More conflict disclosure directed for bond underwriters

Underwriters, which bring municipal bonds to the market, will be required to divulge their possible conflicts of interest and disclose the potential risks of complex debt deals that were volatile and costly for borrowers during the credit crisis under a new interpretation of muni market rules.

The Municipal Securities Rulemaking Board rule interpretation becomes effective in August. There are some limits on the new disclosures that matter to many healthcare borrowers.

Not-for-profit hospitals and health systems that seek financing in the municipal bond market do so with the help of a local or state agency that issues the bonds. Hospitals, as borrowers, do not directly issue the bonds under these circumstances.

The new MSRB interpretation applies only to the cities and states that issue bonds, not the not-for-profits that borrow through municipal agencies, known as “obligated persons.” Underwriters will not be required to inform borrowers to the same degree as bond issuers once the interpretation takes effect.

“The new rules concern the duties of underwriters to municipal entity issuers of municipal securities, which are state and local governments,” the MSRB said in a written statement. “They do not apply to their duties to obligated persons. The new rules are the first step in the MSRB's fulfillment of its duty under the Dodd-Frank proposal. The MSRB will continue to assess underwriters' duties to obligated persons and consider whether additional rulemaking is necessary.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased oversight of municipal bond deals and called for two studies of the market.

Kristin Franceschi, president of the National Association of Bond Lawyers and a partner with DLA Piper, said that oversight is evolving as the MSRB and the Securities and Exchange Commission draft new municipal market rules and the financial sector figures out how to comply with them.

Though new disclosure requirements do not explicitly direct underwriters to inform borrowers along with bond issuers, borrowers may nonetheless benefit indirectly, she said. Borrowers, such as hospitals and health systems, may be involved as a practical matter in bond deals. Underwriters may decide to inform borrowers anyway. Or borrowers or their financial advisers may seek out the information.

You can follow Melanie Evans on Twitter: @MHmevans.