The Municipal Securities Rulemaking Board's latest attempt to regulate direct bank purchases and other private placements by requiring the same registration as public bond offerings, is getting a rare response from market participants: unanimous pushback.
As we reported last month, the Municipal Securities Rulemaking Board (MSRB) has been looking for ways to expand its regulatory oversight to bank placements.
Bank placements are tax-exempt loans purchased by a single commercial lender such as a bank, and have grown in popularity, particularly with not-for-profit hospitals. Placements are not offered to the public and are not considered municipal securities, thus they're not regulated by the SEC or the MSRB and much less burdensome to implement.
The MSRB recently proposed to amend Rule G-34 to require CUSIP registration of private placements. The MSRB's likely motive is that if placements can be registered, they can start being regulated, maybe eventually deemed securities.
Reading comments letters from market groups, this last proposal managed to generate an unusual response: unanimous pushback.
In letters to the MSRB, both the Securities Industry and Financial Markets Association (SIFMA) and the Bond Dealers of America (BDA) asked that negotiated private placements be exempt from registration. SIFMA said private placements are intended to be private transactions, and subjecting them to registration would add costs with no clear benefit to the purchaser. BDA said requiring CUSIP numbers in private placements will have the effect of eliminating placement agents in many transactions and may create an uneven playing field with non-dealer affiliated municipal advisors in direct bank transactions
The National Association of Municipal Advisors (NAMA) and the Government Finance Officers Association (GFOA) both said an exemption to registration ought to be available when a private placement is sold to a single investor (as most bank placements are). The National Federation of Municipal Analysts (NFMA) said mandatory registration would cause obligors to stop voluntarily disclosing placement information on EMMA, so the change would actually result in less transparency. The GFAO is concerned that banks may no longer want to offer bank placements if they have to get a CUSIP. Many lenders specifically ask that their loan not have a CUSIP, because the lack of a CUSIP is seen by market participants as strengthening the case for a placement to be treated as a loan. A CUSIP requirement would expose the purchaser --and other parties involved-- to penalties if the loan were to be later treated as securities.
Regulators want more regulation, but so far, there does not appear to be any support for the MSRB's proposed change. Hospitals and other municipal borrowers who rely on placements as a flexible and cost-effective source of funding are holding their collective breath.