CHICAGO — Bond lawyers and underwriters might not be exempted from having to register as municipal advisors under the Securities and Exchange Commission’s final MA rule even though the intent was to exempt them, members of the National Association of Bond Lawyers worried at a meeting in Chicago on Thursday.
Their concerns were raised during a panel at NABL’s Bond Attorneys’ Workshop. At issue are two of a number of exceptions to the final MA registration rule that the SEC finally released last week, namely those covering attorneys and underwriters. SEC muni chief John Cross and Rebecca Olsen, an attorney fellow in Cross’ office, tried to provide clarifications and assurances to conference attendees peppering them with real-world examples and hypothetical scenarios.
“I think this gets us almost where we need to be,” said Dean Pope of Hunton & Williams LLP in Richmond, Va. Pope said the SEC’s 777-page rule generally did a fine job addressing the concerns of attorneys and other market participants dissatisfied with a much broader initial rule the SEC floated in 2010. Pope added, however, that he had lingering concerns over being forced to register as a municipal advisor while performing duties within the scope of a bond lawyer’s obligation to a client.
The rule exempts attorneys performing traditional legal services from registration, but the waters could still be murky. For example, Pope said, a client might request the lawyer’s counsel on the general competence of a feasibility study on a bond-financed revenue project. That could be viewed as advice subjecting the lawyer to registration, he said.
Kenneth Artin of Bryant Miller Olive PA in Orlando, Fla. said clients sometimes call him for legal advice on doing rate locks or other financial matters.“ Those calls make me very nervous,” he said. “I still think this is going to be a very touchy area moving forward.”
Cross said the attorney exception to registration is intended to be a bright line between normal bond lawyer activities and attorneys purporting to offer expert financial advice. The SEC defines “advice” for MA purposes as being specific to the needs, objectives, and circumstances of a municipal entity or obligated person and relating to muni bonds or other municipal financial products.
“Advice doesn’t include everything you tell a municipality,” Cross said. Olsen added that the rule tries to account for the nature of bond lawyers’ advice. “In the area of municipal finance, this inherently includes a financial aspect,” she said.
Conference attendees also wondered about how the rule might affect them as underwriters’ counsel. Broker-dealers have already said they are concerned that the new rule would essentially prevent them from pitching ideas to issuers and later underwriting any bonds marketed as a result of that idea. Under Municipal Securities Rulemaking Board Rule G-23, underwriters cannot be a financial advisor and still underwrite bonds, though it is not clear if MSRB’s definition of financial advisor squares with the SEC MA definition. Underwriters are exempt from registration under the SEC rule, but that exemption begins only once they are engaged to underwrite a specific bond deal.
Underwriters would likely seek to rely on a provision allowing them to give advice if the municipality certifies it has hired, and is relying on, its own registered MA, but many issuers do not have MAs and would likely be hesitant to certify even if they did. Sandy MacLennan of Squire Sanders in Tampa, Fla. said the days of unsolicited “pitch books” sent from underwriters to issuers might well be over, though one participant suggested a broker-dealer could develop a pitch with the best interests of an issuer in mind, accept the fiduciary burden, and underwrite at arms-length later.
Cross said the SEC would welcome an opportunity to work with stakeholders to provide clarification in areas of concern.