[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55989-55995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23103]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65263; File No. SR-MSRB-2011-09]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Consisting of Proposed 
Interpretive Notice Concerning the Application of MSRB Rule G-17, on 
Conduct of Municipal Securities and Municipal Advisory Activities, to 
Underwriters of Municipal Securities

September 6, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on August 22, 2011, the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the SEC a proposed rule change consisting 
of a proposed interpretive notice (the ``Notice'') concerning the 
application of MSRB Rule G-17 (on conduct of municipal securities and 
municipal advisory activities) to underwriters of municipal securities. 
The MSRB requests that the proposed rule change be made effective 90 
days after approval by the Commission.
    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

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

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

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

1. Purpose
    (a) With the passage of the Dodd-Frank Act, the MSRB was expressly 
directed by Congress to protect municipal entities. Accordingly, the 
MSRB is proposing to provide additional interpretive guidance that 
addresses how Rule G-17 applies to dealers in the municipal securities 
activities described below.
    A more-detailed description of the provisions of the Notice 
follows:
    Representations to Issuers. The Notice would provide that all 
representations made by underwriters to issuers of municipal securities 
in connection with municipal securities underwritings (e.g., issue 
price certificates and responses to requests for proposals), whether 
written or oral, must be truthful and accurate and may not misrepresent 
or omit material facts.
    Required Disclosures to Issuers. The Notice would provide that an 
underwriter of a negotiated issue that recommends a complex municipal 
securities transaction or product (e.g., a variable rate demand 
obligation with a swap) to an issuer has an obligation under Rule G-17 
to disclose all material risks (e.g., in the case of a swap, market, 
credit, operational, and liquidity risks), characteristics, incentives, 
and conflicts of interest (e.g., payments received from a swap 
provider) regarding the transaction or product. Such disclosure would 
be required to be sufficient to allow the issuer to assess the 
magnitude of its potential exposure as a result of the complex 
municipal securities financing. In the case of routine financing 
structures, underwriters would be required to disclose the material 
aspects of the structures if the issuers did not otherwise have 
knowledge or experience with respect to such structures.

[[Page 55990]]

    The disclosures would be required to be made in writing to an 
official of the issuer whom the underwriter reasonably believed had the 
authority to bind the issuer by contract with the underwriter (i) In 
sufficient time before the execution of a contract with the underwriter 
to allow the official to evaluate the recommendation and (ii) in a 
manner designed to make clear to such official the subject matter of 
such disclosures and their implications for the issuer. If the 
underwriter did not reasonably believe that the official to whom the 
disclosures were addressed was capable of independently evaluating the 
disclosures, the underwriter would be required to make additional 
efforts reasonably designed to inform the official or its employees or 
agent.\3\
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    \3\ Section 4s(h)(5) of the Commodity Exchange Act requires that 
a swap dealer with a special entity client (including states, local 
governments, and public pension funds) must have a reasonable basis 
to believe that the special entity has an independent representative 
that has sufficient knowledge to evaluate the transaction and its 
risks, as well as the pricing and appropriateness of the 
transaction. Section 15F(h)(5) of the Exchange Act imposes the same 
requirements with respect to security-based swaps.
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    Underwriter Duties in Connection with Issuer Disclosure Documents. 
The Notice would provide that a dealer's duty to have a reasonable 
basis for the representations it makes, and other material information 
it provides, to an issuer and to ensure that such representations and 
information are accurate and not misleading, as described above, 
extends to representations and information provided by the underwriter 
in connection with the preparation by the issuer of its disclosure 
documents (e.g., cash flows).
    New Issue Pricing and Underwriter Compensation. The Notice would 
provide that the duty of fair dealing under Rule G-17 includes an 
implied representation that the price an underwriter pays to an issuer 
is fair and reasonable, taking into consideration all relevant factors, 
including the best judgment of the underwriter as to the fair market 
value of the issue at the time it is priced. The Notice distinguishes 
the fair pricing duties of competitive underwriters (submission of bona 
fide bid based on dealer's best judgment of fair market value of 
securities) and negotiated underwriters (duty to negotiate in good 
faith). The Notice would provide that, in certain cases and depending 
upon the specific facts and circumstances of the offering, the 
underwriter's compensation for the new issue (including both direct 
compensation paid by the issuer and other separate payments or credits 
received by the underwriter from the issuer or any other party in 
connection with the underwriting) may be so disproportionate to the 
nature of the underwriting and related services performed, as to 
constitute an unfair practice that is a violation of Rule G-17.
    Conflicts of Interest. The Notice would require disclosure by an 
underwriter of potential conflicts of interest, including third-party 
payments, values, or credits made or received, profit-sharing 
arrangements with investors, and the issuance or purchase of credit 
default swaps for which the underlying reference is the issuer whose 
securities the dealer is underwriting or an obligation of that issuer.
    Retail Order Periods. The Notice would remind underwriters not to 
disregard the issuers' rules for retail order periods by, among other 
things, accepting or placing orders that do not satisfy issuers' 
definitions of ``retail.''
    Dealer Payments to Issuers. Finally, the Notice would remind 
underwriters that certain lavish gifts and entertainment, such as those 
made in conjunction with rating agency trips, might be a violation of 
Rule G-17, as well as Rule G-20.
    (b) The MSRB believes that the proposed rule change is consistent 
with Section 15B(b)(2) of the Exchange Act, which provides that:

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
municipal securities dealers, and municipal advisors.
    Section 15B(b)(2)(C) of the Exchange Act, provides that the 
rules of the MSRB shall: be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
municipal securities and municipal financial products, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities and municipal financial products, and, in 
general, to protect investors, municipal entities, obligated 
persons, and the public interest.

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

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

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

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

    On February 14, 2011, the MSRB requested comment on the proposed 
rule change.\4\ The MSRB received 5 comment letters. Comment letters 
were received from the American Federation of State, County and 
Municipal Employees (``AFSCME''); the Bond Dealers of America 
(``BDA''); Municipal Regulatory Consulting LLC (``MRC''); the National 
Association of Independent Public Finance Advisors (``NAIPFA''); and 
the Securities Industry and Financial Markets Association (``SIFMA''). 
The comments are summarized according to the subject headings of the 
Notice.
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    \4\ See MSRB Notice 2011-12 (February 14, 2011).

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[[Page 55991]]

Representations to Issuers
     Comments: Reasonable Basis for Certificates. SIFMA said 
that the MSRB should reconsider the requirement for an underwriter to 
have a reasonable basis for the representations and material 
information in certificates it provides, arguing that other regulatory 
requirements (e.g., IRC Section 6700 and wire fraud statutes) already 
govern such representations. It said that the MSRB should, at least, 
confirm that an underwriter would meet this obligation when it verifies 
the information in the certificate against the official books of the 
issuer and any other factual information within the underwriter's 
control.
    MSRB Response: The MSRB has determined to make no change to this 
requirement of the Notice and notes that the ``reasonable basis'' 
requirement of the Notice in the context of certificates provided by an 
underwriter is consistent with the view of the Commission that the 
underwriter must have a reasonable basis for belief in the truthfulness 
and completeness of the key representations made in any disclosure 
documents used in an offering of municipal securities. See endnote 10 
to the Notice. It is also consistent with Internal Revenue Service 
interpretations of Section 6700 of the Internal Revenue Code, which 
address the application of the penalty to statements (including 
underwriter certificates) material to tax exemption that the maker knew 
or had ``reason to know'' were false or fraudulent, such as the one 
cited in note 9 to SIFMA's comment letter. Therefore, the Notice 
imposes no additional requirement upon underwriters. Review of the 
official books of the issuer and other factual information within the 
underwriter's control may assist the underwriter in forming a 
reasonable basis for its certificate. However, if the certificate 
relies on the representations of others or facts not within the 
underwriter's control, additional due diligence on the part of the 
underwriter may be required. The MSRB notes that a quote from the 
Internal Revenue Service publication cited in SIFMA's letter provides 
some useful guidance on the level of inquiry required: ``Participants 
[in a bond financing] can rely on matters of fact or material provided 
by other participants necessary to make their own statements or draw 
their own conclusions, unless they have actual knowledge or a reason to 
know of its inaccuracy or the statement is not credible or reasonable 
on its face.'' The Internal Revenue Service summarized the legislative 
history of Section 6700. See H. Conf. Rep. No. 101-247, 101st Cong., 
1st Sess. 1397.
Required Disclosures to Issuers
     Comments: Complex Financings. SIFMA argued that more 
guidance is needed on the complex municipal securities financings 
requirements.
    [cir] It said that a transaction should only be deemed complex if 
the municipal issuer informed the underwriter that the issuer had never 
engaged in the type of transaction before and therefore might not 
understand the transaction's material risks and characteristics.
    [cir] It also said that the MSRB should provide more guidance and 
definition with regard to what types of transactions will be considered 
``complex,'' arguing that references to ``external index not typically 
used in the municipal securities market'' and ``atypical or complex 
arrangements'' were vague.
    [cir] It also said that issuers that required an analysis of the 
risks and characteristics of a transaction should hire independent 
advisors or separately contract for this service with their 
underwriters.
    MSRB Response: In response to SIFMA's first comment above, the MSRB 
has added the following language to the 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, in 
each case based on the reasonable belief of the underwriter.'' This 
language is based on the suitability analysis required by the Financial 
Industry Regulatory Authority (``FINRA'') of dealers selling complex 
products, such as options and securities futures,\5\ although the 
Notice does not go so far as to impose a suitability requirement on 
underwriters of municipal securities with respect to issuers.\6\ The 
MSRB notes that this language applies only to disclosures concerning 
material terms and characteristics of a complex municipal securities 
financing. The Notice also provides: ``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.'' The MSRB does not agree with SIFMA that an issuer should 
be required to exercise its supposed ``bargaining power'' in order to 
receive such disclosures.
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    \5\ FINRA Rules 2360 and 2370.
    \6\ The Notice does not address whether engaging in any of the 
activities described in the Notice would cause a dealer to be 
considered a ``municipal advisor'' under the Exchange Act and the 
rules promulgated thereunder and, therefore, subject to a fiduciary 
duty. The MSRB notes that dealers that recommend swaps or security-
based swaps to municipal entities may also be subject to rules of 
the Commodity Futures Trading Commission or those of the SEC. See, 
e.g., Federal Register Vol. 75, No. 245 (December 22, 2010) and 
Federal Register Vol. 76, No. 137 (July 18, 2011).
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    In response to SIFMA's second comment above, the Notice does 
provide examples of complex municipal securities financings: ``variable 
rate demand obligations (``VRDOs'') and financings involving 
derivatives (such as swaps).'' In response to SIFMA's comment, the 
Notice now also distinguishes those examples from: ``The typical fixed 
rate offering.'' It also now provides that: ``Even a financing in which 
the interest rate is benchmarked to an index that is commonly used in 
the municipal marketplace (e.g., 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.''
    With regard to SIFMA's third comment, while the MSRB agrees that an 
issuer seeking an independent assessment of the risks and 
characteristics of a transaction recommended by an underwriter may wish 
to hire a separate municipal advisor for that purpose, at its own 
election, the MSRB is firmly of the view that basic principles of fair 
dealing require an underwriter to disclose the risks and 
characteristics of a complex municipal securities financing that it has 
itself determined to recommend to the issuer.
    The MSRB notes that the Notice has been amended to provide that, in 
the case of routine financing structures, underwriters would be 
required to disclose the material aspects of the structures if the 
issuers did not otherwise have knowledge or experience with respect to 
such structures.
     Comments: Recommendations. NAIPFA argued that underwriters 
should also be required--in the same manner and to the same extent as 
advisors would be required--to have a reasonable basis for any 
recommendation they made and to disclose material risks about the 
course of conduct they recommend, along with the risks and potential 
benefits of reasonable alternatives then available in the market. SIFMA 
said that the MSRB should clarify whether a dealer's recommendation of 
a swap will subject it to a fiduciary duty. MRC said that the 
requirements for disclosures in the

[[Page 55992]]

context of complex municipal securities financings should be set forth 
in Rule G-19.
    MSRB Response: The MSRB has determined not to impose a suitability 
duty in this context at this time. The Notice also does not address 
whether the provision of advice by underwriters will cause them to be 
considered municipal advisors under the Exchange Act and, accordingly, 
subject to a fiduciary duty. In the view of the MSRB, the duty of fair 
dealing is subsumed within a fiduciary duty, so additional duties may 
apply to the provision of advice by underwriters that the Commission 
considers to be municipal advisory activities. See also footnote 6 
herein.
     Comments: Recipients of Disclosures. BDA and SIFMA said 
that an underwriter should only need to have a reasonable belief that 
it was making required disclosures to officials with the authority to 
bind the issuer, particularly if the official represented that he/she 
has such authority.
    MSRB Response: The MSRB agrees with this comment and has revised 
the Notice accordingly.
     Comments: Timing of Disclosures. SIFMA said that the MSRB 
should clarify that disclosures should only be required once. It said 
that, as an example, a representation in a response to an RFP or 
otherwise before the underwriter is engaged should suffice.
    MSRB Response: The Notice does not require disclosures to be made 
more than once per issue. An RFP response could be an appropriate place 
to make required disclosures as long as the proposed structure of the 
financing is adequately developed at that point to permit the 
disclosures required by the Notice.
Underwriter Duties in Connection With Issuer Disclosure Documents
     Comments: Reasonable Basis for Official Statement 
Materials. SIFMA argued that an underwriter should not be required to 
have a reasonable basis for the representations it makes, or other 
material information it provides in connection with the preparation by 
the issuer of its disclosure documents. Instead, SIFMA argued that the 
MSRB should permit an underwriter to agree with an issuer that the 
underwriter will only be responsible for materials furnished to an 
issuer if the underwriter has (i) Consented, in writing, to such 
materials being used in offering documents and (ii) agreed with the 
issuer that the underwriter and not the issuer will assume 
responsibility for the accuracy and proper presentation of such 
material. SIFMA said that an underwriter should be able to limit its 
responsibility for information provided by disclosing to the issuer any 
limitations on the scope of its analysis and factual verification it 
performed. Furthermore, it argued that any duty should extend only to 
material information provided by the underwriter and not to all 
information and analysis, suggesting that an underwriter should not 
have to verify the assumptions and facts that underlie cash flows it 
prepared.
    MSRB Response: The MSRB does not agree with this comment and 
reminds SIFMA of the view of the SEC as summarized in endnote 9 to the 
Notice: With respect to primary offerings of municipal securities, the 
SEC has noted, ``By participating in an offering, an underwriter makes 
an implied recommendation about the securities.'' See SEC Rel. No. 34-
26100 (Sept. 22, 1988) (proposing Exchange Act Rule 15c2-12) at text 
following note 70 (the ``1988 Proposing Release''). The SEC stated in 
the 1988 Proposing Release that ``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.'' It would seem a curious 
result, therefore, 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, including a reasonable belief in 
the truthfulness and completeness of any information provided by others 
that serves as a material basis for such underwriter's information.
Underwriter Compensation and New Issue Pricing
     Comments: Fair Pricing. BDA said that the fair pricing 
obligation in the context of a new issue should employ a good faith 
standard. It said that there is no prevailing market price for new 
issues and that comparisons to secondary market trades are difficult 
because of the infrequency of trades and the differences among issuers. 
Similarly, SIFMA said that an underwriter should only be required to 
purchase securities at the price that it and the issuer negotiated and 
agreed to in good faith, without regard to a prevailing market price, 
which it said does not exist for new issue securities. It said that the 
MSRB's proposal will encourage increased reliance on credit ratings, 
which it characterized as contrary to the intent of Dodd-Frank and SEC 
policy guidance.
    MSRB Response: In response to this comment, the MSRB has amended 
the Notice to remove references to prevailing market price. Consistent 
with SIFMA's observation that many underwriters already make 
representations as to the fair market price of new issues in tax 
certificates to issuers, the Notice now reads: ``The duty of fair 
dealing under Rule G-17 includes an implied representation that the 
price an underwriter pays to an issuer is fair and reasonable, taking 
into consideration all relevant factors, including the best judgment of 
the underwriter as to the fair market value of the issue at the time it 
is priced.''
Conflicts of Interest
     Comments: Conflicts Disclosure. NAIPFA argued that 
underwriters should be required to comply with all the rules regarding 
conflicts to which municipal advisors would be subject under Rule G-17. 
Specifically, NAIPFA said that underwriters should be required to 
disclose with respect to all issues that they:
    [cir] Are not acting as advisors but as underwriters;
    [cir] Are not fiduciaries to the issuer but rather counterparties 
dealing at arm's-length;
    [cir] Have conflicts with issuers because they represent the 
interests of the investors or other counterparties, which may result in 
benefits to other transaction participants at direct cost to the 
issuer;
    [cir] Seek to maximize their profitability and such profitability 
may or may not be transparent or disclosed to the issuer; and
    [cir] Have no continuing obligation to the issuer following the 
closing of transactions.

On the other hand, SIFMA argued that the Notice would impose a 
``fiduciary-lite'' duty on underwriters, citing as examples the 
disclosures required of underwriters recommending complex municipal 
securities financings and the required disclosures of business 
relationships and methods of doing business, including their financial 
incentives. It said that underwriters should not be required to make 
such disclosures as long as their failure to do so did not amount to 
false or fraudulent conduct.
    MSRB Response: A number of NAIPFA's suggested disclosures were 
presented to the MSRB in connection with the MSRB's proposed amendments 
to Rule G-23 and were addressed by the

[[Page 55993]]

MSRB in its filing with the SEC.\7\ The MSRB's interpretive notice 
regarding Rule G-23 contained in that filing provides that a dealer 
will be considered to be acting as an underwriter for purposes of Rule 
G-23(b) if, among other things, it provides written disclosure to the 
issuer from the earliest stages of its relationship with the issuer 
that it is an underwriter and not a financial advisor and does not 
engage in a course of conduct that is inconsistent with arm's-length 
relationship with the issuer. The writing must make clear that the 
primary role of an underwriter is to purchase, or arrange for the 
placement of, securities in an arm's-length commercial transaction 
between the issuer and the underwriter and that the underwriter has 
financial and other interests that differ from those of the issuer. 
Rule G-17 is appropriately applied differently to market participants 
with different roles in a financing. Thus, for example, Rule G-17 may 
appropriately be interpreted to apply different standards of conduct to 
municipal advisors, which function as trusted advisors to municipal 
entities and obligated persons, than it does to underwriters of 
municipal securities, which are arm's-length counterparties to issuers 
of municipal securities, and dealers who solicit municipal entities on 
behalf of third-party clients.
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    \7\ See Amendment No. 1 to SR-MSRB-2011-03 (May 26, 2011). See 
also Exchange Act Release No. 64564 (May 27, 2011) (File No. SR-
MSRB-2011-03).
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    Consistent with this interpretation of Rule G-17, the disclosures 
required by the Notice do not amount to the imposition of a fiduciary 
duty, whether ``lite'' or otherwise, on underwriters of municipal 
securities. Simple principles of fair dealing require that underwriters 
have more than a caveat emptor relationship with their issuer clients.
     Comments: Payments to and from Third Parties. BDA said 
that the MSRB should clarify what types of third party payments it was 
interested in and that they should not include tender option bond 
programs and similar arrangements. Alternatively, BDA said that generic 
disclosure should suffice. It argued that a requirement to disclose 
retail distribution and selling group arrangements was unnecessary 
because such arrangements were typically disclosed in official 
statements. In addition, SIFMA said that the MSRB should clarify the 
details of required disclosures and confirm that issuer consent to 
disclosures regarding third-party payments is not required. It argued 
that payments or internal credits among the underwriter and its 
affiliates should not be required to be disclosed. It made the same 
argument with respect to payments or other benefits received from 
collateral transactions, such as credit default swaps (CDS). While it 
argued that the proposed standard was inconsistent with SEC and FINRA 
requirements, it did not cite specific examples.
    MSRB Response: The MSRB believes that issuers of municipal 
securities should be apprised of payments, values, or credits made to 
underwriters that might color the underwriter's judgment and cause it 
to recommend products, structures, and pricing levels to an issuer when 
it would not have done so absent such payments. For example, if a swap 
dealer affiliate of the underwriter were to make a payment to, or 
otherwise credit, the underwriter for the underwriter's successful 
recommendation that the issuer enter into a swap that is integrally 
related to a municipal securities issue, the Notice would require that 
such payment or credit be disclosed to the issuer. Generic disclosure 
would not suffice. However, only payments made in connection with the 
dealer's underwriting of a new issue would be required to be disclosed. 
Payments from purchasers of interests in tender option bond programs 
would not typically be made in connection with the underwriting and, 
therefore, would not typically be required to be disclosed. The MSRB 
considers it essential that an issuer be made aware of retail 
distribution and selling group arrangements that are integral to the 
underwriter's ability to provide the services that it has contracted 
with the issuer to provide. If such arrangements are already disclosed 
in official statements, this requirement of the Notice should not 
impose an additional burden on the underwriter.
     Comments: Profit-Sharing with Investors. SIFMA said that 
the MSRB should provide guidance on what is meant by profit-sharing 
with investors that, depending upon the facts and circumstances, could 
result in a Rule G-17 violation.
    MSRB Response: The provisions of the Notice concerning profit-
sharing with investors resulted in part from reports to the MSRB that 
underwriters of Build America Bonds sold such bonds to institutional 
investors that then resold the bonds to such underwriters shortly 
thereafter at prices above their initial purchase price but below 
rising secondary market prices. If these reports were accurate and 
reflected formal or informal arrangements between such underwriters and 
institutional investors, these re-sales allowed the investors and the 
underwriters to share in the increase in value of the bonds. The MSRB 
has amended the Notice to note that ``such arrangements could also 
constitute a violation of 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.''
     Comments: CDS Disclosures. BDA said that general 
disclosures about trading in an issuer's CDS should suffice and that 
information barriers within firms might prevent more detailed knowledge 
by the dealer personnel underwriting an issuer's securities. SIFMA made 
the same arguments and additionally said that the proposal that 
underwriters disclose their CDS activity would be highly prejudicial 
because it would require underwriters to disclose their hedging and 
risk management activities and could potentially compromise 
counterparty arrangements. It argued that, if this requirement were 
maintained by the MSRB, it should exempt dealing in CDS that reference 
a basket of securities, including the issuer's.
    MSRB Response: The MSRB is mindful that appropriate information 
barriers may prevent personnel of a dealer firm engaged in underwriting 
activities from knowing about hedging activities of other parts of the 
dealer. However, the Notice requires only that 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, must disclose that to the 
issuer. The Notice does not require information about specific trades 
or confidential counterparty information. The MSRB has amended the 
Notice to provide that disclosures would not be required with regard to 
trading in CDS based on baskets or indexes including the issuer or its 
obligation(s) unless the issuer or its obligation(s) represented more 
than 2% of the total notional amount of the credit default swap or the 
underwriter otherwise caused the issuer or its obligation(s) to be 
included in the basket or index. The most commonly traded municipal CDS 
basket--Markit MCDX--currently imposes this 2% limit on the components 
of its basket.
Retail Order Periods
     Comments: Retail Orders. BDA said that the MSRB should 
clarify what reasonable measures underwriters must take to ensure that 
retail orders are bona fide and said that underwriters should be able 
to rely on representations of selling group members. SIFMA made

[[Page 55994]]

similar arguments about reliance upon representations of co-managers 
made in agreements among underwriters.
    MSRB Response: The MSRB is aware that, in many cases, orders are 
placed in retail order periods in a manner that is designed to ``game'' 
the retail order period requirements of the issuer. For example, in a 
retail order period in which the issuer has defined a retail order as 
one not exceeding $1,000,000 in principal amount, a dealer may place a 
number of $1,000,000 orders. Such a pattern of orders should cause a 
member of the underwriting syndicate to question whether such orders 
are bona fide retail orders. While it would be good practice for senior 
managing underwriters to require that co-managers and selling group 
members represent that orders represented to be retail orders in fact 
meet the issuer's definition of ``retail,'' the MSRB would not consider 
such representations to be dispositive and would expect the senior 
manager to make appropriate inquiries when ``red flags'' such as 
described above could cause the senior manager to question the nature 
of the order. As an example of a ``reasonable measure,'' a senior 
managing underwriter might require the zip codes attributable to the 
retail orders. With regard to orders placed by retail dealers, the MSRB 
reiterates that it would not consider an order ``for stock,'' without 
``going away orders,'' to be a customer order.\8\
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    \8\ See Exchange Act Release No. 62715 (August 13, 2010) (File 
No. SR-MSRB-2009-17).
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Dealer Payments to Issuer Personnel
     Comments: Rule G-20. SIFMA requested that the MSRB clarify 
that its statements regarding Rule G-20 in the Notice were only 
reminders and that the MSRB did not intend to expand its previous 
guidance on Rule G-20 by means of the Notice.
    MSRB Response: The provisions in the Notice regarding Rule G-20 are 
only reminders of existing MSRB guidance.
Miscellaneous
     Comments: Coordinated Rulemaking. AFSCME strongly 
supported the notice; however, it urged the MSRB to coordinate its 
rulemaking with the SEC and the CFTC. BDA said that the Notice should 
not create overlapping and potentially conflicting obligations with SEC 
and CFTC rules and that the Notice might be premature, given ongoing 
rulemaking by the SEC and the CFTC. SIFMA said that the MSRB should 
defer the imposition of disclosure requirements concerning swaps and 
security-based swaps because these would be the subject of rulemaking 
by the SEC and CFTC.
    MSRB Response: The MSRB is aware of ongoing rulemaking by the SEC 
and the CFTC and has taken care to ensure that any requirements of the 
Notice are consistent with such rulemaking. For example, the provisions 
of the Notice concerning the disclosures associated with complex 
municipal securities financings are appropriately consistent with the 
CFTC's proposed business conduct rule for swap dealers and major swap 
participants \9\ and the SEC's proposed business conduct rule for 
security-based swap dealers and major security-based swap 
participants.\10\ The MSRB may undertake additional rulemaking as 
necessary to ensure such consistency in the future. In addition, 
dealers are reminded that they may be subject to other regulatory 
requirements.
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    \9\ See Federal Register Vol. 75, No. 245 (December 22, 2010).
    \10\ See Federal Register Vol. 76, No. 137 (July 18, 2011).
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     Comments: Effective Date. SIFMA argued that many of the 
Notice's requirements would require the development of compliance 
systems and that the Notice should not become effective for at least 
one year after its approval by the SEC.
    MSRB Response: The MSRB agrees that some delay in the effective 
date of the proposed rule change is appropriate, because the MSRB has 
not previously articulated an interpretation of Rule G-17 that would 
require many of the specific disclosures required by the Notice. 
However, the MSRB considers a delay of one year to be too long. The 
MSRB has requested that the proposed rule change be made effective 90 
days after approval by the Commission.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Interested persons are also 
invited to submit views and arguments as to whether underwriters should 
be required to disclose to municipal entities the conflicts of interest 
associated with their compensation arrangements in a manner similar to 
what the MSRB has proposed for municipal advisors. Comments may be 
submitted by any of the following methods:

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-MSRB-2011-09. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Web site (http://www.sec.gov/rules/sro.shtml). Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the MSRB's offices. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-MSRB-2011-09 and should be submitted on or before 
September 30, 2011.


[[Page 55995]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23103 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P