US muni underwriters should apply new rules now-trade group
July 5 |
July 5 (Reuters) - Underwriters of U.S. municipal bonds should start complying with strict disclosure rules that help protect issuers from conflicts of interest as soon as possible and before the formal deadline of Aug. 2, when the regulations go into effect, a trade group recommended.
The Municipal Securities Rulemaking Board (MSRB) wrote the new rules, which its chairman, Alan Polsky, said were the "biggest development" in protecting state and local governments that has been achieved since the self-regulatory group was created in 1975..
In a report issued Tuesday, the Bond Dealers of America said, "We believe that it only makes sense that underwriters should only be required to deliver the disclosures with respect to transactions that have not yet priced."
But the trade group said it was recommending an early start because the new rules do not make it clear how pending transactions are affected.
The regulations come after a string of high-profile scandals over whether sometimes unsophisticated state and local government officials were not fully briefed about the risks posed by some transactions, such as auction rate securities, or financing for flawed projects, such as an incinerator plant for Harrisburg, Pennsylvania, that led to a brush with bankruptcy.
The new MSRB rules, which have the force of federal law, only apply to negotiated transactions.
The trade group noted that the burden is on the underwriter to decide whether a deal is a complicated transaction, which requires the dealer to give the issuer additional information.
"Depending on the sophistication of the issuer, even traditional fixed rate bonds can be considered a complex municipal securities transaction," the trade group said.
The trade group recommended that underwriters weigh a number of factors in determining whether a deal requires the extra disclosures, including the level of financial expertise of the issuer's employees.
It added: "An issuer's statutory, financial or operation condition or limitations may cause risk or complexities that are particular to the issuer and may cause a specific financing structure to pose risks or complexities that are unique to that issuer."
Underwriters also should make the required disclosures about the arms' length nature of the relationship with the issuer "in the earliest stages," the trade group said.
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