Recent comments made by Securities and Exchange Commission Chair Jay Clayton about a temporary exemption to allow municipal advisors to arrange certain private placement deals are inaccurate, said the Bond Dealers of America.
In a letter sent late last week to Clayton, BDA said the SEC chair’s responses to questions during a June 25 House Financial Services Committee subcommittee hearing were “troubling."
“Three of your statements stand out as particularly troubling," said Mike Nicholas, BDA CEO.
During the hearing, Clayton said the temporary exemption to allow MAs to arrange private placement deals without having to register as broker-dealers was “very narrow.” That temporary exemption, announced in June, included a $20 million cap on the size of the private placement deal.
Based on 2019 issuance patterns, Nicholas said, that threshold would make up about 72% of new municipal issuances and therefore is not narrow. Clayton's claim that it is narrow is "simply not true," Nicholas wrote.
The temporary exemption was narrowed compared to a similar exemption order proposed in October 2019. The SEC subsequently said it was not moving forward with that exemption. The temporary exemption will last until Dec. 31, 2020.
The process for the temporary conditional exemption (TCE) upset bond dealers who believed the SEC should have gone out for public comment. During last month’s hearing, Clayton said if the temporary exemption were to be done on a permanent basis or in a broader scope, there would be “an opportunity for notice.”
BDA said it is concerned about under what conditions that the temporary exemption could become permanent. Clayton had said the temporary exemption was made in light of COVID-19 related market conditions such, wanting to allow municipalities maximum flexibility to access financing options in light of declining tax revenues.
“The COVID-19 crisis clearly will not last forever,” Nicholas wrote. “Once the virus threat has receded, why would the SEC need to continue the TCE? What ‘broader scope’ would the SEC consider as the Dec. 31 expiration of the TCE approaches?”
The temporary exemption requires MAs to report transactions to the SEC’s Division of Trading and Markets. During the hearing, Clayton said he would not commit to making that information public but would commit to considering whether it should be made public.
“There is no reason for the SEC to hide the data on the use of the TCE,” Nicholas wrote. “We urge you in the interest of transparency to release deal information reported under the exemption, particularly if there is to be consideration of expanding or extending the TCE.”
BDA also questioned the need for the temporary exemption as municipal markets have shown some improvement since March — when the effects of the pandemic began to unfold.
Yields spiked in March, though high-grade 10-year yields are now where they were before the pandemic started, Nicholas wrote.
“Issuers are pricing new public issues every week,” Nicholas wrote. “Issuance in April and May of 2020 were approximately the same volumes as last year, and issuance in June was 25% higher than last year.”
Nicholas quoted a report released by the New York Federal Reserve last week in which economists said secondary market conditions had stabilized since March. Specifically, the change in yields shows the combined effects of the changes in interest rates and the impact of the Fed’s programs, the Fed said.
When the SEC announced the temporary exemption, the National Association of Municipal Advisors called it a “step forward” that ensured that MAs could provide advice without concern that their MA services were considered broker-dealer activity.
“MAs should be able to assess and assist their clients with all direct placement transactions, and we applaud the commission’s efforts and look forward to continued conversations on this matter,” NAMA said in a recent statement.
NAMA Executive Director Susan Gaffney said on Monday the temporary exemption does not address all concerns raised from a policy perspective, but does provide helpful guidance in limited circumstances that are helpful to MAs being able to serve their clients.
