Few MAs rely on private placement relief
So far just three issuances relied on a temporary exemption the Securities and Exchange Commission gave to municipal advisors to arrange certain private placement deals without needing to register as broker-dealers.
During a National Association of Bond Lawyers conference Wednesday, Rebecca Olsen, director of the SEC’s Office of Municipal Securities, discussed data on the use of the temporary exemption. Though the numbers are just from the first 30 days since the announcement of the order on June 16, some sources suspect the temporary exemption will be lightly used.
From June 16 to July 31, two issuers relied on the temporary exemption for a total of three issuances. The data was posted in August and will be posted every couple of months. The lowest aggregate principal amount was for $169,150 and the highest was $967,630. The temporary exemption restricts the aggregate principal amount to $20 million or less.
It is still early on, said Dave Sanchez, senior counsel at Norton Rose Fulbright, adding it takes about three to four months for deals to close.
“Overall, I do think the numbers will be low because many municipal advisors have already worked out a process to do private placements without needing this exemption.” Sanchez said.
For example, an issuer can issue the request for proposal directly to a bank without the help of a broker-dealer and an MA would not be directly soliciting that bank.
The temporary exemption was put into place until the end of this year and allows MAs to engage in certain solicitations on behalf of issuer clients. At the time of the announcement, SEC Chair Jay Clayton said the temporary exemption was put in place because of market conditions and to facilitate timely and efficient access by smaller municipal issuers to capital in light of the pandemic.
Since the spread of COVID-19, issuers have turned to private placements, Clayton said.
The temporary exemption is subject to a variety of conditions to protect investors such as limiting qualified providers to banks, banks affiliated with credit unions and banks engaging in commercial lending and financing activities, such as an equipment lease financing corporation. MAs that use the temporary exemption must provide notice to staff in the SEC Division of Trading and Markets. That's where the data discussed by Olsen came from.
“The Commission has authorized the staff to periodically release this data on an anonymized and aggregated basis,” Olsen said during the NABL webinar.
Sanchez doesn’t think the temporary exemption will change the way MAs already do business.
“It’s not enough of an incentive for a temporary period but it would be if made permanent,” Sanchez said.
The SEC proposed a similar exemptive order last year that would have been permanent, but then said it was not moving forward with it for the time being.
The low numbers could also be due to the requirement to report to the SEC.
“Most folks are in the market — issuers, broker-dealers — anybody, they all have a fear of the SEC that may not be warranted, but it’s there,” Sanchez said. “They don’t necessarily trust how the SEC will use information. That applies across the board with most market participants. Anytime you have to send something to the SEC, it doesn’t make people feel comfortable.”
The National Association of Municipal Advisors is waiting on additional data.
“This is the first set of data, from a very limited time frame,” said Susan Gaffney, NAMA executive director. “Therefore, it will be important to monitor the information that the SEC collects as additional transactions are reported.”
An independent MA said he has a couple of deals using the temporary conditional exemption (TCE) which have not closed yet, and so therefore were not yet reported to the SEC.
“In those cases, the client wanted to use a local bank,” the independent MA said. “Without the TCE, our hands may have been unnecessarily tied. Or, the client may have been burdened with the extra expense of paying a ‘placement agent’ for providing no additional benefit to the local bank.”
The independent MA said he was not concerned about filing with the SEC. He expects more reporting later on.
Broker-dealers were largely disappointed when the temporary exemption was announced, saying that the SEC should not permit MAs to act as placement agents without registering as broker-dealers. Last month, the Securities Industry and Financial Markets Association brought a lawsuit against the SEC, arguing that the move was not subject to a proper regulatory procedure and creates an "uneven playing field" benefiting non-dealer MAs at the expense of dealer firms.
The amount of issuance in the first report, highlights that the temporary exemption was not needed, said Michael Decker, senior vice president of policy and research at the Bond Dealers of America.
“The market is functioning quite well,” Decker said. “Unless the market deteriorates in the future, issuers will continue to get more execution on new issues and don’t really need any change in rules to help them in that regard.”
Decker is hopeful that the SEC won’t extend the temporary exemption past the end of the year.
“I’m glad that it has not been widely used and that issuers are getting good primary market execution through the traditional issuance mechanisms and hopefully the fact that it hasn’t been widely used will discourage the SEC from extending the exemption beyond the Dec. 30 deadline,” Decker said.