Municipal advisors will be temporarily allowed to arrange certain private placement deals without needing to register as a broker-dealer, much to dealers’ dismay — a big development coming from the Securities and Exchange Commission as it reacts to market shifts due to the pandemic.
SEC Chair Clayton made that announcement during the SEC’s one-day muni disclosure conference Tuesday. The exemptive order will be put into place until the end of the year. The conference was originally set for March but was postponed and held via webcast due to the pandemic.
“In light of market conditions and to facilitate timely and efficient access by smaller municipal issuers to capital, the commission issued today an
Clayton said many issuers face declining revenue or delays in collecting it, and face increased nonbudgeted costs as a result of COVID-19. Thus issuers have turned to private placements as a source of liquidity. The order would allow more timely and efficient access to bank financing alternatives by issuers during COVID-19 related market disruption, the SEC wrote in the order.
The relief would permit MA’s to engage in certain solicitations on behalf of issuer clients.
“A key purpose of the relief is to aid smaller municipal issuers and, accordingly, relief is only available in connection with a direct placement in the aggregate principal amount of $20 million or less,” Clayton said.
Dealers were not pleased by the SEC’s news.
The Securities Industry and Financial Markets Association voiced their disappointment.
“This exemption is in contravention of longstanding and well-established legal principles, SEC guidance and Municipal Securities Rulemaking Board rules,” said Leslie Norwood, managing director, associate general counsel and head of SIFMA’s municipal securities division. “We continue to believe, as we have for years, the SEC should not permit municipal advisors to act as placement agents without registering as broker-dealers.”
The American Securities Association said the SEC ignored its legal obligations under the Administrative Procedure Act — which governs the process by which agencies develop and issue regulations.
“It (SEC) cannot decide unilaterally without public comment to give preferential treatment to certain favored actors, it must go through a formal rulemaking if it wants to change who needs to register as a broker-dealer to engage in broker-dealer activities and who does not,” said Chris Iacovella, ASA CEO.
The Bond Dealers of America disagreed with the SEC’s order, saying current market conditions did not warrant the relief for MAs.
“However this order is temporary, very limited in scope, and has many restrictions, echoing the advocacy of BDA and BDA members over the past year,” said Mike Nicholas, BDA CEO. “Importantly, the SEC recognized BDA’s consistent concern that the initially proposed order would not protect the interests of investors.”
The temporary exemption is subject to a variety of conditions to protect investors such as the MAs notifying both parties that they represent the issuer and limiting the direct placement to not exceed $20 million.
The order also states MAs must also note that the bank or credit union may want to engage the services of a broker-dealer.
Muni advisors called the SEC’s emergency order “a step forward.”
“The order is a step forward in ensuring that MAs can provide this advice without concern that their MA services are considered broker-dealer activity,” said Susan Gaffney, executive director at the National Association of Municipal Advisors. “MAs should be able to assess and assist their clients with all direct placement transactions, and we applaud the commission’s efforts and look forward to continued conversations on this matter.”
Dave Sanchez, senior counsel at Norton Rose Fulbright, said the SEC's design might not be the most conducive to gathering information about use of the exemption.
“The SEC designed the temporary order to help inform the final order with the benefit of real-life experience by requiring MA firms that utilize the temporary order to report that use to the Division of Trading and Markets,” Sanchez said. "However, firms will not feel comfortable reporting use of the temporary order to the SEC and the SEC needs to be very mindful of that going forward. Without that requirement the SEC might have actually received better 'testing' results from this temporary order."
Private placements, bank loans and lines of credit have
The SEC had proposed a similar exemptive order in October but noted that it was not moving forward with that exemption currently. That proposal did not include the $20 million cap on the size of the deal.
