The Municipal Securities Rulemaking Board, or MSRB, has issued an advisory on the potential applicability of MSRB rules to certain municipal finance transactions that have become popularly known as bank products, but may in fact entail securities transactions triggering specific regulatory requirements. The advisory covers certain financings called “bank loans” that could, depending on the nature of the transactions, be placements of municipal securities, as well as certain “direct purchases” by banks of issuers’ securities that are subsequently restructured so significantly that they may constitute primary offerings of securities.
A broker-dealer serving as a placement agent for municipal securities or for a direct purchase by a bank of municipal securities is subject to all MSRB rules and other federal securities laws. The MSRB’s advisory notes that these include the obligation to report primary offerings under MSRB Rule G-32. Other applicable MSRB rules include those covering trade reporting, fair dealing, CUSIP numbers, pay to play prohibitions and underwriting assessments.
Furthermore, a municipal advisor that advises a state or local government issuer on the issuance municipal securities (including the direct purchase by a bank of the issuer’s securities followed by a restructuring of the securities that is considered a primary offering of municipal securities) is subject to MSRB municipal advisor rules. Such a municipal advisor would be subject to the new federal fiduciary duty to the issuer established under the Dodd-Frank Act.
Many bank financings involve the issuance of a note. In the case of Reves v. Ernst & Young, Inc., 494 U.S. 56 (1990), the U.S. Supreme Court set forth factors used to determine whether a note is a security. The MSRB’s advisory discusses each of these factors and suggests dealers and municipal advisors that play a role in bank financings evidenced by notes should consult with their counsel on whether the note is a security under Reves.
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