Nearly three years after the Securities Exchange Commission released its proposed rules concerning the registration of municipal advisors, we now have a series of final rules that provide needed clarifications to the definition of the term “municipal advisor.”
The National Association of Independent Public Finance Advisors supports the practical, common-sense approach taken by the SEC and its office of municipal securities and believes that these rules will directly benefit the interests of issuers by creating a more robust, fair, competitive and transparent municipal market.
For too long there has been an ambiguity with respect to the roles played by various market participants in municipal securities transactions. The rules remedy this by establishing clear delineations, primarily with respect to municipal advisors, but also with respect to other market participants, such as broker-dealers, engineers, CPAs and attorneys.
For example, the rules make it clear that individuals providing advice with respect to the structure, timing, terms and other similar matters will generally be considered to be municipal advisors, whereas persons who merely provide general information to issuers will not. The rules make sense as approved and provide needed protections to muni issuers by ensuring that they will receive unbiased advice from fiduciaries, with only limited exceptions.
However, NAIPFA is troubled to hear that some municipal market participants, particularly those within the broker-dealer community, are engaged in a concerted effort to undo the rules’ issuer protections before they are even effective, undermining the very laws that they pushed so vigorously for in 2010.
Among the arguments being put forth by some broker-dealer groups is that the rules will cut off or impede the free flow of ideas between broker-dealers and issuers. NAIPFA disagrees. Under these rules, broker-dealers are free to provide general information to issuers. In addition, the rules do not prevent broker-dealers from providing advice. They simply require broker-dealers to be engaged as underwriter prior to providing advice to an issuer. Therefore, we disagree with the notion that this rule will cut off or impede the flow of information.
Similarly, it is incorrect to suggest that if issuers do not receive particularized advice from a broker-dealer prior to their engagement as the issuer’s underwriter that issues will not come to market. We must remember that it is the issuer, not the broker-dealer, who is to control whether, why and how to issue securities, which are determinations that must not be impermissibly influenced by broker-dealers whose interests diverge from those of issuers.
Thus, whatever impact these rules may have on the free flow of information will be outweighed by the significant issuer protections that these rules put in place.
However, we have in the past seen significant barriers within the muni market, but these barriers have primarily been to competition, not the free flow of information. For example, historically, many broker-dealers represented themselves as one-stop-shops for all municipal securities matters.
We are hopeful that these rules will break down these barriers by forcing broker-dealers to determine early on in transactions what role they intend to serve — that of municipal advisor or underwriter. This is a significant improvement from the status quo that will improve competition and provide needed protection to municipal issuers, who may otherwise be led to believe that broker-dealers are acting in their best interest.
We also understand that some broker-dealer groups are attempting to convince issuers, lawmakers and regulators that if they are not permitted to provide advice to issuers prior to their engagement as an underwriter, that issuers will be unable to identify refinancing opportunities.
NAIPFA, again, disagrees. Municipal advisor firms, and NAIPFA member firms in particular, many of whom employ individuals who are certified independent public finance advisors, have and will continue to identify and provide advice to issuers with respect to refinancing opportunities.
In addition, although some broker-dealers continue to state that financial advisors do not add value to a transaction, the SEC, the Government Finance Officers Association and others have pointed out in numerous releases that research has consistently shown that the use of municipal advisors can lower an issuer’s borrowing costs.
Finally, although the rule leaves many questions unanswered, NAIPFA does not believe that there is any question as to the rules’ interplay with current Municipal Securities Rulemaking Board Rule G-23. Recently, the SEC reiterated that G-23 is a conflicts rule and stated that it is not superseded or otherwise invalidated by the passage of the rules.
The rules work well within current Rule G-23’s framework insomuch as it prevents a broker-dealer from underwriting an issuer’s securities where a financial advisory relationship exists. This fact, paired with the rules’ test for determining whether an individual is required to register as a muni advisor, leads NAIPFA to conclude that a broker-dealer who provides municipal advisory services to an issuer outside of an underwriting engagement will have developed a financial advisory relationship and will violate G-23 by underwriting that particular issuance of securities.
In light of the foregoing, to the extent that litigation or legislative avenues are being considered by market participants as a means of preventing the implementation of the rules, NAIPFA reiterates what the SEC has stated previously — that such actions will simply delay, perhaps by years, the regulation of municipal advisors and the implementation of these important issuer protections.
Municipal market participants cannot continue to do business as they have in the past. It is time to adapt to the new normal and accept that the municipal market and its regulatory landscape have changed. NAIPFA and its member firms have waited nearly three years for the rules and are now awaiting the day when we can begin registering as municipal advisors, permanently. We also look forward to representing the interests of regulated municipal advisors and working with the MSRB as it promulgates municipal advisor rules.