notice the 
appropriate timing and manner of disclosure. The MSRB also provided 
clarification with respect to the timing of disclosure and the party to 
whom the disclosure must be made. In addition, the Commission notes 
that the MSRB has committed to monitoring matters relating to the 
timing of disclosure in order to determine whether any further action 
with respect to timing is merited.\64\
---------------------------------------------------------------------------

    \64\ See Response Letter II.
---------------------------------------------------------------------------

5. Acknowledgement of Disclosures
    One commenter stated that the requirement for issuer written 
acknowledgement of the receipt of disclosures would be helpful.\65\ 
However, in situations where written acknowledgement is not received 
from the issuer, the commenter urged the MSRB to require underwriters 
to put forth some level of effort to obtain the written 
acknowledgement. Another commenter stated that it believes that an 
underwriter should not be required to document why an official of the 
issuer does not acknowledge in writing that disclosures were 
received.\66\ Instead, the commenter recommended that the underwriter 
should only be required to document that disclosures were made and 
whether acknowledgement was received.
---------------------------------------------------------------------------

    \65\ See NAIPFA Letter II.
    \66\ See BDA Letter II.
---------------------------------------------------------------------------

    In Response Letter II, the MSRB clarified that if an issuer does 
not provide the underwriter with written acknowledgement of the receipt 
of disclosures, the failure to receive such acknowledgement must be 
documented, as well as what actions were taken to attempt to obtain the 
acknowledgement, in order for the underwriter to fulfill its obligation 
under MSRB Rule G-17 to deal fairly with the issuer.
    The Commission finds that the proposed provisions concerning the 
issuer's acknowledgement of the receipt of disclosures are consistent 
with the Act. The Commission believes that the proposed provisions will 
help to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors, municipal entities, and the public interest by 
helping to ensure that the issuer receives appropriate disclosures from 
the underwriter. For example, the Commission notes that, in response to 
comments, the MSRB modified the Interpretive Notice, as originally 
proposed, by specifically setting forth near the beginning of the 
Interpretive Notice the provisions with respect to the timing and 
acknowledgment of receipt of the disclosures, including the obligation 
to document the failure to receive such acknowledgement. In addition, 
in Response Letter II, the MSRB provided clarification with respect to 
the underwriter's obligation to document the failure to receive such 
acknowledgement.

C. Representations to Issuers

    According to the Interpretive Notice, an underwriter must have a 
reasonable basis for the representations and material information 
contained in a certificate that will be relied upon by the municipal 
entity issuer or other relevant parties to an underwriting. One 
commenter stated that one example of such a certificate used by the 
MSRB in the Interpretive Notice (i.e., an issue price certificate) is 
already regulated by tax laws and does not need additional regulation 
by the MSRB.\67\ In Response Letter IV, the MSRB disagreed with the 
comment that evaluating the reasonableness of an issue price 
certificate should be left to the tax authorities, and stated that 
``the reasonableness of an underwriter's representation in an issue 
price certificate may have a direct effect on a key representation that 
an issuer makes to potential investors--that interest on its securities 
is tax exempt.''
---------------------------------------------------------------------------

    \67\ See SIFMA Letter I. See also SIFMA Letter III.
---------------------------------------------------------------------------

    The Commission finds that the proposed provisions with respect to 
representations to issuers are consistent with the Act. The Commission 
believes that these provisions will help to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors, municipal 
entities, and the public interest by helping to ensure that all 
representations made by underwriters to issuers in connection with 
municipal securities underwritings are truthful and accurate. Also, as 
noted by the MSRB, such provisions would provide guidance as to conduct 
required to

[[Page 27518]]

comply with the anti-fraud component of Rule G-17.\68\ In addition, the 
Commission believes that the MSRB has adequately addressed the comment 
with respect to issue price certificates.
---------------------------------------------------------------------------

    \68\ See Amended Notice of Filing, supra note 6 at 72015 
(stating that ``[t]he 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''). See also Response Letter III.
---------------------------------------------------------------------------

D. Required Disclosures to Issuers

    One commenter stated that the disclosure requirements, especially 
for routine transactions, should only be imposed when the underwriter 
has reason to believe that the issuer does not have the knowledge or 
experience available to understand the transaction.\69\ The commenter 
also noted that ``issuer personnel responsible for the issuance of 
municipal securities'' and ``an official of the issuer whom the 
underwriter reasonably believes has the authority to bind the issuer by 
contract with the underwriter'' are not the same.\70\ Thus, the 
commenter stated that clarification should be provided that these 
regulatory requirements are imposed on the underwriter only if the 
underwriter has reason to believe that issuer personnel do not have the 
requisite knowledge or experience, regardless of whether the particular 
official who the underwriter reasonably believes to have the legal 
authority to contractually bind the issuer can be reasonably thought to 
have the requisite knowledge and experience. Another commenter stated 
that the Interpretive Notice should be amended to take into 
consideration the needs of unsophisticated municipal issuers, and 
underwriters should be required to assess the knowledge and 
understanding of municipal issuers on a case-by-case basis.\71\ In 
Response Letter I, the MSRB stated that it does not consider it unduly 
burdensome to require an underwriter to evaluate the level of knowledge 
and sophistication of issuer personnel, particularly considering that 
under the Interpretive Notice, as modified by Amendment No. 2, the 
underwriter need only have a reasonable basis for its evaluation. In 
Response Letter IV, the MSRB also noted that in the Interpretive 
Notice, it provided guidance on the factors that are relevant in coming 
to the reasonable belief.\72\
---------------------------------------------------------------------------

    \69\ See BDA Letter I. One commenter suggested factors to 
determine when disclosures would not be necessary for routine 
financings. See NAIPFA Letter I. In Response Letter I, the MSRB 
stated that while the factors are helpful, they do not address the 
particular issuer personnel's experience and knowledge, which are 
more relevant to the Interpretive Notice. Another commenter stated 
its belief that ``it can do no harm for the underwriter to provide 
information about routine financings to the issuer personnel who are 
charged by the government to execute the financing.'' See GFOA 
Letter II and GFOA Letter III. This commenter further stated that 
the amount of materials and explanations provided may need to be 
determined through conversations with the issuer personnel. Further, 
this commenter stated that it would not be unreasonable for the rule 
to state that the underwriter may be asked by issuer personnel to 
make disclosures about routine financings to others on the finance 
team or the members of a governing board who gave the authorization 
for the financing. In Response Letter II, the MSRB stated its belief 
that the provisions relating to risk disclosure are appropriate for 
the reasons described in Response Letter I and, therefore, no 
further modification is warranted.
    \70\ Another commenter noted that the issue of how the 
underwriter should identify the person to whom it must provide 
information deserves further discussion. See GFOA Letter II and GFOA 
Letter III. In Response Letter II, the MSRB noted that it would 
monitor disclosure practices and would engage in a dialogue with 
industry participants and the Commission to determine whether 
sufficient improvements have occurred in the flow of disclosures to 
decision-making personnel of issuers or whether additional steps 
should be taken.
    \71\ See NAIPFA Letter I and NAIPFA Letter II. The commenter 
also stated that the proposal requires additional changes in order 
to protect the infrequent and/or small, unsophisticated issuers of 
municipal bonds. See NAIPFA Letter II. Another commenter stated that 
there are many unsophisticated issuers who will benefit from the 
disclosures. See AGFS Letter.
    \72\ According to the Interpretive Notice, the level of 
disclosure required may vary according to the issuer's knowledge or 
experience with the proposed financing structure or similar 
structures, capability of evaluating the risks of the recommended 
financing, and financial ability to bear the risks of the 
recommended financing. See Interpretive Notice.
---------------------------------------------------------------------------

    One commenter stated that the underwriter should not be required to 
evaluate issuer personnel when the issuer has retained a municipal 
advisor.\73\ This commenter also stated that the written risk 
disclosures imposed on underwriters related to the financings do not 
take into account the role of the issuer's municipal advisor, if 
any.\74\ Other commenters stated that in a negotiated sale, when the 
issuer of municipal securities engages a registered municipal advisor, 
disclosures should be reduced or eliminated.\75\ In Response Letter I, 
the MSRB stated that underwriters are in the best position to 
understand the material financial terms and risks associated with 
recommended financings, and the burden should not be solely on 
municipal advisors to ascertain such terms and risks.
---------------------------------------------------------------------------

    \73\ See SIFMA Letter I and SIFMA Letter II.
    \74\ See SIFMA Letter I. See also SIFMA Letter II and SIFMA 
Letter III.
    \75\ See, e.g., NAIPFA Letter II; SIFMA Letter II; WM Letter II; 
and BDA Letter I. One commenter stated that if the issuer has a 
financial advisor or internal personnel serving the same role, then 
no underwriter written risk disclosures should be required. See 
SIFMA Letter I. The commenter further recommended that underwriters 
may satisfy their disclosure requirements by communicating the 
disclosures to the financial advisor or issuer internal personnel. 
This commenter stated that the underwriter should be permitted to 
assume, without further inquiry, that the finance staff will use its 
expertise to communicate the disclosure in an appropriate manner to 
other decision makers. See also SIFMA Letter II and SIFMA Letter 
III. In Response Letter IV, the MSRB stated that ``it is essential 
for issuer representatives to be the recipients of the required 
disclosures as they are the ones that must decide whether to accept 
their underwriters' recommendations.''
---------------------------------------------------------------------------

    One commenter stated that the written risk disclosures imposed on 
underwriters related to the financings (including complex financings) 
are too broad and vague.\76\ This commenter noted that if written risk 
disclosures are to be required, then additional guidance and clarity is 
needed on the following: (1) References to ``atypical or complex'' 
financings; (2) references to ``all material risks and characteristics 
of the complex municipal securities financing;'' (3) which issuer 
personnel must have the requisite level of knowledge and 
sophistication; (4) if the issuer does not have a financial advisor or 
internal personnel acting in a similar role, then the issuer's finance 
staff's knowledge and experience should be assessed by underwriters; 
and (5) only material risks that are known to the underwriter and 
reasonably foreseeable at the time of the disclosure should be 
required.
---------------------------------------------------------------------------

    \76\ See SIFMA Letter I. See also SIFMA Letter III.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB stated that it does not consider it 
appropriate to provide a more precise definition of ``complex municipal 
securities financing'' since the Interpretive Notice already provides 
the comparison to a fixed rate financing and examples of financings 
that are considered to be complex, such as those involving variable 
rate demand obligations and swaps.\77\ In addition, the MSRB stated 
that if there is any doubt on the part of the underwriter as to whether 
a financing is complex, it should err on the side of concluding that 
the financing is complex and provide the requisite disclosures. On the 
other hand, the MSRB noted that the Interpretive Notice, as modified by 
Amendment No. 2, would limit disclosures of a complex municipal 
securities financing recommended by the underwriter to its material 
financial characteristics, and its material financial risks that are 
known to the underwriter and reasonably foreseeable at the time of 
disclosure (rather than all material risks and

[[Page 27519]]

characteristics), and would provide examples of the types of 
disclosures in the case of swaps.
---------------------------------------------------------------------------

    \77\ See also Response Letter IV.
---------------------------------------------------------------------------

    One commenter stated that if an issuer has no financial advisor or 
internal financial department, the written disclosure requirements 
should not be triggered unless the issuer informs the underwriter that 
it lacks knowledge or experience and specifically requests such written 
disclosure in writing.\78\ In Response Letter I, the MSRB stated that 
it does not consider it appropriate to require an issuer to inform the 
underwriter that it lacks knowledge or experience with a financing as a 
condition of receiving disclosures from the underwriter because this 
would put the burden on the party least able to understand the 
transaction and its rights to disclosure.
---------------------------------------------------------------------------

    \78\ See SIFMA Letter I.
---------------------------------------------------------------------------

    One commenter stated that it would not be appropriate or practical 
to impose upon the underwriter the duty to assess the level of 
sophistication and experience of the issuer official to whom the 
disclosure is delivered, if the official is reasonably believed to have 
the authority to bind the issuer.\79\ The commenter stated that the 
underwriter should be permitted to rely on a representation from such 
official that he or she is sufficiently sophisticated and experienced, 
and issuers should be responsible for ensuring that they authorize 
appropriate personnel to contract for them.\80\ In Response Letter IV, 
the MSRB stated its expectation that if it were to provide the 
clarification that the commenter requested, issuers would be provided 
with boilerplate language requesting that they waive this disclosure 
requirement, and many of those that actually read the language ``would 
be loath to admit that they lacked sophistication or experience.''
---------------------------------------------------------------------------

    \79\ See id.
    \80\ See SIFMA Letter I and SIFMA Letter III.
---------------------------------------------------------------------------

    One commenter disagreed with the MSRB that the level of disclosure 
may vary based on the issuer's financial ability to bear the risks of 
the recommended financing.\81\ The commenter stated that a municipal 
entity with taxing power, who would be able to bear more risks of a 
financing, should not be ineligible for advice that is competent and 
unimpaired by the broker's own interests simply because the government 
can tax the citizens to restore any loss. In Response Letter II, the 
MSRB conceded that the financial ability to bear the risks of a 
recommended financing would not normally be a sufficient basis by 
itself for determining the level of disclosure. The MSRB noted, 
however, that the Interpretive Notice states three distinct factors 
that should be considered together in coming to this determination.
---------------------------------------------------------------------------

    \81\ See PFM Letter I.
---------------------------------------------------------------------------

    Other commenters noted that disclosure regarding derivatives is 
premature since there are pending rulemakings with the CFTC and the 
Commission that will apply to dealers recommending swaps or security-
based swaps to municipal entities.\82\ One commenter urged the MSRB to 
work together with the Commission and CFTC to ensure that one set of 
definitions and rules apply to the municipal securities market.\83\
---------------------------------------------------------------------------

    \82\ See SIFMA Letter I and BDA Letter I. See also SIFMA Letter 
III.
    \83\ See GFOA Letter I.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB noted that it is aware of the 
ongoing rulemaking by the Commission and CFTC and has taken care to 
ensure that requirements of the Interpretive Notice are consistent with 
such rulemaking. In Response Letter IV, the MSRB also noted that most 
of the derivatives entered into by municipal securities issuers are 
interest rate swaps, which are within the jurisdiction of the CFTC. The 
MSRB noted that the provisions concerning the disclosure of material 
financial risks and characteristics of complex municipal securities 
financings have been drafted to be consistent with the CFTC's business 
conduct rule, which was finalized on January 11, 2012.\84\
---------------------------------------------------------------------------

    \84\ In the Original Notice of Filing, the MSRB stated that it 
may undertake additional rulemaking as necessary to ensure 
consistency with Commission and CFTC rulemaking. See Original Notice 
of Filing, supra note 3 at 55994.
---------------------------------------------------------------------------

    The Commission finds that the proposed disclosures to issuers with 
respect to financings that the underwriter recommends are consistent 
with the Act because they will help to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors, municipal 
entities, and the public interest. Specifically, the Commission 
believes that, in providing municipal issuers with disclosures 
regarding the material financial characteristics and risks of certain 
recommended financing structures, municipal issuers should be better 
informed to evaluate, among other things, potential risks in selecting 
the financing structure most appropriate for their financing needs. The 
Commission also believes that issuers engaging in financings more 
appropriate to their needs will benefit municipal issuers, investors, 
and the public interest. Further, as noted by the MSRB, the required 
disclosures should provide issuers and their advisors with valuable 
information with which to evaluate underwriter recommendations and 
should benefit investors and the public interest.\85\
---------------------------------------------------------------------------

    \85\ See Response Letter III.
---------------------------------------------------------------------------

    In addition, the Commission believes that it is consistent with the 
Act for underwriters to continue to have disclosure obligations even if 
the municipal issuer has retained a municipal advisor. Underwriters are 
in the best position to understand the material terms and risks 
associated with the financings that they recommend.
    The Commission also believes that it is consistent with the Act to 
provide that underwriters must establish a reasonable belief with 
respect to the knowledge and experience of the issuer in determining 
the appropriate level of disclosures. The Commission believes that such 
an approach will result in disclosure more appropriately targeted to 
the level of the issuer's sophistication.\86\ For example, to the 
extent that the disclosures are to a sophisticated issuer, the level of 
disclosure should be reduced. For a less sophisticated issuer, however, 
additional disclosures will help to ensure that the issuer does not 
proceed with a financing transaction that it otherwise would not 
undertake if it fully understood the material aspects of the 
transaction.
---------------------------------------------------------------------------

    \86\ See Response Letter II and Response Letter IV.
---------------------------------------------------------------------------

    In addition, the Commission believes that the MSRB has adequately 
addressed comments regarding the disclosures for financing structures 
that the underwriter recommends to an issuer. Specifically, the 
Commission notes that in response to comments, the MSRB modified the 
Interpretive Notice, as originally proposed, to provide that an 
underwriter that recommends a complex municipal securities financing to 
an issuer must disclose the material financial characteristics of such 
complex municipal securities financing, as well as the material 
financial risks of such financing that are known to the underwriter and 
reasonably foreseeable at the time of the disclosure.\87\ Also, with 
respect to routine financing structures, the MSRB modified the original 
Interpretive Notice by stating that the underwriter must provide 
disclosures only on the material aspects

[[Page 27520]]

of the structures that it recommends (rather than on all routine 
financing structures) and, only in the case of issuer personnel that 
the underwriter reasonably believes lack knowledge or experience with 
such structures.\88\ Further, the Commission notes that the MSRB 
provided clarification with respect to the scope of the disclosure 
requirements and justifications for the timing of the disclosure 
requirements, as well as guidance regarding the types of disclosures 
that must be provided for complex municipal securities financings.
---------------------------------------------------------------------------

    \87\ According to the Interpretive Notice, as originally 
proposed, an underwriter that recommends a complex municipal 
securities financing to an issuer must disclose all material risks 
and characteristics of the complex municipal securities financing. 
The MSRB also modified the examples of the risk disclosures in the 
original Interpretive Notice to provide additional guidance 
regarding such disclosures.
    \88\ The Interpretive Notice, as originally proposed, stated 
that in the case of issuer personnel that lack knowledge or 
experience with routine financing structures, the underwriter must 
provide disclosures on the material aspects of such structures.
---------------------------------------------------------------------------

    In addition, the Commission notes that the MSRB has committed to 
monitor disclosure practices by underwriters to municipal issuers and 
to engage in a dialogue with industry participants and the Commission 
to determine whether sufficient improvements have occurred in the flow 
of disclosures to decision-making personnel of issuers or whether 
additional steps should be taken to improve upon the information 
flow.\89\
---------------------------------------------------------------------------

    \89\ See Response Letter II. See also Response Letter IV.
---------------------------------------------------------------------------

E. Underwriter Duties in Connection With Issuer Disclosure Documents

    Under the Interpretive Notice, the underwriter must have a 
reasonable basis for the representations and information provided to 
issuers in connection with the preparation by the issuer of its 
disclosure documents. One commenter stated its belief that the 
reasonable basis requirement is unreasonably broad.\90\ The commenter 
stated that the Interpretive Notice should be revised to clarify that 
an underwriter may limit its responsibility for the information 
provided by disclosing to the issuer any limitations on the scope of 
its analysis and factual verification. The commenter further stated 
that such duty should extend only to material information. Another 
commenter stated its belief that when an underwriter intends to assist 
in the preparation of an official statement, a disclosure should be 
made to the issuer stating that the underwriter can only be held liable 
where it can be shown that it did not act with a reasonable belief that 
the information presented was truthful and complete.\91\
---------------------------------------------------------------------------

    \90\ See SIFMA Letter I.
    \91\ See NAIPFA Letter I.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB reiterated that, in connection with 
materials prepared by an underwriter for use in an official statement, 
the underwriter must have ``a reasonable basis for the representations 
it makes, and other material information it provides, to an issuer'' 
and ``ensure that such representations and information are accurate and 
not misleading.'' The MSRB stated that the ``reasonable basis'' 
standard is based on the Commission's statement that ``[b]y 
participating in an offering, an underwriter makes an implied 
recommendation about the securities * * * this recommendation itself 
implies that the underwriter has a reasonable basis for belief in the 
truthfulness and completeness of the key representations made in any 
disclosure documents used in the offerings.'' \92\
---------------------------------------------------------------------------

    \92\ See Original Notice of Filing, 76 FR at 55992 (quoting 
Securities Exchange Act Release No. 26100 (September 22, 1988), 53 
FR 37778, 37787 (September 28, 1988) (proposing Exchange Act Rule 
15c2-12)). The MSRB stated that it would be a curious result for the 
underwriter not to be required under Rule G-17 to have a reasonable 
basis for its own representations set forth in the official 
statement, as well as a reasonable basis for the material 
information it provides to the issuer in connection with the 
preparation of the official statement. See Original Notice of 
Filing, 76 FR at 55992. See also Response Letter IV.
---------------------------------------------------------------------------

    The Commission finds that the dealer's duty to have a reasonable 
basis for the representations and material information it provides to 
an issuer in connection with the preparation by the issuer of its 
disclosure documents, and to ensure that such representations and 
information are accurate and not misleading, is consistent with the 
Act. The Commission believes that this provision will help to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors, 
municipal entities, and the public interest. The Commission also 
believes that the MSRB has adequately addressed the comments regarding 
the ``reasonable basis'' standard.

F. Underwriter Compensation and New Issue Pricing

    With respect to the standard that the price an underwriter pays in 
a negotiated sale be fair and reasonable, one commenter stated that the 
standard should be altered so that the price the underwriter pays is 
``not unreasonable.'' \93\ In the alternative, the commenter 
recommended that the disclosure be changed to state that although the 
pricing provided is fair and reasonable, it is not necessarily the best 
or lowest rate available.\94\ Another commenter objected to the 
required disclosure that an underwriter must balance a fair and 
reasonable price for issuers with a fair and reasonable price for 
investors.\95\ The commenter stated that there exists a reasonable 
price for both issuers and investors, and recommended that the 
disclosure be modified to reflect that statement.
---------------------------------------------------------------------------

    \93\ See NAIPFA Letter I and NAIPFA Letter II.
    \94\ See NAIPFA Letter II. This commenter subsequently clarified 
this comment and stated its belief that the ``fair and reasonable'' 
standard should not create an expectation that the underwriter is 
providing the ``best pricing'' in the market. See NAIPFA Letter III. 
The commenter also stated that ``the determinate of `best pricing' 
cannot be made by the underwriter whose conflicts of interest in 
this regard greatly outweigh any objectivity that an underwriter may 
have in regard to the pricing they have provided.'' Id.
    \95\ See BDA Letter II.
---------------------------------------------------------------------------

    In Response Letter I, the MSRB stated that the underwriter's fair 
and reasonable pricing duty is no different than the duties already 
imposed on the underwriter by MSRB rules with respect to its customers. 
In Response Letter II, the MSRB disagreed that underwriters should be 
required to provide a disclosure that the price paid to the issuer may 
not be the best or lowest price available because, depending on the 
specific pricing of a new issue, this might not be an accurate 
disclosure. The MSRB also stated that it is appropriate to characterize 
the underwriter's duties of fair pricing as a balance between the 
interests of the issuer and investors. In Response Letter IV, the MSRB 
agreed that the ``fair and reasonable'' pricing standard should not 
create an expectation by the issuer that the underwriter is providing 
the ``best pricing'' in the market and stated its belief that the 
disclosures under the Interpretive Notice would sufficiently address 
this point.
    One commenter urged that underwriters be required to expressly 
represent in writing to the issuer that the price paid for the issuer's 
debt is fair, and specify the facts that support the 
representation.\96\ This commenter stated that according to the MSRB, 
the underwriter's own judgment as to what is fair is an independent 
component of ``fairness'' and that the MSRB hedged the protection of an 
issuer ``by adhering to its earlier, pre-Dodd-Frank expression of the 
principle that `whether an underwriter has dealt fairly with an 
issuer'--the command of Rule G-17--depends on all `the facts and 
circumstances' and is not dependent solely on the price of the issue.''
---------------------------------------------------------------------------

    \96\ See PFM Letter I.
---------------------------------------------------------------------------

    In Response Letter II, the MSRB stated that its long-standing view 
that whether an underwriter has dealt fairly with an issuer for 
purposes of Rule G-17 is dependent upon all of the facts and 
circumstances of an underwriting, and

[[Page 27521]]

not solely on the price of the issue, enhances issuer protection, and 
that the commenter had misunderstood its meaning. The MSRB further 
stated that even if an underwriter provides a fair price to an issuer 
for its new issue offering, its fair practice duties under Rule G-17 
are not thereby discharged because, among other things, the many 
principles laid out in the Interpretive Notice also must be addressed. 
Conversely, an underwriter cannot justify under Rule G-17 an unfair 
price to an issuer by balancing that unfair price with the fact that it 
may otherwise have been fair to the issuer under the other fairness 
principles enunciated in the Interpretive Notice.
    The Commission finds that the proposed standard with respect to new 
issue pricing is consistent with the Act because it will help to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors, municipal entities, and the public interest. Specifically, 
the Commission notes that the Interpretive 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. The Commission also believes that the MSRB has 
adequately addressed the comments on new issue pricing by clarifying 
the underwriter's duty and required disclosures with respect to such 
pricing.
    In addition, the Commission finds that the proposed provision with 
respect to excessive compensation is consistent with the Act because it 
will help to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors, municipal entities, and the public interest. For 
example, the Interpretive Notice would remind underwriters that 
compensation for a new issue could be so disproportionate to the nature 
of the underwriting and related services performed as to constitute an 
unfair practice with respect to the issuer, and as such a violation of 
Rule G-17.

G. Conflicts of Interest

1. Payments To or From Third Parties
    One commenter suggested that the disclosure requirement with 
respect to payments to or from third parties is too broad.\97\ The 
commenter stated its belief that ``the intent of G-17 is that payments 
to those who carry some level of influence with an issuer and who have 
advocated on the underwriter's behalf in securing municipal securities 
business must be disclosed,'' but the proposed requirement ``may be 
interpreted to encompass a broad array of other professional services 
that happen in the standard course of municipal securities business.'' 
\98\ In Response Letter II, the MSRB clarified that the third-party 
payments to which the disclosure requirement would apply are those that 
give rise to actual or potential conflicts of interest, and the 
disclosure requirement typically would not apply to third-party 
arrangements for products and services of the type that are routinely 
entered into in the normal course of business, so long as any specific 
routine arrangement does not give rise to an actual or potential 
conflict of interest.
---------------------------------------------------------------------------

    \97\ See IA Letter.
    \98\ Id.
---------------------------------------------------------------------------

    One commenter stated that disclosures with respect to third-party 
arrangements for the marketing of the issuer's securities should be 
clarified as to the level of details.\99\ Further, the commenter stated 
that payments to and from affiliates of the underwriters are not third-
party payments since payments would not color a party's judgment when 
the parties are related to each other, unlike third parties. In 
Response Letter I, while the MSRB disagreed with the comment that 
payments from affiliates do not raise risks, the MSRB noted that the 
Interpretive Notice, as modified by Amendment No. 2, would not require 
disclosure of the amount of third-party payments. In addition, in 
Response Letter III, the MSRB stated its belief that ``it is essential 
that issuers and their advisors understand the conflicts of interest 
that might color underwriter recommendations.'' \100\
---------------------------------------------------------------------------

    \99\ See SIFMA Letter I.
    \100\ Specifically, in Response Letter III, the MSRB stated 
that: ``Municipal securities offerings borne of self-interested 
advice or in the context of conflicting interests or undisclosed 
payments to third parties are much more likely to be the issues that 
later experience financial or legal stress or otherwise perform 
poorly as investments, resulting in significant harm to investors 
and issuers, including increased costs to taxpayers.'' The MSRB also 
noted that in recent years, a series of state and federal 
proceedings involving undisclosed third-party payments in connection 
with new issues of municipal securities or closely-related 
transactions have been instituted. According to the MSRB, in at 
least one case, such undisclosed third-party payments allegedly 
occurred in connection with activities that may have contributed to 
the bankruptcy in Jefferson County, Alabama. In addition, the MSRB 
noted that the U.S. Department of Justice, the Commission, and the 
attorneys general of a number of states have pursued criminal and 
civil cases involving allegedly fraudulent activities relating to 
municipal securities offerings and closely-related transactions in 
which undisclosed third-party payments have played an important role 
in carrying out the allegedly fraudulent activities.
---------------------------------------------------------------------------

    Another commenter stated that the payment amount is an important 
variable for the issuer to consider and that it would encourage its 
members to further question the underwriter about any relevant third-
party relationships and payments, which would provide better 
transparency for the transaction.\101\ In Response Letter II, the MSRB 
agreed that such further inquiries could be made. In Response Letter 
IV, the MSRB noted that the purpose of the third-party payment 
disclosure is to draw them to the issuer's attention, and the issuer 
may then request additional information about such payments as it 
considers appropriate.
---------------------------------------------------------------------------

    \101\ See GFOA Letter II. See also GFOA Letter III. In Response 
Letter IV, the MSRB stated that it would monitor whether disclosure 
of the amounts should be required.
---------------------------------------------------------------------------

    The Commission finds that the proposed disclosure with respect to 
the existence of payments to or from third parties is consistent with 
the Act because the disclosure will notify the issuer of potential 
conflicts of interest, even though underwriters need not disclose the 
amount of such payments. As such, the Commission believes that the 
disclosure will help to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors, municipal entities, and the public 
interest.
    In addition, the Commission believes that the MSRB has adequately 
addressed the comments regarding the disclosure of third-party payments 
by providing clarification with respect to the scope of the disclosure, 
the information required to be disclosed, and justifications for the 
disclosure. Specifically, the Commission notes that in response to 
comments, the MSRB modified the Interpretive Notice, as originally 
proposed, by stating that the underwriter is not required to disclose 
the amount of third-party payments, but rather only the existence of 
such payments. The MSRB also modified the original Interpretive Notice 
by providing that an underwriter must only disclose whether it has 
entered into any third-party arrangements for the marketing of the 
issuer's securities. Further, in response to comments, the MSRB deleted 
the statements in the original Interpretive Notice that the underwriter 
must disclose the purpose of the third-party payment, the name of the 
party making or receiving the payment, and details of third-party 
arrangements for the marketing of the issuer's securities. In addition, 
the MSRB stated that it will monitor whether the proposal has achieved 
the effect of providing issuers

[[Page 27522]]

with adequate information about actual or potential material conflicts 
of interest and whether the amount of third-party payments or other 
additional information should be required.\102\
---------------------------------------------------------------------------

    \102\ See Response Letter IV.
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2. Profit-Sharing With Investors
    One commenter sought clarification that legitimate trading, such as 
when an underwriter sells a bond and later repurchases the bond from a 
purchaser, is not included in the disclosure requirement for profit 
sharing arrangements.\103\ In Response Letter II, the MSRB stated that 
the language of the proposal appropriately reflects that the disclosure 
applies in cases where there exists an arrangement to split or share 
profits realized by an investor upon resale.
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    \103\ See BDA Letter II.
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    The Commission finds that the proposed provision with respect to 
profit-sharing arrangements with investors is consistent with the Act 
because it will help to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors, municipal entities, and the public 
interest. For example, the Interpretive Notice would clarify that such 
arrangements could constitute a violation of an underwriter's fair 
dealing obligation under Rule G-17, or a violation of Rule G-25(c), 
which precludes a dealer from sharing in the profits or losses of a 
transaction in municipal securities with or for a customer.
3. Credit Default Swaps
    One commenter expressed support for the disclosure of an 
underwriter's credit default swap position as it relates to the issuer 
and the financing.\104\ Another commenter stated its belief that the 
disclosure of underwriters' hedging and risk management activities 
could unduly deter the use of credit default swaps for risk management 
and could potentially compromise counterparty relationships.\105\ The 
commenter noted that should these disclosures be required, generalized 
disclosures that put the issuer on notice of the possibility that the 
underwriter may, from time to time, engage in such dealings, should be 
sufficient. The commenter objected to any provision that would require 
underwriters to provide specific disclosures that could reveal 
counterparty information or the underwriters' hedging and risk 
management strategies. In Response Letter I, the MSRB stated that the 
disclosure requirement would not compromise counterparty relationships 
or deter the use of credit default swaps for legitimate risk management 
purposes. Specifically, the MSRB noted that the amended Interpretive 
Notice would only require a dealer that engages in the issuance or 
purchase of a credit default swap for which the underlying reference is 
an issuer for which the dealer is serving as underwriter, or an 
obligation of that issuer, to disclose the fact that it does so to the 
issuer, and not the terms of the particular trades.\106\
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    \104\ See GFOA Letter II. See also GFOA Letter III.
    \105\ See SIFMA Letter I.
    \106\ One commenter stated that the Interpretive Notice provides 
that if a dealer issues or purchases credit default swaps for which 
the reference obligor is the issuer to which the dealer is serving 
as an underwriter, the underwriter must disclose that fact to the 
issuer. See SIFMA Letter II. This commenter stated that, in the case 
of a conduit issuer that issues bonds for multiple obligors or with 
respect to a specific project or revenue stream, any disclosure 
regarding credit default swaps needs to be made solely to the 
obligor or obligors that are obligated with respect to the 
securities transaction being underwritten by the underwriter. In 
Response Letter II, the MSRB stated that the proposal only requires 
that credit default swap disclosures be made to the issuers of the 
municipal securities and not to any conduit borrowers or other 
obligors. However, the MSRB stated that it would take under 
advisement the question of whether such disclosure should be 
extended to any applicable obligors other than the issuer.
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    The Commission finds that the proposed disclosure requirements with 
respect to credit default swaps where the reference is the issuer for 
which the dealer is serving as underwriter, or an obligation of that 
issuer, are consistent with the Act. The Commission believes that the 
disclosures will help to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors, municipal entities, and the public 
interest by bringing to the issuer's attention a potential conflict of 
interest with the underwriter. As noted by the MSRB, the disclosure of 
potential or actual material conflicts of interest could help issuers 
and their advisors to understand the conflicts of interest that might 
color underwriter recommendations.\107\ Further, the Commission does 
not believe that the disclosures will deter the use of credit default 
swaps for risk management purposes or compromise counterparty 
relationships because, while a dealer would be required to disclose 
that it engages in credit default swaps to the issuer for which it 
serves as an underwriter, it would not be required to disclose the 
details of such swaps.
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    \107\ See Response Letter III.
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    In addition, the Commission believes that the MSRB has adequately 
addressed the comments regarding the disclosure of credit default swaps 
by providing clarification with respect to the scope of the disclosure. 
Specifically, the Commission notes that in response to comments, the 
MSRB modified the Interpretive Notice, as originally proposed, by 
clarifying that a dealer must only disclose the fact that it engages in 
such credit default swaps to the issuer for which it serves as 
underwriter.\108\
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    \108\ The original Interpretive Notice stated that Rule G-17 
requires that a dealer who engages in such credit default swaps 
disclose that to the issuers for which it serves as underwriter. In 
its discussion of the exemption for credit default swaps on baskets 
or indexes of municipal issuers that include the issuer or its 
obligations, the MSRB replaced the words ``trades in credit default 
swaps'' with ``[a]ctivities with regard to credit default swaps.''
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H. Retail Order Periods

    One commenter recommended that the Interpretive Notice use a single 
standard of requiring that the underwriter not knowingly accept orders 
that do not meet the requirements of the retail order period.\109\ In 
Response Letter II, the MSRB stated that it believes that the commenter 
misunderstood these provisions. According to the MSRB, the Interpretive 
Notice provides that an underwriter that knowingly accepts an order 
that has been framed as a retail order when it is not would violate 
MSRB Rule G-17 if its actions are inconsistent with the issuer's 
expectations regarding retail orders, but also provides that a dealer 
that places an order that is framed as a qualifying retail order but 
that in fact represents an order that does not meet the qualification 
requirements to be treated as a retail order, would violate its duty of 
fair dealing. In Response Letter II, the MSRB stated that these two 
provisions are entirely consistent and appropriate, since in the first 
provision an underwriter is receiving an order framed by a third party, 
whereas in the second provision, a dealer (not limited to an 
underwriter) is itself placing and framing the order. Therefore, the 
MSRB noted that it has not modified these provisions.
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    \109\ See BDA Letter II.
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    The Commission finds that the proposed provisions regarding retail 
order periods are consistent with the Act. The Commission believes that 
the provisions will help to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and, 
in general, to protect investors, municipal entities, and the public 
interest by helping to ensure that the underwriter complies with its 
Rule G-17 duty of fair dealing in a transaction with a retail order

[[Page 27523]]

period. For example, the Interpretive Notice would state that Rule G-17 
requires an underwriter that has agreed to underwrite a transaction 
with a retail order period to honor such agreement and to take 
reasonable measures to ensure that retail clients are bona fide. In 
addition, the Commission believes that the MSRB has adequately 
addressed the comment regarding the requirements for retail order 
periods by providing clarification with respect to the activities that 
could be considered violations of Rule G-17.

I. Dealer Payments to Issuer Personnel

    One commenter requested that, in the absence of disclosure and 
informed consent, underwriters be prohibited from seeking 
reimbursements from bond proceeds for expenditures made on behalf of 
the issuer for any expenses incurred by the underwriter.\110\ The 
commenter also requested that underwriters provide disclosure to 
issuers that ``[e]xpenses made in connection with the issuance of 
securities were incurred by the underwriter on behalf of the issuer, 
but that the issuer is under no obligation to issue additional bonds to 
reimburse the underwriter for these expenditures.'' \111\ In Response 
Letter I, the MSRB stated that it is unreasonable to require 
underwriters to disclose to issuers that they are under no obligation 
to reimburse the underwriter from bond proceeds for expenditures made 
on behalf of the issuer. The MSRB noted that Rule G-20 already 
precludes underwriters from seeking reimbursement for lavish 
expenditures, especially from bond proceeds, and that various state 
laws also address whether such reimbursements are permissible.
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    \110\ See NAIPFA Letter I. See also NAIPFA Letter III. But see 
SIFMA Letter III.
    \111\ NAIPFA Letter I.
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    The Commission finds that the proposed provisions regarding dealer 
payments to issuer personnel are consistent with the Act. The 
Commission believes that the provisions will help to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors, municipal 
entities, and the public interest by reminding dealers of the 
application of MSRB Rules G-20 and G-17 in connection with certain 
payments made to, and expenses reimbursed for, issuer personnel during 
the municipal bond issuance process. The Commission also believes that 
the MSRB has adequately addressed the comments with respect to dealer 
payments to issuer personnel by clarifying the laws and rules that 
govern such payments.

J. Timing and Consistency

    One commenter noted that underwriters that may also be municipal 
advisors will not be able to properly evaluate the Interpretive Notice 
until rules with respect to municipal advisors have been approved and 
adopted by the Commission and the MSRB.\112\ The commenter stated that, 
given the withdrawal of the MSRB's rule proposals with respect to 
municipal advisors, the requirements that will be applicable to 
underwriters that are also municipal advisors are unknown.\113\ The 
commenter suggested that underwriters may ultimately become subject to 
duplicative or inconsistent obligations for the same or similar 
activities. The commenter also stated that many interested parties are 
abstaining from commenting on the proposal due to this uncertainty. In 
Response Letter IV, the MSRB noted that two commenters supported the 
Commission's approval of the proposed rule change even though the 
Commission's rulemaking on the definition of ``municipal advisor'' 
remains pending.\114\ The MSRB also noted that one commenter stated 
that it could ``find no rational correlation between a delay in the 
adoption of the [Interpretive Notice] and the adoption of a definition 
of `municipal advisor'.'' \115\
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    \112\ See SIFMA Letter I; SIFMA Letter II; and SIFMA Letter III. 
See also BDA Letter III. Another commenter, however, stated that the 
proposal should not be dependent on the definition of municipal 
advisor and urged the Commission to approve the proposal. See NAIPFA 
Letter III. See also GFOA Letter III.
    \113\ See SIFMA Letter I.
    \114\ See, e.g., GFOA Letter III and NAIPFA Letter III.
    \115\ NAIPFA Letter III.
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    One commenter stated that because the Interpretive Notice would 
obligate underwriters to comply with detailed and specific requirements 
to which they are not currently subject, the 90-day implementation 
period is too short and requested a period of no less than six 
months.\116\ In Response Letter I, the MSRB stated that it believes 
that 90 days is an adequate time period for underwriters to develop the 
required disclosures, especially as noted by the commenter, 
``underwriters who follow best practices in their dealings with 
municipal issuers already engage in an open dialogue with the issuers 
concerning the risks of the transactions being underwritten.'' \117\
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    \116\ See SIFMA Letter I. See also SIFMA Letter III.
    \117\ SIFMA Letter I. See also Response Letter IV.
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    The Commission finds that the timing of the proposed rule change is 
consistent with the Act. As discussed above, the Commission believes 
that the disclosures specified in the Interpretive Notice will benefit 
municipal issuers, including helping municipal issuers to better 
understand the role of the underwriter, and to better evaluate 
potential risks in engaging a particular underwriter and in selecting 
the financing structure most appropriate for their financing needs. 
Such disclosures should, in turn, benefit investors and the public 
interest. The MSRB also noted that the required disclosures should 
provide issuers and their advisors with valuable information with which 
to evaluate underwriter recommendations.\118\ In addition, the 
Commission does not believe that approval of the proposed rule change 
should be delayed pending rulemaking with respect to municipal advisors 
because, as noted by one commenter, the provisions of the Interpretive 
Notice would govern the conduct of underwriters and not the conduct of 
municipal advisors.\119\ With respect to commenters' concerns about 
potential duplication or inconsistency between the requirements 
applicable to underwriters and the requirements applicable to 
underwriters that are also municipal advisors, the Commission notes 
that any proposal by the MSRB interpreting the application of MSRB Rule 
G-17 to municipal advisors must be filed with, and considered by, the 
Commission pursuant to Section 19(b) of the Exchange Act \120\\\ before 
the proposal can become effective.
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    \118\ See Response Letter III.
    \119\ See NAIPFA Letter III.
    \120\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    The Commission also believes that the 90-day implementation period 
is consistent with the Act and notes that, as stated by one commenter, 
underwriters may already provide issuers with some of the required 
disclosures to the extent such underwriters are already following best 
practices in their dealings with issuers.\121\
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    \121\ See SIFMA Letter I.
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K. Other Comments

    One commenter requested clarification that the proposal is not 
intended to apply to private placement agents.\122\ In Response Letter 
II, the MSRB stated that, given the nature of the proposed role 
disclosures and in light of the characteristics of a ``true private 
placement'' of municipal securities, those elements of the role 
disclosures that would not be applicable to a true private placement 
would not be

[[Page 27524]]

required to be included in the disclosures made in connection with a 
dealer serving as placement agent for a new issue. The MSRB stated, 
however, that Rule G-17, and the remaining provisions of the 
Interpretive Notice, would continue to apply.\123\ The Commission 
believes that the MSRB has adequately addressed the comment on the 
application of the Interpretive Notice to private placement agents by 
providing clarification with respect to the application of Rule G-17 
and the Interpretive Notice to private placement agents.
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    \122\ See SIFMA Letter II.
    \123\ In Response Letter II, the MSRB also reminded dealers to 
remain cognizant of the fact that the circumstances under which a 
true private placement may arise in the municipal market are quite 
constrained.
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    One commenter urged further consideration of the costs of the 
disclosures and weighing of the costs against the potential 
benefits.\124\ In Response Letter II, the MSRB noted its disagreement 
that it did not weigh the costs and benefits. The MSRB noted that the 
Interpretive Notice ``recognizes that there is significant variability 
of size, sophistication and frequency of accessing the market among 
issuers across the country, and many of the disclosures required under 
the Proposal can be tailored, and in some cases are not required at 
all, based on a number of relevant factors set out in the Proposal.'' 
Further, the MSRB stated that although it recognizes that some 
underwriters may bear up-front costs in creating basic frameworks for 
the required disclosures for the various types of products they may 
offer their issuer clients, the on-going burden should thereafter be 
considerably reduced and the preparation of written disclosures would 
become an inter-related component of the necessary documentation of the 
transaction.\125\ In Response Letter II, the MSRB also noted that 
providing more information to issuers would empower and provide 
considerable benefits to issuers.
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    \124\ See SIFMA Letter I; SIFMA Letter II; and SIFMA Letter III. 
Other commenters stated their belief that the proposed disclosures 
will not cause undue costs or burdens to underwriters. See PFM 
Letter II and GFOA Letter III.
    \125\ See also Response Letter III.
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    In addition, in Response Letter III, the MSRB noted that the 
disclosures with respect to the role of the underwriter and actual or 
potential conflicts of interest could consist of the language provided 
in the Interpretive Notice, which would lessen the potential costs 
associated with the disclosures. Moreover, the MSRB stated that 
disclosures with respect to the risks of a proposed financing would not 
burden underwriters greatly as generally only complex financings would 
require such disclosures. For routine financings, the MSRB stated that 
disclosures would only be required if the issuer personnel lacked 
knowledge or expertise.
    In Response Letter III, the MSRB emphasized its belief regarding 
the benefits of the proposed disclosures. First, the MSRB stated that 
municipal securities offerings that result from self-interested advice, 
conflicting interest or undisclosed payments to third-parties are more 
likely to encounter issues at a later date, which could cause harm to 
investors and issuers. Thus, the MSRB believes that the proposed 
disclosures would help address such practices. Second, the MSRB stated 
that municipal issuers have entered into complex financings that later 
created serious risks to the municipalities and that the burden on 
underwriters of the required disclosures would be outweighed by the 
benefits to issuers in avoiding similar situations in the future.
    The Commission believes that the MSRB has adequately addressed 
comments regarding the costs resulting from the Interpretive 
Notice.\126\ The Commission appreciates that the proposed rule change 
will impose costs upon underwriters, but believes such costs are 
justified by the benefits that will result from the Interpretive 
Notice.\127\ As noted above, the Commission believes that the required 
disclosures will benefit municipal issuers by providing them with 
valuable information with which to evaluate, among other things, the 
potential risks of engaging a particular underwriter and entering into 
a recommended financing structure. The Commission also believes that 
the disclosures would benefit investors and the public interest.
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    \126\ In approving this proposed rule change, the Commission has 
also considered whether the proposed change will promote efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). While none 
of the commenters specifically commented on efficiency, competition, 
and capital formation, some of the comments raised concerns about 
the burdens imposed by the proposed rule change and possible effects 
on certain transactions. As discussed above, the additional 
disclosures required by the proposed rule change are intended to 
deter fraud, inform issuers about potential conflicts of interest, 
and help to ensure that municipal entities engage in financings 
appropriate to their needs.
    \127\ See Response Letter III.
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    As noted by the MSRB in Response Letter III, there may be 
additional up-front costs in creating basic frameworks for the 
disclosures, but many of the disclosures could be standardized. The 
Commission believes that such standardization will help reduce the 
ongoing burden of preparing the written disclosures.\128\ In addition, 
to help further reduce the potential costs associated with the proposed 
disclosures, the Commission notes that the Interpretive Notice contains 
language that underwriters may incorporate into their written 
disclosures, such as language in the Interpretive Notice regarding the 
underwriter's role and the conflict of interest caused by contingent 
fee compensation.
---------------------------------------------------------------------------

    \128\ The MSRB stated that standardized disclosures could be 
developed to describe common material financial risks and 
characteristics that would then only need to be modified in the 
event of variants in the structures proposed by the underwriter.
---------------------------------------------------------------------------

    Further, as noted above, in response to comments, the MSRB made 
modifications to the Interpretive Notice, as originally proposed, which 
it believes will help reduce the cost of compliance.\129\ For example, 
under the amended Interpretive Notice, an underwriter that recommends a 
complex municipal securities financing to an issuer must disclose the 
material financial characteristics of such complex municipal securities 
financing, as well as the material financial risks of such financing 
that are known to the underwriter and reasonably foreseeable at the 
time of the disclosure, as opposed to all material risks and 
characteristics of the financing.
---------------------------------------------------------------------------

    \129\ See Response Letter III.
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IV. General Commission Findings

    As noted above, the Commission has carefully considered the 
proposed rule change, as modified by Amendment No. 2, the comment 
letters received, and the MSRB's responses. For the reasons discussed 
above, the Commission finds that the proposed rule change, as modified 
by Amendment No. 2, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to the MSRB. 
Specifically, the Commission finds that the proposed rule change is 
consistent with the provisions of Section 15B(b)(2)(C) of the Act.\130\
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The Commission believes that, in general, the MSRB has adequately 
responded to the comments received on the proposed rule change. The 
Commission also notes that the MSRB has stated that it will monitor 
disclosure practices under the Interpretive Notice and will engage in a 
dialogue with industry participants and the Commission to determine 
whether sufficient improvements have occurred in the flow of the 
disclosures to decision-making personnel of issuers or whether 
additional steps should be

[[Page 27525]]

taken.\131\ The MSRB also stated that it will monitor matters relating 
to the timing of disclosures in order to determine whether any further 
action in this area is merited.\132\ In addition, the MSRB stated that 
it will monitor whether the proposal has achieved the effect of 
providing issuers with adequate information about actual or potential 
material conflicts of interest and whether the amount of third-party 
payments or other additional information should be required.\133\
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    \131\ See Response Letter II and Response Letter IV.
    \132\ See Response Letter II.
    \133\ See Response Letter IV.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\134\ that the proposed rule change (SR-MSRB-2011-09), as modified 
by Amendment No. 2, be, and it hereby is, approved.
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    \134\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-11268 Filed 5-9-12; 8:45 am]
BILLING CODE 8011-01-P


