WASHINGTON — Dealer groups and banks remain greatly concerned that the Municipal Securities Rulemaking Board's proposed core municipal advisor rule could limit the services they offer, while non-dealer advisors say the proposal needs more clarification in several ways.
Those market participants and others made their pitches in comment letters filed with the Securities and Exchange Commission Friday. This round of comments could be the last chance market participants have to affect the MSRB's proposed Rule G-42, which would cover the core duties and responsibilities of non-solicitor MAs. The MSRB previously solicited comments and is seeking SEC approval.
Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association, said the MSRB has done well to improve the proposal since its first introduction last year but that SIFMA still has major concerns with it. SIFMA is particularly worried about the rule's prohibition on an MA acting as a principal in transactions with muni issuer clients that are directly related to a transaction on which it is providing advice. Norwood told the SEC that the rule as drafted is "unreasonably burdensome," and said the ban should be narrower.
The ban should "apply only to transactions that are directly related to the advice provided by the municipal advisor, and not more broadly to municipal securities transactions or municipal financial products as to which the municipal advisor is providing or has provided advice," Norwood wrote.
The ban should further not apply to business affiliates of a firm that had no knowledge of a municipal advisory relationship between a municipal client and the MA firm, Norwood said.
Bond Dealers of America chief executive officer Mike Nicholas also wrote about principal transactions, and offered some examples of what BDA believes the rule should permit.
"We believe that selling securities, as a principal, after winning a competitive bid for an open market refunding escrow, on a refunding bond issue for which the firm was a municipal advisor would not be 'directly related to' the bond issue because they would constitute separate transactions," Nicholas wrote. "In addition, we believe that a dealer who acts as an underwriter for a refunding bond issue for a municipal entity could also serve as a municipal advisor for the investment of the escrow proceeds, if separately documented, as these also represent separate transactions."
Cristeena Naser, vice president of the Center for Securities, Trust & Investment at the American Bankers Association, told the commission in her letter that the latest version of the proposal may be based on concerns that are not always well-founded. The proposal filed with the SEC expanded on the types of transactions banned, and made clear that these include bank loans of more than $1 million in size that are "economically equivalent to the purchase of one or more municipal securities." Naser asked for a clarification on that scenario.
"Assume a bank-affiliated municipal advisor recommends, consistent with its fiduciary duty, that undertaking a bank loan would best serve a municipal entity client's purposes and that the client should solicit bidders for the loan through the use of a request for proposals," she wrote. "The municipal entity undertakes the RFP and receives four or five bids, including one from the municipal advisor's bank. To best serve its taxpayers, the municipal entity itself chooses which bid to accept, which in this case is from the affiliated bank. The bank expects and intends to hold the loan on its books until maturity."
This scenario should mitigate the MSRB's concerns about violation of the fiduciary duty, Naser said, because the RFP process gives the issuer control and the bank holding the bonds means that its interests are aligned with the issuer's.
Terri Heaton, president of the National Association of Municipal Advisors, told the SEC that the proposal needs some more explanation of how MAs can comply with various requirements of the proposed rule. One example NAMA gave is the proposal's requirement that MAs exercise "reasonable diligence" to determine whether a municipal securities transaction or a municipal financial product is suitable for a particular client.
"Regulated entities could benefit from having examples presented of how a municipal advisor/firm should perform its reasonable diligence to satisfy the criteria listed in this section," Heaton wrote.
Without quantifiable criteria in these areas, the rule is left to subjective interpretation," which would not only create too many varying practices among professionals and "also inconsistent criteria used by examiners," Heaton said in a statement. "Further guidance and examples to meet the requirements set forth in the rule are needed as soon as possible, to ensure compliance once the rule is implemented."
