WASHINGTON — The Municipal Securities Rulemaking Board has filed with the Securities and Exchange Commission the first batch of proposals to extend to municipal advisers its rules on fair-dealing, disciplinary actions and administrative requirements.
The proposals, which the board released Monday, come as market participants have pushed MSRB and SEC officials for guidance on muni provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that they claim are ambiguous as far as who they apply to or what they mean.
Specifically, the law mandates SEC registration and MSRB oversight of advisers that assist municipal borrowers on muni financial products or securities. Solicitors of muni borrowers also are covered under the law.
Though attorneys providing legal advice or “traditional” legal services to municipal borrowers are among those exempt from SEC and MSRB oversight under the law, several bond lawyers warned regulators last week that it is unclear if some of their services constitute advisory work and would require them to register as advisers.
Bond attorneys meeting in San Antonio for the National Association of Bond Lawyers’ Bond Attorneys Workshop repeatedly asked for guidance on the circumstances under which they would be required to register as advisers. But regulators kept saying it would depend on facts and circumstances and take time to formulate formal guidance.
The regulators have privately told market participants that they are narrowly interpreting the exemptions in the law because of concerns that some lawyers are telling their issuer clients they can replace their FAs.
In addition to seeking to extend several of its rules to advisers, the MSRB also asked the SEC for permission to launch a registration system for advisers on Nov. 15, on top of a temporary system the commission has in place.
Under the proposals, advisers would have to register with the MSRB by Dec. 31 and would be required to pay an initial fee of $100 and an annual fee of $500 to complete the registration process.
Only municipal advisory firms would be required to register with the MSRB. Individuals would not be required to register unless they operate sole proprietorships. In addition to paying the board fees, advisers also would have to register with the SEC, which plans to roll out a permanent registration system by the end of the year.
The most significant of the proposals would extend Rule G-17 to require advisers to deal fairly with all clients and prohibit deceptive or unfair conduct.
“Municipal advisers should be subject to the most basic of MSRB’s professional conduct rules in providing services to the municipal market,” executive director Lynnette Hotchkiss said in a press release.
In the release, the board said subjecting municipal advisers to G-17 is necessary for “the robust protection of investors against fraud” because they “play a key role in the structuring of offerings of municipal securities and the preparation of offering documents used to market those securities to investors.”
The MSRB also proposed to extend its Rule G-5 to require muni advisers to comply with SEC disciplinary actions.
“The obligation of market intermediaries to operate with integrity is a vital component to ensuring a fair and efficient municipal market,” Hotchkiss said. “Applying our fair-dealing rule to municipal advisers creates a fundamental foundation for professional standards of conduct.”
Both the fair-dealing and disciplinary rule changes are subject to SEC approval.
Meanwhile, the MSRB said it would adopt additional rules for advisers over the coming “months and years,” including ones for gifts and gratuities as well as a rule governing “pay-to-play” in a manner comparable to its existing Rule G-37. The rule restricts dealer contributions to issuer officials and candidates who can influence the award of bond business. The board also expects to provide guidance on the definition of municipal adviser and what it means for an adviser to have a fiduciary duty to a municipal entity, as required under the Dodd-Frank Act.
Speaking at last week’s NABL conference, Hotchkiss said the board and SEC will be working on guidance to address “gray areas” of the Dodd-Frank law. Hotchkiss said the process could be “never-ending” because there are so many ambiguities to address, such as lawyers that go beyond providing traditional legal advice.
Martha Mahan Haines, the SEC’s muni securities chief, who spoke on the same panel, said the precise line where attorneys and other market participants need to register as advisers is “hard to tell and it’s going to be [based on] facts and circumstances.”
Hotchkiss encouraged bond attorneys to read an Oct. 12 settlement between New York Attorney General Andrew Cuomo and the law firm Manatt, Phelps & Phillips LLP, which was fined $550,000 and banned for five years from appearing before any public pension plan in New York because it acted in the capacity of a placement agent without being registered as one in the state.
“I think this sends a pretty clear signal that regulators ... are going to look beyond your structure as a law firm and look at the actual services that you’re providing,” Hotchkiss said.
One bond attorney at the conference warned that if he is not closely assisting in the structuring of a transaction, it is difficult to know if he can render a valid opinion that the bonds are tax exempt under state law that may impose a debt limit on the issuer.
But Haines was not sympathetic, saying there’s a difference between doing a legal analysis to determine how much debt is outstanding versus telling the borrower, “ 'You know, you’ve got a lot of fixed rate outstanding and you ought to consider some [variable-rate demand obligations] now to have a more balanced portfolio.’ ”
“If you’re acting and doing the kinds of things that in other states a financial adviser does in structuring a deal, you’re probably going to be a financial adviser regardless of what state you’re in,” she added.
The bond attorney urged the SEC to take into consideration that many small issuers may not have the means to hire a separate FA if their bond attorneys are no longer able to provide some of the services they have traditionally provided.
Haines said the SEC would consider that in forthcoming guidance, “but right now frankly, we’re scrambling to propose a permanent registration rule.