A federal court must decide whether a lawsuit targeting an expired exemption for municipal advisors working on private placement deals should go forward following a filing by a broker-dealer group concerned that the issue could persist.
The Securities Industry and Financial Markets Association filed a brief late Monday with a federal court in Washington D.C., arguing that its litigation against the Securities and Exchange Commission’s temporary conditional exemption (TCE) for MAs remains relevant. The TCE expired at the end of December, and the SEC previously told the court that the lawsuit should be dismissed.
“The commission argues that the expiration of the 2020 order on December 31, 2020 renders this case moot,” SIFMA said. “But as SIFMA has shown in its opening brief, and reiterates here, this case is not moot both because the controversy raised is capable of repetition yet evading review and because the commission’s voluntary decisions caused the termination of the 2020 order and the commission has offered no evidence to suggest that it does not intend to resume its challenged actions.”
In a January brief, the SEC said the TCE was created to complement the Federal Reserve’s Municipal Liquidity Facility, which also expired on Dec. 31, 2021.
The MLF was created to lend to states and local governments on a short-term basis. The Federal Reserve can’t reestablish the MLF and use it again in 2021 due to a provision included , but federal law still allows it to create other, similar programs.
There is “ample likelihood” that the MLF will be restored in 2021, SIFMA said, creating the same basis for a complementary temporary exemption to accompany it.
During Treasury Secretary Janet Yellen’s confirmation early this year, Yellen said she supported and would pursue actions that deliver needed aid to state and local governments when asking specifically about reimplementing the MLF.
The HEROES Act, passed by the House of Representatives in May, included a provision that would have kept the MLF operational until Dec. 31, 2021. The bill did not gain Senate approval, and would need to be reintroduced in the new Congress that began last month.
SIFMA told the court that possibility of Congress reviving the MLF illustrated the continued relevance of its lawsuit.
“And given the commission’s claim that the 2020 order was designed to supplement the original MLF, there is a corresponding likelihood that the commission will issue another exemptive order to supplement a renewed MLF in 2021,” SIFMA said in its court filing. “This is particularly true in light of the commission’s failure to represent to the court that the 2020 order will not be reinstituted.”
The SEC could also decide to act on a broader, more permanent exemption for muni advisors doing private placement deals — that was proposed but not further pursued in 2019. SIFMA has argued that could be a possibility.
The terms of the TCE and the 2019 order were different. The TCE was much more limited and included limitations such as a $20 million cap on the size of the deal.
“Although this 2019 proposed order depended on a different rationale, the commission’s promulgation of it demonstrates the commission’s predisposition towards employing such a municipal-advisor exemption to remedy any kind of perceived economic need or exigency—whether the COVID-19 pandemic itself, the likely later-resulting economic fallout from it, or something else entirely,” SIFMA said.
The SEC might alternatively decide to issue to issue another temporary order. SIFMA’s brief cited legal precedent that the suit is still relevant as long as the challenged action is too short in duration to be fully litigated before the order expires and that there is a reasonable expectation that the SEC could make another similar order.
In its brief, SIFMA said both of those conditions were satisfied. The SEC has argued that issues raised in regards to the 2020 order will not necessarily involve a duration shorter than two years, so the case should be dismissed.
SIFMA’s broker-dealer members have a legal standing to challenge the TCE under the “competitor standing” doctrine, SIFMA argued. That doctrine says a market participant can challenge agency action when a regulatory change increases economic competition.
“This case straightforwardly satisfies that test,” SIFMA said. “The 2020 order lifts regulatory restrictions on municipal advisors, authorizing them to compete with broker-dealers in the market for solicitation activities connected with the issuance of municipal securities.”
The SEC did not respond to a request for comment. SIFMA declined to comment further.
