WASHINGTON — Nondealer municipal advisors are concerned that the Municipal Securities Rulemaking Board's draft core MA rule contains an exemption for "inadvertent advice," while broker-dealers say certain aspects of the rule are too vague and too broad.
They detailed their concerns in comment letters on the MSRB's Rule G-42 that are to be submitted to the board on Monday.
The inadvertent advice provision, which says a firm is not bound by most of G-42 if it provides inadvertent advice and takes other steps, was added to the amended draft after dealers worried that certain advice could trigger an MA relationship and its associated regulatory burdens, such as documentation, even if the firm was making no effort to provide advice. They were concerned some firms might be unaware that a party receiving the advice was an "obligated person" under the Securities and Exchange Commission's MA registration rule.
Under the provision, firms can avoid an MA relationship if they provide the potential client with a disclaimer saying they did not intend to provide advice and that they have ceased engaging in advisory activities. Firms would also have to provide notice to the potential client that they didn't provide disclosure of material conflicts of interest and other information as required by the rule, as well as a statement that they had undertaken reasonable efforts to identify the advice that was inadvertently provided. A firm would have to request that the municipal entity or obligated person acknowledge receipt of the documentation.
The advisor utilizing this alternative would also have to conduct a review of its supervisory and compliance policies and procedures to ensure that they are reasonably designed to prevent such occurrences.
The National Association of Independent Public Finance Advisors, in a letter signed by NAIPFA president Jeanine Rodgers Caruso, took aim at the supplementary paragraph providing for the inadvertent advice exemption.
"The paragraph and the provisions contained therein are not designed for the benefit municipal entities, obligated persons, the public or municipal advisors as a whole," Rodgers Caruso wrote. "Instead, the paragraph will benefit, to the detriment of all other market participants, only those municipal advisors who are also registered broker-dealers who wish to avoid being prohibited from underwriting an issuance of securities pursuant to MSRB Rule G-23. In other words, except for situations in which a broker-dealer acts as a municipal advisor and wishes to serve in another capacity, specifically, as an underwriter, it is unlikely that this provision will be utilized."
NAIPFA warned the exemption would lead to abuse by broker-dealers and asked that it be removed entirely or at least amended to require corrective action within 10 business days of the discovery of the advice and a full disclosure of the advice rather than the good-faith effort contemplated in the revised draft.
Dealers mostly want clarifications on key portions of the rule, including the ban on an MA acting as a principal in a transaction, which initially caused them anxiety in the first draft. Bond Dealers of America chief executive officer Mike Nicholas said his group supports a change that tailors the ban more narrowly. But BDA still has questions about how closely related a transaction has to be to the area the firm is providing advice on to trigger a violation, he said.
"Would selling securities, as a principal who won a competitive bid for a refunding escrow, on a refunding bond issue for which the firm was a municipal advisor be too directly related?," Nicholas asked. "Would acting as a municipal advisor for a swap while acting as the underwriter on a related series of variable rate bonds be too directly related?"
The BDA is proposing language that would apply the ban to a municipal advisor and any affiliate only if the structure, timing or terms of the principal transaction was established in whole or in part based on the advice of the municipal advisor.
The Securities Industry and Financial Markets Association said it has concerns about the ban including "any affiliate." SIFMA associate general counsel and co-head of municipal securities Leslie Norwood said large institutions have many affiliates who have no connection to, or knowledge of, an MA relationship with a given client, and the MSRB should not factor their activities into the principal transaction ban.
The SEC must approve the draft before it becomes a rule. The MSRB can further revise the draft before seeking SEC approval and the SEC can also choose to seek additional public comment.
