MSRB seeks comment on municipal underwriters consenting to amendments

By Angela McDaniels

Tacoma, Wash., Feb. 7 - The Municipal Securities Rulemaking Board is requesting comments on a draft interpretive notice that identifies circumstances in which municipal underwriters would be prohibited from consenting to amendments because of the potential impact on existing bondholders.

MSRB said it is concerned that, in some cases, underwriters have consented to trust indenture or resolution amendments that affect existing parity bondholders, even though those documents and the official statements did not expressly say that underwriters could provide such consents.

In some cases, those amendments have reduced the security for existing bondholders (e.g., by deleting debt service reserve fund requirements) or have reduced the value of existing bonds (e.g., by changing call features), according to an MSRB news release.

The draft notice describes 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.

The notice provides, as an example, that it would be a violation of Rule G-17 for an underwriter to consent to amendments to an authorizing document that would reduce the security for existing bondholders unless (i) the authorizing document expressly provided that an underwriter could give bondholder consent and (ii) the offering documents for the existing securities expressly disclosed that bondholder consents could be provided by underwriters of other securities issued under the authorizing document.

Underwriters may technically be bondholders when they first purchase the issuer's bonds, but because they will ultimately distribute the bonds to investors, they will not be negatively affected by the amendments to which they consent, MSRB noted.

"In fact, they may have a monetary incentive to consent to the amendments and, accordingly, a conflict of interest," MSRB said in the release.

"If, on the other hand, the underwriting firm became an investor in the bonds and was no longer holding the bonds with a view to distribution, the firm's consent to amendments affecting their bonds would not be precluded by the notice."

Comments should be submitted no later than March 6. They may be submitted at www.msrb.org/CommentForm.aspx.

Questions should be directed to associate general counsel Karen Du Brul (703 797-6600).

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