Amendments to the CUSIP Rule (MSRB Rule G-34) Effective June 14, 2018
Background
In trading, receiving, delivering, and safekeeping municipal debt securities, it is far easier for dealers to identify a specific bond if it has a CUSIP number assigned to it.1 There are millions of municipal bonds issued, and they can be very similar. For example, an Ohio Turnpike, 4.000%, maturing in October 2028 Series 67760HHE4 can easily be mistaken for an Ohio Turnpike, 4.000%, maturing in October 2028 Series 67760HHF4.
New Requirement
The Municipal Securities Rulemaking Board (MSRB) amended its Rule G-34, on CUSIP numbers. Among other things, the amendments codify the Board’s longstanding interpretive view that BDs are “underwriters” when acting as placement agents of private placements of municipal debt securities, including direct purchases.2
Also, the amendments place a requirement on non-dealer municipal advisors to obtain a CUSIP number when advising an issuer on a competitive underwriting.
That said, the revised rule provides an exception. When dealers and municipal advisors in competitive sales reasonably believe (e.g., by getting a written statement) that the present intent of a purchaser is to hold the bonds to maturity (or earlier redemption or mandatory tender3), the requirement to obtain a CUSIP number may be waived.
Clarification of the Definition of Underwriter
The amendments will delete the existing definition of “underwriter” and instead cross reference to the term “underwriter” as it is defined in Exchange Act Rule 15c2-12(f)(8)4, thus adding wider and clearer understanding of the term as understood by most municipal securities professionals.
All-Inclusive Application of the CUSIP Number Requirements
The amendments will apply the CUSIP number requirements to all municipal advisors advising on a competitive sale of a new issue of municipal securities rather than just some of them. The Board is now of the view that requiring some municipal advisors to obtain CUSIP numbers in competitive sales creates problems.
The amendments also clarify the that a municipal advisor in a competitive sale must make an application for a CUSIP number no later than one business day after dissemination of a notice of sale “or other such request for bids.”
Old Rule
“A financial advisor shall make an application by no later than one business day after dissemination of a notice of sale. Such application for CUSIP number assignment shall be made at a time sufficient to ensure final CUSIP numbers assignment occurs prior to the award of the issue.”
New Rule
“A municipal advisor advising the issuer with respect to a competitive sale of a new issue of municipal securities shall make an application by no later than one business day after dissemination of a notice of sale or other such request for bids. Such application for CUSIP number assignment shall be made at a time sufficient to ensure final CUSIP number assignment occurs prior to the award of the issue.”
The additional language looks to ensure the timing of the application for a CUSIP number where bids are sought in a competitive sale of municipal securities using documentation other than a traditional notice of sale. A municipal advisor in a competitive transaction that applies for the CUSIP number no later than one business day following the distribution of a notice of sale or other request for bids helps safeguard that trading in the new issue can begin without delay following the award.
Provides an Exception to the Requirements in Certain Circumstances
Some banks in direct purchase transactions are reluctant to engage in such a transaction if a CUSIP number is required because some bank purchasers take the view that the transaction is a loan for certain bank accounting purposes. This makes the bank less likely to participate in the financing and hindering the dealer’s ability to directly place the municipal securities, leaving issuers with fewer financing options.
Likewise, where a municipality is purchasing municipal securities to secure its other municipal debt obligations, such as in an advance refunding, there is an expectation that the underlying municipal securities being purchased are intended to be held—not traded in the secondary market.
A dealer (or municipal advisor in a competitive sale) is not required to apply for a CUSIP number in the case of sales of municipal securities to a bank, that is purchasing the municipal securities with funds that are securing or paying, the municipality’s debt issue (e.g., state revolving fund or bond bank), and the dealer (or municipal advisor in a competitive sale) reasonably believes (e.g., by obtaining a written representation) that the purchaser has the present intent to hold the municipal securities to maturity or earlier redemption or mandatory tender.
The Board expects dealers and municipal advisors to work up policies and procedures for arriving at a reasonable belief as to an investor’s intent. Obtaining a written representation from the purchaser is just one example for determining the purchaser’s present intent.
-----
1 CUSIP identifying numbers are provided by CUSIP Global Services, which is managed on behalf of the American Bankers Association by S&P Global Market Intelligence.
2 In a competitive sale, bids from interested dealers are opened at the appointed time and place as advertised in trade periodicals, and the issuer awards the sale to the successful (lowest) bidder that meets all the requirements laid out by the issuer and its advisor. In a negotiated sale, an issuer selects its underwriter following a negotiation of the offering terms. A newer third method to sell bonds is by direct purchase by banks or other financial institutions. Bank direct purchases (BDPs) are an increasingly popular alternative to competitive or negotiated sales.
3 Early redemption may occur on bond issuers’ or bondholders’ intentions. For example, a callable bond may be bought back (called) by the issuer often at a premium to compensate the bond owner for lost interest. This happens when interest rates are declining, and the municipality is looking to refinance its outstanding expensive debt. Most bonds are callable. Occasionally an issuer may provide a put feature giving the bond owner the right to “put” or compel the issuer to repay the bond before maturity typically at par thus allowing the bond owner to reinvest in higher yielding bonds.
4 Exchange Act Rule 15c2-12(f)(8) defines “underwriter” as any person who has purchased from an issuer of municipal securities with a view to, or offers or sells for an issuer of municipal securities in connection with, the offering of any municipal security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; except, that such term does not include a person whose interest is limited to a commission, concession, or allowance from an underwriter, broker, dealer, or municipal securities dealer not in excess of the usual and customary distributors' or sellers' commission, concession, or allowance.
