Document ID: SEC-2019-1470-0001
Agency: sec
Document Type: Proposed Rule
Title: Order: Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act for Certain Activities of Registered Municipal Advisors
Posted Date: 2019-10-09T04:00Z

[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Proposed Rules]
[Pages 54062-54067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21882]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-87204; File No. S7-16-19]

Proposed Exemptive Order Granting a Conditional Exemption From 
the Broker Registration Requirements of Section 15(a) of the Securities 
Exchange Act of 1934 for Certain Activities of Registered Municipal 
Advisors

AGENCY: Securities and Exchange Commission.

ACTION: Notification of proposed exemptive order; request for comment.

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SUMMARY: Pursuant to Section 15(a)(2) of the Securities Exchange Act of 
1934 (``Exchange Act'') and Section 36(a)(1) of the Exchange Act, the 
Securities and Exchange Commission (``SEC'' or ``Commission'') is 
proposing to grant exemptive relief, subject to certain conditions, to 
permit municipal advisors registered with the Commission under Section 
15B of the Exchange Act to engage in certain limited activities in 
connection with the direct placement of municipal securities without 
registering as a broker under Section 15 of the Exchange Act.

DATES: Comments should be received by December 9, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to rule-comments@sec.gov.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-16-19. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that the Commission does not redact or edit 
personal identifying information from comment submissions. Commenters 
should submit only information that they wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Emily Westerberg Russell, Chief 
Counsel, Joanne Rutkowski, Assistant Chief Counsel, or Kelly Shoop, 
Special Counsel, at 202-551-5550, in the Division of Trading and 
Markets; Rebecca Olsen, Director, or Adam Wendell, Senior Special 
Counsel, at 202-551-5680, in the Office of Municipal Securities; 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION:

I. Background

A. Municipal Advisor Registration Framework

    Section 975 of Title IX of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act amended the Exchange Act to create a new class 
of regulated persons, ``municipal advisors.'' \1\ The Commission 
subsequently adopted registration rules for municipal advisors in 
2013.\2\ Exchange Act Section 15B(e)(4)(A) defines the term ``municipal 
advisor'' to include a person that provides advice to or on behalf of a 
municipal entity \3\ or obligated person \4\ (together, ``Municipal 
Issuers'')

[[Page 54063]]

with respect to municipal financial products or the issuance of 
municipal securities, including advice with respect to the structure, 
timing, terms, and other similar matters concerning such financial 
products or issues.\5\
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    \1\ See 15 U.S.C. 78o-4(a)(1)(B).
    \2\ See Registration of Municipal Advisors, Exchange Act Rel. 
No. 70462 (Sept. 30, 2013), 78 FR 67468, 67483 n.200 (Nov. 12, 2013) 
(``Municipal Advisor Adopting Release'').
    \3\ Exchange Act Section 15B(e)(8) defines ``municipal entity'' 
as ``any State, political subdivision of a State, or municipal 
corporate instrumentality of a State, including (A) any agency, 
authority, or instrumentality of the State, political subdivision, 
or municipal corporate instrumentality; (B) any plan, program, or 
pool of assets sponsored or established by the State, political 
subdivision, or municipal corporate instrumentality or any agency, 
authority, or instrumentality thereof; and (C) any other issuer of 
municipal securities.'' 15 U.S.C. 78o-4(e)(8); see also 17 CFR 
240.15Ba1-1(g).
    \4\ Exchange Act Section 15B(e)(10) defines ``obligated person'' 
as ``any person, including an issuer of municipal securities, who is 
either generally or through an enterprise, fund, or account of such 
person, committed by contract or other arrangement to support the 
payment of all or part of the obligations on the municipal 
securities to be sold in an offering of municipal securities.'' 15 
U.S.C. 78o-4(e)(10). Exchange Act Rule 15Ba1-1(k) generally provides 
that obligated person has the same meaning as in Exchange Act 
Section 15B(e)(10), ``provided, however, the term obligated person 
shall not include: (1) A person who provides municipal bond 
insurance, letters of credit, or other liquidity facilities; (2) a 
person whose financial information or operating data is not material 
to a municipal securities offering, without reference to any 
municipal bond insurance, letter of credit, liquidity facility, or 
other credit enhancement; or (3) the federal government.'' 17 CFR 
240.15Ba1-1(k). Obligated persons can include entities acting as 
conduit borrowers, such as private universities, non-profit 
hospitals, and private corporations. See Municipal Advisor Adopting 
Release, 78 FR at 67483 n.200.
    \5\ Exchange Act Section 15B(e)(4)(A)(i).
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    In adopting the municipal advisor registration rules, the 
Commission stated that `` `advice with respect to the issuance of 
municipal securities' should be construed broadly from a timing 
perspective to include advice throughout the life of an issuance of 
municipal securities, from the pre-issuance planning stage . . . to the 
repayment stage for those municipal securities.'' \6\ The Commission 
noted that, in connection with the issuance of municipal securities, a 
municipal advisor ``may assist municipal entities in developing a 
financing plan, assist municipal entities in evaluating different 
financing options and structures, assist in the selection of other 
parties to the financing (such as bond counsel and underwriters), 
coordinate the rating process, ensure adequate disclosure, and/or 
evaluate and negotiate the financing terms.'' \7\
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    \6\ Municipal Advisor Adopting Release, 78 FR at 67490.
    \7\ Id. at 67472.
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    Unless otherwise excluded or exempted, a person who engages in 
municipal advisory activities is required to register with the 
Commission as a municipal advisor \8\ and comply with the rules of the 
Municipal Securities Rulemaking Board (``MSRB'').\9\ Exchange Act 
Section 15B(b)(2) requires the MSRB to develop rules that, among other 
things, prevent fraudulent and manipulative acts and practices, promote 
just and equitable principles of trade, and protect investors, 
municipal entities, obligated persons, and the public interest.\10\
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    \8\ Exchange Act Section 15B(a)(2).
    \9\ Exchange Act Section 15B(c)(1).
    \10\ See Exchange Act Section 15B(b)(2)(C). The MSRB has 
developed a regulatory framework that imposes requirements 
regarding, among other things, registration of municipal advisors 
with the MSRB (MSRB Rule A-12); professional qualification 
requirements (MSRB Rules G-2 and G-3); fair dealing obligations 
(MSRB Rule G-17); supervisory and compliance obligations (MSRB Rule 
G-44); restrictions on gifts, gratuities, and non-cash compensation 
(MSRB Rule G-20); restrictions on political contributions (MSRB Rule 
G-37); standards for advertising (MSRB Rule G-40); application for a 
CUSIP number when advising on a competitive sale of new issue 
municipal securities (MSRB Rule G-34); and books and records 
requirements (MSRB Rules G-8 and G-9). In addition, MSRB Rule G-42 
establishes certain standards of conduct consistent with the 
fiduciary duty owed by a municipal advisor to its municipal entity 
clients, including, without limitation, a duty of care and loyalty 
as well as standards of conduct and duties owed by a municipal 
advisor to its obligated person clients.
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    Exchange Act Section 15B includes certain statutory exclusions from 
municipal advisor registration, which the Commission interpreted and 
provided certain additional regulatory exemptions when it adopted the 
municipal advisor registration rules.\11\ For example, Exchange Act 
Section 15B(e)(4)(C) provides a statutory exclusion from the 
requirement to register as a municipal advisor for brokers, dealers, 
and municipal securities dealers serving as underwriters,\12\ which was 
further interpreted by the Commission in adopting the municipal advisor 
rules.\13\ The statute is otherwise silent with respect to whether, and 
under what circumstances, municipal advisors would be required to 
register as brokers.
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    \11\ See Municipal Advisor Adopting Release, 78 FR at 67503-37; 
17 CFR 240.15Ba1-1(d)(2).
    \12\ The statutory definition of ``municipal advisor'' excludes 
a broker, dealer, or municipal securities dealer serving as an 
underwriter (as defined in Section 2(a)(11) of the Securities Act of 
1933). 15 U.S.C. 78o-4(e)(4)(C).
    \13\ See Municipal Advisor Adopting Release, 78 FR at 67511-
67517. A broker cannot rely on the exclusion and provide advice to a 
municipal entity on an issuance of municipal securities until it has 
been engaged to serve as the underwriter for a particular issuance 
of municipal securities. See id. at 67512-13.
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B. Direct Placements of Municipal Securities

    Since 2009, municipal entities have increasingly relied on direct 
placements, that is, direct purchases of municipal securities and 
direct loans from banks and other lenders, as an alternative to public 
offerings of municipal securities.\14\ The demand for these direct 
placements has grown substantially over the past several years, as the 
involvement of commercial banks in the municipal capital markets has 
increased in terms of both purchases of municipal securities and 
extensions of loans to state and local governments and their 
instrumentalities.\15\
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    \14\ See Amendments to Municipal Securities Disclosure, Exchange 
Act Rel. No. 83885 (Aug. 20, 2018), 83 FR 44700, 44702 (Aug. 31, 
2018) (``Amendments to Municipal Securities Disclosure''). See also 
MSRB Notice 2015-03, Bank Loan Disclosure Market Advisory (Jan. 29, 
2015) (noting that ``[direct placements] as an alternative to a 
public offering could provide potential advantages for issuers, 
among other things, lower interest and transaction costs, reduced 
exposure to bank regulatory capital requirements, simpler execution 
process, greater structuring flexibility, no requirement for a 
rating or offering document, and direct interaction with the lender 
instead of multiple bondholders.''), available at http://msrb.org/~/
media/Files/Regulatory-Notices/Announcements/2015-03.ashx?n=1; and 
Municipal Market Bank Loan Disclosure Task Force, Considerations 
Regarding Voluntary Secondary Market Disclosure about Bank Loans 
(May 1, 2013), available at http://www.nfma.org/assets/documents/position.stmt/wp.direct.bank.loan.5.13.pdf. The Task Force comprised 
representatives of the American Bankers Association, Bond Dealers of 
America, Government Finance Officers Association, Investment Company 
Institute, National Association of Bond Lawyers, National 
Association of Health and Educational Facilities Finance 
Authorities, National Association of Independent Public Finance 
Advisors, National Federation of Municipal Analysts, and Securities 
Industry and Financial Markets Association. See also National 
Association of Bond Lawyers, Direct Purchases of State or Local 
Obligations by Commercial Banks and Other Financial Institutions 
(July 2017), at 2, available at http://www.chapman.com/media/publication/783_Chapman_NABL_Direct_Purchases_State_Local-Obligations_Banks_Financial_Institutions_072617.pdf.
    \15\ See Amendments to Municipal Securities Disclosure, 83 FR at 
44731. Direct placements may be structured as either loans or 
municipal securities. See id. at 44702. The relief requested would 
apply (and would be needed) only with respect to direct placements 
structured as municipal securities.
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    As noted above, the Municipal Advisor Adopting Release identifies a 
wide range of activities in which a registered municipal advisor may 
engage on behalf of its Municipal Issuer clients. Since the issuance of 
the Municipal Advisor Adopting Release, the Commission has received 
questions and requests that it clarify the application of the broker 
regulatory framework to registered municipal advisors with respect to 
their activities in facilitating direct placements of municipal 
securities.\16\
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    \16\ The Commission has received a number of letters on this 
topic over the past few years. See Letter to Chair Mary Jo White, 
Commission from Mike Nicholas, Chief Executive Officer, Bond Dealers 
of America (``BDA'') (Oct. 17, 2014); Letter to Chair Mary Jo White, 
Commission from Terri Heaton, President, National Association of 
Municipal Advisors (``NAMA'') (Dec. 15, 2014); Letter to Chair Mary 
Jo White, Commission from Leslie Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') (Mar. 12, 2015). More recently, Commission 
staff has received additional letters on this topic with more 
specific requests for guidance, including a request from a 
registered municipal advisor. See Letter to Brett Redfearn and 
Joanne C. Rutkowski, Division of Trading and Markets and Rebecca 
Olsen, Office of Municipal Securities, from Cheryl Maddox, General 
Counsel, and Leo Karwejna, Chief Compliance Officer, Public 
Financial Management, Inc. (Oct. 30, 2018) (``PFM Letter''); Letter 
to Brett Redfearn and Joanne C. Rutkowski, Division of Trading and 
Markets and Rebecca Olsen, Office of Municipal Securities, from 
Leslie M. Norwood, Managing Director and Associate General Counsel, 
SIFMA (June 12, 2019); Letter to Brett Redfearn and Joanne C. 
Rutkowski, Division of Trading and Markets and Rebecca Olsen, Office 
of Municipal Securities, from Mike Nicholas, Chief Executive 
Officer, BDA (June 28, 2019); Letter to Brett Redfearn, Division of 
Trading and Markets and Rebecca Olsen, Office of Municipal 
Securities, from Susan Gaffney, Executive Director, NAMA (July 18, 
2019); Letter to Brett Redfearn and Joanne C. Rutkowski, Division of 
Trading and Markets and Rebecca Olsen, Office of Municipal 
Securities, from Mike Nicholas, Chief Executive Officer, BDA (Sept. 
9, 2019); Letter to Commissioner Robert J. Jackson Jr. from Mike 
Nicholas, Chief Executive Officer, BDA (Sept. 25, 2019); Letter to 
Brett Redfearn and Joanne C. Rutkowski, Division of Trading and 
Markets and Rebecca Olsen, Office of Municipal Securities, from Mike 
Nicholas, Chief Executive Officer, BDA (Sept. 25, 2019). All of the 
letters are available on the Commission's Office of Municipal 
Securities homepage.

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[[Page 54064]]

II. Discussion of Proposed Relief

    The Commission is proposing to grant exemptive relief pursuant to 
Sections 15(a)(2) \17\ and 36(a)(1) \18\ of the Exchange Act to permit 
a registered municipal advisor,\19\ acting on behalf of a Municipal 
Issuer client, to solicit specified institutional investors in 
connection with the direct placement of municipal securities without 
registering as a broker under Section 15 of the Exchange Act, where 
certain conditions are met.
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    \17\ Section 15(a)(2) of the Exchange Act authorizes the 
Commission to conditionally or unconditionally exempt from the 
registration requirements of Section 15(a)(1) any broker or class of 
brokers, by rule or order, as it deems consistent with the public 
interest and the protection of investors. See 15 U.S.C. 78o(a)(2).
    \18\ Section 36(a)(1) of the Exchange Act authorizes the 
Commission to conditionally or unconditionally exempt any person, 
security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provision or provisions of the 
Exchange Act or any rule or regulation thereunder, by rule, 
regulation, or order, to the extent that such exemption is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors. See 15 U.S.C. 78mm.
    \19\ For purposes of the proposed exemption, the term 
``registered municipal advisor'' means a municipal advisor that is 
registered in accordance with Section 15B(a) of the Exchange Act and 
Rule 15Ba1-2 thereunder. See 17 CFR 240.15Ba1-2.
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    Congress, in enacting the municipal advisor provisions, established 
a framework for comprehensive regulation of those entities in 
connection with their business of providing advice to or on behalf of a 
municipal entity or obligated person with respect to municipal 
financial products or the issuance of municipal securities, including 
advice with respect to the structure, timing, terms, and other similar 
matters concerning such financial products or issues. Registered 
municipal advisors are subject to a comprehensive regulatory framework, 
including rules that, among other things, are designed to prevent 
fraudulent and manipulative acts and practices as well as protect 
investors, municipal entities, obligated persons, and the public 
interest.\20\ The Commission, as noted above, has described the role of 
a municipal advisor as assisting municipal entities in developing a 
financing plan, assisting in evaluating different financing options and 
structures, assisting in selecting other parties to the financing (such 
as bond counsel and underwriters), coordinating the rating process, 
ensuring adequate disclosure, and/or evaluating and negotiating the 
financing terms. The Commission has not previously addressed, however, 
whether and under what circumstances a registered municipal advisor may 
interact or negotiate with potential investors on behalf of its 
municipal entity client without being required to register as a broker, 
with respect to direct placements or other issuances of municipal 
securities.
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    \20\ See Exchange Act Sections 15B(a)(5) and (c)(1) and supra 
note 10 for a description of the applicable MSRB rules.
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    Because the definition in the Exchange Act of the term ``broker'' 
and the registration requirements under Section 15(a) of the Exchange 
Act were drawn by Congress to encompass a wide range of activities 
involving investors and securities markets,\21\ a municipal advisor 
that identifies and assesses potential providers for direct placements 
by a Municipal Issuer client could be viewed as engaging in 
solicitation, a factor relevant to a determination of broker 
status.\22\ This is particularly true in light of the fact that service 
providers in municipal securities transactions, including municipal 
advisors, typically are paid from the proceeds of the securities 
offering and thus routinely receive transaction-based compensation. The 
receipt of transaction-based compensation has been considered by courts 
as a factor indicating that registration as a broker may be 
required.\23\ Absent an exception or exemption, a municipal advisor 
engaging in this activity could be required to register under Section 
15(a) of the Exchange Act.\24\ There is currently no exception or 
exemption promulgated by the Commission applicable to these situations 
and as noted above, the Commission has not previously addressed this 
issue.
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    \21\ See, e.g., Registration Requirements for Foreign Broker-
Dealers, Exchange Act Release No. 27017 (Jul. 11, 1989), 54 FR 
30013, at 30014-15 (Jul. 18, 1989). Section 15(a)(1) of the Exchange 
Act prohibits any broker or dealer from making ``use of the mails or 
any means or instrumentality of interstate commerce to effect any 
transactions in, or to induce or attempt to induce the purchase or 
sale of, any security [] unless such broker or dealer is registered 
in accordance with'' Section 15(b) of the Exchange Act. 15 U.S.C. 
78o(a)(1). Section 3(a)(4)(A) of the Exchange Act defines broker 
generally as ``any person engaged in the business of effecting 
transactions in securities for the account of others.'' 15 U.S.C. 
78c(a)(4)(A).
    \22\ See, e.g., SEC v. Century Inv. Transfer Corp., et al., No. 
71-cv-3384, 1971 WL 297, at *5 (S.D.N.Y. Oct. 5, 1971) (Century 
``engaged in the brokerage business by soliciting customers through 
ads in the Wall Street Journal, and engaging in sales activities 
designed to bring about mergers between private corporations and 
publically held shells controlled by'' a co-defendant); SEC v. 
Hansen, No. 83-cv-3692, 1984 WL 2413, at *4 (Apr. 6, 1984) 
(defendant engaged in unregistered broker activity when he ``sold or 
attempted to sell interest in the five [securities] by use of the 
mails, the telephone, advertisements in publications distributed 
nationally and by other interstate means of communication''); SEC v. 
National Executive Planners, Ltd., et al., 503 F. Supp. 1066, 1072-
73 (M.D.N.C. 1980) (defendant engaged in unregistered broker 
activity by using the mails and telephone to ``solicit[] clients 
actively'' in the offer and sale of securities); SEC v. Earthly 
Mineral Solutions, Inc., No. 2:07-cv-1057, 2011 WL 1103349, at *2 
(D. Nev. Mar. 23, 2011) (defendant engaged in unregistered broker 
activity when, among other things, he ``conducted general 
solicitations through newspaper advertisements''); SEC v. Deyon, 977 
F. Supp. 510, 518 (D. Maine 1997) (defendants engaged in 
unregistered broker activity when they ``solicited investors by 
phone and in person,'' ``distributed documents and . . . prepared 
and distributed sales circulars'').
    \23\ See, e.g., SEC v. Helms, No. 13-cv-01036, 2015 WL 5010298, 
at *17 (W.D. Tex. Aug. 21, 2015) (``In determining whether a person 
`effected transactions [for purposes of the Exchange Act 
registration requirements],' courts consider several factors, such 
as whether the person: (1) Solicited investors to purchase 
securities, (2) was involved in negotiations between the issuer and 
the investor, and (3) received transaction-related compensation.'') 
(citing cases initiated by the Commission).
    \24\ Although Section 15(a) applies to both brokers and dealers, 
the proposed exemption would apply only to activities that 
historically have been associated with broker activity; that is, 
effecting securities transactions for the account of others.
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    The Commission is mindful that the municipal advisor regulatory 
scheme established a framework for comprehensive regulation of those 
entities in connection with their business of providing advice to or on 
behalf of a municipal entity or obligated person with respect to 
municipal financial products or the issuance of municipal securities, 
including advice with respect to the structure, timing, terms, and 
other similar matters concerning such financial products or issues. The 
Commission, as noted above, has described the role of a municipal 
advisor as assisting municipal entities in developing a financing plan, 
assisting in evaluating different financing options and structures, 
assisting in selecting other parties to the financing (such as bond 
counsel and underwriters), coordinating the rating process, ensuring 
adequate disclosure, and/or evaluating and negotiating the financing 
terms. The Commission has not previously addressed, however, whether 
and under what circumstances a registered municipal advisor may 
interact or negotiate with potential investors on behalf of its 
municipal entity client without being required to register as a

[[Page 54065]]

broker, with respect to direct placements or other issuances of 
municipal securities.
    The Commission preliminarily believes that there are certain 
limited circumstances in which a registered municipal advisor should be 
permitted to solicit investors in connection with the direct placement 
of municipal securities by its Municipal Issuer client, without 
registering as a broker under Section 15 of the Exchange Act. 
Accordingly, the Commission is proposing to grant exemptive relief 
pursuant to Sections 15(a)(2) and 36(a)(1) of the Exchange Act \25\ to 
permit such activity without registration as a broker, subject to 
certain conditions described below. For purposes of this exemption, 
``Municipal Issuer'' would be defined as either a municipal entity or 
an obligated person, consistent with Exchange Act Sections 15B(e)(8) 
and 15B(e)(10), respectively.\26\
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    \25\ See 15 U.S.C. 78o(a)(2); 15 U.S.C. 78mm.
    \26\ See supra n. 3 and 4.
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    The proposed exemption would apply only to a registered municipal 
advisor's activities in connection with the ``direct placement'' by a 
Municipal Issuer of an entire issuance of municipal securities with a 
single ``Qualified Provider,'' which we propose to define as (i) a 
bank, savings and loan association, insurance company, or registered 
investment company; or (ii) an investment adviser registered with the 
Commission or with a state; or (iii) any other institution with total 
assets of at least $50 million.\27\ The proposed exemption thus would 
not be available in transactions involving retail investors, including 
public offerings of municipal securities.
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    \27\ The Commission's proposed definition of Qualified Provider 
tracks the definition of Institutional Accounts under FINRA rules 
and the definition of Sophisticated Municipal Market Professionals 
under MSRB rules, with the exception that a Qualified Provider could 
not be a natural person. This is consistent with the Commission's 
preliminary view that for purposes of the exemption permitted 
transaction participants should be limited to an institutional 
investor purchasing the entire issuance for its own investment 
purposes. See FINRA Rule 4512(c) and MSRB Rule D-15(a).
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    The Commission is proposing to limit the universe of Qualified 
Providers to entities that otherwise would be ``institutional 
investors'' for purposes of FINRA rules or ``sophisticated municipal 
market professionals'' (other than natural persons) under MSRB rules, a 
status that is equated with a certain level of investor 
sophistication.\28\ The Commission recognizes that there may be an 
inherent conflict between the interests of a municipal advisor on one 
hand, acting on behalf of its Municipal Issuer client, and those of a 
potential investor on the other. As discussed below, the proposed 
exemption is subject to conditions, including the requirement that the 
investor be a Qualified Provider, that are intended to mitigate 
investor protection concerns.\29\ Further, nothing in the proposed 
relief would preclude a Qualified Provider (or any other transaction 
participant) from engaging a registered broker or other intermediary 
for the transaction. The condition that the entire issuance be placed 
with a single Qualified Provider also reflects the Commission's 
understanding of how these transactions are structured currently.\30\
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    \28\ See FINRA Rule 2111(b), which provides an exemption to 
customer-specific suitability for institutional investors if certain 
conditions are met. MSRB Rule G-48(c) provides a similar exemption.
    \29\ See infra pp. 14-15 (describing required disclosures to the 
Qualified Provider) and 16 (describing the municipal advisor's duty 
of fair dealing and the Commission's antifraud protections). The 
Commission is seeking comment on questions related to potential 
investor protection concerns associated with this proposed 
exemption. Among other things, it is the Commission's understanding 
that in a direct placement the institutional investor--often a 
bank--performs its own due diligence on the issuer subject to the 
institution's own underwriting standards and generally does not rely 
on a broker to perform that service.
    \30\ See MSRB Regulatory Notice 2016-12, Direct Purchases and 
Bank Loans as Alternatives to Public Financing in the Municipal 
Securities Market (April 4, 2016) (``The MSRB and FINRA are aware of 
the increasing practice of privately placing municipal securities 
directly with a single purchaser (sometimes referred to as ``direct 
purchases'') and of the use of bank loans as alternatives to 
traditional public offerings in the municipal securities market.'') 
(emphasis added).
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    As noted above, the proposed exemption would permit registered 
municipal advisors to solicit investors so long as (1) those investors 
meet the definition of Qualified Provider and (2) the solicitation is 
in connection only with a potential direct placement of an entire 
issuance of municipal securities with a single Qualified Provider by 
the registered municipal advisor's Municipal Issuer client. The 
proposed exemption does not prescribe the means of solicitation. 
Permitted solicitation could take a variety of forms. For example, 
Qualified Providers could be identified and assessed in several ways: 
Based upon the Municipal Issuer's or registered municipal advisor's 
prior knowledge and experience, the use of publicly-available 
information sources, or identification of Qualified Providers through 
broader solicitation activities.\31\
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    \31\ The solicitation activities would be in addition to the 
core advisory activities in which a registered municipal advisor 
might otherwise engage, identified by the Commission in the 
Municipal Advisor Adopting Release as typical of municipal advisory 
activities with respect to the issuance of municipal securities, 
namely assisting municipal entities and/or obligated person clients 
in: (i) Developing a financing plan; (ii) assisting in evaluating 
different financing options and structures; (iii) assisting in 
selecting other parties to the financing, such as bond counsel; (iv) 
coordinating the rating process, if applicable; (v) ensuring 
adequate disclosure; and/or (vi) evaluating and negotiating the 
financing terms with other parties to the financing, including the 
provider of the direct placement. See Municipal Advisor Adopting 
Release, 78 FR at 67472.
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    A registered municipal advisor wishing to rely on the proposed 
exemption would be subject to certain conditions:
    First, the registered municipal advisor would be required to make 
written disclosures to the Qualified Provider stating that the 
registered municipal advisor represents solely the interests of the 
Municipal Issuer and not the Qualified Provider. The registered 
municipal advisor would also be required to obtain from the Qualified 
Provider written acknowledgment of receipt of those disclosures.
    Second, the registered municipal advisor would also need to obtain 
a written representation from the Qualified Provider that the Qualified 
Provider is capable of independently evaluating the investment risks of 
the transaction. This condition is consistent with the established 
framework for the institutional investor exemption from a broker's 
customer-specific suitability obligations under FINRA rules as well as 
the analogous exemption under MSRB rules.\32\
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    \32\ See FINRA Rule 2111(b) and Supplementary Material .07 
(deeming a broker's customer-specific suitability obligation 
fulfilled in instances where the member or associated person has a 
reasonable basis to believe that the institutional customer is 
capable of evaluating investment risks independently, both in 
general and with regard to particular transactions and investment 
strategies involving a security or securities and the institutional 
customer affirmatively indicates that it is exercising independent 
judgment in evaluating the member's or associated person's 
recommendations). See also MSRB Rule G-48(c) (eliminating the 
broker, dealer, or municipal securities dealer's obligation to 
perform a customer-specific suitability analysis if it reasonably 
concludes the customer is a Sophisticated Municipal Market 
Professional as defined in MSRB Rule D-15).
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    Finally, the proposed exemption would apply only with respect to 
the limited activities, and subject to the conditions described above, 
including that the entire issuance of municipal securities be placed 
with a single Qualified Provider and that the municipal advisor comply 
with all applicable Commission and MSRB rules. A registered municipal 
advisor that complies with the conditions of the exemption would be 
permitted to solicit Qualified Providers on behalf of its Municipal 
Issuer client and receive transaction-based compensation for

[[Page 54066]]

services provided in connection with a direct placement as described 
above without being required to register as a broker under Section 
15(a) of the Exchange Act.\33\ These functions are some of the most 
relevant to a determination of broker status, which may therefore 
require registration.\34\ Accordingly, if any of the conditions are not 
met--for example, the municipal advisor fails to comply with the 
disclosure conditions described above--the municipal advisor could not 
rely on the exemption and would need to consider whether it is required 
to register with the Commission as a broker under Section 15(a) of the 
Exchange Act. The exemption would apply only with respect to the 
defined activities. A registered municipal advisor could not rely on 
this proposed exemption to engage in broker activity relating to 
municipal securities offerings beyond the scope of the proposed 
exemption, such as facilitating a public offering or the sale of 
securities to a retail investor. Further, a registered municipal 
advisor seeking to rely on the exemption would need to make and keep 
the records required by Exchange Act Rule 15Ba1-8(a)(1). Finally, 
consistent with the narrow scope of activities contemplated by the 
proposed exemption, a registered municipal advisor seeking to rely on 
this proposed exemption could not bind the Municipal Issuer client, or 
handle funds or securities in connection with the direct placement. The 
Commission preliminarily believes that these types of activities would 
implicate the policies underlying the broker regulatory framework.
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    \33\ The Commission preliminarily believes that this exemption 
will also benefit firms that are dually registered as municipal 
advisors and brokers. A dually-registered firm that is acting in a 
municipal advisory capacity advising a Municipal Issuer client on a 
direct placement of municipal securities would be permitted as well 
to engage in limited solicitation activities in accordance with the 
terms and conditions of the proposed exemption without being 
required to comply with broker requirements, such as books and 
records requirements, with respect to those activities. Instead, so 
long as the terms and conditions of the exemption are met, the 
municipal advisor will be acting in the municipal advisory capacity 
through the completion of the transaction. The Commission believes 
disclosure clarifying the role of the municipal advisor is 
particularly critical for dual registrants to avoid confusion on the 
part of potential Qualified Providers as to the capacity in which 
the firm is acting with respect to a direct placement.
    \34\ See, e.g., Definition of Terms in and Specific Exemptions 
for Banks, Savings Associations, and Savings Banks Under Section 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange 
Act Rel. No. 44291, 66 FR 27760, 27772-73 at n.124 (May 18, 2001) 
(``Solicitation is one of the most relevant factors in determining 
whether a person is effecting transactions.''), cited in 
Registration Process for Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Rel. No. 75611 (Aug. 
5, 2015), 80 FR 48964, 48976 (Aug. 14, 2015) (``The Commission has 
previously interpreted the term `effecting transactions' in the 
context of securities transactions to include a number of 
activities, ranging from identifying potential purchasers to 
settlement and confirmation of a transaction.''); Cornhusker Energy 
Lexington, LLC v. Prospect Street Ventures, No. 8:04CV586, 2006 WL 
2620985, at *6 (D. Neb. Sept. 12, 2006) (``Transaction-based 
compensation, or commissions are one of the hallmarks of being a 
broker-dealer.'').
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    The Commission preliminarily believes that the proposed conditions 
with respect to transaction participants, disclosure requirements, and 
transaction type--in combination with applicable regulatory 
protections--should sufficiently restrict the scope of the proposed 
exemption such that permitting solicitation activities in this limited 
context would not implicate the need for additional regulation of these 
activities under the broker regulatory framework. For example, like 
brokers, registered municipal advisors have an obligation to deal 
fairly with all persons--which, as relevant here, includes any 
potential Qualified Providers.\35\ Also, the antifraud provisions of 
the Exchange Act as well as the Securities Act of 1933 apply equally to 
any person, including registered municipal advisors and brokers.\36\ 
The Commission preliminarily believes these are important safeguards 
that operate as a constraint on the conduct of registered municipal 
advisors, independent of whether they are registered as a broker. 
Additionally, as stated above, the proposed exemption would be limited 
to dealings with Qualified Providers, which are entities that meet an 
established threshold of investor sophistication, and the required 
disclosures include an affirmative representation by the Qualified 
Provider that it is capable of independently evaluating the risks, 
which is consistent with the institutional suitability exemption under 
existing FINRA rules.\37\ Finally, the Commission notes that the 
proposed conditional exemption would not preclude any transaction 
participant in a direct placement from engaging a registered broker or 
other intermediary for the transaction.
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    \35\ See, e.g., MSRB Rule G-17 (requiring municipal advisors to 
``deal fairly with all persons and . . . not engage in any 
deceptive, dishonest, or unfair practice''); FINRA Rule 2010 
(prohibiting brokers from effecting transactions in, or inducing the 
purchase or sale of, securities ``by means of any manipulative, 
deceptive or other fraudulent device or contrivance''); FINRA Rule 
2111 Supplementary Material .01 (``Implicit in all member and 
associated person relationships with customers and others is the 
fundamental responsibility for fair dealing.'')
    \36\ See 15 U.S.C. 78j and 17 CFR 240.10b-5; see also 15 U.S.C. 
77q.
    \37\ See FINRA Rule 2111(b) and Supplementary Material .07.
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    Accordingly, for the reasons discussed above, the Commission 
preliminarily believes that the proposed conditional exemption would be 
consistent with the public interest and the protection of investors and 
would be necessary or appropriate in the public interest.

III. Request for Comments

    The Commission is seeking comment on all aspects of the proposed 
exemption. In particular, the Commission requests comment on the 
following questions. When responding to the request for comment, please 
explain your reasoning.
    1. Has the Commission appropriately identified the activities in 
which a registered municipal advisor would be able to engage when 
representing a municipal entity or obligated person in connection with 
direct placements pursuant to the exemption? Please explain.
    2. Should any of the identified activities proposed to be included 
be eliminated or modified? Please explain.
    3. Has the Commission appropriately defined Qualified Provider? If 
not, what would be a more appropriate definition and why?
    4. Should the definition of Qualified Provider be edited to add 
``credit unions''? If so, please explain.
    5. Does the definition of Qualified Provider, together with the 
required conditions, provide adequate assurance that the potential 
investors included in such definition will be sufficiently able to 
evaluate the creditworthiness of the Municipal Issuer and the relevant 
terms of the direct placement offering, among other things? If not, 
please explain.
    6. Should the Commission limit the exemption to direct placements 
of a specific size threshold--e.g., limited by aggregate principal 
amount or by Municipal Issuers with a limited aggregate amount of 
municipal securities outstanding? If so, why and how should the 
Commission define such thresholds?
    7. Should the exemption for municipal advisors with respect to 
direct placements be conditioned on municipal advisors being precluded 
from engaging in solicitation activities on behalf of their Municipal 
Issuer clients? If so, which activities and why? Please explain.
    8. Has the Commission appropriately defined the conditions that 
should apply to the proposed exemption? Please explain.

[[Page 54067]]

    9. Should any of the proposed conditions be eliminated or modified? 
Please explain.
    10. Are there other or different conditions that should apply to 
the proposed exemption? Please explain.
    11. Are there any specific written disclosures to Qualified 
Providers that should be required, beyond those that are a condition of 
the proposed exemption? For example, should the municipal advisor be 
required to provide a written disclosure to the Qualified Provider that 
it may elect to engage a registered broker or other intermediary for 
the transaction? Please explain.
    12. Should the exemption be expanded to include transactions in 
which multiple Qualified Providers purchase portions of the entire 
municipal securities offering directly from the Municipal Issuer? What 
are the relevant issues for the Commission to consider in determining 
whether such an expansion is necessary or appropriate in the public 
interest, and consistent with the protection of investors? For example, 
would the participation of multiple purchasers necessitate additional 
or different conditions or present heightened investor protection 
concerns? Please explain.
    13. Is the type of direct placement contemplated by this proposed 
exemptive order typically resold into the secondary market? If so, how 
often and to what type of investor? Does the possibility of such a 
resale raise any investor protection concerns? If so, please explain. 
How should the Commission address those concerns?
    14. Under the proposed definition of ``Municipal Issuers,'' the 
exemption would apply to conduit transactions involving obligated 
persons--i.e., the issuance of municipal securities by a municipal 
entity to finance a project to be used primarily by a third-party 
obligated person, such as a non-profit hospital or private university. 
Are there reasons the exemption should not apply with respect to 
obligated persons? If so, why not? If the exemption should apply, 
should the Commission impose additional or different conditions 
concerning those transactions? Should the exemption be conditioned on 
additional or different disclosure requirements for transactions 
involving obligated persons? Please explain.
    15. Should the Commission, instead of granting the conditional 
exemption, require municipal advisors wishing to solicit Qualified 
Providers for direct placements on behalf of their Municipal Issuer 
clients to also register as brokers? For example, would a broker 
registration requirement provide necessary protections for investors, 
and if so, what specific protections would result from broker 
registration with respect to direct placement transactions? What would 
be the impact of such a requirement on municipal advisors operating in 
this space, in terms of both cost and competitive considerations? 
Please explain.
    16. With respect only to direct placement transactions described 
above, what are the practical implications of the requirements 
resulting from broker registration, for example those related to any 
due diligence or other investor protection obligations, that are not 
applicable to municipal advisors? What are the practical implications 
of the differences between broker obligations and municipal advisors' 
fair dealing obligations? Please be specific and limit the context of 
the response to direct placements in which a single institutional 
investor purchases the entire issuance.
    17. Would the proposed exemption have a competitive impact--either 
positive or negative--on municipal advisors and/or brokers? For 
example, would this proposed exemption facilitate capital formation for 
smaller Municipal Issuers? Are the costs of engaging a broker for 
direct placements burdensome for smaller Municipal Issuers? Please 
explain.

    By the Commission.

    Dated: October 2, 2019.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21882 Filed 10-8-19; 8:45 am]
 BILLING CODE 8011-01-P