WASHINGTON — Government officials are moving toward regulating municipal advisors, but real reform won’t come until issuers demand higher standards from their advisors, a market observer warned.
Robert Brooks, finance professor at the University of Alabama, said in a recent interview that the “finance industry supplies what the industry demands.”
For years, said Brooks, some issuers have been content with receiving advice from advisors who don’t necessarily have issuers’ interests in mind.
Brooks, who testified about the impact of the Dodd-Frank Act on the muni industry before the House Financial Services’ capital markets subcommittee in July, cited as an example Jefferson County, Ala., which filed for bankruptcy in November 2011 after defaulting on its sewer bonds.
County officials were convicted of accepting bribes in connection with the bonds, and firms, including JPMorgan, settled charges related to swap transactions with the SEC.
Brooks said Jefferson County officials had no qualms with “a transaction-driven, conflict-infested way of doing business.”
Jefferson County may be an extreme case, but Brooks said issuers too often lack the “humility” needed to concede they don’t understand complex financings. As a result, they often don’t hire financial advisors.
Real reform will only come when finance directors “fess up that [they] don’t have the technical capability to drive this ship,” he said.
And issuers may need prodding from the Government Finance Officers Association. “This industry will change when organizations like GFOA take a leadership position,” Brooks said, adding that the group should urge issuers not to work with firms that have been involved in wrongdoing.
GFOA did not respond for comment.
Brooks’ comments came before the House Financial Services Committee approved a bill on Wednesday that would narrow the definition of municipal advisor.
“I don’t think, no matter how you craft this legislation, you are going to change this culture,” Brooks said.
Peter Shapiro, managing director of South Orange, N.J.-based Swap Financial Group LLC., said the muni industry must accept that abuses in recent years — including multiple cases of bid-rigging of guaranteed investment contracts to issuers — really happened.
“Nobody in the industry loves regulation ... but the abuses have been real,” Shapiro said. “It’s time to reestablish credibility.”
He said he has seen “nothing but good will” on the part of regulators, who have been working to ensure new regulations like the pending municipal advisor rules are “manageable” for the industry.
Shapiro said the temporary registration requirements for municipal advisors created by the SEC in 2010 are relatively simple — just fill out some papers and pay a small fee.
He also questioned the motives of those who are opposed to the fiduciary duty for MAs, which is mandated by Dodd Frank. “It has to raise an eyebrow with the higher-ups when [someone is opposed] to higher standards,” Shapiro said. “If people are working so hard to avoid regulation, it’s probably not just because of the regulatory burden.”