Municipal advisors are pressing the Securities and Exchange Commission to provide them permission to participate in certain deals without risking enforcement action.
The National Association of Municipal Advisors made the request in a letter to the SEC dated July 18. At issue is the sometimes thorny path MAs walk when negotiating or overseeing a request for proposal for a bank loan on behalf of a client. Because the line between a loan and a security can sometimes be unclear, broker-dealers have argued that some non-dealer MAs are actually acting as unregistered dealers by becoming placement agents on some transactions.
“Our concern is that there are times when municipal advisors are unable to do their work and serve as their fiduciary in the types of financings their clients may want to enter into,” said NAMA Executive Director Susan Gaffney. “We want to make sure there’s a pathway for MAs to be able to do that.”
The NAMA letter is the latest in a string of correspondence the SEC has received on this subject. In October 2018, the large non-dealer MA firm PFM asked the SEC for interpretive guidance that the firm would not have to be registered as a broker-dealer if it engages in specific activities related to private placements of muni debt.
The letter caused a firestorm among dealer groups who said that if municipal advisors want to engage in broker-dealer activities, that they needed to register as such. The Securities Industry and Financial Markets Association responded to the PFM letter in a June 12 letter to the SEC, asking for PFM’s request to be denied. SIFMA told the SEC that such a measure would harm investors because privately-placed securities could make their way into the secondary market without ever having been subject to the due diligence of a dealer firm.
The Bond Dealers of America followed with its own letter, telling the SEC that PFM's request was predicated on both legal and factual mistakes and warning that investors would suffer with little benefit to issuers if PFM's ask were granted.
NAMA does not look to displace broker-dealers from their roles as underwriters or placement agents nor take on the broker-dealer role without the legal obligations attached to the role, according to the group's letter. NAMA notes that MAs have a fiduciary duty to their clients established under federal securities laws. MAs also undertake a broader set of responsibilities focused on their issuer clients, Gaffney wrote in the letter.
This isn’t the first time NAMA has sent a letter to the SEC with respect to MAs roles with private placements and bank loans. In 2014, NAMA identified “asymmetry” between other market participants and MAs getting exemptions or exclusions that MAs in turn don’t receive.
NAMA noted in its 2014 letter that the line between providing regulated MA services and placement agent services was not clear and needed the SEC’s review.
No action came from the 2014 letter.
Currently, broker-dealers have exemptions from MA rules when acting as underwriters or investment advisors. The exemptions allow underwriters and IAs to fulfill their traditional roles without having to register as muni advisors. Otherwise, any bond-related advice or advice about the investment of bond proceeds could trigger a requirement to be registered. The advice underwriters and IAs can provide under these provisions is subject to certain limits.
NAMA would like the SEC to provide a similar exemption from broker-dealer registration for MAs acting within certain limits.
“There are exemptions and exclusions in the MA rule for broker dealers and investment advisers when they’re serving in those capacities to make sure they don’t trip over and have to register as MAs,” Gaffney said. “What we’re pointing out is that the precedent is there and we just want to have the same kind of regulatory parity that they have.”
Creating regulatory parity would require analysis and regulatory activity possibly through rulemaking or interpretive guidance on the part of the SEC, Gaffney wrote.
NAMA asked for more immediate action, however, from the SEC on MAs roles in direct placements, writing that two areas cause issue -- negotiating on behalf of their clients and identifying purchasers through a request for proposal or other publicly available information for their clients.
Those duties are recognized by the SEC as MA activity, but it raises legal concerns when a small tweak in the terms of the loan could transform it into a security, NAMA told the SEC. The group urged the SEC to "take action at the staff level to allow for MAs to assist clients with direct placements that are effectively the economic equivalent of, and raise the same array of potential risks, as a conventional loan."
The SEC has provided some guidance to corporate market participants, NAMA noted, without having to engage in a difficult analysis of when a debt is a loan or a security.
In its letter, NAMA writes that guidance from the SEC would help MAs identify and prove that they are following appropriate policies and procedures.
“Our members have faced deficiency letters or have otherwise spent an inordinate amount of their time (and the time of examiners) explaining their activities in direct placements, under the threat of being cited for acting as unregistered broker-dealers when what they are really doing is fulfilling their fiduciary duties to their clients and engaging only in recognized municipal advisory activity,” Gaffney wrote.
