Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Consisting of Proposed Amendments to MSRB Rule G-34, on CUSIP Numbers, New Issue, and Market Information Requirements, 60433-60439 [2017-27342]

Download as PDF Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82321; File No. SR–MSRb– 2017–06) Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Consisting of Proposed Amendments to MSRB Rule G–34, on CUSIP Numbers, New Issue, and Market Information Requirements December 14, 2017. I. Introduction On August 30, 2017, the Municipal Securities Rulemaking Board (the ‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of proposed amendments to MSRB Rule G–34, on CUSIP numbers, new issue, and market information requirements, to more clearly express in the rule language the MSRB’s longstanding interpretation that brokers, dealers and municipal securities dealers (collectively, ‘‘dealers’’) when acting as a placement agent in a private placement of municipal securities are subject to the CUSIP number requirements under Rule G–34(a); to expand the application of the rule to cover not only dealer municipal advisors but also non-dealer municipal advisors in competitive sales of municipal securities; and to provide a limited exception from the requirements to apply for CUSIP numbers and to apply for depository eligibility (the ‘‘proposed rule change’’). The proposed rule change was published for comment in the Federal Register on September 18, 2017.3 The Commission received eleven comment letters on the proposed rule change.4 On October 18, 2017, the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 81595 (September 13, 2017) (the ‘‘Notice of Filing’’), 82 FR 43587 (September 18, 2017). 4 See Letter to Secretary, Commission, from Leslie M. Norwood, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated October 10, 2017 (the ‘‘First SIFMA Letter’’); Letter to Secretary, Commission, from Susan Gaffney, Executive Director, National Association of Municipal Advisors (‘‘NAMA’’), dated October 10, 2017 (the ‘‘NAMA Letter’’); Letter to Secretary, Commission, from Steve Apfelbacher, President, Ehlers Inc., dated October 10, 2017 (the ‘‘Ehlers Letter’’); Letter to Secretary, Commission, from Noreen P. White, sradovich on DSK3GMQ082PROD with NOTICES 2 17 VerDate Sep<11>2014 21:36 Dec 19, 2017 Jkt 244001 MSRB granted an extension of time for the Commission to act on the filing until December 15, 2017. On November 7, 2017, the MSRB responded to those comments 5 and filed Amendment No. 1 to the proposed rule change (‘‘Amendment No. 1’’).6 The Commission published notice of Amendment No. 1 in the Federal Register on November 17, 2017.7 In response to Amendment No. 1, the Commission received two comment letters.8 On December 8, 2017, the MSRB submitted a response to comments received on Amendment No. 1.9 This order approves the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. Co-President, and Kim W. Whelan, Co-President, Acacia Financial Group, Inc., dated October 10, 2017 (the ‘‘Acacia Letter’’); Letter to Secretary, Commission, from Cristeena G. Naser, Vice President and Senior Counsel, American Bankers Association (‘‘ABA’’), dated October 10, 2017 (the ‘‘First ABA Letter’’); Letter to Secretary, Commission, from Michael G. Sudsina, President, Sudsina & Associates, LLC, dated October 10, 2017 (the ‘‘Sudsina Letter’’); Letter to Secretary, Commission, from Marianne F. Edmonds, Senior Managing Director, Public Resources Advisory Group (‘‘PRAG’’), dated October 10, 2017 (the ‘‘PRAG Letter’’); Letter to Secretary, Commission, from Emily Swenson Brock, Director, Federal Liaison Center, Government Finance Officers Association (‘‘GFOA’’), dated October 10, 2017 (the ‘‘GFOA Letter’’); Letter to Secretary, Commission, from Peter Warms, Senior Manager of Fixed Income, Entity, Regulatory Content and Symbology, Bloomberg L.P., dated October 10, 2017 (the ‘‘Bloomberg Letter’’); Letter to Secretary, Commission, from Dennis Dix, Principal, DIXWORKS LLC, dated October 10, 2017 (the ‘‘DIXWORKS Letter’’); Letter to Secretary, Commission, from Stephan Wolf, CEO, Global Legal Entity Identifier Foundation (‘‘GLEIF’’), dated October 9, 2017 (the ‘‘GLEIF Letter’’). Staff from the Office of Municipal Securities discussed the proposed rule change with representatives from PFM Financial Advisors LLC and PFM Asset Management LLC on October 26, 2017. 5 See Letter to Secretary, Commission, from Margaret R. Blake, Associate General Counsel, MSRB, dated November 7, 2017 (the ‘‘November Response Letter’’), available at https://www.sec.gov/ comments/sr-msrb-2017-06/msrb201706-2674227161458.pdf. 6 Id. Amendment No. 1 is available at http:// www.msrb.org/∼/media/Files/SEC-Filings/2017/ MSRb-2017-06-A-1.ashx. 7 See Exchange Act Release No. 82053 (Nov. 13, 2017), 82 FR 54455 (Nov. 17, 2017) (the ‘‘Notice of Amendment No. 1’’). The comment period closed on December 1, 2017. 8 See Letter to Secretary, Commission, from Tab Stewart, Senior Counsel, ABA, dated November 30, 2017 (the ‘‘Second ABA Letter’’); and Letter to Secretary, Commission, Leslie M. Norwood, Managing Director and Associate General Counsel, SIFMA, dated December 1, 2017 (the ‘‘Second SIFMA Letter’’). 9 See Letter to Secretary, Commission, from Margaret R. Blake, Associate General Counsel, MSRB, dated December 8, 2017 (the ‘‘December Response Letter’’ and, together with the November Response Letter, the ‘‘MSRB Response Letters’’), available at https://www.sec.gov/comments/sr-msrb2017-06/msrb201706-2779641-161626.pdf. PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 60433 II. Description of Proposed Rule Change As described more fully in the Notice of Filing and Amendment No.1, the MSRB stated that the purpose of the proposed rule change is to: Clarify the application of the CUSIP number requirements to dealers in private placements; apply the CUSIP number requirements to all municipal advisors advising on a competitive sale of municipal securities; provide an exception from the CUSIP number and depository eligibility requirements in certain circumstances; and make certain technical and non-substantive changes.10 The MSRB stated that proposed rule change would amend Rule G–34(a)(i)(A) to delete the definition of ‘‘underwriter’’ from the rule text and would add a new definition of ‘‘underwriter’’ in new section (e), on definitions. New subsection (e)(vii) of Rule G–34 would cross reference the term ‘‘underwriter’’ to the same term as it is defined in Exchange Act Rule 15c2–12(f)(8).11 The MSRB stated that this proposed rule change would codify existing interpretations and clarify in the text of the rule that dealers acting as placement agents in private placement transactions, including direct purchases of municipal securities, are subject to the CUSIP-related requirements set forth in Rule G–34(a).12 The MSRB stated that paragraph (a)(i)(A) of Rule G–34 would be amended to apply the CUSIP number requirements to all municipal advisors (whether dealers or non-dealers) advising on a competitive sale of a new issue of municipal securities.13 The MSRB noted that, in 1986, the MSRB amended Rule G–34(a)(i)(A) to require a dealer ‘‘acting as a financial advisor’’ in a competitive sale of a new issue to apply for CUSIP numbers so as to allow assignment of the number prior to the date of award.14 The MSRB stated that, from a policy standpoint, the market efficiencies served by the 1986 amendments also would be served by these amendments because a dealer no longer would be the first party to begin the process to obtain the CUSIP number after the award in a competitive sale where a non-dealer municipal advisor has been engaged.15 The proposed rule change would amend subparagraph (a)(i)(A)(3) of Rule G–34 which clarifies the timeframe within which municipal advisors 10 See 11 See Notice of Filing and Amendment No. 1. Notice of Filing. 12 Id. 13 Id. 14 Id. 15 Id. E:\FR\FM\20DEN1.SGM 20DEN1 60434 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES advising on a competitive sale must make application for a CUSIP number.16 The MSRB stated that the current provision indicates that the financial advisor must make application by no later than one business day after dissemination of a notice of sale.17 The proposed rule change would amend subparagraph (a)(i)(A)(3) of Rule G–34 to include ‘‘or other such request for bids.’’ The MSRB stated that the additional language added by the proposed rule change would ensure the timing of the application for a CUSIP number in those instances where a municipal advisor seeks bids in a competitive sale of municipal securities using documentation other than a traditional notice of sale.18 The proposed rule change, as modified by Amendment No. 1, would amend Rule G–34(a)(i) to add paragraph (F), to add an exception from the CUSIP number requirement for situations where municipal securities are purchased directly by a bank,19 any entity directly or indirectly controlled by the bank or under common control with the bank, other than a dealer registered under the Exchange Act (‘‘non-dealer control affiliate’’), or a consortium of the entities described above, or by a municipal entity with funds that are, at least in part, proceeds of, or fully or partially secure or pay, the purchasing entity’s issue of municipal obligations (e.g., state revolving fund or bond bank), if the dealer or municipal advisor reasonably believes (based on, for example, a written representation from the purchaser) that the purchaser is purchasing the new issue of municipal securities with the present intent to hold the securities to maturity or earlier redemption or mandatory tender.20 The term ‘‘bank’’ in proposed new paragraph (F) would have the same meaning as set forth in Exchange Act Section 3(a)(6).21 The MSRB stated that it believes that obtaining CUSIP numbers is generally a necessary aspect of, for example, tracking the trading, recordkeeping, clearance and settlement, customer account transfers and safekeeping of municipal securities, including those issued in private placements.22 The MSRB also stated that it is of the view that the increase in the number of direct purchase 16 Id. 17 Id. 18 Id. 19 The MSRB noted that a ‘‘bank’’ for purposes of the proposed exception would not include a ‘‘separately identifiable department or division’’ of a bank, within the meaning of MSRB Rule G–1(a). 20 See Notice of Filing and Amendment No. 1. 21 See Notice of Filing. 22 Id. VerDate Sep<11>2014 21:36 Dec 19, 2017 Jkt 244001 transactions between municipal issuers and banks as an alternative to letters of credit and other similar types of financings supports a limited exception from the blanket requirement to apply for CUSIP numbers in all private placements.23 Also, the MSRB stated that it believes that, where a municipal entity is purchasing municipal securities using funds that are at least in part proceeds of that purchasing entity’s issuance of other municipal obligations, or where the municipal securities being purchased are used to fully or partially secure or pay the purchasing entity’s issue of municipal obligations, there is a strong expectation that the underlying municipal securities purchased are intended to be held and not traded in the secondary market.24 As with the exception for dealers (or municipal advisors in a competitive sale) engaging in direct purchase transactions of new issue municipal securities to banks, the MSRB believes that requiring a CUSIP number in these scenarios would not serve the purposes of Rule G–34 to, among other things, improve efficiencies in the processing, receiving, delivering and safekeeping of municipal securities.25 The proposed rule change would clarify that the depository eligibility requirements of Rule G–34(a)(ii)(A) do not apply in the case of an exemption under Rule G–34(d), which exempts securities that are ineligible for CUSIP number assignment and municipal fund securities.26 Further, the proposed rule change would add subparagraph (a)(ii)(A)(3), providing an exception from the depository eligibility requirements in instances where the new issue is purchased directly by a bank, any entity directly or indirectly controlled by the bank or under common control with the bank, other than a broker, dealer or municipal securities dealer registered under the Exchange Act, or a consortium of such entities; or by a municipal entity with funds that are, at least in part, proceeds of, or fully or partially secure or pay, the purchasing entity’s issue of municipal obligations (e.g., state revolving fund or bond bank), from an issuer in which an underwriter reasonably believes (e.g., by obtaining a written representation) that the present intent of the purchasing entity or entities is to hold the municipal securities to maturity or earlier redemption or mandatory tender.27 The MSRB stated that, for consistency, the proposed rule change would amend paragraph (a)(ii)(C), to clarify that the requirement to input information about a new issue into DTCC’s New Issue Information Dissemination Service only applies to an issue that has been made depository eligible.28 The MSRB stated that the proposed rule change also would make technical and non-substantive amendments as follows: 29 • The proposed rule change would move definitions that apply generally throughout the rule into a new section (e) on definitions, and, as noted above, would add a new definition of ‘‘underwriter’’ in subsection (e)(vii). The terms moved into the new section (e) would be (i) auction agent; (ii) auction rate security; (iii) notification period; (iv) program dealer; (v) remarketing agent; (vi) SHORT system; (vii) underwriter; and (viii) variable rate demand obligation. • The proposed rule change would amend the rule to make more specific references to the provision that describes information necessary for CUSIP number assignments. Currently, the rule refers throughout to paragraph (a)(i)(A). The proposed rule change would amend these references to refer to subparagraph (a)(i)(A)(4). Similarly, references in the rule to the enumerated items to be included in a CUSIP number application would be changed from ‘‘(1) through (8)’’ to ‘‘(a) through (h).’’ • The proposed rule change would change capitalized defined terms to lower case, as appropriate throughout the rule, and would amend references to sections, subsections, paragraphs and subparagraphs, as necessary, to be consistent with other MSRB rule formatting. The MSRB requested that the proposed rule change be effective six months from the date of Commission approval and is requesting accelerated approval of Amendment No. 1.30 III. Summary of Comments Received and MSRB’s Responses to Comments As noted previously, the Commission received eleven comment letters in response to the Notice of Filing and two comment letters in response to Amendment No. 1. The MSRB responded to the comment letters on the Notice of Filing in its November Response Letter,31 and the MSRB responded to the comment letters on 23 Id. 24 See Amendment No. 1. 28 See 25 Id. 26 See 27 See PO 00000 Notice of Filing. 29 Id. Notice of Filing. Notice of Filing and Amendment No. 1. Frm 00066 Fmt 4703 Sfmt 4703 30 See 31 See E:\FR\FM\20DEN1.SGM Notice of Filing and Amendment No. 1. November Response Letter. 20DEN1 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices Amendment No. 1 in its December Response Letter.32 A. Application of CUSIP Number Requirements to All Municipal Advisors In response to the Notice of Filing, six commenters opposed requiring municipal advisors in competitive sales to apply for CUSIP numbers, and instead suggested dealers, in all instances, should bear the responsibility of obtaining a CUSIP number for new issue municipal securities.33 Commenters indicated that removing the obligation for the municipal advisor to obtain a CUSIP number would result in a more efficient process and consistent expectations because the CUSIP numbers would always be obtained by the dealer in all relevant transactions.34 Some commenters indicated that imposing the CUSIP number requirement on non-dealer municipal advisors would not increase transparency or efficiencies or serve a useful purpose, and instead would pose an undue burden on independent municipal advisors.35 One commenter stated that the costs to non-dealer municipal advisors to comply with the proposed rule change were not addressed in the MSRB’s economic analysis.36 The MSRB stated that the policy reason for initially adopting a requirement for financial advisors to apply for CUSIP numbers in competitive sales of new issue municipal securities was meant to provide for assignment of a CUSIP number prior to the award date of the sale.37 The MSRB noted that this policy reason continues to apply where a municipal advisor is retained because in such a scenario, the winning dealer would no longer be the first party to begin the process of obtaining a CUSIP number after the award has been made in a competitive sale.38 Several commenters indicated their understanding that the practice of obtaining a CUSIP number in competitive sales only applies where a municipal advisor is engaged. Commenters noted that this practice would make municipal entities less likely to retain municipal advisors in such transactions and indicated that the MSRB should clarify who is responsible sradovich on DSK3GMQ082PROD with NOTICES 32 See December Response Letter. Acacia Letter; DIXWORKS Letter, Ehlers Letter; NAMA Letter; PRAG Letter and Sudsina Letter. 34 See Acacia Letter; Ehlers Letter; NAMA Letter; PRAG Letter; Sudsina Letter. 35 See Acacia Letter; DIXWORKS Letter; NAMA Letter; PRAG Letter and Sudsina Letter. 36 See NAMA Letter. 37 See November Response Letter. 38 Id. 33 See VerDate Sep<11>2014 21:36 Dec 19, 2017 Jkt 244001 for obtaining CUSIP numbers when a municipal advisor is not retained. The MSRB noted that Rule G–34(a)(i)(A)(2) requires underwriters in a competitive sale to obtain CUSIP numbers where no CUSIP number has been pre-assigned.39 The MSRB further noted that because the CUSIP numbers would have been applied for earlier in the process, this facilitates the ability to trade in the new issue immediately upon award.40 The MSRB stated that while it appreciates commenters’ views that the dealer, in all instances, should be required to apply for the CUSIP number, it believes this arrangement could have unintended results in the market.41 The MSRB stated that under the current rule, where an issuer in a competitive sale of municipal securities engages a nondealer municipal advisor and does not engage a dealer, there is no party responsible for applying for CUSIP numbers.42 Similarly, the MSRB noted, if the responsibility to apply for CUSIP numbers were placed only on dealers, as commenters suggested, issuers choosing to engage only a municipal advisor in a competitive sale would find themselves in a situation where no party is responsible for applying for CUSIP numbers on the new issue.43 The MSRB stated that across the market, there potentially would be a universe of new issue municipal securities being issued without CUSIP numbers assigned.44 The MSRB stated that by requiring all municipal advisors in a competitive sale to apply for CUSIP numbers, and dealers in a competitive sale to apply for CUSIP numbers where none have been pre-assigned, Rule G–34 ensures that all new issue municipal securities in a competitive sale where a dealer or municipal advisor is engaged, other than those falling within the proposed principles-based exception, have CUSIP numbers assigned as early as possible in the issuance process.45 The MSRB stated that it previously considered the impact of the new requirement on nondealer municipal advisors and concluded that, while non-dealer municipal advisors are likely to incur up-front costs associated with development of regulatory compliance policies and procedures to address the new requirements, the costs would be justified by the likely aggregate benefits of the proposed rule change over time.46 39 Id. B. Municipal Advisor Engaging in Broker-Dealer Activity In response to the Notice of Filing, commenters noted their concern about the proposed requirement that a municipal advisor relying on the principles-based exception in a competitive transaction must have a reasonable belief as to the purchaser’s present intent. These commenters indicated that when a municipal advisor interacts with investors, for example, to obtain their present intent, the municipal advisor may be viewed as engaging in broker-dealer activity.48 One commenter indicated that requiring municipal advisors to apply for CUSIP numbers promotes violations of the Exchange Act by requiring municipal advisors to act in a manner that may be viewed as broker-dealer activity.49 The MSRB stated that it appreciates the commenters concerns and understands that determining whether an activity may be deemed broker-dealer in nature is a facts and circumstances analysis that must be closely considered.50 The MSRB stated that, when drafting the proposed rule change, it purposefully proposed a principlesbased exception to allow dealers and municipal advisors alike to establish policies and procedures consistent with their relevant business activities.51 The MSRB stated that it is not suggesting that a municipal advisor engage in any activity that could be viewed as brokerdealer in nature, but rather that the municipal advisor develop a process for reaching a reasonable belief as to an investor’s present intent consistent with the municipal advisor’s allowable business activities.52 Thus, the MSRB stated, in the proposed rule change, the MSRB suggested looking to a written representation from the purchaser as just one example for determining the purchaser’s present intent.53 The MSRB 48 See Acacia Letter; DIXWORKS Letter; NAMA Letter and Sudsina Letter. 49 See NAMA Letter. 50 See November Response Letter. 51 Id. 52 Id. 53 Id. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id. 46 Id. Frm 00067 The MSRB stated that it continues to believe that expanding the requirements of Rule G–34 to apply to all municipal advisors in competitive sales of new issue municipal securities will encourage uniformity and efficiency in competitive sales of municipal securities by ensuring that CUSIP numbers are obtained consistently and earlier in the process so as to allow for immediate trading upon award.47 47 Id. 40 Id. PO 00000 60435 Fmt 4703 Sfmt 4703 E:\FR\FM\20DEN1.SGM 20DEN1 60436 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices stated that it believes that by creating a principles-based exception, municipal advisors (and dealers) relying thereon are free to define the process by which they reach a reasonable belief regarding a purchaser’s present intent.54 The MSRB also noted that in addition to reviewing a written representation, this could include, for example, reviewing transaction documentation without interacting with the purchaser.55 The MSRB also stated that the proposed rule change is not intended to require or encourage municipal advisors to engage in activity they deem outside the scope of their allowed activities.56 sradovich on DSK3GMQ082PROD with NOTICES C. Present Intent to Hold In response to the Notice of Filing, several commenters indicated that the principles-based exception in the original proposed rule change did not accurately reflect the fundamental workings of the direct purchase market.57 Specifically, according to commenters, the requirement in the principles-based exception that the dealer (or municipal advisor in a competitive sale) have a reasonable belief that the purchaser is purchasing the municipal securities with the ‘‘present intent to hold the securities to maturity’’ does not take into account those scenarios where the transaction documentation provides for an earlier call provision to permit a refinancing or other restructuring. Commenters suggested revising the proposed language to account for this common practice. In consideration of such commenters’ suggestions, the MSRB filed Amendment No. 1, which makes amendments to Rule G–34(a)(i)(F) to reflect the suggested changes.58 In particular, the MSRB stated that Amendment No. 1 would require the dealer (or municipal advisor in a competitive sale) relying on the principles-based exception to have a reasonable belief that the purchaser is purchasing the municipal securities with the ‘‘present intent to hold the securities to maturity or earlier redemption or mandatory tender.’’ 59 The MSRB stated that it believes Amendment No. 1 more accurately reflects the terms of direct purchase transactions and as a result creates a more useful exception.60 The MSRB also stated that, for consistency, 54 Id. Amendment No. 1 would make the same amendment to the proposed principles-based exception for dealers from the depository eligibility requirements in Rule G–34(a)(ii)(A)(3).61 In response to the Notice of Filing, one commenter suggested that more clarity should be provided as to the documentation underwriters and municipal advisors may be required to produce during an examination and that sufficient documentation to reach the ‘‘reasonable belief’’ should include any reasonable indicia of an investor’s present intent.62 SIFMA suggested this should include an investor letter or other certification or a term sheet stating conditions of the transaction.63 The MSRB stated that it had indicated in the proposed rule change and also in the proposed rule language that one example by which an underwriter or municipal advisor could arrive at a reasonable belief as to the purchaser’s present intent would be by obtaining a written representation.64 The MSRB stated that it agrees that there are other reasonable indicia that could be considered in order to reach a reasonable belief regarding the purchaser’s present intent, but does not believe an amendment to the proposed rule change is necessary on this point. The MSRB also noted that it believes that the proposed rule language makes clear that obtaining a written representation is just one method by which a reasonable belief as to a purchaser’s present intent could be met.65 In response to Amendment No. 1 and the November Response Letter, SIFMA reiterated its concerns about the proposed rule change, as modified by Amendment No.1, particularly the scope of the proposed principles-based exception in the proposed rule change as so modified, and urged the SEC to institute disapproval proceedings.66 SIFMA focused its concern on the requirement that dealers (and municipal advisors in a competitive sale) relying on the principles-based exception are required to have a reasonable belief that the ‘‘present intent of the purchasing entity or entities is to hold the municipal securities to maturity or earlier redemption or mandatory tender.’’ 67 SIFMA stated that investors are not always willing to make a representation as to the timeframe for 68 Id. 69 Id. 70 Id. 71 Id. 55 Id. 56 Id. 61 Id. 57 See 62 See First ABA Letter, NAMA Letter and First SIFMA Letter. 58 See November Response Letter and Amendment No. 1. 59 Id. 60 Id. VerDate Sep<11>2014 which they intend to hold a security, ‘‘other than setting forth their present intention to hold a security.’’ 68 SIFMA stated that an investor may be hesitant to ‘‘make a statement currently required by the amendment . . . that may be second-guessed if they, e.g., many years later, determine to sell their securities.’’ 69 SIFMA stated that other rules, such as Exchange Act Rule 15c2– 12, do not require a specific time frame as to a purchaser’s intention to hold securities, and thus questioned why such a requirement is necessary in Rule G–34.70 In particular, SIFMA noted that it may be difficult for dealers or municipal advisors to obtain a representation from investors as to the timeframe for which they intend to hold a security.71 Finally, SIFMA stated that the current principles-based exception is ‘‘unduly restrictive’’ and suggested that the exception should be refined to require the dealer or municipal advisor to have a ‘‘reasonable belief (e.g., by obtaining a written representation) that [the] purchasing entity or entities has no present intent to sell or distribute the municipal securities.’’ 72 The MSRB stated that it addressed most of SIFMA’s concerns about the proposed principles-based exception in the November Response Letter and Amendment No. 1.73 The MSRB stated that one method by which an underwriter or municipal advisor could arrive at a reasonable belief as to the purchaser’s present intent would be by obtaining a written representation.74 However, the MSRB stated that it agreed with commenters that there are other reasonable indicia that could be considered in order to reach a reasonable belief regarding the purchaser’s present intent.75 The MSRB noted, as an example, that another method of reaching a reasonable belief as to the investor’s intention would be by reviewing transaction documentation.76 The MSRB stated that it continues to believe there are multiple ways by which a dealer or municipal advisor could reach a reasonable belief regarding the purchaser’s intent with respect to holding the securities in question.77 The MSRB stated that it purposefully made the exception principles based so dealers and 21:36 Dec 19, 2017 Jkt 244001 72 Id. First SIFMA Letter. 73 See 63 Id. 64 See November Response Letter. 65 Id. 66 See Second SIFMA Letter. 67 Id. PO 00000 December Response Letter. November Response Letter, December Response Letter. 75 See December Response Letter. 76 Id. 77 Id. 74 See Frm 00068 Fmt 4703 Sfmt 4703 E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices municipal advisors could determine, based on their particular business activities, the most effective way of reaching a reasonable belief as to an investor’s intent.78 The MSRB noted that obtaining a written representation is merely one method for making such a determination.79 In the First SIFMA Letter, SIFMA stated that the proposed language in the principles-based exception was ‘‘unduly restrictive’’ because ‘‘[f]or a bond maturing in 20 or 30 years, it is typical to include a call or mandatory tender date at 5 to 10 years to permit a refinancing or other restructuring.’’ 80 The MSRB responded that it agreed with SIFMA and other commenters and proposed in Amendment No. 1 to refine the language to more accurately reflect the terms of direct purchase transactions including the potential for earlier redemption or mandatory tender.81 SIFMA noted that the language in Amendment No. 1 is still ‘‘unduly restrictive’’ and may make a purchasing entity uncomfortable to certify as to its present intent to hold the securities to a date certain.82 SIFMA suggested alternative language that would require the dealer or municipal advisor to have a ‘‘reasonable belief (e.g., by obtaining a written representation) that [the] purchasing entity or entities has no present intent to sell or distribute the municipal securities.’’ 83 The MSRB noted that the principlesbased exception requires that the dealer or municipal advisor reach a reasonable belief as to the purchaser’s present intent regarding holding the municipal securities in question.84 The MSRB stated that this language recognizes that, in those transactions included in the principles-based exception, the dealer or municipal advisor is not required to speculate as to a purchaser’s future intent.85 The MSRB stated that the rule language makes clear that it is solely the present intent of the purchaser that need be considered.86 The MSRB noted that the purpose of the principles-based exception is to acknowledge those scenarios where a CUSIP number may not be necessary. The MSRB stated that, in particular, the exception addresses the direct purchase market, which, according to earlier comment letters, typically involves banks purchasing sradovich on DSK3GMQ082PROD with NOTICES 78 Id. municipal securities with the intention of holding them to maturity.87 The MSRB stated that Amendment No. 1 merely recognizes that often there are early redemption provisions or mandatory tenders in such arrangements, and thus, the securities are not held to maturity in all instances.88 The MSRB added that if a purchaser’s present intent is to hold the securities today, but perhaps sell them tomorrow or sometime before maturity, redemption or tender, this is not the type of transaction the principles-based exception was created to address.89 Further, the MSRB noted, the industry group representing many purchasers in direct purchase transactions supported the proposed rule change with Amendment No. 1, indicating that ‘‘the exception language in the proposed rule change and Amendment No. 1 to the proposed rule change appropriately recognizes the realities of the direct purchase market.’’ 90 D. Sales of Municipal Securities to Other Municipal Entities In response to the Notice of Filing, several commenters stated that the principles-based exception from the CUSIP number requirements should be expanded to include private placements of municipal securities with other municipal entities, including state revolving funds.91 According to commenters, in this sort of transaction, a state revolving fund issuance is secured by local government bonds which are held by the state issuer and not traded in the secondary market. Other commenters asked generally that all sales of municipal securities to another municipal entity be excepted from the requirements of Rule G–34. The MSRB stated that, in consideration of comments received from commenters, it amended the proposed rule change, in Amendment No. 1, to expand the principles-based exception to include issuances of municipal securities purchased by a municipal entity with funds that are, at least in part, from the proceeds of, or used to fully or partially secure or pay, the purchasing entity’s issue of municipal obligations, such as in the case of a state revolving fund or bond bank.92 The MSRB stated that it believes these scenarios are, for purposes of this context, comparable to sales of municipal securities to banks in direct purchase transactions in that the municipal securities being sold to the purchasing municipal entity are not intended to be sold in the secondary market.93 In addition, the MSRB stated that, as with the principles-based exception for direct purchase transactions with a bank, in order to rely on the exception, a dealer (or municipal advisor in a competitive sale) must have a reasonable belief that the purchasing municipal entity has the present intent to hold the securities to maturity or earlier redemption or mandatory tender.94 The MSRB stated that it believes a dealer (or municipal advisor in a competitive sale) should apply for a CUSIP number in sales of municipal securities between municipal entities, other than in the scenarios discussed above.95 The MSRB stated that it understands that municipal entities purchasing municipal securities for investment purposes may have a need for liquidity prior to the maturity of the issue and may want to sell the municipal securities into the secondary market.96 In such a scenario, the MSRB stated, the purchasing entity may find it difficult to resell the municipal securities without a CUSIP number and, based on discussions with industry participants, the MSRB stated that it understands there is no existing process in place to obtain a CUSIP number later for secondary market trading.97 The MSRB stated that it believes that applying for a CUSIP number at the time of the new issue will avoid this situation and will ensure the municipal securities are tradeable in the secondary market.98 E. Use of Other Standard Identifiers In response to the Notice of Filing, one commenter suggested that the proposed rule change be amended to permit the use of ‘‘appropriate openstandard identifiers.’’ 99 In particular, this commenter emphasized concerns that Rule G–34 is an endorsement of a commercial entity’s product and is contradictory to SEC policy. The MSRB stated that it recognizes the commenter’s concerns and is aware of efforts in the industry exploring a move towards an open-standard identifier environment.100 However, the MSRB 79 Id. 80 See 81 See First SIFMA Letter. Amendment No. 1 and December Response 21:36 Dec 19, 2017 88 Id. 94 Id. 89 Id. 95 Id. 90 See Letter. 82 See Second SIFMA Letter. 83 Id. 84 See December Response Letter. 85 Id. 86 Id. VerDate Sep<11>2014 93 Id. 87 Id. 96 Id. Second ABA Letter and December Response Letter. 91 See GFOA Letter, NAMA Letter and First SIFMA Letter. 92 See November Response Letter. Jkt 244001 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 60437 97 Id. 98 Id. 99 See Bloomberg Letter. November Response Letter. 100 See E:\FR\FM\20DEN1.SGM 20DEN1 60438 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices stated that it understands that the use of an identifier other than a CUSIP number extends well beyond the municipal securities market and a change to expand the universe of identifiers would require significant coordination between all market participants.101 The MSRB stated that it believes that merely adding in language to Rule G–34 to allow the use of ‘‘other standard identifiers’’, as the commenter suggested, without significant coordination among other market participants and consideration of how such a change would impact all aspects of the overall securities market could cause substantial confusion.102 The MSRB stated that, along with other industry stakeholders, it will continue exploring the expansion of the universe of securities identifiers, but that it does not believe amending Rule G–34 at this time to include the use of other identifiers is appropriate without further information gathering and industry input.103 sradovich on DSK3GMQ082PROD with NOTICES F. Use of Legal Entity Identifier In response to the Notice of Filing, one commenter suggested that the SEC should require issuers of municipal securities to be identified by a legal entity identifier (‘‘LEI’’) as part of the proposed rule change.104 The commenter suggested the SEC could use LEIs in its regulatory data collection framework to identify parties and market participants by a standard method. The MSRB stated that it recognizes the potential for LEIs to provide useful information on municipal issuers and is in the process of gathering industry input on the availability and value of obtaining this information in the market.105 Specifically, the MSRB noted, in a concept proposal issued on September 14, 2017, the MSRB sought industry comment on whether issuers and obligors typically have LEIs and if so, whether that information should be collected by the MSRB on its Form G– 32 and included in Rule G–34 to permit or require dealers to submit such information if available.106 The MSRB stated that it will consider this issue further, once the results of the request for comment are received and fully evaluated.107 101 Id. G. Other Comments In response to the Notice of Amendment No. 1, the ABA stated that it maintains its support for the exception to the proposed rule requirement to obtain CUSIP numbers for dealers and municipal advisors in private placements of municipal obligations to a single bank, its affiliates (other than a registered broker-dealer), or a consortium of such entities if the intent of the purchasing entity or entities is to hold the municipal obligation until maturity.108 The ABA stated that it supports the modification included in Amendment No. 1 and that it ‘‘appreciates the MSRB’s acknowledgment of the banking industry’s concerns about the impact of the CUSIP requirements on the direct purchase market.’’ 109 The ABA also stated that it believes that the modifications to the proposed rule change made by Amendment No. 1 ‘‘appropriately recognizes the realities of the direct purchase market.’’ 110 IV. Discussion and Commission Findings The Commission has carefully considered the proposed rule change, the comment letters received, the MSRB Response Letters, and Amendment No. 1. The Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the MSRB. In particular, the proposed rule change, as modified by Amendment No. 1, is consistent with Section 15B(b)(2)(C) of the Act.111 Section 15B(b)(2)(C) of the Act requires that the MSRB’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, in general, to protect investors, municipal entities, obligated persons, and the public interest.112 The Commission believes that the proposed rule change, as modified by Amendment No. 1, is consistent with 102 Id. 103 Id. 108 See 104 See 109 Id. GLEIF Letter. 105 See November Response Letter. 106 Id. 107 Id. VerDate Sep<11>2014 21:36 Dec 19, 2017 Second ABA Letter. the provisions of Section 15B(b)(2)(C) 113 of the Act because it would remove impediments to and perfect the mechanism for a free and open municipal securities market by codifying existing MSRB interpretations and clarifying in the text of the rule that dealers acting as placement agents in private placement transactions, including direct purchases of municipal securities, are subject to the CUSIPrelated requirements set forth in Rule G–34(a). In addition, the Commission believes that the proposed rule change, as modified by Amendment No. 1, would help prevent fraudulent and manipulative practices, promote just and equitable principles of trade and protect investors, municipal entities, obligated persons and the public interest by ensuring that eligible municipal securities, including those issued in a private placement, have an appropriate identifier assigned in order to provide market participants with greater ability to receive, deliver, and safekeep such securities. The Commission believes that the availability of a limited exception to this requirement would eliminate impediments to and perfect the mechanism of a free and open market in municipal securities by allowing dealers and municipal advisors to provide services in certain direct purchase transactions without inhibiting their issuer clients’ access to financings that otherwise might not be available if CUSIP numbers were required. In addition, the Commission believes that the proposed rule change, as modified by Amendment No. 1, would remove impediments to a free and open market by requiring all municipal advisors to comply with the requirements of Rule G–34(a)(i)(A), thus encouraging consistency and efficiency in competitive sales of municipal securities and ensuring that CUSIP numbers are obtained by municipal advisors earlier in a competitive deal to allow for immediate trading upon award. In approving the proposed rule change, as modified by Amendment No. 1, the Commission also has considered the impact of the proposed rule change, as modified by Amendment No. 1, on efficiency, competition, and capital formation.114 The Commission believes the proposed rule change, as modified by Amendment No. 1, would reduce regulatory uncertainty for underwriters and municipal advisors with regard to the requirement to apply for CUSIP numbers because dealers and municipal 110 Id. 111 15 U.S.C. 78o–4(b)(2)(C). 15 U.S.C. 78o–4(b)(2)(C). 112 See Jkt 244001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 113 Id. 114 15 E:\FR\FM\20DEN1.SGM U.S.C. 78c(f). 20DEN1 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES advisors would know with greater certainty when application for a CUSIP number is required in private placement transactions. Similarly, the Commission believes that while in practice some non-dealer municipal advisors may be applying for CUSIP numbers in a competitive offering before the final award is made, the proposed rule change, as modified by Amendment No. 1,would ensure that this is the case, thus reducing the risk of delays in secondary market trading where a competitive offering is awarded but no CUSIP number has been assigned. The Commission notes that the MSRB considered the impact of the proposed rule change on non-dealer municipal advisors and concluded that, while nondealer municipal advisors are likely to incur up-front costs associated with compliance with the proposed rule change, the cost would be justified by the likely benefits of the proposed rule change over time.115 As noted above, the Commission received eleven comment letters on the Notice of Filing and two comment letters on Amendment No. 1. The Commission believes that the MSRB, through its responses and through Amendment No. 1, has addressed commenters’ concerns. For the reasons noted above, the Commission believes that the proposed rule change, as modified by Amendment No. 1, is consistent with the Act. VI. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 The Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1, prior to the 30th day after the date of publication of the Notice of Amendment No. 1 in the Federal Register. As discussed above, Amendment No. 1 modifies the proposed rule change by amending proposed paragraph Rule G– 34(a)(i)(F) of the proposed rule change to require dealers (and municipal advisors in a competitive sale) seeking to rely on the principles-based exception to reasonably believe the purchaser’s present intent is to hold the municipal securities to maturity ‘‘or earlier redemption or mandatory tender.’’ Amendment No. 1 also would modify the proposed rule change to expand the principles-based exception in proposed paragraph Rule G– 34(a)(i)(F) to include cases where a municipal entity purchases the municipal securities with funds that are at least in part proceeds of the purchasing entity’s issue of municipal obligations, or the municipal securities being purchased are used to fully or partially secure or pay the purchasing entity’s issue of municipal obligations. For consistency, Amendment No. 1 also would apply the same amendments to the principles-based exception for dealers from the depository eligibility requirements of the rule set forth in subparagraph Rule G–34(a)(ii)(A)(3).116 The MSRB stated that the only substantive change made by Amendment No. 1 to the proposed rule change is responsive to commenters and that Amendment No. 1 expands the application of the previously proposed principles-based exception to include sales of new issue municipal securities to municipal entities that are purchasing the underlying municipal securities with funds that are at least in part proceeds of the purchasing entity’s issue of municipal obligations, or the municipal securities being purchased are used to fully or partially secure or pay the purchasing entity’s issue of municipal obligations.117 The MSRB further noted that the other amendment to the proposed rule change made by Amendment No. 1 merely clarifies that in a direct purchase transaction there may be a redemption or mandatory tender that occurs prior to the municipal security’s maturity.118 Additionally, the MSRB stated that, in light of one of the purposes of the principles-based exception in the proposed rule change—to allow dealers and municipal advisors to provide services without inhibiting their issuer clients’ access to certain financings—the revisions are consistent with the proposed rule change.119 For the foregoing reasons, the Commission finds good cause for approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis, pursuant to Section 19(b)(2) of the Act. VIII. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,120 that the proposed rule change (SR–MSRB–2017– 06), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. 116 See November Response Letter. VerDate Sep<11>2014 21:36 Dec 19, 2017 Jkt 244001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82326; File No. SR–GEMX– 2017–56] Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Primary Market Maker Obligations December 14, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 29, 2017, Nasdaq GEMX, LLC (‘‘GEMX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 701, entitled ‘‘Openings,’’ to specify the obligations of a Primary Market Maker (‘‘PMM’’) when entering Valid Width Quotes 3 during the Opening Process. The text of the proposed rule change is available on the Exchange’s website at http://nasdaqgemx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The U.S.C. 78s(b)(1). CFR 240.19b–4. 3 A ‘‘Valid Width Quote’’ is a two-sided electronic quotation submitted by a Market Maker that consists of a bid/ask differential that is compliant with Rule 803(b)(4). See Rule 701(a)(8). 2 17 119 Id. PO 00000 [FR Doc. 2017–27342 Filed 12–19–17; 8:45 am] 1 15 118 Id. 121 17 For the Commission, pursuant to delegated authority.121 Eduardo A. Aleman, Assistant Secretary. Amendment No. 1. 117 Id. 120 15 115 See 60439 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00071 Fmt 4703 Sfmt 4703 E:\FR\FM\20DEN1.SGM 20DEN1

Agencies

[Federal Register Volume 82, Number 243 (Wednesday, December 20, 2017)]
[Notices]
[Pages 60433-60439]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27342]



[[Page 60433]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82321; File No. SR-MSRb-2017-06)


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Accelerated Approval of a Proposed Rule Change, 
as Modified by Amendment No. 1, Consisting of Proposed Amendments to 
MSRB Rule G-34, on CUSIP Numbers, New Issue, and Market Information 
Requirements

December 14, 2017.

I. Introduction

    On August 30, 2017, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or 
``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
consisting of proposed amendments to MSRB Rule G-34, on CUSIP numbers, 
new issue, and market information requirements, to more clearly express 
in the rule language the MSRB's longstanding interpretation that 
brokers, dealers and municipal securities dealers (collectively, 
``dealers'') when acting as a placement agent in a private placement of 
municipal securities are subject to the CUSIP number requirements under 
Rule G-34(a); to expand the application of the rule to cover not only 
dealer municipal advisors but also non-dealer municipal advisors in 
competitive sales of municipal securities; and to provide a limited 
exception from the requirements to apply for CUSIP numbers and to apply 
for depository eligibility (the ``proposed rule change''). The proposed 
rule change was published for comment in the Federal Register on 
September 18, 2017.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 81595 (September 13, 
2017) (the ``Notice of Filing''), 82 FR 43587 (September 18, 2017).
---------------------------------------------------------------------------

    The Commission received eleven comment letters on the proposed rule 
change.\4\ On October 18, 2017, the MSRB granted an extension of time 
for the Commission to act on the filing until December 15, 2017. On 
November 7, 2017, the MSRB responded to those comments \5\ and filed 
Amendment No. 1 to the proposed rule change (``Amendment No. 1'').\6\ 
The Commission published notice of Amendment No. 1 in the Federal 
Register on November 17, 2017.\7\ In response to Amendment No. 1, the 
Commission received two comment letters.\8\ On December 8, 2017, the 
MSRB submitted a response to comments received on Amendment No. 1.\9\ 
This order approves the proposed rule change, as modified by Amendment 
No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \4\ See Letter to Secretary, Commission, from Leslie M. Norwood, 
Managing Director and Associate General Counsel, Securities Industry 
and Financial Markets Association (``SIFMA''), dated October 10, 
2017 (the ``First SIFMA Letter''); Letter to Secretary, Commission, 
from Susan Gaffney, Executive Director, National Association of 
Municipal Advisors (``NAMA''), dated October 10, 2017 (the ``NAMA 
Letter''); Letter to Secretary, Commission, from Steve Apfelbacher, 
President, Ehlers Inc., dated October 10, 2017 (the ``Ehlers 
Letter''); Letter to Secretary, Commission, from Noreen P. White, 
Co-President, and Kim W. Whelan, Co-President, Acacia Financial 
Group, Inc., dated October 10, 2017 (the ``Acacia Letter''); Letter 
to Secretary, Commission, from Cristeena G. Naser, Vice President 
and Senior Counsel, American Bankers Association (``ABA''), dated 
October 10, 2017 (the ``First ABA Letter''); Letter to Secretary, 
Commission, from Michael G. Sudsina, President, Sudsina & 
Associates, LLC, dated October 10, 2017 (the ``Sudsina Letter''); 
Letter to Secretary, Commission, from Marianne F. Edmonds, Senior 
Managing Director, Public Resources Advisory Group (``PRAG''), dated 
October 10, 2017 (the ``PRAG Letter''); Letter to Secretary, 
Commission, from Emily Swenson Brock, Director, Federal Liaison 
Center, Government Finance Officers Association (``GFOA''), dated 
October 10, 2017 (the ``GFOA Letter''); Letter to Secretary, 
Commission, from Peter Warms, Senior Manager of Fixed Income, 
Entity, Regulatory Content and Symbology, Bloomberg L.P., dated 
October 10, 2017 (the ``Bloomberg Letter''); Letter to Secretary, 
Commission, from Dennis Dix, Principal, DIXWORKS LLC, dated October 
10, 2017 (the ``DIXWORKS Letter''); Letter to Secretary, Commission, 
from Stephan Wolf, CEO, Global Legal Entity Identifier Foundation 
(``GLEIF''), dated October 9, 2017 (the ``GLEIF Letter''). Staff 
from the Office of Municipal Securities discussed the proposed rule 
change with representatives from PFM Financial Advisors LLC and PFM 
Asset Management LLC on October 26, 2017.
    \5\ See Letter to Secretary, Commission, from Margaret R. Blake, 
Associate General Counsel, MSRB, dated November 7, 2017 (the 
``November Response Letter''), available at https://www.sec.gov/comments/sr-msrb-2017-06/msrb201706-2674227-161458.pdf.
    \6\ Id. Amendment No. 1 is available at http://www.msrb.org/~/
media/Files/SEC-Filings/2017/MSRb-2017-06-A-1.ashx.
    \7\ See Exchange Act Release No. 82053 (Nov. 13, 2017), 82 FR 
54455 (Nov. 17, 2017) (the ``Notice of Amendment No. 1''). The 
comment period closed on December 1, 2017.
    \8\ See Letter to Secretary, Commission, from Tab Stewart, 
Senior Counsel, ABA, dated November 30, 2017 (the ``Second ABA 
Letter''); and Letter to Secretary, Commission, Leslie M. Norwood, 
Managing Director and Associate General Counsel, SIFMA, dated 
December 1, 2017 (the ``Second SIFMA Letter'').
    \9\ See Letter to Secretary, Commission, from Margaret R. Blake, 
Associate General Counsel, MSRB, dated December 8, 2017 (the 
``December Response Letter'' and, together with the November 
Response Letter, the ``MSRB Response Letters''), available at 
https://www.sec.gov/comments/sr-msrb-2017-06/msrb201706-2779641-161626.pdf.
---------------------------------------------------------------------------

II. Description of Proposed Rule Change

    As described more fully in the Notice of Filing and Amendment No.1, 
the MSRB stated that the purpose of the proposed rule change is to: 
Clarify the application of the CUSIP number requirements to dealers in 
private placements; apply the CUSIP number requirements to all 
municipal advisors advising on a competitive sale of municipal 
securities; provide an exception from the CUSIP number and depository 
eligibility requirements in certain circumstances; and make certain 
technical and non-substantive changes.\10\
---------------------------------------------------------------------------

    \10\ See Notice of Filing and Amendment No. 1.
---------------------------------------------------------------------------

    The MSRB stated that proposed rule change would amend Rule G-
34(a)(i)(A) to delete the definition of ``underwriter'' from the rule 
text and would add a new definition of ``underwriter'' in new section 
(e), on definitions. New subsection (e)(vii) of Rule G-34 would cross 
reference the term ``underwriter'' to the same term as it is defined in 
Exchange Act Rule 15c2-12(f)(8).\11\ The MSRB stated that this proposed 
rule change would codify existing interpretations and clarify in the 
text of the rule that dealers acting as placement agents in private 
placement transactions, including direct purchases of municipal 
securities, are subject to the CUSIP-related requirements set forth in 
Rule G-34(a).\12\
---------------------------------------------------------------------------

    \11\ See Notice of Filing.
    \12\ Id.
---------------------------------------------------------------------------

    The MSRB stated that paragraph (a)(i)(A) of Rule G-34 would be 
amended to apply the CUSIP number requirements to all municipal 
advisors (whether dealers or non-dealers) advising on a competitive 
sale of a new issue of municipal securities.\13\ The MSRB noted that, 
in 1986, the MSRB amended Rule G-34(a)(i)(A) to require a dealer 
``acting as a financial advisor'' in a competitive sale of a new issue 
to apply for CUSIP numbers so as to allow assignment of the number 
prior to the date of award.\14\ The MSRB stated that, from a policy 
standpoint, the market efficiencies served by the 1986 amendments also 
would be served by these amendments because a dealer no longer would be 
the first party to begin the process to obtain the CUSIP number after 
the award in a competitive sale where a non-dealer municipal advisor 
has been engaged.\15\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
    \15\ Id.
---------------------------------------------------------------------------

    The proposed rule change would amend subparagraph (a)(i)(A)(3) of 
Rule G-34 which clarifies the timeframe within which municipal advisors

[[Page 60434]]

advising on a competitive sale must make application for a CUSIP 
number.\16\ The MSRB stated that the current provision indicates that 
the financial advisor must make application by no later than one 
business day after dissemination of a notice of sale.\17\ The proposed 
rule change would amend subparagraph (a)(i)(A)(3) of Rule G-34 to 
include ``or other such request for bids.'' The MSRB stated that the 
additional language added by the proposed rule change would ensure the 
timing of the application for a CUSIP number in those instances where a 
municipal advisor seeks bids in a competitive sale of municipal 
securities using documentation other than a traditional notice of 
sale.\18\
---------------------------------------------------------------------------

    \16\ Id.
    \17\ Id.
    \18\ Id.
---------------------------------------------------------------------------

    The proposed rule change, as modified by Amendment No. 1, would 
amend Rule G-34(a)(i) to add paragraph (F), to add an exception from 
the CUSIP number requirement for situations where municipal securities 
are purchased directly by a bank,\19\ any entity directly or indirectly 
controlled by the bank or under common control with the bank, other 
than a dealer registered under the Exchange Act (``non-dealer control 
affiliate''), or a consortium of the entities described above, or by a 
municipal entity with funds that are, at least in part, proceeds of, or 
fully or partially secure or pay, the purchasing entity's issue of 
municipal obligations (e.g., state revolving fund or bond bank), if the 
dealer or municipal advisor reasonably believes (based on, for example, 
a written representation from the purchaser) that the purchaser is 
purchasing the new issue of municipal securities with the present 
intent to hold the securities to maturity or earlier redemption or 
mandatory tender.\20\ The term ``bank'' in proposed new paragraph (F) 
would have the same meaning as set forth in Exchange Act Section 
3(a)(6).\21\ The MSRB stated that it believes that obtaining CUSIP 
numbers is generally a necessary aspect of, for example, tracking the 
trading, recordkeeping, clearance and settlement, customer account 
transfers and safekeeping of municipal securities, including those 
issued in private placements.\22\ The MSRB also stated that it is of 
the view that the increase in the number of direct purchase 
transactions between municipal issuers and banks as an alternative to 
letters of credit and other similar types of financings supports a 
limited exception from the blanket requirement to apply for CUSIP 
numbers in all private placements.\23\ Also, the MSRB stated that it 
believes that, where a municipal entity is purchasing municipal 
securities using funds that are at least in part proceeds of that 
purchasing entity's issuance of other municipal obligations, or where 
the municipal securities being purchased are used to fully or partially 
secure or pay the purchasing entity's issue of municipal obligations, 
there is a strong expectation that the underlying municipal securities 
purchased are intended to be held and not traded in the secondary 
market.\24\ As with the exception for dealers (or municipal advisors in 
a competitive sale) engaging in direct purchase transactions of new 
issue municipal securities to banks, the MSRB believes that requiring a 
CUSIP number in these scenarios would not serve the purposes of Rule G-
34 to, among other things, improve efficiencies in the processing, 
receiving, delivering and safekeeping of municipal securities.\25\
---------------------------------------------------------------------------

    \19\ The MSRB noted that a ``bank'' for purposes of the proposed 
exception would not include a ``separately identifiable department 
or division'' of a bank, within the meaning of MSRB Rule G-1(a).
    \20\ See Notice of Filing and Amendment No. 1.
    \21\ See Notice of Filing.
    \22\ Id.
    \23\ Id.
    \24\ See Amendment No. 1.
    \25\ Id.
---------------------------------------------------------------------------

    The proposed rule change would clarify that the depository 
eligibility requirements of Rule G-34(a)(ii)(A) do not apply in the 
case of an exemption under Rule G-34(d), which exempts securities that 
are ineligible for CUSIP number assignment and municipal fund 
securities.\26\ Further, the proposed rule change would add 
subparagraph (a)(ii)(A)(3), providing an exception from the depository 
eligibility requirements in instances where the new issue is purchased 
directly by a bank, any entity directly or indirectly controlled by the 
bank or under common control with the bank, other than a broker, dealer 
or municipal securities dealer registered under the Exchange Act, or a 
consortium of such entities; or by a municipal entity with funds that 
are, at least in part, proceeds of, or fully or partially secure or 
pay, the purchasing entity's issue of municipal obligations (e.g., 
state revolving fund or bond bank), from an issuer in which an 
underwriter reasonably believes (e.g., by obtaining a written 
representation) that the present intent of the purchasing entity or 
entities is to hold the municipal securities to maturity or earlier 
redemption or mandatory tender.\27\ The MSRB stated that, for 
consistency, the proposed rule change would amend paragraph (a)(ii)(C), 
to clarify that the requirement to input information about a new issue 
into DTCC's New Issue Information Dissemination Service only applies to 
an issue that has been made depository eligible.\28\
---------------------------------------------------------------------------

    \26\ See Notice of Filing.
    \27\ See Notice of Filing and Amendment No. 1.
    \28\ See Notice of Filing.
---------------------------------------------------------------------------

    The MSRB stated that the proposed rule change also would make 
technical and non-substantive amendments as follows: \29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

     The proposed rule change would move definitions that apply 
generally throughout the rule into a new section (e) on definitions, 
and, as noted above, would add a new definition of ``underwriter'' in 
subsection (e)(vii). The terms moved into the new section (e) would be 
(i) auction agent; (ii) auction rate security; (iii) notification 
period; (iv) program dealer; (v) remarketing agent; (vi) SHORT system; 
(vii) underwriter; and (viii) variable rate demand obligation.
     The proposed rule change would amend the rule to make more 
specific references to the provision that describes information 
necessary for CUSIP number assignments. Currently, the rule refers 
throughout to paragraph (a)(i)(A). The proposed rule change would amend 
these references to refer to subparagraph (a)(i)(A)(4). Similarly, 
references in the rule to the enumerated items to be included in a 
CUSIP number application would be changed from ``(1) through (8)'' to 
``(a) through (h).''
     The proposed rule change would change capitalized defined 
terms to lower case, as appropriate throughout the rule, and would 
amend references to sections, subsections, paragraphs and 
subparagraphs, as necessary, to be consistent with other MSRB rule 
formatting.
    The MSRB requested that the proposed rule change be effective six 
months from the date of Commission approval and is requesting 
accelerated approval of Amendment No. 1.\30\
---------------------------------------------------------------------------

    \30\ See Notice of Filing and Amendment No. 1.
---------------------------------------------------------------------------

III. Summary of Comments Received and MSRB's Responses to Comments

    As noted previously, the Commission received eleven comment letters 
in response to the Notice of Filing and two comment letters in response 
to Amendment No. 1. The MSRB responded to the comment letters on the 
Notice of Filing in its November Response Letter,\31\ and the MSRB 
responded to the comment letters on

[[Page 60435]]

Amendment No. 1 in its December Response Letter.\32\
---------------------------------------------------------------------------

    \31\ See November Response Letter.
    \32\ See December Response Letter.
---------------------------------------------------------------------------

A. Application of CUSIP Number Requirements to All Municipal Advisors

    In response to the Notice of Filing, six commenters opposed 
requiring municipal advisors in competitive sales to apply for CUSIP 
numbers, and instead suggested dealers, in all instances, should bear 
the responsibility of obtaining a CUSIP number for new issue municipal 
securities.\33\ Commenters indicated that removing the obligation for 
the municipal advisor to obtain a CUSIP number would result in a more 
efficient process and consistent expectations because the CUSIP numbers 
would always be obtained by the dealer in all relevant 
transactions.\34\ Some commenters indicated that imposing the CUSIP 
number requirement on non-dealer municipal advisors would not increase 
transparency or efficiencies or serve a useful purpose, and instead 
would pose an undue burden on independent municipal advisors.\35\ One 
commenter stated that the costs to non-dealer municipal advisors to 
comply with the proposed rule change were not addressed in the MSRB's 
economic analysis.\36\
---------------------------------------------------------------------------

    \33\ See Acacia Letter; DIXWORKS Letter, Ehlers Letter; NAMA 
Letter; PRAG Letter and Sudsina Letter.
    \34\ See Acacia Letter; Ehlers Letter; NAMA Letter; PRAG Letter; 
Sudsina Letter.
    \35\ See Acacia Letter; DIXWORKS Letter; NAMA Letter; PRAG 
Letter and Sudsina Letter.
    \36\ See NAMA Letter.
---------------------------------------------------------------------------

    The MSRB stated that the policy reason for initially adopting a 
requirement for financial advisors to apply for CUSIP numbers in 
competitive sales of new issue municipal securities was meant to 
provide for assignment of a CUSIP number prior to the award date of the 
sale.\37\ The MSRB noted that this policy reason continues to apply 
where a municipal advisor is retained because in such a scenario, the 
winning dealer would no longer be the first party to begin the process 
of obtaining a CUSIP number after the award has been made in a 
competitive sale.\38\ Several commenters indicated their understanding 
that the practice of obtaining a CUSIP number in competitive sales only 
applies where a municipal advisor is engaged. Commenters noted that 
this practice would make municipal entities less likely to retain 
municipal advisors in such transactions and indicated that the MSRB 
should clarify who is responsible for obtaining CUSIP numbers when a 
municipal advisor is not retained. The MSRB noted that Rule G-
34(a)(i)(A)(2) requires underwriters in a competitive sale to obtain 
CUSIP numbers where no CUSIP number has been pre-assigned.\39\ The MSRB 
further noted that because the CUSIP numbers would have been applied 
for earlier in the process, this facilitates the ability to trade in 
the new issue immediately upon award.\40\
---------------------------------------------------------------------------

    \37\ See November Response Letter.
    \38\ Id.
    \39\ Id.
    \40\ Id.
---------------------------------------------------------------------------

    The MSRB stated that while it appreciates commenters' views that 
the dealer, in all instances, should be required to apply for the CUSIP 
number, it believes this arrangement could have unintended results in 
the market.\41\ The MSRB stated that under the current rule, where an 
issuer in a competitive sale of municipal securities engages a non-
dealer municipal advisor and does not engage a dealer, there is no 
party responsible for applying for CUSIP numbers.\42\ Similarly, the 
MSRB noted, if the responsibility to apply for CUSIP numbers were 
placed only on dealers, as commenters suggested, issuers choosing to 
engage only a municipal advisor in a competitive sale would find 
themselves in a situation where no party is responsible for applying 
for CUSIP numbers on the new issue.\43\ The MSRB stated that across the 
market, there potentially would be a universe of new issue municipal 
securities being issued without CUSIP numbers assigned.\44\ The MSRB 
stated that by requiring all municipal advisors in a competitive sale 
to apply for CUSIP numbers, and dealers in a competitive sale to apply 
for CUSIP numbers where none have been pre-assigned, Rule G-34 ensures 
that all new issue municipal securities in a competitive sale where a 
dealer or municipal advisor is engaged, other than those falling within 
the proposed principles-based exception, have CUSIP numbers assigned as 
early as possible in the issuance process.\45\ The MSRB stated that it 
previously considered the impact of the new requirement on non-dealer 
municipal advisors and concluded that, while non-dealer municipal 
advisors are likely to incur up-front costs associated with development 
of regulatory compliance policies and procedures to address the new 
requirements, the costs would be justified by the likely aggregate 
benefits of the proposed rule change over time.\46\ The MSRB stated 
that it continues to believe that expanding the requirements of Rule G-
34 to apply to all municipal advisors in competitive sales of new issue 
municipal securities will encourage uniformity and efficiency in 
competitive sales of municipal securities by ensuring that CUSIP 
numbers are obtained consistently and earlier in the process so as to 
allow for immediate trading upon award.\47\
---------------------------------------------------------------------------

    \41\ Id.
    \42\ Id.
    \43\ Id.
    \44\ Id.
    \45\ Id.
    \46\ Id.
    \47\ Id.
---------------------------------------------------------------------------

B. Municipal Advisor Engaging in Broker-Dealer Activity

    In response to the Notice of Filing, commenters noted their concern 
about the proposed requirement that a municipal advisor relying on the 
principles-based exception in a competitive transaction must have a 
reasonable belief as to the purchaser's present intent. These 
commenters indicated that when a municipal advisor interacts with 
investors, for example, to obtain their present intent, the municipal 
advisor may be viewed as engaging in broker-dealer activity.\48\ One 
commenter indicated that requiring municipal advisors to apply for 
CUSIP numbers promotes violations of the Exchange Act by requiring 
municipal advisors to act in a manner that may be viewed as broker-
dealer activity.\49\
---------------------------------------------------------------------------

    \48\ See Acacia Letter; DIXWORKS Letter; NAMA Letter and Sudsina 
Letter.
    \49\ See NAMA Letter.
---------------------------------------------------------------------------

    The MSRB stated that it appreciates the commenters concerns and 
understands that determining whether an activity may be deemed broker-
dealer in nature is a facts and circumstances analysis that must be 
closely considered.\50\ The MSRB stated that, when drafting the 
proposed rule change, it purposefully proposed a principles-based 
exception to allow dealers and municipal advisors alike to establish 
policies and procedures consistent with their relevant business 
activities.\51\ The MSRB stated that it is not suggesting that a 
municipal advisor engage in any activity that could be viewed as 
broker-dealer in nature, but rather that the municipal advisor develop 
a process for reaching a reasonable belief as to an investor's present 
intent consistent with the municipal advisor's allowable business 
activities.\52\ Thus, the MSRB stated, in the proposed rule change, the 
MSRB suggested looking to a written representation from the purchaser 
as just one example for determining the purchaser's present intent.\53\ 
The MSRB

[[Page 60436]]

stated that it believes that by creating a principles-based exception, 
municipal advisors (and dealers) relying thereon are free to define the 
process by which they reach a reasonable belief regarding a purchaser's 
present intent.\54\ The MSRB also noted that in addition to reviewing a 
written representation, this could include, for example, reviewing 
transaction documentation without interacting with the purchaser.\55\ 
The MSRB also stated that the proposed rule change is not intended to 
require or encourage municipal advisors to engage in activity they deem 
outside the scope of their allowed activities.\56\
---------------------------------------------------------------------------

    \50\ See November Response Letter.
    \51\ Id.
    \52\ Id.
    \53\ Id.
    \54\ Id.
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

C. Present Intent to Hold

    In response to the Notice of Filing, several commenters indicated 
that the principles-based exception in the original proposed rule 
change did not accurately reflect the fundamental workings of the 
direct purchase market.\57\ Specifically, according to commenters, the 
requirement in the principles-based exception that the dealer (or 
municipal advisor in a competitive sale) have a reasonable belief that 
the purchaser is purchasing the municipal securities with the ``present 
intent to hold the securities to maturity'' does not take into account 
those scenarios where the transaction documentation provides for an 
earlier call provision to permit a refinancing or other restructuring. 
Commenters suggested revising the proposed language to account for this 
common practice. In consideration of such commenters' suggestions, the 
MSRB filed Amendment No. 1, which makes amendments to Rule G-
34(a)(i)(F) to reflect the suggested changes.\58\ In particular, the 
MSRB stated that Amendment No. 1 would require the dealer (or municipal 
advisor in a competitive sale) relying on the principles-based 
exception to have a reasonable belief that the purchaser is purchasing 
the municipal securities with the ``present intent to hold the 
securities to maturity or earlier redemption or mandatory tender.'' 
\59\ The MSRB stated that it believes Amendment No. 1 more accurately 
reflects the terms of direct purchase transactions and as a result 
creates a more useful exception.\60\ The MSRB also stated that, for 
consistency, Amendment No. 1 would make the same amendment to the 
proposed principles-based exception for dealers from the depository 
eligibility requirements in Rule G-34(a)(ii)(A)(3).\61\
---------------------------------------------------------------------------

    \57\ See First ABA Letter, NAMA Letter and First SIFMA Letter.
    \58\ See November Response Letter and Amendment No. 1.
    \59\ Id.
    \60\ Id.
    \61\ Id.
---------------------------------------------------------------------------

    In response to the Notice of Filing, one commenter suggested that 
more clarity should be provided as to the documentation underwriters 
and municipal advisors may be required to produce during an examination 
and that sufficient documentation to reach the ``reasonable belief'' 
should include any reasonable indicia of an investor's present 
intent.\62\ SIFMA suggested this should include an investor letter or 
other certification or a term sheet stating conditions of the 
transaction.\63\ The MSRB stated that it had indicated in the proposed 
rule change and also in the proposed rule language that one example by 
which an underwriter or municipal advisor could arrive at a reasonable 
belief as to the purchaser's present intent would be by obtaining a 
written representation.\64\ The MSRB stated that it agrees that there 
are other reasonable indicia that could be considered in order to reach 
a reasonable belief regarding the purchaser's present intent, but does 
not believe an amendment to the proposed rule change is necessary on 
this point. The MSRB also noted that it believes that the proposed rule 
language makes clear that obtaining a written representation is just 
one method by which a reasonable belief as to a purchaser's present 
intent could be met.\65\
---------------------------------------------------------------------------

    \62\ See First SIFMA Letter.
    \63\ Id.
    \64\ See November Response Letter.
    \65\ Id.
---------------------------------------------------------------------------

    In response to Amendment No. 1 and the November Response Letter, 
SIFMA reiterated its concerns about the proposed rule change, as 
modified by Amendment No.1, particularly the scope of the proposed 
principles-based exception in the proposed rule change as so modified, 
and urged the SEC to institute disapproval proceedings.\66\ SIFMA 
focused its concern on the requirement that dealers (and municipal 
advisors in a competitive sale) relying on the principles-based 
exception are required to have a reasonable belief that the ``present 
intent of the purchasing entity or entities is to hold the municipal 
securities to maturity or earlier redemption or mandatory tender.'' 
\67\ SIFMA stated that investors are not always willing to make a 
representation as to the timeframe for which they intend to hold a 
security, ``other than setting forth their present intention to hold a 
security.'' \68\ SIFMA stated that an investor may be hesitant to 
``make a statement currently required by the amendment . . . that may 
be second-guessed if they, e.g., many years later, determine to sell 
their securities.'' \69\ SIFMA stated that other rules, such as 
Exchange Act Rule 15c2-12, do not require a specific time frame as to a 
purchaser's intention to hold securities, and thus questioned why such 
a requirement is necessary in Rule G-34.\70\ In particular, SIFMA noted 
that it may be difficult for dealers or municipal advisors to obtain a 
representation from investors as to the timeframe for which they intend 
to hold a security.\71\ Finally, SIFMA stated that the current 
principles-based exception is ``unduly restrictive'' and suggested that 
the exception should be refined to require the dealer or municipal 
advisor to have a ``reasonable belief (e.g., by obtaining a written 
representation) that [the] purchasing entity or entities has no present 
intent to sell or distribute the municipal securities.'' \72\
---------------------------------------------------------------------------

    \66\ See Second SIFMA Letter.
    \67\ Id.
    \68\ Id.
    \69\ Id.
    \70\ Id.
    \71\ Id.
    \72\ Id.
---------------------------------------------------------------------------

    The MSRB stated that it addressed most of SIFMA's concerns about 
the proposed principles-based exception in the November Response Letter 
and Amendment No. 1.\73\ The MSRB stated that one method by which an 
underwriter or municipal advisor could arrive at a reasonable belief as 
to the purchaser's present intent would be by obtaining a written 
representation.\74\ However, the MSRB stated that it agreed with 
commenters that there are other reasonable indicia that could be 
considered in order to reach a reasonable belief regarding the 
purchaser's present intent.\75\ The MSRB noted, as an example, that 
another method of reaching a reasonable belief as to the investor's 
intention would be by reviewing transaction documentation.\76\ The MSRB 
stated that it continues to believe there are multiple ways by which a 
dealer or municipal advisor could reach a reasonable belief regarding 
the purchaser's intent with respect to holding the securities in 
question.\77\ The MSRB stated that it purposefully made the exception 
principles based so dealers and

[[Page 60437]]

municipal advisors could determine, based on their particular business 
activities, the most effective way of reaching a reasonable belief as 
to an investor's intent.\78\ The MSRB noted that obtaining a written 
representation is merely one method for making such a 
determination.\79\
---------------------------------------------------------------------------

    \73\ See December Response Letter.
    \74\ See November Response Letter, December Response Letter.
    \75\ See December Response Letter.
    \76\ Id.
    \77\ Id.
    \78\ Id.
    \79\ Id.
---------------------------------------------------------------------------

    In the First SIFMA Letter, SIFMA stated that the proposed language 
in the principles-based exception was ``unduly restrictive'' because 
``[f]or a bond maturing in 20 or 30 years, it is typical to include a 
call or mandatory tender date at 5 to 10 years to permit a refinancing 
or other restructuring.'' \80\ The MSRB responded that it agreed with 
SIFMA and other commenters and proposed in Amendment No. 1 to refine 
the language to more accurately reflect the terms of direct purchase 
transactions including the potential for earlier redemption or 
mandatory tender.\81\ SIFMA noted that the language in Amendment No. 1 
is still ``unduly restrictive'' and may make a purchasing entity 
uncomfortable to certify as to its present intent to hold the 
securities to a date certain.\82\ SIFMA suggested alternative language 
that would require the dealer or municipal advisor to have a 
``reasonable belief (e.g., by obtaining a written representation) that 
[the] purchasing entity or entities has no present intent to sell or 
distribute the municipal securities.'' \83\
---------------------------------------------------------------------------

    \80\ See First SIFMA Letter.
    \81\ See Amendment No. 1 and December Response Letter.
    \82\ See Second SIFMA Letter.
    \83\ Id.
---------------------------------------------------------------------------

    The MSRB noted that the principles-based exception requires that 
the dealer or municipal advisor reach a reasonable belief as to the 
purchaser's present intent regarding holding the municipal securities 
in question.\84\ The MSRB stated that this language recognizes that, in 
those transactions included in the principles-based exception, the 
dealer or municipal advisor is not required to speculate as to a 
purchaser's future intent.\85\ The MSRB stated that the rule language 
makes clear that it is solely the present intent of the purchaser that 
need be considered.\86\ The MSRB noted that the purpose of the 
principles-based exception is to acknowledge those scenarios where a 
CUSIP number may not be necessary. The MSRB stated that, in particular, 
the exception addresses the direct purchase market, which, according to 
earlier comment letters, typically involves banks purchasing municipal 
securities with the intention of holding them to maturity.\87\ The MSRB 
stated that Amendment No. 1 merely recognizes that often there are 
early redemption provisions or mandatory tenders in such arrangements, 
and thus, the securities are not held to maturity in all instances.\88\ 
The MSRB added that if a purchaser's present intent is to hold the 
securities today, but perhaps sell them tomorrow or sometime before 
maturity, redemption or tender, this is not the type of transaction the 
principles-based exception was created to address.\89\ Further, the 
MSRB noted, the industry group representing many purchasers in direct 
purchase transactions supported the proposed rule change with Amendment 
No. 1, indicating that ``the exception language in the proposed rule 
change and Amendment No. 1 to the proposed rule change appropriately 
recognizes the realities of the direct purchase market.'' \90\
---------------------------------------------------------------------------

    \84\ See December Response Letter.
    \85\ Id.
    \86\ Id.
    \87\ Id.
    \88\ Id.
    \89\ Id.
    \90\ See Second ABA Letter and December Response Letter.
---------------------------------------------------------------------------

D. Sales of Municipal Securities to Other Municipal Entities

    In response to the Notice of Filing, several commenters stated that 
the principles-based exception from the CUSIP number requirements 
should be expanded to include private placements of municipal 
securities with other municipal entities, including state revolving 
funds.\91\ According to commenters, in this sort of transaction, a 
state revolving fund issuance is secured by local government bonds 
which are held by the state issuer and not traded in the secondary 
market. Other commenters asked generally that all sales of municipal 
securities to another municipal entity be excepted from the 
requirements of Rule G-34.
---------------------------------------------------------------------------

    \91\ See GFOA Letter, NAMA Letter and First SIFMA Letter.
---------------------------------------------------------------------------

    The MSRB stated that, in consideration of comments received from 
commenters, it amended the proposed rule change, in Amendment No. 1, to 
expand the principles-based exception to include issuances of municipal 
securities purchased by a municipal entity with funds that are, at 
least in part, from the proceeds of, or used to fully or partially 
secure or pay, the purchasing entity's issue of municipal obligations, 
such as in the case of a state revolving fund or bond bank.\92\ The 
MSRB stated that it believes these scenarios are, for purposes of this 
context, comparable to sales of municipal securities to banks in direct 
purchase transactions in that the municipal securities being sold to 
the purchasing municipal entity are not intended to be sold in the 
secondary market.\93\ In addition, the MSRB stated that, as with the 
principles-based exception for direct purchase transactions with a 
bank, in order to rely on the exception, a dealer (or municipal advisor 
in a competitive sale) must have a reasonable belief that the 
purchasing municipal entity has the present intent to hold the 
securities to maturity or earlier redemption or mandatory tender.\94\
---------------------------------------------------------------------------

    \92\ See November Response Letter.
    \93\ Id.
    \94\ Id.
---------------------------------------------------------------------------

    The MSRB stated that it believes a dealer (or municipal advisor in 
a competitive sale) should apply for a CUSIP number in sales of 
municipal securities between municipal entities, other than in the 
scenarios discussed above.\95\ The MSRB stated that it understands that 
municipal entities purchasing municipal securities for investment 
purposes may have a need for liquidity prior to the maturity of the 
issue and may want to sell the municipal securities into the secondary 
market.\96\ In such a scenario, the MSRB stated, the purchasing entity 
may find it difficult to resell the municipal securities without a 
CUSIP number and, based on discussions with industry participants, the 
MSRB stated that it understands there is no existing process in place 
to obtain a CUSIP number later for secondary market trading.\97\ The 
MSRB stated that it believes that applying for a CUSIP number at the 
time of the new issue will avoid this situation and will ensure the 
municipal securities are tradeable in the secondary market.\98\
---------------------------------------------------------------------------

    \95\ Id.
    \96\ Id.
    \97\ Id.
    \98\ Id.
---------------------------------------------------------------------------

E. Use of Other Standard Identifiers

    In response to the Notice of Filing, one commenter suggested that 
the proposed rule change be amended to permit the use of ``appropriate 
open-standard identifiers.'' \99\ In particular, this commenter 
emphasized concerns that Rule G-34 is an endorsement of a commercial 
entity's product and is contradictory to SEC policy. The MSRB stated 
that it recognizes the commenter's concerns and is aware of efforts in 
the industry exploring a move towards an open-standard identifier 
environment.\100\ However, the MSRB

[[Page 60438]]

stated that it understands that the use of an identifier other than a 
CUSIP number extends well beyond the municipal securities market and a 
change to expand the universe of identifiers would require significant 
coordination between all market participants.\101\ The MSRB stated that 
it believes that merely adding in language to Rule G-34 to allow the 
use of ``other standard identifiers'', as the commenter suggested, 
without significant coordination among other market participants and 
consideration of how such a change would impact all aspects of the 
overall securities market could cause substantial confusion.\102\ The 
MSRB stated that, along with other industry stakeholders, it will 
continue exploring the expansion of the universe of securities 
identifiers, but that it does not believe amending Rule G-34 at this 
time to include the use of other identifiers is appropriate without 
further information gathering and industry input.\103\
---------------------------------------------------------------------------

    \99\ See Bloomberg Letter.
    \100\ See November Response Letter.
    \101\ Id.
    \102\ Id.
    \103\ Id.
---------------------------------------------------------------------------

F. Use of Legal Entity Identifier

    In response to the Notice of Filing, one commenter suggested that 
the SEC should require issuers of municipal securities to be identified 
by a legal entity identifier (``LEI'') as part of the proposed rule 
change.\104\ The commenter suggested the SEC could use LEIs in its 
regulatory data collection framework to identify parties and market 
participants by a standard method. The MSRB stated that it recognizes 
the potential for LEIs to provide useful information on municipal 
issuers and is in the process of gathering industry input on the 
availability and value of obtaining this information in the 
market.\105\ Specifically, the MSRB noted, in a concept proposal issued 
on September 14, 2017, the MSRB sought industry comment on whether 
issuers and obligors typically have LEIs and if so, whether that 
information should be collected by the MSRB on its Form G-32 and 
included in Rule G-34 to permit or require dealers to submit such 
information if available.\106\ The MSRB stated that it will consider 
this issue further, once the results of the request for comment are 
received and fully evaluated.\107\
---------------------------------------------------------------------------

    \104\ See GLEIF Letter.
    \105\ See November Response Letter.
    \106\ Id.
    \107\ Id.
---------------------------------------------------------------------------

G. Other Comments

    In response to the Notice of Amendment No. 1, the ABA stated that 
it maintains its support for the exception to the proposed rule 
requirement to obtain CUSIP numbers for dealers and municipal advisors 
in private placements of municipal obligations to a single bank, its 
affiliates (other than a registered broker-dealer), or a consortium of 
such entities if the intent of the purchasing entity or entities is to 
hold the municipal obligation until maturity.\108\ The ABA stated that 
it supports the modification included in Amendment No. 1 and that it 
``appreciates the MSRB's acknowledgment of the banking industry's 
concerns about the impact of the CUSIP requirements on the direct 
purchase market.'' \109\ The ABA also stated that it believes that the 
modifications to the proposed rule change made by Amendment No. 1 
``appropriately recognizes the realities of the direct purchase 
market.'' \110\
---------------------------------------------------------------------------

    \108\ See Second ABA Letter.
    \109\ Id.
    \110\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, the MSRB Response Letters, and Amendment 
No. 1. The Commission finds that the proposed rule change, as modified 
by Amendment No. 1, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to the MSRB.
    In particular, the proposed rule change, as modified by Amendment 
No. 1, is consistent with Section 15B(b)(2)(C) of the Act.\111\ Section 
15B(b)(2)(C) of the Act requires that the MSRB's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in municipal securities and municipal financial products, to remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities and municipal financial products, in general, to 
protect investors, municipal entities, obligated persons, and the 
public interest.\112\
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78o-4(b)(2)(C).
    \112\ See 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change, as modified 
by Amendment No. 1, is consistent with the provisions of Section 
15B(b)(2)(C) \113\ of the Act because it would remove impediments to 
and perfect the mechanism for a free and open municipal securities 
market by codifying existing MSRB interpretations and clarifying in the 
text of the rule that dealers acting as placement agents in private 
placement transactions, including direct purchases of municipal 
securities, are subject to the CUSIP-related requirements set forth in 
Rule G-34(a). In addition, the Commission believes that the proposed 
rule change, as modified by Amendment No. 1, would help prevent 
fraudulent and manipulative practices, promote just and equitable 
principles of trade and protect investors, municipal entities, 
obligated persons and the public interest by ensuring that eligible 
municipal securities, including those issued in a private placement, 
have an appropriate identifier assigned in order to provide market 
participants with greater ability to receive, deliver, and safekeep 
such securities. The Commission believes that the availability of a 
limited exception to this requirement would eliminate impediments to 
and perfect the mechanism of a free and open market in municipal 
securities by allowing dealers and municipal advisors to provide 
services in certain direct purchase transactions without inhibiting 
their issuer clients' access to financings that otherwise might not be 
available if CUSIP numbers were required. In addition, the Commission 
believes that the proposed rule change, as modified by Amendment No. 1, 
would remove impediments to a free and open market by requiring all 
municipal advisors to comply with the requirements of Rule G-
34(a)(i)(A), thus encouraging consistency and efficiency in competitive 
sales of municipal securities and ensuring that CUSIP numbers are 
obtained by municipal advisors earlier in a competitive deal to allow 
for immediate trading upon award.
---------------------------------------------------------------------------

    \113\ Id.
---------------------------------------------------------------------------

    In approving the proposed rule change, as modified by Amendment No. 
1, the Commission also has considered the impact of the proposed rule 
change, as modified by Amendment No. 1, on efficiency, competition, and 
capital formation.\114\ The Commission believes the proposed rule 
change, as modified by Amendment No. 1, would reduce regulatory 
uncertainty for underwriters and municipal advisors with regard to the 
requirement to apply for CUSIP numbers because dealers and municipal

[[Page 60439]]

advisors would know with greater certainty when application for a CUSIP 
number is required in private placement transactions. Similarly, the 
Commission believes that while in practice some non-dealer municipal 
advisors may be applying for CUSIP numbers in a competitive offering 
before the final award is made, the proposed rule change, as modified 
by Amendment No. 1,would ensure that this is the case, thus reducing 
the risk of delays in secondary market trading where a competitive 
offering is awarded but no CUSIP number has been assigned. The 
Commission notes that the MSRB considered the impact of the proposed 
rule change on non-dealer municipal advisors and concluded that, while 
non-dealer municipal advisors are likely to incur up-front costs 
associated with compliance with the proposed rule change, the cost 
would be justified by the likely benefits of the proposed rule change 
over time.\115\
---------------------------------------------------------------------------

    \114\ 15 U.S.C. 78c(f).
    \115\ See November Response Letter.
---------------------------------------------------------------------------

    As noted above, the Commission received eleven comment letters on 
the Notice of Filing and two comment letters on Amendment No. 1. The 
Commission believes that the MSRB, through its responses and through 
Amendment No. 1, has addressed commenters' concerns.
    For the reasons noted above, the Commission believes that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the Act.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of the Notice of Amendment No. 1 in the Federal 
Register. As discussed above, Amendment No. 1 modifies the proposed 
rule change by amending proposed paragraph Rule G-34(a)(i)(F) of the 
proposed rule change to require dealers (and municipal advisors in a 
competitive sale) seeking to rely on the principles-based exception to 
reasonably believe the purchaser's present intent is to hold the 
municipal securities to maturity ``or earlier redemption or mandatory 
tender.'' Amendment No. 1 also would modify the proposed rule change to 
expand the principles-based exception in proposed paragraph Rule G-
34(a)(i)(F) to include cases where a municipal entity purchases the 
municipal securities with funds that are at least in part proceeds of 
the purchasing entity's issue of municipal obligations, or the 
municipal securities being purchased are used to fully or partially 
secure or pay the purchasing entity's issue of municipal obligations. 
For consistency, Amendment No. 1 also would apply the same amendments 
to the principles-based exception for dealers from the depository 
eligibility requirements of the rule set forth in subparagraph Rule G-
34(a)(ii)(A)(3).\116\
---------------------------------------------------------------------------

    \116\ See Amendment No. 1.
---------------------------------------------------------------------------

    The MSRB stated that the only substantive change made by Amendment 
No. 1 to the proposed rule change is responsive to commenters and that 
Amendment No. 1 expands the application of the previously proposed 
principles-based exception to include sales of new issue municipal 
securities to municipal entities that are purchasing the underlying 
municipal securities with funds that are at least in part proceeds of 
the purchasing entity's issue of municipal obligations, or the 
municipal securities being purchased are used to fully or partially 
secure or pay the purchasing entity's issue of municipal 
obligations.\117\ The MSRB further noted that the other amendment to 
the proposed rule change made by Amendment No. 1 merely clarifies that 
in a direct purchase transaction there may be a redemption or mandatory 
tender that occurs prior to the municipal security's maturity.\118\ 
Additionally, the MSRB stated that, in light of one of the purposes of 
the principles-based exception in the proposed rule change--to allow 
dealers and municipal advisors to provide services without inhibiting 
their issuer clients' access to certain financings--the revisions are 
consistent with the proposed rule change.\119\
---------------------------------------------------------------------------

    \117\ Id.
    \118\ Id.
    \119\ Id.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds good cause for 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis, pursuant to Section 19(b)(2) of the Act.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\120\ that the proposed rule change (SR-MSRB-2017-06), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78s(b)(2).
    \121\ 17 CFR 200.30-3(a)(12).

    For the Commission, pursuant to delegated authority.\121\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27342 Filed 12-19-17; 8:45 am]
BILLING CODE 8011-01-P