Quarterly Regulatory Update

Welcome to the inaugural edition of the Quarterly Regulatory Update from the author’s new home at Kline Alvarado Veio.  This advisory serves as an extension of those disseminated from Sherman & Howard, which summarized the most significant regulatory developments from each quarter affecting municipal bond underwriters and Municipal Advisors.


SEC Grant’s Temporary Exemptive Order Regarding Municipal Advisors’ ability to Conduct Private Placements.  On June 16, the SEC released an Order Granting Temporary Conditional Exemption from the Broker Registration Requirements of the Securities Exchange Act of 1934 for Certain Activities of Registered Municipal Advisors.  While ostensibly an emergency measure intended to provide relief relating to the ongoing COVID-19 Pandemic, the SEC’s Order was precipitated by a series of proposals made by the independent Municipal Advisor community and as well as heated debate, which was covered in the October 2019 Quarterly Regulatory Update (from Sherman & Howard).  Pursuant to the Order, through the end of the year independent Municipal Advisors are able to solicit commercial banks (including subsidiaries thereof as well as credit unions) on behalf of municipal issuers in connection with the potential direct placement of securities as well as receive transaction-based compensation for conducting a private placement without being required to register as a broker-dealer and without the involvement of a registered broker-dealer. The Order contains numerous limitations. Municipal Advisors seeking to engage in placement activity without the involvement of a dealer must provide certain representations to prospective bank purchasers as well as obtain various representations therefrom, and Municipal Advisors must notify the SEC of instances of reliance on this exemption.  All private placements transacted pursuant to this exemption must be issued in minimum authorized denominations of $100,000 and will be subject to transferability restrictions as well as certain additional recordkeeping and notice requirements.

On July 7, the SEC held a Virtual Discussion on the Order that included both SEC and MSRB officials.  The video recording of the Virtual Discussion is available here.

MSRB Harmonizes Rule G-19, Rule G-48, and Rule G-20 with Requirements of Regulation Best Interest.  On June 25, 2020, the MSRB received approval from the SEC for amendments to MSRB Rules G-19, G-48, and G-20 that align these rules to the Commission’s recently adopted Regulation Best Interest.  An overview of Regulation Best Interest is provided in the July 2019 Quarterly Regulatory Update. The primary purpose of Regulation Best Interest is to impose a new standard of conduct for broker-dealers that goes beyond the existing standard, which requires that broker-dealers make recommendations that are “suitable” for the relevant customer. Under Regulation Best Interest, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests.  Pursuant to the amendments, Rule G-19, which governs suitability, will apply only in circumstances in which Regulation Best Interest does not apply and will thus apply to recommendations made to non-retail customers as well as recommendations made to any customers by bank dealers.  Further, Rule G-48, which governs transactions with Sophisticated Municipal Market Professionals (SMMP), will be clarified to state that the limited exception thereunder from the requirement to perform a customer-specific suitability analysis is available only for recommendations that are subject to Rule G-19. And Rule G-20, which governs gifts, gratuities, and non-cash compensation, will require any permissible non-cash compensation to align with the requirements of Regulation Best Interest. Additionally, Rules G-8 and G-9 were amended to harmonize certain books and records requirements with the provisions of Regulation Best Interest.

MSRB Waives Market Activity Fees for Transactions with the Municipal Liquidity Facility.  On May 28, the MSRB filed a proposed rule change for immediate effectiveness with the SEC to amend MSRB Rule A-13 on underwriting and transaction assessments for broker-dealers, which provides temporary relief from certain market activity fees related to the new Municipal Liquidity Facility (MLF) established by the Federal Reserve in June. Pursuant to the amendments, the following fees are waived: (i) the underwriting fee (formerly in the amount .00275%, or $.0275 per $1,000) assessed against the par amounts on primary offerings purchased by or on behalf of the MLF; (ii) transaction fees on sales to the MLF (formerly .001%, or $.01 per $1,000 of the aggregate number of reported transactions); and (iii) technology fees (formerly $1.00 per transaction) assessed against sales to the MLF.  The MSRB intends the waiver to be temporary and to expire at the same time as the MLF, which is currently scheduled to cease purchasing Eligible Notes (i.e. Tax Anticipation Notes, Tax and Revenue Anticipation Notes, Bond Anticipation Notes , Revenue Anticipation Notes, and similar short-term notes from eligible issuers) on December 31, 2020, unless the Federal Reserve decides to extend the program.

MSRB Amends Certain Rules to Provide Regulatory Relief During COVID-19 Pandemic.  On April 9, the MSRB filed a series of proposed rule changes with the SEC for immediate effectiveness seeking to provide regulatory relief on a temporary basis to broker-dealers and Municipal Advisors in light of the operational challenges due to the ongoing COVID-19 pandemic. In an effort to afford regulated entities an opportunity to better manage and allocate resources, the proposed rule changes: (i) suspend late fees owed for the period of March 1, 2020 through July 31, 2020; (ii) modify the date by which compliance obligations must be completed under certain MSRB rules for a temporary period; and (iii) extend the compliance date of certain rule changes that have yet to be implemented.  The changes affect MSRB Rules A-11 (on fee payment guidelines), A-12 (on registration with the MSRB), G-3 (on professional qualification requirements), G-27 (on supervision), and G-44 (on the supervisory and compliance obligations of Municipal Advisors).

Harsha Sekar is an attorney in KAV’s Public Finance Group. His practice involves the representation of underwriters, issuers and borrowers, banks and other transaction participants in municipal securities offerings.