Debate over the appropriate roles for municipal advisors has flared up in dueling letters from MA and dealer groups, as the Municipal Securities Rulemaking Board reviews its rule governing financial advisors.
In a recently-leaked letter to the Securities and Exchange Commission in October 2018, PFM asked for interpretive guidance that PFM would not have to be registered as a broker-dealer if it engages in specific activities related to private placements of muni debt. PFM is among the largest non-dealer municipal advisory firms, and was the top-ranked muni financial advisor last year with about 17% of the market share.
“PFM submits that such clarity and transparency would not only enhance the efficiency of the municipal financing markets but would also enable ME (municipal entity) issuers, working with their MAs, to obtain the best financing available to better serve their constituents,” PFM wrote.
The letter caused a firestorm among dealer groups who say that if municipal advisors want to engage in broker-dealer activities, they need to register as such. Dealer groups have complained in the past that MA firms not registered as dealers have acted as placement agents on such deals, selling bonds to banks or other single investors on behalf of issuers. Regulators consider placement agent activity to be broker-dealer activity.
PFM said guidance is needed because the definition of municipal advisory activities “expressly contemplates certain functions that -- when conducted by intermediaries outside of the realm of registered MAs -- appear similar to activities that have historically been considered indicative of BD activities.”
Without guidance, PFM said, uncertainty caused by this “gray area” between municipal advisor and dealer activities can result in a “chilling effect” on a municipal advisor’s ability to provide the full range of services that Congress intended when it created the muni advisor categorization in the 2010 Dodd-Frank Act.
PFM emphasized that it was not asking for general bond dealer registration relief for MAs participating in private placements or other direct placements of municipal securities. The letter states explicitly the firm is not seeking to act as a placement agent.
“On the contrary, the relief requested is narrowly-targeted to address only activities that PFM believes Congress intended to be performed by registered MAs for the sole benefit of MEs under the new Dodd-Frank MA regulatory regime,” PFM wrote.
The activities PFM wants relief for include identifying and assessing potential "qualified providers," negotiating terms with them, and coordinating with the buyer selected.
PFM was not able to immediately respond to a request for comment.
The Securities Industry and Financial Markets Association responded in a June 12 letter to the SEC, asking that PFM’s request be denied.
If the request is granted, it could harm investors, said Leslie Norwood, managing director,associate general counsel and head of municipal securities at SIFMA.
PFM’s request extends to SMMPs or Sophisticated Municipal Market Professionals, such as an insurance company. Under MSRB rules, SMMPs are entitled to fewer investor protections because they do not need them.
"These institutions may very well trade the municipal securities without there having been any broker-dealer due diligence and without any assurance that there is a disclosure document with all material information," Norwood wrote.
SIFMA wants MAs engaging in broker-dealer activities to register as a broker-dealer and vice versa. Broker-dealers engaging in MA activity have to register as MAs. The same goes if broker-dealers engage in investment adviser activity, they would have to register under the Investment Advisers Act, Norwood said.
PFM told the SEC that the activities described in the request are neither broker-dealer activity nor placement agency activity and that if the SEC should require it to register as a broker, it would have a conflict with its fiduciary duty to its issuer client.
Norwood wrote that PFM’s request speaks of MAs generally, when the relief they are asking would only benefit MAs that are non-dealer MAs.
“That conclusion is because – as PFM itself has pointed out and as described later in this letter - broker-dealer municipal advisors are precluded by the MSRB under Rule G-23 from engaging in the activities described in the request because they present an unmanageable conflict,” Norwood writes.
The MSRB reopened discussion about the roles of MAs in May when it requested comment on its Rule G-23 on activities of financial advisors as part of its retrospective rule review.
Prior to some 2011 amendments to Rule G-23, an underwriter firm serving as an issuer’s financial advisor could get insight and leverage a deal, only to then resign as advisor and underwrite a transaction or at least submit a bid on a competitive deal.
Dealer groups have said that by not allowing broker-dealer firms to switch roles and underwrite bonds, it takes one more firm out of the equation that can actually submit a bid.
Norwood said PFM's request is "incongruent" with G-23.
“Municipal advisors want to be able to serve as municipal advisors and not have it considered to be broker-dealer activity,” said Susan Gaffney, the National Association of Municipal Advisors’ executive director. “They’re there to help the clients, as their fiduciary, structure the appropriate financing.”
Bond Dealers of America members have "serious concerns" about PFM's request for guidance for permission for non-dealer municipal advisors to engage in various activities relating to private placements by municipal entities, BDA CEO Mike Nicholas, wrote in a statement.
"The BDA strongly believes the SEC's approval of the activity outlined in the request for guidance would confuse and mislead investors and would reverse decades of investor protections implemented through broker-dealer regulations, where persons who identify, negotiate and arrange securities transactions need to be properly regulated, qualified and capitalized to balance the interests of investors, issuers and taxpayers," Nicholas wrote.
