Trials and Tribulations
Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Act”) independent financial
advisors (advisors that are not associated with brokers, dealers or
banks) will be required to register with the Securities Exchange
Commission (SEC) and will be regulated by the Municipal Securities
Rulemaking Board (a Self Regulatory Organization that previously
regulated only brokers, dealers and banks). The Municipal Securities
Rulemaking Board ("MSRB") was created in 1975 to protect investors.
Under the Act, the MSRB is now required to protect the interests of issuers
as well as investors. This page describes my personal regulatory
which I hope will be both informative as well as a light hearted look at my road
to regulation over the next ? years.
July 21, 2010
– The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Act”) becomes law.
Under the Act, all "Municipal Advisors" will be required to register with the SEC and will be regulated by the Municipal Securities
The Act defines "Municipal Advisor" as any person that "provides advice
to or on behalf of a municipal entity or obligated person with respect
to municipal financial products or the issuance of municipal securities,
including advice with respect to the structure, timing, terms, and other
similar matters concerning such financial products or issues."
The term Municipal Advisor excludes
any individual who is a municipal entity or an employee
of a municipal entity, a broker, dealer, or municipal securities dealer
serving as an underwriter (as defined in section 2(a)(11) of the
Securities Act of 1933) (15 U.S.C. 77b(a)(11)), any investment adviser
registered under the Investment Advisers Act of 1940, or persons associated
with such investment advisers who are providing investment advice, any
commodity trading advisor registered under the Commodity Exchange Act or
persons associated with a commodity trading advisor who are providing advice
related to swaps, attorneys offering legal advice or providing services that
are of a traditional legal nature, or engineers providing engineering
Effective October 1, 2010, Municipal Advisors have a fiduciary
responsibility to their municipal clients. In addition, under the Act, the MSRB is now required to:
(i) prescribe means reasonably designed
to prevent acts, practices, and courses of business as are not
consistent with a municipal advisor’s fiduciary duty to its clients;
(ii) provide continuing education
(iii) provide professional standards;
(iv) not impose a regulatory burden on
small municipal advisors that is not necessary or appropriate in the
public interest and for the protection of investors, municipal
entities, and obligated persons, provided that there is robust
protection of investors against fraud.
The main provisions of the Act pertaining to municipal securities
available on the MSRB's website. See
Section 15B of the Securities Exchange Act.
August 17, 2010
– The MSRB Proposes Amending Rule G-23 (the Rule that prohibits brokers and dealers from
simultaneously serving as Financial Advisor and Underwriter)
Currently, Rule G-23 prohibits any
broker, dealer or municipal securities dealer (“dealer”) acting as
financial advisor to an issuer in connection with its new issue of
municipal securities from also serving as underwriter for such issue.
However, a financial
advisor may discontinue its financial advisory relationship and serve as
underwriter for the issue if the dealer submits a letter
stating that this may create a conflict of interest. For several years the
National Association of
Independent Public Finance Advisors has urged the MSRB to amend Rule
G-23 in order to protect issuers from the conflict of interest created
by role switching. In 2006, when Rule G-23 remained unchanged, the
Government Finance Officers Association wrote
Rule G-23: Who's Protecting Whom."
On August 17, 2010, the MSRB released a
proposed amendment to Rule G-23. The MSRB
stated that it "is considering these amendments in view of a
request that it do so by the Securities and Exchange Commission." In its
release, the MSRB also included a request for comments regarding the change
that expires on
The proposed amended rule and the request for comments is available at
August 18, 2010 – My Rule G-23 Comments
writing my comments. My thoughts: Will my comments be read?
Will my comments be worthy of consideration? I better write my
comments in King's English. If I don't, the MSRB will surely read my letter and
require me to have additional continuing
September 1, 2010
– The SEC adopts the "Interim
The SEC adopts the "Interim Final Temporary Rule" to enable
Municipal Advisors to be registered by
October 1, 2010. The list of all
registered Municipal Advisors is available at
https://tts.sec.gov/MATR/index.html. As an over achiever I was
the 7th Municipal Advisor to register. I didn't realize that as a
result I would be listed near the bottom of the web page.
"Interim Final Temporary Rule;" is it just me or is this an
As to my G-23 Comments - I'm still writing. I just won't worry about it
anymore. I can file my comments as "Interim Final Temporary
Comments". If I make grammatical error or typos I'm covered.
The SEC established a comment period
on the Interim Final Temporary Rule
that expires on
October 8, 2010.
I'm not writing because I'm certain that no one submits comments on an
Interim Final Temporary Rule.
September 1, 2010 – The MSRB Files
Proposed Changes to Rule A-3 with the SEC Relating to the Composition of its Board
On September 1, the MSRB filed a request with the SEC to change its Board
composition and, as part of the filing, the SEC requests
comments within 45 days following publication in the Federal Registrar.
Under the Act, the MSRB must have a new
Board by October 1, 2010 with at least 15 members. The majority must be
members who are independent of any
municipal securities broker, municipal securities dealer, or municipal
advisor, at least 1 of whom must be representative of institutional or
retail investors in municipal securities, at least 1 of whom must be
representative of municipal entities, and at least 1 of whom must be a
member of the public with knowledge of or experience in the municipal
industry. The remaining 7 individuals are to be associated with a
broker, dealer, municipal securities dealer, or municipal advisor,
including at least 1 who is associated with and
representative of brokers, dealers, or municipal securities dealers that
are not banks or subsidiaries or departments or divisions of banks, at least 1 who is associated with and
representative of municipal securities dealers which are banks or
subsidiaries or departments or divisions of banks, and at least 1
individual who is associated with a municipal advisor and, together with
the broker-dealer representatives and the bank representatives, are
referred to as ‘regulated representatives’.
Try to stay with me on this.
In its filing with the SEC, the MSRB announced plans to expand the number of members
to 21. This would enable the MSRB to have 10 regulated representatives
and permit retention of its members whose terms are not expired.
With respect to the public members, the MSRB defines
independent to mean "no material business relationship," which in turn,
would mean that, at a minimum, the individual is not and, within the
last two years, was not associated with a municipal securities broker,
municipal securities dealer, or municipal advisor, and that the
individual does not have a relationship with any municipal securities
broker, municipal securities dealer, or municipal advisor, whether
compensatory or otherwise, that reasonably could affect the independent
judgment or decision making of the individual. 30% of the
regulated members are to be Municipal Advisors.
Although the MSRB apparently selected its new
Board in late July, no announcement was made regarding its members.
Now this is something I can sink my teeth into. I don't have a
clue who comprises the Board but I'm a financial advisor - I can do the
math even if its a guesstimate. I know there are 10 regulated
representatives 3 of which are Municipal Advisors but the Municipal Advisors
might also be associated with a broker, dealer or bank. That leaves 11 that are public
members who could be former employees of a broker,
dealer or bank. So if I do my math correctly
11+10 = 21 or 100% of the Board could
be associated with brokers, dealers or banks.
So why do I care? Underwriters and
independent financial advisors have always sat on opposite sides of the
table in representing investors and issuers, respectively. If the
majority of the MSRB's Board is comprised of brokers, dealers and banks is
it possible that the MSRB could impose punitive
regulations for independent financial advisors rather than constructive efforts to improve transparency and
fair dealing in the market place? And the answer is ... I
guess I better write a comment letter.
September 22, 2010
– Comments Relating to the Composition of the MSRB Board (Rule A-3) are Due
I finished my
Rule A-3 letter with time to spare. Other Independent Financial Advisors
also submitted letters. We all
supported more representation by Independent Financial Advisors. Some of
us believed that the MSRB's definition of "independent"
with respect to public representatives was not sufficient to insure
Given the MSRB's new expanded role to protect issuers, the Government
Finance Officers Association ("GFOA") properly requested that more than
one issuer be added to the Board as
As to my G-23 Comments - I'm still writing.
September 23, 2010
– MSRB Comments on Comments to Rule A-3
I'm impressed, the MSRB has a speed reader. Twenty-four hours after
the comments were due, the MSRB
commented on the comments. It
took me more than a month following passage of the Act to begin writing this saga.
September 30, 2010
– The SEC Approves the New MSRB Board
The SEC adopts MSRB's proposed Rule A-3 without any changes. I think they read my letter but didn't like it.
September 30, 2010
Comments are due on Rule G-23 (The Rule
that Prohibits an Underwriter from Simultaneously Serving as a Financial
I finished my
letter on time. My partner also
letter and so did other Independent Financial Advisors. All of
the Independent Financial Advisors
supported a stronger Rule G-23 than the MSRB is proposing. It's not a
big deal, we just happen to think it's a conflict of interest for an
underwriter to serve as financial advisor on one transaction and simultaneously serve
as an underwriter on a different transaction for the same issuer.
The GFOA submitted a comment letter supporting the proposed
amendments to Rule G-23. Among their comments were the following: "We support and
encourage the MSRB to implement the significant and long overdue changes
it has proposed to Rule G-23 (Rule). For many years, the GFOA has
encouraged the MSRB to adopt changes to the Rule that prohibit a
financial advisor (FA) from resigning and becoming the underwriter for
Of course brokers and dealers expressed their preference to have no changes
the current rule. Most of the remaining
71 comments were from Kentucky
issuers. As you know, a primary role of a financial advisor in a
competitive sale is to provide services that result in the largest
number of bids possible. However, these Kentucky issuers have the same
Broker Financial Advisor who is unable to get them more than one or two bids in a
competitive sale. Consequently, these issuers share the same
philosophy: allow their Broker Financial Advisor to submit a bid and
have the opportunity to serve as underwriter.
I have an idea Kentucky issuers! I can serve as your financial
advisor so that the broker with whom you presently work can submit bids
without a conflict of interest. Furthermore, there is a good chance that
my marketing efforts would produce more than two bids.
October 1, 2010 – People do submit
comments on "Interim Final Temporary Rules"
I bumped into the SEC's comment page and was surprised to find comments.
One firm seemed to have the formulas on how companies could serve as
"Municipal Advisors" without being classified as "Municipal Advisors". So I'm writing again.
October 8, 2010
– Comments to the "Interim Final Temporary Rule" are due
I finished my
letter on October
5. Maybe I'm getting the hang of this writing thing. I hope the
SEC likes this letter more than the letter I wrote regarding Rule A-3.
December 24, 2010
– SEC Proposes a Permanent Rule for the Registration of Municipal
Just in time for the holidays the
SEC released its rule on December 20. The release includes the
rule for the permanent registration of municipal advisors, basis for the rule and questions for comments (due in 45 days
after the release is published in the Federal Registrar) all in a brief
231 page document. The rule does provide some clarification
relating to individuals that will be considered to be and must register
as municipal advisors. In addition to independent financial
advisors and broker dealers serving as financial advisors, the rule
includes additional guidance relating to attorneys, accountants and