In an act of generosity a little bit like the famous 2004 episode of the Oprah Winfrey Show (“You get a car! You get a car! You get a car!”), the MSRB recently amended its Rule G-34 to clarify the requirement that placement agents and municipal advisors obtain CUSIPs* for municipal securities. After the June 14, 2018 effective date of the Rule G-34 amendment, placement agents in private placements of municipal securities and municipal advisors in competitive sales must apply for CUSIPs for a new issue of securities, unless an exception described below applies. Previously, many in the municipal market understood Rule G-34 to require a broker-dealer acquiring municipal securities for distribution (i.e., an underwriter, not a placement agent), or a broker-dealer acting as financial advisor in a competitive sale, to apply for CUSIPs.
The MSRB previously stated its view that the definition of “underwriter” in Rule G-34 should be read broadly to include placement agents. To eliminate ongoing confusion in the market over the application of the CUSIP requirements in private placements and disparate treatment between broker-dealers and “non-dealer” municipal advisors in competitive sales, the MSRB proposed amendments to Rule G-34 in March 2017. After revisions to the proposed rule in response to public comments, the SEC approved revised proposed amendments to Rule G-34 on December 14, 2017. The amendment updates the definition of “underwriter” for purposes of Rule G-34 to match the definition included in SEC Rule 15c2-12 and includes a specific statement that the definition “includes a dealer acting as a placement agent,” among other changes.
The full text of Rule G-34 as amended is available here.
Private Placement Exceptions
Much of the public comment in response to the proposed Rule G-34 amendments (available here and here) related to the preference by some purchasers of privately-placed municipal securities, mostly banks and bank affiliates, to purchase municipal securities without CUSIPs. Most banks and bank affiliates consider the assignment of a CUSIP to an obligation as one of a few factors determining whether a municipal obligation should be treated as a loan or a security for accounting and bank regulatory purposes, regardless of whether the obligation is a security for securities law purposes. The final Rule G-34 amendment contains two specific exceptions from the requirement for an underwriter or municipal advisor to obtain a CUSIP in a private placement.
The amended Rule G-34 allows an underwriter (including a placement agent) or a municipal advisor to elect not to apply for assignment of a CUSIP number on a new issue municipal security if (1) the security will be purchased by a bank, an affiliate of a bank that is not a broker-dealer, or a consortium of banks or bank affiliates and (2) the underwriter or municipal advisor reasonably believes that each purchasing entity has a present intent to hold the security to maturity, earlier redemption, or mandatory tender. Participants in private placement transactions should expect placement agents to begin requesting representations from bank and bank affiliate purchasers both (1) that the purchasing entity qualifies as a bank (or a “non-dealer” affiliate of a bank) under the Securities Exchange Act definition of “bank” and (2) that the purchaser presently intends to hold the security to maturity, earlier redemption, or mandatory tender.
State Revolving Fund/Bond Bank Exception
An underwriter or municipal advisor may similarly elect not to apply for assignment of a CUSIP number on a new issue municipal security if (1) the security will be purchased by a municipal entity with proceeds that are at least partially proceeds of the purchasing entity’s issuance of municipal obligations and (2) the underwriter or municipal advisor reasonably believes that the purchasing entity or entities have a present intent to hold the security to maturity, earlier redemption, or mandatory tender. To the extent a placement agent is involved in the purchase of municipal securities of one municipal entity by another municipal entity, the placement agent will likely request the purchasing municipal entity to provide representations regarding its intent to hold the security to maturity, prior redemption, or mandatory tender and its status as a municipal entity.
“Other Request for Bids”
The amended Rule G-34 also provides that the CUSIP requirements may apply even if something other than a traditional notice of sale is used to seek bids in a competitive sale of municipal securities. Because the amended rule requires a municipal advisor to apply for a CUSIP no later than one business day after dissemination of a notice of sale or “other such request for bids,” it may require the municipal advisor to apply for a CUSIP before an ultimate purchaser is identified in a potential private placement transaction. This could be interpreted to minimize the utility of the bank exception to Rule G-34 where a municipal advisor requests bids from potential private placement purchasers of a municipal security in a quasi-competitive sale context. We think a municipal advisor could structure a request for bids to satisfy the bank exception by limiting qualifying respondents to those that make the representations necessary to satisfy the bank purchase exception from Rule G-34 in their bid submissions, which would serve as the basis for the municipal advisor’s reliance on the bank exception.
We believe the amended Rule G-34 will provide certainty on an issue that has been problematic since bank purchases and private placements became a substantial part of the public finance market in the wake of the 2008 financial crisis. Generally, municipal securities will bear CUSIPs, unless placed with a bank or municipal entity in compliance with the bank or municipal purchaser exceptions described above. While the industry may deal with a period of adjustment as placement agents, municipal advisors, bank purchasers, and other market participants work through the changes to Rule G-34, the certainty provided by the amendment should ultimately allow everyone involved in private placements, competitive sales, and other affected transactions to operate in an environment where most industry participants share a clear understanding of the CUSIP requirement rules.
*CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services is managed on behalf of the American Bankers Association by S&P Global Market Intelligence.