Alert August 29, 2011

MSRB Recommends Sanctions for Disclosure Noncompliance

Michael Bartolotta, chair of the Municipal Securities Rulemaking Board (“MSRB”), recently sent a letter to Elisse Walter, commissioner of the Securities and Exchange Commission (“SEC”), recommending more stringent enforcement of continuing disclosure obligations.  Mr. Bartolotta noted in his letter that “there is limited accountability” of bond issuers and borrowers who choose not to comply with their disclosure obligations and recommended that the SEC “consider issuing more interpretive guidance in this area and amending Rule 15c2-12, as necessary to impose consequences for noncompliance with continuing disclosure undertakings.”

In his letter, Mr. Bartolotta recommended several specific actions the SEC should consider, including:

  • Requiring more “robust” disclosure in official statements regarding previous failures to provide continuing disclosure.
  • Requiring disclosure agreements to include enforceable remedies for noncompliance, such as enforcement rights for investors or the engagement of professionals to assist with compliance.

Mr. Bartolotta also addressed specific areas of disclosure in his letter, recommending that the SEC provide guidance in the following areas:

  • Enhanced disclosure for variable rate instruments.
  • Disclosure regarding underlying obligors in transactions with liquidity providers or credit enhancers.
  • Uniform disclosure regarding risk factors.
  • Disclosure regarding conflicts of interest, particularly with respect to payments made and received by third parties, such as swap or guaranteed investment contract providers.

Industry reaction to Mr. Bartolotta’s letter has been mixed. Most market participants favor transparency and complete information for investors.  Some observers have noted, however, that the SEC’s jurisdiction is limited to municipal securities brokers and dealers, making it difficult for the agency to impose sanctions on issuers and borrowers for disclosure noncompliance.