Pressed by Securities Industry and Financial Markets Association President and CEO Kenneth Bentsen about a proposal to allow municipal advisors to perform certain tasks in private placement deals, Securities and Exchange Commission Chair Jay Clayton declined to take sides and urged concerned dealers to comment.
At a SIFMA conference on Tuesday in Washington, Bentsen expressed his concerns about recent proposed exemptive relief for MAs, which broker-dealers object to because they view it as potentially endorsing MAs acting as unlicensed placement agents. MAs have said they are not trying to act as placement agents, but are only seeking the freedom to fulfill their legal mandates to act in the best interests of their clients.
“There’s a new proposal with respect to allowing municipal financial advisors as placement agents for private placement, which our industry is somewhat concerned about,” Bentsen told Clayton during an on-stage discussion between the two men. “We don’t quite see it squaring with where the Commission’s been.”
Clayton urged market participants to comment and told Bentsen that others believe the proposed order could save municipalities and investors money.
“But if people disagree with that, they should comment,” Clayton said.
SIFMA plans to submit comments, Bentsen said.
The SEC opened a request for comment in October, and comments are due Dec. 9. The proposal would allow registered MAs to act in certain limited activities in connection with private placements without registering as a broker-dealer.
"We feel very strongly that this (relief) would turn the tide on the SEC's regulations of investor protection and the Municipal Securities Rulemaking Board’s and SEC's drive to more transparency in the direct placement market,” said Leslie Norwood, a managing director, associate general counsel and head of municipals at SIFMA.
SIFMA’s primary concern is investor protection given that the relief is broad, Norwood said in an interview shortly after Bentsen's discussion with Clayton. Dealers are worried that investors would not be protected. MAs have a fiduciary duty to their issuer clients and not to investors, while dealers have a variety of legal and regulatory obligations to investors.
SIFMA plans to highlight in its comment letter that engaging in broker-dealer activity should be subject to the broker-dealer registration regime — including due diligence and fair dealing requirements on behalf of investors.
Norwood doesn’t believe issuers will see a reduction in fees if the exemptive relief is approved. Instead, municipal advisors acting as placement agents will get those fees instead of broker-dealers, Norwood said.
The proposed relief came following 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 the National Association of Municipal Advisors and by broker-dealer groups are part of a years-long debate about the proper roles of MAs and broker-dealers in private placements.
MAs want to be able to perform their MA duties and represent their clients without having that labeled as broker-dealer activity, NAMA has said. They are not asking for MAs to be able to perform broker-dealer activity without being registered, NAMA said.
To qualify for an exemption from dealer registration under the SEC proposal, an MA would have to make written disclosures to the investor saying that the MA 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.
Since October, both muni advisor and broker-dealer firms and groups have met with Clayton and SEC Commissioners to discuss the proposal.
Only one market participant has so far commented on the proposal. Tom Lawrence, a small financial advisor, said the exemption clarifies a murky area for firms that are registered only as an MA.
Norwood said it is too early to tell if the exemptive relief would be approved, but hoped if it were to move forward, that the relief would be limited.
