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.

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entity issuers (“issuers”) or bond owners often request amendments to bond authorizing documents in order to modernize outdated provisions or address other concerns that have arisen after the initial issuance of bonds.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 ( printed 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]

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]

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]

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]

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]

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 ( printed 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.