Muni market awaits SEC response on MA order, transparency ahead of conference

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Tensions are high going into a Securities and Exchange Commission conference next week as market participants expected a decision beforehand on an SEC order to give municipal advisors more leeway to participate in private placements.

Some hope the SEC will address the order at Tuesday’s conference, though it is not officially due to be discussed.

“We hope the SEC will address the next steps at the upcoming municipal disclosure event to help alleviate some concerns about process and outcome,” said Mike Nicholas, CEO of Bond Dealers of America.

The SEC could decide to approve the order with or without changes in the next few days before the Tuesday conference. The conference, entitled,“Spotlight on Transparency: A Discussion of Secondary Market Municipal Securities Disclosure Practices,” will discuss the market’s concerns involving secondary market disclosure.

SEC Chair Jay Clayton will participate in Tuesday's SEC municipal disclosure conference.

The SEC proposed the MA exemptive order late last year and it has since garnered debate among municipal market participants.

Some say action on the exemption has slowed.

“Policymakers and the industry have raised enough issues that we hear the entire exemption process has slowed to a crawl,” a broker-dealer representative said. “It’s possible this issue could gain further attention at next week’s conference.”

The controversy originally 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.

Broker-dealer groups have strongly opposed the order, saying it would negatively impact the market. MAs say it is important for them to be in the room to help state and local governemnts engage in a contract that is best for them.

The SEC received almost 40 comments on the proposed order from MAs, dealers, issuers and lawyers as well as lawmakers.

The American Securities Association said the proposal is controversial.

“This has been an extremely controversial deregulatory proposal that effectively puts the thumb of government on the scale and chooses one business model over another,” said Chris Iacovella, ASA CEO.

Reps. David Kustoff, R-Tenn., and French Hill, R- Ark, both on the House Financial Services Committee, sent separate letters to the SEC opposing the order.

Hill was concerned about the regulatory path of the order and urged the SEC to “reconsider their path forward.”

Hill said the order would impact retail investor protections negatively and create an unlevel playing field between non-broker-dealer MAs and broker-dealers among others.

Kustoff was also concerned about investor protections if the order were to go through.

“My key concern is that this proposal would erode the critical investor protections that the broker dealer registration regime was designed to provide, such as dealer due diligence and fair pricing,” Kustoff wrote in the letter.

Tensions are also high regarding transparency in the secondary market following former SEC Chair Elisse Walter’s public comments that issuers have not made enough progress in secondary market disclosure over the last couple of decades.

Walter said it may be time for the SEC to take regulatory action.

Issuer officials and buy-side analysts want more timely information in the secondary market, where issuers’ audited financials often aren’t available until several months after the close of their fiscal years.

Ben Watkins, director of the Florida Division of Bond Finace, said Thursday regulatory action should be the last thing the SEC does to get more timely information. He hopes the conference will help educate commissioners on market practices, adding that the muni market is in a good place.

Watkins said commissioners could be hearing concerns from outliers and the conference will be a good time to hear more representative ideas.

”You can’t regulate to the worst case beause regulation applies across the board,” Watkins said.

Current SEC Chair Jay Clayton has mentioned several times that he wants to be sure investors aren’t too reliant on stale disclosures.

Watkins said it is impossible to compress how long issuers take to submit their annual audited financial statements and told Clayton issuers can share information through their own websites.

“A regulatory solution is not the right solution and that’s where Elisse is headed because she grew up a regulator and she always had that point of view of a regulator,” Watkins said. “She thinks a regulator solution is the answer and I couldn’t disagree more with that.”

The SEC conference is a single-day affair, and is expected to be attended by representatives of all parts of the market.

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