MSRB scrutinizing MA CUSIP requirement

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WASHINGTON — The Municipal Securities Rulemaking Board is asking for feedback on the usefulness of requiring muni advisors to apply for CUSIP numbers when advising on competitive deals, including whether it should abolish the requirement for both dealer and non-dealer MAs.

The MSRB released this latest request for comment, a part of its ongoing retrospective rule review, Wednesday afternoon. The RFC concerns Rule G-34 on CUSIP numbers, which was amended in 2017 to require for the first time that non-dealer MAs apply for CUSIPs when advising on a competitive transaction. The rule became effective in June 2018. Muni advisors on Thursday said they were glad to see the requirement, which they never supported, coming under scrutiny.

“We are looking to get formal and informative feedback on the CUSIP requirement to ascertain whether a change in the rule may be warranted,” said Lanny Schwartz, MSRB’s chief regulatory officer.

Rule G-34 dates back to 1983. In 1986 the MSRB added the CUSIP-for-competitive-issues requirement for dealers acting as financial advisors on such transactions. The rationale was to allow the dealer financial advisor to obtain a CUSIP number at the earliest possible date to facilitate automated trading, as well as avoid potential market inefficiencies, such as having each dealer who is planning to submit a bid bear the cost of applying for CUSIP numbers, the MSRB said.

But the passage of the Dodd-Frank Act changed the financial advisory role by making those who gave bond advice to municipal issuers “municipal advisors,” with a fiduciary duty to put a municipality’s interests over their own. The traditional role of the “financial advisor” became largely the role of the municipal advisor, and the MSRB embarked on years of rulemaking to codify the Securities and Exchange Commission’s muni advisor rules. Among that work was the G-34 amendments, which the board rationalized for much the same reasons as in 1986.

The amendments also addressed some other topics, namely what the MSRB said was a codification of its longstanding interpretation that dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions with certain exceptions. Dealers opposed that language, saying it was a new requirement in their view.

The RFC asks a number of sweeping questions about G-34’s requirement that an MA apply for a CUSIP in a competitive deal.

“Would the elimination of the requirement for all municipal advisors adversely affect the market or investors?” one question asks. “What would the impact be on the market if only dealer municipal advisors but not non-dealer municipal advisors were subject to the CUSIP Requirement, or vice versa?” asks another.

Other questions concern the frequency of MAs applying for CUSIP numbers, the costs and burdens associated with them doing so, and how the requirement meshes with the “inherent obligations” of a muni advisor.

Susan Gaffney, executive director of the National Association of Municipal Advisors, said she was happy that the MSRB was seeking comment on this subject.

“NAMA has previously stated that no MA (independent or broker/dealer MA) should secure CUSIP numbers,” Gaffney said in an email. “The origins of Rule G-34 were put in place prior to the advent of the MA rule and MA definition. This new regulatory structure should be considered as the MSRB reviews how rules developed prior to the Dodd Frank Act for broker/dealer MAs apply today. Our forthcoming comment letter will address this point and provide other information as requested in the notice.”

Comments are due by May 28.

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