Direct purchases and bank loans to state and local governmentscould potentially be classified as municipal securities, the Municipal SecuritiesRulemaking Board and the Financial Industry Regulatory Authority said in an April4 joint regulatory notice.
Both regulators say state and local governments are increasinglybypassing the municipalsecurities markets through direct purchases of munis and receiving bank loans. "Simplylabeling a financing as a 'loan' is not dispositive of whether it is a loan or asecurity," the notice stated.
The agencies are concerned firms connected with alternative financingsare not "conducting sufficient due diligence and analysis to determine whetherthe financing instruments are municipal securities or bank loans even where thefinancing instrument is described as a 'loan.'" In addition, firms may notfully understand their roles in the transactions and may not have considered thelaws and regulations that apply to those transactions, the regulatory notice stated.
Firms that want to participate in alternative financings needto conduct due diligence to ensure the transactions are compliant with FINRA andMSRB rules and federal securities laws, the notice said.
The MSRB askedfor comment on a proposal regarding public access to information on muni loans madeby banks in a March 28 press release. While the regulator already asks municipalitiesand banks to voluntarily publish the terms and conditions of such loans on its website,it is considering requiring municipal advisers to disclose financings to the board.