Document ID: SEC-2020-0960-0001
Agency: sec
Document Type: Notice
Title: Order: Temporary Conditional Exemption from the Broker Registration Requirements of the Securities Exchange Act for Certain Activities of Registered Municipal Advisors
Posted Date: 2020-06-19T04:00Z

[Federal Register Volume 85, Number 119 (Friday, June 19, 2020)]
[Notices]
[Pages 37133-37136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13284]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89074]

Order Granting a Temporary 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

June 16, 2020.
AGENCY: Securities and Exchange Commission.

ACTION: Temporary exemptive order.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
granting a temporary conditional exemption from broker registration 
under Section 15 of the Securities Exchange Act of 1934 (``Exchange 
Act'') for registered municipal advisors to address disruption in the 
municipal securities markets as a result of the coronavirus disease 
2019 (``COVID-19'') pandemic. The temporary conditional exemption 
permits registered municipal advisors to solicit banks, their wholly-
owned subsidiaries that are engaged in commercial lending and financing 
activities, and credit unions in connection with direct placements of 
securities issued by their municipal issuer clients, subject to the 
requirements set forth below.

DATES: This exemptive order is effective from the date of this Order 
until December 31, 2020.

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

I. Overview

    The Commission continues to closely monitor the impacts of the 
COVID-19 pandemic. The Commission understands that the outbreak has had 
far-reaching and unanticipated effects, including disruption to the 
municipal securities market.\1\ Municipal issuers have been 
experiencing COVID-19-related stress, but must continue to operate 
despite facing increased unbudgeted costs coupled with revenue 
uncertainty.\2\ Timely and efficient access to the capital markets is 
critical in order for municipal issuers to continue to meet their 
operational needs. On June 3, 2020, the Federal Reserve Board announced 
the revised terms of its Municipal Liquidity Facility, originally 
established in April 2020 to purchase debt from state and local 
governments.\3\ The revised facility will support lending to U.S. 
states and the District of Columbia, U.S. cities with a population 
exceeding 250,000 residents, and U.S. counties with a population 
exceeding 500,000 residents that had an investment grade rating as of 
April 8, 2020, from at least one credit rating agency that the Federal 
Reserve has classified as a ``major nationally recognized statistical 
rating organization.'' \4\ In addition to the population and ratings 
requirements, in order to access the facility, an eligible issuer must 
also provide a written certification that it is unable to secure 
adequate credit accommodations from other banking institutions and that 
it is not insolvent.\5\ Most municipal issuers, including many small 
cities, towns and villages, facing significant budget shortfalls do not 
meet the population thresholds and are not eligible to access the 
facility.\6\ At the same time, municipal issuers have faced challenges 
accessing the primary market, and as an alternative many municipal 
issuers have

[[Page 37134]]

turned to other means of financing, such as private placements, loans, 
and lines of credit with banks.\7\
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    \1\ See, e.g., Heather Gillers and Gunjan Banerji, ``How the 
Muni Market Became the Epicenter of the Liquidity Crisis'' Wall 
Street Journal, April 2, 2020; Lynne Funk, ``Virus Leads to Growing, 
Severe Selling Pressure on Muni Market,'' The Bond Buyer, March 18, 
2020 and Lynne Funk, ``Billions Pulled from Funds as Investors Flee 
Munis,'' The Bond Buyer, March 19, 2020.
    \2\ On April 14, 2020, the United States Conference of Mayors 
(USCM) and the National League of Cities (NLC) released findings of 
a survey that reported nearly nine in 10 cities expect a budget 
shortfall due to the impact of the COVID-19 pandemic on their 
economies. See ``Cities Report Pandemic Creating Painful Budget 
Shortfalls, May Force Furloughs and Layoffs'' April 14, 2020 
available at https://www.usmayors.org/2020/04/14/cities-report-pandemic-creating-painful-budget-shortfalls-may-force-furloughs-and-layoffs/ (``USCM and NLC Survey''); Tony Romm, ``More than 2,100 
U.S. cities brace for budget shortfalls due to coronavirus, survey 
finds, with many planning cuts and layoffs,'' The Washington Post, 
April 14, 2020. See also National League of Cities--COVID available 
at https://www.nlc.org/topics/health-wellness/covid-19 for general 
information on the impact of COVID on cities and COVID-19 Pandemic 
County Response Efforts & Priorities available at https://www.naco.org/covid19 for general information the impact of COVID on 
counties.
    \3\ See Federal Reserve Board Term Sheet, June 3, 2020 (``Term 
Sheet'') available at https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200603a1.pdf. In addition, to ensure 
that each U.S. state has at least two total cities and counties (on 
a combined basis) that may participate in the facility, certain U.S. 
state governors are permitted to designate up to two of the state's 
most populous cities and/or counties (on a combined basis) to access 
the facility, resulting in an additional 34 cities and/or counties 
that may access the facility as of June 2020. See Term Sheet --
Appendix A for details of the allocation.
    \4\ For further information on the cities and counties that meet 
the population requirement, see Federal Reserve Bank of New York 
FAQs: Municipal Liquidity Facility and FAQs Appendix A available at 
https://www.newyorkfed.org/medialibrary/media/markets/municipal-liquidity-facility-eligible-issuers. For details of the required 
ratings criteria, see Federal Reserve Bank of New York FAQs: 
Municipal Liquidity Facility and FAQs Appendix B available at 
https://www.newyorkfed.org/medialibrary/media/markets/municipal-liquidity-facility-pricing.
    \5\ Id.
    \6\ There are 19,495 incorporated cities, towns, and villages in 
the U.S. Only 87 have populations above the required 250,000 
threshold. See City and Town Population Totals: 2010-2018, available 
at https://www.census.gov/data/tables/time-series/demo/popest/2010s-total-cities-and-towns.html. There are 3,142 counties in the U.S. 
Only 140 have populations above the 500,000 required threshold. See 
County Population Totals 2010-2019, available at https://www.census.gov/data/tables/time-series/demo/popest/2010s-counties-total.html. An additional 34 cities and/or counties that do not meet 
these population thresholds may be ``designated'' as eligible to 
access the facility. See Term Sheet --Appendix A; see also USCM and 
NCL Survey. A total of 2,463 cities, towns and villages provided 
information to NLC and USCM. 2,191 of the cities are under 50,000 
population; 181 are between 50,000 and 199,999; 56 are between 
200,000 and 499,999; and 35 have a population of 500,000 and above--
a group that includes 19 of the nation's 20 largest cities. The 
cities who participated in the survey represent 57% of the nation's 
municipal finance sector and 10% of its municipal governments, and 
their population totals 93,015,252, which is 28% of the total U.S. 
population. The Government Finance Officers Association also 
conducted an online survey of finance officers regarding the fiscal 
impacts of the COVID-19. See ``Survey Results Quick Snapshot as of 
March 23, 2020,'' available at https://www.gfoa.org/early-data-gfoa-survey-shows-substantial-fiscal-impact-governments-covid-19-outbreak-and-response (``March 2020 GFOA Survey''). Approximately 
1,100 finance officers responded, more than half of whom represent 
smaller jurisdictions. The survey responses indicated that for 
respondents with operating budgets of $100 million or less, nearly 
15% projected that unanticipated expenses for the next six months 
could be anywhere from 1 percent to over 30 percent of their 
operating budget (e.g., for a small government with an operating 
budget of $75 million, 1 percent is $750,000). These unanticipated 
expenses are expected to be driven largely by staff sick leave, 
equipment and technology, and staff overtime.
    \7\ Lynne Funk, ``With Muni Primary in Limbo, Issuers Turn to 
Private Placements,'' The Bond Buyer, March 23, 2020 available at 
https://www.bondbuyer.com/news/private-placements-on-uptick-as-issuers-search-for-buyers; Amanda Albright and Danielle Moran ``BofA 
Gets States That Want to Borrow Now Rather Than Wait on Fed,'' 
Bloomberg, April 21, 2020; Robert Slavin, ``Alternative Muni 
Borrowings Have Spiked Since March,'' The Bond Buyer, May 19, 2020 
available at https://www.bondbuyer.com/news/alternative-municipal-borrowings-have-spiked-since-mid-march.
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    Municipal issuers often retain registered municipal advisors to 
provide advice on financing options, including but not limited to the 
types of financing described above. In order to facilitate more timely 
and efficient access to bank financing alternatives by municipal 
issuers during this historic COVID-19-related market disruption, we are 
issuing this Order granting an emergency, temporary conditional 
exemption permitting registered municipal advisors to solicit a defined 
set of banks, wholly-owned subsidiaries of banks, and credit unions in 
connection with certain direct placements of municipal securities by 
their municipal issuer clients (the ``Temporary Conditional 
Exemption'').
    In October 2019, the Commission proposed and sought public comment 
on a conditional exemption from the broker registration requirements 
under Section 15(a)(2) of the Exchange Act for registered municipal 
advisors engaging in specified activities with respect to direct 
placements of municipal securities.\8\ While the Commission is not 
moving forward with the proposed exemption at this time, it believes 
that it is important to issue the Temporary Conditional Exemption with 
the parameters and requirements specified to address the exigent 
circumstances during this unprecedented time. Specifically, the 
Temporary Conditional Exemption is designed to aid smaller municipal 
issuers that may be struggling to meet their unexpected financing needs 
in light of the COVID-19 pandemic. This Temporary Conditional Exemption 
will provide additional flexibility for registered municipal advisors 
to assist their municipal issuer clients in more efficiently obtaining 
financing during this market disruption in a way that remains 
consistent with investor protection. To the extent market participants 
have information or views related to the Proposed Exemption, including 
in light of actions taken pursuant to the Temporary Conditional 
Exemption, that information can be submitted to the comment file for 
the Proposed Exemption for the Commission's consideration.
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    \8\ See 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, Release No. 34-87204 (Oct. 2, 2019), 
84 FR 54062 (Oct. 9, 2019) (``Proposed Exemption''). Comments on the 
Proposed Exemption are available at https://www.sec.gov/comments/s7-16-19/s71619.htm.
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    The Temporary Conditional Exemption is subject to a number of 
conditions designed to protect investors. The Temporary Conditional 
Exemption requires that the Registered Municipal Advisor obtain written 
representations from the Qualified Provider, which limits the potential 
investor base for direct placements issued pursuant to the Temporary 
Conditional Exemption 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 Temporary Conditional 
Exemption requires that the Registered Municipal Advisor make written 
representations, which protect potential investors by putting them on 
notice of what duties and obligations the municipal advisor will 
undertake in connection with the transaction. It also requires the 
Registered Municipal Advisor to obtain written representations from the 
Qualified Provider(s) regarding the Temporary Conditional Exemption's 
investor eligibility and transfer restriction conditions. The Temporary 
Conditional Exemption further requires Registered Municipal Advisors to 
notify the Commission staff of any instances of reliance on the 
exemption, which will inform the Commission about how the exemption may 
affect the municipal securities market.
    The solicitation activities permitted under the Temporary 
Conditional Exemption, as discussed below, would be in addition to the 
core advisory activities in which a registered municipal advisor might 
otherwise engage under the existing regulatory regime. These core 
advisory activities include 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.\9\
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    \9\ See Registration of Municipal Advisors, Exchange Act Rel. 
No. 70462 (Sept. 30, 2013), 78 FR 67468, 67472.
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II. Temporary Conditional Exemption From Broker Registration for 
Certain Activities of Registered Municipal Advisors in Connection With 
Direct Placements of Municipal Securities

    It is ordered, pursuant to Sections 15(a)(2) and 36(a)(1) of the 
Exchange Act, that:
    During the Exemption Period as defined in Section III below, a 
Registered Municipal Advisor may (1) engage in Permitted Activities--
i.e., solicitation--of one or more Qualified Providers in connection 
with a potential Direct Placement of municipal securities by its 
Municipal Issuer client and (2) receive transaction-based compensation 
for services provided in connection with that Direct Placement, without 
being required to register as a broker under Section 15(a) of the 
Exchange Act, so long as all of the conditions in this Order are met.

Definitions

    For purposes of this Temporary Conditional Exemption:
     Registered Municipal Advisor means a municipal advisor 
registered with the Commission under Section 15B of the Exchange Act.
     Municipal Issuer means either a municipal entity or 
obligated person as defined in the Exchange Act.\10\
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    \10\ See Exchange Act Section 15B(e)(8) (defining ``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). See also Exchange Act 15B(e)(10) (defining 
``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 included 
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 (Nov. 12, 2013).

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[[Page 37135]]

     Qualified Provider means (i) a bank as defined in Section 
3(a)(6) of the Exchange Act; (ii) a wholly-owned subsidiary of a bank 
engaged in commercial lending and financing activities, such as an 
equipment lease financing corporation; or (iii) a federally- or state-
chartered credit union.\11\
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    \11\ The Commission believes these institutions typically 
perform their own credit evaluations of the municipal issuer 
consistent with their commercial lending practices and regulatory 
obligations and therefore likely are in less need of a placement 
agent to undertake the due diligence activities on their behalf. The 
Commission notes that federal credit unions are already expressly 
permitted pursuant to National Credit Union Administration 
regulations to purchase municipal securities so long as they 
undertake a required analysis. See, e.g., 14 U.S.C. 1752(1) 
(defining federal credit union as, among other things, an 
association ``creating a source of credit for provident or 
productive purposes''); 12 CFR 703.14(e) (permitting a federal 
credit union to purchase municipal securities so long as it performs 
an analysis and ``reasonably concludes the security is at least 
investment grade'').
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     Direct Placement means a direct purchase from a Municipal 
Issuer of municipal securities by one or more Qualified Providers.
     Permitted Activities means solicitation activities to 
identify and assess potential Qualified Providers based upon, among 
other things, 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.
    Required Representations. The Registered Municipal Advisor must 
obtain written representations from the Qualified Provider(s) that the 
Qualified Provider:
     Is a Qualified Provider as defined in the Temporary 
Conditional Exemption;
     Is capable of independently evaluating the investment 
risks of the transaction;
     Is not purchasing with a view to distributing the 
securities; \12\ and
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    \12\ These restrictions, which apply to the Qualified Provider, 
are consistent with the restrictions applicable to broker-dealers 
with respect to the limited offering exemption in Exchange Act Rule 
15c2-12 regarding Municipal Securities Disclosure. See 17 CFR 
240.15c2-12(d)(1)(i).
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     Will not transfer any portion of the direct placement 
within one year of the date of issuance of the securities, except to 
another Qualified Provider(s).

These required representations are designed to help ensure a Registered 
Municipal Advisor acting in reliance on this Temporary Conditional 
Exemption is soliciting only eligible Qualified Providers. They also 
are intended to help minimize the potential for resale to retail 
investors of direct placements, which the Commission understands may 
not be rated and are not required to have disclosure documents.\13\
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    \13\ In contrast to direct placements, which are not subject to 
Exchange Act Rule 15c2-12's requirements, a participating 
underwriter in a primary offering of municipal securities subject to 
Rule 15c2-12 must obtain and review a ``deemed final'' official 
statement and a final official statement prepared by an issuer or 
its representatives. See 17 CFR 240.15c2-12(b)(1) and (3) and 
(f)((3).
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    The Registered Municipal Advisor must also make a written 
representation to, and obtain a written acknowledgment of receipt from, 
the Qualified Provider(s) that the Registered Municipal Advisor:
     Represents solely the interests of the Municipal Issuer 
and not the Qualified Provider;
     Is soliciting the Qualified Provider in connection with 
the direct placement pursuant to the Commission's Temporary Conditional 
Exemption;
     Has not conducted due diligence on behalf of the Qualified 
Provider;
     Has not, as of the date of the written representation, 
engaged, nor has the Municipal Issuer engaged, a broker-dealer as a 
placement agent in connection with the direct placement; and
     Acknowledges that the Qualified Provider nonetheless may 
choose to engage the services of a broker-dealer to represent the 
Qualified Provider's interests.

These required representations are designed to help avoid any confusion 
by the Qualified Provider concerning the role of the Registered 
Municipal Advisor in the transaction, and further to make explicit that 
a Qualified Provider is in no way restricted from engaging the services 
of a broker-dealer as intermediary in the transaction, if it chooses to 
do so.

Other Required Terms and Conditions

     Restricted Scope of Temporary Conditional Exemption: A 
Registered Municipal Advisor cannot rely on this Temporary Conditional 
Exemption to engage in broker activity relating to municipal securities 
offerings beyond the scope of this Order. For example, this exemption 
does not apply with respect to public offerings of municipal securities 
or the sale of securities to a retail investor. Additionally, a 
Registered Municipal Advisor seeking to rely on this Temporary 
Conditional Exemption cannot bind the Municipal Issuer, or handle funds 
or securities, in connection with the subject Direct Placement. The 
Permitted Activities have been narrowly drawn to address the needs of 
municipal issuers that may be struggling to meet their unexpected 
financing needs. These restrictions are intended to provide further 
protections by limiting the scope of brokerage activities permitted by 
this order.
     Size Limit: The aggregate principal amount of the Direct 
Placement may not exceed $20 million. This is consistent with the 
Commission's intended objective of facilitating access to capital for 
smaller Municipal Issuers that may be ineligible for the Federal 
Reserve's Municipal Liquidity Facility.\14\
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    \14\ See, e.g., supra n. 6. The March 2020 GFOA Study states 
that of the subgroup of respondents with an operating budget of less 
than $100 million, over 15 percent of those smaller governments 
anticipate issuing debt for projects in amounts ranging from 10 
percent to nearly 50 percent of their operating budgets. See id. The 
Commission believes that, in light of these responses, a size limit 
of $20 million would be sufficiently large to permit these smaller 
jurisdictions to address their liquidity needs through the use of 
direct placements if they choose to do so.
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     Authorized Denomination Requirement: The Direct Placement 
must be issued in authorized denominations of $100,000 or more. This 
floor on denomination size is designed to diminish the likelihood of a 
secondary market resale of these direct placements, particularly to 
retail investors, because these direct placements may not be rated and 
are not required to have disclosure documents.\15\
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    \15\ See supra note 13.
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     Restriction on Transferability: If the Qualified 
Provider(s) transfers all or any portion of the direct placement within 
one year of the date of issuance of the direct placement, the Qualified 
Provider(s) may transfer the securities only to another Qualified 
Provider(s). This condition, along with the Authorized Denomination 
Requirement, is designed to discourage secondary market resale of 
direct placements, particularly to retail investors, for the same 
reasons stated above.
     Recordkeeping: A Registered Municipal Advisor seeking to 
rely on the Temporary Conditional Exemption must make and keep the 
records required by Exchange Act Rule 15Ba1-8(a)(1).
     Notification Requirement: A Registered Municipal Advisor 
seeking to rely on the Temporary Conditional Exemption must notify 
staff in the Division of Trading and Markets of any Direct Placement 
for which it has relied on the Temporary Conditional Exemption no later 
than 30 calendar days after the sale of securities in the Direct 
Placement. The notification must identify: (1) The Municipal Issuer; 
(2)

[[Page 37136]]

the date of the Direct Placement; (3) principal amount of the Direct 
Placement; (4) the Qualified Provider(s); and (5) the CUSIP, if 
available. Notification should be made by sending this information in 
an email to Commission staff at tradingandmarkets@sec.gov.

III. Time Period for the Temporary Conditional Exemption

    The relief provided by this Temporary Conditional Exemption begins 
on the date of this Order and will expire on December 31, 2020.
    The Commission intends to continue to monitor the situation as it 
develops. The Temporary Conditional Exemption may be modified as 
appropriate.

IV. Conclusion

    In light of the current and potential ongoing effects of COVID-19 
on the municipal securities market discussed above, the Commission 
finds that the Temporary Conditional Exemption set forth above is 
consistent with the public interest and the protection of investors and 
is necessary or appropriate in the public interest, consistent with 
Sections 15(a)(2) and 36(a)(1) of the Exchange Act.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-13284 Filed 6-18-20; 8:45 am]
BILLING CODE 8011-01-P