December 7, 2019
I am writing regarding the Commission’s Release No. 34-87204 Proposed Exemptive Order Granting a Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Registered Municipal Advisors. I applaud the Commission for seeking to provide clarity to participants in public finance, particularly Municipal Issuers. I believe that the proposal is the proper public policy and strikes the appropriate balance in direct placements of municipal obligations between issuer protection and investor protection. I am a lawyer licensed to practice in Colorado and I have been acting as counsel to participants in public finance transactions since 1977. My practice today largely involves acting as bond counsel in public finance transactions. Many of my clients are small governments with limited staff with experience in public finance matters. I am submitting these comments as an individual and not as a member or representative of any organization. In my practice, the following is a fairly common example of a direct placement. A Municipal Issuer with advice from a municipal advisor determines to proceed with a direct placement rather than a public offering. A request for proposal is prepared and is sent to commercial banks seeking a bank to make a loan to the Municipal Issuer. The loan is often evidenced by a loan agreement but sometimes is structured as a bond issue in order to comply with state laws, local charters, master indentures, or other outstanding ordinances or resolutions of the Municipal Issuer. Because of the current uncertainty in the marketplace, the municipal advisor is unwilling to assist the Municipal Issuer in soliciting a bank to make the loan or in negotiating the terms with the winning bank. Oftentimes, the municipal advisor will advise the issuer to retain a broker-dealer to act as a placement agent to perform those activities. The Municipal Issuer then is paying both the municipal advisor and the placement agent. A variation on this fact pattern is that the Municipal Issuer determines to save money by only hiring a placement agent and goes without a municipal advisor. Of course, the placement agent does not have a fiduciary duty to the Municipal Issuer whereas the municipal advisor does. Some of the current uncertainty in the public finance community about direct placements occurs because there is no bright line test for determining whether the transaction is a loan or a security. Even where the direct placement involves the issuance of a bond by a Municipal Issuer, most lay people would describe the transaction as a loan. For most direct placements, the purchaser is a bank or other financial institution which is accustomed to making commercial loans to businesses and individuals. Regardless of whether the direct placement is of a bond or a loan agreement the purchaser’s approach to originating and approving the transaction is the same as when making a commercial loan to a business or individual. Even where a bond is being placed with a purchaser in a direct placement, the parties take steps to attempt to defeat the characterization of the transaction as a security such as: no rating is obtained; there are no CUSIPs; there is no Official Statement; and if there is a bond, it is delivered to the purchaser in physical form as opposed to book-entry delivery through DTC. Of course, an important purpose of a broker-dealer in selling securities to investors is to undertake diligence on the transaction in order to form a reasonable basis for recommending the security to an investor. In a public finance direct placement transaction where the purchaser is a financial institution which also makes commercial loans, such an institution is capable of doing its own diligence and forming its own conclusions on whether to make the loan to the Municipal Issuer. I believe that the Commission’s proposed exemptive order provides much needed clarity to market participants. If the proposed exemptive order is finalized in substantially the form proposed, I believe that Municipal Issuers will be benefitted and that institutions purchasing a bond or making a loan in a direct placement will not be harmed. The definition of Qualified Provider captures most of the entities which I see in my practice. The inclusion of “any other institution with total assets of at least $50 million” is a useful catch-all for institutions (like credit unions) which are otherwise not specifically listed. I encourage the Commission to expand the exemption to include transactions where multiple Qualified Providers are involved. I work on direct placements where the loan is made by two or more commercial banks. Even where one bank makes the loan it is common for a bank to retain the right to grant participations to affiliates or other banks after the closing without notice to or the consent of the Municipal Issuer. Also, the Commission should consider what is meant by the phrase “entire issuance.” If on the same day the Municipal Issuer closes a transaction involving two separate loan agreements with two different banks but a parity pledge of revenues and other collateral, would those loans fit within the proposed exemptive release? Federal tax law provides that two or more series of bonds sold not less than 15 days apart, pursuant to a common plan of finance, and payable from the same source of funds, are treated as a single issue for federal income tax purposes. Is this the standard the Commission proposes in using the phrase “entire issuance”. In closing, I congratulate the Commission on taking this step to provide clarity to market participants. Thank you for the opportunity to comment. Dee Wisor Butler Snow LLP D: [redacted]| F: [redacted] 1801 California Street, Suite 5100, Denver, CO 80202 [redacted] pre>