For a market anchored by self-regulation and tax-exemption, creeping regulation and political crossfire are nothing new, but also show no sign of abating — look no further than the Securities and Exchange Commission’s “regulation by enforcement” and the hyper-politicization of environmental, social and governance investing factors.
That’s the message from a group of municipal market veterans, speaking during a “Hall of Fame” panel Wednesday during The Bond Buyer’s second annual infrastructure conference.
Loop Capital Markets
With more than 350 years of experience between them, the panelists weighed in on market changes and challenges over the decades.
The SEC’s “disturbing trend” of enforcement without clear guidance topped the list of irritants.
Over the last roughly 18 months, the SEC has brought seven enforcement actions against underwriters for violations of so-called limited offering rules. That’s “regulation by enforcement,” said Margaret “Peg” Henry, head of legal for the municipal securities group at Stifel. The SEC’s Municipalities Continuing Disclosure Cooperation initiative from 2014 to 2016 was the unpopular “forerunner” to the pattern, Henry said.
“You can have your own views if these enforcements were justified,” Henry said, “but it’s a disturbing trend which I have seen time and time again since MCDC.”
Some regulations over the years have been positive, acknowledged Frank Fairman, the longtime head of public finance at Piper Sandler.
“Taking the political contribution element out of this business was huge, that was regulation that was needed,” Fairman said. But other moves have proved overly restrictive.
“I do worry that self-regulation is under attack — maybe from Congress, maybe the SEC — and it’s very important for this industry to maintain self-regulation; we do it better,” he said.
The SEC’s scrutiny has varied depending on the chair, said Howard Zucker, managing partner at Hawkins Delafield & Wood LLP.
“It’s incredible how much a chairman’s tenure affects the SEC,” Zucker said, adding that the “jury is still out on whether [current SEC Chair Gary Gensler] weighs in on munis.”
The SEC’s head of Office of Municipal Securities, David Sanchez, a muni market veteran, will likely “try very hard to get out useful guidance for our industry,” Zucker added.
Weighing in on the role of ESG factors in investing, panelists lamented the fact that municipal bonds, which many see as inherently green, have gotten caught up in the partisan culture wars. Part of the problem is a blurring of the lines between ESG-related disclosure, the debate over labeled bonds, and legislation seeking to penalize firms Republicans see as overly “woke.”
The investor should be the one who decides whether to buy an ESG-related bond, even if it means a loss, said Loop Capital Market’s Jim Reynolds, Jr.
“If the city of Chicago issued $100 million of bonds to fight gang violence and all the money is going to that, I’d take 50 basis points less yield, and I think a whole lot of people would, and I don’t need a politician to say Chicago can’t issue that debt,” Reynolds said.
Reynolds, who also chairs the Securities Industry and Financial Markets Association’s board, noted that the association sued Missouri last month to try to halt its new ESG-related rule.
The politicization of the issue is “just bizarre,” Reynolds said.
The ESG debate is “not a healthy thing for the market,” said Greg Carey, chairman of public finance at Goldman Sachs & Co. and co-head of the firm’s Global Sports Finance business.
Beyond trends like ESG and regulation, the changing structure of the market’s buyer base over the years carries its own threats, Carey said.
“It’s a feast or famine market,” he said. “You get outflows from the big firms, and the street is full and the market throws up,” he said. “How the hell are we going to pay for all this infrastructure that has to be done if we start having outflows?” Carey asked. “If we start seeing huge supply, the market just can’t handle it.”