With the Securities and Exchange Commission appearing likely to grant some kind of regulatory relief for municipal advisors working on private placement deals, broker-dealers are making a push that any such guidance be narrowly-tailored and treat all MAs equally.
In a letter sent to the SEC on Wednesday, the Bond Dealers of America again opposed any form of relief for municipal advisors participating in private placement activities without registering as a broker dealer. At the SEC's suggestion, however, BDA submitted in its letter a suggested framework for relief that BDA believes could be granted without "significantly harming important investor protections."
“Any exemptive relief should be very clear so as to not to disenfranchise investors,” said Mike Nicholas, CEO of the bond dealers' group.
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, a large non-dealer municipal advisory firm, has requested from the SEC guidance concluding that the firm would not need to register as a broker-dealer to engage in certain activities when advising on a private placement of municipal bonds. The National Association of Municipal Advisors has weighed in also seeking that relief, while both BDA and the Securities Industry and Financial Markets Association have told the SEC they oppose any such exemptive order being granted.
An industry participant told The Bond Buyer that the SEC was leaning towards some form of relief for MAs. The SEC declined to comment.
The BDA recently met with staff leadership and Commissioner Robert Jackson to discuss their concerns about the SEC potentially issuing relief.
“Through in person meetings and letters filed with the SEC, it’s imperative the BDA continues to be part of any solution to this request to ensure against regulatory and competitive imbalance, always with an eye on the investor,” Nicholas said.
BDA would also want the relief, if it comes to fruition, to include all municipal advisors.
“It’s important that if relief is being considered by the SEC then it’s inclusive of all municipal advisors, not just independent municipal advisors with no connection to broker dealers,” Nicholas said.
If exemptive relief were to be granted, Nicholas said it would be a “regulatory slippery slope” and set a dangerous precedent for MAs placing securities and its impact on other fixed income markets.
The SEC has an increased focus on retail investors, a top priority for SEC Chairman Jay Clayton. Nicholas noted that the exemptive relief would not protect retail investors and would impact disclosure and transparency of the municipal bond market. While NAMA has said that the limited activities it wants relief for are appropriate and in keeping with the fiduciary duty MAs owe their municipal entity clients, dealers have maintained that investor protections would be compromised if the SEC appears to condone a system in which bonds could make their way into the market without having been subject to the due diligence required of broker-dealers.
Private placements inherently have less disclosure and transparency, Nicholas said.
NAMA's goal has been to ensure that municipal advisors are able to provide advice to their clients, said Susan Gaffney, NAMA executive director.
“We appreciate BDA’s willingness to contemplate ways in which MAs and their issuer clients can work together without such actions being considered broker/dealer activity,” Gaffney wrote. “While we are still studying the BDA letter, the dialogue related to this issue has taken a step forward.”
Specifically, the BDA would want the relief to be tailored to cover transactions that are not immediately traded in the secondary market so as not to engage in broker-dealer activities that impact a larger market beyond a direct placement transaction, according to BDA’s letter.
Other requirements under BDA's proposed framework include that an MA could not solicit any more than three banks to purchase municipal securities in direct placement transactions. Also, the bank must represent at the time of issuance that it intends to hold the securities until maturity or a mandatory tender.
Nicholas said the BDA is strongly opposed to the relief, but that the trade group will be a part of the solution.
“If that means the SEC is determined to move forward on exemptive relief in some capacity, it’s important that the BDA is at the table and working with the SEC to ensure that whatever exemptive relief is granted is as narrow as possible so as to not disrupt the current regulatory framework as it currently exists,” Nicholas said.
