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Law360 (June 16, 2020, 5:05 PM EDT) -- The U.S. Securities and Exchange Commission will temporarily allow registered municipal advisers to sell municipal securities to qualified banks and credit unions through 2020, an effort to free up cash in small cities and towns amid COVID-19, the regulator said in an order issued Tuesday.
The SEC acknowledged that the pandemic has had "far-reaching and unanticipated effects" as municipal issuers face "increased unbudgeted costs coupled with revenue uncertainty," noting that many small municipalities do not meet the population threshold necessary to access the Federal Reserve's Municipal Liquidity Facility.
"Most municipal issuers, including many small cities, towns and villages, facing significant budget shortfalls do not meet the population thresholds and are not eligible to access the facility," the order said.
Among its requirements, the Fed's municipal facility — issued in April and revised June 3 — only grants relief to U.S. cities with a population over 250,000 as well as counties exceeding 500,000 residents.
Allowing municipal advisers in smaller jurisdictions access to banks, credit unions and the like to place securities will "address the exigent circumstances during this unprecedented time" and "facilitate more timely and efficient access to bank financing alternatives," the order states.
The order allows the advisers to receive transaction-based compensation for the direct placements, which must be issued in denominations of $100,000 or more, without having to register as brokers under securities laws.
But the SEC built a number of protections into the temporary order.
The advisers must obtain written representations showing that the institutions tapped "routinely engage in credit risk analysis," do not intend to resell the securities to retail investors and will not transfer any of the securities for one year post-issuance unless to another qualified entity.
In addition, they must document that their interests lie solely with the municipality, not the bank, that the transaction is being done under the SEC's temporary order and that they haven't conducted due diligence for the banks.
The restrictions and others ensure that the banks tapped by the advisers are qualified, "help minimize the potential for resale to retail investors of direct placements" and avoid confusion as to the advisers' intentions, the SEC said.
The advisers must also outline their "duties and obligations" in connection with the transactions in writing to potential investors.
The order is "consistent with the public interest and the protection of investors ... in light of the current and potential ongoing effects of COVID-19 on the municipal securities market," the SEC said.
--Editing by Jack Karp.
For a reprint of this article, please contact reprints@law360.com.
