For a market based on self-regulation and tax-exemption, regulation and political crossfire are nothing new, but show no signs of abating either – apart from “regulation by enforcement” and the hyper-politicization of the Securities and Exchange Commission. See nothing else. Environmental, social and governance investment 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.
Jim Reynolds, Jr., CEO of Loop Capital Markets, said the politicization of ESG in the municipal market is “absolutely bizarre.”
Loop Capital Markets
With over 350 years of experience between them, the panelists reflected on market changes and challenges over the decades.
The SEC’s “troubling trend” of enforcement without clear guidance tops the troubling list.
Over the past approximately 18 months, the SEC has taken seven enforcement actions against underwriters for violations of so-called limited offering rules. It’s “regulation by enforcement,” said Margaret “Peg” Henry, legal head of the municipal securities group at Stifel. Henry said that the SEC’s Municipal Continuous Disclosure Cooperation Initiative from 2014 to 2016 was the unpopular “pioneer” for the pattern.
Henry said, “You can have your opinion if these enforcements were appropriate, but this is a troubling trend that I have seen repeatedly since MCDC.”
Frank Fairman, the longtime head of public finance at Piper Sandler, acknowledged that some regulations over the past few years have been positive.
“Taking the political contribution element out of this business was a huge task that required regulation,” Fairman said. But other measures have proven overly restrictive.
“I’m concerned that self-regulation is under attack — maybe from Congress, maybe from the SEC — and it’s very important for this industry to maintain self-regulation; we better do it,” he said.
Howard Zucker, managing partner of Hawkins Delafield & Wood LLP, said SEC investigations vary depending on the chairman.
“It’s incredible how much a chair’s tenure impacts the SEC,” Zucker said, “The jury is still out on whether [current SEC Chair Gary Gensler] It takes a heavy toll on Munis.”
The head of the SEC’s Municipal Securities Office, David Sanchez, who is a veteran of the muni market, will likely “work very hard to get useful guidance to our industry,” Zucker said.
Considering the role of ESG factors in investing, panelists lamented the fact that municipal bonds, which many see as inherently green, have become mired in partisan culture wars. Part of the problem is the blurring of the lines between ESG-related disclosures, the debate over labeled bonds, and legislation seeking to punish companies that Republicans deem overly “woke.”
Jim Reynolds, Jr. of Loop Capital Markets said it should be the investor who decides whether to buy an ESG-related bond, even if it means taking a loss.
“If the city of Chicago issued $100 million of bonds to fight gang violence and all the money was going into that, I would take the yield 50 basis points lower, and I think a lot of people would do that, and I need that.” There’s not one politician saying Chicago can’t issue that debt,” Reynolds said.
Reynolds, who is also chairman of the board of the Securities Industry and Financial Markets Association, said the association sued Missouri last month to try to block its new ESG-related rule.
The politicization of the issue is “absolutely 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 composition of the market’s buyer base over the past few years has its own dangers, Carey said.
“It’s a feast or famine market,” he said. “You get outflows from big companies, and the streets are full and the market goes up.” “How are we going to pay for all this infrastructure if we start having outflows?” Carrie asked. “If we start to see heavy supply, the market won’t be able to handle it.”