WASHINGTON — Public officials responsible for the investment of municipal funds will have to keep track of bond proceeds when the muni advisor rule takes effect in less than two weeks, even if compliance is ultimately not their problem, according to experts participating in a California Debt and Investment Advisory Commission webinar Monday.
The MA rules take full effect July 1, after which firms providing advice on the issuance of muni bonds or the management of muni proceeds or escrows will be required to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. The SEC has made clear that absent a firm's ability to utilize one of several exclusions or exemption available in the rule, providing such advice bars a firm from underwriting a bond issuance on the same transaction.
Some market participants have worried about the ease of knowing whether a given fund contains muni bond proceeds or not. The SEC issued guidance in May stating that firms could use "reasonable diligence" in making that determination, and commission muni chief John Cross has said it should be relatively easy for issuers to keep track of whether any new investments are proceeds or not. In practice, this means issuers may have to track that themselves.
Jennifer Christensen, an investment and debt officer for Santa Barbara County, Calif., said she recommends making use of both the general information exclusion and the request for proposals exemption when figuring out how to invest public money. Firms are permitted to provide general, factual information to municipalities without being captured by the MA regime, and firms are also allowed to give advice in response to a municipality's request sent to at least three firms. Christensen said she was initially skeptical that the RFP exemption would be workable, but is now convinced it could be very useful for issuers wanting ideas from investment bankers.
"There is some workability that is developing," she said.
John McNally, a partner at Hawkins Delafield & Wood LLP in Washington, D.C., reminded public officials that the burden of compliance with the rule does not lie with them. Though governors, mayors, debt managers, and other issuer officials have voiced concern about the implementation of the MA rule and subsequent MSRB rulemaking, the regime makes no new requirements of issuers. It only affects how they communicate with dealers and financial advisory firms.
"At the end of the day, it's not your problem," McNally said. "It's the broker-dealer's problem,
