Study shines light on muni advisor market

WASHINGTON — Municipal advisors commonly provide issuer clients with advice about new issues and say they rarely advise them on underwriter selection, according to a paper presented here by academic researchers at a conference on Monday.

The researchers' work was hampered somewhat by the fact that the Securities and Exchange Commission reported more MAs registered than the Municipal Securities Rulemaking Board, possibly because roughly one third of the SEC registrants failed to update their filings.

These are among the findings of Brandeis professor Daniel Bergstresser and University of Texas professor Martin Luby in their paper “The Evolving Municipal Advisor Market in the Post Dodd-Frank Era.” Their work is one of a number of scholarly papers presented at the Brookings Institution's 7th annual Municipal Finance Conference.

Bergstresser and Luby collected their data from publicly available sources and also received help from the Municipal Securities Rulemaking Board which provided information on the type of advice that MAs say they provide their clients.

Bergstresser said that he became interested in the study because municipal advisors, only federally regulated since the passage of the Dodd-Frank Act in 2010, play an important role in the market.

“It’s worth getting our arms around what I think are some very basic questions about this market,” Bergstresser said.

Bergstresser said that one of the more surprising discoveries of the study was that muni advisors do not often provide advice on the selection of underwriters, at least according to the data that firms provided to the MSRB. In 2017, only 15% of MAs reported that they provided advice on underwriter selection, Bergstresser and Luby found. That was actually up from 12% in 2016, and only 9% in 2015. Advice on issuance advice was most commonly provided, with 66% of MAs reporting that they gave that advice in 2017. The next most common was advice about muni derivatives, at 23%, followed by advice on guaranteed investment contracts, at 19%.

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But the two researchers also encountered some frustration with what appears to be a lack of clarity and accuracy in information about the municipal advisor market, including data discrepancies between different regulators and failures of firms to regularly update their publicly available information.

“One of the challenges in our analysis, which in an important sense is our key finding, is that there seems to be a discrepancy between the data collected by the MSRB and SEC,” Bergstresser and Luby wrote.

The MSRB lists 525 firms that have an advisor who passed the Series 50 competency exam, Bergstresser and Luby noted. The SEC, however, lists 593 firms that currently serve as municipal advisors.

“Even on a standalone basis, without reference to the MSRB data, the SEC data appear incomplete: of these 593 firms in the municipal advisor business that are presumably still active, 182 have not updated their annual MA-A filings since calendar year 2016,” Bergstresser and Luby wrote. “Thirty-nine have not updated their filings since 2014.”

"If they're not filing, we kind of don't know what they're doing," Bergstresser told attendees at the conference.

This apparent lack of reliable information poses a potentially serious problem for anyone seeking to understand the MA market, the scholars concluded.

“This means that any assessment of the market structure and characteristics of the advisor market must grapple with the question of the extent to which available data are a noisy reflection of reality,” they wrote.

Other takeaways from their work included the finding that while the number of registered MA firms has dropped from the more than 800 registered as recently as 2013, a fairly steady number of muni advisory professionals, around 3,500,continue to “chase” a fairly steady number of clients.

Bergstresser and Luby also investigated MA effects on pricing, looking at the average bond price increase in the post-issuance market. The two asserted that the difference between the initial offering price of a bond and the average price the bond is sold to final investors could be used to measure the effectiveness of the sale. The lower the increase, the better the advisor did at providing advice. The two researchers concluded that based on their data, issuers would do well to avoid bond financing teams in which the underwriters and municipal advisors have consistently worked with each other.

The Brookings conference continues Tuesday.

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Securities law Municipal advisors Primary bond market MSRB SEC Washington DC
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