MSRB Establishes New Protections for State and Local Governments

Date: August 2, 2012

Contact: Jennifer A. Galloway, Chief Communications Officer
             (703) 797-660


Alexandria, VA – Effective today, state and local governments that issue bonds will receive additional information about the risks of complex financial transactions and potential conflicts of interest from underwriters of municipal securities. New regulations for underwriters, established by the Municipal Securities Rulemaking Board (MSRB), are intended to ensure that state and local governments have the necessary information to make appropriate decisions when undertaking financial transactions.

Underwriters for negotiated offerings of municipal securities are now required to disclose to their state and local government clients risks about complex financial transactions, potential conflicts of interest and compensation received from third-party providers of derivatives and investments, among other new requirements.

These important new protections for state and local governments are outlined in the MSRB’s interpretive notice, which was approved by the Securities and Exchange Commission on May 4, 2012. MSRB rules previously prohibited an underwriter from engaging in any deceptive, dishonest or unfair practice with respect to an issuer of municipal securities. The new requirements significantly clarify the different roles, responsibilities and relationships of the financial professionals involved in municipal bond deals, and highlight for state and local governments the risks and characteristics involved in complex municipal financings.

The principles covered in the new regulations are summarized below. Read the complete new regulations.

  • An underwriter is required to provide robust disclosures as to its role, its compensation and any actual or potential material conflicts of interest.
  • All representations made by underwriters to state and local governments must be truthful and accurate and may not misrepresent or omit material facts.
  • Underwriters of municipal bond issues that recommend complex municipal securities transactions or products are required to disclose all material financial risks and characteristics, incentives and conflicts of interest regarding the transactions or products.
  • An underwriter's duty to have a reasonable basis for the representations it makes to a state or local government extends to representations made in connection with the preparation by the state or local government of its disclosure documents.
  • The duty to treat state and local governments fairly includes an implied representation that the price an underwriter pays to a state or local government is fair and reasonable, taking into consideration all relevant factors.
  • Underwriters are required to disclose potential conflicts of interest, including the existence of 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 state or local government whose securities are being underwritten.
  • Underwriters are reminded not to disregard the state and local governments' rules for retail order periods by accepting or placing orders that do not satisfy the state and local governments' definitions of "retail."

The MSRB recently conducted a webinar explaining the changes to MSRB Rule G-17 regarding the new duties of underwriters to state and local governments and published comprehensive implementation guidance to assist underwriters in meeting these expanded legal obligations to state and local governments.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a Congressionally-chartered, self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is subject to oversight by the Securities and Exchange Commission.