If Congress decides to legislatively authorize federal regulation of independent, unregulated financial advisers, it should recognize that there are "fundamental differences" between them and dealer-affiliated advisers, the National Association of Independent Public Finance Advisers said in a recent letter to lawmakers.
NAIPFA made clear it is opposed to any attempts to regulate independent FAs but said, in a resolution and the letter, that it wants to work with Congress if members push for legislation.The letter was sent to key lawmakers on the House Financial Services and Senate Banking committees. It urged them to recognize that independent FAs "are not employed, given direction or controlled" by a broker-dealer, are charged only with providing financial advice and not selling a particular security, and have a fiduciary obligation to act solely in the best interests of the issuers they represent "rather than representing both the buyer and seller of securities which is a conflict of interest."
The resolution was approved by the group's board on March 16 and the letter was sent to lawmakers on Friday, but they were not made public until yesterday.
NAIPFA's pleas come as President Obama and Congress plan to reshape the financial regulatory system and could alter federal oversight of the muni market. The Municipal Securities Rulemaking Board has already called for the president and Congress to consider allowing the board to regulate brokers of guaranteed investment contracts and FAs in the municipal market that are not currently subject to regulation.
Meanwhile, staff for House Financial Services Committee chairman Barney Frank, D-Mass., have said they are working to draft an expansive bill to provide federal assistance to the municipal market that also may propose to regulate unregulated advisors.
The broker-dealer community has long complained that independent financial advisers have an unfair advantage over them because they are not subject to professional standards or testing.
In a statement yesterday, MSRB chairman Ronald Stack, managing director and head of public finance at Barclays Capital, said: " 'Independent' should not mean unregulated. We believe investor protection requires that independent financial advisers, investment brokers, and other intermediaries in the municipal market be subject to standards of professional qualifications, fair practice, and restrictions on pay-to-play." NAIPFA responded to that argument, at least in part, in its letter, saying its members must adhere to the association's code of ethics, meet ongoing professional education standards as certified independent public finance advisers, and do not underwrite or buy municipal securities.
NAIPFA also said that it "strongly" believes that the MSRB is not the appropriate agency to regulate FAs because the board's Rule G-23 on dealer-financial advisers currently only states that there "may" be a conflict of interest if a dealer-FA switches roles to become the underwriter on a negotiated transaction. For several years, NAIPFAhas pushed the MSRB to amend the language to say that a conflict "does" exist, but the board has declined.
Still, the Government Finance Officers Association last year adopted a recommended practices document urging finance officials to recognize that the conflicts of interest do exist in such role changes
NAIPFA's resolution and letter were signed by its president, Steve Apfelbacher, the president of Ehlers & Associates Inc. in Roseville, Minn. It also said that the Securities and Exchange Commission, rather than the MSRB, is a more appropriate regulator of public FAs because the SEC already regulates investment advisors that have a fiduciary responsibility.
Robert Doty, president of the financial advisory firm American Governmental Financial Services Co. in Sacramento, said he believes that NAIPFA's framing of the issue is misguided. The issue of independence does not revolve around whether an FA is "independent" or affiliated with dealer, he said.
A dealer-FA may provide completely independent advice to its clients, while an independent FA may be conflicted by so-called contingent fees, in which they are paid only if a transaction goes forward, warned Doty, a former NAIPFA member.
"The heart of the matter relates to whether there's a conflict of interest in representation to the clients," he said.