Mike Nicholas is chief executive officer of Bond Dealers of America.

In October, Bond Dealers of America wrote to the Securities and Exchange Commission and Municipal Securities Rulemaking Board about confusion in the municipal marketplace caused by non-dealer municipal advisory firms acting as placement agents in violation of the Federal securities law. The Dec. 16 Bond Buyer article, "NAMA: Grant Exemptions for Registered MAs" articulates the rationale and describes the market practices that are the direct cause of the confusion.

The National Association of Municipal Advisors requests an exemption to allow non-dealer municipal advisors to, essentially, act as broker-dealers without being subject to any of the investor-focused protections of the broker-dealer regulatory regime, which includes registration, qualification, duties, and responsibilities that dealers are obligated to follow for the protection of investors.

The issue that we raised in October was not focused on municipal advisors engaging in activities that are traditional municipal advisory activities. On the contrary, the issue that clearly demands regulatory attention is that some MAs are engaging in broker-dealer activities in violation of securities law. If the issuance-related activities of a municipal advisor are restricted to providing advice to an issuer, they are acting in the role of an MA and not that of a broker-dealer. That is clear.

BDA member firms have witnessed many instances when the non-dealer MA morphs into the role of intermediary between an issuer and an investor as a placement agent related to securities. Those activities are the defining characteristics of the legal definition of broker-dealer activities.

NAMA feels that the solicitation and negotiation of a municipal securities transaction on behalf of an issuer with an investor is a municipal advisory activity because they are confusing two distinctly different regulatory regimes. This confusion has led non-dealer municipal advisors to wrongly believe that because providing advice to an issuer in their capacity as a municipal advisor is permissible that means they can also act as an intermediary between the issuer and investors. They believe this despite the fact that the latter is activity that blatantly crosses the line into activity that requires registration as a broker-dealer.

The municipal advisor regime exists to protect issuers; the broker-dealer regime exists to protect investors. The NAMA letter states, "The MA is regulated, the broker-dealer is regulated.  We believe an MA exemption for direct loans (private placements) may provide significant economic benefit to issuers, or obligated persons, in certain types of transactions." This misses the whole point of the broker-dealer regulatory regime. While municipal advisors are now regulated, they are regulated for the benefit and protection of issuers, not investors. By engaging in broker-dealer activities without registering as a broker-dealer or complying with the requirements of broker-dealers, the investors are robbed of the protections of the regime. The MSRB made this very point in August 2011 when it stated, "If a financial advisor, by virtue of its activities, would be viewed as a placement agent for a new issue of securities, its activities in connection with such placement would be subject to all MSRB rules normally applicable in connection with private placements."

The fact that an MA can send a request for proposal to broker-dealers in order to facilitate the selection of a regulated broker-dealer intermediary between the issuer and investors has nothing to do with the question at all. In that specific capacity, the MA is not serving as an intermediary in a securities transaction that would consist of broker-dealer activities. That is not the case when an MA sends an RFP to qualified institutional buyers - the MA is soliciting investors for the purpose of facilitating a securities transaction.

The fact that NAMA articulates the view expressed in its letter is a clear admission that the activities that the BDA wrote to the securities regulators about have been going on for some time and are continuing to go on with enough regularity to compel NAMA to write its letter.  This all highlights the concerns BDA raised: that the SEC and the MSRB need to step in and remind MAs that these activities are broker-dealer activities and enforce the law.

Mike Nicholas is chief executive officer of Bond Dealers of America.