Broker-Dealers Blast G-44

WASHINGTON — Broker-dealers criticized a proposed Municipal Securities Rulemaking Board rule, saying it would subject them to tougher rules than those that apply to municipal advisers who practice on their own or in independent firms.

“The proposed Rule G-44 would create a two-tiered system, with municipal advisers at broker-dealers being subject to stricter requirements than stand-alone municipal advisers,” said Mike Nicholas, chief executive officer of the Bond Dealers of America, in a two-page comment letter to the MSRB dated June 24. “This two-tiered system would not only create a competitive advantage to municipal advisers that have a stand-alone business model, but would also provide issuers with less protection when they deal with stand-alone municipal advisers.”

The comments come nearly one year after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which placed non-dealer muni advisers under federal oversight and regulation for the first time.

Under existing Rule G-27, broker-dealers, including dealer-financial advisers engaged in certain activities, must have certain “detailed” supervisory systems to ensure compliance with MSRB rules, the board noted in its release last month.

Draft G-44 would require a “basic supervisory structure” for muni advisers not already governed by the existing rule. The MSRB said in its release that a muni adviser’s supervisory system should, at a minimum, include: establishing and maintaining written procedures, designating a muni-adviser principal based on experience or training, and conducting annual compliance interviews or meetings.

Draft G-44 would not require muni advisers with multiple offices to create “offices of municipal supervisory jurisdiction,” as broker-dealers must under Rule G-27. The board also said many of G-27’s customer provisions lacked a muni adviser counterpart, since muni advisers tend to have issuer clients, as opposed to individual customers. Issuers are not defined as customers under MSRB rules.

But in comment letters, broker-dealers and dealer groups panned the MSRB’s approach, saying the board should forge the same supervisory requirements for all municipal advisers.

“To ensure a level playing field, all market participants engaging in the same activity should be subject to the same standards,” wrote David Cohen, a managing director and associate general counsel at the Securities Industry and Financial Markets Association.

First Southwest Co. — which operates as both a broker-dealer and financial adviser — also took issue with the MSRB’s approach, saying draft G-44 failed to include “critical components” of effective supervision and compliance regimes.

In a three-page comment letter dated June 23, Robert Coulter, a senior vice president and chief administrative officer at First Southwest, said the MSRB should require all muni advisers to designate a chief compliance officer and produce an annual compliance report to the firm’s senior management.

“A consistent set of rules for both dealer firms and municipal advisers is critical to the protection of issuers,” Coulter wrote.

Meanwhile, in a five-page comment letter dated June 24, the National Association of Independent Public Finance Advisors — an independent FA group — asked the MSRB for guidance about small muni adviser firms and sole practitioners.

Specifically, NAIPFA’s president, Colette Irwin-Knott, urged the MSRB to clarify that each muni adviser firm would have the flexibility to adopt a supervisory regime “that makes sense for that firm,” so regulators who enforce the MSRB’s rules, such as the Financial Industry Regulatory Authority, would not expect or require uniformity.

She also said muni adviser firms with one employee should be exempt from draft G-44’s proposed supervision requirements. In particular, she wrote, sole practitioners should not have to designate a principal, use reasonable efforts to ensure that supervisory personnel are qualified, or conduct an annual compliance meeting.

In other regulatory matters, market participants last week continued their sharp division over MSRB Rule G-23, the long-contested role-switching ban that would prohibit municipal securities dealers from acting as an FA to a municipal entity on a new issuance and later acting as an underwriter on the same issue.

Last month, the SEC approved an amended version of the MSRB’s proposed Rule G-23, capping a lengthy and contentious rulemaking process. In its approval order, the SEC called for an additional comment period, which expired Friday.

As approved, Rule G-23 clarifies that an underwriter may provide certain advice to an issuer without violating the role-switching ban if it clearly identifies itself as an underwriter “from the earliest stages of its relationship with the issuer” on that issue. It must disclose that it is in an arm’s-length relationship with the issuer, and that its interests differ from those of the issuer. The underwriter cannot engage in conduct inconsistent with an arms-length relationship.

In a three-page comment letter dated June 24, SIFMA’s managing director and associate general counsel, Leslie Norwood, wrote that SIFMA is concerned about “the ramifications” of an underwriter being deemed an FA without “actually having consented to that role and its attendant obligations.”

She said G-23 “effectively promulgates what could be used as a new standard of care” that would subject an underwriter’s actions to hindsight.

But NAIPFA, in a 10-page comment letter signed by Irwin-Knott, said G-23 would allow broker-dealers to provide the same advice as FAs — about the structure, timing, and terms of a muni issuance — without the issuer protections erected by Dodd-Frank.

Muni advisers are fiduciaries under the statute and must put issuers’ interests ahead of their own.

Broker-dealers serving as underwriters are not fiduciaries under Dodd-Frank.

The G-23 changes will become effective Nov. 27.

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