Lawyers Ask About Carve-Out from CUSIPs for Some Private Placements

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WASHINGTON – The Municipal Securities Rulemaking Board should consider a carve-out from draft CUSIP requirements for private placements where the munis are either held or only redistributed to a few other financial institutions, lawyers meeting here said on Friday.

The lawyers, some of which represent dealers, made their comments about the draft amendments to MSRB Rule G-34 on CUSIP numbers, new issue, and market information requirements during a National Association of Bond Lawyers' Tax and Securities Law Institute panel. The MSRB proposed the amendments that it says clarifies the definition of "underwriter" after learning that the muni industry has had questions about the application of CUSIP number requirements for private placements of munis. Some industry participants, such as banks in direct purchase transactions, do not appear to believe that CUSIP numbers are required with respect to muni securities, the MSRB said in its notice.

"The MSRB historically has taken the view that private placements of municipal securities are subject to the requirements of Rule G-34," the MSRB said.

One lawyer noted that the rule does not currently specify that "underwriter" extends to private placements and that the MSRB's "clarification" is more like a "rule change" that would broaden the current definition by using the definition of underwriter in the Securities and Exchange Commission's Rule 15c2-12 on disclosure.

The CUSIP requirement for dealers acting as placement agents sparked conversation among the lawyers about what the change would mean for the debate over determining whether certain debt instruments should be considered loans or securities. That determination has bearing on what regulations apply to both the instrument and the firms and individuals participating in the transaction.

Lawyers at the panel session said many market participants consider CUSIP numbers an indicator that a debt instrument is a security, which may create problems for banks that enter into the private placements with the intention of keeping the instrument classified as a loan.

Robert Fippinger, the MSRB's chief legal officer, said at a TSLI panel on Thursday that if the MSRB proposed rule changes are approved and all the banks are in the same situation where all private placements have CUSIP numbers, "I think that lessens the argument that a CUSIP is an indicia of a security.

"I have never been convinced myself that a CUSIP is an indicia of a security," he said during the panel.

At the panel on Friday, lawyers said the concerns about the effect of requiring CUSIPs could also be alleviated by the carve-out. The carve-out would "be extremely helpful for broker-dealers" by allowing them to continue having "disparate views on whether something is a loan or a security and serve the market," one lawyer said. However, another lawyer said the MSRB may try to be more restrictive with any exception and not add in the ability to avoid a CUSIP if a bank would only be distributing the privately placed munis to other financial institutions. The lawyer said it is unlikely a bank could agree that it would never redistribute.

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