WASHINGTON — Two recent solicitations for financial advisors in Orlando and Los Angeles illustrate the tensions between dealer and non-dealer advisors, as the Securities and Exchange Commission and Municipal Securities Rulemaking Board begin to put in place a regulatory scheme to create a level playing field between the two.
FirstSouthwest is challenging Public Financial Management Inc.'s status as a non-dealer financial advisor, claiming it is affiliated with broker-dealers and is failing to disclose this in response to issuers' requests for proposals for FAs. Philadelphia-based PFM denies any impropriety in correspondence with issuers and statements made to them.
Dallas-based FirstSouthwest complained about both PFM and another FA when Los Angeles announced in November that it would only consider hiring non-dealer FAs. FirstSouthwest executives said the firm will challenge any such restrictions as they arise, and also protested the Greater Texoma Utility Authority's trying to limit its FA request for proposal process to non-dealer FAs in Texas last month.
But Greater Orlando Aviation Authority's FA selection was open to all FAs. FirstSouthwest complained about PFM as the authority was weighing responses to its RFPs, prompting GOAA to conduct its own examination of PFM's ownership structure and disclosure. PFM was among three firms to make the cut for final consideration, while FirstSouthwest was not.
GOAA concluded that PFM's "disclosures could have been more robust," but that the firm, along with fellow finalists Frasca and Associates, LLC and Raymond James and Associates were all fully capable of serving as its FA.
GOAA general counsel Marcos Marchena's memo to the authority's finance committee detailed public comments made by FirstSouthwest managing director Ed Stull, who is based in Orlando, and PFM's responses.
Stull contended PFM is affiliated with broker-dealers. One of the investors in PFM Group, the parent company of PFM, is ICV Fund II, which received investments from Citibank, JP Morgan Chase, and Bank of America, among others. But PFM maintains that the ICV Fund II investors are limited partners that do not engage actively in the management of it or any of the companies the fund invests in. PFM also told GOAA that less than 10% of the ICV Fund II assets are invested in the PFM Group.
FirstSouthwest questioned whether PFM is transparent with potential clients about its ownership. PFM told GOAA it is owned by its managing directors and "a private equity investor."
GOAA's review indicated that both the disclosure and the GOAA's own request for information should have been stronger. "This comprises the sole disclosure relative to the ownership interest of ICV Fund II in PFM Group," GOAA said in the memo. "In retrospect the request for disclosure of potential conflicts in the authority's solicitation as well as the disclosure by PFM of its ownership structure could have been more robust." But GOAA did not see this as something that would prevent it from considering PFM on a shortlist for the FA post.
FirstSouthwest executives pointed out that JP Morgan Chase's disclosures are fuller. That firm disclosed to a different issuer that an affiliate, JP Morgan Chase Community Development Corporation, owned a 3.9% non-voting interest in ICV Fund II.
Stull also complained that a managing director in PFM's Orlando office, was a registered broker for PFM Fund Distributors, a subsidiary of PFM Asset Management LLC, the other main company in PFM Group, that trades securities on the secondary market. But the managing director's broker's license expired in January 2012, leading GOAA to conclude that the information was not very relevant.
PFM told GOAA that there are walls between its FA business and PFM Asset Management, which is registered with the SEC as an investment advisor. PFM said its FA practice is registered as a municipal advisor with the SEC and the MSRB, and that it recognizes its fiduciary duty to put its clients' interests ahead of its own.
Stull also challenged PFM on its use of lobbyists, which dealer FAs are not permitted to hire under the MSRB's Rule G-38 on solicitation of municipal securities business. PFM paid two firms, Capitol Insight, LLC and The Fiorentino Group, to lobby Florida's executive branch on its behalf during part of last year, according to state records. Stull suggested that because of the PFM managing director's presence as a broker, that could have been a G-38 violation.
PFM told GOAA that neither firm is used for business representation in central Florida. Non-dealer FAs are not bound by G-38 or certain other MSRB rules that restrict the behavior of dealer FAs. PFM said it voluntarily adheres to the MSRB's Rule G-37, which restricts a firm's ability to do negotiated muni business with an issuer for two years if it or its municipal finance professionals make significant political contributions to issuer official who can influence the award of muni business.
The MSRB is working on rules that will apply the same standards to anyone who provides muni bond advice to state and local governments, whether they are affiliated with dealers or not.
Hill Feinberg, chairman and chief executive officer of FirstSouthwest, said PFM is not keeping with the spirit of transparency that regulators are working toward. "The spirit is that everything is disclosed," he said.
He added that ultimately it is up to a client to decide if PFM is truly a non-dealer FA and if there are conflicts of interest present or not. "If the client thinks it's ok, that's fine," he said. "All we want is a level playing field."
A PFM spokesperson said company officials do not comment on an open RFP process.
In a letter sent last month to the chief financial officer at the Orlando Utilities Commission, PFM responds to "misleading and false allegations regarding PFM's independence" that it said are being made by some of its competitors. PFM said it "is an independent financial services firm not engaged in the underwriting of municipal bonds" and that it "has a fiduciary relationship with its clients - putting the client's interests first." PFM said, "as a firm free of conflicts, we always fulfill that obligation."
