December 13, 2019
To whom it may concern:
Masterson Advisors LLC is a registered Municipal Advisor. We support the proposed rule change to allow Municipal Advisors to solicit buyers for direct placements of municipal securities under specified conditions. This rule change would greatly clarify ambiguous areas regarding MA’s roles on direct placements.
For background purposes, Masterson Advisors currently has 17 registered MA’s with two of them dedicated full time as a market pricing desk/structured products desk. We were established just last year but closed approximately 196 financings in the last 12 months totaling $2.7 billion. We have over 350 clients under contract.
Currently MA’s that are more regulatorily rigorous are at a disadvantage compared to much of the competition. Because multiple areas of the current regulatory regime are subject to interpretation, they are being interpreted differently. For example, the definition of whether a direct placement is a security is subject to different views. In Texas, municipalities are statutorily authorized to issue notes and bonds but not bank loans. When a bank buys a direct placement, they typically want to treat it as a loan in their portfolio so it is not marked to market like a security would be. They typically require that the “loan” not have a CUSIP and not be rated by a rating agency. If you ask bank counsel whether this vehicle is a loan or a security, they say it is a loan. But the bond documents say that it is a note or more commonly a bond. If you ask bond counsel if it is a security, they say that under state law it is a security. This leaves the MA in the precarious position of deciding if they need to have their client pay for a placement agent or not. Those that chose to recommend using a Placement Agent add extra costs for their clients compared to the competition that does not use a placement agent.
You can get different answers within the same firm. Florida law does allow municipalities to enter into bank loans. There the use of placement agents is less common.
The other option for MA’s in avoiding the extra cost of a Placement Agent is to avoid introducing investors to a client and to avoid directly negotiating the terms with a direct purchaser. In this case the MA finds out if the issuer already has a relationship with certain financial institutions. Then the issuer directly solicits bids from those existing investor relationships. The MA can still advise the issuer but must avoid contact with the investor as it relates to soliciting or negotiating the terms. Some firms are comfortable with this arrangement, others may not be. In any event it puts the regulators in the position of policing for foot faults where the MA may have communicated inappropriately with an investor or slipped the issuer a list of prospective bidders. Let’s do away with this uncertainty and put all MA’s on a level playing field.
We realize that broker dealers hate this idea. It means less money for them. It helps issuers and does no harm to investors who will certify that they can independently evaluate the credit. This conclusion assumes that MA’s do not charge extra for dealing with investors. We would not charge extra, but we can’t speak for all MA’s.
We do not believe that the rule change will significantly increase the volume of direct placements. On the margin it will save issuers the placement agent fee, but that is not likely to be enough to tilt the decision one way or the other. Tax reform in 2017 was a huge factor in decreasing the number of direct placements as bank rates rose significantly when their tax brackets fell from 35% to 21%. We are seeing more direct placement proposals related to forward bond commitments on future refundings.
Thank you for the opportunity to comment.
Masterson Advisors LLC