Interesting Times for BDA’s Boss

WASHINGTON — The new chairman of the Bond Dealers of America, Michael Marz, takes the helm amid historic interest and uncertainty in the municipal securities market.

The market’s heightened profile, spurred in part by the enactment of the Dodd-Frank Act last year and an ongoing Securities and Exchange Commission review of disclosure practices, suits the BDA, which bills itself as the only trade association devoted exclusively to fixed-income securities.

The Securities Industry and Financial Markets Association also boasts fixed-income firm members, some of which belong to both groups, but Marz said BDA’s specialization boosts its appeal, especially now.

“There is so much regulation across so many market sectors,” said Marz, a vice chairman of First Southwest Co. in Dallas who assumed his leadership role at the association on March 1.

The BDA represents a range of members, from small independent firms to large, bank-owned institutions, such as Wells Fargo Securities, but focuses on regional mid-market firms. Its membership has spiked almost three-fold in the past three years, surging from 14 firms in 2008 — when the group shed its previous incarnation as the Regional Bond Dealers Association — to its current roll of 42. By next year, BDA officials say they expect membership to reach 50 firms.

Marz, who joined First Southwest in 1993, after stints at Goldman, Sachs & Co. and Bear Stearns & Co., takes over BDA as broker-dealers feel pressure on several fronts.

So far this year, municipal issuance has plunged to a level not seen in a decade, as state and local governments grapple with budget shortfalls and the end of stimulus programs such as Build America Bonds, which expired last year. Many BDA member firms, after netting record revenue in 2009, saw their revenues dip by 5% in 2010, according to Mike Nicholas, the group’s chief executive officer.

Meanwhile, the Municipal Securities Rulemaking Board, the SEC and FINRA have unleashed a flood of proposed rules and guidance in Dodd-Frank’s wake.

“I think our members are as engaged as ever in [the] sector of fixed-income municipals,” Marz said.

One of Marz’s top priorities is to persuade the SEC to dive into an ongoing dispute about the increasing fees charged by CUSIP Global Services, formerly the CUSIP Service Bureau, which is operated by Standard & Poor’s under the direction of the American Bankers Association.

A CUSIP, which stands for the Committee on Uniform Securities Identification Procedures, is the identifier for all securities. In the muni market, the first six numbers identify the issuer and the last three, which typically include letters, identify the specific security. CUSIPs are the means by which market participants check disclosure information or trade data on the MSRB’s Electronic Municipal Market Access online system.

Though state and local governments have long had to purchase CUSIPs when they issued bonds, the ABA started imposing CUSIP licensing fees on market participants in the mid-1990s. For a mid-market firm, the fees range between $50,000 and $200,000, said Nicholas, who notes that CUSIP Global Services is unregulated and provides no insight into how it calculates fees.

This week, BDA officials met with the senior staff at the SEC’s division of trading and markets, hoping to prod the it to take action, although it is unclear if the commission has jurisdiction. An alternative, said Nicholas, would be for the BDA to raise the issue on Capitol Hill, where lawmakers might have an interest in CUSIP-fee transparency.

According to the BDA’s website, the European Commission has an ongoing antitrust lawsuit against Standard & Poor’s related to CUSIP fees.

Among other issues of interest to the BDA, Marz cites disclosure as a high priority.

Currently, BDA firms are working on a “best practices” secondary market-disclosure document for firms and hope to have a final draft by mid-March. Their efforts came after FINRA floated a checklist for secondary market disclosure last fall, purporting to envision a step-by-step, six-page disclosure regimen for registered representatives who sell muni securities in the secondary market.

The FINRA document specifies what brokers should discuss with muni customers, including bond features, terms and sources of repayment, the existence of continuing disclosures such as material event notices, and whether the bond’s rating has been recently upgraded or downgraded.

Brokers also are urged to talk about interest payments, tax status, call provisions, and default risk and are encouraged to take notes on their conversations with customers, according to a copy of the document obtained by The Bond Buyer. 

Whatever the outcome of the BDA’s discussions with FINRA, Marz said, any such disclosure effort has to be reasonable.

Like many market participants, Marz also harbors concerns about the SEC’s proposed muni-adviser registration rules, saying the agency went beyond the language of Dodd-Frank, which carves out an exemption for broker-dealers serving as underwriters.

In one of almost 700 comment letters filed with the SEC during the public comment period, which ended last month, the BDA warned that the commission’s proposed registration requirements for muni advisers do not make clear when broker-dealers might be treated as muni advisers that must register.

The BDA said underwriters provide a variety of services to issuers besides underwriting, such as structuring deals, and the proposed rules “cast confusion” on whether they would be treated as advisers when providing such services.

Marz also said many BDA members serve on local nonprofit boards and are concerned that the SEC’s proposed registration rules do not exempt appointed members of state and local governing boards.

In its comment letter, the BDA warned that if the SEC does not change its position there will be a “chilling effect” on members’ willingness to donate their time and expertise to their communities.

“Hopefully, the comments will be heard and some adjustments will be made,” Marz said.

Finally, Marz and the BDA would like to see Congress reinstate the increased small-issuer limit for bank-qualified bonds that was temporarily provided by the American Recovery and Reinvestment Act, but expired on Dec. 31. Under the ARRA provisions, banks could deduct 80% of the cost of buying and carrying tax-exempt debt sold by issuers whose annual issuance was not more than $30 million, an increase from $10 million.

Marz’s BDA chairmanship comes at a time when his colleague, Michael Bartolotta, also a vice chair at First Southwest, is chairman of the MSRB.

For the most part, Marz’s BDA leadership role has elicited favorable responses from market participants. One said he is the right person to lead the group now, since First Southwest has both strong underwriting and financial advisory businesses.

Last year the firm was ranked third among financial advisers, serving as FA for $27.86 billion in 721 issues, according to Thomson Reuters. It ranked 27 among lead underwriters, serving as senior manager for almost $2.23 billion in 178 issues. 

“It provides him with an interesting perspective on multiple aspects of the business,” said Peter Shapiro, managing director of Swap Financial Group in South Orange, N.J.

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