The Municipal Securities Rulemaking Board, responding to criticism from municipal bond dealers and advisors, backed off an effort to write a new rule on minimum denominations and agreed to modify proposals on CUSIP numbers and municipal fund securities.
The board now will request comment on how to best assist dealers and muni advisors in complying with current rules, MSRB executive director Lynnette Kelly announced Monday, following the board’s quarterly meeting last week.
The meeting was the first since the MSRB’s new fiscal year began Oct. 1 and its new chair and board members took their seats. Kelly said the board’s decisions and the actions it will take reflect the organization's responsiveness to the comments it receives.
The board decided to suspend further rulemaking on minimum denominations of municipal securities transactions and to instead prepare a report addressing the policy issues faced by diverse market participants, Kelly said. G-15 prohibits a dealer from executing a customer transaction in an amount lower than the minimum denomination set by the issuer with certain exceptions. Numerous firms have been caught violating this rule in recent months and been fined by the Financial Industry Regulatory Authority.
The board last year proposed a standalone minimum denomination rule and filed a proposed rule change with the Securities and Exchange Commission in January 2017. The proposal was withdrawn in May after dealers complained that it would have limited interdealer transactions and harmed market liquidity. To continue to evaluate the issue, the board directed MSRB staff to meet with market participants, with a particular effort to include the views of issuers of municipal securities, the MSRB announced.
“Our intensive outreach and subsequent analysis helped the board determine that, given the conflicting views around core issues, the best option for the market is to maintain the existing rule, publish our outreach findings and promote education for all deal team members about the role and effects of minimum denominations in bond documents,” Kelly said.
The board also decided to modify a proposal already pending before the SEC which the MSRB said would codify its longstanding interpretation that dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions. The board will now amend that proposal, which was filed in late August. The change will modify a proposed exception to the rule for direct purchases by banks, their non-dealer control affiliates and consortia where the dealer or muni advisor “reasonably believes the purchaser’s intent is to hold the securities to maturity” to reflect that the bonds may be subject to a mandatory tender or other redemption prior to maturity.
Another modification, sought by the Government Finance Officers Association, will extend an exception for purchases by municipal entities that are not established for the purpose of secondary market trading, such as state revolving funds and bond banks.
“It’s good to see the MSRB acknowledge GFOA’s comments requesting an exception for obtaining CUSIPs for intergovernmental transactions," said Emily Brock, director of GFOA's Federal Liaison Center. "We noted throughout each of our comments to the MSRB and the SEC that these types of transactions take place between issuers with great frequency, considering states that employ state revolving funds or bond banks. The exception should be a necessary component of G-34, and we are glad to see that this issue will be addressed.”
The board decided to file with the SEC a more limited version of its proposed changes to Form G-45 under its Rule G-45, on reporting of information on municipal fund securities. The proposal was to collect four new data points about investment options offered in ABLE (Achieving a Better Life Experience Act) programs and 529 college savings plans, but the one that will head to the SEC will only request information about program management fees and investment option closing dates. The other data points, which included benchmark return percentages and performance by asset class, were considered too burdensome.
The Securities Industry and Financial Markets Association commended MSRB for its outreach efforts.
“SIFMA and its members appreciate the MSRB’s decision to solicit input from industry members regarding compliance guidance and other related issues going forward," said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s Municipal Securities Division. "We look forward to working closely with the MSRB on such issues. We also applaud the MSRB for its thoughtful consideration of industry comments on minimum denominations, and look forward to the upcoming report on this subject. We also appreciate the anticipated amendments to the MSRB’s proposed changes to Rule G-34 and G-45.”
In keeping with its recent focus on helping regulated entities comply with existing rules, the board will publish a request for comment on that subject establish a compliance advisory group to provide expertise and input on that front, the MSRB announced. Kelly said that the MSRB is committed to responding to input from stakeholders throughout its compliance support activities and needs industry help to prioritize those efforts.
The SEC must ultimately approve the MSRB’s proposals.