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 Dodd-Frank.com 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.