The Municipal Securities Rulemaking Board (“MSRB”) issued a concept release last month suggesting that market transparency trumps the direct Congressional prohibition against federal regulations requiring filing of information by (or by broker-dealers, from) municipal issuers (the “Tower Amendment”).
Regulators are concerned that direct purchases of municipal debt (akin to private placements) and bank loans to municipal entities might avoid the municipal securities regulatory regime, yet affect the priority and integrity of municipal securities:
The MSRB has noted that, because bank loans are not subject to the same level of disclosure as public offerings of municipal securities, “holders of an issuer’s outstanding debt, as well as potential investors and other market participants, may not become aware of such bank loans or their impact on the issuer’s outstanding debt until the release of an issuer’s audited financial statements.” As a result, investors may not be able to fully appreciate the overall amount of indebtedness of an issuer in a timely fashion, and they may also lack knowledge of key terms of any undisclosed indebtedness, which could be material to their investment decisions. For example, some direct purchases and bank loans may have provisions that make creditors senior to bondholders or that provide creditors with more favorable remedies than bondholders in the event of default.
MSRB Reg. Not. 2016-11 (Mar. 28, 2016)(here).
Never mind that the SEC’s own municipal-disclosure rule, Rule 15c2-12, doesn’t require disclosures about municipal debt that’s not a “municipal security.” And never mind that the 1934 Exchange Act actually prohibits the SEC or MSRB from directly (or indirectly through brokers or dealers) requiring municipalities to file registration statements. ’34 Act § 15B(d)(1), 15 U.S.C. § 78o-4(d)(1). And never mind that the Eleventh Amendment and Federalism concerns prompted then Texas Senator John Tower from amending the very act that created the MSRB to prohibit requiring regulatory filings of information not generally available elsewhere:
The Board is not authorized under this chapter to require any issuer of municipal securities, directly or indirectly through a municipal securities broker, municipal securities dealer, municipal advisor or otherwise . . . to furnish to the Board . . . any . . . document, or information with respect to such issuer: Provided, however, [that] the Board may require municipal securities brokers and municipal securities dealers or municipal advisors . . . to furnish the Board . . . documents, and information with respect to the issuer thereof which is generally available from a source other than such issuer.
’34 Act §15B(d)(1), 15 U.S.C. § 78o-4(d)(2).
No, citing its own “broad rulemaking authority,” the MSRB “believes … it may be possible to require disclosures by municipal advisors of information about direct purchases and bank loans of their municipal entity clients within the limitations of the Tower Amendment.”
Regulatory authorities have been concerned about direct purchases and bank loans for some time – as potential “end-arounds” the regulatory and disclosure regimes. See, e.g., MSRB Reg. Not. 2015-03 (Jan. 29, 2015); MSRB Reg. Not. 2011-52 (Sept. 12, 2011); MSRB Reg. Not. 2011-37 (Aug. 3, 2011).
Indeed, the MSRB and FINRA just released a joint advisory earlier this month reminding market participants that direct purchases and bank loans might substantively be “securities” notwithstanding their labels, with registration and other regulatory consequences. See MSRB Reg. Not. 2016-12 (Apr. 4, 2016); FINRA Reg. Not 16-10 (Apr. 4, 2016), here.
Market disclosure and transparency for investors are good things. Under the “goose-gander rule,” though, it seems that transparency also ought to apply to government regulatory action. If the growth, maturity and fair functioning of the nation’s municipal securities markets requires more extensive issuer disclosure, then the regulatory community should go to the Hill to revisit the Tower Amendment, instead of engaging in notice-and-comment “end-arounds” to avoid legislative prohibitions.
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