United States: SEC Proposes New Guidance On Role Of Municipal Advisers In Private Placements

In response to the proliferation of direct placements of municipal securities with financial institutions over the past decade, the Securities and Exchange Commission (SEC) has proposed a regulatory change to clarify the role that non-dealer municipal advisers can play in arranging such direct placements.  This action was in response to a perceived gap in regulatory oversight that some parties in the municipal industry asserted created confusion for such advisers.

Under long-standing law, municipal brokers and dealers (which includes underwriters) are required to register with the SEC and are subject to extensive regulation by the SEC and the Municipal Securities Rulemaking Board (MSRB).  Historically, financial advisers who did not underwrite securities were not regulated, but this changed with enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010.  Dodd-Frank required the SEC to create a regime for the registration of these advisers, who are now called "municipal advisers" or "MAs."  MAs now are required to register with the SEC and are subject to MSRB Rules, in many cases the same as apply to dealers.   One significant difference in the respective regulations is that dealers do not have a fiduciary duty to their issuer clients, but are treated as having interests adverse to the issuers, while MAs do have a fiduciary duty to their clients.

Of course, many registered municipal dealers also act as municipal advisers, in cases where they do not choose to try to underwrite the securities of a client (see MSRB Rule G-32).  Hence, Dodd-Frank and the applicable MSRB Rules created an exemption for registered dealers from having to also register as a municipal adviser.  There was no corresponding exemption, until now, for registered municipal advisers.

This regulatory gap has become more noticeable in the context of direct placements, which are typically made between a bank or other financial institution or group of institutions and an issuer (including obligors in conduit financings). The administrative and advisory functions to arrange such a transaction are handled by a professional serving as a placement agent.  There is no formal definition of what exactly makes an entity a placement agent, rather than a pure adviser, but for regulatory purposes, absent an exemption, an entity acting as a placement agent has to comply with rules applicable to dealers, including registration with the SEC. 

In an effort to bridge this regulatory gap, the SEC has now proposed1 to allow non-dealer municipal advisers to carry out certain activities to assist issuers consummate a direct placement without having to register as municipal dealers – in effect to act as a placement agent.2  However, the SEC has proposed limits on the scope of this potential exemption.

First, the exemption will only be available for the purchase from an issuer of 100% of an issue of securities by a single purchaser.

Second, the exemption will only be available if the purchaser of the securities fits within a new definition of a "Qualified Purchaser."  Qualified Purchaser (QP) must be one of the following:

(a) a bank, savings and loan association, insurance company or registered investment company;

(b) an investment adviser registered with the SEC or any state; or

(c) any other institution (but not a natural person) with total assets of at least $50 million.

This definition is expressly designed to exclude any kind of retail distribution of securities pursuant to the proposed exemption.

The proposed exemption also requires the municipal adviser to comply with these additional conditions:

First, the MA must make a written disclosure to the QP stating that the MA does not represent the QP, but only the issuer, and the MA must obtain a written acknowledgment from the QP of receipt of these disclosures.3

Second, the MA must obtain a letter from the QP that the QP is capable of independently evaluating the investment risk of the proposed transaction.  This "big boy" letter is already standard in direct placements but now would have to be addressed to the MA in addition to the issuer.

Third, the exemption is only available if the MA adheres strictly to the limitations and conditions described above.  Further, the MA must comply with any other applicable SEC and MSRB regulations. 

If an MA follows all these conditions and qualifies for an exemption from dealer registration, it can carry out certain activities that would otherwise be problematic for an unregistered entity.  Most prominent would be the ability for the MA to solicit potential buyers for the issuer's securities and to be paid for its services from proceeds of the issue. 

The SEC is soliciting comments on this proposed exemption through December 9, 2019.  In that regard, the October 9 release listed 17 specific questions to which it is soliciting responses.  These particular questions can be viewed in the release.

Footnotes

1 Exchange Act Release No. 34-87204, published in the Federal Register on October 9, 2019.

2 This entire issue becomes moot if the transaction is treated as purchase of a loan rather than a security, since the SEC only regulates securities transactions.  The distinction between these two categories is, however, quite unclear and always depends on the facts of a particular case, so few, if any, firms would risk violating securities laws over this distinction.

3 This is analogous to disclosures that an underwriter has to make to an issuer under Rule G-17 that the underwriter has interests adverse to the issuer and disclosing any potential conflicts of interest by the underwriter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Nov 2019, Webinar, California, United States

Please join Heather Sussman and Kyle Kessler for the Cyber, Privacy & Data Innovation practice's webinar “CCPA Compliance – It’s Not Too Late to Get Started!”

21 Nov 2019, Seminar, Tokyo, Japan

Orrick's Total Access Japan Event Series provides entrepreneurs business, tactical, and legal education through complimentary panels and seminars and networking events.

23 Nov 2019, Workshop, Washington, United States

Orrick’s Jill Rosenberg will serve as a panelist at the upcoming Law Firm General Counsel Workshop at Georgetown Law Center in Washington D.C.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions