New FA Rules 'Fair and Balanced’

WASHINGTON — As the Municipal Securities Rulemaking Board begins to regulate an anxious and skeptical non-dealer advisory community, its new chairman, Michael Bartolotta of Dallas-based First Southwest Co., the largest dealer-advisory firm in the nation, is stressing that the MSRB’s rules will be fair to all regulated market participants.

In an interview this week, Bartolotta downplayed concerns that he and other dealers would continue to dominate the new, majority-public MSRB, repeatedly stating that the board will work to ensure a fair regulatory playing field among dealers and advisers.

The new board holds its first quarterly meeting at the MSRB’s Alexandria, Va., headquarters next week.

“Our agenda is just fair and balanced rules” that will promote the mission of ensuring both investor and issuer protection, said Bartolotta, vice chairman at First Southwest. “This is not about firms competing. It’s about raising the profile and the professionalism of the industry.”

More generally, he said the MSRB’s objectives boil down to ensuring that “issuers and investors are able to make informed decisions about what debt they sell or transactions they enter into.”

Though Bartolotta said it will be up to the reconstituted self-regulator to determine how to implement its expanded mission, MSRB executive director Lynnette Hotchkiss, who sat in on the interview, said the board’s steps may include making improvements to the functionality and features of its online Electronic Municipal Market Access system.

As MSRB chairman, Bartolotta succeeds Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan. Bartolotta is in the second year of a three-year term. He previously served on the board for about three months in late 2008, but had to resign his securities-firm seat after First Southwest was purchased by PlainsCapital Corp., the second-largest privately held bank in Texas.

Previous chairmen of the MSRB have left their mark by jaw-boning on derivatives, working to establish the central disclosure repository known as EMMA or pushing for rating agencies to feed ratings directly onto the site. But Bartolotta said his tenure will revolve around implementing an array of rules and guidelines for the “wide swath” of muni advisers that the board began to oversee Oct. 1.

Those who will be subject to the new rules include financial advisers, swap and pension fund advisers, guaranteed investment contract brokers, and placement agents.

Specifically, the MSRB must apply existing dealer pay-to-play restrictions and fair-dealing requirements to advisers.

It also must develop tests, professional standards, recordkeeping and continuing education requirements for advisers, as well as rules or guidance detailing the fiduciary duty obligation that the Dodd-Frank Wall Street Reform and Consumer Protection Act imposes on them but does not clearly define.

Bartolotta’s assurances on fairness come as a number of non-dealer advisers have expressed skepticism about his election to head the MSRB, with several noting that his firm was instrumental in lobbying for state legislation that would have prohibited issuers in Texas from hiring independent financial advisers to work on their muni transactions.

Though the legislation was altered significantly before it was signed into law in 2007, and now only requires that advisers register with the state securities board, non-dealer advisers saw it as an effort to eliminate the competition. First Southwest often switches from serving as financial adviser to underwriter in the same transaction.

First Southwest was adviser for 520 issues totaling $19 billion this year as of Oct. 1, according to Thomson Reuters. The firm is ranked largest among dealer-FAs and is second only to Public Financial Management Inc. for all financial adviserss. PFM was adviser for 705 issues totaling $38.9 billion.


One adviser, who asked not to be named for fear of retribution from the board, said of Bartolotta’s election: “If the MSRB wanted to pick a single candidate that the newly regulated independent advisers would be most suspicious of, they couldn’t have picked a better one.”

Advisers are reluctant to be quoted by name voicing their concerns. But Tom Johnsen, a principal at financial advisory firm Fieldman Rolapp & Associates in Irvine, Calif., and board member on the National Association of Independent Public Finance Advisors, said he is reserving judgment until he has a chance to meet with Bartolotta.

“The world is full of rumors and a lot of rumors are incorrect,” he said. “Maybe we could learn some things about him and he could learn some things about us.”

Johnsen stressed, however, that he hopes the board’s deliberations are more transparent.

MSRB staff have picked up on concerns and uncertainty surrounding the new authority over municipal advisers. Speaking at a NAIPFA conference last week, Hotchkiss said she is confident the board’s actions “will demonstrate our commitment to a fair, open and transparent rulemaking process.”

In the interview, Bartolotta said the MSRB will go out of its way to solicit input from advisers and other market participants. To that end, it is holding the two outreach events for market participants, one in New York on Nov. 2 and another in Chicago on Dec. 6.

It also is establishing a panel or focus group of advisers to provide feedback to the board on its rules and regulations, in addition to separate advisory panels or focus groups of issuers, dealers, and investors.

Meanwhile, Bartolotta downplayed the possibility that as both chairman and a bank-dealer representative, he would wield disproportionate influence on the new board, which increased to 21 members from 15 and is now led by a majority of 11 “public” representatives. Before Oct. 1, 10 of the 15 board seats were filled by bank and securities firm representatives.

“I’m just one vote out of 21 and there has to be a majority” on any issue, Bartolotta said.

He declined to discuss the board’s recently released draft changes to its Rule G-23, which would eliminate the current practice of allowing a dealer-FA to resign as adviser and then underwrite the same transaction provided it makes certain disclosures to, and receives permission from, the issuer. In May, SEC chairman Mary Schapiro called on the board to alter the rule, deriding such role-switching as a “classic” conflict of interest.

Bartolotta said he wanted to withhold comment on the proposal until he had a chance to fully digest the 70 comments that the MSRB has received.

Asked about the fiduciary duty for which the MSRB must write rules or guidance, Bartolotta would only say that he believes fiduciaries generally must put “someone’s interests ahead of your interests” and that board members must discuss the issue.

Some regulators, most recently SEC commissioner Elisse Walter, have highlighted as a concern the separation between rulemaking and enforcement in the municipal market. But Bartolotta defended the unique, proscriptive rulemaking role played by the MSRB, which stems from its “core knowledge and competency” in munis, he said.

“This board has certain knowledge that we can bring to regulate the industry that is highly specialized and focused that other organizations may not have or have had the ability to have,” he said.

Currently, the MSRB writes rules for dealers and advisers while the Financial Industry Regulatory Authority enforces them for dealers and the SEC enforces them for advisers.

In a speech last October on muni regulation, Walter, a former FINRA senior executive vice president, said that maintaining a separate “regulatory function” from the “enforcement and examination functions” leads to “coordination and communication problems.”

But Hotchkiss said she believes “there is a very real, meaningful and substantial exchange of information between the MSRB and various enforcement agencies.”

She noted that the board has launched a new website, RegWeb, that allows other regulators to extract data straight from MSRB databases.

The board also helps FINRA train its staff on municipal issues and is required to meet regularly with other regulators to strengthen their communication, as required by the Dodd-Frank law.

“I would personally challenge the premise that there is a disconnect,” Hotchkiss said.

Bartolotta has more than 22 years of experience in public finance. In addition to chairing First Southwest’s public finance management committee, he is a member of the board of directors of TexSTAR, a local government investment pool, and an advisory board member to LOGIC, another local government investment pool.

He also is a member of the M.D. Anderson Cancer Center’s board of visitors, the philanthropic arm of the massive Houston hospital. He earned a bachelor’s degree in actuarial science from the University of Illinois.

Bartolotta lives in Houston with his wife and two young twins.

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