The proposal, which would amend Rule G-11 on primary offering practices, replaces an interpretive notice on Rule G-17 the MSRB issued in February. It warned dealers they could violate fair-dealing requirements if they consented to certain changes to bond authorizing documents. That notice was less restrictive.
The board asked for comments on the new draft rule changes by Aug. 13.
The rule changes focus on parity bonds. Issuers sometimes sell different issues of parity bonds, which have equal and ratable claims on the same underlying security and source of payment for debt service. When the underwriter purchases the new bonds from the issuer, it may try to make changes to the authorizing documents that could adversely affect the holders of the existing parity bonds.
The proposal would prohibit underwriters from consenting to any changes to muni bond authorizing documents, with three exceptions. A dealer could consent to changes if it owns the securities as an investment, or if it is acting as a remarketing agent after a mandatory tender in which all of the outstanding securities have been tendered. In addition, underwriters or remarketing agents could consent to changes if they would not take effect until all other bondholders affected by the changes had also consented.
“The MSRB believes that this draft proposal will address our concern that underwriters are providing bondholder consent to document changes under circumstances that might adversely affect existing bondholders,” executive director Lynnette Kelly said in a release. “The draft proposal reaches a fair balance between protecting existing bondholders’ interests and continuing to provide efficient means for municipal securities dealers to assist issuers in making changes to bond authorizing documents with appropriate safeguards for bondholders.”
The former G-17 interpretative notice warned underwriters that they could violate fair-dealing rules by consenting to amendments that would “reduce the security” of existing bondholders. The notice had said underwriters would not violate G-17 if authorizing documents expressly gave them authority to provide consent, and if the documents for existing securities specified that consents could be provided by underwriters of other securities issued under the same documents.
The board said it decided to draft rule changes after reviewing industry comment letters in response to the G-17 notice.
“The MSRB recognizes concerns on the part of commenters about the ability to identify what constitutes a reduction in security, as well as the ability to balance the short- and long-term consequences of certain changes, and to balance the interests of bondholders and those of the issuer,” the board said a document accompanying the draft rule changes.
Bond Dealers of America chief executive officer Mike Nicholas called the proposed change “too narrow and too restrictive,” saying it could prohibit issuers from making non-material changes to bond documents. Current rules benefit bondholders by letting underwriters consent to changes as minor as changing an incorrect date in a document, he said.
“What you are potentially doing is preventing dealers from making clerical fixes to bond authorizing documents after the sale of the bonds,” he said, adding that the proposal should recognize the uniqueness of different bond documents. He warned that a “blanket prohibition” of bondholder consent could restrict market efficiency.
Leslie Norwood, co-head of the muni securities division at the Securities Industry and Financial Markets Association, said her group appreciates the MSRB’s “thoughtfulness” in reviewing the G-17 comment letters and the difficulty of balancing bondholders’ interests with the need for an efficient means to change authorizing documents.
SIFMA supports the MSRB’s decision to allow underwriters to consent to changes to bonds that have been mandatorily tendered, she said, noting that in those circumstances bondholders can review changes before making new investment decisions.