BDA opposes PFM request for private placement relief

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A second dealer group has asked the Securities and Exchange Commission not to grant PFM's request for written guidance that the firm need not be a registered broker-dealer to engage in certain activities when advising on a private placement of municipal bonds.

Bond Dealers of America made its case against PFM's position in a June 28 letter to the SEC. The letter follows a similar opposition from the Securities Industry and Financial Markets Association, which also told the SEC it should deny PFM's request. PFM sought the guidance in an October 2018 letter which The Bond Buyer obtained recently.

Mike Nicholas, Bond Dealers of America CEO, wrote that BDA strongly disagreed with the “legal and factual predicates” of the PFM letter.

“It misstates the current state of the law, misstates the reasons why the law is what it is, misstates what this actually looks like in the municipal securities market and misstates the practical implications that would ensue if the law is changed,” Nicholas wrote.

The controversy stems from whether or not municipal advisors are becoming de facto placement agents in some private placement deals, essentially selling the bonds to investors on behalf of their municipal clients. Regulators have said they consider placement agent activity to be the realm of broker-dealers.

PFM told the SEC guidance is needed because the definition of municipal advisory activities “expressly contemplates certain functions that -- when conducted by intermediaries outside of the realm of registered MAs -- appear similar to activities that have historically been considered indicative of BD activities.” PFM's letter said explicitly that it does not want permission to act as a placement agent.

Specifically, PFM said it would like regulatory relief for identifying and assessing potential "qualified providers," negotiating terms with them, and coordinating with the buyer selected.

PFM declined to comment on the BDA letter.


Nicholas countered what he read as PFM's claim that transactions are not getting done because of regulatory uncertainty. The SEC was prompted to amend its Rule 15c2-12, which dictates post-issuance disclosure, because issuers had been regularly entering into direct placements with banks and other lenders, Nicholas wrote.

“The market statistics undermine PFM’s argument that small issuers are being handcuffed in their ability to effect private placements as the market is robust at all levels of size and sophistication,” Nicholas wrote.

If the SEC were to provide the guidance, Nicholas wrote, it would worsen an existing competitive imbalance between dealer and non-dealer municipal advisors.

BDA was also concerned that if the SEC acts on the PFM letter that it could roll back essential protections for investors without providing “purported benefits to issuers.”

“The broker-dealer regulatory regime exists for good reasons,” Nicholas wrote. “In this context, persons who identify, negotiate and coordinate securities transactions need to be properly regulated, qualified and capitalized because the interests of the investors are as worthy of protection as those of issuers.”

Broker-dealers serving as placement agents of municipal securities have legal obligations intended to protect investors, such as due diligence responsibilities under the federal antifraud laws, Nicholas wrote.

“The financial crisis of 2008-2009, inflicted significant financial damage to institutional investors as much as retail investors and has put the value of the broker-dealer regime to all investors beyond doubt,” Nicholas wrote.

Susan Gaffney, executive director of the National Association of Municipal Advisors, said MAs are only looking for reassurance that they can carry out their jobs, which include a fiduciary duty to their municipal entity clients, without being considered unregistered broker-dealers.

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