Public Finance Alert
To increase access to liquidity for smaller municipal issuers facing unprecedented budget shortfalls and loss of revenues as a result of the COVID-19 virus, on June 16, 2020 the SEC issued an Order granting a limited and temporary conditional exemption allowing non-dealer municipal advisors to engage in certain specified activities and receive transaction-based compensation with respect to the placement of up to $20 million of municipal securities for their clients without registering as a broker-dealer, notwithstanding that such activities are normally associated with broker-dealers. In its June 16, 2020 Release, the SEC stated that it is issuing the Order to facilitate more timely and efficient access to alternative financings, such as private placements, loans and lines of credit, which have become more critical during the COVID-19 crisis as municipal issuers, especially smaller municipal issuers, struggle to access the primary market. Moreover, small issuers cannot access the Federal Reserve’s Municipal Liquidity Facility. The Order grants an emergency, temporary conditional exemption from broker-dealer registration to permit non-dealer municipal advisors to solicit a defined set of banks, wholly owned subsidiaries of banks and credit unions (the “Qualified Providers”) in connection with certain direct placements of securities by municipal issuers. The exemption is restricted in scope and subject to a number of conditions designed to protect investors. The Order requires the municipal advisor to obtain certain written representations from Qualified Providers purchasing the issuer’s municipal securities, including representations that such Qualified Provider: (i) is a Qualified Provider, (ii) is capable of evaluating the investment risks, (iii) is not purchasing with a view to distributing the securities and (iv) will not transfer the securities within one year of the date of issuance of the securities, except to another Qualified Provider. In addition, the municipal advisor is required to make written representations to the Qualified Provider that the municipal advisor (a) represents solely the interests of the issuer, (b) is soliciting the direct purchase pursuant to the SEC’s Temporary Conditional Exemption, (c) has not conducted due diligence on behalf of the Qualified Provider, (d) has not engaged a broker-dealer as placement agent and (e) acknowledges that the Qualified Provider nonetheless may choose to engage a broker-dealer to represent its interests in connection with the direct placement. Further, the Order requires that the registered municipal advisor notify the SEC of any direct placements for which it has relied on the temporary conditional exemption. The Order also limits the direct placement to a maximum amount of $20 million, sets minimum denominations of $100,000 and imposes restrictions on transferability. The Order will expire on December 31, 2020.
It should be noted that in October 2019 the SEC proposed a broader Conditional Exemption to permit non-dealer municipal advisers to assist clients in completing private placements of securities, but has taken no further action on it. Orrick’s prior client alert on the SEC’s October 2019 proposal is linked here. The current Temporary Conditional Exemption is similar in many respects to the October 2019 proposal, but the new Exemption is limited in dollar amount, has a much smaller universe of Qualified Providers to which securities can be privately placed, and expires at the end of 2020 (which happens to coincide with the current end of the MLF).
The Order is available for viewing here