WASHINGTON — The Municipal Securities Rulemaking Board has proposed including two more exceptions in draft rules that would limit underwriters’ ability to consent to changes in muni bond authorizing documents.
The latest proposal, released Nov. 21, would allow underwriters to consent to bond document changes if their ability to do so is stated in both the authorizing documents and the offering documents of so-called parity bonds.
Underwriters could also consent when acting as an agent for other bondholders who already provided written consent.
The MSRB called this second exception an “omnibus consent,” and said it could relieve issuers from the obligation of collecting consents from each bond purchaser.
Comments are due by Dec. 21.
In a statement, MSRB executive director Lynnette Kelly said the proposal, which amends a rule change the board proposed in July, “reflects the thoroughness with which the MSRB approaches changes to regulations. We are committed to a rulemaking process that takes into consideration all relevant information and public comment,” she said.
The proposal is the third this year in which the MSRB has addressed concerns about bondholder consent. The proposals seek to limit the ability of underwriters from consenting to changes in bond documents during the brief period when they are majority bondholders.
The board said such consents can adversely affect holders of parity bonds, which were sold separately but have equal claim on the same source of payment.
In February, the board published a draft interpretive notice saying that underwriters who consent to amendments may violate their fair-dealing obligations under the MSRB’s Rule G-17.
In response to industry comments, in July the MSRB proposed rule changes to prohibit underwriters from consenting except in three circumstances: when the underwriter owns the securities as an investment, when the underwriter acts as a remarketing agent after all of the outstanding securities have been tendered, and when the changes would not take effect until all other bondholders consented.
Market participants have mixed views on the MSRB’s proposals, but have praised the board for refining its proposals in response to industry concerns.
Mike Nicholas, chief executive officer of Bond Dealers of America, said his group “appreciates that the MSRB continues to ask for and consider industry input as it makes adjustments to Rule G-11.”
Nicholas reiterated concerns that the proposal could keep dealers from making “non-material changes” to bond documents that could benefit all investors.
David Cohen, managing director at the Securities Industry and Financial Markets Association, said it’s impractical for issuers to be expected to receive consent from all bondholders, who can be difficult to track down.
Cohen added that many bond documents allow changes with consent from a majority, or two-thirds, of bondholders. The MSRB should not pass a rule that would override such provisions, he said.
But Cohen commended the board for seeking to balance the rights of bondholders with issuers’ need to make changes.
“They are not rushing. They are trying to get it right. We think that’s good,” he said.
Jeanine Rodgers Caruso, board president of the National Association of Independent Public Finance Advisors, said the MSRB has still not addressed her group’s concern that the proposals put too much burden on issuers.
She noted that amendments are often requested by bond purchasers, not issuers, and said underwriters or remarketing agents should have the obligation to obtain consents.
“They are the best suited for this role from a cost-effective efficiency standpoint,” she said in an email.
Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, said she is still reviewing the notice while adding that GFOA wants to ensure that rule changes don’t impose undue costs on issuers.
The National Federation of Municipal Analysts could not be immediately reached for comment. But in a comment letter submitted to the MSRB this summer, NFMA executive director Lisa Good largely supported the board’s efforts.
Good said the July proposal would protect investors with a minimum burden on market participants. She also urged the board to differentiate between changes that merely modernize documents, and those that diminish security provisions.
The NFMA also suggested that offering documents explain consent-related provisions and suggested that issuers should report changes to security provisions in “material event notices” on the MSRB’s online EMMA system.