DENVER – Middle-market securities dealers need to mobilize even more to make their voices heard as regulators prepare to tighten the reins on the muni market, Bond Dealers of America members said Thursday.
Regulatory developments were the hot topic at the BDA’s National Fixed Income Conference in Denver Thursday and Friday. While the regulators who were invited to speak laid out the path forward for existing proposals and hinted at more that could be on the way, BDA members spoke passionately and colorfully about what the mid-size firms consider to be a disproportionate negative impact on their businesses.
Keynoting the Thursday opening luncheon was Warren Stephens, chairman, president, and chief executive officer at Little Rock, Ark.-based Stephens, Inc.
He said middle-market firms should not be at a competitive disadvantage against the top five Wall Street firms, which have “unwieldy balance sheets” and multiple divisions that may not communicate with each other effectively.
“I really think the big five banks should be made into 10,” Stephens said during the luncheon, indicating some worry about what would happen at the top of the market in the event of another Great Recession-level crisis. But the thrust of his keynote speech and comments in a subsequent question-and-answer session focused on the SEC’s Municipalities Continuing Disclosure Cooperation initiative and his displeasure with how it played out.
The MCDC encouraged underwriters and issuers to voluntarily report to the SEC any time in the previous five years that they sold or underwrote bonds with offering documents that contained materially false or misleading statements or omissions. The deadline for underwriters to submit under the initiative was Sept. 10 of last year and the deadline for issuers was Dec. 1. A number of dealer settlements with the commission have already been made public, with SEC officials saying there will be more.
“We all went through this time-consuming process that yielded questionable results,” Stephens said, noting that Stephens paid a $400,000 fine to the SEC, nearly as much as the $500,000 fines paid by the largest firms.
“They were by and large issuer problems,” he said of the violations their reviews of past deals identified, “and no one lost a dime.”
Stephens said he was upset that the language of the settlements triggered statutory disqualifications from securities business, requiring the Financial Industry Regulatory authority to grant waivers allowing firms who came forward to keep operating. Stephens said he feels the SEC deliberately kept firms “in the dark” about what they’d be agreeing to, and that his firm might be less inclined to cooperate with another “amnesty” program.
Speakers on other panels also had some gripes with regulators.
Guy Yandel, executive vice president and head of municipal finance at George K. Baum, said that the issuer community has not yet had to experience increased costs passed along to them by dealers who are having to pay more to comply with regulations governing municipal advisors and other things, but soon will.
“It is not yet a shared pain experience, but it will be a shared pain experience,” Yandel said.
Jonas Biery, operations manager for Portland, Ore., spoke on the same panel as Yandel and said he gets agitated when he sees a push for regulatory uniformity between the muni market and other markets.
“I don’t see it being for the good of the industry,” Biery said.
The SEC, Municipal Securities Rulemaking Board, and FINRA all sent representatives to the conference, and provided some guidance on what might be coming.
Cindy Friedlander, director of fixed income regulation at FINRA, said the authority is on the lookout for firms acting improperly as municipal advisors, including firms outside the muni community who may not be aware of the rules.
Friedlander said FINRA also has more cases in the pipeline in which firms will be disciplined for misrepresenting interest as tax-exempt when it is actually taxable due to the firm being short on its position.
Short positions occur when a firm sells bonds that it does not own at the time. A dealer who executes a short sale must then go to the market and subsequently purchase the securities from a third party in order to make delivery on the transaction.
When a short position corresponds to a customer's "long" position, the dealer makes a substitute interest payment to the customer. But because only interest from municipal issuers is tax-exempt, interest generated from a short position is taxable. FINRA has fined two firms for large amounts for that behavior this year. The new cases could come “fairly soon” Friedlander said.
Robert Fippinger, the MSRB’s chief legal officer, said the MSRB might be interested in whether it should revisit the syndicate rules under its rule G-11 on Primary Offering Practices and possibly require syndicate members to make an effort to sell a bona fide public offering at offering price. Fippinger said fair dealing rules can already allow this interpretation, but exploring a rule change might be better.
Jessica Kane, director of the SEC’s Office of Municipal Securities, told the BDA to comment early and often on regulation, and encouraged members to comment through their own firms as well.
Steve Genyk, head of fixed income capital markets at Janney Montgomery Scott and BDA chairman, also called on members to make their voices heard with regulators and lawmakers.
“We need to speak up,” Genyk said. “This is a call to action.”
