In response to market uproar, the Municipal Securities Rulemaking Board has revised its draft amendments to Rule G-34 and now proposes to exempt bank placements from registration. If adopted, the amendments would be a win for hospitals and other borrowers that rely on placements for a portion of their debt structure.
In April, we reported the Municipal Securities Rulemaking Board (MSRB) was proposing to require a CUSIP for bank placements and how this could be bad news for hospitals and other municipal borrowers that rely on bank loans for funding.
Under current rules, tax-exempt bank placements are not required to be registered as municipal securities, whereas bonds sold to the public must be assigned a CUSIP and registered.
Municipal market groups were vocal in their opposition to the proposed change to the rule.
Reading the latest press release, the MSRB appears to have heard them.
The MSRB revised its draft amendments to provide an exception to the requirements of Rule G-34 for municipal securities purchased directly by a bank where there is a reasonable expectation that the bank will hold the securities to maturity or limit their resale to another bank.
The MSRB's change of heart is a very positive development because the vast majority of banks expect placements to be held to maturity, so most placements would be exempt from registration.
At first glance, requiring a CUSIP for bank placements may not appear to be a big deal, but the consequences could have been far-reaching.
The MSRB recognizes that without the exemption, banks may be less likely to enter into a bank placement if the loan has to have a CUSIP because it may be viewed as "something other than a loan" for banking purposes.
In fact, banks specifically ask that loans not be CUSIP'd and not be rated, because the last thing they need is to be told later that loans are registered securities.
Under banking and securities laws, this would subject them to a whole new set of costly regulations, affecting their profitability and reporting requirements, even facing penalties. As the Government Finance Officers Association said in its comments to the MSRB, banks may no longer want to offer direct placements.
All hospitals depending on bank placements as a cost-effective and flexible source of tax-exempt funding should hold their fingers crossed and hope that the proposed exemption makes its way into the final rules.
Comments are due back to the MSRB by June 30.