More of the same from the SEC

by: Michael Decker
July 8, 2020

SEC and MSRB staff yesterday held a webinar to walk through the details of the unprecedented Temporary Conditional Exemption the Commission released on June 16. It’s always good to hear from the regulators, and their comments will help those who use the TCE to properly comply with its terms. However, the TCE overall is misguided policy, and staff gave no better defense of the exemption than the commission did in its Order.

The TCE, for those who haven’t seen it, is an exemption for Municipal Advisors to be able to conduct activity like soliciting investors in certain municipal private placements that would otherwise cause them to be broker dealers.

Staff took pains to distance the TCE from the from the massive October 2019 Proposed Exemptive Order that would have provided a similar exemption for MAs but with almost none of the restrictions and limitations of the TCE. In numerous discussions with commissioners and staff before and after the October release, well before the COVID crisis, the SEC struggled to justify why easing restrictions on private placements was necessary. Private placements, as we know, have boomed since the financial crisis. Banks especially have been clamoring for more municipal bonds. There clearly was no lack of market access for issuers.

Now the SEC has rebranded its initiative. It’s now pitched as a response to the COVID crisis, citing the market disruption in March as justification. As the commissioners surely must know, however, the market has nearly fully recovered since then. Last month was the second biggest June for municipal issuance in history.

Staff also continued to paint the exemption as “narrow,” much as Chairman Clayton did in his appearance before a House subcommittee last week. They were a little funny with the numbers yesterday. It’s true, as they say, that setting the maximum deal size under the exemption at $20 million affects only 13% of issuance dollar volume. But it affects 72% of transactions accounting for nearly 10,000 deals in a typical year. That’s not my idea of narrow.

Staff presenters also several times emphasized that the exemption does not allow MAs to be placement agents. That’s true technically, but the exemption certainly allows MAs to engage in placement agent activity without any of the regulatory burdens that go along with it.

Maybe the most surprising outcome from yesterday’s webinar is that the SEC set the compliance bar for MAs who use the exemption higher than I expected. As Zach Zweihorn at Davis Polk reminds me, staff specified yesterday that MAs who use the exemption will have to:

  • Amend their supervisory procedures
  • Stop activity permitted by the exemption by the December 31 deadline even if deals are in the pipeline
  • Make required representations and disclosures to all potential bank investors, not just the one that buys the deal;
  • Refrain from charging a placement fee; and
  • Ensure that they aren’t splitting a large deal into $20 million pieces in order to use the exemption, among other requirements.

None of these obligations by itself will prevent a MA from using the exemption. But together they represent more compliance mandate than I was expecting.

What was missing from yesterday’s presentation? Any reference to statements Chairman Clayton made two weeks ago about expanding, extending and making permanent the exemption after the December 31 expiration date, despite the fact that we pre-submitted questions on that issue. That nobody from the SEC yesterday walked back the Chairman’s comments about making the exemption permanent is perhaps the most troubling aspect of the webinar.

BDA has led the industry’s response to the SEC’s consideration of MAs’ roles in private placements. Call or write to discuss this further.

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