The Securities and Exchange Commission does not expect to extend a temporary conditional exemption that allows municipal advisors to facilitate certain private placement deals.
In a letter sent to Rep. French Hill, R-Ark., late last week, SEC Chair Jay Clayton told the lawmaker that the SEC would pull the plug on the TCE at its deadline of Dec. 31.
“At this time, I do not expect the commission to extend this temporary relief,” Clayton said. “The commission believed it important to issue this temporary exemption to permit municipal advisors to engage in a defined, narrowly drawn set of permitted activities to address the needs of municipal issuers that may be struggling to meet unexpected financing needs during this unprecedented time.”
The SEC created the TCE in June, and the exemption contains restrictions such as a $20 million principal amount cap and minimum denominations of $100,000. The SEC proposed a similar, wider exemptive order in October.
Dealer groups criticized the SEC for not requesting comment when proposing the TCE. Hill said during a House Financial Services Committee hearing in June that the SEC should have used a traditional rulemaking approach.
Hill called the TCE a “wolf in COVID sheep clothing,” saying he did not agree with Clayton’s use of the TCE in an emergency-like situation.
The TCE was sparsely used. The most recent data shows that 101 issuers relied on the exemption from Oct. 1 to Nov. 30. The median issuance principal amount was about $2.2 million during that reporting period. The number of deals using the TCE is relatively small to the private placement market as a whole. The private placement market had $19.7 billion of issuance so far in 2020.
MAs have said the TCE should continue and argued that MAs just want to do their job in advising their clients.
In August, the Securities Industry and Financial Markets Association sued the SEC over the TCE, calling it “arbitrary and capricious,” and asked a federal court to strike it.
The issue is sensitive because dealer firms have always maintained that placement activity is in their realm and that anyone wishing to engage in that business should properly register as a broker-dealer.
SIFMA also took issue with the process of the TCE, saying the SEC violated the Administrative Procedure Act, which governs the process in which federal agencies develop and issue regulations. The SEC did not follow that since it didn’t provide the chance for stakeholders to comment, SIFMA said.
The SEC did solicit comment for the 2019 exemptive order and received over 40 comment letters.
SIFMA also accused the SEC of relying on news articles, including The Bond Buyer, that detailed market disruption, but ignored those same news sources indicating that the disruption had ended before June when the SEC issued the TCE.
The SEC argued earlier this month that the TCE was based on more than just market disruption in March, but on increased unbudgeted costs by municipalities coupled with revenue uncertainty because of the pandemic. Combined with many issuers turning to private placements as an alternative to the primary market, that led to the creation of the TCE, the SEC said.