The Municipal Securities Rulemaking Board has filed a proposal with the Securities and Exchange Commission that would prohibit, with a few exceptions, broker-dealers from providing consent to issuer requests to change bond authorizing documents.
The MSRB says the change, an amendment to its Rule G-11 on primary offering practices, would help protect bond owners by not allowing underwriters or remarketing agents to agree to changes that could adversely affect them. Issuers often seek changes to authorizing documents to eliminate outdated provisions or correct operational concerns. These alterations typically are approved with the consent of a certain percentage of bondholders. Since identifying and obtaining consent from bond owners can be difficult, issuers frequently have requested underwriters, as temporary owners of bonds during the initial distribution period, to consent to the changes.
“The MSRB believes that while existing bond owners may be considered as having agreed to provisions relating to amendments to the authorizing documents at the time of purchase, such owners are not likely to have contemplated that a dealer, acting as an underwriter or remarketing agent with no prior or future long-term economic interest in the bonds, could provide such consent unless such ability had been specifically authorized in the authorizing documents and disclosed to bond owners,” the MSRB filing states.
The proposed amendment offers several exceptions to the rule, including instances in which the ability of dealers to provide bondholder consent is expressly included in bond documents and disclosed to purchasers. Dealers are also allowed to provide consent for securities they own outside their roles as underwriters, and for securities surrendered to them as remarketing agents as a result of mandatory tenders. Underwriters could also provide “omnibus” consent for bondholders who had authorized them in writing to do so.
“This exception would benefit the issuer and the existing bond owners in that the underwriter, in tabulating consents to support its omnibus’ consent, would be required to authenticate ownership and requisite corporate authority of the purchaser of bonds to provide a consent, thereby reducing the burden on the issuer and its trustee of such duty,” the MSRB stated in the filing.
A final exception would allow an underwriter to provide consent for prospective purchasers of the bonds, as long as the changes to the authorizing documents would not become effective until all existing bondholders also consented.
The proposed change would not grant dealers the right to provide consents in some circumstances, but rather would prohibit them from doing so in all but the identified circumstances. Dealers would still be obligated to deal fairly with customers under Rule G-17, and the MSRB filing notes that the board initially considered relying only on interpretive guidance to the fair-dealing rule to prohibit proxy consent.
Both dealers and issuers worried that these requirements could impose costs on them and prevent them from making changes that would benefit bondholders. The MSRB recognized that the proposal could impose burdens on both issuers and dealers, but concluded that any such burdens would be justified by the protections afforded bondholders if the SEC approves the change.