The Securities Industry and Financial Markets Association is suing to block the Securities and Exchange Commission's temporary order allowing non-dealer muni advisors to facilitate certain private placements of municipal debt.
SIFMA said Friday it had filed suit in Federal court in Washington D.C. asking the court to vacate the SEC’s Temporary Conditional Exemption (TCE) from broker-dealer registration for municipal advisors arranging particular transactions between their municipal issuer clients and financial institutions. Dealers have long
“The TCE creates an uneven playing field that exclusively benefits municipal advisors at the expense of more regulated broker-dealers, and ultimately we believe at the expense of issuers and market transparency,” said Kenneth E. Bentsen, Jr., president and CEO of SIFMA in a press release. “The SEC in effect suspended SEC regulatory requirements for one type of business entity, at the expense of another. Further, we believe the SEC failed to follow the proper procedure by taking such sweeping action absent a formal rulemaking with notice and comment, along with a genuine cost-benefit analysis.”
The SEC presented the TCE as a measure to “designed to aid smaller municipal issuers that may be struggling to meet their unexpected financing needs in light of the COVID-19 pandemic,” and the move found favor with municipal advisors and many issuer officials. The SEC had previously floated a proposal to provide a similar exemption, but chose not to move forward with it after soliciting public comment in October 2019.
While the TCE is limited in scope, dealer groups including SIFMA have complained the order is not as narrow as its proponents claim. Some of the conditions applied to the temporary exemption include capping the size of the direct placement deal at $20 million, and a requirement the debt must be issued in denominations of $100,000 or more. Under the TCE, MAs are allowed to solicit such transactions to banks, their wholly owned subsidiaries that are engaged in commercial lending and financing activities, and credit unions.
Non-dealer MAs have taken the position they have no interest in usurping dealers’ roles as placement agents, but were seeking regulatory certainty that they could provide advice to their clients during private placement transactions, whether or not a registered broker-dealer was involved.
While the text of SIFMA’s complaint is not yet public, the heart of the group’s attack on the order is that the SEC failed to adequately justify why its action was “consistent with the public interest and protection of investors,” particularly because the commission issued the order via its emergency authority rather than through the public comment process.
“This action has not gone through the required rulemaking notice and comment procedure,” Bentsen said during an interview.
Bentsen said the healthy issuance numbers for the year contradict the idea that issuers are struggling to find buyers for their debt. Long-term municipal bond sales were up 18.2% year-over-year during the first half of the year to $205.14 billion from $173.62 billion, according to data from Refinitiv. Other than the muted month of March, muni issuance has been heavy and it looks as though 2020 will surpass 2019 in terms of sheer volume, if it stays on this current pace.
Bentsen added that the relatively opaque nature of the private placement market makes it difficult to even claim that issuers are saving money by using private placements. Savings realized by not having to publicly market bonds or compensate an underwriter might be offset by higher interest on the debt, Bentsen contended.
“We don’t know, because there’s no data on that,” he said.
Leslie Norwood, SIFMA’s head of municipals, said that while it's true MAs can’t charge a placement agent fee for these services under the TCE, nothing stops them from charging issuers more for their regular services.
SIFMA also argues that the SEC’s decision endangers the market because non-dealer MAs are not subject to the due diligence and reporting standards imposed on dealers by the securities laws, though they do have a legal obligation as fiduciaries to place the interests of their municipal entity clients above their own.
“Broker-dealer transaction reporting requirements provide critical market data and transparency to the municipal securities market,” Bentsen said. “These reporting requirements, along with other significant compliance obligations, are completely lacking when a municipal advisor acts pursuant to the TCE. There is also a risk of harm to issuers, as the TCE undermines the duty owed them by advisors, and the SEC has not provided any empirical evidence that issuers would benefit from the TCE as compared to the public market or direct placements solicited by broker-dealers.”
SIFMA rarely litigates muni regulations, having last done so nearly 14 years ago in successfully challenging a Connecticut campaign finance law on behalf of its members. Though SIFMA’s challenge is highly unlikely to be resolved prior to the TCE’s scheduled expiration at the end of the year, the underlying questions the lawsuit raises are important regardless, Bentsen said.
“The issue that is being challenged here would live beyond the expiration date,” he said.
