The Securities Industry and Financial Markets Association failed to give evidence that another exemptive order for municipal advisors will be created and has no standing to challenge a temporary exemption which expired at the end of 2020, the Securities and Exchange Commission contends.
The SEC argued those points in a filing in federal court in Washington D.C. last week, asking the court to dismiss SIFMA’s petition to strike down a temporary conditional exemption (TCE) that allows non-dealer MAs to facilitate certain private placements of municipal bonds. That TCE expired at the end of 2020, but SIFMA has argued that its lawsuit is still relevant because the SEC could consider extending, reinstituting or revising the TCE.
“Because the challenge is not live and, even if it were, SIFMA has failed to show it has standing to bring it, the court should dismiss the petition,” the SEC told the court.
The court cannot remedy the situation because Article lll of the U.S. Constitution says federal courts have “jurisdiction only over live cases or controversies,” the SEC argued.
SIFMA had also suggested that the timing of the TCE’s expiration was designed to evade litigation, but the SEC said the TCE was created in line with another Federal Reserve tool.
“It is no mystery why the commission set the exemption’s expiration date for Dec. 31, 2020: it is coterminous with the expiration of the Federal Reserve’s Municipal Liquidity Facility, which the commission’s order was designed to complement,” the SEC said.
The MLF expired on Dec. 21, 2020 as well and was created to lend to states and local governments on a short-term basis. The
The SEC could 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. Over the past few months, SIFMA has argued that that could be a possibility.
The issue is sensitive because dealer firms have maintained that placement activity is in their realm and that others wanting to engage in that business should properly register as broker-dealers. Dealer firms have worried that a permanent exemption like the one proposed in 2019 would have a negative effect.
“SIFMA points to the fact that the commission ‘previously proposed’ another, broader exemption for municipal advisors in 2019,” the SEC wrote. “But SIFMA ignores that the order under review here expressly states that ‘the commission is not moving forward with the [2019] proposed exemption at this time,’ and SIFMA offers no evidence to suggest otherwise.”
The terms of the TCE and the 2019 order were different. The TCE was much more limited than the 2019 proposal and included a $20 billion cap on the size of the deal. The TCE was relatively scarcely used, with the most recent data showing that MAs relied on it in 112 issuances by 101 issuers with a median issuance principal amount of $2.2 million.
SIFMA's complaint also did not show that the TCE subjected brokers to increased competition, the SEC said. The TCE was not designed to put MAs into direct competition with broker-dealers for issuers who wanted to use a broker-dealer, the SEC said.
“The commission designed the exemption to temporarily give municipal advisors ‘additional flexibility … to assist their municipal issuer clients in more efficiently obtaining financing’ during the COVID-19 crisis,” the SEC said.
Both SIFMA and the SEC declined to comment further on the litigation.
