While it believes "outdated" financial advisor references should be eliminated across the Municipal Securities Rulemaking Board's rulebook, the National Association of Municipal Advisors in a comment letter this week urged the MSRB to postpone adoption of proposed rule amendments to retire FA terminology.
NAMA submitted its letter in response to a request for comment the MSRB issued in April seeking input on draft amendments to MSRB Rules G-1, G-3, G-20, G-23 and G-37 to eliminate references to the term "financial advisor" or "financial advisory and consultant services" in references to dealers serving in such financial advisory capacity.
Instead, the draft amendments would adopt the uniform term "municipal advisor" to achieve consistency with terminology established with regard to both dealers and non-dealers providing such advisory services under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – and used in MSRB rules adopted since that legislation's enactment – "to eliminate any potential ambiguities and unintended burdens associated with the use of both terms in MSRB rules," the MSRB's RFC notice said.
The RFC, revised in May, represents the first phase of the MSRB's retrospective review of its suite of MA rules adopted since Dodd-Frank's enactment. The comment deadline was July 20.
"Although eliminating the outdated FA references across MSRB's rules and related materials is necessary, the proposed amendments must be postponed and addressed as part of the broader [retrospective rule review] process," NAMA said in its letter, signed by NAMA Executive Director Susan Gaffney.
Incorporating the FA revisions into that broader effort "will allow the MSRB to take a comprehensive approach, evaluate related policy matters, identify additional changes needed within the cited rules, and avoid a drawn-out multi-step process where terminology revisions inadvertently create substantive or interpretive implications," NAMA's letter said.
"This is especially true regarding the proposed changes to Rule G-23," the letter said, adding that the proposed Rule G-23 amendments have policy implications beyond the stated intent of the notice to revise the financial advisor terminology.
"Any changes to Rule G-23 and its interpretive guidance should only be made as part of the RRR, reviewed thoughtfully alongside the [Securities and Exchange Commission's] Municipal Advisor Rule, the statutory definition of fiduciary duty, and other MSRB core conduct rules including Rules G-42 and G-17, and not in isolation or on an immediately effective basis," NAMA's letter said.
Like NAMA, PFM Financial Advisors LLC, one of the nation's leading independent municipal advisors, in its comment letter also advocated for the replacement of FA terminology to be undertaken as part of the MSRB's full retrospective rule review.
"PFM supports the objective of the draft amendments and the modernization they would achieve in the MSRB's municipal advisor regulatory framework," PFM's letter, signed by Cheryl Maddox, PFM's chief legal and compliance officer, said.
The letter, however, encouraged the MSRB "to incorporate the retirement of the 'financial advisor' terminology into its comprehensive, rule-by-rule retrospective review — replacing the term at the same time as any other amendments proposed for a given rule — rather than advancing it as a standalone first phase, so that all proposed changes to each affected rule, as well as corresponding interpretive guidance, may be considered together in context."
In its letter, PFM also cautioned the MSRB "against using the retrospective rule review as an occasion to comprehensively rewrite its rules." In PFM's experience, the current MA regulatory regime generally works well, "and the review would be most productive if directed toward targeted refinements around the edges and the provision of additional clarity and guidance, rather than wholesale revision," PFM's letter said.
"In weighing any material changes to the rules, we further urge the MSRB to remain aware of and focused on the regulatory burden, both in personnel and financial terms, that such changes impose on all municipal advisors," PFM said in its letter, which in particular urged that consideration be given to the "disproportionate impact" such material changes would have on the solo and small independent MAs that make up a substantial majority of the industry.
"Material changes that do not yield benefits to issuers or investors, or whose burdens outweigh any such benefits, fall most heavily on these businesses," PFM's letter said.
The American Securities Association, a trade group representing broker-dealers and registered investment advisers across the U.S., supports the proposed retirement of the term "financial advisor" from MSRB Rules G-1, G-3, G-20, G-23 and G-37 and replacing it with "municipal advisor," ASA said in its comment letter signed by ASA Chief Legal Officer Jessica Giroux.
With regard to Rule G-23 however, ASA's support is limited to the terminology change itself, and doesn't extend to a "separate proposal to relocate the G-23(c) documentation requirements to Rule G-42, which raises distinct substantive concerns," ASA's letter said.
While the MSRB characterizes the change as a cleanup measure designed to eliminate duplication between Rule G-23 and Rule G-42, ASA disagrees with that characterization, its letter said.
"The G-23 documentation requirement has a distinct and specific function: it governs the written record of the new issue municipal advisory relationship for a dealer acting in that capacity, and it carries unique substantive obligations, including provisions governing the deposit of funds and the utilization of fiduciary or agency services," ASA's letter said. "These are not generic relationship documentation requirements that map cleanly onto G-42."
In its letter, ASA urged the MSRB "to defer the G-23 documentation restructuring to the core duties phase of the retrospective review, where it can be considered in the context of the full suite of obligations applicable to dealer municipal advisors and alongside the interplay between G-23, G-42, and SEC Rule 15Ba1 requirements."
The Securities Industry and Financial Markets Association, a trade group representing broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets, also submitted a comment letter.
"Overall, SIFMA supports the MSRB's objective of promoting clarity and consistency in terminology, provided that the amendments do not inadvertently alter the scope or application of existing requirements," SIFMA's letter, signed by Leslie Norwood, managing director, associate general counsel and head of municipal securities at SIFMA, said.
SIFMA's letter urged the MSRB to ensure the amendments don't "expand the substantive scope of any rule, particularly with respect to dealer obligations." The letter also urged the MSRB to ensure that existing distinctions between dealer and municipal advisor activity are preserved and that interpretative guidance is updated comprehensively to avert uncertainty.
