
[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75398-75400]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29488]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70990; File No. SR-MSRB-2013-08]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change Consisting of 
Amendments to MSRB Rule G-11, on Primary Offering Practices, Relating 
to Changes in a Bond Authorizing Document

December 5, 2013.

I. Introduction

    On September 19, 2013, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change consisting of amendments to MSRB Rule G-11, 
Primary Offering Practices, relating to consents to changes in a bond 
authorizing document. The proposed rule change was published for 
comment in the Federal Register on October 22, 2013.\3\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 70607 (October 3, 2013), 
78 FR 62736 (``Notice'').
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II. Description of the Proposed Rule Change

    The MSRB states in the Notice that municipal entity issuers 
(``issuers'') or bond owners often request amendments to bond 
authorizing documents in order to modernize outdated provisions or 
address other concerns that have arisen after the initial issuance of 
bonds. These amendments are typically achieved by the consent of owners 
of a specified

[[Page 75399]]

percentage of the aggregate principal amount of bonds, as determined by 
the authorizing document. The MSRB asserts that the process of 
obtaining consents from bond owners and related costs can be 
significant because the identity of beneficial owners of bonds is 
frequently unknown to issuers and trustees.\4\ To address some of these 
burdens, issuers frequently have requested underwriters, as temporary 
owners of bonds during the initial distribution period and representing 
the aggregate principal amount of bonds underwritten, to provide 
consents to amendments to authorizing documents. According to the MSRB, 
this allows issuers to avoid the potential cost and delay of obtaining, 
by direct solicitation, consents from beneficial owners. However, 
according to the MSRB, this approach may result in a dealer consenting 
to changes to authorizing documents that adversely affect the interests 
of existing bond owners.\5\
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    \4\ The MSRB states that many municipal securities are issued in 
book-entry form and registered as a single ``global'' certificate in 
the name of a depository. Thus, the identity of beneficial owners of 
the bonds is frequently unknown to issuers and trustees. 
Additionally, the MSRB states that identifying such owners and 
obtaining consents often results in cost and delay in achieving the 
requisite number of consents.
    \5\ The MSRB represents, that while existing bond owners may be 
considered as having agreed to provisions relating to amendments to 
the authorizing documents at the time of purchase, such bond owners 
are not likely to have anticipated that a dealer, acting as an 
underwriter or remarketing agent with no prior or future long-term 
economic interest in the bonds, could provide such consent unless 
such ability had been specifically authorized in the authorizing 
documents and disclosed to bond owners.
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    The MSRB proposes to amend MSRB Rule G-11, Primary Offering 
Practices, to prohibit brokers, dealers and municipal securities 
dealers (``dealers'') from providing consents to any amendment to 
authorizing documents for municipal securities, either as an 
underwriter, a remarketing agent, or as agent for or in lieu of bond 
owners, except in certain limited circumstances set forth in proposed 
section (l) of Rule G-11.\6\
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    \6\ The MSRB notes that consents from dealers solely in their 
capacity as an underwriter or a remarketing agent and required or 
permitted in connection with their administrative duties under 
authorizing documents are not subject to the proposed rule change. 
Further, the MSRB notes that the proposed rule change does not 
affect other methods used by issuers to obtain consents from owners 
of newly issued bonds, such as consents received from bond owners 
upon initial purchase of the bonds.
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    Subparagraph (l)(i)(A) will except from the prohibition an 
underwriter that provides bond owner consents to changes in authorizing 
documents if such documents expressly allowed an underwriter to provide 
such consents and the offering documents for the issuer's existing 
securities expressly disclosed that consents could be provided by 
underwriters of other securities issued under the same authorizing 
documents.
    Subparagraph (l)(i)(B) will except from the prohibition a dealer 
that owns the relevant securities other than in the capacity of an 
underwriter or a remarketing agent. The MSRB states that the 
determination of whether a dealer owns the securities for purposes of 
this exception will depend on whether it purchased such securities 
without a view to distribution.
    Subparagraph (l)(i)(C) will except a dealer acting as a remarketing 
agent to whom the relevant securities had been tendered as a result of 
a mandatory tender, provided that all securities affected by the 
amendment (other than securities retained by an owner in lieu of a 
tender and for which such bond owner had delivered consent) had been 
tendered. If a bond owner elects to exercise its right to ``hold'' 
bonds subject to a mandatory tender in lieu of tendering, the 
remarketing agent will be prohibited from providing consents to any 
amendment to an authorizing document unless it also receives the 
specific written consent of such bond owner to such change.
    Subparagraph (l)(i)(D) will except a dealer that provides consent 
to changes to authorizing documents solely as agent for and on behalf 
of bond owners that delivered separate written consents to such 
amendments. An underwriter providing an ``omnibus'' consent under this 
subparagraph will not be viewed as substituting its judgment for that 
of bond owners but rather as an agent facilitating the collection and 
delivery of consents.
    Subparagraph (l)(i)(E) will except a dealer, in its capacity as an 
underwriter, that provides consent on behalf of prospective purchasers 
to amendments to authorizing documents if the amendments would not 
become effective until all existing bond owners affected by the 
proposed amendments (other than the prospective purchasers for whom the 
underwriter had provided consent) had also consented.\7\
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    \7\ The MSRB states that this exception recognizes a limited 
circumstance in which an underwriter's consent to amendments to 
authorizing documents, provided in lieu and on behalf of new 
purchasers of bonds, will be permitted. In this case, the 
underwriter's consent will not become effective until existing 
owners of all bonds (other than the prospective purchasers for whom 
the underwriter had provided consent) affected by such amendment and 
outstanding at the time such consent became effective had also 
provided consent. The MSRB states that this alternative might be 
considered when an issuer was in the process of accumulating 
consents from all owners of outstanding bonds and had not completed 
acquiring the consents prior to issuing a new series of bonds. In 
that case, an underwriter's consent on behalf of new purchasers 
would not become effective until all other bond owners affected by 
the amendment had also provided their consent and such other 
consents were currently effective. The MSRB represents that this 
exception would not affect an underwriter's ability to provide 
consents as permitted in subparagraph (l)(i)(D) of the proposed rule 
change.
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    Lastly, paragraph (l)(ii) will define certain terms for purposes of 
proposed section (l), specifically the terms ``authorizing document,'' 
\8\ ``bond owner,'' \9\ and ``bond owner consent.'' \10\
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    \8\ The MSRB defines the term ``authorizing document'' to mean 
the trust indenture, resolution, ordinance, or other document under 
which the securities are issued.
    \9\ The MSRB defines the term ``bond owner'' as the owner of 
municipal securities issued under the applicable authorizing 
document.
    \10\ The MSRB defines the term ``bond owner consent'' to mean 
any consent specified in an authorizing document that may be or is 
required to be given by a bond owner pursuant to such authorizing 
document.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change 
and finds that the proposal is consistent with the requirements of the 
Act and the rules and regulations thereunder.\11\ In particular, the 
proposed rule change is consistent with Section 15B(b)(2)(C) of the 
Act, which provides that the MSRB's rules shall 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, and, in general, to 
protect investors, municipal entities, obligated persons, and the 
public interest.\12\
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    \11\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-4(b)(2)(C).
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    The Commission believes that the proposed rule change is consistent 
with Section 15B(b)(2)(C) of the Act, because it should protect 
investors by prohibiting consents to amendments to authorizing 
documents from a dealer who may be only the temporary owner of the 
bonds and thus may not share a bond owner's prior or long-term economic 
interest in the bonds, except under limited circumstances set forth in 
the rule. The Commission notes that the

[[Page 75400]]

exceptions in the rule to allow dealer consent to changes in 
authorizing documents are limited in nature so as to protect existing 
bond holders, while addressing concerns of issuers about obtaining 
consents to amendments of their authorizing documents in certain 
situations. In addition, the Commission believes that the proposed rule 
change will enhance transparency regarding the practice of obtaining 
bond owner consents from dealers.
    At the same time, the Commission notes that the MSRB has 
represented that the proposed rule change does not grant an affirmative 
right to dealers to provide consents to changes to authorizing 
documents and does not alter the dealer's obligations applicable under 
other MSRB rules, including its fair dealing obligations under Rule G-
17. Accordingly, dealers may not simply rely on the exceptions 
prescribed in the rule but rather are obligated to consider and comply 
with their Rule G-17 obligations in seeking to provide consents to 
amendments in authorizing documents at the request of an issuer in 
accordance with the exceptions provided.
    For these reasons, the Commission believes that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to the MSRB, and in 
particular, Section 15B(b)(2)(C) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-MSRB-2013-08) be, and hereby 
is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29488 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P


