Request for Comment on Exception Provisions of Draft Rule Amendment to Limit Dealer Consents to Changes in Authorizing Documents for Municipal Securities

INTRODUCTION

The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on a revised draft amendment to MSRB Rule G-11 on primary offering practices (the “Revised Draft Rule G-11 Amendment”) concerning the practice by brokers, dealers, and municipal securities dealers (“dealers”) of consenting to changes in authorizing documents for municipal securities.  While the MSRB continues to consider the comments received on all aspects of the Draft Rule G-11 Amendment, published in July 2012, it has determined to seek comment on two new exceptions under the proposal, as described below.

Comments should be submitted no later than December 21, 2012, and may be submitted in electronic or paper form.  Comments may be submitted electronically by clicking here.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[1]

Questions about this notice should be directed to Karen Du Brul, Associate General Counsel, at 703-797-6600.

BACKGROUND

The current proposal is the MSRB’s third request for comment on this topic.  First, on February 7, 2012, the MSRB published MSRB Notice 2012-04 in which it requested comment on a draft interpretive notice concerning the application of MSRB Rule G-17 on fair dealing to the provision of bondholder consents by underwriters of municipal securities (“Draft Rule G-17 Notice”).

The Draft Rule G-17 Notice would have provided, depending upon the facts and circumstances, that the practice by underwriters of consenting to amendments to bond authorizing documents, such as trust indentures and bond resolutions, could be a violation of the duty of dealers under MSRB Rule G-17 to deal fairly with all persons in the conduct of their municipal securities activities.  In cases where the amendments reduced the security for the existing bondholders, the Draft Rule G-17 Notice stated that the provision of consents by underwriters would be a violation of their Rule G-17 duty of fair dealing unless: (i) the authorizing document expressly provided that an underwriter could provide bondholder consent; and (ii) the offering documents for the existing securities expressly disclosed that bondholder consents could be provided by underwriters of other securities issued under the authorizing document.

In publishing the Draft Rule G-17 Notice for comment, the MSRB cited its concern that the practice of underwriters providing consents to changes in the authorizing documents, particularly to changes that reduced the security for existing parity holders, had not been explicitly provided for in the authorizing documents, nor had it been specifically disclosed in the offering documents for outstanding bonds affected by the change.  The MSRB also recognized the interests of some issuers or obligated persons to amend their authorizing documents in an efficient and cost effective manner.  In an effort to balance the concerns of issuers, obligated persons and existing bondholders, the Draft Rule G-17 Notice stated that underwriters would not violate their Rule G-17 duty by providing consents to changes that reduced the security for existing bondholders if the ability of an underwriter to provide such consents had been explicitly authorized in the authorizing documents and expressly disclosed in the offering documents for the existing bonds.

DRAFT RULE G-11 AMENDMENT

Second, the MSRB sought comment on a proposed amendment to MSRB Rule G-11 (“Draft Rule G-11 Amendment”), prohibiting certain consents by dealers to amendments to bond authorizing documents, subject to limited exceptions.[2]

The Draft Rule G-11 Amendment, developed in response to the comments on the Draft Rule G-17 Notice,[3] would have prohibited a dealer from providing bondholder consent to any amendment to authorizing documents for municipal securities, either as an underwriter, remarketing agent, or agent for owners, or in lieu of owners, subject to limited exceptions.  The exceptions consisted of consents given: (1) by a dealer for securities owned by it other than in its capacity as an underwriter or remarketing agent; (2) by a remarketing agent for all securities affected by such consent, provided that all such securities had been tendered to it as a result of a mandatory tender; and (3) by a dealer if all owners of securities that would be affected by such amendments (other than the securities for which the dealer provides its consent) had provided or would have provided consent to such amendments prior to their taking effect.

The MSRB received nine comment letters on the Draft Rule G-11 Amendment.[4]  Many of the commenters expressed views regarding the potential impact on the ability of issuers to amend their bond authorizing documents in an efficient, cost effective and timely manner.  In addition, several commenters expressed views regarding the appropriateness and adequacy of the exceptions set out in the Draft Rule G-11 Amendment.  While the MSRB continues to consider the comments received on all aspects of the Draft Rule G-11 Amendment, it has determined to seek comment on two new proposed exceptions, as described below.

REVISED DRAFT RULE G-11 AMENDMENT

New Exceptions Under Revised Draft Rule G-11 Amendment.  The Revised Draft Rule G-11 Amendment includes two additional exceptions to the basic prohibition on dealers providing bondholder consents: (i) for underwriters providing consents to amendments to bond authorizing documents under circumstances where such documents and the bond offering documents expressly provide for such consent; and (ii) for underwriters providing consent to an issuer solely as agent on behalf of bondholders who had delivered to the underwriter their respective written consents to such amendments.[5]

The first new exception from the prohibition under the Revised Draft Rule G-11 Amendment would allow underwriters to provide consent to amendments to bond authorizing documents where the bond documents explicitly provided that underwriters could give such consent, and the offering documents for existing securities expressly disclosed the ability of an underwriter to provide such consent.

The second new exception would allow an underwriter to deliver an omnibus consent to an issuer representing the consents of holders who had purchased the new issue of municipal securities and had delivered corresponding written consents to the underwriter.  This might occur, for example, when an issuer requested an underwriter to collect and verify each purchaser’s authority to execute and deliver such consent, thus relieving the issuer or a trustee from this obligation and allowing the issuer to rely on a single consent from the underwriter.

Existing Exceptions from Draft Rule G-11 Amendment.  The two new exceptions described above would be in addition to the three exceptions previously included in the Draft Rule G-11 Amendment.

The first existing exception, unchanged from the Draft Rule G-11 Amendment, would allow dealers that owned securities as an investment to provide bondholder consents with respect to those securities.  There would be no precise holding period established for purposes of determining whether the dealer no longer held the securities in its capacity as underwriter or remarketing agent – rather, the dealer would look, among other things, to how its holding was treated for its other regulatory and internal risk management purposes as well as whether its own financial interests would be affected by the proposed amendment to the authorizing documents.

The second existing exception, also unchanged from the Draft Rule G-11 Amendment, would allow a dealer, as a remarketing agent, to provide consent for securities that had been tendered to it as a result of a mandatory tender, provided that all securities affected by the consent had been tendered.  Thus, if a bondholder elected to exercise a right to “hold” bonds subject to a mandatory tender in lieu of tendering, a dealer acting as the remarketing agent would be prohibited from providing consents to changes in the authorizing documents unless the remarketing agent had also received the specific written consent of such bondholder to such change.

The third existing exception, unchanged from the Draft Rule G-11 Amendment, would allow a dealer (whether acting as underwriter or remarketing agent) to consent to an amendment to authorizing documents in circumstances where the amendment would not become effective until all bondholders affected by such amendment (other than the holders of the securities for which such dealer provides consent) had also provided consent.  This might occur, for example, when an issuer was accumulating, over time, bondholder consents from individual owners of bonds previously outstanding under the authorizing document through traditional methods of obtaining written bondholder consents.  Under this exception, the amendment to the authorizing document would not become effective for all bondholders until all such existing bondholders had consented or their bonds had matured or been redeemed.

Additional Aspects of Proposal.  The Revised Draft Rule G-11 Amendment would be effective prospectively following the effective date and would not affect consents provided by underwriters before the effective date.

The Revised Draft Rule G-11 Amendment would not affect other methods used by issuers to obtain consents from owners of newly issued bonds, such as consents received (in writing or constructively) by an issuer directly from bondholders upon initial purchase of the bonds.  The Revised Draft Rule G-11 Amendment would, however, prohibit the dealer from providing any such constructive or deemed consent for or in lieu of bondholders.  The second new exception under the Revised Draft Rule G-11 Amendment noted above, allowing an underwriter to deliver an omnibus consent based on actual written consents received from bondholders, would not be considered to be providing constructive or deemed consent for or in lieu of bondholders.[6]

The Revised Draft Rule G-11 Amendment would apply only in connection with consents that the authorizing documents state are to be provided by bond owners (including beneficial owners of bonds).  Consents from dealers solely in their capacity as an underwriter or a remarking agent required or permitted under authorizing documents, and not as an agent for or in lieu of bondholders, would not be subject to the Revised Draft Rule G-11 Amendment.  For example, if an authorizing document provides that a dealer, in its role as remarketing agent, must consent to a change relating to the manner or timing for tendering bonds, the dealer serving as remarketing agent would be permitted to provide such consent.  However, if the authorizing document also requires consent from bond owners to such change, the remarketing agent would not be permitted to provide consent on behalf of or in lieu of bondholders.

REQUEST FOR COMMENT

The MSRB requests comments on the proposed additional exceptions to the Revised Draft Rule G-11 Amendment, including whether such additional exceptions would result in an additional burden on issuers, and whether there are less burdensome and cost effective alternatives.

November 21, 2012

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TEXT OF DRAFT RULE G-11 AMENDMENT [7]

Rule G-11: Primary Offering Practices

(a) – (j) No change.

(k) Prohibitions on Consents by Brokers, Dealers, and Municipal Securities Dealers.  No broker, dealer, or municipal securities dealer shall provide bond owner consent to amendments to authorizing documents for municipal securities, either in its capacity as an underwriter or remarketing agent, or as agent for or in lieu of bond owners.  Notwithstanding the foregoing, a broker, dealer, or municipal securities dealer may provide bond owner consent to amendments to authorizing documents for municipal securities if:

(i) the indenture or bond authorizing document expressly allows an underwriter to provide bond owner consents and the offering document for the existing securities expressly disclosed that bond owner consents could be provided by underwriters of other securities issued under the indenture;

(ii) (i) such securities are owned by such broker, dealer, or municipal securities dealer other than in its capacity as underwriter or remarketing agent;

(iii) (ii) all securities affected by such amendment are held by the broker, dealer, or municipal securities dealer, acting as remarketing agent, as a result of a mandatory tender of such securities; or

(iv) the broker, dealer or municipal securities dealer provides consent solely as agent for and on behalf of bond owners delivering written consent to such amendments; or

(v) (iii) all bond owners of securities that would be affected by such amendments, other than the securities for which the broker, dealer or municipal securities dealer provides consent, have provided or will provide consent to such amendments prior to their taking effect.

For purposes of this section, the term “authorizing document” shall mean the trust indenture, resolution, ordinance, or other document under which the securities are issued, and the term "bond owner consent" shall mean any consent specified in an authorizing document that may be or is required to be given by an owner of municipal securities issued pursuant to such authorizing document.

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