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Increased disclosure for muni bonds

Wednesday 3 August 2011 - by Andrew Hickley

US municipal bond underwriters will have to inform issuers of any risks and conflicts of interest that could stem from transactions under new proposals released on Tuesday.

The proposals, put forward by the Municipal Securities Rulemaking Board, will require bond underwriters to disclose all the material risks and characteristics associated with complex securities financing.

Under the move, banks will have to divulge any incentives they have for recommending the financing. They will also have to disclose any payments they may receive from other parties in the deal, as well as any other conflicts of interest.

"This proposal is a ground-breaking effort in ensuring the interests of state and local government bonds issuers are further protected in their transactions with underwriters of municipal securities," said MSRB executive director Lynnette Kelly Hotchkiss.

"Dodd Frank explicitly requires the MSRB to protect municipal entities. This gives us the ability to establish detailed requirements for underwriters and make important information more readily available to state and local governments that sell bonds."

The proposals have been put forward to the Securities and Exchange Commission, which must vote to approve the measures in order to put them into law. The MSRB has recommended the rules come into force 90 days after receiving the necessary SEC approval.

The changes also aim to prohibit excessive compensation of underwriters, with their remuneration having to be determined by the "specific facts and circumstances of the offering" to ensure the price paid by the bank is "fair and reasonable" for the issuers' bonds.

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