WASHINGTON - Attorneys opposed to new municipal advisor regulations warned state treasurers this week that the new regime will end productive relationships with investment bankers and hurt issuers financially.
Hank Morgan, associate corporate counsel of fixed income at Raymond James & Associates, Inc. and Richard Sigal, a lawyer at McKenna Long & Aldridge LLP made the comments at the National Association of State Treasurers' annual legislative conference on Tuesday. The two lawyers spoke frankly and urged treasurers to help protect the flow of information between broker-dealers and issuers, who they said mostly will not need the shield the Securities and Exchange Commission's MA rule will provide when it becomes effective July 1.
"This is something the broker-dealer community has looked on as not a good thing," Morgan told the group. "It's going to change the rules of the road."
The MA registration rule requires anyone who provides advice about muni bonds or the investment of muni proceeds to a state or local government or conduit borrower to register with the commission and with the Municipal Securities Rulemaking Board. Under the Dodd-Frank Act and a proposed MSRB, MAs would have a fiduciary duty to put the interests of state and local government clients over their own interests, and regulators have said MAs cannot serve as underwriters on the same transactions.
Dealer groups have long warned that this could impact the way potential underwriters exchange ideas with issuers, but the SEC has tried to assuage their concerns by providing some exemptions in its registration rule. An issuer can freely accept advice from firms interested in underwriting if that issuer has retained its own municipal advisor independent of the dealer firm and has said it will rely on the MA's advice. Dealers can also submit ideas through a mini-request for proposals process without having to register as MAs.
Morgan said the SEC deserves some credit for working to improve the rule over time, but more interpretations are necessary and major problems remain.
Non-dealer advisors and regulators have said the rule will not greatly impede information between dealers and issuers, citing the available exemptions.
But Morgan said, "We don't think it's a great idea. We don't like it at all." He told treasurers that almost any financial talk between a banker and themselves or other issuers could result in the MA rule coming into play, such as an email or even a comment at a cocktail party.
"We can be deemed to be a municipal advisor whether we wanted to or not. Whether you wanted us to or not."
Sigal said the rule should include an opt-out for sophisticated issuers like states that do not need the protection, and said the new regulatory regime will deprive issuers of many innovative ideas investment bankers routinely bring to the table.
Virginia treasurer Manju Ganeriwala, who moderated the panel, said her office has benefited from such ideas in the past and sees little harm because she is not obligated to follow their advice.
"This is going to cost you," Sigal warned the treasurers. "It's going to cost you a lot of money."
