WASHINGTON — The Municipal Securities Rulemaking Board has asked the Securities and Exchange Commission for guidance on when a bank loan qualifies as a municipal security, officials said Monday.
Word of the request comes amid growing concerns among market participants about the lack of transparency in private placements by muni issuers.
Direct bank purchases of munis — private loans to an issuer — have spiked in recent months, spawning concerns about the transactions, which state and local governments are not obligated to report to the board’s online EMMA system.
Last week, Fitch Ratings issued a report urging muni borrowers to disclose information about bank loans, so investors and rating agencies can analyze their outstanding debt.
Concern about private placements also surfaced last week when MSRB members, including new chairman Alan Polsky, a senior vice president at Dougherty & Co., met with SEC chairman Mary Schapiro and her senior staff. The joint meeting among regulators coincided with a three-day MSRB board meeting in Alexandria, Va., the first since Polsky took the helm Oct. 1.
“The MSRB acts as both a resource to and partner with the SEC,” Polsky said during a conference call briefing reporters about the board meeting. He noted that the MSRB issued two notices on bank loans in August and September, but said the board felt additional guidance from the SEC would be helpful.
SEC spokesman John Nester declined to comment on the board’s request.
In an interview, MSRB executive director Lynnette Hotchkiss said the SEC has several options for framing such guidance, including speeches and press releases.
“Only the SEC has the authority to interpret the federal securities laws,” said Hotchkiss. “It ultimately comes to that.”
At the National Association of Bond Lawyers’ bond attorneys’ workshop in San Antonio last month, Dave Sanchez, an attorney-fellow in the SEC’s office of municipal securities, said whether a transaction is a bank loan or a security is a fact-specific analysis, stemming from SEC and U.S. Supreme Court guidance.
“The rules haven’t changed,” he said.
Currently, the board encourages issuers to share bank-loan information voluntarily, Hotchkiss said during the call.
Peg Henry, the MSRB’s general counsel, added that SEC staff have also said it might be useful if the board sent fact patterns to the commission, describing what it is seeing.
In its notices, the board warned market participants and financial advisors to state and local governments that certain bank loans and financings may qualify as private placements of munis.
The board also said broker-dealers and muni advisors who participate in such transactions could inadvertently violate MSRB rules and other federal securities laws.
It said whether bank loans are munis “can be a difficult question.”
In addition, the board plans to provide the commission with additional information to assist it in determining who is a municipal advisor, including a list of traditional services performed by such advisors, Polsky said.
SEC staff are finalizing a permanent municipal advisor registration scheme and definition. Both are slated for release by the end of the year, according to the agency’s web site.
But in September, SEC commissioner Elisse Walter said the agency could, if necessary, seek to extend the existing rules, which expire at the end of the year.
Hotchkiss also indicated the MSRB may only be able to post ratings on EMMA from one credit rating agency this coming year. She said the board expects to add information from “at least one” and possibly two rating agencies by year-end.
In mid-September, the board asked the SEC for a two-and-a-half month delay, no later than Dec. 31, 2011, to implement its project to post rating agency information on EMMA’s continuing disclosure service. The MSRB said it needed more time to secure participation from a second rating agency, which it did not identify. But it has not been able to do so thus far.
Michael Adler, a spokesperson for Moody’s Corp., the holding company for Moody’s Investors Service, said the agency is still evaluating the proposal, which it is discussing with the MSRB.
A spokesman for Standard & Poor’s, David Wargin, declined to comment.
Fitch agreed to participate last fall, the sole rating agency to have done so.
Given the information-technology resources and testing required to provide such data, it could take another year to incorporate any agencies not already committed to the project, Hotchkiss noted.
“It’s a complicated process,” Polsky said.