SAN DIEGO - Months after the municipal advisor registration rule's final effective date, there is still considerable confusion among both regulated entities and issuers about what the new regulations require.
Issuers, dealers, regulators, and municipal advisors discussed the state of play of the MA regulations at The Bond Buyer's California Public Finance Conference which is being held here until Friday.
Last fall the Securities and Exchange Commission finalized its rule codifying Dodd-Frank Act provisions subjecting those who give advice to state and local governments to a fiduciary duty and requiring them to register with the commission and with the Municipal Securities Rulemaking Board. But roughly a year later, market participants still have many unanswered questions and anxieties, several prominent industry representatives said.
There has been a shift in the tenor of discussions about the rule since it became effective July 1, as the MSRB has done work on its supporting rules and the SEC has released additional guidance on particularly confusing aspects of when a person or firm must register as an MA, what constitutes "advice" in the commission's eyes, and other issues. Reaction from those bearing new responsibilities under the rule was initially somewhat negative, but discussions are now more supportive.
""I think the MA rule was designed to protect issuers, and we should be supportive of it," Raul Amezcua, a managing director at Stifel Nicolaus & Co., said during the conference.
Brian Thomas, a managing director at Public Financial Management, said there was a need to regulate the muni advisory business but that the new rules from the MSRB would definitely increase costs and create some difficulties. Many underwriters are relying on exemptions from registration as MAs, which they need in order to be able to underwrite a resulting bond deal. One of the most prominent of these is the independent registered municipal advisor exemption, or IRMA, which allows underwriters and others to give advice to municipalities who have certified that they have retained and will rely on the advice of their own MA. Thomas said PFM will not serve as a token IRMA.
"We want to work with our clients, but we're not going to be hired as an IRMA just so you can let a bunch of bankers give you ideas and not talk to us," he said. "You really do need to use your independent financial advisor."
Katie Koster, a managing director at Piper Jaffray, said that while large sophisticated issuers are taking the rules in stride, smaller to medium-sized issuers remain confused about how the MA rule changes their relationships with the firms they work with. Koster said there have been cases where Piper was hired as an underwriter and almost immediately put on a conference call to discuss alternatives to bond financing, before any exemptions allowing them to give that advice were in place.
"It does sometimes get to be a little bit uncomfortable," she said.
"I kind of feel that I'm the child in the room, and all the adults are talking about me," said Natalie Brill, chief of debt management for Los Angeles. "Although I've been told I'm not regulated, I definitely feel regulated."
Brill said the fact that the MSRB has yet to finish and get SEC approval for many of its rules, including its core MA conduct rule, is adding to the confusion.
"The problem right now is we're in this gray cloud of not exactly knowing," she said.
MSRB executive director Lynnette Kelly said some MAs need basic guidance and help on topics such as how to file comments with MSRB or what an SEC examination of their business might look like. She encouraged comments from the industry, and said the MA rules are the focus of the MSRB. The unfinished rules are hampering completion of an MA professional qualifications exam, she said, noting that the board needs rules to properly formulate an exam.
"It's a little bit of a chicken and egg situation," Kelly said.
Kelly said the goal is to have MAs taking the exam in a year, and that a rule on MA gifts and gratuities will come out within a couple of weeks. There are additional MA rules that might come up over the years, Kelly said, but added that she doesn't see the board doing much in that space until all the current priority rules are complete.
