More Experts Voice Their Concerns Over New FA Rule

SAN FRANCISCO — Industry experts echoed concerns Wednesday about regulatory changes in the municipal bond industry and the possible impact the changes may have in the coming weeks and months.

During a panel on proposed regulatory changes at a workshop hosted by the California Debt and Investment Advisory Commission, Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the speed of the implementation of the Dodd-Frank act has created uncertainties in the new regulation of financial advisers in the municipal bond market.

As part of the new legislation regulating the financial industry, the Municipal Securities Rulemaking Board has the added responsibility of regulating ­financial advisers.

“There is a lot of ambiguity in that rule and it may change your relationships with the firms you already have working for you in different capacities,” Norwood told an audience at the workshop before The Bond Buyer’s California Public Finance Conference here.

She said questions remain as to the extent of the fiduciary relationship between advisers and issuers and whether it applies to an adviser’s entire firm.

Norwood used California as an example of a complex relationship between the state and its broker-dealers, with many different interactions on many different levels.

In the long term, “I think we have some concerns [the rule] may take some players out of the market, but that has yet to be seen,” Norwood said.

Justin Pica, director of uniform practice policy at the MSRB, said that the new board, which has been expanded with the addition of 11 members, would have a keen focus on its new oversight role over the next few years.

He said new rules will likely be similar to those now on the books for brokers and dealers, such as fair practice and registration requirements.

Norwood also raised the point that MSRB’s Rule G-23 proposal that would prevent dealers from underwriting bonds on which they served as financial adviser, is backed strongly by the Securities and Exchange Commission.

“Many of the smaller deals only have one or two bids on them and limiting issuer choice might be detrimental to the pricing of those bonds by limiting the number of bidders,” Norwood said. “It is something that would impact directly the issuer community.”

Carol Lew, a partner at Stradling Yocca Carlson & Rauth, also noted the rising level of federal regulatory involvement in the municipal market as a result of Dodd-Frank and other ongoing changes.

“The threads of the federal government are going quite deep, it is even reaching lawyers,” Lew said.

She said lawyers on municipal bond deals might have to be registered in the near future with the Internal Revenue Service as paid tax preparers as they now must sign all 8038 forms they file for issuers.

Participants also raised the issue of “trading up” in the secondary market, which has been under the scrutiny of regulators.

Norwood said SIFMA recently did an analysis of the topic in different bond markets and found that corporate bonds trade up the most in the initial period after underwriting and negotiated bonds trade up the least, with competitive sales somewhere in the middle.

“Trading up is a normal part of capital markets — they show demand for a security,” she said.

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