As a former chairman of the Municipal Securities Rulemaking Board and as chairman and chief executive officer of one of the largest public financial advisory firms that is also a registered broker-dealer, I strongly believe it's time for all muni financial advisers to operate under the same set of stringent rules that have long-applied to registered broker-dealers who are also FAs. Only this will ensure that all municipal clients and investors receive appropriate protections.
The Dodd-Frank Wall Street Reform and Consumer Protection Act set in motion a revolution in the regulation of municipal securities, and the MSRB, Securities and Exchange Commission and Financial Industry Regulation Authority are working hard to put all the pieces in place.
Section 975 of Dodd-Frank provides a new regulatory framework for municipal financial advisers, ending a situation in which some FAs have not been regulated while others have.
Previously, unregistered FAs have been exempt from the standards that ensure consistent regulation, transparency, and accountability within the industry. Unregistered FAs were not required to certify their expertise, remain current through required continuing education, or even, at the most basic level, demonstrate the kind of fiduciary duty that guarantees the interests of the client come first.
Dodd-Frank, in theory, cured that by requiring that all FAs be registered. The theory, however, becomes reality only through the rules that are written and applied. The effectiveness of the new rules will depend upon all muni FAs operating under the same standards.
In the spirit of Dodd-Frank, an FA is an FA. Failure to reflect that consistently in the rules will fail to provide the protection for the issuers and investors intended by Dodd-Frank. Specifically, the MSRB's proposed Rule G-44 along with G-23 and others yet to be released should:
- Promote fair dealing.
- Provide protections against fraudulent and manipulative acts and practices.
- Prescribe professional standards that are much needed in today's environment.
- Require that all FAs demonstrate their knowledge through periodic examinations.
- Require all FAs to keep and retain accurate records.
- Ensure compliance by enforcing the same rigorous set of regulations for all.
If some FAs are not subject to minimal capital requirements, a harmed issuer is at a disadvantage in seeking financial recourse. For the same reason, all FAs must be required to carry sufficient professional liability insurance.
There is no doubt that the changes are controversial. Previously unregistered FAs don't like it, and seek lesser regulation. While it's easy for opponents to cry "excessive regulation," such complaints are self-serving. They see their ox as being gored.
Some object, saying these requirements will be costly to them even though the proposed regulations provide for reasonable fees to defray costs and expenses. Their concerns pale in comparison to the value of the fair dealing, improved protection and professional standards that will be applied throughout the municipal finance market.
Previously registered FAs, like my company First Southwest, have been patiently waiting for a level playing field. No doubt we are looking forward to full implementation of the promised rules.
But what happens to those of us in the industry is not what's important. What matters most is the impact on the municipalities, school districts and other issuers that we advise and the investors who buy and trade muni securities. The key principles for the new rules should be to improve protection for those who depend on advice from FAs and to improve protection for municipal bond investors.
Sure, the rules proposed thus far could use some tweaking to ensure they align with the intent of Dodd-Frank. For example, appointed and elected members of muni governing bodies should be excluded from the definition of a municipal FA. There's no need to discourage qualified, good women and men from serving on boards.
In another example, the MSRB rules governing private placements should be universally applied to non-broker dealer and broker-dealer FAs alike. By enacting uniform rules both issuers and investors will be protected.
But, less-central issues aside, it's important to finalize and adopt rules that place the same strong requirements on all muni FAs. Municipal borrowers will benefit. Investors will benefit. And in the end, the industry will benefit from the increased credibility that results from fair dealing, improved issuer and investor protection, and enhanced, enforced professional standards.