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US Securities and Exchange Commission provides temporary regulatory exemption to municipal advisors acting in private placements
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United States | Publication | June 18, 2020
On June 16, 2020, the US Securities and Exchange Commission (the “Commission”) took action to permit registered municipal advisors to directly solicit potential purchasers of municipal securities for private placements through the end of the calendar year under specified conditions.
In Release No. 34-89074, the Commission granted a temporary conditional exemption (the “Temporary Exemption”) from broker registration under Section 15 of the Securities Exchange Act of 1934 (“Exchange Act”) for registered municipal advisors. Although the Temporary Exemption expires on December 31, 2020, statements made by the Commission in the order granting the Temporary Exemption and by individual commissioners suggest that experience with the Temporary Exemption will influence whether the Commission adopts the permanent exemption that it has previously proposed as well as the scope of the exemption, if adopted.
Core municipal advisor activities are not subject to broker registration requirements, but municipal advisors generally may not solicit purchasers of municipal securities without registering with the Commission as a broker. The Temporary Exemption temporarily permits direct “solicitation” of “Qualified Providers” to purchase municipal securities under specified conditions without registering as a broker. For these purposes, “solicitation” means “activities to identify and assess potential Qualified Providers,” and “Qualified Providers” are limited to banks, wholly-owned subsidiaries of banks that are engaged in commercial lending and financing activities, and credit unions. This means that, under the conditions set forth in the Temporary Exemption, registered municipal advisors would be permitted to contact Qualified Providers directly to gauge their interest in a potential purchase of municipal securities, regardless of whether the Qualified Provider had previously contacted their municipal entity or conduit borrower client.
Instruments properly classified as loans, rather than securities, continue to be exempt from any municipal advisor or broker regulatory requirements.
The Temporary Exemption is subject to a number of important limitations and additional documentation requirements. We summarize the Temporary Exemption below and also identify important issues for municipal advisors to consider when utilizing the Temporary Exemption.
Important limitations
Temporary exemption
The Temporary Exemption expires on December 31, 2020. Although not explicitly mentioned in the Temporary Exemption, the transaction for which the exemption is used should close on or before December 31, 2020, absent further guidance.
Maximum principal amount
The Temporary Exemption only applies to direct placements that do not exceed an aggregate principal amount of US$20 million. The Commission did not specify how to calculate aggregate principal amount, so firms should avoid soliciting placements for a premium purchase price that exceeds US$20 million or breaking up a single issue into multiple issues of less than US$20 million, especially given Commission precedent regarding integrated offerings. Placements with two or more Qualified Providers that do not exceed US$20 million in the aggregate are expressly permitted.
Authorized minimum denominations
Must be US$100,000 or more.
No discretion or funds handling
Under the Temporary Exemption, municipal advisors are not permitted to bind the municipal issuer or conduit borrower or to handle the securities or the funds that they generate.
No public offering
The Temporary Exemption does not extend to “public offerings,” but does extend to solicitations of multiple Qualified Providers.
Key documentation requirements
In order to take advantage of the Temporary Exemption, municipal advisors must provide two “disclosure” documents as well as obtain written representations from the purchaser.
Disclosure to Qualified Providers by municipal advisor
The municipal advisor must make a series of disclosures to the Qualified Provider outlining the municipal advisor’s limited role in the transaction.1
Representations by the Qualified Provider
Municipal advisors must obtain certain written representations2 from each Qualified Provider that it solicits, confirming the Qualified Provider’s ability to independently evaluate the financing, its agreement to certain resale limitations, and its acknowledgment of the municipal advisor’s disclosures. These representations could be obtained in a stand-alone certificate or as part of another closing document.
Disclosure to the Commission by municipal advisor
Not more than 30 days after the close of the transaction the municipal advisor must disclose certain information3 regarding the transaction to the Commission. The Commission could use this information to check whether the issuer files a continuing disclosure notice with respect to the direct placement transaction.
Affirmation of municipal advisor role
The Temporary Exemption does not classify municipal advisors who utilize it as placement agents. Rather, the solicitation activities permitted under the Temporary Exemption are in addition to the core advisory activities otherwise permitted to be undertaken by registered municipal advisors in direct placement transactions regardless of whether the Temporary Exemption is utilized or expires. These core municipal advisory activities include:
- developing a financing plan;
- assisting in evaluating different financing options and structures;
- assisting in selecting other parties to the financing;
- coordinating the rating process, if applicable; and/or
- evaluating and negotiating the financing terms with other parties to the financing, including the provider of the direct placement.
Subject to additional action or clarification by the Municipal Securities Rulemaking Board (MSRB), use of the Temporary Exemption should not subject municipal advisors to MSRB rules applicable to placement agents.4
Conclusion
The Temporary Exemption provides, in certain circumstances, an opportunity for municipal advisors to streamline the process by which they identify potential direct placement purchasers for their municipal issuer clients by allowing the municipal advisor to initiate direct contact with potential purchasers. Because of their existing fiduciary obligations and because the experience of the market with this temporary exemption may inform potential future Commission action, municipal advisors may wish to utilize the Exemption despite the accompanying additional regulatory conditions.
Further information
If you have further questions regarding the Temporary Exemption or would like advice regarding the regulatory obligations imposed or impacted by the Temporary Exemption, please reach out to Dave Sanchez, Fredric (Rick) Weber, or your customary Norton Rose Fulbright lawyer or lawyers.
Footnotes
1
Municipal advisors taking advantage of the Temporary Exemption must inform the Qualified Provider that (i) they represent solely the interests of their municipal issuer client with respect to the transaction and do not represent the interests of the Qualified Provider, (ii) they have not conducted any due diligence on behalf of the Qualified Provider, (iii) a broker-dealer has not been engaged to act as a placement agent and (iv) the Qualified Provider may choose to engage the services of a broker-dealer to represent its interests.
2
Qualified Providers must certify that they (i) are a bank as defined in Section 3(a)(6) of the Exchange Act of 1934, a wholly-owned subsidiary of a bank engaged in commercial lending and financing activities (such as an equipment lease financing corporation) or a federally- or state-chartered credit union, (ii) are capable of independently evaluating the investment risks of the transaction, (iii) are not purchasing the securities with a view to distributing them; and (iv) will not transfer any portion of the securities within one year of their issue date, except to another purchaser described in clause (i) above. Neither that purchaser nor subsequent purchasers would be required to make the representations or agree to the resale restrictions required of the initial purchaser, however.
3
Municipal advisors taking advantage of the Temporary Exemption must email to the Commission’s Division of Trading and Markets (i) the name of municipal issuer, (ii) the date of closing the direct placement transaction, (iii) the principal amount of the transaction, (iv) the name of the purchasing Qualified Provider and (v) the CUSIP No. (if any).
4
MSRB Rule G-23 provides that “no broker, dealer, or municipal securities dealer that has a financial advisory relationship with respect to the issuance of municipal securities shall . . . act as agent for the issuer in arranging the placement of such issue.” In May 2019, the MSRB sought input as to whether this prohibition is clear as to the municipal advisor activities that a dealer financial advisor may perform without being regarded as a placement agent and whether interpretative guidance is needed. The MSRB has not yet indicated whether the prohibition is clear or interpretive guidance is needed. Absent further guidance from the MSRB, some doubt remains as to whether a dealer advisor may provide core municipal advisor activities and the solicitation services permitted by the Temporary Exemption in a private placement.
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