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]
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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,
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2 17
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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.
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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.
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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.
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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
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Notice of Filing.
29 Id.
Notice of Filing.
Notice of Filing and Amendment No. 1.
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30 See
31 See
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Notice of Filing and Amendment No. 1.
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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
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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
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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.
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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.
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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
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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.
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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
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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.
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97 Id.
98 Id.
99 See
Bloomberg Letter.
November Response Letter.
100 See
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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
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114 15
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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).
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]]>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.
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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\
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\104\ See GLEIF Letter.
\105\ See November Response Letter.
\106\ Id.
\107\ Id.
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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\
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\108\ See Second ABA Letter.
\109\ Id.
\110\ Id.
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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\
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\111\ 15 U.S.C. 78o-4(b)(2)(C).
\112\ See 15 U.S.C. 78o-4(b)(2)(C).
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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.
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\113\ Id.
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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\
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\114\ 15 U.S.C. 78c(f).
\115\ See November Response Letter.
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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\
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\116\ See Amendment No. 1.
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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\
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\117\ Id.
\118\ Id.
\119\ Id.
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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.
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\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
