WASHINGTON — Market participants are divided over the Municipal Securities Rulemaking Board's proposal to require a qualifications exam for municipal advisors, with some wanting a uniform exam for all muni finance professionals and others wanting an approach more tailored to specific MA activities.
Dealers and investment companies are suggesting two very different approaches in response to the MSRB's request for comments on proposed changes to its Rule G-3 on classifications, which would classify MAs as registered representatives who provide services and MA principals who are supervisors. MAs would have to take a general exam and there would be no grandfathering of current financial advisors.
In his comment letter, Bond Dealers of America president and chief executive officer Mike Nicholas wrote that the MSRB should streamline its proposal and require MAs to take the same test dealer representatives take.
"It is our opinion that there is nothing one group of municipal finance professionals should be trained to comprehend that another should not," Nicholas wrote.
If the MSRB chose to use the Series 52 examination for muni securities representatives as the universal test, BDA suggests, it would also allow broker-dealers who have taken and pased the test to qualify as MAs under the new Rule G-3. The Financial Industry Regulatory Authority allows such "opt-ins" for individuals who have passed the general securities representative exam and also wish to register as investment bankers. The MSRB should consider following that precedent, Nicholas wrote.
Another option, BDA's letter states, would be for the MSRB to create a supplemental exam for professionals who have already passed the muni securities exam, while letting previously unregistered MA representatives take the supplemental exam or a combination of the supplemental test and an existing test. If the MSRB chooses to not standardize the Series 52 or go with a supplemental test option, BDA's letter argues, the board should create an entirely new test for all market professionals.
But the Investment Company Institute told the MSRB it should take a very different approach, creating not just a new MA representative exam but also a separate test for those whose advisory activities are limited to municipal fund securities.
"We are concerned that use of a one-size-fits-all examination will result in those representatives whose municipal advisory business is limited to municipal fund advice being required to pass a qualification examination that has little, if anything, to do with their advisory activities," wrote ICI senior associate counsel Tamara Salmon.
"For example," Salmon's letter continues, "providing advice on municipal securities likely requires a representative to be knowledgeable about issues such as negotiated prices, debt limits and ratios, underwriting periods, agreements, par values, etc. — none of which would be relevant for a municipal advisor whose advisory business is limited to providing advice relating to a municipal fund security such as a 529 education savings plan. As such, testing the representative's competence in these areas would appear to be a mismatch with the services it provides to its clients."
Alternatively, the MSRB could grandfather investment company representatives that have passed the Series 6 exam for investment companies and variable contracts. This exam is already particularized to their activities, ICI's letter argues, making grandfathering appropriate despite the MSRB's stated approach of not grandfathering anyone.
The National Association of Independent Public Finance Advisors cautioned that without further clarification on who qualifies as an MA representative, firms might register too many or too few individuals. This could lead to either many violations, or extreme over-compliance, NAIPFA's letter suggests. Proposed Rule G-3 defines an MA representative as "an associated person of a municipal advisor who engages in municipal advisory activities on the firm's behalf, other than a person whose functions are solely clerical or ministerial." The proposal does not define an "associated person." But NAIPFA's letter notes that "associated person" is defined in the securities laws as a person who manages, directs, supervises, or performs "any activities relating to the provision of advice."
The Securities and Exchange Commission's MA rule refers only to the act of providing advice, and not to performing activities related to providing advice, NAIPFA's letter notes. As such, the group wants the MSRB to clarify whether a person who produces debt schedules or official statements without ever interacting with an issuer would qualify as an MA representative under G-3.
"Absent some interaction or communication that involves the provision of advice, NAIPFA does not believe that a person should be deemed to fall within the municipal advisor representative category," wrote Jeanine Rodgers Caruso, the group's president.
Other groups and individual firms also submitted comments to the MSRB, raising a range of points that frequently urging grandfathering. The Third Party Marketers Association, for example, told the MSRB that the existing regulatory framework for placement agents who introduce alternative investment managers to public pensions is sufficient, and includes municipal securities training.
The SEC would have to approve the MSRB proposal before it could become a rule. The MSRB could choose to propose the rule to the SEC as written, or could revise it. If the board chooses to revise, it could put the proposal out for another comment period or could submit it to the SEC with revisions.
