Dealers condemn, non-dealer MAs cheer SEC proposal

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The SEC is opening a request for comment for exemptive relief for municipal advisors to be involved in some private placement activities, immediately drawing pushback from broker-dealer groups who called the proposal overly broad and "troubling."

Following the SEC’s announcement late Wednesday night, participants at Thursday’s National Association of Municipal Advisors conference were outwardly elated by the request for comment. The SEC’s proposal would give relief to registered MAs to act in certain limited activities in connection with private placements without registering as a broker-dealer, said Rebecca Olsen, director of the SEC’s Office of Municipal Securities.

“The commission preliminarily believes that there are certain limited circumstances in which a registered MA should be able to solicit investors in connection with the direct placement of municipal securities by its municipal entity or obligated person client without requiring to be registered as a broker-dealer,” Olsen said.

This follows a letter sent to the SEC from PFM, a large MA firm, in 2018 asking for interpretive guidance on some private placement activities. That letter and several more written by NAMA and broker-dealer groups are part of a years-long debate about the proper roles of MAs and broker-dealers in private placements.

The SEC had been receiving questions since 2014 asking them to clarify whether an MA engaging in certain activities to facilitate a private placement would be required to register as a broker-dealer, Olsen said.

The SEC noted that it had not previously addressed whether and under what circumstances an MA may interact or negotiate with potential investors on behalf of its client without being required to register as a broker in direct placement deals.

To qualify for an exemption from dealer registration under the SEC proposal, the MA would have to make written disclosures to an investor saying that it represents the interests of the issuer, not the investor. In return, the MA would have to get written acknowledgment of that disclosure from the investor.

The MA would also need to get written representation from the investor that they are capable of independently evaluating the investment risks of the transaction. Also the entire issuance would have to be placed with a single investor and the MA would have to continue to comply with regulations governing municipal advisors.

The relief would not apply to deals sold to retail investors, Olsen said.

Among other questions on the proposal, the SEC is interested in hearing if private placements are a buy and hold market and curious to see where they end up in the secondary market, Olsen said.

Olsen also reminded conference attendees that the SEC would not have jurisdiction over MAs working with a loan, as it does with a security. The difference between the two has long been a point of confusion in the market. Participants can use the Reves Test, a legal analysis to determine whether an obligation is a loan or a security, but Olsen said the market has a more conservative lean to determine it as a security.

The SEC relief concerns the Bond Dealers of America because of its lack of investor protections, BDA CEO Mike Nicholas said.

“We are particularly troubled by the broad scope of the proposal, especially given zero public policy reason for adoption,” Nicholas said. “Non-dealer MAs have minimal regulatory obligation to investors. Rather than limit the relief to transactions that resemble bank loans, the exemptive relief as drafted would permit non-dealer MAs to very broadly market municipal securities to nearly any institutional investor.”

Congress will be troubled by the proposal, Nicholas said, and BDA urges the SEC to “substantially amend” the proposal before finalizing it. BDA plans to provide specific recommendations in its comment letter.

The Securities Industry and Financial Markets Association also had a strong negative reaction to the proposal, which the group said appears to be "eroding the broker-dealer regulatory framework."

"This request distracts from the common practices of some non-dealer MAs of flouting existing broker-dealer regulatory requirements," said Leslie Norwood, SIFMA's head of municipals. "Municipal advisor regulation and the Series 50 (examination) does not cover protecting investors. Further, the proposed relief favors non-dealer municipal advisors over dealer municipal advisors, furthering an un-level playing field. The SEC has previously viewed serving as a municipal advisor and placement agent as an unmitigable conflict of interest related to issuer protection. If municipal advisors are granted an exemption to broker dealer registration when acting as a placement agent, there are numerous negative ramifications for investors without issuers saving costs.”

The National Association of Municipal Advisors looks forward to responding to the proposal, said Susan Gaffney, NAMA executive director.

“It is especially important that MAs be in the room and help state and local governments engage in a contract that is best for their jurisdiction,” Gaffney said.

The Government Finance Officers Association plans to comment on the proposal.

“The GFOA has long advocated for substantive development of the municipal advisor rule in order to enhance the advice and fiduciary duty the profession provides to their issuer clients,” said Emily Brock, director of GFOA’s federal liaison center. “In this proposal, the SEC seems to have considered several safeguards together with an expanded role of the MA in the broker regulatory framework.”

The proposal will be open to comment for 60 days after it is printed in the Federal Register.

Olsen also announced that her office recently added three new attorneys — Emily Hanson Santana formerly of PMA Securities, Mark Stewart was at North American Securities, and Ernesto Lanza previously of the Clark Hill law firm.

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