Oct. 10, 2017
DIXWORKS LLC is a single member firm established in March of 2001 serving small and medium-sized issuers in the State of Connecticut, many which might not otherwise have access to the capital markets on account of their small size, no previous credit, or small or infrequent borrowing needs. The most readily available credit source for these small issuers is the bank loan. These are plain vanilla credits that are booked as commercial loans and placed in the bank's loan portfolio never to see the light of day until maturity. Our loan documents specifically state that the loan may not be marketed in any form that might constitute a municipal security. Placing a CUSIP on these loans might lead to the misinterpretation that they are a municipal security, to the benefit of no one, and to the erroneous conclusion that a Municipal Advisor (MA) was acting as a broker/dealer.
The MSRB and other market players have made it abundantly clear that bank loans need to be disclosed in order to determine a complete credit picture of a particular issuer. I have no quarrel with that position. The EMMA portal has been updated to facilitate same. No CUSIP is needed to find and identify a properly disclosed bank loan.
I am bewildered by the new imposition on independent MAs to provide CUSIP numbers for competitively bid new issues. This function has been effectively and reliably executed by the broker/dealer community for decades. A vague new concept of “regulatory imbalance” to justify this change escapes my understanding despite having read and re-read MSRB Notice 2017-05. A broker/dealer MA may bury its CUSIP cost in the spread, but a non-broker/dealer MA has no such option. An independent MA must either absorb this new cost or invoice their clients in addition to whatever fee we are charging. How do we recover the time-cost of this additional processing? Increase our fees? To what end? If this new regulatory burden on independent MAs somehow represents a correction of “regulatory imbalance”, it certainly is not in favor of the independent MA industry. To me, this regulation attempts to fix something that is not broken. Rather than burden non-broker/dealer MAs with a function that has historically been a broker/dealer activity, why not provide some regulatory relief and eliminate the MA CUSIP obligation for both MA segments and require the broker/dealer to obtain CUSIPs when required?
Any financing transaction requires that there be an issuer and a lender/underwriter. There is no absolute necessity for the issuer to retain an MA. In the case where an issuer chooses not to use a MA, not uncommon, which party is charged with obtaining a CUSIP under the conditions for which a MA would normally be obligated if the MSRB Rule G-42 amendments are approved?
The proposed rulemaking allows for an exception to obtaining CUSIPs for a direct placement when the MA (or underwriter in negotiated sale) “reasonably believes that the purchasing bank is likely to hold the municipal securities to maturity or limits the resale of the municipal securities to another bank, affiliated banks or a consortium of banks.” The proposal provides an example (e.g., by obtaining a written representation”) of how the independent MA may be able to make that determination. This means that the independent MA will have to determine the intent of the investor which is very problematic for independent MAs since interacting with investors is usually seen as broker/dealer activity.
I have profound respect for the MSRB's outreach efforts over the years to try and determine what exactly an MA does. Unlike the broker/dealer community where everyone does essentially the same thing, the regulation of that industry may be fairly uniform for all players. The MA business is extremely diverse as to the services it provides and the type of clients it serves. I urge that the SEC not attempt to pound regulatory round pegs into square holes and to try and accommodate the amazing diversity of the MA universe. If I recall correctly, the Dodd-Frank Act included language stating that regulation of small market participants not be unduly burdensome. In my opinion, shifting the CUSIP process from underwriters to independent MAs serves no useful purpose, does nothing to enhance the municipal securities market, and does pose an undue burden on the small independent MA shops such as mine.
Thank you for your attention.