FAs Question SEC’s Haines on Who Must Register

DETROIT — Independent financial ­advisers meeting here Thursday questioned the Securities and Exchange Commission’s Martha Mahan Haines about which advisers must register with the SEC under the new regulatory reform law, while Haines announced that the agency will hold its next field hearing on munis in Chicago on Nov. 16.

Haines, the SEC’s current muni chief, strongly urged advisory firms to register even as the commission works to develop answers to frequently asked questions from market participants who say some of the muni provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act are ambiguous about who they apply to or what they mean.

“Right now, we’re not collecting scalps” for those who fail to register, Haines said, speaking at the annual conference of the National Association of Independent Public Finance Advisors. “We’re just trying to get the word out to municipal advisers about the need to apply for registration and how to do so. Of course, enforcement will follow in time for those who fail to register.”

Under Dodd-Frank, advisers are defined as individuals who provide advice to, or on behalf of, a municipal borrower regarding “municipal financial products” or the issuance of muni securities. Solicitors or placement agents for muni borrowers also must register with the SEC under the law.

The commission has had a “temporary final interim” rule in effect since late August that allows firms to register with it. As of Wednesday only 653 dealer-adviser and non-dealer adviser firms had done so — far less than the roughly 1,000 firms the SEC had anticipated would register prior to the Oct. 1 deadline.

One NAIPFA associate member asked Haines if lease-brokers who work with school districts and cities on the sale of fire trucks and other equipment should be required to register. The brokers often respond to requests for proposals, negotiate with the local governments for the right to be their leasor, and then find commercial banks willing to buy the leases. The leases may not be considered securities.

The NAIPFA member warned that if these firms are required to register, they may gain undue credibility with municipal governments even though they may not actually advise a municipality on muni bonds or financial products.

Haines said the facts and circumstances particular to each firm will determine whether it must register. In an interview with The Bond Buyer, she said Dodd-Frank only describes the type of activities that are now regulated and does not provide a full list of the types of firms that must register.

In addition to SEC registration, Dodd-Frank requires that muni advisers submit to regulations by the Municipal ­Securities Rulemaking Board, which will soon ­establish its own separate registration ­requirements for muni advisers.

The MSRB has said the advisers it began overseeing Oct. 1 constitute a fairly broad group. They include ­advisers to conduit borrowers such as hospitals and colleges, as well as advisers to ­local ­government investment pools, public ­pension funds, and college savings plans set up under section 529 of the federal tax code.

The MSRB plans to soon begin writing new or amended rules for advisers that will encompass Rule G-17 on fair dealing and Rule G-37 on political contributions, among others, that currently only apply to banks and broker-dealers.

The board also must elaborate on a fiduciary duty imposed on advisers under Dodd-Frank as of Oct. 1, as well as craft professional standards, testing, and continuing education requirements.

While Haines announced the date for the November field hearing, she said the topics have not been decided. The SEC held its first hearing last month in San Francisco. It plans additional hearings in Washington, D.C., in December; Tallahassee, Fla., in January; Austin, Texas, in February; and Birmingham, Ala.

Speaking about the overall impact of Dodd-Frank on the muni market during Thursday’s NAIPFA conference, Robert Doty, president of American ­Governmental Financial Services in Sacramento, said the law’s fiduciary duty requirement will likely “override” Rule G-23, which currently ­allows dealer-FAs hired to advise an ­issuer on a transaction to switch roles and ­underwrite the bonds.

Doty said the ­fiduciary duty will make it difficult for dealer-FAs to have a ­significant conflict of interest, which they would have in ­switching roles. He also predicted ­advisers will have to abandon their reliance on fees that are contingent on the issuer selling bonds because such fees create significant ­conflicts of interest.

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