MSRB Requests Comment on Proposal to Restrict Underwriters' Provision of Bondholder Consent

Date: February 7, 2012

Contact: Jennifer A. Galloway
             (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today published a draft proposal concerning circumstances under which municipal bond underwriters would violate their duty to deal fairly by consenting to certain amendments to bond authorizing documents. The MSRB is concerned that underwriters are providing bondholder consent to document changes, such as elimination of a reserve fund or change in priority of debt service, in cases that could affect existing bondholders without prior notice.

Public comments on the notice should be submitted to the MSRB no later than March 6, 2012.

Today’s proposal, which is a draft interpretive notice about the MSRB’s existing “fair dealing” requirements for underwriters, seeks to address the MSRB’s concern that, in some cases, underwriters have consented to trust indenture or resolution amendments that affect existing parity bondholders, even though those authorizing documents and the official statements for the existing bonds did not provide expressly that underwriters could provide such consents. In some cases, those amendments have reduced the security for existing bondholders by, for example, eliminating debt service reserve fund requirements, or have reduced the value of existing bonds.

The draft notice would describe circumstances under which this practice would violate MSRB Rule G-17’s requirements that brokers, dealers, and municipal securities dealers deal fairly with all persons in the conduct of their municipal securities activities.

In its draft notice, the MSRB says that, “The MSRB is aware that underwriter provision of bondholder consents may be perceived by issuers and obligated persons to be a more cost-effective way of obtaining required bondholder consents than, for example, the defeasance of existing securities or solicitation of existing bondholders, and that, in some cases, issuers and obligated persons may face economic constraints that cause them to seek changes to the security provisions of authorizing documents. Nevertheless, the MSRB cautions dealers to consider carefully before providing such consents whether they have the potential to violate Rule G-17.”

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.