After the Municipal Securities Rulemaking Board's April meeting, chairman Jay Goldstone reported that MSRB members had discussed the recently reported broker-dealer contracts with municipal issuers in which the former "disclaim any legal and regulatory obligations."
Recently, John Cross, director of the Securities and Exchange Commission's municipal securities office, described these contracts as being "a bit too cute."
Both gentlemen were referring to the ever-increasing number of contracts being proffered to issuers by broker-dealers in which the dealers refer to themselves either as "financial advisors" who disclaim fiduciary responsibility, or as "investment bankers" who provide services identical to those provided routinely by municipal advisors as well as services relating to the underwriting of the issuer's securities.
We must presume that the compliance departments of these broker-dealers were comfortable with these "non-municipal advisory" engagements. However, they fly in the face of the intent of the Dodd-Frank Act — to protect the interests of municipal issuers and their taxpayers and ratepayers.
These attempts to skirt Dodd-Frank's intent are very disconcerting to the National Association of Independent Public Finance Advisors and our member firms with respect to their impact on municipal issuers.
As NAIPFA has expressed with respect to recent legislative efforts, including the so-called Dold Amendment, some broker-dealers appear to be seeking a continuation of the business practices that were commonplace prior to the enactment of Dodd-Frank — the provision of municipal advisory services to municipal entities without having to accept corresponding fiduciary duties.
It is our concern that some broker-dealers will use their "non-municipal advisory" relationship as a platform to convince would-be issuers to allow them to serve as the underwriter of the issuer's securities.
Such a workaround seems to be a veiled attempt by some firms to represent the issuer on both sides of the transaction, as both financial advisor and underwriter, a practice that NAIPFA had hoped would be curtailed by the recent amendments to the MSRB's Rule G-23.
Although the recent amendments to G-23 and G-17 were a step in the right direction, the amendments did accommodate many broker-dealers' concerns related to their business practices. The result is that broker-dealers continue to be allowed to engage in extensive discussions with issuers prior to declaring which role they will play in a muni securities transaction.
In turn, broker-dealers are able to develop close trusting relationships with issuers, creating a potential conflict of interest almost as great as what was meant to be curtailed by the amendments to these rules.
That is, in many cases, issuers will rely upon the advice they receive from broker-dealers, including advice with respect to the broker-dealer's own engagement as either underwriter or financial advisor. In short, we are concerned that the current regulatory framework allows broker-dealers to gain influence over issuers' decision-making processes while affording broker-dealers the ability to determine what role in the transaction will provide them with the greatest opportunity for remuneration, to the potential detriment of the issuers.
NAIPFA agrees with many of the broker-dealer groups that have stated throughout the rulemaking process that there should be a level playing field. However, currently there is not, as issuers remain confused about the distinct roles played by underwriters and financial advisors.
As these "non-municipal advisory" contracts demonstrate, the current regulations accommodating broker-dealer business models puts issuers at a disadvantage. They remain confused about the role broker-dealers play since such actors are not required to declare at the earliest point of their relationship with the issuer whether they intend to act as FA or underwriter.
This regulatory approach is not consistent with the need for full clarity and transparency of roles within the context of a municipal debt transaction.
The MSRB should therefore revise its rules in two principal ways. First, it should clarify that regulated persons serving as financial advisors, regardless of the title they utilize, cannot disclaim fiduciary responsibility for the municipal advisory services they provide.
Second, the board should amend its rules to require broker-dealers to declare at the earliest point in their relationship with an issuer — and prior to discussing matters related to a particular muni transaction — the role that they intend to play in the deal.
Issuers need to know whether a firm or individual being considered for an engagement will be serving as their underwriter or financial advisor. In addition, an issuer should not have to guess as to whether the entity providing municipal advisory services has corresponding fiduciary duties.
The MSRB has a responsibility to protect issuers, and these rule changes would clearly be in municipal issuers' best interests. They would also further the intent of Dodd-Frank by making clear that the recent rash of broker-dealer "non-municipal advisory" contracts will not be tolerated.
Market participants, broker-dealers and independent financial advisors alike, must acknowledge that we live in a new world and all of our business practices must undergo necessary changes. The time for change has come and it must be embraced by all.
As we undergo these changes we must remember that Dodd-Frank's municipal securities provisions were enacted to protect the interests of issuers, taxpayers and ratepayers. Unfortunately, it is becoming ever more apparent that there are some within the municipal securities community that are reluctant to change.
Therefore, for the protection of issuers, taxpayers and ratepayers, it is imperative that the regulations governing our industry be modified to clarify participant roles, increase transparency, and help to ensure that the conflict-riddled practices that were all too common in the past are not allowed to become entrenched in our post-Dodd-Frank world.
Jeanine Rodgers Caruso is president of the
|National Association of Independent Public Finance Advisors.