CHICAGO — Middle-market, fixed-income dealer firms are adding staffers to their compliance divisions, part of an expensive effort to comply with a host of new financial regulations coming from Washington, D.C., some executives said at a meeting here.
Speaking during a panel discussion Thursday at the Bond Dealers of America's National Fixed-Income Conference, the executives said they are preoccupied with all of the new rules mandated by the Dodd-Frank law and that their firms are spending more resources than ever on compliance.
"Right now I spend all my time thinking about regulation. We spend most of our day trying to prove to the world we didn't do anything wrong," said James McKinney, head of debt capital markets at Chicago-based William Blair & Co., LLC.
McKinney, one of six panelists, also expressed frustration that the Municipal Securities Rulemaking Board may begin selling municipal bond trade data back to firms like his, which already provides the data to the MSRB for free.
"We get paid nothing [for submitting the data] and we spend money giving it to them …. It is kind of offensive," McKinney said.
Other executives agreed that rules coming from the MSRB and the Securities and Exchange Commission, as well as the Volcker Rule, which restricts proprietary trading at banks, are cause for anxiety.
"Compliance and regulation are the top things that keep you up at night," said Marty Vogtsberger, senior vice president and managing director at Fifth Third Securities Inc.
Vogtsberger said he also worries about interest rates, which have compressed dealers' margins.
"The frustrating thing about regulation is figuring out … what you have to comply with," he said, noting that many rules and definitions have not been completed by regulators. Muni market participants have waited for roughly two years for the SEC to finish its final definition of municipal advisor, he said.
And even though Vogtsberger's firm may not be subject to the Volcker Rule, it will have to spend money to prove that to the regulators. "We have to convince them that we are not [subject to the rule]. That costs money," he said.
Thomas Dannenberg, president of Hutchinson, Shockey, Erley & Co. in Chicago, said, "Compliance and regulation is a nightmare."
For years his firm prided itself on operating a lean business, he said. But today, such efficiency could be a liability, "if we don't have enough depth in our compliance area," said Dannenberg. He said his firm will be forced to spend money to expand its compliance division.
Another of Dannenberg's concerns: the security of the tax-exemption for municipal bonds. He said he often thinks about how his firm could adapt if the exemption were eliminated.
Dannenberg said he is pleased the BDA is helping form Municipal Bonds for America, a new coalition of dealers and other market participants that advocates for maintaining the tax-exemption for municipal bonds.
