Regulator wants to require “fair dealing”

August 3, 2011

Regulator wants to require fair dealing

In a far-reaching proposal, the Municipal Securities Rulemaking Board (MSRB) has asked the Securities and Exchange Commission for permission to impose new rules to protect municipalities. These rules would vastly expand the disclosures that dealer underwriters are required to give their municipal clients who issue bonds.

MSRB’s executive director Lynnette Kelly Hotchkiss said in a statement:

Dodd-Frank explicitly requires the MSRB to protect municipal entities. This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds.

The rules would require disclosure of “conflicts of interest” to municipalities before they enter into contracts to issue bonds. Specifically the new rules would require banks to:

  • disclose all “material risks” associated with bond financings
  • disclose when floating-rate securities are coupled with interest-rate swaps
  • disclose potential conflicts of interest
  • disclose incentives paid to recommend transactions
  • disclose payments they may get from other parties in a deal
  • disclose if they have derivative contracts that only pay off if the borrower defaults

The blog points out the simple effect of the proposed rules:

The notice also would require that all representations by underwriters, whether written or oral, to issuers be truthful and accurate. For example, an underwriter may not represent that it has the requisite knowledge or expertise with respect to a particular financing if its personnel that it intends to work on the financing do not have that expertise.


Bloomberg: Wall Street Faces Disclosure to States, Cities

Bond Buyer: MSRB Seeks SEC Nod for Disclosure Conflict Guidance

MSRB: Notice 2011-36: Interpretive Notice on Rule G-17 Filed with SEC

Shift in muniland tone

This was an interesting appearance by Alexandra Lebenthal on CNBC yesterday. The discussion ranged from the Central Falls, RI bankruptcy filing (Alexandra repeats the conventional wisdom that Rhode Island’s recently passed legislation will protect bondholders in full in Chapter 9 proceedings) to the threat of the United States losing its AAA rating. The most interesting part of this segment is that all the commentators have gone “anti-Meredith” and now recognize that defaults will not be market wide. Rather, defaults will be sporadic and will hinge on weak fiscal conditions for specific issuers. It’s good to see a more balanced view at CNBC.

Cash and CDS markets tread similar path

I’ve mashed up the Thomson Reuters Municipal Market Data spread over Markit CDS data. This tells us how cash municipal bond markets are pricing risk versus how the CDS market is pricing risk for specific munis. Let’s keep an eye on this. (Thanks to @Otis_Casey at Markit for CDS prices)

Twitter Talk

@munilass: Sales tax holidays occurring in 2011 by state (Tax Foundation)

@Fixedology:  Light muni supply week, $4 BIL led by NYC Trans Fin Auth Deal 900mm; supply should pick up as uncertainty (in Wash, D.C.) clears

@AmyResnick:  Cutting public library hours isn’t a muni-bond default. Disbanding a city symphony orchestra isn’t a muni default-Mysak

@GreatLakesGuy: Yes to Milwaukee streetcar

Follow me at @cate_long and general muni issues at #muniland

Good links

US Department of JusticeJuvenile Residential Facility Census, 2008: Selected Findings

Cities Speak: Rebranding Infrastructure

Birmingham News: Jefferson County prepares new proposal in search for settlement in sewer debt crisis

Bloomberg: Hockey Arena Bonds for New York Islanders Rejected by Nassau County Voters

Press Enterprise: RIVERSIDE: Officials not worried about highest-ever debt

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[…] says it all: “Bond-Disclosure Rules Backed by SEC to Protect States From Banks”: The rules were proposed by the Municipal Securities Rulemaking Board last year and are aimed at preventing Wall Street […]

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