Earlier this summer, Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board (MSRB) spoke to the National Association of State Treasurers about the “New Rules of Engagement for Municipal Finance.”
She noted that in working with many state treasurers and individuals responsible for state debt management, she has gained a deep appreciation for their work as stewards of state funds and as supervisors and mentors for the state municipalities that issue debt. However, as gatekeepers of and participants in the decision-making process to borrow and assemble deal teams, she urged those on the government side of the line to pay special attention to “new regulations that are changing the relationship between certain professionals on the deal team and you, their clients.”
Her goal: To ensure that local governments understand what they should expect from their municipal advisor professionals – and what the municipalities themselves are responsible for when it comes to sound financial policies and good disclosure practices.
Regulating muni advisors?
According to Kelly, 2016 has been a watershed year for the development of rules of the road for municipal advisors. Many state and local governments, she reported, have added a municipal advisor to their deal team to provide financial advice about the structure, pricing, timing and distribution of their bonds to investors. And while underwriters have long been subject to MSRB rules of fair play, there are no corresponding regulations or professional standards for those advisors.
This gap, she said, “allowed unqualified and unscrupulous individuals to take advantage of their trusted positions for personal gain.” Imagine that!?! Worse yet, it allowed many underwriters to put themselves forward as advisors even though they did not have an obligation to provide disinterested advice.
Unhappy regulators make rules
To protect the interests of state and local governments seeking unbiased advice, the Dodd-Frank Act established a federal fiduciary duty for municipal advisors working with municipal entities. The MSRB was charged with creating a comprehensive regulatory framework for municipal advisors to further define their relationship to their clients and the bounds of professional conduct.
These rules currently are in effect and have implications for issuers, municipal advisors, and the underwriters who used to be able to blur the line between underwriting and advisory services. For example, MSRB Rule G-42 establishes the core standards of conduct owed to clients of municipal advisors. It addresses disclosure of conflicts of interest, documentation of the advisory relationship, recommendations of transactions or products and specified prohibitions.
The MSRB also has extended two of its key rules promoting market integrity to municipal advisors, who must now adhere to the same standards as dealers limiting the size and nature of gifts to officials of state and local governments. While the aim is to curb conflicts of interest that may arise from gift-giving in connection with municipal advisory activities, the MSRB will be paying particular attention to financial firms’ use of political contributions to state and local governments as a business development tool. Municipal advisors are now subject to amendments to MSRB Rule G-37 extending the reach of its pay-to-play rule.
Who’s watching? The MSRB says state treasurers, of course, 50 percent of whom, Kelly reported, already have implemented policies and procedures to ensure their municipalities exert sufficient oversight in bond issuance.
So, what are you doing?
If you are doing the right thing, you have implemented the necessary policies and procedures and are tracking your members’ activities, including any political contributions, and gifts and entertainment expenditures. Are you?
Stuff happens. It always happens. Just make sure it doesn’t happen to you! Don’t be that firm. The regulators are out in force hunting for evildoers. Whether you trade municipal bonds, futures, are a broker-dealer, or RIA, you know that compliance matters.
If you don’t have the bandwidth to be your own compliance, outsource. When your compliance function is under pressure to do more with less, you have options?
Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community.