Since August 2, 2012, investment banking firms retained to act as underwriters on municipal finance transactions have been required to provide written disclosure to issuers concerning the relationship between issuers and underwriters, possible conflicts of interest and certain other matters under Municipal Securities Rulemaking Board (MSRB) Rule G-17 (Rule G-17) and MSRB Notice 2012-25 (the "Interpretive Notice"). http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2012/2012-25.aspx. The Securities Industry and Financial Markets Association (SIFMA) has provided a model for such disclosure letters (the "SIFMA Model").http://www.sifma.org/uploadedfiles/services/standard_forms_and_documentation/municipal_securities_markets/sifmamodelg-17underwriterdisclosureletter07-18-2012.pdf
The following are some thoughts on the form of the SIFMA Model and on sample disclosure letters received to date by certain issuers represented by this firm:
- The sections of the disclosure letters concerning the underwriters’ role and underwriters’ compensation will likely quickly become boilerplate using the SIFMA Model language, which closely parallels the Interpretive Notice. Many underwriters have been including a section in their form bond purchase agreements to address the role of the underwriters in light of Rule G-17.
- The section of the disclosure letters concerning “additional conflicts disclosures” is more problematic. While the Interpretive Notice and the SIFMA Model appear to contemplate that underwriters either state that they have not identified “any additional potential or actual material conflicts that require disclosure” or provide a listing on the particular conflicts, most underwriters appear to be taking the approach of listing the various products and services they provide which may give rise to conflicts without actually identifying any conflicts. This approach of not specifying any particular conflict beyond those inherent in the services provided raises issues, discussed in the next paragraph, regarding the issuer acknowledgment of the disclosure.
- The SIFMA Model contains the following paragraph: “It is our understanding that you have the authority to bind the Issuer by contract with us, and that you are not a party to any conflict of interest relating to the subject transaction. If our understanding is incorrect, please notify the undersigned immediately.” This language varies from the Interpretive Notice and from comment 4 to the SIFMA Model itself, which reads: “All of the disclosures must be made in writing to an official of the Issuer that the underwriter reasonably believes has the authority to bind the Issuer by contract with the underwriter and that, to the knowledge of the underwriter, is not a party to a disclosed conflict.” Asking the recipient of a disclosure letter to acknowledge s/he has authority to bind the issuer is not required by the Interpretive Notice but may not be an unreasonable request. The second part concerning conflicts is more troublesome given that, as noted above, the pattern in disclosure letters appears to be that underwriters are not disclosing any specific conflicts. The SIFMA Model language, by asking the recipient to acknowledge s/he is not party to any conflict relating to the transaction, arguably shifts to the issuer the burden of making the determination that no conflict exists.
- Because of these wording concerns, we are seeing some issuers take the approach of acknowledging receipt of the disclosure letter while specifically stating that the acknowledgement is only as to receipt and not an acceptance, confirmation or consent to the contents of such letters.
At this point, it seems unlikely that individual underwriters will deviate very far from the SIFMA Model letter. It is likely that SIFMA will review the form and comments received from issuers and underwriters and may incorporate changes to address any concerns raised by issuers as to the language regarding conflicts or otherwise.
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