WASHINGTON — Municipal market participants have mixed opinions about the Municipal Securities Rulemaking Board’s proposal to restrict the ability of underwriters to consent to bond document changes.
Some issuers and an analyst group praised the proposal, while a dealer group and a bond-issuing authority official said it could impede issuers from updating bond documents.
The comments were made in response to the MSRB’s July 5 proposal to generally prohibit underwriters from consenting to bond document changes. The proposal, which superseded a February interpretive notice, included exceptions for dealers who own securities as investments and for remarketing agents who hold securities after mandatory tenders. Underwriters also are permitted to change documents if bondholders consent to the changes.
The proposed changes to Rule G-11 address instances when an underwriter buys bonds from an issuer and then, as the majority bondholder at that time, consents to changes in bond authorizing documents. Such changes impact holders of parity bonds, which may be sold in a series of issues but have equal claim on the same source of payment, the MSRB said.
The Rhode Island Health and Educational Building Corp. praised the MSRB’s efforts.
“The practice of having an underwriter, who has no prior or future economic interest in the bonds and may hold them only temporarily, provide consent to changes impacting bondholders may be unfair and deceptive,” wrote executive director Robert Donovan.
Consent provisions in authorizing documents should be more clear and detailed, Donovan said. He also suggested that market participants develop a system to notify bondholders of consent requests.
The National Federation of Municipal Analysts also applauded the proposal, which it said would protect investors with minimum burden on market participants.
“Municipal bond analysts are averse to changes in security provisions unless these changes are transparent and are accomplished via the intent of bond documents,” wrote NFMA executive director Lisa Good.
But new rules should differentiate between amendments that merely modernize documents, and those that diminish security provisions, she added.
NFMA also suggested that offering documents clearly explain consent-related provisions, and recommended that documents disclose if an underwriter is in the process of accumulating consent. NFMA also suggested that issuers should report changes to security provisions in “material event notices” on the EMMA system.
Thomas Paolicelli, executive director of the New York City Municipal Water Finance Authority, said consents from underwriters allow his agency to periodically update a 1994 general resolution covering $19.6 billion of outstanding bonds.
“We have found it necessary to make changes from time to time to enable the authority to access the market more efficiently and save money utilizing modern financing and investment techniques,” he said.
Paolicelli recommended the MSRB allow underwriter consents if they are specified in authorizing and offering documents for existing parity bonds, an exception that was included in the MSRB’s earlier interpretive notice.
Leslie Norwood, co-head of municipal securities of the Securities Industry and Financial Markets Association, agreed. “We believe that with the elimination of the exception, [the MSRB] appears to be over-reaching beyond the bounds of investor protection,” she said.
Norwood added that it’s unreasonable to require issuers to receive consent from all existing bondholders. She said tracking down bondholders would be “time-consuming, labor-intensive and costly.”
David Belton of Standish Mellon Asset Management Co., a Bank of New York Mellon Corp. subsidiary, took issue with the MSRB’s proposed exceptions for remarketing agents and dealers that hold bonds as investments.
Belton, who could not be reached for comment, wrote that the exceptions would provide dealers too much discretion in assessing their role as a bondholder.”