Dealer and bank groups warned they face a regulatory quagmire with the Municipal Securities Rulemaking Board’s draft muni adviser pay-to-play restrictions because the board and Securities and Exchange Commission define terms associated with muni advisers differently and have varying sets of rules for muni and investment advisers.
Meanwhile, independent financial advisers urged the MSRB to go farther with its pay-to-play restrictions and generally bar advisers and broker-dealers from contributing to bond-ballot campaigns in which they are not eligible to vote.
In an interview Monday on the MSRB’s draft Rule G-42, Leslie Norwood, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said: “We feel strongly about the elimination of pay-to-play in the business of municipal advising. The question is making sure pay-to-play works.”
The Dodd-Frank Act authorized the MSRB to establish comprehensive muni-adviser regulations, including rules to implement a fiduciary duty, prevent fraud, and promote just and equitable trade principles. Several agencies are promulgating proposed muni-adviser rules under the act, including the SEC — which closed the comment period on its proposed registration scheme last week — the MSRB, and the Commodity Futures Trading Commission.
Under Dodd-Frank, muni advisers include persons who provide advice to or on behalf of a municipal entity or borrower with respect to the issuance of muni securities or with respect to muni financial products: derivatives, guaranteed investment contracts, and investment strategies.
In its proposed registration rules for advisers, the SEC defined muni financial products expansively, saying “investment strategies” include plans or programs for the investment of proceeds of muni securities and plans, programs or pools of assets that invest funds held by or on behalf of a muni entity.
The MSRB has urged the SEC to narrow its definition of investment strategies so that it would not cover brokers giving advice to state and local governments about investing their general funds.
Market participants’ comment letters on the MSRB’s draft Rule G-42, similar to the letters they sent the SEC on its proposed adviser registration rules, urge the regulators to coordinate their efforts and avoid potentially redundant and conflicting guidance. The MSRB’s draft Rule G-42 would extend Rule G-37’s broker-dealer pay-to-play restrictions to muni advisers, with several key differences.
Rule G-42 would bar muni advisers from being compensated for advisory work with a muni entity for two years after making a significant contribution to an official of a municipal entity who can influence the award of business. The compensation ban would begin on the date of the contribution and end two years after advisory business with the entity terminates.
The draft rule would prohibit third-party solicitors from soliciting advisory business within two years of making a “non-de minimis” contribution. Muni advisers would be permitted to make “de minimis” contributions, of no more than $250, to public election campaigns in which the adviser is entitled to vote.
Under the board’s existing Rule G-37, by contrast, muni finance professionals can contribute up to $250 to a state or local official for whom they can vote without triggering a two-year ban on negotiated muni securities business for their firms.
The SEC’s pay-to-play restrictions for investment advisers, adopted last year and slated to go into effect Sept. 13, would bar an investment adviser from receiving compensation for advisory services to state and local governments for two years if it, or certain of its executives or employees, made significant political contributions to elected officials who could influence investment-adviser selection.
The SEC rule, however, would permit investment advisers to contribute up to $350 to an elected official for whom they could vote, or $150 to any elected official, regardless of whether they could vote for him or her.
In a 32-page comment letter filed with the MSRB on Friday, SIFMA raised concerns about conflicting interpretations of the term “muni adviser” by the SEC, in its proposed registration rules for advisers, and the MSRB in its draft Rule G-42. The SEC, for example, would include appointed state and local board members as muni advisers, while the MSRB views that approach as too broad.
SIFMA urged the board to adopt a two-phase approach to rulemaking, proceeding only with those parties who are “clearly covered” under the statutory definition of muni adviser, and “delaying action for those entities who may not qualify until the SEC’s definition of 'muni adviser’ is finalized.”
SIFMA also worried that the SEC may require broker-dealer placement agents to register as muni advisers and asked that the commission work with the MSRB and Financial Industry Regulatory Authority “to create a single, non-duplicative and jurisdictionally sound pay-to-play regime for broker-dealer placement agents.”
Similarly, in a comment letter filed with the MSRB on Friday, the American Bankers Association asked the board and the SEC to coordinate their pay-to-play rules, so market participants can avoid “draconian penalties for even inadvertent violations.”
In particular, the ABA said the MSRB should conform to the SEC’s guidance, permitting a $350 contribution to an official, per election, when the adviser is entitled to vote, and allowing a $150 contribution to an election in which an adviser is not entitled to vote.
Meanwhile, the National Association of Independent Public Finance Advisers used its comment letter to lobby the board for a stricter approach to its draft Rule G-42.
NAIPFA, whose members represented clients on more than 2,800 issues totaling about $75 billion in 2009, said muni advisers and underwriters should be limited to contributing up to $250, including in-kind donations, to bond-ballot campaigns in which they can vote.
NAIPFA said underwriters and advisers should not be permitted to make any contributions to bond-ballot campaigns in which they are not eligible to vote.
