By Heather Gillers
Wall Street's longstanding hold on the $4 trillion
municipal-bond market faces a challenge from an onslaught of small,
independent firms known as municipal advisers.
The Securities and Exchange Commission is considering allowing
these advisers to arrange private bond sales to skilled investors
without the involvement of the large banks and midsize brokers that
have for decades dominated the market for high-grade local
Though private sales make up only a small portion of the overall
market, broker-dealers -- as these banks and brokers are known
because they price and sell new bonds and trade existing ones --
aren't eager to face further inroads.
The firms that sell municipal debt include some of the biggest
U.S. banks. Last year the top five underwriters were Bank of
America Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan
Stanley and Royal Bank of Canada, according to Refinitiv.
"We're pushing for this whole thing to be killed," said Mike
Nicholas, CEO of Bond Dealers of America, a trade group.
Advisers that hire themselves out to local governments now
participate in three-quarters of muni-bond issues, up from 52% in
2004. They pitch governments on the benefits of having a fiduciary
at the table to evaluate prospective deals.
Today there are around 500 municipal-advisory firms scattered
around the country, more than 70% made up of fewer than five
advisers, according to Municipal Securities Rulemaking Board data.
They often work out of small shops or sometimes home offices,
logging hours on the road to visit rural towns and schools that
make up their client base. Some are affiliated with bond
The SEC proposal, which was released last month, came in
response to a letter from the nation's largest muni advisory firm,
Philadelphia-based PFM, which advised on $47.3 billion in bond
deals last year, according to Refinitiv.
Broker-dealers are alarmed at the SEC proposal, reflecting
broader shifts occurring in the municipal market alongside the
postcrisis regulatory squeeze on both major banks and regional
Regulators are increasingly focused on the interests of not only
investors but also local governments pledging taxpayer dollars to
build schools or dig sewers. At the same time, money managers and
other institutions are displacing individual bondholders as the
biggest holders of munis and forming closer relationships with
For towns or school systems that already prefer to sell a few
million dollars in debt to a bank over issuing bonds publicly, the
SEC proposal could simplify the process. Allowing larger sales to a
wider range of investors could have a more significant market
impact, however, rerouting private deals away from a longstanding
network of dealers and -- if it makes private debt sales more
appealing -- further reducing bonds available to traditional
buy-and-hold retail investors. The scope of the SEC proposal
surprised dealers and advisers alike.
"It could be a significant change for how borrowers access
capital," said Matt Fabian, a partner with Municipal Market
Private placements total between about $5 billion and $20
billion a year, according to Refinitiv data that excludes some
smaller deals. But they are growing, according to the SEC. Though
they are typically small debt sales to banks, some recent deals
have included higher-priced, more coveted securities. Dallas-based
Preston Hollow Capital in 2018 directly purchased a combined total
of about $1 billion in municipal debt from universities and other
The SEC proposal would allow such deals to be handled by
municipal advisers alone so long as the debt is placed with a bank,
insurance company, investment firm, any other institution with at
least $50 million, or a registered investment adviser who could
represent multiple investors.
Mr. Nicholas of the Bond Dealers of America said investors will
suffer if deals don't include a broker-dealer with SEC-mandated
investor protection duties. He said municipal advisers who don't
trade bonds lack "the market intelligence" and other qualifications
to handle even small rural bank placements. The SEC proposal would
require municipal advisers to disclose to the investors that they
don't represent investors' interests.
"Just by definition these are qualified sophisticated investors
so they really don't need another layer of protection," said Howard
Cure, director of municipal bond research at Evercore Wealth
Management, which invests in munis.
Jonas Biery, a Portland, Ore., finance official who spent nearly
five years as the city's debt-program manager, said he might want a
dealer's assistance in a private sale to investors, but that sales
to banks would become simpler and more efficient for many small
issuers. While one-fifth of the muni debt issued through October
came from deals of more than $500 million, 56% of bond issues
produced $10 million or less, according to Municipal Securities
Rulemaking Board data.
Robert A. Tijerina, a municipal adviser with San Antonio-based
Tijerina Galvan Lawrence, said if the proposal takes effect he will
no longer bring in a dealer when he sells Texas town and school
debt to local banks, and the total cost to the borrower will
Municipal adviser Tim King with Kings Financial in Monticello,
Ill., does his private placements without a dealer. But in an
effort to avoid running afoul of current rules allowing only
dealers to solicit investors, he stays out of initial talks between
the borrower and the bank, assigning that outreach to mayors or
school superintendents more experienced in public safety or student
achievement than municipal finance.
If the proposal takes effect, Mr. King said "it'll be a whole
lot easier because now we can directly contact these folks."
The SEC is seeking comments on the proposal by Dec. 9.
Write to Heather Gillers at firstname.lastname@example.org
(END) Dow Jones Newswires
November 13, 2019 08:06 ET (13:06 GMT)
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