SEC's Two GOP Members Delay Fair-Dealing Guidance

WASHINGTON — Two Republican members of the Securities and Exchange Commission have stalled the Municipal Securities Rulemaking Board’s proposed G-17 guidance on fair dealing for underwriters, saying they need more time to analyze the proposal, according to sources.

Under the Dodd-Frank Act, the SEC had to act on the MSRB’s proposed G-17 amendments by Dec. 8, which was 90 days after the original proposal’s publication in the Federal Register. Instead, the commission issued an order instituting proceedings to determine whether to disapprove the proposal, saying it had not reached any conclusions about the issues involved, and calling for more public comments.

The delay comes after dealer and industry groups criticized the proposal, which would for the first time require broker-dealers to tell issuers that, unlike municipal advisors, they are not fiduciaries and would prohibit underwriters from telling issuers not to hire FAs.

A fiduciary generally must put a client’s interests ahead of its own.

Issuers applauded the proposed revisions, saying they would help protect state and local governments from fraudulent and manipulative acts and practices.

“It’s a significant and major issuer-protection initiative and it’s incredibly important,” said Lynnette Hotchkiss, the MSRB’s executive director. “But it’s better to take the time and get it right.”

Hotchkiss said this was the first time the SEC has issued such an order for a board rule change since Dodd-Frank, but the commission has released similar orders for proposals from the Financial Industry Regulatory Authority.

Previously, under federal law, the SEC had 180 days to act on a self-regulator’s rule.

The board’s G-17 guidance for underwriters has already withstood three rounds of public comments, one at the MSRB earlier this year and two at the SEC.

Only the third version, floated in November, contained the two controversial provisions.

Those requirements were added after the SEC received input from the Government Finance Officers Association, which requested the disclosure revision in an October comment letter, and from an independent FA firm, Public Financial Management Inc.

John Bonow, a managing director at PFM in Seattle, warned in an Oct. 6 letter to SEC commissioner Elisse Walter that underwriters often prod muni issuers not to hire financial advisors. If the issuer insists on an FA, the underwriter will push it to retain a dealer-FA rather than an independent advisor, he wrote.

Dealer and industry groups blasted the proposed amendments, saying they went too far and could prove costly for broker-dealers.

The five-member commission consists of an independent, chairman Mary Schapiro, two Democrats, Walter and Luis Aguilar, and two Republicans, Troy Paredes and Daniel Gallagher.

Paredes, a former law professor, was appointed by former President George W. Bush. Gallagher, a former partner at WilmerHale here and a former co-acting director of the SEC’s division of trading and markets, was sworn in on Nov. 7.

An SEC spokesperson, John Nester, declined to comment.

The Bond Dealers of America, a dealer group, met with Paredes late last month to raise concerns about the SEC’s permanent muni advisor registration scheme and rule, slated for release later this month, according to the SEC’s website.

The group mentioned G-17 at that meeting, according to Bill Daly, BDA’s senior vice president of government relations.

An independent FA group, the National Association of Independent Public Finance Advisors, met with SEC staff on Nov. 16 about G-17 and the muni advisor rule.

“We hope that the SEC’s decision to delay approval of the proposed changes to MSRB Rule G-17 does not indicate any backtracking from the important work that the MSRB has done on this issue,” Eric Johansen, Portland, Ore.’s treasurer and the chairman of GFOA’s debt management committee, wrote in an email. 

But dealer and industry groups said they were pleased.

“SIFMA has significant concerns about this proposal, as outlined in our comment letters to both the MSRB and the SEC,” said Leslie Norwood, managing director and co-head of the muni division.

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