Municipal advisors adamant on SEC's temporary exemption, despite lawsuit

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The Securities Industry and Financial Markets Association's lawsuit to invalidate the Securities and Exchange Commission’s temporary exemption allowing municipal advisors to facilitate private placement deals without registering as broker dealers has been embraced by other dealer interests and sparked confusion and concern among MAs.

On Friday, SIFMA filed suit in federal court in Washington D.C. asking the court to vacate the SEC’s temporary conditional exemption that is in effect until Dec. 31, 2020. The American Securities Association, representing broker-dealers, commended SIFMA’s move to sue.

“ASA supports the industry’s effort to stop the SEC’s misguided rewrite of decades-old broker-dealer regulation,” said Chris Iacovella, ASA CEO. “The American people deserve accountability and transparency from their government, not action that weakens investor protection rules and benefits favored companies."

SIFMA's complaint is not yet public.

Mike Nicholas, BDA CEO, wants the SEC's temporary conditional exemption to be indeed temporary.

Bond Dealers of America said it remains adamantly opposed to the SEC’s TCE.

“It remains our number one priority to ensure this order remains temporary and sunsets on December 31, 2020 and the BDA will continue to advocate in opposition to this regulatory overreach,” said Mike Nicholas, BDA CEO.

“We have not had the opportunity to review the complaint and therefore do not have the ability to respond appropriately,” said Susan Gaffney, National Association of Municipal Advisors executive director. “Generally though, NAMA has stated in numerous comment letters and venues, that MAs should have the ability to provide MA services to their clients, without concern that they are crossing the line into broker-dealer activity, which the order addresses.”

SIFMA’s lawsuit is unlikely to be resolved before the end of the year.

The SEC said the TCE would be a way to help smaller issuers that may be struggling to meet unexpected financing during the coronavirus pandemic. Before the order, the SEC had a similar proposed exemption, but chose not to move forward with it.

Other independent MAs were confused to see broker-dealer groups' reaction to the TCE.

“Municipal advisors just want to do their job advising their clients,” an independent MA said. “That’s it. I have no idea how SIFMA is in such a dither on this.”

“It’s (TCE) very narrow,” the independent MA later said. “I just don’t understand the intensity of the reaction from the broker-dealer community.”

The order includes a $20 million cap on the size of a deal arranged by a muni advisor who is not a registered broker-dealer, and limits participating "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. Debt must also be issued in denominations of $100,000 or more.

SIFMA said the order is not narrow and said the SEC failed to justify why its action was “consistent with the public interest and protection of investors,” since the SEC issued the order via its emergency authority and not through the public comment process.

“The market of deals under $20 million dollars that are securities offerings of bank loans that fall into this niche is not huge,” the independent MA said. “I don’t think you’re going to find thousands of filings with trading and markets. There is no MA that wants to be a broker-dealer. If we wanted to be a broker-dealer, we’d go be broker-dealers, but we do want to be able to work with our clients and give them the best possible information without constantly worrying that we’re going to do something that’s going to put us over the line and become a placement agent and that’s wrong.”

Muni advocacy could also be playing a hand in broker-dealers’ reaction to the TCE, the independent MA suggested. BDA has grown its membership drastically since its founding in 2008. SIFMA drew some criticism for seemingly dialing down its municipal effort following the decision to let go of its longtime muni lobbyist Michael Decker, who went on to work with BDA, but has been very involved in lobbying against the TCE.

This comes as ASA has come into the fold as a louder advocate for municipal broker-dealers.

“There’s this membership battle going on,” the independent MA said. “SIFMA who is sort of on the sidelines between BDA and ASA, all of a sudden SIFMA is filing the lawsuit.”

The independent MA said MAs don’t have money flowing through their firms like broker-dealer firms do.

“You’re selling intellectual capital as a municipal advisor,” the independent MA said. “There isn’t that huge base of money to throw at organizations on your behalf.”

A securities lawyer said SIFMA’s move on Friday was the latest example of broker-dealers objecting to an unlevel playing field in which independent advisors can compete with fewer restrictions or fewer expenses than dealers.

“At the end of the day it’s a pocketbook issue that from a broker-dealer standpoint will allow lower-cost competitors to get into the placement market,” the securities lawyer said.

Broker-dealers claim that the TCE is bad for investors because MAs would not be subject to legal and regulatory obligations that broker-dealers have to protect investors. MAs say it will allow issuers to do private placements less expensively since they would not have to hire a broker-dealer. Both sides have some truth to them, the securities lawyer said.

Next steps could be, if SIFMA hasn’t done so already, to get a court order to halt the TCE until its lawsuit with the SEC is complete. However that would be up to the court to decide, the securities lawyer said.

The SEC declined to comment on the lawsuit.

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