WASHINGTON — The National Association of Independent Public Finance Advisors has sent an open letter to Securities and Exchange Commission chairman Mary Jo White insisting the municipal advisor rule the SEC adopted in September will not restrict the flow of information between issuers and other parties to a bond deal.
The NAIPFA letter comes a week after dealer firms were considering launching a media campaign to portray the rule as potentially disastrous for issuers.
Penned by president Jeanine Rodgers Caruso, the NAIPFA letter reiterates the group's support for the rule as adopted unanimously by the SEC's five members. Copies of the letter also were sent to SEC muni chief John Cross and to Municipal Securities Rulemaking Board executive director Lynnette Kelly.
Dealers have been arguing the final rule will restrict their ability to communicate with issuers the way they have for decades.
Under the rule, giving particularized advice to a municipal entity would force a dealer firm to register as an MA and take on a fiduciary duty to put the issuer's interests ahead of its own. Dealers and regulators both consider a fiduciary duty to be inconsistent with the role of an underwriter, meaning that the common practice of sending unsolicited "pitches" to issuers might grind to a halt under the MA rule. The rule allows anyone to provide general information or objective facts to an issuer without incurring a fiduciary responsibility.
"NAIPFA believes that the rules will help preserve the integrity of the municipal market by ensuring that issuers will receive needed protections, particularly with respect to the advice they receive in connection with the issuance of municipal securities and municipal financial products," Rodgers Caruso wrote. "NAIPFA disagrees with the notion that the rules will restrict issuer access to market information or that the rules will otherwise result in financing delays. Rather, the rules allow anyone to provide general information without having to register as a municipal advisor."
The Bond Buyer reported about 10 days ago that the Securities Industry and Financial Markets Association had circulated a draft letter to its member firms entitled "An Open Letter to the U.S. Municipal Community," warning the SEC rule, slated to take effect in mid-January, would "restrict issuers' access to market information and impact their access to the capital markets — delaying financings for schools, hospitals, public housing, and other critical infrastructure projects in communities across America." The SIFMA draft urged issuers to express their concerns to federal regulators and members of Congress.
SIFMA declined to comment on the content of NAIPFA's letter, but Michael Decker, the group's managing director and co-head of the municipal securities group, indicated more SEC guidance would be needed to allow for a healthy situation for issuers.
"Absent more flexible guidance from the SEC, when the municipal advisor rule takes effect in January, issuers will be left to depend to an even greater extent on [financial advisors] that remain unregulated and not subject to testing or licensing. The municipal advisor provisions in the Dodd-Frank Act are intended to protect issuers from unregulated, non-dealer financial advisors, not impede communications between issuers and their bankers."
Rodgers Caruso's letter goes on to state that although the rule is certain to create some change for issuers by formalizing the way they receive advice from dealer firms, nothing in the rule should cause the quantity or quality of information issuers receive to decline. The letter points out that issuers could still receive generalized information from broker-dealers wishing to underwrite bonds, and could rely on exemptions that allow dealers to provide advice in response to issuer requests for proposals from multiple firms or if the issuer already retains its own municipal advisor.
The letter also cites a recently released report from Missouri State Auditor Thomas Schweich, which concluded many local government officials are not equipped to negotiate the bond issuance process and that localities in the "Show Me State" could have saved millions between 2008-2011 had they retained their own advisors.
Although underwriters and municipal advisors may continue to disagree on this point," the NAIPFA letter states, "we are certain that the rules, as approved, will help protect issuers."