CUSIPs for private placements, advertising rules on tap for MSRB meeting

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WASHINGTON – The Municipal Securities Rulemaking Board will weigh how to proceed with requirements for CUSIPs for private placements and advertising rules as well as whether the MSRB should alter its regulations on primary offering practices during its meeting next week.

The MSRB meeting, scheduled to take place here on July 26 and 27, is also expected to include discussion of the municipal advisor professional qualification exam as well as possible improvements to the EMMA system in line with the board’s strategic goal to make that a priority.

The MSRB’s discussion of CUSIP numbers will be tied to recent comments the board received on its described "clarification" that dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions, including direct purchases, where the dealer is the placement agent. Dealers contend it's a new requirement. The proposed change to MSRB Rule G-34 on CUSIP numbers would also, for the first time, require non-dealer municipal advisors to be subject to the CUSIP requirement for new issue securities that are sold in a competitive offering.

The board recast the proposal in June in response to market concerns about an exception for private placements that involve a limited number of participants and are not expected to be resold. The exception would allow a dealer acting as an underwriter or a placement agent in a new private placement with a bank to “elect not to apply for assignment of a CUSIP number if the dealer has a reasonable belief that the purchasing bank is likely to either hold the securities to maturity or limit the resale of the municipal securities to another bank.”

The exception would also apply for MAs in competitive sales of munis where the securities are purchased directly by a bank and the MA believes the bank will hold the securities to maturity or limit any resale to another bank.

Market groups applauded the addition of the exception but asked that it be broadened to include non-bank affiliates, like entities directly or indirectly controlled by the bank or under common control with the bank other than a broker-dealer, as well as a consortium of banks or bank-controlled institutions used to participate in a purchase of new issue securities.

The American Bankers Association also included a suggestion to mandate that the exception apply if the purchasers represent their intentions not to resell and to only resell to the particular investors in the exception, meaning dealers and MAs could rely on the investors’ representations.

The National Association of Municipal Advisors agreed with the ABA’s representation standard and added that it still opposes requiring non-dealer MAs to be subject to the CUSIP requirement because it does not align with the regulatory structure or roles and responsibilities with MAs. The requirement would create confusion when a competitive deal doesn’t have an MA involved and blur the line between MA and dealer activity, NAMA said.

NAMA also had misgivings about proposed advertising requirements. The MSRB has proposed to revise its Rule G-21 on dealer advertising and then create a new, similar Rule G-40 on municipal advisor advertising. The goal of the amendments and new rule would be to reinforce protections for investors and issuers as well as standardize requirements for dealers and MAs with Financial Industry Regulatory Authority requirements on communications with the public.

Rule G-40 would be substantially similar to Rule G-21 but its specific language would be altered so it is aligned with MA practices. It would apply to advertisements by non-solicitor and solicitor MAs and would define advertisement as any promotional literature described or made generally available to a municipal advisory client by an MA. Similarly to G-21, G-40 would exclude certain documents from the definition of advertisements like official statements, preliminary prospectuses, and registration statements.

NAMA has asked the MSRB to withdraw the proposal, citing concerns it fails to differentiate between the “products” that underwriters and investment advisors offer to retail customers and the “services” that MAs generally provide to their issuer clients.

Dealer groups are asking the SEC to better harmonize G-21 with FINRA’s Rule 2210, which breaks down communication into three categories: institutional, retail, and correspondence.

The MSRB’s focus on primary offering practices will center on what next steps it should take in possibly revising its Rule G-11 on such practices. The board has been soliciting feedback from market participants over the last several months about syndicate practices and other primary offering developments in the market. It is possible the board could decide to draft a concept proposal that would ask for more market feedback and help determine where the rule should be amended.

The approaching Sept. 12, 2017 deadline for municipal advisors to take and pass the Municipal Advisor Representative Examination, called the Series 50, is also expected to take up some time during the meeting.

The MSRB had previously said it was concerned that a number of registered MAs don't have any professional who has passed the exam. As of mid-June, there were still 170 firms out of 638 registered that were in that position. That number has since narrowed to 135 firms out of 633 registered. The board plans to continue its outreach to MAs about the looming deadline and will also discuss the development of a separate, principal exam for MAs.

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