WASHINGTON — The National Association of Municipal Advisors is urging the Securities and Exchange Commission to create exemptions from broker-dealer and investment adviser registration for MA firms engaged in activities that are understood to be normal municipal advisory services.
NAMA president Terri Heaton made the pitch in a Dec. 15 letter to SEC chair Mary Jo White. NAMA, formerly the National Association of Independent Public Finance Advisors, drew inspiration from the Bond Dealers of America's October letter to the commission, in which BDA president Mike Nicholas urged the SEC to crack down on MAs acting as unlicensed placement agents.
Heaton told White that NAMA agrees that there is no "bright line" between MA and placement agent activity, and that it should be reviewed.
"NAMA believes that any such review would properly result in new rules or guidance providing an exemption from broker-dealer registration for municipal advisors engaged in municipal advisory activity," Heaton wrote. "Absent such an exemption, municipal advisors who are not broker-dealers could not provide advice to, or negotiate on behalf of, municipal entities or obligated persons in direct purchase transactions."
The issue arises from increasingly-popular alternative funding mechanisms whereby issuers choose to raise capital by selling munis to a bank or a select number of investors instead of offering bonds to the public. Firms automatically become MAs when they provide targeted bond-related advice to issuers and MAs owe their state and local government clients a fiduciary duty to put those clients' interests first, before their own.
But the Municipal Securities Rulemaking Board warned in 2011 that MAs that introduce potential investors to issuers or negotiate with potential investors in exchange for transaction-based compensation may be subject to federal securities laws and MSRB rules that apply to dealers.
NAMA acknowledged the MSRB notice, but said the board's words "did not purport to be guidance," and that acting as an intermediary is between an issuer and a bank that might potentially be an initial purchaser of bonds clearly falls into the realm of municipal advisory activity as defined by the Dodd-Frank Act.
Heaton argued that it would be inconsistent with the goal of issuer protection for the SEC to allow broker-dealers to provide placement services without registering as MAs, but only allow MAs who owe the fiduciary duty to provide such services if they also registered as broker dealers.
"Regulated broker-dealers and investment advisors are provided with exemptions under the MA definition," Heaton said in a statement to The Bond Buyer. "Regulated MAs should have access to similar exemptions with respect to certain direct (private) placements. This just makes sense as issuers would then have access to potentially more economically competitive and varied funding sources."
Shelley Aronson, a NAMA member and president of First River Advisory in Philadelphia, said such exemptions would benefit issuers.
"An MA can send [a request for proposals] to investment bankers at underwriting firms to buy bonds, why does it not make sense for an MA to be able to send an RFP to qualified institutional buyers to buy bonds?," Aronson said. "In either alternative, the MA is sending an RFP to qualified institutional investors to buy bonds. The MA is regulated, the broker-dealer is regulated. We believe an MA exemption for direct loans (private placements) may provide significant economic benefit to issuers, or obligated persons, in certain types of transactions."
NAMA also asked that the SEC review its guidance on investment adviser registration because those rules did not contemplate the existence of the new MA regime. SEC guidance from September 2000 states that financial advisors to municipalities could provide advice on the investment of bond proceeds without register as IAs as long as they did so without compensation and only on the occasional request of the client. Such advice is explicitly MA activity under the SEC's registration regime, NAMA argued, and the SEC should provide clarification.
Copies of the letter were also sent to each commissioner, the heads of the SEC's muni office and enforcement division, as well as the MSRB.
