SEC Director Warns Advisors on Deal Structures in a Low-Issuance Muni Market

Director of the SEC Office of Municipal Securities Dave A. Sanchez raised supervisory concerns over evolving deal structures amid low issuance in the municipal securities market.

At a compliance conference hosted by the SEC, FINRA and the MSRB, Director Sanchez identified the following areas of concern which are prompting greater regulatory scrutiny:

• Deal Structures and Advisory Practices: Municipal advisors must uphold their fiduciary duty to ensure that recommendations to borrow are well-founded and based on accurate information.
• Questionable Deal Structures: The reemergence of certain deal structures, including certain housing deals and taxable forward refunding and tenders with questionable underlying economics, which may indicate a potential lapse in the responsibilities of gatekeepers, including municipal advisors, broker-dealers and attorneys.
• Choice of Negotiated Sales: An increase in the number of municipal entities choosing to do negotiated sales without proper exploration of alternatives; (explaining that negotiated sales consistently yield inferior pricing and higher costs).
• Unregistered Entities and Activities: An increase in the number of unregistered entities engaging in municipal advisory activities, including P3 advisors, attorneys and other participants.

Director Sanchez emphasized the importance of regulatory clarity, simplified rules, and ongoing supervision over filings, procedures and compliance with Series 50 and Series 54 exams. He also highlighted the significance of complete, fair and accurate disclosure, particularly in the context of cybersecurity and the role of municipal advisors and broker-dealers in ensuring comprehensive environmental disclosure. Mr. Sanchez reminded regulated entities that there are "guardrails in place" to help resolve most of these concerns.