WASHINGTON - The Government Finance Officers Association has adopted two best practices, one to help issuers hire brokers to invest their bond proceeds under the municipal advisor rule, and the other to improve the valuation of pension plans.
These two of four GFOA best practices that were approved on Wednesday reflect changes in the muni bond industry, particularly the effectiveness of the MA rule that took effect July 1 and the growing concerns about rising pension and other post-employment benefit liabilities. GFOA considers best practices to be among the most important functions of the group, because they offer guidance to the tens of thousands of issuers active in the muni market.
The Dodd-Frank Act and the resulting Securities and Exchange Commission MA rule subject brokers who give state and local governments advice on the investment of their bond proceeds to a fiduciary duty to put the interests of the issuers ahead of their own. The updated best practice describes two exemptions from MA registration that are available to dealer firms or others wishing to offer that advice without becoming an MA in situations where they are not acting as an official financial advisor to the municipality.
Brokers can avoid the MA obligations either by responding to a bona fide competitive request for proposals put forth by the issuer, or by making sure that the issuer is getting investment advice from its own MA independent from the firm seeking the exemption, GFOA says in the best practice. Some market participants have pointed out that registered investment advisers are also exempt from the MA requirements, but dealer groups have said going that route would increase the costs to issuers. A registered IA may not serve as an issuer's independent registered municipal advisor.
The document also offers basic guidance about the kind of information that will not likely meet the MA rule's definition of "advice," such as general information about what investment options exist or price quotes of investment options.
The new best practice on enhancing the reliability of actuarial valuations for pension plans is aimed at helping government finance officials get a better picture of how much funding they need to keep pension plans fiscally solvent. Pension liabilities are an area of intense interest across the market, and are both an economic issue that has a direct bearing on local economies as well as a regulatory issue for governments who could potentially mislead bond investors about the extent of their pension liabilities.
Government officials need to make sure they provide their actuaries with accurate information, including census data and any changes to pension plan administrative procedures, according to the new guidance. Finance officers should also consider engaging actuaries to perform additional services, GFOA said, such as conducting studies of the plan's assets and liabilities under various scenarios and past performance versus actuarial projections.
The GFOA additionally approved new guidance on coordination the work of multiple auditors and reducing the impact of investment fees on retirement plan portfolios.
