Regulators have taken notice of dealer-affiliated municipal advisors being increasingly tardy in providing conflict of interest disclosure, which they are supposed to provide their clients either before or when they provide advice.
The Financial Industry Regulatory Authority has seen more violations of Municipal Securities Rulemaking Board Rule G-42 on the duties of non-solicitor MAs over the past year, said Bonnie Bowes, FINRA’s director of fixed income regulation. Bowes discussed FINRA's findings at a National Association of Municipal Advisors conference last week.
Bowes emphasized that a majority of the disclosures were still done on time, but for those MA broker-dealers that come in late, it could be due to an administrative reason or not understanding the rule.
"It might be that they delivered their disclosures, but they were late,” Bowes said.
Rule G-42 requires disclosure of all "material" conflicts of interest, such as a financial interest for the MA or the presence of an affiliate in a deal. The rule became effective in June 2016, part of a package of muni advisor rules proposed by the MSRB to implement the requirements of the SEC's municipal advisor registration rule.
FINRA only examines and has authority to bring disciplinary actions against dealer-affiliated MAs because FINRA only has authority over its member firms. Non-dealer MA enforcement is the Securities and Exchange Commission's responsibility.
Concurrently, FINRA is also seeing violations of Rule G-44, on supervisory and compliance obligations. So firms may not have had adequate procedures for delivering their disclosures on time, Bowes said.
FINRA also noted continued failures to comply with Rule G-20, on gifts, gratuities and non-cash compensation. The rule sets a cap of $100 a year to a person other than an employee or partner of the dealer.
FINRA wants to remind the market that the rule applies to a particular individual over a 12-month period and that there needs to be a process for keeping track of the sum of the gifts, Bowes said.
In 2020, Bowes said FINRA plans to focus on Rules G-44, G-42 as well as Rules G-40 on and G-21 on advertising by MAs and dealers, respectively.
Rule G-44 was approved in 2014 and has been plagued with
Some firms failed to designate anyone as being in charge of supervision and in other cases, firms failed to tailor their supervisory systems to their business practices, resulting in written supervisory procedures that either failed to hit all the necessary points or included information that was irrelevant to the firm.
Disclosing under Rule G-42 is a continuous process, said Leo Karwejna, managing director and chief compliance officer at PFM, a non-dealer MA firm.
“It’s not a one-and-done-type action,” Karwejna said. “It’s something that you have to keep mindful of as you progress.”
Karwejna said he doesn’t see a lot of missed opportunities for providing the disclosure if there is a process in place.
“It’s important to be thoughtful and transparent at the initial stages, at the time of engagement and then ultimately throughout leading up to the transaction, for updates or revisions to be shared,” Karwejna said.
