The SEC proposed exempting certain municipal advisor activities from broker-dealer registration requirements.
The exemption would be available only to registered municipal advisors with respect to the direct placement by a municipal issuer of municipal securities with a single "Qualified Provider." The SEC would define "Qualified Provider" as either (i) a banking organization or a registered investment company or (ii) a state- or SEC-registered investment adviser or any other institution with total assets of at least $50 million. Under the exemption, a municipal advisor could receive transaction-based compensation without registering as a broker-dealer.
To mitigate the potential conflict of interests between that of the municipal advisor representing its municipal issuer client and that of the potential investor, the SEC stated, the proposed exemption is subject to certain conditions, including that the municipal advisor must provide specified disclosures to any potential Qualified Provider.
Comments on the proposal must be submitted to the Federal Register by December 9, 2019.
Commentary
It is always a good thing for the regulators to avoid imposing two sets of regulations on the same activity. However, the limitation under the proposed exemption of selling only to a single Qualified Provider seems to create a needless conflict between the interests of the issuer and the municipal advisor. For example, what happens if the advisor can obtain better terms by selling to two clients, rather than to a single client? As a practical matter, the advisor will have to sell only to the single client, since it is not possible to register as a broker-dealer within the timeframe of getting a deal done. So the advisor will be constrained to the detriment of the issuer. It is hard to discern a clear policy rationale for that.
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