Outlook 2021: New year, existing rules up for debate

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The two biggest regulatory issues of 2021 are likely to be an exemption for muni advisors and the Municipal Securities Rulemaking Board’s efforts to update its existing rules.

Next year brings the possibility of a renewed effort to bring about an exemptive order previously floated by the Securities and Exchange Commission in 2019. That order would allow MAs to facilitate private placement deals without having to register as a broker-dealer.

The SEC may look to see what else can be done in the disclosure space in 2021, said Rebecca Olsen, director of the SEC's Office of Municipal Securities.

A similar, but narrower temporary conditional exemption (TCE) is expiring Dec. 31.

During The Bond Buyer's California Public Finance conference in October, Rebecca Olsen, director of the SEC’s Office of Municipal Securities, did not comment directly on the future of the TCE, and noted the TCE was not done at the staff level and it would be up to SEC commissioners to extend it.

However, some dealer advocates are concerned that the SEC may still try to move forward with an exemption of some sort.

“There is still the risk that the temporary exemptive order be renewed by an acting chair or a new chair at the SEC or that the SEC acts on the previous order because that was not addressed either,” said Leslie Norwood, managing director, associate general counsel, and head of municipals at the Securities Industry and Financial Markets Association.

The staff can’t drive the formation of an exemption on its own, said Kenneth Bentsen, Jr., SIFMA president and CEO, and the commissioners may not be able to pursue big initiatives until the new commission is situated.

MAs have said the original proposed order would allow them to fulfill their statutory obligations to municipal entities and obligated persons.

Gail Marshall, MSRB chief regulatory officer, said initially the MSRB looked into amending its to respond to the exemption in 2019, but have since put a pin in that, waiting to see what the SEC does next.

“We started the process, but we put a pin in them because of activity at the SEC with the exemptive order,” Marshall said. “So we still have those in our pipeline, but we like the rest of the industry want to see what the SEC does.”

In the coming year, the SEC’s OMS will continue its work on regulating muni advisors, Olsen said.

“As most people know, they have to submit their registration information to the SEC’s EDGAR system,” Olsen said. “So in our office, we continue to implement the municipal advisor registration rules. We work with several colleagues cross divisionally on improving the SEC registration system for municipal advisors on EDGAR.”

EDGAR is the SEC’s online database.

In regard to issuer disclosure, the OMS may explore options for improving the timeliness of issuers' annual disclosures.

The SEC’s Fixed Income Market Structure Advisory Committee asked the SEC in February to explore ways to make deadlines for annual financial information timelier and to see whether a time frame obligation should be established.

“I think we could explore ways in the disclosure space to collect more focused public comment specifically on the FIMSAC recommendations and also from some of the reactions we’ve gotten from the bulletin and the joint statement and see if there’s something additional we should be doing in that space,” Olsen said.

On the broker-dealer side, the SEC's Regulation Best Interest became effective in June this year and the MSRB will continue to amend its rules in response. Two amendments were approved by the SEC to MSRB Rule G-19 on suitability in 2020.

RegBI strengthens the broker-dealer standard of conduct beyond existing suitability obligations and makes it clear that a broker-dealer may not put its own financial interests ahead of that of a retail investor. It also requires broker-dealers and investment advisors to state clearly facts about their relationships with their customers, including financial incentives.

Bank dealers are muni securities dealers associated with banks and not subject to RegBI.

Marshall said the MSRB amended its rules to apply to broker-dealers, not to bank dealers, so the board will be issuing a request for comment to effectively apply RegBI to bank dealers. This will be done so that retail customers are afforded the protections whether they engage in municipal securities transactions with a broker-dealer or bank dealer, Marshall said.

MSRB Chief Regulatory Officer Gail Marshall said the board is waiting to see what the SEC does next with a municipal advisor exemption before taking action on its own rules.

SIFMA agrees with the MSRB’s efforts to harmonize those rules and wants ample time to implement the changes.

“We believe that there should be an appropriate implementation period since bank dealers have not had to comply to date and we believe that the MSRB does understand that there will need to a significant implementation period,” Norwood said.

Amendments were also made in 2020 in response to RegBI to Rule G-20, on gifts and gratuities, Rule G-48, on transactions with sophisticated municipal market professionals and MSRB rules G-8 and G-9, on books and records.

Separately, the MSRB plans to seek comment, as part of its ongoing retrospective rule review, on its Rule G-27, on supervision in the first quarter of next year. The board is also doing a request for comment in 2021 on a new rule for solicitor MAs as part of reviewing its Rule G-17 on fair dealing.

Solicitor MAs are municipal advisors that, for compensation, solicit municipal entities and obligated persons for business on behalf of certain other finance professionals.

The G-17 guidance touches on various duties of solicitor MAs, such as a requirement that they disclose to municipal entities information about their clients and compensation. That guidance also explains that solicitor MAs are not subject to the same fiduciary responsibility to municipal entities that non-solicitor MAs are, because their clients are not the municipal entities but rather other third parties.

The MSRB also plans to begin a multiyear initiative in 2021 to clear up guidance behind its rules.

The vast majority of the guidance is over 20 years old, Marshall said.

Many of the MSRB’s rules are supported by interpretive guidance, but over time, the value of the guidance has become diminished due to rules and market practice changes.

The MSRB plans to retire some of the guidance.

“When we retire the guidance, we will be putting it on our website under archived materials so that it’s always available for its historical value, but then we’re recognizing that this is what we’re maintaining for historical value,” Marshall said.

For example, MSRB Rule G-23 on activities of financial advisors, originally allowed financial advisors to act as an underwriter of the same issuance if they received written consent from the issuer. The MSRB has guidance that talks about that written consent.

In 2011, the MSRB amended that rule that prohibits a dealer from serving as a financial advisor and underwriter on a transaction.

“So we amended the rule to say you can’t get consent — that won’t satisfy the rule,” Marshall said. “But we didn’t delete the historical guidance that explained how to get consent.”

Market participants are also eager to comment on the MSRB’s new focus for the next few years. Comments are due Jan. 11, 2021. The MSRB’s last strategic plan was created in 2017.

“That exercise will hopefully give us a better idea of what the MSRB has in mind for its agenda for the next few years,” said Michael Decker, senior vice president of policy and research at Bond Dealers of America.

One area where some broker-dealers want to see changes in MSRB rules is with onsite inspections under MSRB Rule G-27. The MSRB extended the deadline earlier this month for onsite inspections due to the pandemic to Dec. 31, 2021. Some broker-dealers are hopeful that virtual inspections will become permanent, said Rebecca Lawrence, senior counsel at Ballard Spahr.

“Most of these records are electronic or could be easily made electronic,” Lawrence said. “People are struggling with why they have to send a compliance officer to 50 branch offices and the expense involved with that is pretty astronomical when those documents tend to be online anyways.”

On Capitol Hill, the outlook for regulation is unclear. Stakeholders are still waiting to see if the Senate will flip Democrat during two Georgia Senate runoff elections Jan. 5. Two seats are up for grabs and Democrats need both to secure the majority.

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