WASHINGTON — The Securities and Exchange Commission on Friday released long-awaited guidance on its municipal advisor registration rule, providing clarifications on key questions regarding broker-dealer behavior less than one business day before the rule becomes effective on Monday.
The 19 pages of guidance addresses topics that have emerged as controversial since the rule's approval in September, including the scope of the communication underwriters can have with issuers of municipal bonds without becoming MAs and whether role-switching from MA to underwriter in the same transaction might be possible under some circumstances. Market participants had anticipated the guidance would be available weeks ago, and its release comes one day after the Securities Industry and Financial Markets Association sent the SEC a letter requesting it take no enforcement action on violations of the rule until July 1. SIFMA had been seeking a delay in the rule's Jan. 13 effective date.
The SEC guidance, issued in a question and answer format, makes clear that broker-dealers who have registered as MAs so they can offer particularized advice and recommendations to an issuer cannot underwrite the bonds. The Municipal Securities Rulemaking Board's Rule G-23 prevents dealer firms from formally serving as a financial advisor to an issuer and then as an underwriter on a resulting transaction. But some market participants had hoped that under the MA rule, .a firm could register as an MA, accept a fiduciary duty to put the issuer's interests first, and then underwrite the transaction. The SEC's guidance shuts this idea down.
"If a broker-dealer acts as a municipal advisor to a municipal entity with respect to an issuance of municipal securities, it owes a fiduciary duty to the municipal entity with respect to that issue and must not take any action inconsistent with its fiduciary duty to the municipal entity," SEC staff said.
Most market participants view a fiduciary duty as inconsistent with the arm's-length nature of an underwriting relationship, in which underwriters and issuers have different interests. Under G-23, which the SEC guidance says MAs must adhere to, underwriters must make this fact clear to issuers in a written disclosure.
The guidance also offers more clarification for dealers that were concerned the MA rule would end the longtime practice of soliciting business by sending issuers information on how they can tap the market. The rule suggested that only objective facts about the market could qualify for an exemption from MA registration. But the guidance stresses that some "hypothetical" scenarios for a given issuer could be acceptable especially if accompanied by disclaimers indicating the information does not represent a recommendation. The SEC said it will determine whether the rule has been violated or not based on the entirety of the facts and circumstances. The guidance, however, suggests disclaimers mean nothing if behavior violates the rule.
The guidance also provides a more detailed rundown of another much talked-about aspect of the rule that provides an exemption from registration in situations where an issuer is relying on the advice of its own MA. Some dealers had expressed concerns that requiring issuers to represent that they would rely on their own independent MA would be problematic, as many issuers have been hesitant to verify they have received disclosures related to G-23.
The release did not offer any respite from compliance, although some sources said they expect the SEC to agree not to take action on violations of the rule for perhaps 30 days. SIFMA sent a four-page letter to SEC muni chief John Cross Jan. 9. requesting the SEC not enforce the rule until July 1. MAs must register or re-register with the SEC beginning July 1 on a phased-in basis through October. More than 1,100 MAs are temporarily registered with the SEC.
