The coming year has the potential to bring regulatory changes that could seriously alter the way municipal advisors and broker dealers interact with clients in private placements, secondary market transactions, and other ways.
The biggest changes in the year 2020 appear likely to stem from a pair of SEC actions in 2019, when the SEC proposed a municipal advisor exemptive order and approved a new rule called Regulation Best Interest. Both will likely trickle down to impact Municipal Securities Rulemaking Board rules and the behavior of market professionals, sources told The Bond Buyer.
“That’s an issue that’s going to carry over into next year that I’m paying a lot of attention to,” Bond Dealers of America consultant Michael Decker said of the proposed exemptive order. “It’s a pretty foundational issue and I know a lot of broker-dealers are taking that issue very seriously.”
The MSRB plans to review its rules to address the relief order, which would allow for MAs to be involved in some private placement activities without registering as a broker-dealer. The board is focused on a handful of rules that might need changes if the order is approved, including Rules G-32 on disclosures in connection with primary offerings, G-34 on CUSIP numbers, G-42 on the duties of municipal advisors and G-23 on activities of financial advisors.
The National Association of Bond Lawyers assumes if the SEC were to take action on the proposed order, that it would happen in 2020.
If the relief does go through, NABL wants to be sure it wouldn't create confusion.
“We want to do our best to be sure that that exemptive relief can be implemented without causing unintended consequences or confusion in the marketplace," said Rich Moore, NABL's president.
Marshall said the MSRB is pausing to see what the SEC is going to do via its exemptive order before deciding on next steps.
“If they do something, we will have to react and be nimble enough to modify it or look at modifying whatever our rules are,” Marshall said.
Rule G-23 may be set to change next year regardless of the SEC's order. The MSRB requested comment on the rule in May 2019, asking among other things whether it remains relevant in light of the municipal advisor regime created over the past several years. Among other things, the rule prohibits a dealer from serving as a financial advisor and underwriter on the same transaction.
Some issuers have been opposed to reopening the discussion because prior to amendments to Rule G-23, an underwriter firm serving as an issuer’s advisor could get insight and leverage a deal, only to then resign as advisor and underwrite a transaction or at least submit a bid on a competitive deal. That created what some have called “an inherent conflict of interest.”
The MSRB will also be reviewing Rule G-27 since it hasn’t been thoroughly reviewed, Marshall said. The Financial Industry and Regulatory Association consolidated its supervision rule in 2012 and so the MSRB wants to make sure Rule G-27 continues to harmonize with FINRA’s rule.
The MSRB didn’t originally review the supervision rule in 2012 since that was at the same time the municipal advisory regime began to be built out, taking up a lot of the MSRB’s time and attention, Marshall said.
As for Rule G-42, the MSRB will be focusing on the consistency of disclosures made by issuers regarding disciplinary and legal events.
Rules G-19 on suitability and G-20 on gifts and gratuities are two rules that could well be impacted by Regulation Best Interest.
RegBI is a rule that would strengthen the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. It will also require both broker-dealers and investment advisers to state clearly key facts about their relationships with their customers, including financial incentives.
The MSRB plans very soon to file amendments to Rule G-19 and Rule G-20 to reflect the SEC’s changes.
Later on in November 2020, the deadline will arrive for MA principals to take their Series 54 professional qualifications exams. The MSRB rolled out the exam in November 2019 and is giving them one year to take the exam. Each muni advisor firm needs a qualified principal in order to do business.
Disclosure will also be top of mind in 2020 as the SEC is set to soon release a staff bulletin to clear up confusion on what types of public disclosures are subject to the anti-fraud provisions of the federal securities laws.
Decker said he believes the SEC will be taking some form of action in 2020 to improve the timeliness of financial reporting. At an SEC hosted municipal disclosure conference in December 2018, SEC commissioners expressed support for improving municipal disclosure, and it has been a subject of several more recent comments by SEC Chairman Jay Clayton.
The SEC could decide to add a provision to Rule 15c2-12, Decker said. Two new provisions under the rule became effective in early 2019 and require issuers to disclose when they incur new material financial obligations and events that “reflect financial difficulties.”
“It’s been just about a year now, and I’m speculating a bit, but I’ll guess that a project is underway at the SEC and we may see something from them in 2020 — a proposal on 15c2-12,” Decker said. “That could potentially be a pretty big landmark proposal depending on the direction that they go in.”
Leo Karwejna, managing director and chief compliance officer at PFM, is hopeful that the MSRB continues to look at the market from a practical perspective in continuing its retrospective rule review.
“A lot of those rules were written years or in some cases decades ago, and there’s been a lot of change,” Karwejna said. “I’m hopeful that they’re also forward-looking in those rules and mindful of sort of the distinctions between the market participants.”
The MSRB will also likely get a new CEO in 2020 as its former CEO and President Lynnette Kelly left in 2019. The board has hired a search firm to help find its next leader.
“With the MSRB board, I’m looking for the continuing good and healthy review and debate of the issues that matter most to the constituents they serve,” Karwejna said. “That means a good mix of issuers, a good mix of underwriters, a good mix of the public, a good mix of MAs all being in the room and have the opportunity to have that healthy, constructive debate about what’s best for those different issuers, investors those different registrants that the MSRB looks to serve.”
