WASHINGTON — Michael Bartolotta, vice chairman of First Southwest Co., a dealer financial advisory and underwriting firm, has been elected the new chairman of the Municipal Securities Rulemaking Board beginning Oct. 1, drawing concerns from non-dealer advisers that will fall under the board’s regulatory regime at the start of his term.
Bartolotta was elected chairman at the MSRB’s quarterly meeting in July, but the board did not announce his new post until Thursday evening.
The board said also that the vice chairman will be John Young 2d, managing director of municipal underwriting and public finance marketing at Samuel A. Ramirez & Co. It said it will announce the other new board members after the Securities Exchange Commission approves its proposal to expand the board.
Bartolotta will succeed Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan.
Several non-dealer municipal advisers note that Bartolotta and his Dallas-based firm aggressively sought to regulate independent FAs and that they were instrumental in lobbying for legislation signed into law by Texas Gov. Rick Perry in 2007 that requires swap advisers to be registered with the state’s securities board, the first bill of its kind to become law.
Though the bill was generally seen by dealer-FAs as a way to level the regulatory playing field between dealer and non-dealer advisers, non-dealer advisers saw it as an effort to eliminate competition.
“Bartolotta is viewed as the most anti-independent adviser guy,” said one non-dealer adviser who asked not to be named.
Another independent adviser said the decision was unexpected given First Southwest’s opposition to changes to the board’s Rule G-23, which currently allows a dealer-FA hired to advise a borrower on a transaction to resign as FA and underwrite the transaction, as long as it discloses to the borrower that there may be conflicts of interest.
SEC chairman Mary Schapiro earlier this year urged the MSRB to scrap the rule, calling such role-switching a classic example of a conflict of interest.
Though the MSRB proposed draft changes to the rule last month that would eliminate role-switching, the independent adviser said: “This calls into question the board’s seriousness of revising Rule G-23.”
Steven Apfelbacher, president of both the National Association of Independent Public Finance Advisors and Ehlers & Associates in Roseville, Minn., noted that FA regulation will be a “major focus” of the new board and that Bartolotta’s appointment is surprising.
“That would certainly give us concern in terms of ensuring the discussion and airing of the issues,” Apfelbacher said. “This is, in our view, not a good way to start the discussion of municipal advisers and developing trust and fairness.”
However, some industry officials praised the Bartolotta and Young’s elections.
“Both have an exemplary history of service in municipal finance and will undoubtably provide the industry’s primary regulator with strong leadership,” said Michael Nicholas, chief executive officer of Bond Dealers of America.
Michael Decker, co-head of the Securities Industry and Financial Markets Association's municipal securities division, said: "SIFMA congratulates Mike Bartolotta on becoming Chairman of the MSRB. Mike will be an excellent chairman and leader during such a crucial time for the municipal market. We look forward to working with him on the myriad issues facing the municipal securities market."
Bartolotta could not be reached for comment and SEC staff declined to comment.
Bartolotta’s election comes as the board is already in the midst of a controversial proposal to temporarily expand its membership to 21 members from 15 to allow most of the current dealer members to stay on and finish out their terms.
Eleven of the 21 members would be independent representatives not associated with securities or bank-dealer firms, assuring that a majority of the board is comprised of “public” members, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Specifically, the SEC is seeking public comment through Wednesday on proposed changes to Rule A-3 that would allow for the new board. Currently, the 15 board members have staggered three-year terms so that five typically leave and are replaced every year. But in a notice on the proposed rule changes, the MSRB said it plans to elect 11 new members: eight from the public and three from the municipal advisory community. The remaining seven industry seats would be filled by industry representatives currently serving on the board.
When the SEC published the MSRB filing in the Federal Register for public comment, it asked a series questions that seemed designed to draw out any complaints about board’s proposed expansion.
“Because the MSRB, under the Dodd-Frank Act, now will be proposing and adopting rules with respect to the activities of two distinct categories of market participants — municipal securities dealers and municipal securities advisers — is the proposed structure of the MSRB board designed to assure that the interests of each are appropriately represented, and that a fair and effective regulatory regime will be implemented both for municipal securities dealers and municipal securities advisers?” the SEC asked in its request for comments.
“Are there alternative board structures or other governance arrangements that would better achieve these goals?” the commission also asked.
“Is increasing the size of the MSRB board the appropriate way to accommodate the new representation required by the Dodd-Frank Act, or should the new representation be accomplished by reconstituting the current board? Will increasing the size of the MSRB board negatively impact its ability to operate effectively?”
Peter Shapiro, managing director of Swap Financial Group and the only market participant to comment on the measure ahead of next week’s filing deadline, asked the MSRB to consider appointing at least four advisers during the two-year transitional board, rather than just three.
“During the transition period, advisers will constitute less than 15% of the board and among the regulated members, their voices will be dwarfed by the dealers,” Shapiro wrote in a two-page comment letter. “And it is during the transition period when the voices of advisers are most needed, as the largest new task facing the board will be the inaugural formulation of a vast new array of rules affecting advisers. If anything, this is the time to bend over backward to make sure that there is a good, diversified group of advisors on the board.”
Shapiro argued that four different categories of advisers ought to be represented, including at least one member from a general FA firm with national scope, a regional FA firm with a client base of governmental entities, an FA firm with a client base of obligors who borrow through tax-exempt conduits, and a swap or financial products advisory firm.
But another market participant who did not want to be identified said it may be difficult for the board to find swap adviser representatives for the MSRB after July 2011, when muni swap advisers may be required to register with the Commodity Futures Trading Commission. That is because Dodd-Frank for the first time expands the definition of “commodity trading advisers” to encompass advisers involved in swaps.
Currently, commodity advisers with more than 15 clients in a 12-month period are required to register with the CFTC. Unless the CFTC alters that exemption, muni swap advisers would have de-register with the SEC and would fall under the oversight of the CFTC. They would cease to be municipal advisers overseen by the MSRB. A CFTC spokesman declined to comment on this issue.
