SEC temporary relief for MAs process is unfounded, lawmaker says

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Some lawmakers believe the Securities and Exchange Commission should have used traditional rulemaking instead of exemptive relief in allowing municipal advisors to arrange certain private placement deals without registering as broker-dealers.

Rep. French Hill, R-Ark., expressed that belief during a House Financial Services Committee subcommittee hearing Thursday afternoon. The SEC said when making the announcement last week that the temporary order would allow more timely and efficient access to bank financing alternatives by issuers during coronavirus related market disruption.

SEC Chair Jay Clayton said the SEC's actions on temporary relief for MAs to participate in some private placement deals without registering as a broker-dealer were appropriate.

SEC Chair Jay Clayton, who was testifying before the panel, said last week that 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.

However, Hill does not see the order’s use as an emergency situation.

“I view this more as a wolf in COVID sheep clothing in terms of using the pandemic to justify its rationale,” Hill said.

Clayton said the SEC’s actions were appropriate.

“It’s very narrow," Clayton said. "This was something that was contemplated and it’s temporary. It would be my expectation that if this were done on anything like a permanent basis, or in any broader scope, that there would be an opportunity for notice.”

The temporary order was narrowed compared to a similar exemptive order in October. The SEC has said it was not moving forward with that exemption currently.

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.

Bond dealer groups were pleased to see those restrictions, but have opposed the relief order from the beginning. The Bond Dealers of America said last week said the SEC recognized its concerns that an initial similar proposed order from last year would not protect the interests of investors.

The municipal securities market is also functioning well due to work from the Federal Reserve and Treasury, Hill said.

“I see no lack of access for state and local governments to reach the market through traditional means,” Hill said. “In fact, all of the month of June has seen capital inflows an all the tax-exempt bond funds.”

MAs that use the temporary exemption must provide notice to staff in the SEC Division of Trading and Markets. Hill asked if that information would be made public, and Clayton said he was committed to considering whether that information would be made publicly available.

MAs called the SEC’s temporary order a “step forward” last week. The National Association of Municipal Advisors said MAs should be able to assess and assist their clients with all direct placement transactions.

Broker-dealers were largely disappointed saying that the SEC should not permit MAs to act as placement agents without registering as broker-dealers.

BDA said current market conditions did not warrant relief for MAs.

The American Securities Association said the SEC ignored its legal obligations under APA, saying it should have gotten public comment.

In a Thursday press release, ASA urged the House Financial Services committee to curtail the SEC.

“As the country battles the COVID-19 pandemic, broker-dealers have continued to serve municipalities of all sizes and maintained their critical role of providing liquidity to cities and communities across America,” wrote Chris Iacovella, ASA CEO. “But alarmingly and without any due process, the SEC recently put its finger on the scales of the municipal market to enact a deregulatory order allowing unregistered firms without any capital to act as broker-dealers, essentially picking winners and losers."

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Coronavirus Washington DC SEC regulations Broker dealers Municipal advisors