April 20, 2017
Brent J. Fields
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090
Re: File No. S7-01-17, Docket Number: SEC-2017-0410, Federal Register Number: 2017-04323
To Whom It May Concern:
I generally agree with the Commission’s stated intentions behind the amendments to Exchange Act Rule 15c2-12 that would broaden the “list of events” that municipal issuers and obligated persons must give the MSRB notice of. The Commission has provided ample evidence the current rule does not fully address the disclosure problems inherent in the direct placement of municipal securities and it is clear that the Commission has broad statutory authority under the Exchange Act to address these concerns. I also believe it is crucial that these types are rules are made proactively in times of relative economic calm, rather than reactively after a major economic crisis.
However, I have one major concern from a legal and procedural standpoint that I believe the Commission should further address in order to ensure that the rule will pass the scrutiny of any possible future judicial review under APA § 706(2)(A). Specifically, the Commission should—either thorough its own analysis of the solicitation of additional comments—attempt to quantify the potential change in borrowing costs and their larger effect on the municipal direct placement market resulting from the revised rule.
Major Concern: The Commission Should Further Study Increased Borrowing Costs Before Implementing the Rule
The Commission has appropriately considered the increased record-keeping burden on issuers and dealers that the new rule will cost and the potential financial costs of compliance.
However, the Commission does not genuinely address the systemic increased borrowing costs that may result from this rule which could drastically affect then entire municipal direct placement market and possibly shut many smaller actors out of the market completely. It is clear that the Commission has broad statutory authority under to promulgate this type of rule under multiple sections of the Exchange Act. Nevertheless, that authority is not unlimited and if borrowing costs under the rule become prohibitive it is possible that some borrowers and obligated parties may seek judicial review of the new revised rule. This type of challenge would probably argue that because the Commission did not consider the systemic impact of the revised rule on borrowing costs it could not have possibly acted reasonably in rejecting alternatives to the new rule. Any potential claim would likely argue that because the Commission failed to thoroughly consider these alternatives that the revision of the rule was “arbitrary” or “capricious” under APA § 706(2)(A).
While—because of the Commission’s otherwise in-depth economic analysis—it is unlikely that a court would disapprove of the rule under current case law, there are steps the Commission can take to further ensure the rule will pass judicial scrutiny. The Supreme Court has explained that an agency’s actions can be considered arbitrary and capricious if it ignores the “relevant factors” it is statutorily required to consider when promulgating a rule. See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971). Here, the broadness of the factors Congress has directed the Commission to consider will likely not lead a court to perform a searching review that would disturb the revised rule. See 15 U.S. Code § 78o (2016) (“The Commission shall, for the purposes of this paragraph, by rules and regulations define such devices or contrivances as are manipulative, deceptive, or otherwise fraudulent”).
However, the Supreme Court has also required that agency consider “all significant and viable” reasonable alternatives and give a “reasoned explanation” for rejecting alternative routes to enforcing the stature. See Motor Vehicles Manufacturers Association v. State Farm, 463 U.S. 29 (1983). Here, the Commission has explained that it—and other market participants—has explored ways other ways of encouraging voluntary disclosure. However, it hastily concludes that the amount of voluntary disclosures made as “limited,” while simultaneously acknowledging that its estimates may under severely “understated.”
The rejection of voluntary approaches is potentially problematic given the fact that “the Commission is unable to provide reasonable estimates of the potential change in borrowing costs related to direct placements.” If there have been limited voluntary disclosures, it suggests that the costs of the disclosures are probably high. Right now the Commission claims it is “striking a balance” but potentially massively underestimating the total effect of the entire municipal direct placement market as a whole. Although the Commission seems to be superficially aware of this fact, I worry that its analysis—or lack thereof—will cause problems for the revised rule if it is judicially reviewed. Thus, the Commission should continue to analyze and seek qualified comments that would properly quantify the possible effects of the new rule on borrowing costs. A failure to seek out and consider this information may lead to increased judicial scrutiny in a future legal challenge to the revisions.
J.D. Candidate 2017
Cornell Law School