BDA makes last effort to limit MA exemptive order

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The Bond Dealers of America is making a final push to limit the scope of a new order to give municipal advisors more leeway to facilitate private placements, through furnishing the Securities and Exchange Commission with a long list of requests this week.

In a letter sent to the SEC on Tuesday, the group said it wants to narrow the SEC’s proposed relief order through a variety of conditions such specifying the types of municipal entities that could participate in MA-led private placements. Dealers have fiercely opposed the proposed exemptive relief from the beginning.

“BDA remains opposed to the proposed exemptive order and we continue to urge the commission to reject the proposal outright,” said Mike Nicholas, BDA’s CEO. “Inspired by our conversations, however, BDA members recently revisited elements of our comment letter filed in December with an eye towards refining some of the criteria and conditions we specified for a scaled down approach to the issues covered in the proposal.”

An industry participant told The Bond Buyer late last year that the SEC was leaning towards some form of relief for MAs.

The SEC released a proposed exemptive order in October that would allow MAs to participate in some private placement activities without registering as a broker-dealer. Stakeholders commented on the proposal in December.

The controversy originally stems from whether or not municipal advisors are becoming de facto placement agents in some private placement deals, essentially selling the bonds to investors on behalf of their municipal clients. Regulators have said they consider placement agent activity to be the realm of broker-dealers.

PFM, a large non-dealer MA firm, requested from the SEC guidance in 2018 concluding that the firm would not need to register as a broker-dealer to engage in certain activities when advising on a private placement of municipal bonds.

Among BDA’s 12 requests, they want MAs to represent a municipal entity and not a conduit borrower or obligated person. In BDA’s December letter, the group pointed out that MAs do not have a fiduciary duty to obligated persons as they do to municipal entities.

The BDA also wants MAs to disclose in writing to each solicited bank that no broker-dealer was involved in the private placement and that the MA had not conducted “a due diligence investigation on behalf of investors.” BDA also wants MAs to have to disclose to the buyer that the MA only represents the issuer.

BDA also wants the SEC to add a condition that the MA would inform the issuer in writing that they can choose to work with a dealer placement agent on that transaction and that the dealer may have access to a broader network of potential investors.

Banks should, at the time of issuance, intend to hold the securities until maturity, redemption or mandatory tender, BDA said.

The SEC should also limit the scope of the proposal to small issuers or small issues, BDA said. The group said smaller issuers have a more difficult time accessing the capital markets and are not “covered” by as many underwriters and MAs.

BDA also referenced municipal bond rule changes that would need to happen if the order went through.

If the proposal were to go through as written, the Municipal Securities Rulemaking Board has said they would need to consider changes to a handful of its rules, including G-17 on fair dealing and G-32 on disclosures in primary offerings.

“If the Commission moves forward with the exemptive order, we urge you to provide an effective date simultaneous with the MSRB finalizing the appropriate conforming rule changes,” Nicholas said to the SEC.

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Municipal advisors Broker dealers SEC regulations MSRB rules MSRB SEC BDA Washington DC