Cross: No Opt-Out for Issuers under MA Rule, More Guidance Coming Before July 1

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WASHINGTON — The Securities and Exchange Commission's municipal advisor rule does not provide an "opt out" for sophisticated issuers and is intended to allow issuers to decide which firms they want to obtain advice from and when they want to receive it, the commission's muni chief told governmental officials meeting here.

The SEC will continue to address technical questions with further interpretive guidance prior to the rule becoming effective on July 1, Cross also said at the annual winter meeting of the Government Finance Officers Association's committee on governmental debt management.

Cross' remarks marked the first public dialogue between him and stakeholders since the SEC released further guidance on the MA rule Jan. 10. Though the rule's effective date has been pushed back until July 1 from Jan. 13, there remains some market debate over how the rule will affect the market and whether it is a faithful interpretation of the Dodd-Frank Act's mandate that municipal advisors register with the commission and become subject to Municipal Securities Rulemaking Board rules.

Dealer groups have maintained the law was never intended to restrict the activities of dealer-affiliated advisors, but rather was written to reign in non-dealer advisors who had been subject to no federal regulatory oversight.

Several issuer officials told Cross it might be helpful to allow very sophisticated issuers to waive protections under at least some provisions of the rule. One example raised during the committee meeting involved allowing potential underwriters to pitch specific ideas to an issuer prior to the issuer putting out a request for proposals for underwriters. Under the rule, a dealer or other advisor can respond to an issuer RFP sent to at least three competitive firms without being considered a municipal advisor that has to register with the SEC. But some issuer officials indicated they preferred to hear the ideas from potential underwriters prior to the RFP and without necessarily having to vet each idea with an MA independent of those firms. Under the SEC rule, issuers can accept advice freely if they retain and certify that they are relying on the advice of their own MA.

Cross pointed out that there are far more small, infrequent issuers in the market than large sophisticated ones, and told the group that the SEC has not provided a way for an issuer to release a "big boy" letter that would exempt them from protection under the rule. Other debt committee members added that defining "sophistication" could be problematic.

"Municipal issuers should control the process," Cross said, adding that additional MA guidance will be available before July 1. Cross said the new guidance would probably address some technical questions, such as the details of how an issuer's independent MA establishes that it is not associated with an entity relying on the independent MA exemption. Debt committee chairman and Florida director of bond finance Ben Watkins thanked Cross for planning to provide these clarifications.

"We've made a lot of progress through the [Frequently Asked Questions]," he said.

The meeting was originally scheduled as a closed session, but Cross informed the GFOA that the SEC would not want to create even the impression of impropriety by having him speak at a session closed to the press and public. A later session of the debt committee featuring representatives of dealer groups and non-dealer financial advisors remained closed despite protests from The Bond Buyer and requests that it be made public.

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