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US Securities and Exchange Commission

SEC Asks Court to Toss out Industry Lawsuit Against Expired Muni Adviser Relief

Bill Flook  Editor, Accounting and Compliance Alert

Bill Flook  Editor, Accounting and Compliance Alert

A securities industry group cannot sue the SEC over its now-expired order granting regulatory relief to municipal advisers, the commission told the D.C. circuit in a January 22, 2021, brief. Brokers represented by the Securities Industry and Financial Markets Association (SIFMA) “have no possible stake in the outcome, as they seek no alteration to the status quo, but rather what would now be nothing more than an advisory opinion,” the agency argued.

SIFMA sued the commission in August over the temporary rules exempting municipal advisers from broker-dealer registration in connection with certain direct placements of securities. In late November, the group sought to keep its suit alive by arguing that the SEC, despite the December 31 expiration of the order, could “reinstitute the exemption at any time, without notice,” criticizing the “suspicious timing and circumstances of the planned expiration.”

The SEC issued the order in Release No. 34-89074Order 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.

The SEC, with the temporary exemption, allowed registered municipal advisers to – with some conditions – solicit banks and credit unions in connection with direct placements of securities of their municipal clients, without registering as broker-dealers under the Securities Exchange Act of 1934. The SEC, in Release No. 34-89074, wrote that the relief was necessary “in order to facilitate more timely and efficient access to bank financing alternatives by municipal issuers during this historic COVID-19-related market disruption.” (See SEC Grants Temporary Relief to Municipal Advisers From Broker-Dealer Registration for Direct Placements in the June 18, 2020, edition of Accounting & Compliance Alert.)

The muni adviser exemption was part of a wave of temporary COVID-19 relief the SEC issued last year in an attempt to ease regulatory pressures on the financial industry and help it cope with the disruption brought about by the pandemic and related economic shut-down.

But since the relief is expired, the SEC argued that “there is no live case or controversy before the court.” And SIFMA cannot show the same controversy is likely to arise again, according to the SEC.

SIFMA is arguing that the SEC flouted the notice-and-comment requirements of the Administrative Procedure Act (APA), created a disparity in requirements between the “similarly situated groups” of broker-dealers and municipal advisers, and distorted the market for municipal services without real justification.

“This disparity does not increase the availability of direct placements for municipal issuers. It merely distorts the demand for who will make those placements—putting municipal advisors at a competitive advantage over broker-dealers because of the decreased regulatory burden imposed on their solicitation activities,” SIFMA wrote in the November 30 brief. “And this distorted demand undermines the purposes of requiring registration in the first place, increasing the risk that more placements of municipal securities will occur without the important statutory and regulatory safety nets that were imposed on broker-dealers for the protection of investors.”

The exemption in Release No. 34-89074 represents a scaled-back version of the SEC’s proposed rules from October 2019, which SIFMA also opposes.

The SEC issued that proposal in Release No. 34-87204Notice of 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. See SEC Proposal Would Exempt Municipal Advisers From Broker-Dealer Registration for ‘Direct Placements’ in the October 16, 2019, edition of ACA.)


This article originally appeared in the January 29, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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