In the fourth quarter of 2019 and beginning of 2020, the municipal securities industry saw new regulatory activity relating to the announcement of examination and enforcement priorities in the new year, the private placement of municipal securities, and underwriters’ fair dealing obligations. Below, we have summarized the most significant regulatory developments from the past quarter affecting municipal bond underwriters and Municipal Advisors.
- The SEC’s 2020 Examination Priorities Letter Highlights Municipal Advisors. Last month, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) released its 2020 Examination Priorities letter, which describes the Commission’s intent to focus on Municipal Advisors in the coming year. Specifically, the letter states that the SEC will prioritize the review of Municipal Advisor fiduciary duty obligations to municipal entity clients, fair dealing with market participant requirements, and the disclosure of conflicts of interest. OCIE will also focus on the conduct of Municipal Advisors when faced with conflicts of interest as well as compliance with the new MSRB Rule G-40, which governs advertising requirements. The Financial Industry Regulatory Authority (FINRA) last month also released its 2020 Risk Monitoring and Examination Priorities Letter but did not include any public finance topics.
- Compliance Date Set for Revised Interpretive Notice on Underwriters’ Fair Dealing Obligations to Issuers. The Municipal Securities Rulemaking Board (MSRB) established a compliance date of November 30, 2020, for its amendments to its 2012 Interpretive Release that provides guidance regarding the fair dealing obligations underwriters owe to issuers of municipal securities under MSRB Rule G-17, which governs conduct standards when engaging in municipal securities and municipal advisory activities. The SEC approved the MSRB’s 2019 filings outlining its proposed amendments, which are summarized in last quarter’s Regulatory Update, on November 6, 2019. The amendments apply only to the 2012 Interpretive Release and will not amend Rule G-17 itself. Notably, the amendments were opposed by the investment banking community.
- SIFMA and the BDA Continue to Lobby Against the SEC’s Proposed Exemptive Order Regarding Municipal Advisors’ Engagement in Private Placements. As noted in last quarter’s Regulatory Update, in 2019 the SEC issued a Proposed Exemptive Order that would grant exemptive relief pursuant to Section 15 of the Exchange Act to permit a registered Municipal Advisor, acting on behalf of a municipal issuer client, to solicit specified institutional investors (such as commercial banks) in connection with the direct placement of municipal securities without registering as a broker-dealer when certain conditions are met. The investment banking industry has continued to vigorously lobby against the proposal, with both the Securities Industry and Financial Markets Association (SIFMA) and Bond Dealers of America (BDA) releasing follow-up letters (see here and here) arguing that the Order is inconsistent with current law regarding broker-dealer registration and that it would enable Municipal Advisors to facilitate private placements with minimal disclosure and due diligence obligations. Both industry groups have made clear their intention to significantly restrict if not completely kill the Order.
- The MSRB Votes to Reduce the Size of Its Board. Last month, the MSRB voted to reduce the size of its board from 21 to 15 members and make other changes regarding the board’s composition and terms, which have been consolidated in draft amendments on which the MSRB is currently seeking comments. In a Regulatory Notice released shortly after the vote was made public, the MSRB states that the proposed amendments would tighten the independence standard required of public representatives, impose a limit on the number of years a board member may serve, and require that board committees responsible for assisting the board in overseeing critical governance functions be led by public representatives, among certain other changes. Regarding the “independence standard,” the MSRB is specifically seeking comments on whether the current standard—which requires all independent board members to maintain a two-year period of separation from any municipal securities broker, municipal securities dealer, or independent Municipal Advisor—is sufficiently lengthy. The amendments appear to reflect several of the propositions outlined in the currently pending MSRB Reform Act, which was described in last quarter’s Regulatory Update.
Harsha Sekar is an attorney in Sherman & Howard’s Public Finance Group. His practice involves the representation of underwriters, issuers and borrowers, banks and other transaction participants in municipal securities offerings.
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