The Securities and Exchange Commission’s forthcoming municipal advisor definition will exempt underwriters, but is also likely to focus on what participants in a transaction are actually doing, rather than on their official titles, SEC municipal office director John Cross said Monday.
Speaking on a panel at The Bond Buyer’s Tri-State Area Public Finance Conference, Cross indicated that the Municipal Securities Rulemaking Board’s interpretive guidance for its Rule G-17 on fair dealing rule has been helpful in his office’s efforts to craft provisions exempting dealer firms from further regulation when they act as underwriters on muni transactions.
G-17 already requires underwriters to deal fairly in a transaction and to disclose their roles clearly. In addition, MSRB Rule G-23 makes clear that dealers cannot serve as both municipal advisor and underwriter on the same deal.
The interpretive guidance to G-17, which applies to dealers and MAs, was not on the books in July 2010 when the Dodd-Frank Act was enacted and required MAs to register with the SEC, comply with a federal fiduciary duty to put their issuer clients’ first before their own, and become subject to MSRB rules.
It’s subsequent release was helpful in considering how to approach underwriter under the MA definition, Cross told those at the conference.
While Dodd-Frank broadly specified the kinds of market participants that would be included as MAs, the SEC is further defining the term in its registration rules and has broad discretion under the law to determine who falls within that definition.
The panel, moderated by Hawkins, Delafield, and Woods LLP’s John McNally, also included MSRB chairman Jay Goldstone and PFM Group’s chief compliance office Leo Karwejna.
Karwejna said that existing MSRB rules already provide good protection for issuers in dealing with underwriters, though there is a disparity between small, infrequent issuers and more sophisticated public entities that come to market more often, in understanding those rules.
“The protection that’s necessary is available under G-17,” he said.
But Cross and Goldstone also raised the point that some dealer financial advisors appear to have been pushing the envelope, crafting agreements that include municipal advisory services while disclaiming MA status and a fiduciary duty, sa well as leaving the door open to underwriting any resulting bond deal.
Cross said some of that language was “a bit too cute,” and said that a firm’s role in a transaction should be considered on its substance and not on whether or not it labeled itself a municipal advisor.
Karwejna said that MSRB rule wrangling aside, stakeholders should be considering that one of the goals of G-17 and G-23 is to protect the issuer.
“Sometimes you can forget what this is all supposed to protect in the first place,” he said.
On the subject of continuing disclosure, Cross said the SEC wants a principles-based approach rather than the line-item disclosure regime used for corporate securities.
