Sep. 20, 2019
I am chair of the Legislative Committee of the California Municipal Treasurers Association (“CMTA”).
On behalf of CMTA, which represents California cities, counties, and special districts, I wish to offer the following comments with respect to questions 20, 21, and 25 of Securities and Exchange Commission (“SEC”) File No. S7-08-19, entitled “Concept Release on Harmonization of Securities Offering Exemptions”.
20. Should we change the definition of accredited investor or retain the current definition? If we make changes to the definition, should the changes be consistent with any of the recommendations contained in the Accredited Investor Staff Report? Have there been any relevant developments since the 2015 issuance of the Accredited Investor Staff Report, such as changes to the size or attributes of the pool of persons that may qualify as accredited investors; developments in the market or industry that may assist in potentially identifying new categories of individuals that may qualify as accredited investors; or changes in the risk profile, incidence of fraud, or other investor protection concerns in offerings involving accredited investors that we should consider? How do those changes affect investors, issuers, and other market participants?
The California Municipal Treasurers Association recommends that the SEC change the definition of “accredited investor” by expanding it to include selected state and local governments. The impetus for this change is the virtual collapse of the high-quality Section 3(a)3 commercial paper market due to the mass conversion of high-quality 3(a)3 commercial paper issuance programs, which state and local governments can buy, into Section 4(a)(2) commercial paper issuance programs, which state and local governments cannot buy. Corporate issuers favor the latter because of lower issuance costs. This market development has happened since the 2015 issuance of the Accredited Investor Staff Report.
Public investment officers are now left with four choices: 1) abandon the commercial paper market; 2) buy high-quality 4(a)(2) paper and risk criminal prosecution; 3) buy lower-quality 3(a)3 commercial paper which has greater liquidity risk and default risk ; or 4) seek a “No Action” letter from the SEC on an agency-by-agency basis, a time-consuming and expensive undertaking.
The California State Treasurer’s Office (“STO”) estimates that state and local governments currently cannot buy 80 percent of all outstanding commercial paper issuance because it has been issued under Section 4(a)(2). The STO also believes that the high-quality 3(a)3 corporate medium-term note market will eventually disappear under similar circumstances.
Under the existing regulatory framework, state and local governments will ultimately be unable to buy any high-quality corporate debt securities. CMTA is therefore requesting that the SEC provide state and local governments with access to the 4(a)(2) corporate debt market so that they can continue to buy corporate debt securities. If such access is granted, then many state and local governments will want to buy restricted securities on resale through their authorized broker-dealers (which could serve as fraud filters). This means that selected state and local governments would also need to be classified as “qualified institutional buyers (“QIBs”)” under Rule 144A.
21. Should we revise the financial threshold requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors? If so, should we consider any of the following approaches to address concerns about how the current definition identifies accredited investor natural persons and entities:
· Revise the definition as it applies to entities with total assets in excess of $5 million by replacing the $5 million assets test within a $5 million investments test and including all entities rather than specifically enumerated types of entities;
The California Municipal Treasurers Association believes that the SEC should adopt a financial threshold of $100 million of assets under management in order for state and local governments to qualify as accredited investors. That is the current test for financial service companies under Rule 144A. The SEC should also require that state and local governments can only qualify as accredited investors if they are authorized to buy corporate debt securities under their respective state and local laws.
In California, public investment portfolios of $100 million or more are typically managed by either a full-time public investment officer or a registered investment advisor. If managed by a public investment officer, then the officer normally has an undergraduate business degree, if not a master’s degree in business administration (“MBA”). An increasing number of California public investment officers who manage investment portfolios of $1 billion or more also hold the chartered financial analyst (“CFA”) designation. There is also a trend in this segment of hiring fixed-income brokers from the private sector as public investment officers.
The California Municipal Treasurers Association, the California Association of County Treasurers and Tax Collectors (“CACTTC”), the State of California Debt and Investment Advisory Commission (“CDIAC”), and the Government Investment Officers Association (“GIOA”) provide treasury training so that California public investment officers are knowledgeable and up-to-date on best practices.
The practical effect of granting state and local governments accredited investor/QIB status would be limited in scope. In rural states, such as Idaho, only the state treasury, and perhaps the capitol city and capitol county treasuries would typically meet the $100 million threshold that CMTA is proposing. In other states, such as New York, local governments are not authorized to buy corporate debt securities under state law.
25. Are there other changes to the definition that we should consider when harmonizing our exempt offering rules? For example, should we amend Rule 501(a)(3) to expand the types of entities that may qualify as accredited investors? If so, what types of entities should be included? Should we consider amendments to apply an investment-owned standard, or other alternative standard for entities to qualify as accredited investors?
As indicated in the responses to questions 20 and 21, the California Municipal Treasurers Association believes that Rule 501(a)(3) should be amended to include state and local governments that have at $100 million of assets under management and that are authorized under their respective state and local laws to buy corporate debt securities.
Respectfully,
Thomas Metz, J.D., M.B.A.
Deputy City Treasurer
[redacted]
www.cityofpalmdesert.org
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