Letters

MSRB Rule G-34 Obligation of Municipal Advisors to Apply for CUSIP Numbers When Advising on Competitive Sales

Summary

SIFMA provides comments to the Municipal Securities Rulemaking Board (MSRB) regarding MSRB Notice 2019-08: Request for Comment on MSRB Rule G-34 Obligation of Municipal Advisors to Apply for CUSIP Numbers When Advising on Competitive Sales.

The MSRB is seeking public comment on a provision of MSRB Rule G-34 that generally requires a municipal advisor advising an issuer with respect to a competitive sale of a new issue of municipal securities to apply for the assignment of a CUSIP number or numbers with respect to such issue within a specified time frame. In early 2018, the MSRB extended an existing requirement for dealers acting as financial advisors to apply for CUSIP numbers in competitive offerings to all municipal advisors advising on such offerings.  However, based on the municipal securities market’s experience with the provision, and stakeholder input regarding the utility and the burden of this requirement in practice, MSRB determined that a retrospective review of the operation of the CUSIP requirement was merited. MSRB notice can be found here.

PDF

Submitted To

MSRB

Submitted By

SIFMA

Date

28

May

2019

Excerpt

May 28, 2019

Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW
Suite 1000
Washington, DC 20005

Re: MSRB Notice 2019-08: Request for Comment on MSRB Rule G-34 Obligation of Municipal Advisors to Apply for CUSIP Numbers When Advising on Competitive Sales

Dear Mr. Smith:

The Securities Industry and Financial Markets Association (“SIFMA”) appreciates this opportunity to respond to Notice 2019-08 (the “Notice”)1 issued by the Municipal Securities Rulemaking Board (the “MSRB”) in which the MSRB is requesting comment on MSRB Rule G-34(a)(i)(A)(3)(the “CUSIP Requirement”), which requires a municipal advisor advising an issuer with respect to a competitive sale of a new issue of municipal securities to apply for the assignment of a CUSIP number or numbers with respect to such issue within a specified time frame, subject to exceptions.

I. Considerations with Respect to the Rule

A. Private Placements
We acknowledge the MSRB’s concerns about unintended results in the market, should municipal advisors be relieved of the duty to apply for CUSIP numbers. Issuers choosing to engage only a municipal advisor in a placement could find themselves in a situation where no party would be responsible for applying for CUSIP numbers. Removing the requirement for municipal advisors to obtain CUSIP numbers runs counter to the intent of the changes implemented in the revision of 2017 G-34 Amendments, 2  which were, in part, to ensure private placement transactions were reported to MSRB and such information made available to investors.
Further, the 2017 G-34 Amendments clarified the application of the CUSIP Requirement to dealers in private placements and provided an exception from the CUSIP number and other requirements in the case of private placements of municipal securities to a bank, non-dealer control affiliate of a bank or a consortium thereof. However, the 2017 G-34 Amendments seem to have given certain market participants the idea that one can have a competitive private placement, distinct from a typical negotiated private placement.

SIFMA and its members question whether a competitive private placement is a viable concept in the first instance but, in any event, if Rule G-34 were to be amended, it might make sense to recognize the procedural distinction between all private placements and competitive underwritings of municipal securities.

In the case of private placements, if CUSIPs are to be obtained at all, it is most appropriate for CUSIPs to be obtained by the placement agent once the investor has been determined, not when the request for bids is distributed. Once determined, the investor may end up being a bank, a non-dealer control affiliate of a bank or a consortium thereof, whereby no CUSIP number would be necessary. Also, time is not of essence, and such securities are not expected to trade if the appropriate representations have been received. Transfers of such securities that do occur do not involve DTCC. There is no binding commitment to transact until the issuer and the purchaser sign a final term sheet, which is analogous to a bond purchase agreement.

Moreover, prior to that time there is likely no structure and a placement agent is likely trying to get a sense of investor demand. Applying for CUSIP numbers prior to the signing of the final term sheet is premature. Unlike a competitive underwriting where all of the terms other than coupons and prices are set forth in the notice of sale, solicitations of bids for placements allow flexibility in the terms that bidders may submit. Indeed, in many cases, the lack of specificity of terms results in an unwillingness of the CUSIP Service Bureau to assign CUSIPs at the time that bids are solicited.

B. Competitive Public Offerings of Notes
In the case of competitive public offerings of notes, in the event that the MSRB proceeds in making any changes or putting out a more formal request for comment, the MSRB may consider whether or not to provide limited relief for municipal advisors of the obligation to obtain the relevant CUSIP numbers for these transactions. In this limited case, it may make more sense for the winning underwriters to obtain the CUSIP numbers for the notes. Unlike the case of a competitive underwriting of securities, where there is likely to be one underwriter and one coupon per maturity, competitive notes transactions may be underwritten by multiple underwriters resulting in multiple coupons for the same maturity of notes, each requiring its own CUSIP numbers. In this scenario, the winning bidders may be the most appropriate parties to obtain the CUSIP numbers to avoid any potential confusion. It is not clear that the CUSIP Service Bureau will assign CUSIPs in advance for such competitive notes, at any rate.

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1 MSRB Notice 2019-08 (February 27, 2019).
2 As defined in the Notice.