WASHINGTON (Reuters) - Growing use of private placements to sell U.S. municipal bonds is generating confusion about securities regulations and dealers and advisers could inadvertently break the law, the board that writes the rules for the bond market said on Wednesday.
When issuers sell bonds through private placements they bypass the traditional routes of offering their debt publicly to the market, either through negotiated or competitive sales.
The Municipal Securities Rulemaking Board said financial advisers to state and local governments on the sales could be considered placement agents, which would trigger certain legal requirements.
It also warned that financings called "bank loans" may be private placements, which would make those involved subject to MSRB rules, as well.
"Private placements of municipal securities are on the rise and it is critical that financial advisers determine whether their activities require registration with the Securities and Exchange Commission as a broker to avoid inadvertent violations of relevant securities laws," MSRB Executive Director Lynnette Kelly Hotchkiss said in a statement.
Essentially, the advisers would have to follow rules governing broker-dealer behavior, such as the reporting of underwriting and disclosing of political contributions.
The MSRB, a self-regulatory organization composed of issuers, bankers and advisers, writes the rules for the market that the Securities and Exchange Commission enforces.
The financial overhaul law passed last year known as Dodd-Frank for its congressional authors tightened regulation of financial advisers to states and local governments, requiring them to act as fiduciaries. Since then, the MSRB and SEC have worked to define exactly who counts as a financial adviser and how existing rules may apply to them.
The SEC will likely approve a final definition of advisers this fall, Hotchkiss told reporters earlier this week.
Before 2000, the SEC allowed firms to introduce issuers to investors and receive transaction-based compensation in private placements without registering as broker-dealers. But, the advent of the internet allowed "more and different types of persons to become involved," and changed oversight of placement agents, the MSRB said.
(Reporting by Lisa Lambert; Editing by Andrew Hay)