I read with interest the recent op-ed on the SEC’s proposed Exemptive Order governing the role of Municipal Advisors on private placement transactions. (Susan Gaffney, “Setting the record straight on SEC Order,” March 11, 2020.) The piece is misleading and factually inaccurate in several respects.
First, the proposed Exemptive Order clearly recognizes that the kinds of behaviors covered by the proposal, such as soliciting investors and placing securities, are broker-dealer, not MA, activity. It is for this reason that the proposal is in the form of an Exemptive Order. The SEC acknowledges that the activity in question is outside the bounds of MA regulation and offers an exemption from regulatory treatment if the parties meet the terms of the Order. Identifying and soliciting investors, and placing securities is not part of the role of a MA. The SEC and the courts have recognized solicitation and placement as broker-dealer activity for decades.
Second, the proposed Exemptive Order would go much farther in granting new permissions to MAs than “negotiating terms and conditions of bank loans and placements.” The SEC’s proposal would allow MAs to solicit nearly any category of institutional investor for nearly any size private placement transaction. If that is not “wanting to be placement agents without registering as broker-dealers,” I do not know what is. In fact, the whole point of the PFM and NAMA requests is for less regulated non-dealer MAs to conduct broker dealer activity without registering and being regulated as broker dealers.
Third, it is not possible to argue credibly that MAs have anywhere near the degree of investor protection obligations and liability as dealers. MAs are bound only to not commit fraud and to treat investors fairly. MAs have no duty to conduct due diligence activities with respect to issuer disclosures, to price deals fairly, to determine institutional investor suitability, to deliver issuer disclosures and other communications, and numerous other explicit duties borne by dealers. As PFM clearly states in their original letter to the SEC, MAs bear duties only to issuers. They are not regulated in a manner anticipating serving as broker or “middleman” on a transaction. And investor protection is not the only area where dealers are more heavily regulated. Dealers have capital requirements and are examined more frequently, for example.
Perhaps most important, nobody involved in this issue has argued that issuers or anybody else would benefit in any way from exempting MAs from appropriate regulation. Issuers would not recognize a cost savings. As Robert Doty, now retired, long-time Municipal Advisor and board member of NAMA’s predecessor organization, said about the proposal, MAs “will, of course, increase their contingent fees to compensate them for this ‘additional service.’” It is also not the case that issuers would get better deal execution. Indeed, depending on a party not in the regular business of placing investments is a sure road to poorer execution. And there is nothing whatsoever in the proposal to benefit investors.
SEC Chair Clayton and former Chair Walter have argued that the municipal market needs more disclosure and greater transparency. The SEC proposal completely flies in the face of increased transparency and would invariably drive more municipal issuance into the disclosure-free private market.
There is no indication that the municipal private placement market is “broken” and in need of regulator attention. To the contrary, private placements have boomed in recent years, peaking in 2017 at over $40 billion of issuance, driven by strong bank appetites for municipal credit (at least until the 2017 tax law kicked in).
The SEC’s proposed Exemptive Order would clearly benefit one specific category of market participants to the detriment of the market overall. The proposed Exemptive Order is a “solution” in search of a problem. The SEC should completely reject this request or at the very least, as Congressmen French Hill (AR) and David Kustoff (TN) have suggested, approach this issue with a proposed rule amendment, not a proposed Exemptive Order.
Chief Executive Officer
Bond Dealers of America