On June 16, 2020, the Securities and Exchange Commission issued an Exemptive Order in Release 34-89074 to temporarily permit registered municipal advisors (MAs) to solicit banks and other financial institutions in connection with the direct placement of certain issues of bonds and other municipal debt securities issued by their municipal issuer clients, without the need for MAs to register as broker-dealers under Section 15(a)(2) of the Securities Exchange Act of 1934. The Exemptive Order applies to direct placement solicitation activities carried on by MAs through December 31, 2020. You can find Release 34-89074 here.
In Release 34-89074, the SEC notes that it is closely monitoring the impacts of the COVID-19 pandemic on the municipal securities market and that market regulators have taken certain relief measures. These measures include, in particular, the Federal Reserve Board’s Municipal Liquidity Facility (MLF), which is designed to support access to capital and liquidity for U.S. states, the District of Columbia, cities with populations exceeding 250,000 and counties with populations exceeding 500,000 with investment grade credit ratings. The SEC also notes in the Release that most municipal issuers facing budgetary stress or market access challenges during the pandemic, including many small cities and towns, will not meet the MLF’s minimum population thresholds and therefore will not be able to access the liquidity facility. The Order is intended to facilitate timely and efficient access to bank financing alternatives by municipal issuers, particularly smaller issuers, as noted below.
The Release addresses an area of securities regulation that was the subject of a recently proposed SEC rulemaking. On October 2, 2019, in Release 37-87204, the SEC proposed a conditional exemption from the broker-dealer registration requirements under Section 15(a)(2) of the Securities Exchange Act of 1934 for registered municipal advisors engaging in specified activities with respect to direct placements of municipal securities. You can access Hinckley Allen’s Public Finance Group advisory on the October 2019 Release here. The SEC did not take action on the October 2019 proposed rulemaking in the new Release, and that proposal is still pending.
The temporary exemption in the new Order is subject to a number of conditions. It only covers solicitations of banks, wholly-owned subsidiaries of banks engaged in commercial lending and financing activities (such as an equipment lease financing corporation) and federally- or state-chartered credit unions (Qualified Providers), and it only covers direct placements of municipal securities with an aggregate principal amount of not more than $20 million. The municipal securities offered pursuant to a covered solicitation must be issued in authorized denominations of $100,000 or more. The Order requires the registered MA to obtain written representations from the Qualified Provider that is being solicited, to limit the potential investor base for direct placements issued pursuant to the Order to institutions that routinely engage in credit risk analysis (and typically do so consistent with their commercial lending practices and regulatory obligations) and typically do not resell such securities to retail investors.
The Order requires the registered MA to make written representations in connection with the solicitation, to advise a potential investor regarding the duties and obligations the MA will undertake in connection with the transaction. It also requires the MA to obtain written representations from the Qualified Provider regarding the investor’s eligibility and transfer restriction conditions on the municipal security (limiting the transfer of the municipal security during the first year after issuance only to another Qualified Provider). The Order also requires MAs conducting covered solicitations to notify SEC staff in the Division of Trading and Markets of any instances of reliance on the exemption, and sets forth the information that must be provided to the staff.
The solicitations contemplated in the Release are in addition to the core advisory activities in which a registered MA is authorized to engage in under the existing securities laws and regulations. These core MA activities include assisting municipal entities and/or obligated persons clients to: (i) develop financing plans, (ii) evaluate different financing options and structures, (iii) select other parties to the financing, such as bond counsel, (iv) coordinate the rating agency process for an offering of municipal securities, if applicable, (v) ensure that adequate disclosures are made and (vi) evaluate and negotiate financing terms of a municipal securities offering with other parties to the financing, including the investor in the direct placement of municipal securities.
The preceding is a brief summary of the provisions of SEC Release 34-89074. Please contact Kris Moussette, Antonio Martini, or any other member of Hinckley Allen’s Public Finance Group, if you would like more information about this Release or about any other developments during the COVID-19 public health emergency affecting tax-exempt bonds.
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