MSRB lawyer weighs in on muni advisor loyalties when conducting private placements

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The Municipal Securities Rulemaking Board’s assistant general counsel said Friday municipal advisors’ loyalties lie with their issuer clients when using an exemption that allows MAs to arrange certain private placement deals without registering as broker-dealers.

During a National Association of Bond Lawyers virtual conference, MSRB Director of Market Regulation David Hodapp was asked what duties an MA has to an investor. This is an especially timely topic following the Securities and Exchange Commission’s temporary exemption announced in June that will last until the end of the year that allows MAs to engage in certain solicitations on behalf of their issuer clients.

David Hodapp, the Municipal Securities Rulemaking Board's assistant general counsel, spoke Friday during the National Association of Bond Lawyers' online conference.

MSRB fair dealing rules apply to both dealers and municipal advisors in all their activities.

“It’s different in the context of an MA,” Hodapp said. “It has a fair dealing obligation to an investor and it has a fiduciary duty to the issuer client. Generally speaking that fiduciary duty would trump what would be the fair dealing obligation.”

The MA doesn’t have an obligation to produce a price to an investor, Hodapp added. Underwriters are obligated to produce a price under MSRB Rule G-30, on prices and commissions, and MSRB Rule G-17 on fair dealing.

The MSRB has not spoken specifically about the relationship between MAs and investors, Hodapp emphasized.

“The umbrella answer is that the MA has a fair dealing obligation to the investor,” Hodapp said. “That obligation again — don’t lie, don’t cheat, don’t steal — is a little different than the underwriter.”

When the SEC originally proposed a more permanent exemptive order in October 2019, the MSRB wrote in a comment letter that it was concerned that the benefits of the order to issuers could be outweighed by the detrimental impact to market transparency and collateral consequences for retail investors.

“The MSRB believes that a registered municipal advisor who, without the participation of a registered dealer, places municipal securities directly with a qualified provider should be required to comply with MSRB rules necessary and appropriate to foster market transparency,” the board wrote last year.

The MSRB had also said several of its rules would need to be amended to protect investors.

The SEC has said it is not moving forward with the permanent exemptive order for the time being.

As of the end of July, the temporary exemption was lightly used. From June 16 to July 31, two issuers relied on the temporary exemption for a total of three issuances. 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.

Sources expect those numbers to remain low.

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 “unlevel playing field” benefitting non-dealer MAs at the expense of dealer firms.

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