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BDA Expresses Concerns to SEC

NOV 30, 2011 7:25pm ET
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WASHINGTON — Broker-dealers from midsize regional firms converged on Capitol Hill and the Securities and Exchange Commission Wednesday to vent frustration with regulatory delays and what they see as an uneven playing field for dealer financial advisors and independent FAs.

About a half-dozen members of Bond Dealers of America met with Sens. Tim Johnson, D-S.D., and Richard Shelby, R-Ala., the chair and ranking Republican of the Senate Banking Committee, and Reps. Spencer Bachus, R-Ala., and Barney Frank, D-Mass., the chair and top Democrat of the House Financial Services Committee, as well as Sen. Mike Crapo of Idaho, the banking committee's second-most senior Republican.

Among their goals was to complain about the SEC's failure to adopt a final municipal advisor registration rule and definition, and highlight the stricter regulatory regime under which dealer FAs operate, including such MSRB rules as G-17 on fair dealing and G-37 on political contributions, they said in an interview.

A separate group of roughly six BDA members met with SEC commissioners Troy Paredes and Luis Aguilar to raise similar concerns.

"The firms that are going to be up here today are the firms that represent Main Street," said Hill Feinberg, chairman and chief executive of First Southwest Co. in Dallas. "A lot of these firms do a lot of business with individuals and small municipalities. That's where the jobs are created."

BDA's lobbying marks a new level of intensity in an ongoing, sometimes contentious debate among independent financial advisors and dealer FAs about the scope of proposed rules, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, for previously unregulated municipal advisors. In October, a managing director from Public Financial Management Inc., the muni market's largest financial advisor, wrote a letter to SEC Commissioner Elisse Walter saying broker-dealers urge municipal issuers not to engage financial advisors, or only to work with dealer FAs. BDA called such views "unfounded."

For BDA members, a particular concern is that dealer FAs must comply with a host of rules, including G-17 and G-37, that have not been finalized for muni advisors.

"It continues to create a lot of problems," said Michael Nicholas, BDA's chief executive.

In September, the MSRB pulled five proposed muni advisor rules that had been pending with the SEC, saying it would refile them after the commission finalizes its rule and definition.

The SEC is slated to release a permanent muni advisor rule and definition later this month, according to its website.

Meanwhile, BDA said, dealer FAs are subject to a range of compliance and professional requirements, including testing, licensing and periodic exams, that have not been implemented for independent FAs.

"This delay is playing right into the hands of the unregulated," said Larry Bowden, executive vice president for fixed income at Stephens Inc. in Little Rock, Ark.

A dealer FA bristled at recent criticism. "It offends me to say just because I have the expertise of having a desk — because I'm a broker-dealer — that I'm a bad guy for my client," said David Medanich, vice chairman and president of asset management at First Southwest in Fort Worth, Texas.

Medanich, who estimated 98% of his work is as an FA, said he has known some of his clients for 30 years and considers some of them his friends.

"We're not transaction-oriented," he said. "It's all about having a long-term relationship."

But an independent FA group disagreed with BDA, saying regulators should take their time. "These are important steps that are being taken to implement the provisions of Dodd-Frank, so going about this in a very thorough manner is the appropriate approach, in our belief," said Colette Irwin-Knott, a partner at H.J. Umbaugh & Associates LLP in Indianapolis and the president of the National Association of Independent Public Finance Advisors.

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