That “loan” may be a “bond”
In a groundbreaking announcement, the Municipal Securities Rulemaking Board (MSRB) has advised municipal bond market participants that many “bank loans” currently being structured for state and local governments are likely to be classified as municipal securities, even though these “bank loans” are often being privately placed.
In the market advisory the MSRB makes reference to the Exchange Act and a landmark Supreme Court case about the definition of a “security.” From the MSRB:
Many loans are evidenced by notes. Section 3(a)(10) of the Exchange Act includes “notes” within the definition of “security.” The principal legal authority on the distinction between a note that is a security from one that is not is the U.S. Supreme Court case of Reves v. Ernst & Young, Inc. A note is presumed to be a security under the Supreme Court’s opinion in Reves unless it is of a type specifically identified as a non-security.
If a financial transaction is a “municipal security” then market participants must follow MSRB rules that apply to broker-dealers, which include the following:
Broker-dealers must pay assessments on underwritings and placements of municipal securities
Broker-dealers engaged in municipal securities activities must pass qualifying exams
Broker-dealers must report purchases and sales of municipal securities
There is a duty of fair dealing on broker-dealers and municipal advisors
Broker-dealers must obtain CUSIP numbers for municipal securities issues
Broker-dealers are banned from engaging in municipal securities business for two years following non-de minimis political contributions to certain “issuer officials”
Given all the oversight that the MSRB exercises when municipal bonds are issued and traded it’s easy to see why banks and broker-dealers were trying to escape oversight by structuring “bank loans” for municipal issuers. This market advisory is a very strong assertion of authority by the MSRB and effectively creates many protections for issuers and investors. The advisory will help illuminate the disclosure requirements and order of priority for municipal loan and bond investors. Outstanding regulatory effort by the MSRB. Kudos!