Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today released for public comment a revised draft rule to establish the core duties of municipal advisors when providing advice on municipal securities transactions and related products. The revised draft MSRB Rule G-42 addresses a number of issues raised by commenters on the initial draft rule published in January 2014.

“As the foundation of the MSRB’s regulatory framework for municipal advisors, MSRB Rule G-42 will play a central role in achieving the MSRB’s mandate to protect municipal entities that engage the services of a municipal advisor,” said MSRB Executive Director Lynnette Kelly. “It is important to us and to the market that we develop a rule that effectively and appropriately provides guidance on the core responsibilities of municipal advisors to their clients. The comments we received on the previous draft have informed a number of changes to the text of the draft, and the MSRB wants to provide an opportunity for market stakeholders to review and comment on these changes.”

Specifically, the initial draft prohibition on principal transactions has been revised to apply only to transactions with municipal entity clients, not with obligated persons. In addition, to clarify the narrow scope of the prohibition, the revised draft rule defines principal transactions as limited to those directly related to the subject of the municipal advisor’s engagement with the municipal entity client. The definition also specifies the types of transactions that are covered.

Among the other key changes to the draft rule is elimination of specified requirements that municipal advisors review the official statement in a new issue transaction, disclose information about professional liability insurance and estimate in relationship documentation their expected total compensation in dollars. These changes reflect commenter feedback, including the view that the client primarily should control the scope of the engagement with its municipal advisor.

The revised draft rule also clarifies a municipal advisor’s suitability and related obligations when making recommendations to municipal entity and obligated person clients or reviewing the recommendations of others.

To address potential practical and operational issues, the revised draft rule provides relief from certain disclosure and documentation requirements for anyone who inadvertently provides advice that would be considered municipal advisory activity. However, the new provision does not offer a safe harbor from potential violations of Securities and Exchange Commission (SEC) and MSRB registration requirements and other rules for those providing municipal advisory services.

The MSRB’s January 2014 request for comment solicited input on whether the federal fiduciary duty should be extended to apply to municipal advisors that work with obligated persons. The revised draft rule does not extend the fiduciary duty.

Comments are due no later than August 25, 2014. Read the full text of the revised draft rule to view all changes from the January 2014 draft. The MSRB is hosting an educational webinar on the revised core standards rule on August 14, 2014 at 3:30 p.m. ET. Register for the webinar.

The MSRB continues to develop additional rules for municipal advisors.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today filed a revised proposal with the Securities and Exchange Commission to require dealers to provide annual municipal securities training for registered persons who are regularly engaged in or supervise municipal securities activities.

In December 2013, the MSRB requested public comment on draft changes to the “Firm Element Continuing Education” requirement in MSRB Rule G-3. The MSRB modified the proposed new requirement to remove the specified one-hour minimum amount of training. The MSRB also amended the proposal to apply only to registered personnel.

“The rule change we are filing today responds to issues raised during the public comment process while continuing to address the need for firms to focus on the particular training needs of staff responsible for understanding municipal securities products and complying with all applicable requirements,” said MSRB Executive Director Lynnette Kelly.

Currently, securities firms are required to offer continuing education to their staff based on the firm’s assessment of its overall needs, but there are no existing obligations under MSRB rules to ensure that training on municipal securities is provided to dealer personnel regularly engaged in such activities.

The MSRB requires competency of municipal market professionals and compliance with MSRB rules through professional examinations and continuing education requirements. Separately, the MSRB is in the process of developing a professional qualifications program for municipal advisors. Read more here.

WASHINGTON — The Municipal Securities Rulemaking Board’s proposal to simplify and harmonize its rules on professional designations has drawn applause from a dealers group.

David Cohen, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, expressed support for the tweaks in a letter filed with the Securities and Exchange Commission Tuesday.

The MSRB’s proposal would alter its Rules G-3, on classification of principals and representatives, and would make corresponding changes to Rules G-7 on information concerning associated persons, and G-27 on supervision.

Under G-3, limited representatives are individuals whose activities, with respect to municipal fund securities, may include underwriting or sales; research or investment advice with regard to underwriting or sales; or any other activities that involve communication, with public investors with regard to underwriting or sales. The proposed change would limit the activities of limited representatives exclusively to sales to, and purchases from, customers of municipal fund securities. The MSRB has said this approach is consistent with the approach taken by the Financial Industry Regulatory Authority.

The MSRB is also seeking to eliminate its designation of “financial operations principal” under G-3, because FINRA has overlapping FINOP designation requirements, including an exam.

“The responsibilities and duties of FINOPs pertaining to municipal securities are not unique, and FINRA rules establish general responsibilities and duties for such individuals,” the MSRB said in its June filing with the SEC. Cohen said the proposed changes will simplify things for dealers.

“The MSRB is eliminating duplicative licensing requirements,” Cohen said in an interview. “It doesn’t lessen obligations.”

SIFMA was the only group to submit comments on the proposal to the SEC, which has oversight over the MSRB and must approve its rule changes.

The Bond Buyer
BY KYLE GLAZIER
JUL 16, 2014 1:15pm ET

WASHINGTON — A Republican congressman is pushing the Securities and Exchange Commission to limit the scope of its disclosure violations self-reporting program to the last two years, warning that if it does not he and other lawmakers may seek a legislative solution.

Rep. Steve Stivers, R-Ohio, fired the shot across the SEC’s bow during House lawmakers’ discussion of H.R. 5016, an appropriations bill for the Treasury on Wednesday.

Stivers had prepared an amendment to bill that would not fund the SEC’s MCDC’s efforts for more than two years. He did not formally offer it, but discussed his concerns about the program on the House floor with Rep. Ander Crenshaw, R-Fla., chair of the Appropriations Committee’s financial services panel.

The Municipalities Continuing Cooperation Disclosure initiative allows issuers and underwriters to get favorable settlement terms if they voluntarily report, by the end of Sept. 9, any time in the last five years they offered bonds without disclosing failures to meet their continuing disclosure agreements they set up under the SEC’s Rule 15c2-12. But Stivers’ amendment would have prevented MCDC settlements for deals taking place before March 19, 2012.

That date coincides with a risk alert issued by the SEC’s office of compliance inspections and examinations that detailed the commission’s view on an underwriter’s obligations under 15c2-12. Though that part of the rule was adopted in 1994, the SEC only began to take enforcement actions in this area since the risk alert.

Market groups including the Government Finance Officers Association, the Securities Industry and Financial Markets Association, and Bond Dealers of America have lobbied the SEC to extend the deadline for MCDC participation and restrict its scope to more recent deals, but the commission has refused to budge. House rules prevent legislating in appropriations bills, but Stivers’ amendment would have cut off MCDC funding for violations prior to March 2012.

The House has only 10 working days before the end of the MCDC period because the chamber is not scheduled for legislative business in August. But Stivers told colleagues that he is interested in working with them to make changes to the program if the SEC continues to stick to its guns.

“The states and localities that the SEC is trying to protect do not support this program, and feel it’s very punitive,” Stivers told Crenshaw, noting that the Government Finance Officers Association supported his amendment. Stivers thanked Crenshaw for being willing to work with him and the House Financial Services Committee on a solution “should the SEC not choose to curtail this program on their own.”

“We want to make sure it’s fair and equitable to our states and local municipalities,” Stivers said.

Crenshaw said making sure a large number of bond deals is in compliance is “a huge undertaking,” and told Stivers he looked forward to helping him “find some solutions.”

Michael Decker, a managing director and co-head of municipal securities at SIFMA, applauded the action.

“We thank Rep. Stivers for his attention to the issues raised by the MCDC Initiative,” Decker said. “We, too, believe it would be appropriate for the SEC to focus the program on transactions that were executed after the SEC’s Office of Compliance Inspections and Examinations issued their notice in March 2012 focusing the municipal market’s attention on compliance issues covered by the MCDC.”

There has been only one MCDC settlement so far. The SEC last week charged Kings Canyon Joint Unified School District in California with misleading bond investors in a 2010 deal. Some market participants have pointed out that Kings Canyon was already under investigation when it consented to participate in the MCDC, so it did not actually self-report.

Bond attorneys have also expressed frustration that the settlement does not specify what disclosure failures the SEC focused on. Muni groups have repeatedly sought SEC guidance on what threshold of failure warrants an MCDC confession, but the commission has been silent on that front.

Stivers has shown an interest in muni market issues before, previously sponsoring legislation and lobbying the SEC to narrowly tailor municipal advisor regulations.

The Bond Buyer
BY KYLE GLAZIER
JUL 17, 2014 4:01pm ET

After a 38-year debate on how to make trading costs for corporate and municipal debt transparent, regulators are making another attempt at forcing dealers to disclose how much they earn on the transactions.

The Municipal Securities Rulemaking Board will discuss a proposal at the end of the month, Executive Director Lynnette Kelly said yesterday, after U.S. Securities and Exchange Commission Chair Mary Jo White asked the regulator to come up with a plan by year end. The new rules would apply to so-called riskless trades, where firms fill client orders rather than use their own money to opportunistically buy.

Regulators are placing a greater emphasis on making sure smaller buyers don’t get fleeced when transacting in the corporate- and municipal-bond market that’s grown 36 percent since 2008. While stock brokers must tell investors how much they earn, bond dealers have profited from an opaque market where trades are still often completed over the telephone.

“You don’t know how many bites out of a yield are taken by the time you’re buying a bond,” said Marilyn Cohen, who manages $320 million of corporate and municipal bonds as founder of Envision Capital Management Inc. “Here we are in 2014 and we’re still talking about this.”

Increasing Prices

Individuals are especially in the dark about how much they’re paying brokers, Cohen said. Investors pay higher prices than securities firms when they trade U.S. state and local government bonds, according to a study of the $3.7 trillion municipal market released this week by the MSRB.

The price of a municipal bond increased by an average of 1.78 percent when a broker purchased a security from one investor and resold it to another, according to the MSRB analysis of trading from 2003 to 2010. Trades between securities firms, in comparison, increased in price by 0.5 percent.

Concern is mounting that the bond market’s antiquated infrastructure will exacerbate losses when sentiment reverses after more than five years of easy-money policies that have suppressed borrowing costs and spurred record demand for debt. Investors have funneled about $978.3 billion into long-term bond mutual funds since the end of 2008, an amount that’s greater than Turkey’s annual gross domestic product, according to the Investment Company Institute.

While yields are still close to all-time lows, analysts predict they’ll climb as the Federal Reserve ends its monthly purchases of Treasuries and mortgage debt later this year and prepares to raise benchmark interest rates.

Drafting Parameters

The SEC is “very focused” on making changes in the bond market’s structure in the “next year or two,” White said in a June 20 speech. She also said the SEC asked the MSRB and Financial Industry Regulatory Authority to draft parameters for how to force dealers to disclose their commissions.

“We look forward to working with the SEC on these important topics,” George Smaragdis, a Finra spokesman, said in an e-mailed statement.

MSRB’s Kelly said in a telephone interview yesterday that the two regulators are working together and that “it’s important for there to be regulatory consistency.”

The idea of requiring dealers to disclose commissions on certain bond trades isn’t new. The SEC has proposed rules on three separate occasions that would require dealers to reveal mark-ups on riskless principal trades, and failed to follow through each time.

Majority Support

The agency issued the most recent proposal in 1994, and didn’t adopt the rule in part because regulators were readying the bond-price reporting system now known as the Trade Reporting and Compliance Engine, or Trace, which went into effect in 2002.

Regulators are more confident they’ll follow through this time because a majority of the five-member commission — White and two Republican SEC commissioners, Daniel M. Gallagher and Michael S. Piwowar — have called for requiring disclosure.

In addition, a bipartisan Senate bill introduced in March, sponsored by Senator Mark Warner of Virginia and Senator Tom Coburn of Oklahoma, would require dealers to reveal their mark-ups on transactions with customers who placed an order to buy or sell.

“If you have a commission or a mark-up that is three or four percent, that is one year of interest on a bond in many cases,” Piwowar said in a phone interview. “You can burn your yield up on these transactions. Having it on their confirm would provide another level of transparency.”

Riskless Principal

The main issue of contention is how to determine which trades would be subject to the rule.

Regulators are considering rules that would be dependent on how much time it takes between when a dealer buys and sells a bond. Lobbyists from the securities-brokerage industry are opposed to those parameters, and argue regulations should target trades where firms have client orders in hand when they purchase debt.

“Whether we can get comfortable with this really depends on how the regulators define riskless principal,” said Michael Decker, managing director and co-head of municipal securities for the Securities Industry and Financial Markets Association.

“If they are thinking of riskless principal in terms of how long you as a dealer were exposed to market risk, if it’s less than an hour or less than a day, that in our view is not a riskless principal trade,” he said.

Declining Costs

The lack of information about brokers’ commissions is indicative of the antiquated nature of the $40 trillion U.S. bond market. Corporate-bond trading has been slow to move to electronic platforms, partly because there are thousands of individual bonds that trade relatively infrequently.

While transaction costs have declined after the advent of bond-price reporting systems, investors still typically pay more to transact in these markets than in equities. In the year after the Trace bond-price reporting system was introduced, a study found that $1 billion in commissions were wiped out.

Rules mandating more disclosure of commissions “will probably compress the spreads in terms of how much everyone is making,” Envision’s Cohen said.

By Lisa Abramowicz and Dave Michaels Jul 17, 2014 2:50 AM PT

To contact the reporters on this story: Lisa Abramowicz in New York at [email protected]; Dave Michaels in Washington at [email protected]

To contact the editors responsible for this story: Shannon D. Harrington at [email protected] Caroline Salas Gage, Faris Khan

WASHINGTON — Investors pay more for municipal securities than dealers, particularly when there is more time between trades, according to a long-awaited report commissioned by the Municipal Securities Rulemaking Board.

But market sources said that the report’s finding is not surprising and that the report is limited in its results.

Erik Sirri of Babson College in Massachusetts conducted the study, which he has been working on since January 2011. The work analyzed millions of municipal market trades and provides an analysis of the muni market’s structure, the price differential between two trades of the same security, and the impact of near real-time trade reporting.

MSRB director of research Marcelo Vieira said that the report provides the MSRB a clear picture of how municipal securities move through the market and the information about the impact of its Real-Time Transaction Reporting System reinforces the importance of price transparency. Many market participants have said for years that the many small, retail customers in the muni market typically pay more for the same securities than either institutional customers or dealers.

Fifty percent of all trades had a trade size at or below $25,000, the study reveals. But the study did not differentiate between institutional and retail customers.

Vieira said the MSRB did not pay Sirri, a former director of the division of trading and markets at the Securities and Exchange Commission, for the study. But the professor does retain the rights to the data and its use in future research.

“This report provides a highly detailed benchmark analysis on secondary market trading from the MSRB, an independent and objective source of information, and the key regulator of the municipal securities market,” MSRB executive director Lynnette Kelly said in a release Tuesday. “The MSRB supports the use of data in its oversight of the market and encourages further analysis by others into the intricacies of municipal market trading.”

The report examines the four types of “trade pairs” that exist in the market: a dealer purchase from a customer followed by a dealer sale to a customer; a dealer purchase from a customer followed by an inter-dealer trade; an interdealer trade followed by a dealer sale to a customer; and interdealer trade followed by an interdealer trade.

Sirri found that the average basis point spread from a dealer purchasing a muni from a customer and selling it to a customer was 178, compared to 146 for a dealer buying a muni from a dealer and selling it to a customer, 67 for a dealer purchasing a muni from a customer and selling it to another dealer, and 50 for a dealer purchasing a muni from a dealer and selling to a another dealer. The average increase for all transactions was 127 basis points.

“Paired-trade differentials are noticeably higher when trades involve a customer, as opposed to another dealer,” the report concludes. “Using an [interdealer-interdealer] trade pair as a starting point, replacing either side of the trade pair with a customer trade serves to increase the paired-trade differential relative to the [interdealer-interdealer] pair. This is perhaps not surprising if higher costs are associated with identifying and trading with a customer versus another dealer.”

The basis point differentials shrank when Sirri looked only at transactions that took thirty minutes or less between the first trade and second. The overall spread dropped to 80 basis points from 127, and fell to 76 for trades occurring within 14 minutes of each other.

The study also examines the impact of the RTRS. Beginning on Jan. 31, 2005, prices for most trades of municipal securities became available to the public on a near real-time basis, within 15 minutes after trade execution. Prior to that, prices became available the next day.

The study shows that the average basis point change in a trade dropped to 160 in 2006 from 213 in 2003, but had edged up to 208 by 2010. The report points to the 2007 financial crisis as a probable factor in the increase of basis points.

“It reflects the importance of transparency,” Vieira said. “From our perspective, it’s all about transparency.”

The study did not attempt to examine riskless principal trades, or purchases and sales of the same munis at almost the same time which do not expose dealers to market risks. SEC commissioners have said that dealers should be required their markups on these trades.

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the report contains no surprises. The efforts of Sirri and the MSRB underscore the unique characteristics of the muni market, Cohen said, and the role of dealers in an environment that includes many small trades and some securities that trade very infrequently. Cohen added that the report deals with aggregated data, and that the facts and circumstances of individual trades differ considerably.

“There’s a story behind each trade,” Cohen said. “I think it’s important to take that into consideration.”

Joseph Fichera, chief executive officer of Saber Partners LLC., said the study has to be viewed with some qualifications noted in Sirri’s report. The price change data is not analagous to the formal concepts of “mark ups and mark downs,” and the report was never meant to be used as a measure of whether transactions are fair or not for regulatory purposes. It also doesn’t account for specific circumstances, such as changes in credit worthiness.

“Time is money, inventory is a cost, and dealers have a right to make a profit when making markets, especially over time,” Fichera said.

The Bond Buyer
BY KYLE GLAZIER
JUL 15, 2014 3:35pm ET

The SEC Staff recently provided further guidance on the provisions of Rule 506(c) of Regulation D which permit the use of general solicitation and general advertising when sales are made only to accredited investors and the issuer verifies the accredited investor status of the purchasers. The Staff has now clarified certain aspects of the verification process through a series of new Securities Act Rules Compliance and Disclosure Interpretations.

When a purchaser holds assets in an account jointly or holds property jointly with an individual that is not the person’s spouse, the Staff has said that the assets in the account or property held jointly can be taken into account for the net worth test set forth in Rule 501(a)(5), but only to the extent of the purchaser’s percentage ownership of the account or property (Question 255.49).

The Staff has indicated that in a situation where a purchaser’s annual income is not reported in U.S. dollars, the issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for the year (Question 255.48). If a purchaser is not a U.S. taxpayer and therefore cannot provide an IRS form to report income, the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) would not be available; however, the Staff has said that the principles-based verification method could be utilized where an issuer could reasonably conclude that a purchaser is an accredited investor based on a review of tax forms that report income in a foreign jurisdiction which imposes penalties for falsely-reported information that are comparable to those of the U.S (Question 260.36).

If an issuer is seeking to rely on the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) and thus wants to review the purchaser’s income as reported on IRS forms for the two most recent years, but the most recent year is not yet available, it would not necessarily be appropriate for the issuer to then review years prior to the two most recent years. However, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification approach by:

• reviewing the Internal Revenue Service forms that report income for the two years preceding the recently completed year; and
• obtaining written representations from the purchaser that (i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available, (ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and (iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year. (Question 260.35).

With respect to the review of tax assessments for the purposes of determining an accredited investor’s net worth under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff notes that reviewing a tax assessment that is more than three months old would not be appropriate when relying on the verification safe harbor. That said, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method, if the issuer uses the most recently available tax assessment when determining whether the purchaser has the requisite net worth (Question 260.37).

Lastly, in reviewing consumer reports for the purposes of determining a purchaser’s liabilities under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff indicates that while a consumer report from a non-U.S. entity would not work for the purposes of the safe harbor, an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification method by reviewing s foreign report report and taking any other steps necessary to determine the purchaser’s liabilities (such as a written representation from the purchaser that all liabilities have been disclosed) in determining whether the purchaser has the requisite net worth (Question 260.38).

In those interpretation where the Staff noted that an issuer could reasonably conclude that a purchaser is an accredited investor based on the principles-based verification method, the Staff further noted that when the issuer has reason to question the information that is being considered or, depending on the test, the purchaser’s net income or net worth, then additional verification measures may be necessary in order to verify that the purchaser is an accredited investor.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

July 14 2014
Article by David M. Lynn
Morrison & Foerster LLP

© Morrison & Foerster LLP. All rights reserved

On July 8, 2014, the SEC announced that it had settled charges that a school district in California misled bond investors about its failure to comply with its continuing disclosure obligations under Rule 15c2-12 of the Exchange Act. Pursuant to the Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative, Kings Canyon Joint Unified School District, without admitting or denying the SEC’s findings, agreed to entry of an Order (1) finding that it was in violation of Section 17(a)(2) of the Securities Act, (2) requiring it to cease and desist from violating Section 17(a)(2), (3) requiring it to establish written policies and procedures and to conduct periodic training regarding continuing disclosure obligations, and (4) requiring it to cooperate with the Enforcement Division in any subsequent investigation and to disclose the settlement in future bond offering materials. The SEC did not order any disgorgement or civil penalty.

Rule 15c2-12 requires that an underwriter obtain a written agreement from an issuer, for the benefit of bondholders, in which the issuer promises to submit certain financial information on an annual basis. This financial information is usually submitted to appropriate national and state repositories where it is available to the investing public. Notably, a broker-dealer must consider an issuer’s failure to disclose such financial information in determining whether to recommend a security and must disclose the failure to provide such financial information to customers. Rule 15c2-12 undertakings must be described in final Official Statements.

According to the SEC, Kings Canyon publicly offered $19 million of municipal bonds in December 2006, $4.5 million of municipal bonds in November 2007, and $6.7 million of municipal bonds in December 2007. The SEC found that Kings Canyon executed 15c2-12 agreements to affirm that it had made continuing disclosures of financial information. The SEC alleged, without specificity, that Kings Canyon failed to submit “some” of the disclosures required by that agreement.

According to the Order, in November 2010, Kings Canyon offered $6.8 million of municipal bonds. The Official Statement for the 2010 offering stated that Kings Canyon “has had no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation .…” Again, without providing specifics as to what information Kings Canyon did not disclose, the SEC found that statement to be “untrue.”

The SEC concluded that Kings Canyon’s inclusion of the “untrue statement” violated Section 17(a)(2). Section 17(a)(2) makes it unlawful “in the offer or sale of any securities … to obtain money or property by means of any untrue statement of material fact or omission to state a material fact necessary in order to make statements made, in light of the circumstances under which they were made, not misleading.” Section 17(a)(2) does not require that the SEC prove that a respondent acted with “scienter.” Rather, the SEC may establish such a violation by showing that the respondent acted negligently.

The SEC also did not provide significant details about Kings Canyon’s negligence. The SEC simply concluded that Kings Canyon reviewed drafts of the 2010 Official Statement that included summary descriptions of previous continuing disclosure agreements and that it subsequently approved the Official Statement. Moreover, the SEC, without discussion, concluded that investors would “attach importance” to Kings Canyon’s failure to comply with its continuing disclosure agreements and that the alleged “untrue” statement was therefore material.

The SEC does not refer to any individuals in the settled Order against Kings Canyon. The SEC Order also does not indicate what role the underwriter played in drafting or approving the 2010 Official Statement. Given that the MCDC Initiative was announced on March 10, 2014, it appears that the staff conducted a fairly swift investigation in order to resolve the matter four months later. The undertaking that Kings Canyon cooperate with any subsequent investigation by the Enforcement Division may suggest, as we pointed out in our April 22 post, that the SEC may use issuers’ cooperation to pursue individuals. Moreover, it is not out of the realm of reason that the SEC may extend its focus to other participants in municipal securities offerings, such as underwriters and broker-dealers.

Article By:
Mary P. Hansen
Drinker Biddle & Reath LLP
posted on: Friday, July 11, 2014

©2014 Drinker Biddle & Reath LLP. All Rights Reserved

On July 2, 2014, the MBFA Coalition held a “Municipal Bonds 101” seminar on Capitol Hill for congressional staff and interested parties focusing on the importance of preserving the present-law treatment of tax-exempt municipal bonds.

The seminar featured a distinguished panel of municipal finance experts from varying backgrounds who explained the benefits of the traditional municipal bond market to staff from key congressional personal and committee offices.

Panelists included:

Ron Bernardi, Principal, President and CEO, Bernardi Securities
Mayor Steve Benjamin, Columbia, South Carolina
Kevin Burke, President and CEO, Airports Council International – North America

The education seminar featured panel presentations, an interactive discussion and fostered a great learning environment for key hill staffers. This “Muni Bonds 101” seminar is the second we’ve hosted in two years and has proven to be a key component in an ongoing effort by the MBFA Coalition to educate policy makers and staff on the benefits of the municipal market and the negative implications of scaling back or eliminating the tax exemption on municipal debt.

Click here for handouts from the seminar.

For more information on the Municipal Bonds for America coalition, please visit our website: www.munibondsforamerica.org

WASHINGTON — The Government Finance Officers Association has issued an alert for issuer officials urging them to approach the Securities and Exchange Commission’s continuing disclosure self-reporting program cautiously, and advising the group’s members that attempts to lobby the SEC for changes to the initiative have been largely unsuccessful.

The GFOA alert released Monday came barely two months before the SEC’s Municipalities Continuing Disclosure Cooperation initiative is set to expire Sept. 10. The program allows issuers and underwriters to get lenient settlement terms if they voluntarily self-report their failures to ensure bond offering documents were not false or misleading about their compliance with their continuing disclosure obligations. Issuers would not face civil financial penalties if they participate, but individuals would not enjoy any immunity. Issuers need to take the MCDC “seriously, but exercise caution,” the alert states.

“The legal consequences of participating in the MCDC initiative are significant and should be thoroughly evaluated with the assistance of counsel,” it advises.

The alert also explains that issuers need not worry about the MCDC if they have not issued bonds in the past five years, the time period covered by the initiative. For issuers who have offered debt in that time period and who are unsure if their official statements might have been inaccurate, the GFOA recommends a review of those offerings with transaction participants in addition to scrutinizing internal files and EMMA filings. If an OS admits to past noncompliance, it is probably not problematic, the GFOA alert states.

“If the information in the official statement describes any instances of prior non-compliance (including instances that may be immaterial), the issuer can probably conclude that it has not misstated compliance and no further investigation is necessary,” it explains.

If an issuer official does discover potentially problematic official statements, it should consult counsel about the materiality of the lapse and about the potential advantages and disadvantages of participating in the MCDC, GFOA’s alert concludes. Issuers in that situation should also adopt or enhance policies and procedures to prevent future lapses in addition to correcting noncompliance as quickly as possible.

The MCDC has been controversial since it was announced earlier this year, and GFOA debt committee chairman Ben Watkins has publicly expressed strong distaste for the SEC’s approach. GFOA is among several industry groups, including the Bond Dealers of America, National Association of Bond Lawyers, and Securities Industry and Financial Markets Association, who have pushed the SEC to make changes to the MCDC.

Many market participants want the deadline extended to December or beyond. GFOA is also seeking clarification on what the SEC would consider to be material for the sake of the MCDC, a term courts have ruled means information a “reasonable investor” would want to know.

SEC officials have indicated that they are unlikely to alter the MCDC, although they have expressed some sympathy for the struggles that both issuers and underwriters have reported experiencing while attempting to find documents on deals that happened before the EMMA system became the muni market’s sole transparency database in 2009.

“The initial feedback from the SEC indicated an unwillingness to streamline the MCDC Initiative to improve the efficiency and effectiveness and reduce the uncertainties and burdens being imposed on issuers,” the GFOA alert states. “GFOA will continue to press for common-sense changes to modify the MCDC Initiative and focus on constructive ways to improve continuing disclosure compliance.”

The Bond Buyer
BY KYLE GLAZIER
JUL 7, 2014 2:02pm ET

Settlement Is First Under Initiative Targeting Municipal Disclosure

Washington D.C., July 8, 2014 — The Securities and Exchange Commission today charged a school district in California with misleading bond investors about its failure to provide contractually required financial information and notices. The case is the first to be resolved under a new SEC initiative to address materially inaccurate statements in municipal bond offering documents.

The SEC found that in the course of a 2010 bond offering, Kings Canyon Joint Unified School District affirmed to investors that it had complied with its prior continuing disclosure obligations. The statement was inaccurate because between at least 2008 and 2010, the school district had failed to submit some required disclosures. The California school district agreed to settle the charges without admitting to or denying the findings.

Under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC’s Enforcement Division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The 2014 initiative, launched on March 10, expires on September 10.

“The integrity of the municipal securities market requires that issuers carefully comply with all of their disclosure obligations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “Our MCDC initiative is one piece of our efforts to ensure that issuers meet their obligations going forward.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit added, “An important component of the MCDC program is that it provides issuers who were already under investigation the opportunity to accept the standard terms and resolve their enforcement matters in a fair and efficient manner. We are pleased that King’s Canyon has taken advantage of the program and we continue to encourage all eligible issuers and underwriters to do so while the MCDC terms are still available.”

The SEC’s order instituting settled administrative proceedings finds that in three bond offerings between 2006 and 2007, Kings Canyon contractually agreed to disclose annual financial information and notices of certain events pertaining to those bonds. When it conducted a $6.8 million bond offering in November 2010, Kings Canyon was required to describe any instances where it had failed to materially comply with its prior disclosure obligations. In the 2010 offering document, Kings Canyon inaccurately affirmed that there was “no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation.” Because Kings Canyon failed to submit some of the contractually required disclosures relating to the 2006 and 2007 offerings, the November 2010 bond offering document contained an untrue statement of a material fact.

Without admitting or denying the SEC’s findings, Kings Canyon consented to an order to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act. It also agreed to adopt written policies for its continuing disclosure obligations, comply with its existing continuing disclosure obligations, cooperate with any subsequent investigation by the Enforcement Division, and disclose the terms of its settlement with the SEC in future bond offering materials.

The SEC’s investigation was conducted by Monique C. Winkler and was supervised by Cary Robnett. Both are in the SEC’s San Francisco Regional Office and are members of the Enforcement Division’s Municipal Securities and Public Pensions Unit.

Kings Canyon Joint Unified School District Allegedly Failed to Provide Some Required Financial Disclosures

The Securities and Exchange Commission said Tuesday it reached a settlement with a California school district on claims the district failed to provide some required financial disclosures during a 2010 bond offering.

The case is the first to be resolved under a SEC initiative to address materially inaccurate statements in municipal bond offering documents, the agency said.

According to the SEC, the Kings Canyon Joint Unified School District had affirmed to investors that it had complied with previous disclosure requirements in the course of a 2010 bond offering. However, the SEC said the school district had failed to submit some required disclosures between at least 2008 to 2010.

The California school district agreed to settle the charges without admitting to or denying the findings. Terms of the settlement include consenting to a cease-and-desist order, adopting written policies related to continuing disclosure obligations and disclosure of the terms of its settlement with the SEC in future bond offering materials.

“The school district is glad they were able to resolve the matter amicably with the SEC,” said Jeffrey Kuhn, defense counsel for the district.

Mr. Kuhn said there were “inadvertent errors in the way they handled things” that have been acknowledged and the district is in the process of adopting policies and procedures so that it won’t happen again.

Under an initiative that began in March, the SEC’s enforcement division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or who were already under investigation for violations involving continuing disclosure obligations. The initiative is set to expire Sept. 10.

By TESS STYNES
July 8, 2014 2:31 p.m. ET

As many state and local governments across the country begin their July 1 fiscal year, a new federal law going into effect is of particular interest to municipal governments that issue bonds. The new law defines the scope of activities of municipal advisory professionals and establishes new requirements for those that provide advice on matters of public finance.

Each of the various financial professionals that work with state and local governments plays a different role and may have relationships that could affect any recommendations they make. The definition of a municipal advisor, established by the Securities and Exchange Commission, together with an associated regulatory regime for municipal advisors, will provide needed oversight of these financial professionals. The Municipal Securities Rulemaking Board is charged with developing a regulatory framework that clarifies and establishes requirements for these roles, responsibilities and relationships of municipal advisors. These “three Rs” are fundamental to understanding why we are here.

First, a bit of history. Congress mandated the creation of a regulatory framework for municipal advisors with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The goal of this framework is to protect state and local governments from the potentially costly consequences of relying on the financial advice of unregulated professionals that may lack sufficient expertise and accountability. Dodd-Frank imposed a federal fiduciary duty on municipal advisors to put the interests of their state and local government clients first, and a comprehensive regulatory framework will establish basic standards for the roles, responsibilities and relationships of municipal advisors.

Dodd-Frank broadly defined the term “municipal advisor” and left it to the SEC to provide additional clarity and guidance on who ultimately is a municipal advisor and must comply with any existing or future regulatory requirements. The SEC provided that guidance in its final registration rule released in September 2013 and effective today.

With certain exceptions, financial professionals who provide advice about municipal financial products or the issuance of municipal securities for an issuer must register with both the SEC and the MSRB and must comply with a broad MSRB requirement to deal fairly with all persons. The MSRB is developing additional rules to govern the conduct and professional qualifications of municipal advisors. The MSRB seeks to ensure that all municipal market participants understand the role of a municipal advisor, an advisor’s responsibilities to its client and the relationships among the various participants in a transaction.

To date, the MSRB has focused on establishing core standards of conduct for municipal advisors, setting supervision and compliance obligations for municipal advisor firms, and creating a professional qualification exam to require municipal advisors to demonstrate a minimum level of competency. The MSRB also plans to revise its rules on pay-to-play practices. Current rules that prohibit pay-to-play by municipal securities dealers will be extended to include municipal advisors.

The MSRB invites extensive participation in the development of its regulatory framework and hosts a number of outreach events and webinars to ensure stakeholders understand developing rules and how to comment. As the municipal advisor regulatory structure continues to evolve, the July 1 effectiveness of the SEC’s registration rule signifies a major step forward in bringing all municipal advisors under the regulatory oversight of the SEC and the MSRB. Follow the current status of municipal advisor rulemaking and access free educational resources on the MSRB’s website (MSRB.org) in the “Resources for Municipal Advisors” section.

BY DAN HEIMOWITZ
JUN 30, 2014 9:57pm ET

Daniel Heimowitz is Chair of the Municipal Securities Rulemaking Board.

A new rule about who can give governments financial advice goes into effect Tuesday, but how to apply it is far from resolved.

It’s been a confusing road for the creation of a new category of financial advisors who will be regulated by the federal government. So confusing, in fact that the feds delayed implementating the Municipal Advisor Rule by half a year to July 1.

A municipal advisor is a qualified financial professional (such as a banker or financial consultant) who give municipalities advice on financial deals like bond offerings. That person must be registered through the SEC as a municipal advisor and cannot have any other interest in the deal.

Historically, it was common for those orchestrating the transaction to also dish out advice and counsel to the municipality entering. The problem with this model was that while most underwriters or brokers are fair and reasonable, entrusting a financial professional to give advice to a municipality when that professional could potentially benefit a great deal if the municipality enters into the deal creates an inherent conflict interest.

Reaction from bankers and underwriters on how best to cope with the new restrictions on what they can and can’t say to their government clients has been varied. (The rule technically goes into effect this week but many institutions have already been operating under its restrictions ahead of time.) An exception does exist that allows underwriters and bankers on a deal to talk with the government about options so long as the government presents in writing that it already has a municipal advisor and it is relying on its advisor’s advice. Still, said Mark-David Adams, a bond counsel at Edwards Wildman law firm, some have effectively instituted a gag order.

“Some banks are telling their officers … to absolutely not give any advice flat-out, whatsoever,” he said. “It’s just set a term sheet, [that says] ‘this is what we want, this is what we’ll pay for it, have a nice day and good bye.’”

There are gray areas in which those who conduct financial deals for governments can work and issuers can expect most of the underwriters they deal with to operate in this realm. Some additional key exceptions offered by the Municipal Market Advisors include:

1) Underwriters may include recommendations and advice when responding to an issuer’s request for proposal if the RFP is about a specific financing and has been advertised either to three reasonably competitive firms or via posting on the issuer’s website. The response timeframe off the RFP must also be less than 6 months.

2) While underwriters and other professionals may not provide recommendations or advice to issuers unless an exemption is met, underwriters may talk with the issuer about “general market information.” This does not mean underwriters can “express subjective assumptions, opinions, or views [that] constitute a recommendation.” But it does mean they can talk about available products and even “information regarding a municipal entity’s particular outstanding bonds, such as current market prices and yields, without this information constituting a recommendation.”

Adams said many governments are considering whether to retain a municipal advisor on an ongoing basis so as to make it easier for underwriters or bankers to approach a government with a deal that might be good for them (like refinancing debt at a lower interest rate). But that’s not a solution that will work for everyone as many governments are used to seeking advice from different people depending on their expertise and the type of deal.

Adams predicted a 6-month growing pains period before governments and financial institutions settle in to the new routine.

“It’s probably going to be a little clumsy,” he said. “Like someone going out on their first date – it’s going to be awkward for a while.”

GOVERNING.COM
BY LIZ FARMER | JULY 1, 2014

WASHINGTON — The Bond Dealers of America is making another push for changes to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative after the SEC rejected BDA’s earlier requests to narrow the scope of the program and extend its deadline.

The BDA renewed its efforts in a four-page June 30 letter signed by chief executive officer Mike Nicholas and sent to SEC chairman Mary Jo White. The letter repeats an earlier BDA request that the program be extended to Dec. 15 from its current deadline of Sept. 10. The program allows issuers and underwriters to get lenient settlement terms if they voluntarily self-report their failures to ensure bond offering documents were not false or misleading about their compliance with their continuing disclosure obligations,

The letter also reiterates a proposal from the BDA’s June 9 letter that issuers and underwriters only have to review bond documents on the Municipal Securities Rulemaking Board’s EMMA website to determine their past compliance history, rather than going back into the much less user-friendly Nationally Recognized Municipal Securities Information Repository or NRMSIR system that existed prior to 2009. The letter includes a new request that the civil penalty cap of $500,000 included in the MCDC should be lowered and tiered according to the firm’s size. The penalty size is currently pegged to the size of the deal, not the firm, and maxes out at $500,000 for the largest totals.

“The BDA wants our member firms to be able to take advantage of the amnesty program, but in doing so at the $500,000 cap, we fear that it will cause them to face an unduly burdensome financial challenge and should therefore be tiered accordingly,” Nicholas wrote. “We believe that the intent of the commission was to place a reasonable cap on an underwriter’s exposure; however, the $500,000 cap places a disproportionate burden on smaller firms with no associated tangible benefit connected to the initiative.”

The total cost for a dealer who hires an outside vendor to come through the potentially decade-long list of deals searching for potentially misleading official statements could reach $600,000, a penalty a cost that could be staggering for a smaller firm, according to the BDA letter.

A June 30 letter to BDA from LeeAnn Ghazil Gaunt, head of the municipal securities and public pensions unit at the SEC’s Division of Enforcement declined to offer the BDA any relief on either the NRMSIR issue or the time limit. While the SEC struck a sympathetic tone about the increased challenges of searching the NRMSIR system compared to EMMA, the commission appears unwilling to go as far as BDA would like. The latest letter expands on the group’s concerns.

“When dealers review the transactions in which they were involved, they are encountering numerous practical problems with the NRMSIR system that render any review with respect to filings under the NRMSIRs essentially impossible to conduct in a meaningful and reliable way,” the BDA letter states.

These problems include systems that are no longer operational, and one that supplies unreliable information.. Further, Nicholas argues, it is unreasonable for the SEC to make market participants wade through a system that everyone agreed was broken before it was replaced by EMMA.

“The whole point of the EMMA system was to fix what was broken with the NRMSIR system,” the BDA letter states.

The letter closes with a final appeal for a time extension, arguing that the short current deadline will limit the abilities of underwriters and issuers to huddle on their past deals and decide which ones might be eligible under the MCDC. SEC officials have signaled that a deadline extension is unlikely and said that the “modified prisoner’s dilemma” structure of the initiative that pits the interests of underwriters against those of issuers is an important aspect of the MCDC. The BDA also asks for a face-to-face meeting with White or her staff.

The Bond Buyer
BY KYLE GLAZIER
JUL 1, 2014 12:16pm ET

The Municipal Securities Rulemaking Board (MSRB) today marked the fifth anniversary of a pivotal milestone in the transparency of the municipal securities market. On July 1, 2009, the MSRB’s Electronic Municipal Market Access (EMMA®) website became the official, centralized public access point for financial and other continuing disclosures from state and local governments that issue municipal securities, making these documents freely available to investors and the general public for the first time. View a graphic that highlights key events in the evolution of municipal market transparency.

View the full press release.

The Securities and Exchange Commission’s (SEC) final municipal advisor registration rule takes effect today, July 1, 2014. Before engaging in municipal advisory activities, municipal advisors must register with the SEC and the Municipal Securities Rulemaking Board (MSRB). To assist municipal advisors in staying apprised of developing regulatory initiatives, the MSRB regularly updates a dedicated page on its website and provides numerous resources for municipal advisors. Access News and Resources for Municipal Advisors.

Municipal advisors can also sign up to receive regulatory notices and other information from the MSRB. Please note that the primary regulatory contact at each MSRB-registered municipal advisor firm automatically receives regulatory notices from the MSRB.

WASHINGTON — Dozens of firms have withdrawn their registrations as municipal advisors under the new regulatory regime that takes full effect Tuesday, citing a myriad of reasons for avoiding participation in a new era of muni advising.

Beginning July 1, individuals and firms providing advice to state and local governments about the issuance of muni bonds or the investment of muni proceeds or escrows must begin registering under the Securities and Exchange Commission’s permanent MA regime. More than 1,100 MAs temporarily registered with the commission, including major broker-dealer firms, single-proprietor advisory firms, lawyers, and other professionals. But by the eve of the rule’s final effective date, many of those temporary registrants had decided not to remain registered as MAs.

“I haven’t really been doing municipal advisory work, said Alexis Jackson, president of A.A. Jackson & Associates in Stone Mountain, Ga. Jackson, a lawyer and finance consultant, said she registered as an MA early in the regime because she had a client that wanted to do a tax-exempt deal. She said a subsequent change in the lending market led her to withdraw her registration in 2011, before the SEC’s final rules were unveiled, because that one deal she registered for was scuttled.

Other market participants also indicated that they are no longer active in markets that would require them to be registered MAs. Peter Kvam, manager of investments and compliance at Healthcare Community Securities Corporation in New York, said his firm was one which decided to play it safe by registering rather than risk the consequences of practicing as an unregistered MA. Although the final rules have not been effective, MAs have already been required to register under a temporary regime and have been subject to a fiduciary duty and fair play rules.

“We took the conservative approach,” Kvam said.

The company decided to withdraw earlier this year because it no longer carries 529 college savings plans, the only aspect of its business that it felt might trigger any obligation under the MA regime.

Other market participants said they simply decided not to get into the municipal advisory game after all.

“Not something I wanted to do right now,” said Mallory Factor, a manager at Caelus Consulting, which solicits business for investment firms.

Nathan Howard, an attorney who works with municipal advisors, said the many withdrawals are the result of guidance that has made it more clear who is likely to be an MA in the view of the SEC staff. In recent months, the SEC has published two sets of interpretive guidance in the form of “frequently asked questions.” That guidance explained that firms could be exempted from having to register as MAs under some circumstances, including if an issuer had retained its own independent MA, if the firms were responding to a legitimate request for proposals, or if they were offering certain types of advice permissible for their professions. Bond lawyers, for example, would not have to register as MAs as long as they do not cross the line from providing traditional legal services to providing professional financial advice or holding themselves out to be financial experts.

The recent withdrawals are reflective of the broad registration exemptions granted by the SEC that are set to take effect on July 1, which will allow many firms to provide advice without triggering any fiduciary duty obligations,” Howard said. “The withdrawals are also resulting from the growing number of firms who have determined to cease their municipal advisory business either due to prospective costly regulation or an increase in acquisition activity.”

Some market observers continue to predict that large numbers of MAs, particularly smaller sole proprietorships, are likely to fold up shop rather than deal with the fees, tests, and other requirements imposed by the still-growing MA regulatory regime. Although the MA rule is ultimately just one small piece of the 2010 Dodd Frank Act and the SEC rule is now final, the Municipal Securities Rulemaking Board is still in the process of writing rules which will dictate the behavior of muni advisors. Of central concern to dealer and non-dealer MAs alike is the MSRB’s proposed Rule G-42 on the duties of non-solicitor municipal advisors, which is undergoing revision. While the law says that MAs have a fiduciary duty to put their municipality clients ahead of their own, it is up to the MSRB to create a regulatory framework that defines precisely what that means.

SEC Muni Chief John Cross has said previously that he expects the number of registered MAs under the final regime to be similar to that under the temporary one.

The Bond Buyer
BY KYLE GLAZIER
JUN 30, 2014 3:00pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers that a revised MSRB Rule G-30, which consolidates dealers’ existing fair-pricing obligations to facilitate compliance with a fundamental investor protection regulation, becomes effective on July 7, 2014.

View the new rule or the May 12, 2014 MSRB Regulatory Notice.

WASHINGTON — The Securities and Exchange Commission’s enforcement action against Harvey, Ill., and its comptroller may give issuers pause about participating in the SEC’s self-reporting program, a top municipal bond lawyer said.

John Grugan, a partner in Ballard Spahr’s Philadelphia office, said the SEC’s most recent muni enforcement action is a perfect illustration of why it’s unrealistic to expect all issuers to participate in the commission’s Municipalities Continuing Disclosure Cooperation initiative. In a civil suit filed earlier this week in the U.S. District Court for the Northern District of Illinois,, the SEC accused the city and comptroller Joseph Letke of misusing bond proceeds and misrepresenting investment risks and Letke’s own financial interests in connection with bond offerings in 2008, 2009, and 2010. A federal judge blocked an imminent sale of the Chicago suburbs bonds at the request of SEC lawyers, an almost unheard-of step in the municipal market.

Grugan, who is co-leader of Ballard’s municipal securities regulation and enforcement group, said that the case is a straightforward misuse of bond funds action on its face, not much different from many others the SEC has charged over the years. But this case came to light during the MCDC period, and was brought by the Chicago office where MCDC architect Peter Chan works, Grugan pointed out. The MCDC allows issuers, other borrowers and underwriters to get lenient settlement terms if they voluntarily self-report certain disclosure failures to the SEC by Sept. 10, but the commission has been clear that the settlement will not apply to individuals and will not cover violations other than offering documents that paint a false picture of the issuer’s continuing disclosure record.

“This case illustrates how the SEC, once it begins its investigation, can go in different directions,” Grugan said. “It can mushroom into something that’s not controllable by the issuer.”

There is no indication that Harvey attempted to participate in the MCDC, Grugan said, adding that the kind of activity alleged in the case could be easily discoverable by SEC investigators and would not fall under the MCDC’s lenient terms, which include immunity from civil penalty for muni issuers. Some securities lawyers have said publicly that participation in the initiative is a slam dunk for all underwriters and most issuers.

Robert Feyer, senior counsel at Orrick, Herrington & Sutcliffe in San Francisco, said the case represents another exclamation point on the SEC’s increasingly vocal vows to be tough on muni securities lawbreakers.

“It’s certainly a significant action,” Feyer said.

Lawyers said it was unclear if the SEC could pursue action against Letke under the municipal advisor regime. According to court documents, Letke ran two companies which both were registered municipal advisors and provided financial advisor services regarding the issuance of municipal bonds to Harvey and other municipalities. Most of the MA regulatory regime remains in effect and most of the conduct mentioned in the complaint pre-dates the 2010 Dodd-Frank Act, after which all MAs have been subject to fair dealing rules.

The case does have some parallels with a 2001 enforcement action against Pacific Genesis Group, Inc., a municipal securities underwriting firm based in Alameda, Calif., and its former lead underwriter, David Fitzgerald. In that case, filed in late 2000, a judge ordered all proceeds of a recent bond offering be returned to investors when the SEC accused the firm of raising money for residential developments via misleading offering documents. Fitzgerald went on to lose his broker’s license.

The Bond Buyer
BY KYLE GLAZIER
JUN 26, 2014 5:25pm ET

The U.S. Securities and Exchange Commission (SEC) announced its first enforcement action under “pay-to-play” rules for investment advisers since those rules were adopted nearly four years ago. TL Ventures Inc., a Philadelphia-area private equity firm, has agreed to pay nearly $300,000 in disgorgement and penalties to settle the charges that it continued to receive advisory fees from city and state pension funds after making mayoral and gubernatorial campaign contributions.

Continue reading.

June 24, 2014

by M. Norman Goldberger, John C. Grugan, Christine O’Neil, and Tesia N. Stanley

Federal regulators went to court on Wednesday to keep a city in Illinois from bringing its bonds to market, an unprecedented step they called necessary to halt a widening securities fraud.

The Securities and Exchange Commission, in a complaint filed in United States District Court for the Northern District of Illinois, said that Harvey, an impoverished city of 25,000 south of Chicago, had sold $14 million in municipal bonds under false pretenses since 2008 and was planning to bring more of them to market this week.

Harvey issued bonds three times from 2008 to 2010, telling investors it was using the proceeds to rebuild a large Holiday Inn near a busy stretch of Interstate highway, something that was supposed to create jobs and bolster the city’s fortunes. It used a legal provision that allows cities to share the value of their bonds’ tax exemption with commercial companies for such projects.

Harvey said it would repay the debt from a dedicated stream of taxes it was counting on, including taxes collected from the travelers who would stay at the hotel. But the prospectus also called the securities “general obligation bonds.”

Instead of renovating the hotel, the S.E.C. said, Harvey was using some of the money to meet its payroll and for other general operations. The developer who received most of the bond money moved to India, leaving a half-gutted hotel building standing empty “with dangling wires and exposed studs,” the S.E.C. said. Work on the derelict site is at a standstill, and no one can stay at the hotel, much less pay the occupancy taxes pledged to bondholders.

Despite these many setbacks, the S.E.C. said, Harvey planned to bring a new batch of tax-exempt bonds to market as soon as this week — this time to build a supermarket — and its draft prospectus failed to tell prospective buyers about its previous bond disaster, which is still unresolved.

In addition to the city, the S.E.C.’s complaint named Harvey’s comptroller, Joseph T. Letke. It said that Mr. Letke, an accountant, had worked at the same time for the city and for the developer who was given the bond proceeds to rebuild the hotel. He received $269,000 of the proceeds without disclosing the payments, as required, it said.

Mr. Letke’s lawyer, Dean Polales, declined to comment.

In its complaint, the S.E.C. asked the court to prohibit Harvey and its officials from offering any municipal bonds for five years unless it retained a court-appointed independent consultant to make the offering legal. It also asked the court to make Mr. Letke forfeit ill-gotten gains and pay unspecified civil penalties.

The action against Harvey was the first time the S.E.C. sought an emergency court order to keep a municipality’s bonds off the market, according to a person briefed on the case, who spoke on the condition of anonymity because the investigation was continuing.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” Andrew J. Ceresney, director of the S.E.C.’s enforcement division, said in a statement. “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

Throughout its existence, the S.E.C. has had only limited authority to police the municipal bond market. The law assumes that cities are under the control of the states, which are sovereigns. But in recent years, as municipal bankruptcies and bond defaults have become more common, the commission has been finding ways to step up its activities in the $3.7 trillion municipal bond market.

It has censured two states, New Jersey and Illinois, for misleading investors about their pension systems, for example, saying they papered over the risk that investors might find themselves competing with pensioners for the same limited pool of dollars — something that has happened in the bankruptcy of Detroit.

Bondholders have expressed surprise and anger at the way Detroit proposes to settle its debts, prompting market participants to look more carefully at city finances in general and the quality of the resources pledged to secure bonded debt.

By MARY WILLIAMS WALSH JUNE 25, 2014

A Chicago suburb is under investigation for allegedly diverting at least $1.7 million in bond proceeds meant for a new hotel to instead pay for the municipality’s operating costs including wages, the Securities and Exchange Commission announced Wednesday.

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and its comptroller, Joseph Letke, who the SEC says received approximately $269,000 in undisclosed payments from the bond proceeds. The commission also halted a planned bond offering by the city this week via an emergency court order.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in an issued statement. “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

In 2008, 2009 and 2010, Harvey issued limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax or incremental tax from the Tax Increment Financing District created for the planned Holiday Inn development. The payback structure meant that it was vitally important to bond investors that the money raised in the bond offering was actually used to fund the hotel development. That’s because the amount of funds available to repay the bonds were derived from tax revenues collected by the project — and those revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were misled about the purpose and risks of the bonds they purchased from the city. The SEC’s release cited news reports that described the Holiday Inn hotel and conference center as “a decrepit shell” with a façade pocketed with holes and a gutted interior with dangling wires and exposed studs.

“As Harvey and Letke perpetrated the scheme to divert bond-related proceeds,” the commission said, “the hotel redevelopment project turned into a fiasco for bond investors and city residents.”

The SEC action comes as part of increased enforcement by the commission on municipalities and states. Last year, the commission reached independent settlements with the Illinois and Harrisburg, Pa. The commission had accused both governments of securites fraud. It said Illinois had misled investors about the poorly funded state of its pensions while accusing Harrisburg of misleading investors by not reporting important city financial data. Both governments reached financial settlements with the SEC and did not have to admit to wrongdoing.

This is the first fraud charge by the SEC this year against a government. The commission has hinted at more to come. This spring, the Enforcement Division announced a self-reporting offer, encouraging “issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.” In exchange, the SEC is promising “standardized, favorable settlement terms,” but did not specify what those terms could be. The offer stands until Sept. 10.

BY LIZ FARMER | JUNE 25, 2014

Moves by Head of the Agency’s Office of Credit Ratings Signal Potential Flurry of Regulatory Activity

The government’s top credit-rating watchdog has kept a low profile since taking the job two years ago to help prevent another financial crisis. That may be about to change.

Thomas J. Butler, head of the Securities and Exchange Commission’s Office of Credit Ratings, said he has referred multiple cases to the agency’s enforcement division and is helping complete several industry regulations to address quality and transparency in how big debt deals are rated.

Those moves signal a potential flurry of regulatory activity involving ratings firms, which have been largely untouched as government oversight has increased in most other financial sectors in recent years.

Mr. Butler, a 56-year-old former Citigroup Inc. C -0.19% executive, has been relatively quiet since launching the office in 2012 to oversee firms including Standard & Poor’s Ratings Services and Moody’s Investors Service. MCO +1.06% The creation of the office was mandated in the Dodd-Frank financial-overhaul law.

His office has produced annual reports summarizing industry activity and monitored ratings firms to make sure they comply with existing rules that dictate how criteria are developed for evaluating bonds and whether internal protocols are followed, among other things. Mr. Butler’s office doesn’t have direct enforcement powers over firms, but monitors their activities and can make referrals to the unit headed by Andrew Ceresney, the SEC’s top enforcement chief, for potential action. Mr. Butler declined to say how many referrals he has made or what firms are involved.

Some critics have questioned whether the office has moved quickly enough to bring substantive changes to an industry widely blamed for helping trigger the financial crisis, largely by giving top ratings to mortgage bonds that later soured and left investors with billions in losses.

They point out the three biggest firms—S&P, Moody’s and Fitch Ratings—still dominate the industry, despite lawmakers saying they hoped to attract new entrants. Momentum to adopt major revisions, such as changing the business model or standardizing ratings across asset classes, also has petered out.

“While we’ve made some progress, I’m frustrated that key reforms still aren’t fully implemented,” said Sen. Al Franken (D., Minn.), who wrote a Dodd-Frank amendment in 2010 that would have overhauled the credit-rating business model but hasn’t been adopted. Issuers of bond deals pay ratings firms to grade their deals, a model that Sen. Franken and others have said gives firms an incentive to compromise their criteria in order to win business.

In an interview, Mr. Butler acknowledged his office has work left to do, but said, “I couldn’t be happier with what we’ve accomplished.” He added that he is seeing “real results” from the firms responding to the findings in the annual reports and recommendations from his staff in routine examinations.

Other SEC officials have similarly indicated the ratings world is increasingly in focus.

Chairman Mary Jo White told Congress in late April that rules improving transparency and rating integrity “are a priority for the commission in 2014.” Mr. Ceresney, the enforcement chief, at a Wall Street Journal event last week in Washington said, “You’ll see a lot of activity” with credit-rating firms in the near future.

Since the financial crisis, the SEC has taken action against one ratings firm, Egan-Jones Ratings Co. The small firm was barred from rating certain bonds for 18 months, starting in January 2013, for allegedly overstating the number of ratings it had done. “We are glad the matter is behind us,” said Alan S. Futerfas, a lawyer for Egan-Jones President Sean Egan.

Mr. Butler is a ratings-world outsider. A Rutgers University law graduate, he spent 14 years at what became Morgan Stanley Smith Barney, Citigroup’s former wealth-management joint venture with Morgan Stanley. His roughly 40-person staff represents less than 1% of the SEC’s total workforce. Mr. Butler spends most of his time in lower Manhattan, working out of a sparse office with little more than government-issued furniture and a few photos of his dogs.

Mr. Butler said his staff is developing rule recommendations for Chairman White that clarify what disclosures should be made and how best to separate analysts from sales staff. Those recommendations, done with the SEC’s Division of Trading and Markets, will be completed versions of regulations that were first proposed in 2011 but not yet implemented.

Rating firms have largely embraced regulation and Mr. Butler’s team, saying they give investors added insight into how ratings are determined. Moody’s shares the SEC’s goals of making the ratings process easier to understand and effective, said a Moody’s spokesman.

Adam H. Schuman, chief legal officer for Standard & Poor’s Ratings Services, which is owned by McGraw Hill Financial Inc., MHFI +0.59% said Mr. Butler’s annual reports have given useful guidance on what the firm should be doing for compliance.

Many smaller firms say some of the regulations and compliance requirements disproportionally affect them, making it harder for new players to emerge. “It’s expensive and far easier for the bigger firms to absorb those costs” around email retention, recordkeeping and compliance, said Joseph Petro, chief operating officer at Morningstar Credit Ratings LLC.

By TIMOTHY W. MARTIN
Updated June 25, 2014 1:29 p.m. ET

Write to Timothy W. Martin at [email protected]

SEATTLE – Small issuers and firms will be most impacted by the imminent regulatory changes that the municipal industry will soon undergo, according to issuers, underwriters, and financial advisors speaking at The Bond Buyer’s Pacific Northwest Municipal Market Symposium on Tuesday.

With just one week left before the municipal advisor rule takes full effect, market participants anticipated how the rule will impact the market.

“I’ve been a financial advisor for 28 years and there’s no question that this is the biggest change I’ve witnessed in these years,” Chip Pierce, a partner at Western Financial Group, LLC, said during the conference.

Once the rule takes effect July 1, firms providing advice on the issuance of muni bonds or the management of muni proceeds or escrows will be required to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board.

The SEC has made clear that absent a firm’s ability to utilize one of several exclusions or exemption available in the rule, providing muni advice bars a firm from underwriting a bond issuance on the same transaction.

The amount of time and money needed to comply with the regulations is significant, panelists said.

“There’s no question this is going to disadvantage smaller firms,” Pierce said.

Small advisory firms will likely take the biggest hit from rule’s implementation, having to consolidate or lose staff in order to deal with the greater costs of compliance, according to Pierce.

That will particularly disadvantage less-frequent issuers, because small firms have historically sought their business and large firms may not see it as worth their while for an issuer that issues every three years or so, he said.

Bob Lamb, president of Lamont Financial Services Corporation, said his firm will likely end up spending 20% of its effort complying with new rule, adding 0% to its productivity.

Firms will take different strategies to deal with the greater need for compliance, whether they staff current employees or hire third parties.

Pierce likened his firm’s deliberation on how to deal with increased compliance to a game of “hot potato”—whoever was left holding the potato will have had to be chief compliance officer.

He said they ended up deciding to pay someone else to “hold the potato,” which will cost Western Financial an estimated $10,000 to $15,000 extra a year.

“This is a new landscape,” he said. “It is what it is, but it’s taking away from things we pride ourselves on.”

Another possible outcome from the rule’s implementation is a continued shift among issuers away from the tax-exempt bond market and toward the banking and direct loan market.

Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said there has already been some movement, but she wouldn’t be surprised if the new rule further contributed to the shift.

Market participants also discussed the implications of the SEC’s Municipalities Continuing Disclosure Cooperation Initiative, which aims to come down on municipal and underwriters that have violated federal securities laws.

Specifically, the MCDC initiative will address violations of Rule 15c2-12, which prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security an issuer.

It also requires that official statements contain a description of any instances in the previous five years in which the issuer failed to comply with any previous commitment to provide such continuing disclosure.

Under MCDC, underwriters and issuers have until September 10 to voluntarily fill out a questionnaire to report any type of material misstatement in return for receiving favorable settlement terms.

Smaller issuers are less likely to have the resources needed to understand and comply with the initiative, said Robert Feyer, senior counsel at Orrick, Herrington & Sutcliffe LLP, and moderator for the panel.

He added that legal counsel can help guide issuers on what might be considered material statements, but it’s up to each issuer to determine its own risk tolerance and whether it’s in their best interest to self-report.

Laura Lockwood-McCall, director of debt management division at the Oregon State Treasury, said she has thought long and hard about whether or not to cooperate with the initiative and self-report.

Since there’s the possibility that the underwriter might report on any violations of the issuer, it’s a huge risk not to report.

However, Lockwood-McCall said that before deciding whether or not to report, issuers should first go over all of their municipal bond issuances in the past ten years to see if they have, in fact, any materially inaccurate statements.

Lockwood-McCall herself created a database of all Oregon’s issuances in the past ten years, and mailed a list to the bankers on each issue to ask them to notify the state if they planned to report on anything.

“We are relying on the word ‘cooperation’ in the MCDC Initiative’s title,” she said.

Brian Hellberg, an RBC Capital Markets director for municipal finance policy and procedure, also said that there will need to be a significant amount of cooperation, especially since much of the information is in the hands of the issuer.

He referred to the situation as a “prisoner’s dilemma,” because of the possibility underwriters will self-report a problem under the MCDC program that an issuer has decided not to.

“The next two months will be about working through the process,” Hellberg said. “Not until all the cards on the table will we be able to decide about material statements.”

The consequences for an issuer that does not participate in the MCDC self-reporting program and subsequently faces SEC charges for what it didn’t report are serious, Feyer said. And underwriters have an incentive to report as much as possible, he said, because they can reduce potential future liability while there is a cap on their total financial penalties under the program.

BY TONYA CHIN
JUN 24, 2014 6:21pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers that consolidated fair-dealing obligations, contained in revised MSRB Rule G-19 on suitability of recommendations and transactions, new MSRB Rule G-47 on time of trade disclosure obligations, and new MSRB Rules G-48 and D-15 on sophisticated municipal market professionals, as well as related changes to MSRB Rule G-8, become effective on July 5, 2014.

Read the March 12, 2014 MSRB Regulatory Notice.

The MSRB will host a free educational webinar about upcoming rule changes to consolidated fair-dealing obligations for dealers on Thursday, June 26 from 3 p.m. to 4 p.m. ET. Register for the webinar.

Major government associations are chastising the Securities and Exchange Commission’s Daniel Gallagher for his public slamming of pension fund management during a speech he gave last month at a Municipal Securities Rulemaking Board summit. You may recall that Gallagher took a hard line on the way that public pension fund liabilities are calculated, chiming in on the side of conservative-minded economists who say that funds hide their true liabilities. In particular, he pointed to the now familiar argument about which discount rate to use in calculating a pension’s liability (the higher the discount, or investment rate of return, the lower the assumed liability).

Gallagher accused plans of not being transparent and for playing numbers games. This week, in response, 11 government associations including the National Governor’s Association and the National Association of State Retirement Administrators, called him out for highlighting a few bad apples. “We understand the SEC’s interest in appropriate disclosure of state and local government pension obligations,” the June 16 letter said. “However, your comments could lead many to believe that the disclosure issues are systemic, rather than individualized problems.”

Almost snidely, the letter adds that the commissioner “may not be aware of” governments’ actions in this arena and goes on to list the many types of pension reforms that they have implemented in recent years to manage their liabilities, in addition to establishing a pension funding task force that made recommendations to elected officials. The letter concludes by offering to discuss these reforms and upcoming disclosures changes further with the commissioner.

Liz Farmer |
[email protected] | @LizFarmerTweets | Google+

The Securities and Exchange Commission is seeking to shine a light on trades in the relatively opaque markets for corporate and municipal bonds.

Mary Jo White, the head of the S.E.C., said in a speech on Friday that she had asked the agency to pursue an effort to make information about bond prices more widely available. The initiative, which would require the public dissemination of price quotes generated in alternative trading systems and other electronic markets, could enhance transparency in a sector of Wall Street where middlemen may now have an advantage over investors, Ms. White said.

Just weeks after unveiling sweeping proposals for the stock market, Ms. White signaled a renewed commitment by the S.E.C. to treat oversight of bond trading as a priority. The agency in 2012 released several recommendations related to municipal bonds, but that report did not produce the changes that many in the market had expected.

The market for municipal bonds is highly fragmented, with tens of thousands of issuers and nothing resembling a centralized exchange. Even the market for corporate bonds, while more centralized and consistent than the municipal market, lacks an easy way for average investors to find information about price quotes. Bonds, in general, trade far less frequently than stocks.

A requirement to make more information public could eat into the profits of Wall Street brokerage houses, which can use the market’s opacity to their advantage.

Ms. White, in the remarks delivered to the Economic Club of New York, indicated that the S.E.C. would support other regulatory bodies as they complete separate efforts to enhance oversight of the bond markets. She said the agency would work with the Municipal Securities Rulemaking Board, a self-regulatory body, as it finalizes a rule to make sure that investors in municipal bonds have their orders executed on the best available terms.

The agency would also collaborate with the Financial Industry Regulatory Authority, Wall Street’s self-regulator, and the municipal board to help them provide guidance on how brokerage firms can follow the best-execution requirement, Ms. White said.

In addition, Ms. White said the S.E.C. would work with the two self-regulatory bodies as they write rules governing the disclosure of mark-ups in “risk-less principal” transactions. In that type of transaction, a brokerage firm executes a client’s order by simultaneously executing an identical order in the market, with the intention of eliminating its own risk. Brokerage firms can charge a markup for this service.

Ms. White contrasted the bond market with the stock market, which she said had largely benefited from advances in technology. In the bond market, also known as the fixed-income market, it is an open question whether “the transformative power” of technology and competition has “been allowed to operate to the extent it should to benefit investors,” Ms. White said.

“I am therefore concerned that, in the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries, and its potential to achieve more widespread benefits for investors, including the broad availability of pre-trade pricing information, lower search costs and greater price competition, especially for retail investors, is not being realized,” Ms. White said.

The S.E.C. chief’s assessment of the bond markets followed her recommendations earlier this month for new rules in stocks, aimed at strengthening the structure of the stock market and improving disclosures for investors.

Her recommendations for the bond market were similarly aimed at improving disclosure.

“Properly implemented, rules providing for better pre-trade pricing transparency have the potential to transform the fixed income markets by promoting price competition, improving market efficiency and facilitating best execution,” Ms. White said.

By WILLIAM ALDEN JUNE 20, 2014 1:17 PM

WASHINGTON — The Securities Industry and Financial Markets Association has sent a letter to numerous federal regulators arguing that the joint venture structure used for the first time last week to sell tender option bonds is compliant with the Volcker rule.

The five-page letter was signed by David Cohen and Matthew Nevins, managing directors and associate general counsel for SIFMA’s municipal securities division and the asset management group, respectively. It was addressed to the regulators responsible for implementing the Volcker rule, including the Securities and Exchange Commission, Federal Reserve, Federal Deposit Insurance Corporation, Comptroller of the Currency, and Commodity Futures Trading Commission. The letter seeks to communicate to the regulators that the joint venture trust structure laid out in an accompanying term sheet is a legal solution for the TOB market, the SIFMA lawyers said.

TOB programs have traditionally provided a supply of short-term tax-exempt bonds to money market funds, and have generally accounted for approximately 25%-30% of the assets of muni MMFs, according to Fitch Ratings. In a traditional TOB program, the sponsor will deposit a fixed-rate bond or note into a trust, which will issue two new certificates — a floating rate certificate sold to a money market fund and a residual certificate which may be sold to a mutual or closed-end fund or held by a bank. The floating rate certificate will have a tender option, through a liquidity facility that is typically issued by the program’s sponsor or an affiliate, that shortens the maturity of the bond or note so it becomes eligible to be purchased by a tax-exempt money market fund.

But the Volcker Rule, finalized late last year, prevents banks and their affiliates from sponsoring a TOB program, owning a residual certificate issued by a TOB trust, or providing credit enhancement, liquidity, or remarketing services to these programs.

The joint venture solution, first used by Merrill Lynch, Pierce Fenner & Smith in an $8.5 million deal last week, relies on an exemption in the rule. Joint ventures that exist between banks or their affiliates and unaffiliated parties, and are exempt from the rule as long as they have no more than 10 unaffiliated co-venturers and only engage in activities permitted of banking entities. Under the new structure, banking entities will provide liquidity while a co-venturer holds the floating note and another holds the residual note.

Some experts have warned that regulators might view the JVTs as a re-definition of an existing structure to get around the rules, but Cohen and Nevins said in an interview that the structure represents months of work by “various SIFMA stakeholders” and the letter is intended to inform the regulators of the group’s reasoning.

“We wanted to inform the regulators of our solution,” Cohen said. “It allows the market to move forward in an orderly fashion.”

Nevins said the various attorneys and market experts who worked on the project came to the consensus that the JVT structure complies with Volcker and is the most logical way forward.

“I think what we’ve done is in the spirit of what the regulators have done under the Volcker rule,” he said.

The JVT structure is likely to be the way the TOB market is going to operate going forward, said Cohen. Some market participants have floated a second idea, which would swap the bank sponsor out for a non-banking entity such as a mutual fund or a dealer. That option would not work for banks.

Rating agencies had previously said that the TOB market would “unwind” in the months following the final Volcker Rule, but have since dubbed the emergence of the JVT structure a positive development that can keep the market functioning.

BY KYLE GLAZIER
JUN 16, 2014 1:39pm ET

The Bond Dealers of America sent a letter to the SEC, urging limitations to the scope of its Municipal Continuing Disclosure Cooperation (MCDC) Initiative.

The letter, sent to the SEC Chairman and Commissioners states that the MCDC initiative has caused a financial and personnel investment by issuers and underwriters that goes beyond what is needed to achieve the goals of the SEC because its scope relies upon the now defunct NRMSIR system.

Specifically, the asks that the deadline be extended until December 15 and that the scope of the initiative is limited to access to information on the MSRB’s EMMA website, which dates back to 2009.

You can view the full letter here.

The self-regulatory organization overseeing municipal bonds introduced on Monday a new way for investors to analyze prices in the often opaque market.

The Municipal Securities Rulemaking Board launched a tool on its Electronic Municipal Markets Access website designed to enable users to more easily find and compare prices for municipal securities with similar characteristics, such as geography, interest rates and maturity.

The tool will provide side-by-side comparisons of price and yield for up to five bonds at a time. It also can produce a graph of a bond’s historical pricing.

“It’s another tool to allow retail investors to better understand the value of bonds that they own or are considering purchasing,” Lynnette Kelly, MSRB executive director, said. “They’re better able to have access to information so that they can have more constructive conversations with their investment professionals.”

Investment advisers said that the web tool would help them and their clients.

“It’s a really good step forward, and it’s long overdue,” said Richard Goldman, principal at Conscient Capital. “The municipal securities market has been a backwater in terms of price transparency.”

As advisers switch from putting their clients in bond funds to placing them in individual bonds, the MSRB tool will assist them in making recommendations, according to Michael Kitces, a partner and director of research at Pinnacle Advisory Group.

“Anything that provides greater transparency so that advisers can get prices for bonds is good,” Mr. Kitces said. “More transparency allows us as advisers to understand if we’re getting good execution and to hold accountable our trading and brokerage arrangements that we use.”

The EMMA tool will help investors, but it won’t be able to tell them precisely how much they should be paying for a bond because markups are still hidden, according to Bradford Pine, president of Bradford Pine Wealth Group.

“That’s where it need to be more transparent – [the price] where the adviser is buying it and where, ultimately, the client purchases it,” Mr. Pine said. “You need to work with an adviser you trust and feel comfortable with. It’s still a very fragmented market that needs be corrected.”

In another move to strengthen pricing fairness, the MSRB at its meeting in early May agreed to send a rule to the Securities and Exchange Commission that would require bond dealers to use “reasonable diligence” in obtaining the best execution price for retail investors.

The SEC must approve MSRB rules and will ask for public comment on the best-execution rule.

Without a benchmark, such as a 10-year U.S. Treasury bond, the municipal market can be difficult to navigate among 50 states and hundreds of local governments that offer debt instruments to finance construction and other projects.

Recently, Detroit, New Jersey and Puerto Rico have been embroiled in controversies over bonds.

“The MSRB needs to put pressure on issuers to update their financial positions and make that information available to investors,” Mr. Goldman said.

The biggest boon to market transparency is technology, such as the MSRB’s EMMA site, according to Ms. Kelly.

“Technology has fundamentally changed the market,” Ms. Kelly said. “The ability for retail investors to access information about pricing is better than it ever has been.”

By Mark Schoeff Jr.
Jun 9, 2014 @ 2:08 pm (Updated 3:27 pm) EST

Mark Schoeff Jr. Email @twitter LinkedIn Google
Mark Schoeff Jr. covers legislation and regulations affecting investment advisers and brokers and wants to hear from you about how Washington policymakers are influencing your business.

(Reuters) – Municipal and corporate bond dealers would have to tell investors how much they charge to cover their compensation under bipartisan legislation currently in the U.S. Senate to end secret price markups.

The proposal, quietly introduced earlier this year by Virginia Democratic Senator Mark Warner and Oklahoma Republican Senator Tom Coburn, comes as momentum is growing among U.S. securities regulators to bring more transparency to the combined $13 trillion-plus municipal and corporate bond markets.

This week, executives from Charles Schwab met with federal lawmakers, Securities and Exchange Commission officials and other regulators to advocate for requiring disclosure on municipal bond markups.

“It’s very opaque and somewhat confusing to investors,” said Peter Crawford, a senior vice president at Charles Schwab.

“One of the things we have found in this over-the-counter market is the degree of price difference from one dealer to the next can be significant.”

Most individual investors, the $3.7 trillion municipal bond market’s backbone, are in the dark about how much dealers add to prices in trades.

Complicating matters, regulation on compensation is hazy. Currently, dealers must disclose if they act as agents facilitating trades but not if they act as principals in the trades. For most trades in the municipal market, then, dealers are “riskless principals,” purchasing securities from their customers and immediately reselling them to other dealers.

Crawford, whose firm levies a flat charge of $1 per bond transaction to customers, said Charles Schwab has studied the lack of disclosure for about seven years.

The brokerage analyzed a California general obligation bond with a 5.25 percent coupon bond offered by five different dealers on its trading platform. It found the prices ran from $120.938 to $124.10, which meant on a $10,000 trade there was a $316.40 difference in prices.

The current federal push on dealer compensation in the municipal market began two years ago, when a comprehensive SEC report found individual investors pay more for bonds than institutions because they lack information, specifically about markups and markdowns.

In recent months the call for change has grown louder, with SEC Republican Commissioner Michael Piwowar saying in January retail investors must be given a better sense of markups.

Last month, his fellow SEC Republican Commissioner Daniel Gallagher said “‘riskless principal’ is basically just a fancy name for ‘agency,'” and disclosing markups and markdowns “would enable customers to assess the fairness of the execution prices.”

Meanwhile, the two self-regulatory organizations helping the SEC oversee the bond markets are focusing on the issue.

The Municipal Securities Rulemaking Board is currently taking steps that may lead to new rules on riskless principal transactions. At the same time the Financial Industry Regulatory Authority is “reviewing” the issue for corporate bonds, Richard Ketchum, its head, told reporters last month.

Crawford said this was the firm’s first visit to Washington policymakers about markups, which was inspired by Piwowar’s comments.

Thu Jun 5, 2014 3:24pm EDT
By Lisa Lambert and Sarah N. Lynch

This publication was written by members of Ballard Spahr’s Municipal Securities Regulation and Enforcement Group.

The U.S. Securities and Exchange Commission recently charged a Chicago charter school operator with defrauding investors in a $37.5 million bond offering by failing to disclose transactions that presented conflicts of interest. According to the SEC’s complaint, UNO Charter School Network, Inc. (UNO) failed to disclose a multimillion-dollar construction subcontract with a company owned by a brother of UNO’s Chief Operations Officer, as well as the potential impact of this transaction on UNO’s ability to repay its bond obligations. This announcement is notable both in itself and for what may be forthcoming: SEC officials have stated that the agency may bring charges against individuals in the ongoing investigation.

UNO has settled the complaint without admitting to or denying the charges. The settlement can be instructive for issuers and underwriters determining whether to self-report under the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC).

The MCDC, spearheaded and publicized by the SEC’s Chicago Regional Office, which is handling the case against UNO, allows issuers and underwriters to voluntarily report materially inaccurate statements made in offering documents regarding prior continuing disclosure obligations in exchange for lesser sanctions. When determining whether to self-report, however, an issuer or underwriter must determine whether its prior disclosure lapses were material—a determination that can be difficult to make, particularly in a realm involving mostly settled actions.

In announcing its charges against UNO, however, the Chicago Regional Office demonstrated that there is a category of disclosures that it considers material—those relating to the issuer’s ability to repay the bonds. As the SEC noted, “[i]nvestors had a right to know that UNO’s transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.” Determinations of whether to self-report under to the MCDC still must be made on a case-by-case basis, but this case may provide a guidepost regarding the SEC’s view on materiality.

A more detailed analysis of the complaint is available here.

June 4, 2014

Ballard Spahr’s Municipal Securities Regulation and Enforcement Group helps municipal market participants navigate a rapidly evolving regulatory, investigative, and enforcement environment, enabling them to anticipate and address compliance issues and respond effectively to investigations when necessary. For more information, please contact John C. Grugan at 215.864.8226 or [email protected] or Christine O’Neil at 215.864.8228 or [email protected].

The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission of a proposal to amend MSRB Rule G-3(a) to: (1) limit the scope of permitted activities for a limited representative – investment company and variable contracts products to sales to and purchases from customers of municipal fund securities; (2) eliminate the FINOP classification, qualification and numerical requirements in MSRB Rule G-3(d); (3) clarify in Supplementary Material .01 to Rule G-3 that references to sales includes the solicitation of sales of municipal securities; and (4) make certain technical and clarifying amendments to Rule G-3.

These amendments will affect MSRB Rules G-3 (classifications of principals and representatives; numerical requirements; testing; continuing education), G-7 (information concerning associated persons) and G-27 (supervision).

View the rule filing.

Effective May 12, 2014, MSRB Rule A-12 was amended to consolidate MSRB registration requirements into a single rule and to create a simplified electronic registration form. Municipal advisor firms that are currently registered with the MSRB under the previous requirements must verify, update and complete their registration information in the new form by August 10, 2014. The MSRB provides a number of educational resources below to assist municipal advisors with submitting their first Form A-12.

• MSRB Registration Manual
• Checklist on Preparing to Submit MSRB Form A-12
• FAQs on MSRB Registration
• Guidance on the MSRB Municipal Advisor Registration Process
• Webinar on the New Registration Rule and Form (June 12, 2014)

The head of the U.S. Securities and Exchange Commission’s unit overseeing municipal bonds and pensions is urging local governments to come clean if they failed to keep investors informed about the state of their finances.

If they do: Localities can escape fines, while Wall Street firms that sold their bonds would see them capped at $500,000. If not: “They absolutely should be expecting harsher sanctions.”

Gaunt took over in November, policing a $3.7 trillion market coping with record bankruptcies, depleted pension funds and new rules aimed at protecting localities from banks and once-unregulated financial advisory firms.

The unit has charged New Jersey, Illinois, and Harrisburg, Pennsylvania, with fraud for misleading investors about deteriorating finances. In November, it took a new tack, fining a Washington authority that defaulted on hockey-rink bonds after hiding misgivings, marking the first financial penalty against an municipal issuer.

Following is condensed from a recent telephone interview about her priorities as the market’s top enforcement official:

Q: In March, the SEC offered leniency to municipalities and underwriters in cases where buyers were told that a borrower had been providing adequate updates on their financial affairs, even when they weren’t. They have until September to report violations. What has the response been?

A: On the one hand, it’s a little disturbing that they don’t know whether they have been in compliance. On the other hand, it’s great that people are trying to get their houses in order. We certainly hope that if they find problems, they take advantage of the initiative. They absolutely should be expecting harsher sanctions if they elect not to.

Q: Since last year the agency has been scrutinizing the disclosures of distressed borrowers. Can we expect enforcement actions to result?

A: We certainly are seeing situations where issuers would have strong incentives to be less than fully candid. We’re going to be prepared to bring enforcement actions when we find the right kind of cases. We are actively monitoring distressed issuers, including whether they are continuing to comply with their disclosure obligations. Our Harrisburg case was particularly instructive. Harrisburg had not been complying, creating a kind of information vacuum, which is particularly dangerous for an issuer that’s in distress.

Q: During the financial crisis, municipalities were hurt by complex transactions. Since Dodd-Frank, the Municipal Securities Rulemaking Board has updated its rules to put added requirements on underwriters’ dealings with municipalities. What is the agency’s approach toward enforcing regulations aimed at protecting issuers?

A: We’re looking at the conduct of banks as it relates both to issuers and investors. What you sometimes see is that conduct that hurts issuers also hurts investors. We’re investigating cases where the posture is issuer as victim, as distinct from issuer as perpetrator. Are they being dealt with fairly? Are they getting competent advice from their advisers? Are these sensible structures? Are they getting the lowest possible borrowing costs? What are the risks? Are they getting unconflicted advice? That’s a very high priority for us. That’s a core focus.

Q: Are there areas of the municipal market where you feel there aren’t sufficient regulations?

A: There’s a lot of work to be done around issues associated with markups in the secondary market, just in terms of ensuring there’s adequate disclosure to investors about what markups they’re paying.

Q: Your division also oversees pensions. What is the agency’s focus there?

A: There’s a substantial intersection between underfunded pension funds and municipal securities issuers. Accurately reporting the extent of the underfunding is important, and the failure to do so could be materially misleading to investors.

Separately, we’re focused on instances where pension funds have been victimized by bad behavior by other participants. We always have a very healthy stable of pay-to-play investigations. As we’re seeing more pensions investing in alternative investments, we’re interested in fee disclosures. Many pension funds are sophisticated. Many are not — and we’re interested in whether they’re receiving adequate disclosure about the fees associated with those types of investments.

By William Selway Jun 4, 2014

To contact the reporter on this story: William Selway in Washington at [email protected]

To contact the editors responsible for this story: Stephen Merelman at [email protected] Mark Schoifet

Alexandria, VA – To inform the development of a professional qualification exam for municipal advisors, the Municipal Securities Rulemaking Board (MSRB) will conduct a survey of registered municipal advisors later this month. The confidential electronic survey will assess the business activities of municipal advisory professionals.

An independent survey administrator will distribute the survey to those individuals at registered municipal advisor firms who are designated as a regulatory contact for the MSRB. Survey recipients are invited to distribute it to other appropriate professionals within the firm. Municipal advisors who have previously indicated a willingness to complete the survey will also receive the survey, which will run from the week of June 16, 2014 until early July 2014.

“The MSRB hopes to collect survey information from as many municipal advisor professionals as possible,” said MSRB Executive Director Lynnette Kelly. “Because of the diversity of the industry, responses from variety of firms will play a central role in guiding the MSRB’s work to develop a professional qualifications program that makes sense for all municipal advisors.”

The MSRB will host a webinar to provide detailed instructions for completing the survey on Wednesday, June 18, 2014 at 4:00 p.m. EDT. Registered municipal advisors will receive a registration link to the webinar from the MSRB.

NABL this week sent a letter offering Treasury officials alternative proposals to the current practice of suspending the sales of State and Local Government Securities (SLGS) subscriptions when the federal debt approaches the statutory limit. In the letter, NABL recommended several non-exclusive alternatives. One was that Treasury should “only suspend subscriptions for larger SLGS purchases,” making the cutoff at $10,000,000. “Since purchases of smaller quantities of SLGS have the most difficulty with alternative adjustments, suspensions of SLGS subscriptions over [the $10,000,000 limit] would solve the problems for many local government units.”

The letter also suggests that, if necessary, Treasury should “consider an increase of the advance subscription period when extraordinary measures are in effect.” NABL went on to explain that “small issuers could in extraordinary times adjust to a longer subscription period of… 10 days,” understanding that a longer period would make it easier to adjust treasury auctions in response to subscriptions for SLGS.

NABL also suggested that SLGS terms could be limited to a “relatively short period,” as short-term treasuries “are the most difficult to bid as an alternative to SLGS. The final recommendation from NABL was to “allow subscriptions for 0% SLGS during periods of extraordinary measures.”

The NABL letter can be seen here.

Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.

Brokers who acquire bonds to fill an immediate customer order should be required to disclose how much they mark up the securities at sale, SEC Commissioner Daniel M. Gallagher said in a speech in Washington on May 29. Rules only require the broker to trade with customers at a “fair and reasonable” price, Gallagher said.

His comments underscore how regulators are focusing on the $3.7 trillion municipal-bond market, where retail investors constitute a majority of participants. The Municipal Securities Rulemaking Board is weighing a proposal to require that brokers seek the most favorable prices for clients in the municipal-bond market, which lacks a centralized exchange.

“It is still common for investors to place corporate- and municipal-bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price,” Gallagher told the rulemaking board’s annual regulatory summit.

Meanwhile, the Municipal Securities Rule Making Board said today it will be making gauging the fair price for infrequently traded municipal securities easier next week with a new Web tool allowing investors to compare prices of similar bonds.

Gallagher also criticized state and local governments for understating the risk of their bonds by undervaluing pension liabilities. Lax accounting practices used to estimate those future payments “can amount to a fraud on municipal bond investors,” Gallagher said.

“In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games,” he said.

JUNE 2, 2014 • BLOOMBERG NEWS

(Reuters) – A Chicago charter school operator lied to holders of $37.5 million of municipal bonds about conflicts of interest and risked having to liquidate its schools, the U.S. Securities and Exchange Commission said on Monday in charging the operator with defrauding investors.

The SEC said UNO Charter School Network Inc did not admit or deny the charges, but agreed to a settlement where it would improve its internal procedures, including appointing an independent monitor. The commission’s enforcement division is continuing to investigate, as well. The attorney for UNO did not respond to requests for comment.

The charges and settlement stem from a spending scandal that led the state of Illinois to suspend grants to UNO, which operates 16 charter schools. The scandal also prompted the resignation of UNO’s long-serving Chief Executive Officer Juan Rangel in December, according to the Chicago Sun-Times.

According to a complaint filed in federal court in Chicago, UNO breached a conflict of interest provision in grants it received from the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three schools. It contracted with two companies owned by its chief operating officer’s brothers, with one company installing windows for $11 million and the other acting as an owner’s representative during construction. One of the brothers was a former UNO board member, as well, the SEC said.

The bond offering document had a specific section assuring investors of a “robust” policy against conflicts of interest, the SEC said. UNO also failed to tell investors that the commerce department could take back all of its grant money if the provision was violated.

“Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools – the very revenue-producing assets essential for repayment of the bonds,” the SEC said in a statement.

For more than a year the SEC has cracked down on the $3.7 trillion U.S. municipal bond market, often using its greatest regulatory power over tax-exempt debt – citing issuers for not disclosing information important to bond buyers.

When it comes to charter schools, though, credit rating agencies have led the charge. Last July Fitch Ratings said the average charter school it rates had speculative-grade credit as the schools, which receive charters from their local districts to operate independently, had burdensome debt levels and “breakeven” margins.

Over the course of five years, UNO received $280 million in public money but had very little oversight from Chicago’s educational agencies, according to a profile published in Chicago Magazine in February.

WASHINGTON Mon Jun 2, 2014 2:41pm EDT

Read the Advisory.

Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.

Brokers who acquire bonds to fill an immediate customer order should be required to disclose how much they mark up the securities at sale, SEC Commissioner Daniel M. Gallagher said in a speech in Washington yesterday. Rules only require the broker to trade with customers at a “fair and reasonable” price, Gallagher said.

His comments underscore how regulators are focusing on the $3.7 trillion municipal-bond market, where retail investors constitute a majority of participants. The Municipal Securities Rulemaking Board is weighing a proposal to require that brokers seek the most favorable prices for clients in the municipal-bond market, which lacks a centralized exchange.

“It is still common for investors to place corporate- and municipal-bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price,” Gallagher told the rulemaking board’s annual regulatory summit.

Gallagher also criticized state and local governments for understating the risk of their bonds by undervaluing pension liabilities. Lax accounting practices used to estimate those future payments “can amount to a fraud on municipal bond investors,” Gallagher said.

“In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games,” he said.

By Dave Michaels May 29, 2014

To contact the reporter on this story: Dave Michaels in Washington at [email protected]

To contact the editors responsible for this story: Maura Reynolds at [email protected] Anthony Gnoffo, Gregory Mott

WASHINGTON — Issuers are disclosing more failures to comply with their continuing disclosure agreements than in past months — a development some market participants said stems from a Securities and Exchange Commission’s program encouraging them and their underwriters to self-report instances in which bond documents falsely stated the issuer was in compliance with its CDA.

Event notices of failures to comply with CDAs posted by issuers to the Municipal Securities Rulemaking Board’s EMMA website in April and May far exceeded those in any of the previous several months before the announcement of the SEC’s Municipalities Continuing Disclosure Cooperation initiative on March 10.

Searches for such event notices reveal almost 300 were posted in both April and May, compared with less than 100 in February.

The MCDC focuses only on OS’ that omitted past disclosure failures. Correcting past mistakes does not shield an issuer from SEC action, but some market participants said the controversial program’s existence has spurred a much more detailed look at whether any disclosure failures have remained unacknowledged.

“We’re taking a second look to make sure,” said Anthony Inverso, a senior managing director at municipal advisor firm Phoenix Advisors in Downingtown, Pa.

Phoenix filed a May 27 notice on behalf of one of its clients, Hamilton Township, N.J., indicating that the municipality failed to file its annual financial information in a timely manner in 2008, 2009, and 2010. Under a provision of the SEC’s Rule 15c2-12 on disclosure, an OS must disclose anytime within the last five years that the issuer failed to meet its self-imposed deadline for filing annual financial and operating information filing. But in 2010, Hamilton sold more than $24 million of general obligation bonds and said in the official statement that its filings were late only in 2002, 2003, 2006, and 2007.

The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report their own CDA violations by Sept. 10, when the initiative expires. The program creates what SEC enforcement officials have termed a “modified prisoner’s dilemma,” in that it creates tension between issuers and underwriters who can effectively turn one another in to the SEC.

Dealer groups have said most firms will probably participate in the MCDC, tempted by the promise of relatively low financial penalties, which cannot exceed $500,000. Issuers face no financial penalties if they participate, but would effectively be pleading guilty to securities fraud and would be it with an order to cease and desist from further such violations.

Inverso said he is very aware of the MCDC and the SEC’s increased scrutiny of continuing disclosure in general. The SEC issued a risk alert in March 2012 warning that underwriters can be exposed to enforcement action if they do not have policies and procedures in place that allow them to reasonably determine that issuers will comply with their continuing disclosure obligations.

In November, the SEC collected the first ever financial penalty from a muni issuer when it fined both an issuer in Wenatchee, Wash. and its underwriter Piper Jaffray & Co., in connection with misleading investors with false information in an official statement.

“It’s important to make sure everything is done to a ‘t,'” Inverso said. “You could get the wrath of the SEC on you.” Inverso added that the SEC’s intense focus on this issue will probably result in many issuers making corrections to their filings on EMMA.

Some issuer officials have questioned whether the MCDC initiative is an SEC scare tactic, but the commission has maintained that the purpose of the entire effort is to improve the disclosure behavior of market participants.

“You may see a flood,” Inverso said of the corrected filings and past failure notices. “I think you’ll see quite a few.”

Issuers who participate in the MCDC will have to take remedial action to correct their failings, including filing any necessary notices, annual financial reports, or other obligated information to EMMA. They would have 180 days after the SEC files the MCDC case to correct delinquent filings. Securities lawyers said it is unlikely that any issuers have concluded an MCDC agreement yet, but that many are aware of the program and are taking it seriously.

Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, said he does not know if issuer notices of disclosure failures are connected to the MCDC program, but acknowledged that it has “magnified” awareness of 15c2-12 obligations. Many dealer firms are still in the process of looking back over the last five years’ worth of their transactions to see if they have any problematic ones that might warrant self-reporting, he said.

Some issuers said their recent corrections had nothing to do with SEC activity. Rockland County, N.Y. disclosed in an event notice filed on May 27 that it had not filed notices of its rating changes in a timely fashion several times from 2009 to 2012, during which time both Standard and Poor’s and Moody’s Investors Service cut the county’s rating multiple notches. Stephen DeGroat, deputy commissioner of finance for Rockland County, said the notice wasn’t inspired by any looming SEC threat, but is instead part of the county’s continuing effort to recover from recent hardship.

Cindy Epperson, finance and budget director for Yakima, Wash., said she has heard of the MCDC and knows the SEC is becoming more serious about preventing disclosure-based fraud. But she said that Yakima’s recent admission that it failed to disclose bond insurer downgrades and was late filing some financial operating data was prompted by a new bond offering and the past mistakes were detected either by the underwriter or by bond counsel.

Securities lawyers said issuers should be making an effort to correct past mistakes on EMMA, but added that there is no “one size fits all” advice for issuers considering whether or not to participate in the MCDC if they find themselves eligible.

“We’re trying to encourage issuers to review their records,” said Teri Guarnaccia, a partner at Ballard Spahr in Baltimore. “We think that if they found a failure, they should correct it.”

Guarnaccia said the key issue for participation in the MCDC is whether an issuer’s claim in its OS that it was in compliance with its CDA, when it wasn’t, is materially misleading. The SEC has said it is highly unlikely to offer any guidance on what it would consider material, despite calls from issuers, underwriters, and many attorneys to do so. Materiality has generally been defined in Supreme Court cases as whether an investor would want to know the information in question before making an investment decision.

Guarnaccia said underwriters are probably more likely to have a tendency to report more failures as material than issuers. She added that, while making corrections or new disclosures on EMMA will not save an issuer from SEC scrutiny if a past bond sale had a misleading OS, it will at least prevent future OS’ from containing false statements.

Kenneth Artin, a shareholder in Bryant Miller Olive’s Orlando office, said his firm is getting calls from issuers asking them what to do. “It’s a case-by-case situation,” he said. “It has heightened the awareness of continuing disclosure.”

Orrick, Herrington, & Sutcliffe has put together a national task force of its lawyers to work on the MCDC, said Roger Davis, a partner in the firm’s San Francisco office and chair of its public finance practice. That task force includes former SEC muni enforcement leader Elaine Greenberg, who joined Orrick’s Washington, D.C. office last year. Davis said there is no generic advice to be offered to potential MCDC participants, and called counseling such clients a “tricky exercise.”

“This is occupying a lot of people’s time and attention,” he said.

Market participants have expressed a desire to see the MCDC extended beyond its current expiration date, to include the remainder of 2014 or possibly beyond. SEC officials have downplayed that possibility.

BY KYLE GLAZIER
MAY 30, 2014

WASHINGTON — Two members of Congress are urging federal regulators to reevaluate a proposal to exclude municipal bonds from qualifying as high quality liquid assets under banking rules designed to ensure banks are equipped to handle severe financial and economic stress.

Reps. Gwen Moore, D- Wis. and Terri Sewell, D- Ala., made the request in a two-page letter sent to Federal Reserve chairman Janet Yellen, Federal Deposit Insurance Corporation chair Martin Gruenberg, and Comptroller of the Currency Thomas Curry on Wednesday. Both women are members of the House Committee on Financial Services, which has jurisdiction over banks and capital markets.

The two lawmakers are the latest to question the decision not to classify munis as HQLA in the rule that the Fed, FDIC, and Comptroller’s office proposed in October.

The proposed rule would require large banks to maintain a minimum liquidity coverage ratio, defined as the ratio of HQLA to total net cash outflows. Assets would qualify as HQLA if they could be easily and immediately convertible to cash with little or no loss of value during a period of liquidity stress.

The rules could be finalized as soon as this summer, and become effective Jan. 1. Local government groups, banks, and others have already argued that a failure to include munis will hurt the market by making tax-exempt securities a less attractive investment for banks.

Moore and Sewell wrote that they are “concerned” about the rule as proposed. Including munis as HQLA would actually make the rule stronger by diversifying investments and therefore reducing systemic risk, they argued in the letter argues.

“In fact, during the 2008 financial crises, classes of municipal bonds, specifically highly-rated dollar-denominated general obligation and revenue bonds, exhibited greater price stability than comparably rated corporate bonds,” they told the banking regulators. “Presumably, this is due to the low default rate of these securities.”

The lawmakers also wrote that munis have a lot in common with the securities already classified as HQLA under the proposal, such as corporate bonds. Munis trade over a real-time reporting system and the muni market includes a diverse range of participants, the letter noted, adding, the Fed already accepts municipal bonds as collateral for overnight lending.

Regulators said that they did not include munis as HQLA because “these assets are not liquid and readily-marketable in U.S and thus do not exhibit liquidity characteristics necessary to be included in HQLA under this proposed rule.”

Moore and Sewell urged Yellen, Gruenberg, and Curry to collaborate with the Securities and Exchange Commission and Municipal Securities Rulemaking Board to “further evaluate” the proposal and reach “additional findings.”

BY KYLE GLAZIER
MAY 28, 2014

The Municipal Securities Rulemaking Board (MSRB) next week will introduce a new tool to allow investors and others to more quickly and easily gauge the trade price of a municipal bond on the Electronic Municipal Market Access (EMMA®) website. EMMA’s price discovery tool will enable users to find trade prices of municipal securities with similar characteristics, which can be helpful in assessing the potential value of a security that has not traded recently. Additional enhancements to the display of trade data on EMMA will help users visualize trends in municipal bond trade prices over time.

Read about EMMA’s price discovery tool.

Register for a webinar tour of the new tool on Thursday, June 19, 2014.

WASHINGTON – Securities and Exchange Commission member Daniel Gallagher said Thursday that pension and other post-employment benefit liabilities need to be made more transparent for investors, and argued for a universal “disclosure baseline” that all cities should use.

Gallagher, who has been outspoken on his interest in the muni market and who told The Bond Buyer last year that he had taken a “blood oath” to keep the SEC’s attention on munis, made the remarks at the Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit here. The summit was a non-public event open to regulatory officials and staff from the SEC, MSRB, Financial Industry Regulatory Authority, and others, an MSRB spokeswoman said.

Recent accounting standard reforms undertaken by the Governmental Accounting Standards Board have improved transparency for investors in municipal securities, Gallagher said, but take a step back by doing away with the annual required contribution and a need for more OPEB transparency remains.

“The ARC was the amount plan sponsors had to pay to amortize unfunded liabilities over a maximum 30-year period,” Gallagher said. “Every plan was required to disclose the ARC, and so it was a well-defined, easy-to-use measuring stick to determine whether plan sponsors were meeting their funding obligations. While I understand the need to divorce the technical nature of accounting for pension promises from the political nature of funding those pension promises through the state budgetary process, removing the ARC will diminish transparency on this important issue.”

Gallagher said he hopes GASB will revisit its standards again in time, but added that supplemental disclosure could be a help for investors more immediately. Municipalities should value and disclose their total liabilities using a risk-free discount rate such as the treasury yield curve, Gallagher suggested. They should then calculate and disclose a baseline plan contribution equal to the amount actuarially necessary to fully fund the plan.

“Investors would then be able to readily compare financials calculated using GASB standards and disclosures about the current level of plan funding against this common baseline,” he said. “Entities would be free to explain to investors why the differences exist.”

Gallagher also spoke about three steps muni regulators can take in the near future to improve the secondary market — requiring disclosure of riskless principal markups, improving post-trade price transparency, and adopting a best execution rule.

Commissioner Michael Piwowar has also made public comments recently about plucking some of this “low hanging fruit” that would not require radical overhauling of the market or legislative action.

Riskless principal transactions occur when a dealer almost simultaneously buys and sells securities, thereby taking on little or no risk that the market will move against the firm during that short time. The SEC’s comprehensive 2012 report on the municipal market recommends the MSRB consider requiring dealers to disclose to customers any markups or markdowns on these transactions.

“Given that ‘riskless principal’ is basically just a fancy name for ‘agency,’ there is no real reason to perpetuate this dichotomy,” Gallagher said. “Disclosure of the markup or markdown in riskless principal transactions would enable customers to assess the fairness of the execution prices.”

The MSRB should consider amending its Rule G-15 on confirmation to require this disclosure, he said.

Gallagher said the fixed income markets are a mystery to most investors, and drew a Hollywood comparison to what the bond market looks like.

“Maybe a good approximation of today’s debt markets are the scenes from the equity markets of 25 years ago as portrayed in ‘The Wolf of Wall Street,’ he said. “Although I do hope there is a lot less fraud, and at least a little less debauchery, than what was depicted in that film. It is still common for investors to place corporate and municipal bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price.”

The MSRB has already proposed a best execution rule that would require broker-dealers to use “reasonable diligence” to obtain the best price for a customer based on prevailing market conditions, and is also exploring options for improving both pre and post-trade transparency on its EMMA website.

BY KYLE GLAZIER
MAY 29, 2014

Minneapolis, MN, May 20, 2014 – SIFMA today issued the following statement from Kenneth E. Bentsen, Jr., SIFMA president and CEO, after his luncheon remarks at the Government Finance Officers Association (GFOA) Annual Meeting taking place May 18-21, 2014 in Minneapolis:

“SIFMA is committed to promoting efficient municipal markets that facilitate capital formation, investor opportunity and economic growth. The municipal bond markets fuel local economies through infrastructure investment and job creation – in fact, state and local governments have already accessed over $88 billion in capital this year. It is vital to the prosperity of U.S. communities that this public-private partnership remain strong and not be constricted by unnecessary regulatory reform. Specifically, SIFMA is concerned that in more than one occasion, regulators have taken actions that work to the detriment of the municipal bond markets and state and local government issuers.

“For instance, in the case of the recently approved municipal advisor rule, the SEC incorrectly interpreted legislative history to create new burdens for both underwriters and issuers, as opposed to establishing a much needed, industry supported, regulatory framework for otherwise unregulated financial advisors. We are also concerned that the SEC’s Municipal Continuing Disclosure Cooperation Initiative (MCDC Initiative) creates a prisoner’s dilemma by trying to incentivize underwriters to report on their clients under the threat of penalty by the SEC. Instead, the SEC should be focusing on helping issuers comply with their obligations in an efficient manner and ensure investors have the information they need going forward. In the tax arena, we are closely monitoring the threat to end the tax-exemption for municipal bond interest, which would lead to higher capital costs and decreased municipal investment.

“SIFMA is dedicated to working with regulators and market participants to help craft well thought out rules and business practices that strike the appropriate balance between investor protection, safety and soundness and market efficiency. We are also working to stay ahead of future threats including systemic cyber attacks or other emergency scenarios that could impact the municipal markets and the industry’s broad ability to fulfill its role of intermediating capital and credit between investors and end users. We remain steadfast in our goal of promoting efficient, resilient municipal markets that can facilitate economic growth across the country.”

Release Date: May 20, 2014
Contact: Liz Pierce, 212.313.1173, [email protected]

This month, Standard & Poor’s Ratings Services (“S&P”) sent letters to all issuers of the bonds it rates advising the issuers to provide all relevant documentation related to any private debt, including bank loan financing, that the issuer enters into.

What Type of Debt Does S&P Want Disclosed?

• Direct Bank/Private Loans
• Private Placements
• Private Debt
• S&P is looking to be notified of all such debt, regardless of whether or not such additional debt is rated by S&P.

What Documentation Is S&P Looking For?

• All relevant documentation
• Form of Note or Bond
• Loan or Financing Agreement
• Covenant Agreement
• Security Documentation (mortgages, security agreements, etc.)

When Does S&P Want the Information?

No later than promptly following the closing of the transaction, though preferably before closing.

What Is the Consequence of Not Disclosing?

Risk suspension or withdrawal of your S&P rating.

While S&P is requiring direct disclosure of the referenced debt to it, bondholders and their representatives have also encouraged issuers to voluntarily post information about such bank loans and private debt on the Electronic Municipal Market Access (“EMMA”) website, which is maintained by the Municipal Securities Rulemaking Board (“MSRB”). In 2012, the MSRB published a notice in which it encouraged, but did not mandate, issuers to post such information in order to provide timely access to investors and other market participants to allow them to make informed investment decisions. The MSRB encouraged the filing of either a PDF of the appropriate loan documents or a summary of the transaction, including the name of the lender, payment dates, maturity and amortization, prepayment provisions, purpose, security, tax status, guarantees, events of default, and remedies, among other information.

Any issuer considering voluntary disclosure on EMMA or with questions on when and what to send to S&P may wish to consult with counsel prior to any disclosure. The attorneys in Day Pitney’s Municipal Finance Group routinely counsel clients on such matters. Please feel free to contact any of the attorneys listed to the right of this alert if you would like to discuss this alert or your disclosure obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Last Updated: May 22 2014
Article by Namita Tripathi Shah
Day Pitney LLP

The SEC Office of Municipal Securities today issued an updated set of Frequently Asked Questions concerning municipal advisors. The updated FAQs are available here. The updated FAQs include questions concerning obligated persons, investment strategies and proceeds of municipal securities (including pension obligation bonds), the engineering exclusion, the bank exemption and the attorney exclusion. The original FAQs, which were issued on January 10, 2014, are included in the document released today. The date of each FAQ is at the end of the answer.

The BDA filed a comment letter with the SEC asking for them to summarily suspend the MSRB’s proposed rule change consisting of new rule A-11, on $300 assessments for municipal advisor professionals.

Specifically, the BDA asked the SEC to suspend the implementation of the new rule because the assessment is unduly burdensome for broker-dealers and would affect middle-market dealers disproportionately. Additionally, we asked that the MSRB perform a calculation as to how much money they anticipate collecting from the $300 assessment for municipal advisor professionals so that the MSRB can make a direct correlation between the money it collects and the money it spends on the costs and expenses of operating this wholly new municipal advisor regime. We believe that since MSRB will be using the additional monies from these assessments to create the municipal advisor regulatory regime, it should outline just how expensive this regulatory activity will be so that it correlates with the monies it collects from municipal advisors and would not take from the underwriter assessment fees it already collects from broker-dealer firms.

You can find the final letter here.

05-22-2014

Today, the BDA submitted a comment letter addressing MSRB Draft Rule G-3 on professional qualification requirements for municipal advisors.

Specifically, the letter addresses the following:

• All municipal finance professionals should have the same training;
• BDA suggested alternatives to the MSRB’s approach so as to alleviate some of our anticipated concerns;
• The rule, as proposed, would be prohibitively costly to the industry; and
• A suggested delay in implementation.

You can find the final comment letter here.

The NFMA Advanced Seminar Co-Chairs, Dan Berger and Chris Mauro, are forming their steering committee to plan the Fall 2014 Advanced Seminar on Municipal High Yield. The event will be held in Chicago, Illinois at The InterContinental Chicago Magnificent Mile from Thursday, October 23 through Friday, October 24, 2014.

Steering committee responsibilities include participating on regular conference calls (two or three times per month), reviewing panel ideas, and seeking qualified moderators and panelists. Each steering committee member will be responsible for organizing one panel. Participation on the steering committee neither guarantees nor requires participation as a speaker or moderator.

Interested parties should contact Dan Berger at [email protected] or Chris Mauro at [email protected] by Friday, May 30th. Please also include information on the sectors you cover or any relevant expertise relating to Municipal High Yield. Dan and Chris also invite all members to submit ideas for panel topics and/or speakers.

At the recent May meeting, the NABL Board of Directors selected the following members to participate on the 2014 Nominating Committee to select the nominees for the 2014-2015 Executive Committee and Board of Directors: Scott Lilienthal, Chair, Allen Robertson, Vice Chair, Antonio Martini, Carol McCoog, Deanna Gregory, Stefano Taverna, and Stephen Weyl.

NABL members are encouraged to submit nominees for Board positions to Linda Wyman, NABL COO, no later than Monday, June 16, 2014. Submissions should include a description of the nominee’s qualifications and past and current NABL committee and project participation. The Committee will consider all qualified nominations from the membership. The list of the current Board of Directors can be found here.

The candidates selected by the Nominating Committee for the 2014-2015 Executive Committee and Board of Directors will be sent to the membership by August 15, 2014, thirty days prior to the Annual Membership Meeting, in accordance with the NABL By-Laws. (Additional nominations from the floor are accepted only if provided in writing to the Chief Operating Officer and the President, not less than 14 days prior to the Annual Meeting.) The election will take place on Wednesday, September 17 during the 39th Bond Attorneys’ Workshop at the Fairmont Chicago.

Rule’s Implications When Hiring Municipal Advisors and Underwriters

The Securities and Exchange Commission (SEC) has given final approval to a rule which takes effect July 1, 2014, defining the term “municipal advisor” (MA), and has produced supplementary Frequently Asked Questions about the rule. The SEC Municipal Advisor Rule specifies activities which will be covered by the Dodd-Frank Act’s imposed fiduciary duty of a municipal advisor to its government client, may result in the need for underwriters to receive new written representations from issuers, and may limit the manner in which underwriters and other professionals interact with issuers. While the Rule does not regulate issuers directly, there are numerous indirect implications. The practical effect of the MA Rule on issuers is to limit the ability of underwriters to provide advice to issuers. However, a few exemptions to the Rule may apply, thus allowing underwriters to provide advice to issuers as described below. This alert seeks to assist governments in understanding key aspects of the Rule and how it will likely require modifications to how issuers interact with underwriters.

Regulating Municipal Advisors

The MA Rule, which regulates municipal advisors, places a fiduciary duty on those professionals that advise governments when they sell bonds. GFOA recommends that unless a government has sufficient internal expertise that it use a municipal advisor when considering and developing a bond transaction. Municipal advisors must also now be registered with the SEC and Municipal Securities Rulemaking Board (MSRB). Issuers can check the MSRB’s Municipal Advisor registration page to ensure their professionals are registered.

The MA Rule and Underwriters

The role of the underwriter is to sell bonds for the issuer. They do not have a fiduciary duty to the issuer. However, many investment banking firms have previously provided other services to their clients, including financing recommendations and advice on bond sales. The MA Rule states that only professionals with a fiduciary duty to the state or local government may provide advice, unless an exemption is in place. While investment bankers may continue to respond to RFPs, talk in general terms with issuers about general market information, and pitch products within certain limits, specific advice from investment bankers is prohibited unless certain exemptions apply. Below is a discussion of the exemptions along with model language that issuers may wish to use themselves, or may be sent to them from underwriters or other professionals.

The MA Rule and Investment of Bond Proceeds

Due to the SEC’s Municipal Advisor Rule and forthcoming MSRB rules, investment bankers may be considered municipal advisors if they provide advice on investments of bond proceeds to governments. Additionally, currently proposed MSRB rules may restrict the ability of municipal advisors to sell the products that they “recommended” as investments to their government clients. Investment bankers will be deemed to have made a “recommendation” when they advise their government clients to buy a particular security. Additionally, the underwriter may not provide advice related to the investment of bond proceeds unless; (1) the government issuer has in place a municipal advisor or an investment adviser, or (2) the underwriter is responding to the government’s request for proposal process regarding how to invest the bond proceeds. The SEC is expected to issue new MA Rule guidance to clarify whether or not broker recommendations on the investment of bond proceeds will be considered advice, and the MSRB is likely to further discuss this issue in their rulemaking. This document will be updated with this clarifying information.

Key Items Issuers Need to Know About the MA Rule

• “Municipal advisor” is defined as a person (not including a municipal entity or employee of a municipal entity) who provides advice to 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; or undertakes a solicitation of a municipal entity or an obligated person.
• The term “advice” is not specifically defined, but includes recommendations regarding municipal finance products or the issuance of municipal securities, including recommendations as to structure, timing, terms and other similar matters concerning such financial products or issues. Advice on the issuance of municipal securities encompasses advice given during the entire lifespan of the transaction, from earliest pre-planning stages through maturity or earlier redemption.
• In the past, issuers may have communicated with underwriters and banks about matters such as structure or timing of municipal securities or been pitched financing ideas, but such communications are likely to change upon the implementation of the MA Rule. Underwriters will not be able to provide advice to issuers unless certain exemptions apply.
• • Underwriters will be able to communicate with issuers about general market issues, facts and ideas. However, unless an exemption is met, underwriters cannot advise a government to take a specific action.
• There are exclusions and exemptions from the definition of municipal advisor that would allow freer communications between underwriters and issuers, but it is not yet clear how these exemptions will be satisfied. While there is some guidance about how the exemptions should apply, the interpretation of the Rule by compliance departments of individual underwriters may determine whether certain communications between the underwriter and an issuer are permitted.
• Issuers may still obtain advice on the investment of monies that are not bond proceeds or held in escrow to pay for bonds, but may be required to provide a written representation to their broker regarding the nature of such funds before such advice will be given.
• Exemptions from the definition of “municipal advisor” allow underwriters to provide advice to issuers in certain circumstances:

The Independent Municipal Advisor Exemption

An issuer may obtain advice from an underwriter when the issuer has retained an independent registered municipal advisor. The independent registered municipal advisor must not have been associated with the underwriter within the past two years. The issuer must represent in writing to the underwriter that it has retained and will rely on a municipal advisor for advice. The underwriter must have a reasonable basis for relying on the issuer’s representation. The municipal advisor may be hired for a specific deal for which the underwriter may be providing advice, or if a government hires a municipal advisor on a retainer basis, an underwriter may approach the issuer on any type of financing, as long as the issuer states in writing that it will rely on advice of its municipal advisor. Upon request, the issuer may send the representation to the underwriter directly, or post it on its web site. The GFOA recommends posting this language on the government’s website for efficient distribution and access by underwriters. It is important to note that the issuer remains in control of the scope of work it wishes to receive from its municipal advisor. GFOA discourages an underwriter from speaking with or sending materials directly to the issuer’s municipal advisor unless specifically authorized by the issuer . Additionally, for those entities that use multiple municipal advisors, suggested language is noted below for those circumstances.

Independent Municipal Advisor Exemption Language

[State or local government] has retained an independent registered municipal advisor. [State or local government] is represented by and will rely on its municipal advisor [Include name of firm here] [If desired, include name of advisor at the firm here] to provide advice on proposals from financial services firms concerning the issuance of municipal securities and municipal financial products (including investments of bond proceeds and escrow investments (if applicable) ). This certificate may be relied upon until (insert date). Proposals may be addressed to [State or local government] at ______________. If the proposal received will be seriously considered by [State of local government] the entity will share the document with its municipal advisor. Please note that aside from regulatorily mandated correspondence between an underwriter and municipal advisor, the underwriter should not speak directly with or send documents directly to the municipal advisor unless specifically directed to by the issuer.

Draft language for 2nd sentence to be used by larger entities – The [State or local government] uses several municipal advisors in its debt management program. To know which firm is being used for a particular credit, please contact the issuer at _______________, [or see below for the appropriate listing].

[If posted on the issuer’s website, add the following language at the beginning: By publicly posting the following written disclosure, [State or local government] intends that market participants receive and use it for purposes of the independent registered municipal advisor exemption to the SEC Municipal Advisor Rule.]

Issuer Uses RFP/RFQ Process/RFP Exemption

Underwriters responding to an RFP may include recommendations without violating the MA Rule. For this exemption to apply, the RFP may not be outstanding for more than six months and the issuer must widely distribute the RFP to at least three reasonably competitive firms or post it on their web site. The GFOA recommends that the RFP be posted on a government’s web site to ensure wide distribution. If an issuer uses a pool of underwriters from which it chooses underwriters for a particular transaction, the issuer may have to issue a mini-RFP to receive advice from members of its underwriting pool. Issuers may be asked to provide – or may provide on their own – a disclaimer that they their RFP process is in line with the MA Rule, as noted here:

Issuer Uses RFP/RFQ Process/RFP Exemption Language

[State or local government] is aware of the “Municipal Advisor Rule” of the Securities and Exchange Commission (effective July 1, 2014) and the RFP/RFQ exemption from the definition of “municipal advisor” for a person providing “advice”. In response to an RFP/RFQ, [State or local government] hereby notifies [all] [certain designated] investment banking firms that it wishes them to provide advice and recommendations on [insert description of particular objectives concerning the issuance of municipal securities and/or municipal financial products (as such terms are defined in the Municipal Advisor Rule)]. [State or local government] intends for such advice and recommendations to qualify for the RFP/RFQ exemption. The advice and recommendations may be made orally or in writing. [State or local government] reserves the right to accept or reject any proposals submitted to it and to conduct a formal procurement process, in each case if deemed by [State or local government] to be in its best interests and to comply with applicable laws or procurement policies. This RFP/RFQ is open from _________ to [insert date no later than six months after the first date or, in the case of mini RFPs, a date that is no later than 3 months after the first date]. [State or local government] understands that by responding to this RFP/RFQ, respondents are not municipal advisors to [State or local government]. [If not posting publicly, add the following language: This RFP/RFQ is being sent to [a least three investment banking firms] [the entire pool of firms].
Underwriter is Selected for a Transaction/Letter of Intent

Upon selection of an underwriter for a specific transaction (GFOA recommends selecting underwriters through a competitive RFP process), the GFOA recommends issuing a “letter of intent”, which will allow the underwriter to more freely discuss the transaction as its being developed. Model language for this exemption is suggested as followed:

Underwriter is Selected for a Transaction/Letter of Intent Language

[State or local government] is aware of the “Municipal Advisor Rule” of the Securities and Exchange Commission (effective July 1, 2014) and the underwriter exclusion from the definition of “municipal advisor” for a firm serving as an underwriter for a particular issuance of municipal securities.

[State or local government] hereby designates [Underwriter] as an underwriter for [brief description of the Bonds] (the “Bonds”) that [State or local government/Conduit Issuer/Obligated Person] currently anticipates issuing. [State or local government] expects that [Underwriter] will provide advice to [State or local government] on the structure, timing, terms, and other matters concerning the Bonds.

It is [State or local government’s] intent that [Underwriter] serve as an underwriter for the Bonds, subject to satisfying applicable procurement laws or policies, formal approval by [governing body/issuer], finalizing the structure of the Bonds and executing a bond purchase agreement. While [State or local government] presently engages [Underwriter] as the underwriter for the Bonds, this engagement letter is preliminary, nonbinding and may be terminated at any time by [State or local government] without penalty or liability for any costs incurred by the underwriter, or [Underwriter]. Furthermore, this engagement letter does not restrict [State or local government] from entering into the proposed municipal securities transaction with any other underwriters or selecting an underwriting syndicate that does not include [Underwriter].

________________________
[Underwriter]

________________________
[[State or local government] duly authorized official responsible for public finance]

Resources

• SEC Municipal Advisor Rule
• SEC MA Rule Frequently Asked Questions 1/16/14
• GFOA Issue Brief: SEC Municipal Advisor Rule
• GFOA Best Practice, Selecting and Managing the Engagement of Municipal Advisors (2014)
• GFOA Best Practice, Selecting and Managing the Engagement of Underwriters for Negotiated Bond Sales (2014)
• GFOA Best Practice, Selecting and Managing the Method of Sale of State and Local Government Bonds (2014)
• GFOA Best Practice, Investment of Bond Proceeds (2013)

Wednesday, May 14, 2014

The SEC approved amendments to FINRA Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) to expand the circumstances in which termination fees and rights of first refusal are permissible; exempt from the filing requirements certain collective investment vehicles that are not registered as investment companies; and make clarifying, nonsubstantive changes regarding documents filed through FINRA’s electronic filing system. The amendments become effective May 15, 2014.

Effective Date: May 15, 2014

Questions concerning this Notice should be directed to:

• Paul Mathews, Vice President, Corporate Financing, at (240) 386-4623;
• James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270;
• Kathryn M. Moore, Associate General Counsel, OGC, at (202) 728-8200.

In the next step of the MSRB’s regulatory framework for municipal advisors, it plans to request comment on extending the MSRB’s pay-to-play rule for dealers to include municipal advisors. MSRB Rule G-37 has played a central role in curbing the use of political contributions to secure municipal securities business for two decades. At its April meeting, the MSRB Board agreed that extending these provisions to municipal advisors would help prevent quid pro quo political corruption, and the appearance of it, in public contracting for both dealers and municipal advisors.

In other municipal advisor news, the MSRB is revising its draft Rule G-42 on core standards of conduct for municipal advisors. The revisions seek to clarify and respond to concerns raised by commenters on the rule, including those regarding the treatment of principal transactions. The MSRB will continue to consider the comments received on draft Rule G-42 and will announce next steps soon.

The MSRB is moving forward with establishing the first-ever “best-execution” standard for transactions in the municipal market. At its April 2014 meeting, the MSRB Board of Directors agreed to seek approval from the Securities and Exchange Commission on a rule to require dealers to use “reasonable diligence” when handling and executing municipal securities trades for retail investors. The rule aims to improve pricing for retail investors by ensuring dealers have appropriate procedures in place to achieve a price that is as favorable as possible under prevailing market conditions. The rulemaking process is ongoing. Read the draft best execution rule from February 2014.

The MSRB also is advancing three initiatives to enhance price transparency for municipal securities investors on its Electronic Municipal Market Access (EMMA®) website. The MSRB plans to:

• Introduce a “price discovery tool” on EMMA that will allow investors to easily find and compare prices of municipal securities with similar characteristics and provide a graphical view of historical pricing
• Develop a concept release on the presentation of market information to aid investors in assessing markups or markdowns on their transactions
• Expand the pricing-related data available on EMMA by developing a proposed framework for collecting additional post-trade information for public display and exploring an approach for collecting and disseminating relevant, selected pre-trade data
• These developments will be introduced in the coming months.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to consolidate municipal securities dealers’ existing fair-pricing obligations into a single rule, facilitating dealer compliance with a fundamental investor protection regulation. This action is part of a larger, multi-year initiative that the MSRB has underway to review and streamline its Rule Book.

 Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) published guidance to assist municipal advisors with understanding changes to the MSRB’s registration process taking effect today. The guidance seeks to clarify that these changes are separate and apart from the Securities and Exchange Commission’s transition to a permanent registration regime for municipal advisors.

A California appeals court ruled last month that emails and other forms of electronic communication about public business are not subject to the state’s Public Records Act if they’re conducted on a private computer or device. But the decision’s impact on government transparency policies may cause aftershocks well beyond the Golden State’s borders.

NEW YORK (Reuters) – A state appeals court on Thursday denied Citigroup Inc’s bid to dismiss a fraud claim in a lawsuit stemming from nearly $1 billion of collateralized debt obligations.

New York, NY, May 7, 2014 – SIFMA today announced that it has finalized its model documents and related guidance to help brokers, dealers and other financial institutions serve their clients and comply with the new regulatory requirements created by the SEC’s Municipal Advisor Rule.  The documents are available atwww.sifma.org/MAForms.

“We released the draft documents last month in an effort to help our members comply with this new rule,” said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s municipal securities division.  “We would like to thank the industry for its review and thoughtful comments on the drafts.”

The SEC’s Municipal Advisor Rule imposes a registration regime upon municipal advisors, i.e., firms that give advice absent an exemption or exclusion to municipal entities and obligated persons, and imposes a fiduciary duty upon municipal advisors that give advice to municipal entities.  MSRB rulemaking will impose additional requirements and prohibitions on the conduct of municipal advisors.

SIFMA’s model disclosures are designed to be a starting point to aid firms with serving their clients and compliance with the SEC’s Municipal Advisor Rule; however, close attention must be paid to the specific language used, as the Rule and the SEC’s interpretive guidance is very specific as to what is required for compliance with certain exemptions or exclusions.  SIFMA encourages firms to modify these documents as necessary to reflect their own analysis of the Rule or the specifics of particular client relationships or transactions.

SIFMA also recommends that firms update their internal policies and procedures and continue to educate their personnel about this new regulatory requirement ahead of the Municipal Advisor Rule’s July 1 effective date.

SIFMA will also host a seminar and webinar titled “Muni Advisor Regulation – Implementation and Registration” on May 9, 2014 in New York City. The seminar will provide an in-depth discussion on the regulatory framework and outlook for municipal advisors and other firms potentially covered by this rule.

The program will begin with an introduction and launch of SIFMA’s Municipal Advisor Model Documents, followed by three consecutive panel discussions:  Municipal Advisor Regulation, with panelists from the SEC, FINRA and the MSRB; Municipal Advisor Registration Rule Implementation – Underwriting; and Municipal Advisor Registration Rule Implementation – Asset Management and Bond Proceeds. The seminar will conclude with a presentation from featured speaker Lanny Schwartz, Partner at Davis Polk & Wardwell LLP, who will cover specific practical tips and potential issues with respect to the filing of the Form MA. Filing deadlines and differences with the Form BD will be highlighted. Issuers can register for the event for free.  Please click here to view more information on the conference: http://www.sifma.org/munireg2014/program/

Alexandria, VA– In conjunction with the Securities and Exchange Commission Historical Society, the Municipal Securities Rulemaking Board (MSRB) is inviting submissions to a writing competition on municipal securities regulation sponsored by the Society. The winning essay will be part of the Society’s Gallery on Municipal Securities Regulation, opening in 2015.

The writing competition is open to all visitors to the Society’s virtual museum and archive at www.sechistorical.org. The writing award will recognize an essay on any area of municipal securities regulation and will become part of the MSRB’s gallery, opening December 1, 2015. The MSRB will celebrate its 40th anniversary in 2015.

The award recipient will receive a $5,000 prize. The submission deadline for essays is December 31, 2014. View complete entry guidelines.

The SEC Historical Society shares, preserves and advances knowledge of the history of financial regulation. The Society is a 501(c)(3) non-profit organization, independent of and separate from the U.S. Securities and Exchange Commission.

With seemingly daily news about the Securities and Exchange Commission cracking down on advisory firms for wrongdoing, here’s a list of five top issues and lessons learned from recent regulatory actions.

Alexandria, VA – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting April 30 – May 2, 2014, where it advanced several initiatives to improve the structure, efficiency and transparency of the municipal securities market. The Board also continued to develop a regulatory framework for municipal advisors, agreeing to propose extending its landmark pay-to-play rule to municipal advisors, among other actions.

California’s political watchdog is investigating whether school officials failed to report gifts from municipal bond underwriter Stone & Youngberg, now a unit of Stifel Financial Corp.

On March 10, 2014, the Enforcement Division of the Securities and Exchange Commission (SEC) announced  the Municipalities Continuing Disclosure Cooperation Initiative (MCDC) – an offer for municipal issuers and their underwriters to turn themselves (and others) in now for certain potential violations of the securities laws in exchange for lighter punishments, in contrast to harsh penalties threatened for those caught after the September 9, 2014 deadline. The offer extends only to potential violations of the antifraud rules made in an Official Statement regarding the issuer’s past compliance with continuing disclosure agreements and not to other violations of the antifraud provisions. The scope of transactions potentially covered by the MCDC is extensive and the terms provided in SEC materials raise many questions. The chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit, LeeAnn Gaunt, and her deputy Mark Zehner provided additional insight into MCDC in response to questioning during recent panels chaired by Paul Maco, one of the authors of this Alert. That insight is incorporated into this Alert.

BDA submits comment letter to the MSRB on Draft Rule G-44, on Supervisory and Compliance Obligations of Municipal Advisors.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested public comment on a proposal to establish qualification requirements for municipal advisor professionals. The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing professional standards for municipal advisors to enhance protections for state and local governments.

“The creation of a professional qualifications program for municipal advisors is a key step toward safeguarding the interests of state and local governments that engage the services of municipal advisors,” said MSRB Executive Director Lynnette Kelly. “Individuals entrusted with providing financial advice to state and local governments will be required to demonstrate both an understanding of the business and regulatory requirements.”

The MSRB’s proposal would amend its existing rule on qualification requirements for personnel of municipal securities dealers to incorporate requirements for municipal advisor professionals. The draft amendments to MSRB Rule G-3 add registration classifications for municipal advisors to distinguish between those who engage in municipal advisory activities—municipal advisor representatives—and those who engage in their management, direction or supervision—municipal advisor principals.

Under the draft amendments to Rule G-3, municipal advisor representatives would be required to take and pass a professional qualification test to demonstrate a minimum level of competency before providing or continuing to provide financial advisory services to state and local governments. The MSRB is proposing a one-year grace period for all individuals currently engaged in municipal advisory activities to take and pass the test.

“Given the significant changes that accompany a new regulatory regime, the MSRB believes it is important for all municipal advisor representatives, regardless of their years of experience or other certifications, to take the exam,” Kelly said.

Next steps in the development of the test include a survey of municipal advisors on their core activities to further inform the MSRB on the areas to be tested and the preparation of a study outline, which will be filed with the Securities and Exchange Commission (SEC). The MSRB anticipates implementing a pilot exam in 2015.

The MSRB earlier this year requested comment on a proposal to establish core standards of conduct for municipal advisors and supervisory and compliance obligations. Future MSRB rule proposals for municipal advisors will include measures to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of municipal advisors acting as solicitors. The MSRB also plans to implement a per-professional fee of $300 for municipal advisors to begin to fairly distribute assessments across all regulated entities.

While the majority of the draft amendments to MSRB Rule G-3 are targeted toward municipal advisors, the MSRB also proposes to eliminate the practice of apprenticeship, which required municipal securities representatives to shadow an experienced professional for 90 days before conducting business with the public. This change aligns with trends in other regulatory regimes toward allowing firms to identify appropriate training and supervision for new employees.

Comments on the draft amendments should be submitted to the MSRB no later than May 16, 2014. The MSRB is hosting an educational webinar on the main aspects of the municipal advisor professional qualification requirements on April 3, 2014 at 3:00 p.m. ET. Register for the webinar.

The U.S. securities industry says that it supports a move to reduce systemic risk and enhance efficiency by shortening the settlement cycle to T+2 from T+3.

A new rule tries to keep muni market players from getting too friendly.

The Beatles let us know that we all “get by with a little help from our friends.” Those nine words from the Awesome Foursome capture the essence of the American municipal bond market. Some new developments, however, could redefine how friends help state and local governments get by in the muni market.

Scores of trades in bonds Puerto Rico issued this month have been canceled by dealers, including some that were under the $100,000 minimum transaction level stipulated in deal documents, data compiled by Bloomberg show.

Executive Summary

FINRA is updating the imbedded text of Securities Exchange Act (SEA) financial responsibility rules in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the SEC adopted. The updated imbedded text relates to SEA Rules 15c3-1, 15c3-3, 15c3-3a, 17a-3 and 17a-4.

Questions concerning this Notice should be directed to:

• Yui Chan, Managing Director, Risk Oversight and Operational Regulation (ROOR), at (646) 315-8426; or
• Susan DeMando Scott, Associate Vice President, ROOR, at (240) 386-4620.

The Financial Industry Regulatory Authority said it’s examining trading in the $3.5 billion of general-obligations that Puerto Rico sold this month.

This week, the National Association of Bond Lawyers (NABL) submitted comments to the Municipal Securities Rulemaking Board (MSRB) on MSRB Notice 2014-01, related to draft MSRB Rule G-42, on standards of conduct and duties of municipal advisors when engaging in municipal advisory activities other than the undertaking of solicitations. In the comments, NABL urged that “careful consideration be given to the precise language used” in the final rule “to insure that municipal advisors are clearly informed of their duties and not unduly burdened, and that the choices available to municipal entities and obligated persons in engaging municipal advisors are not inadvertently or unduly limited.”

The comments were prepared by an ad hoc subcommittee of the NABL Securities Law and Disclosure Committee and can be seen here.

(Reuters) – A proposal by Wall Street’s industry-funded watchdog to ramp up oversight of securities brokerages could expose clearing firms to more enforcement actions and lawsuits, lawyers say.

The Financial Industry Regulatory Authority has said it wants to review, on a continuous basis, vast quantities of data from the clearing firms that brokerages hire to settle customers’ buy and sell orders.

But some clearing firms are raising concerns that the fledgling plan could ensnare them in legal hassles. As the data flows from brokerages to FINRA, the clearing firms could be held accountable for malfeasance buried in that information, they say. For example, FINRA could question why a clearing firm did not spot that a brokerage customer was laundering money.

“The clearing firm should not become another supervisor,” said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association, a trade group representing clearing firms as well as retail brokerages. SIFMA plans to voice its concerns in a letter this month.

Consumer investor lawyers agree that the proposed system could make clearing firms bear more responsibility for errant behavior. “For decades, clearing firms have buried their heads in the sand, saying they don’t have responsibilities for anyone,” said Andrew Stoltmann, a Chicago lawyer who represents investors. “I think that defies common sense.”

A FINRA spokesman declined to comment.

FINRA announced the plan, known as the Comprehensive Automated Risk Data System, or CARDS, in December, but recently extended the deadline for public input to March 21. The system could take years to put in place, as FINRA would have to develop a more formal proposal and get approval from the U.S. Securities and Exchange Commission.

The watchdog is exploring the idea as financial regulators try to expand their presence by mining data. The SEC, for example, has recently announced efforts to crunch trading data to detect insider trading and other illegal activity.

BIG DATA

FINRA already receives some data from clearing firms for its brokerage examinations, but they provide it voluntarily and often upon request, the regulator has said. For example, examiners may ask for data about trades in a certain security.

CARDS, however, would require clearing firms to be a pipeline for an “unprecedented” combination of data, said Joan Schwartz, chief legal officer of Bank of New York Mellon Corp’s Pershing LLC unit.

Clearing firms like Pershing would have to transmit an ongoing stream of data to FINRA about everything from securities transactions and asset movements to customers’ risk tolerances and time lines. At Pershing alone, those responsibilities would apply to millions of brokerage accounts.

FINRA recently said it would not require clearing firms to submit details, such as names and Social Security numbers, that would identify specific brokerage customers.

Nor will FINRA hold clearing firms responsible for the accuracy of the data, according to its plan, but that protection is limited, said Irwin Pronin, a New York lawyer who advises clearing firms. More risks could come later if the regulator looks back and says a clearing firm turned a blind eye to brokerage misbehavior revealed in its data, Pronin said.

Daniel Nathan, a Washington lawyer who advises brokerages on regulatory issues, said the plan could make clearing firms vulnerable to fines and other sanctions. The proposed system “will have the effect of dumping into FINRA’s lap a treasure trove of potential evidence” that could show what a clearing firm might have known about the brokerage firm’s activities, he said.

To be sure, FINRA requires brokerages and clearing firms to sign agreements that lay out which entities are liable for certain responsibilities. For example, retail brokerages are responsible for opening customers’ accounts and recommending securities that are in sync with their goals.

But even that may not be an ironclad defense. Pershing’s Schwartz, who is also vice chair of SIFMA’s clearing firm committee, pointed to a December enforcement case in which FINRA described a clearing firm as a “gatekeeper to the securities markets.” The term could signal a change in regulators’ expectations for these firms, Schwartz said.

“We’re generally concerned about the erosion of this concept that we’re 10 steps removed,” Schwartz said.

LITIGATION

FINRA’s proposal follows a spate of lawsuits and securities arbitration cases against clearing firms by investors.

Some cases were filed when an investor’s brokerage goes out of business, often because of a fraud. Others may involve brokerages that cannot make good on losses in a risky security. Pursuing the clearing firm may be the only way for investors to recoup money, lawyers say.

These are tough cases to win, but investors have sometimes prevailed. In 2010, creditors of Bayou Group LLC scored a $20.6 million arbitration award against a Goldman Sachs Group Inc unit that cleared the hedge fund’s trades. Bayou, which was bankrupt, turned out to be a Ponzi scheme.

The case hinged on Goldman’s ignoring data about the hedge fund’s losses, said Ross Intelisano, a New York lawyer who represented the creditors.

Goldman lost two efforts to overturn the ruling. A Goldman spokeswoman declined to comment.

In another case, a group of athletes filed a multimillion-dollar arbitration against Pershing last year, saying the clearing firm should have detected that private investments their adviser recommended in a failed casino project were fraudulent. The case is pending, and Pershing declined to comment.

At least several arbitration cases against other clearing firms were settled last year, according to a FINRA database.

BY SUZANNE BARLYN

March 18 Tue Mar 18, 2014 11:09am EDT

Prepared by BDA member firm Lumesis Inc., this paper focuses on the content and nuances of the new rules around time of trade disclosure, the amended rule regarding suitability and explores how technological innovation has and will impact compliance and business practices

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested public comment on a proposal to establish qualification requirements for municipal advisor professionals. The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing professional standards for municipal advisors to enhance protections for state and local governments.

“The creation of a professional qualifications program for municipal advisors is a key step toward safeguarding the interests of state and local governments that engage the services of municipal advisors,” said MSRB Executive Director Lynnette Kelly. “Individuals entrusted with providing financial advice to state and local governments will be required to demonstrate both an understanding of the business and regulatory requirements.”

The MSRB’s proposal would amend its existing rule on qualification requirements for personnel of municipal securities dealers to incorporate requirements for municipal advisor professionals. The draft amendments to MSRB Rule G-3 add registration classifications for municipal advisors to distinguish between those who engage in municipal advisory activities—municipal advisor representatives—and those who engage in their management, direction or supervision—municipal advisor principals.

Under the draft amendments to Rule G-3, municipal advisor representatives would be required to take and pass a professional qualification test to demonstrate a minimum level of competency before providing or continuing to provide financial advisory services to state and local governments. The MSRB is proposing a one-year grace period for all individuals currently engaged in municipal advisory activities to take and pass the test.

“Given the significant changes that accompany a new regulatory regime, the MSRB believes it is important for all municipal advisor representatives, regardless of their years of experience or other certifications, to take the exam,” Kelly said.

Next steps in the development of the test include a survey of municipal advisors on their core activities to further inform the MSRB on the areas to be tested and the preparation of a study outline, which will be filed with the Securities and Exchange Commission (SEC). The MSRB anticipates implementing a pilot exam in 2015.

The MSRB earlier this year requested comment on a proposal to establish core standards of conduct for municipal advisors and supervisory and compliance obligations. Future MSRB rule proposals for municipal advisors will include measures to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of municipal advisors acting as solicitors. The MSRB also plans to implement a per-professional fee of $300 for municipal advisors to begin to fairly distribute assessments across all regulated entities.

While the majority of the draft amendments to MSRB Rule G-3 are targeted toward municipal advisors, the MSRB also proposes to eliminate the practice of apprenticeship, which required municipal securities representatives to shadow an experienced professional for 90 days before conducting business with the public. This change aligns with trends in other regulatory regimes toward allowing firms to identify appropriate training and supervision for new employees.

Comments on the draft amendments should be submitted to the MSRB no later than May 16, 2014. The MSRB is hosting an educational webinar on the main aspects of the municipal advisor professional qualification requirements on April 3, 2014 at 3:00 p.m. ET. Register for the webinar.

Melissa Gainor, senior counsel at the SEC’s Investment Adviser Regulation Office, explained that the commission isn’t envisioning a complete rewrite of its rules to account for the increasing use of social media within advisory practices. In remarks during a panel discussion at the Investment Adviser Association’s compliance conference, Gainor explained that advisors will be expected to keep records about the content they post on social sites just as they do with other materials on traditional channels.

“Broadly, firms that communicate through social media must retain records of those communications covered by the record-keeping rule. It’s really the content that’s determinative rather than the form of communication used,” Gainor said.

SEC GUIDANCE

Similarly, she noted that the SEC’s advertising rule has been interpreted broadly in the past, and much of the guidance for promotional materials will carry over to the use of online tools like blogs, Facebook, Twitter and LinkedIn.

“Generally it doesn’t depend on the type of technology or device used,” she said.

The SEC has produced guidance directly addressing the use of social media within the practice, but for compliance experts like Michael Sherman, a partner with the firm Dechert LLP, the area remains distressingly vague. The proliferation of social tools — and the freewheeling nature of comments on the Web — has introduced considerable uncertainty into areas like endorsements and testimonials, a confusion that the SEC could address with more detailed examples in its guidance.

“It’s as though we got flying cars but we never revised the rules of the road for highways,” Sherman said.

Incorporating social media into the practice has been the subject of considerable debate in advisor circles in recent years. Consensus has been in short supply, but advisors are increasingly coming to believe that as they pursue a younger generation of clients, it’s no longer a viable strategy for firms simply to have in place a policy “saying don’t use it,” according to John Thomas, Jr., managing director at BNY Mellon Asset Management.

“They have to have a presence,” Thomas said.

And there are a number of third-party tools such as PageFreezer, Socialware and Smarsh to help firms in regulated industries remain compliant, offering on-demand services like archiving and monitoring.

SETTING BOUNDARIES

Even with the aid of those services, compliance professionals say that they still need to set boundaries on what advisors can use within their practice. Marla Roeser, director of compliance and risk management with Convergent Wealth Advisors, suggested that it’s a simpler exercise to keep a white list of social sites advisors can use rather than try to maintain a roster of sites that are off limits at a time when new social tools and applications are sprouting like weeds.

“Instead of prohibiting certain sites, I would list the sites that they’re authorized to use,” she said. “You have to have the resources to monitor this activity. You have to be prepared for that.”

In Convergent’s case, that leaves just LinkedIn and Twitter available for use inside the practice, but even limiting usage just to those two, Roeser still has to navigate how the content that her firm’s advisors are pushing out meshes with the SEC’s rules.

Gainor acknowledged that a risk alert on social media that the SEC’s Office of Compliance Inspections and Examinations issued left considerable gray areas, and said that the commission’s work in that area had been slowed by its push to enact regulations under the JOBS Act (which also touched on social media, but in a different context). In the meantime, in the absence of more explicit guidance, the SEC still expects RIAs to be diligent in monitoring the content they publish on social sites.

“One of the things that you need to consider when you’re developing your compliance policies and procedures is your ability to monitor,” Gainor said. “If you don’t have the ability to monitor, it begs the question as to how broad you can allow social media use.”

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to consolidate extensive interpretive guidance on the fair-practice obligations of municipal securities dealers into three new rules and amendments to an existing rule. The MSRB will establish rules focused on time-of-trade disclosures to investors, dealers’ dealings with sophisticated municipal market professionals and suitability of dealers’ recommendations of municipal securities transactions.

“As part of the MSRB’s ongoing efforts to enhance regulatory efficiency, the MSRB examined the many interpretations that have been issued primarily under MSRB Rule G-17, its central fair dealing rule, and identified opportunities to better facilitate compliance,” said MSRB Executive Director Lynnette Kelly. “Creating stand-alone rules on key principles of fair dealing serves to highlight their importance and ensure that dealers understand and comply with these obligations.”

The MSRB will codify into a new MSRB Rule G-47 the existing requirement under Rule G-17 that municipal securities dealers disclose material information to customers, at or prior to the time of the municipal securities trade. The new time-of-trade disclosure rule does not substantively change the current obligations, but rather seeks to aid dealers and other market participants in understanding, complying with and enforcing these obligations.

The MSRB also will establish two new rules to consolidate guidance for municipal securities dealers who deal with experienced investors called sophisticated municipal market professionals (SMMPs). MSRB Rule D-15 defines an SMMP and Rule G‑48 provides the regulatory obligations of dealers to SMMPs, underscoring the differences in dealers’ obligations to the more sophisticated professionals in the market.

Additionally, the MSRB revised MSRB Rule G-19 on suitability to more closely align with the Financial Industry Regulatory Authority’s (FINRA) suitability provisions and consolidate existing MSRB interpretive guidance on the subject. The revised rule makes clear the specific factors that dealers must consider when recommending a transaction or investment strategy to municipal securities investors.

The new and revised rules will take effect July 5, 2014. Related interpretive guidance on these principles will be removed from the MSRB’s Rule Book, but will be archived and available for review on the MSRB’s website here.

WASHINGTON — The Securities and Exchange Commission on Monday launched an effort to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

Under the Municipalities Continuing Disclosure Cooperation Initiative, the SEC’s Enforcement Division’s Municipal Securities and Public Pension unit will recommend favorable settlement terms for muni issuers and underwriters who voluntarily report that there were inaccurate statements in bond documents about their prior compliance with continuing disclosure obligations. Rule 15c2-12 of the Securities Exchange Act of 1934 requires underwriters to reasonably determine that an issuer will comply with its continuing disclosure agreement before underwriting any new municipal securities. The rule also requires new offering documents to include descriptions of any continuing disclosure violations in the past five years.

“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the Enforcement Division. “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative. Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”

The SEC has repeatedly indicated it is paying stricter attention to whether issuers are living up to their disclosure agreements and whether underwriters are doing their due diligence in making sure of that. Last year an SEC probe examined underwriters in California, and a July 2013 enforcement action targeted both West Clark Community Schools in Clark County, Ind. and Indianapolis-based City Securities Corp. with falsely claiming in bond documents that the issuer was meeting its secondary market disclosure obligations when it was not.

“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit. “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”

Bond Dealers of America president and chief executive officer Mike Nicholas said the SEC goal is sound but the details of the new program will have to be carefully examined.

“The BDA supports the SEC’s goal toward self-reporting of violations to the extent an obvious violation of the securities law has occurred,” Nicholas said. “We caution that there may be disproportionate administrative, reporting and other burdens on underwriters via the settlement obligation requirements and we will be examining those in more detail in the coming days.”

Ben Watkins, Florida’s bond finance director and the chair of the Government Finance Officers Association’s debt management committee, said the new program isn’t likely to provide much incentive for issuers to step forward.

“I don’t see it,” Watkins said, adding that issuers would probably end up with a cease-and-desist order whether they self-report or get caught by SEC investigators.

John McNally, a lawyer at Hawkins, Delafield & Wood LLP, said the SEC’s announcement underscores a point the commission has already made. McNally said that the investigations currently being done by underwriters of an issuer’s filing history are very comprehensive, and pointed out that the SEC issued a release in June 2010 warning underwriters that they should be diligent about looking into an issuer’s filing history. The West Clark case made issuers sit up and take notice as well, McNally said.

“The SEC has already advised issuers and underwriters of their concerns, and all parties are paying careful attention to such advice,” he said.

BY KYLE GLAZIER
MAR 10, 2014 2:28pm ET

WASHINGTON — The Municipal Securities Rulemaking Board’s proposed standards of conduct for municipal advisors would unnecessarily prevent banks from providing normal banking services as well as muni advice, the American Bankers Association is warning.

The ABA raised the concerns in one of more than 12 comment letters filed prior to Monday’s deadline to provide input on the MSRB’s proposed Rule G-42, called “Duties of Non-Solicitor Municipal Advisors.”

The proposed rule codifies the language of the Dodd-Frank Act and the Securities and Exchange Commission’s registration rule for MAs, which impose a fiduciary duty on them to put their client’s interest first before their own. The draft rule says MAs owe both a duty of loyalty and a duty of care to their municipal entity clients. It would prohibit MAs and their affiliates from engaging in any other transaction in a principal capacity with a client, which some market participants read as barring MAs from engaging in any non-fiduciary business relationship running concurrent to the municipal advisory agreement.

“Draft Rule G-42 would prohibit a municipal advisor and any of its affiliates from acting as principal in any transaction with entities or obligated persons,” wrote ABA vice president and senior counsel Cristeena Naser. “We believe that the proposed complete prohibition is far too blunt an instrument to address any concerns the MSRB may have regarding principal transactions.”

“Such a ban would also force banking organizations’ municipal entity customers and obligated persons to decide to choose between receiving covered municipal advice or banking products and services from their banks, because banks would not be permitted to provide both,” her letter adds.

The ABA letter points out that other regulatory regimes imposing a fiduciary standard do not have similar requirements. Naser conceded that a ban on principal transactions might work in the case of firms that provide only MA services, but would be very disruptive to advisors with banking affiliates.

“Although a complete ban on principal transactions by affiliates might be feasible in the case of stand-alone advisors, it is entirely unreasonable and impractical in the context of the structure of the banking industry. Such a prohibition would necessarily force a banking organization to assess the value of providing advisory services to municipal entities and obligated persons as compared to the value of providing all other products and services to municipal entities and obligated persons.”

Leslie Norwood, associate general counsel and co-head of the municipal securities group at the Securities Industry and Financial Markets Association, called the prohibition on acting as a principal in other transactions “unworkable.”

“We support the MSRB’s effort,” Norwood said. “We oppose the blanket prohibition on principal transactions.

Susan Collet, senior vice president of government relations at the Bond Dealers of America, said the MSRB proposal and its ban on principal transactions is confusing in light of recent SEC guidance, which stated that an underwriting firm acting as an MA can not switch roles to underwrite bonds on the same transaction.

“The MSRB has an important opportunity with G-42 to add clarity to the framework created under the SEC municipal advisor rule,” Collet said. “The two rules need to work together, yet the proposed G-42 language on principal transactions makes very confusing something that the SEC rule made clear: the scope of a prohibition on ‘role switching’ is limited to the specific issuance or transaction for which a municipal advisor is engaged.”

The National Association of Independent Finance Advisors expressed support for the rule and its letter, signed by NAIPFA president Jeanine Rodgers Caruso, said the ban on principal transactions is appropriate but should be further clarified in any final rule. However, rule goes too far in some areas, such as the proposal to require MAs to disclose the scope and size of any professional liability insurance they carry, NAIPFA said. That proposal would put smaller firms at a competitive disadvantage since larger firms and those affiliated with broker-dealers would certainly carry larger and more expensive policies, she said.

“NAIPFA would welcome a revised provision that states in effect that municipal advisors must truthfully disclose, upon request, information related to any professional liability insurance maintained,” Rodgers Caruso wrote.

Another point of contention for commenters was the MSRB’s request for comment on whether the rule should impose a fiduciary duty on “obligated persons” such as conduit borrowers. The law explicitly places the fiduciary duty on MAs only with respect to municipal entities, which are issuers but not conduit borrowers. The draft of G-42 proposes a lesser duty of care for clients that are not municipal entities. NAIPFA said it would be supportive of such a measure, but the ABA and SIFMA both said that the MSRB should not impose a fiduciary standard on MAs providing advice to any client other than a municipal entity.

Illinois Finance Authority vice president and president of the National Association of Health and Educational Facilities Finance Authorities Pamela Lenane said many conduit issuers retain advisors who may also provide advice to municipal entities, and that the current system is efficient and should not be interfered with by the new rule.

“The association respectfully submits that imposing a fiduciary duty (whether implicitly or explicitly) on a municipal advisor that provides advice to an obligated person is contrary to the specific legislative intent expressed in the Dodd-Frank Act and unnecessarily complicates a municipal advisor’s role in conduit financings,” NAHEFFA said in its letter. The group, which represents certain conduit issuers, said the MSRB should clarify the differences between the duty of loyalty owed to municipal entities and the duty of care owed to other clients and perhaps create a separate rule governing the conduct of MAs with “obligated persons,” meaning conduit borrowers. The MSRB could also clarify how the duties of MAs would apply to a conduit borrower in cases where the borrower retains its own MA in addition to the MA retained by the municipal entity issuing the bonds.

The American Council of Engineering Companies is also seeking clarification from the MSRB for any engineers who might find themselves ensnared by the regime. The SEC rule sought to provide an exemption for engineers providing normal engineering advice to municipalities, but some firms remain concerned that services such as feasibility studies evaluating the financial potential of a toll road or other revenue-producing asset could have to register as an MA. The group pointed out that engineers are already heavily regulated at the state level owe a high ethical duty to the public.

The MSRB must seek final approval from the SEC before any rule could take effect.

BY KYLE GLAZIER
MAR 10, 2014 4:36pm ET

The SEC today announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected. Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12.

To be eligible for the MCDC Initiative, an issuer or underwriter must self-report by accurately completing a questionnaire and submitting it by 12:00 a.m. EST, September 10, 2014.

A detailed description of the initiative is available here.

The questionnaire is available here.

A press release concerning the initiative is available here.

Yesterday, BDA members and staff met with the MSRB and the SEC’s Office of Municipal Securities to discuss ongoing concerns and further clarifications with the SEC’s Final Municipal Advisor Rule as well as the MSRB’s approach to their regulatory regime for municipal advisors.

Meeting with the MSRB

BDA members primarily discussed concerns with MSRB proposed Rule G-42 on duties of non-solicitor municipal advisors. Specifically, we discussed the following items:

• Principal Transactions – We expressed our concern that the language contained in proposed Rule G-42 creates a potentially unworkable paradigm, which may cause an underwriter to be precluded from certain principal transactions by inadvertently becoming a municipal advisor;
• Obligated Persons – The BDA believes MSRB’s Rule G-17 on fair dealing protects obligated persons in a sufficient manner while recognizing that obligated persons are different from public entities and that the fiduciary duty standard should not be extended to obligated persons;
• Official Statements – The BDA believes the issuer should be positioned to determine the scope for review by a municipal advisor of its official statement and agreed with the MSRB that the ultimate goal should be that all parties to a transaction understand one another’s obligations.

Regarding ongoing work by the MSRB in developing their regulatory framework for municipal advisors, we can expect further proposals on the following:

• Core duties of non-solicitor municipal advisors (G-42);
• Supervision of municipal advisors (G-44);
• Municipal Advisor Fees;
• Political Contributions;
• Gifts and Gratuities; and
• Solicitation Activities.
• Meeting with the SEC’s Office of Municipal Securities

The BDA focused primarily on four areas of concern in its discussion with John Cross and other staff from the Office of Municipal Securities. Our desire is to have further clarification on the items below which include:

• Whether a firm can be a municipal advisor for the purpose of investment of proceeds without being precluded from underwriting the bonds;
• Navigating the municipal advisor rule when providing investment advice to municipal entities such that advice on bond proceeds can be avoided;
• Use of the language, “rely upon,” under the Independent Registered Municipal Advisor (IRMA) exception; and
• The scope of the two-year “cooling off” period for municipal advisors, under the IRMA exclusion.

The BDA will be submitting another round of requested clarifications to the the SEC and hope to see a second round of FAQs released this spring.  We will also be submitting a comment letter to the MSRB on their proposal for Rule G-42 and we encourage all of our member firms to do the same.  The comment period expires on March 10, 2014.

WASHINGTON — Securities and Exchange Commission member Michael Piwowar has asked the staff of the Office of Municipal Securities to give him some proposals that he can push through the SEC to improve price transparency in the municipal market.

Piwowar, a Republican who joined the commission last year, replacing Troy Paredes, suggested in a speech in January that dealers should be required to disclose markups and markdowns in riskless principal transactions, But he told The Bond Buyer in an interview that he is looking for other ideas as well.

It was Piwowar’s first post at the SEC that kindled his interest in the muni market. He was working as an economist in what was then called the Office of Economic Analysis in 2002 when he was approached by the SEC’s chief economist and offered the chance to go in a different direction.

“I came here and thought I was going to work on equity market structure issues,” Piwowar said. “That was my area of research. Literally my second day here our chief economist at the time, Larry Harris, said, ‘Do you realize we have every transaction in municipal bonds for a one year period?’ I said ‘No.’ He said, ‘Do you want to work on a research project?’ I said ‘Yes.’ He said, ‘Good, because if you had said no I would have fired you.’ So I spent basically a year learning as much as I could about the muni market.”

Harris, who is now a professor at the University of Southern California, remembers Piwowar as playing an important role in helping to shed light on the understudied bond market.

“He was a very promising young economist,” Harris said. “He was already quite accomplished when he came to the SEC.”

Harris and Piwowar’s study, eventually published in a financial research publication, was an examination of spreads and markups in the bond market. Piwowar said the goal was to figure out why investors paid additional costs in some cases, and to determine what might affect those costs.

“What we wanted to try to do was figure out was what were the effects of adding transparency to the market,” he said. “I just looked at the spreads in this market and I thought, ‘There is something wrong here.’ It must be off by a decimal place, the spreads are just too wide. Especially at retail sizes.”

Unfortunately for the researchers, data available from the Municipal Securities Rulemaking Board didn’t allow them to isolate the effects of adding transparency to the market, Piwowar said. But they observed a decrease in spread size correlating to transparency in the corporate bond market. Piwowar said his work during this time demonstrated to him that while institutional muni investors could call around to different broker-dealers and find the best prices, retail investors generally could not do that and might not even be aware of where they could find data available.

Harris said Piwowar really dove into the project and learned a lot of difficult muni-specific concepts in a hurry. Harris said the study was influential in helping the SEC to decide to require real-time trade reporting, and said Piwowar deserves much credit for that work.

“Mike was instrumental in making that happen,” Harris said.

Piwowar said more can be done.

“Now I’m back, so there is an opportunity I think to continue doing some work in this area,” he said.

Piwowar moved around both before and between his stops at the SEC, staying no more than four years in any one place – nothing new for the product of a Navy family who moved from coastal city to coastal city in California, Virginia, and elsewhere before earning a B.A. in foreign service and international politics from the Pennsylvania State University, an M.B.A. from Georgetown University, and a Ph.D. in Finance also from Penn State.

The economist said he began his college career believing he would be a diplomat and perhaps ambassador to a foreign country, but jokingly recalled that he was soon disabused of the idea.

“I did an internship at the State Department,” he said. “What I learned is that if you work really hard in the foreign service, you get to be an ambassador to a country that hates us. If you want to be an ambassador to a country that likes us, you go out and you make a bunch of money and donate it to the guy that becomes president.”

He taught finance courses at Iowa State University from 1998 to 2002, prior to his first stop at the SEC. After leaving the commission, Piwowar worked as a principal at the Securities Litigation and Consulting Group, which provides assistance to law firms and others involved in complex securities litigation. During and just after the financial crisis, he served for one year at the White House as a senior economist at the President’s Council of Economic Advisers under both Presidents George W. Bush and Barack Obama. While there, Piwowar also served as a staff economist for the Financial Regulatory Reform Working Group of the President’s Economic Recovery Advisory Board. Most recently, he was the chief economist for Republican members of the Senate Banking Committee and worked on the Dodd-Frank Act.

Piwowar won Senate confirmation for a five-year term as commissioner in August 2013, and created a stir at his first public meeting by criticizing SEC chairman Mary Jo White for not giving him enough time to review the municipal advisor registration rule. He voted with his fellow commissioners to approve that major muni rule unanimously, but many observers commented that Piwowar’s comments were unusual. Piwowar is outspoken about the need for detailed economic analysis of market rulemaking. He is the only current commissioner who is not an attorney. When it comes to specific muni issues, Piwowar shows interest, but is not strongly opinionated.

“I don’t have a particular view on broker’s brokers,” he said when asked about them. The SEC’s 2012 Report on the Municipal Securities Market recommended broker’s brokers and alternative trading systems be required to start making some of their pricing information publicly available in order to improve price transparency. The SEC’s Office of Compliance Inspections and Examinations, possibly as a prelude to that, is examining the extent to which dealers using alternative trading systems and broker’s brokers are engaged in anti-competitive practices such as blocking or filtering out competitors from being able to bid on their municipal securities. Piwowar said he previously wondered if more market transparency would eliminate the need for brokers’ brokers.

“They obviously seem to be filling a role that the dealers think is useful, or else they wouldn’t use them,” Piwowar said. “Maybe there is a particular niche that they are filling.”

The commissioner said he views the pricing question as a very difficult one for the muni market. Some muni securities trade so infrequently, it is difficult to benchmark the price, he said.

He has gone public with his view that money market mutual funds need to be reformed and that investors should possibly be able to choose whether to invest in funds that have either a floating net asset value or funds that have fixed NAVs but can restrict redemptions to prevent runs during times of economic panic.

Piwowar said the time to act on some muni reforms is now, whether they are those included in the commission’s muni market report or new ideas developed up by the muni office. Aging baby boomers will be shifting their investments away from equities and towards less risky bonds, he said. Interest rates are going to rise, further complicating the landscape for investors who may not understand the effect that has on their investments.

Piwowar said if the muni office can identify three or more pieces of “low-hanging fruit” that the commission could coalesce around, there is a chance to get things done quickly.

“Here’s a real opportunity where we could work together,” he said.

BY KYLE GLAZIER

MAR 7, 2014 11:13am ET

Bowing to industry concern, regulator won’t collect account names, addresses, tax IDs

Nodding to public criticism, Finra announced it would limit the type of data that it plans to collect as part of its proposed Comprehensive Automated Risk Data System.

The program, which is designed to help the Financial Industry Regulatory Authority Inc. monitor firms by automatically collecting data on account activity, will not require firms to submit sensitive client information including the account name, address or tax identification number, according to a notice posted to the regulator’s website Tuesday.

“Finra has concluded that the CARDS proposal will not require the submission of information that would identify to Finra the individual account owner,” the notice said.

Finra would still collect trading information and other data, including building out customer profiles based on investment objectives and date of birth, according to the proposal. The goal was to identify potential trouble spots such as churning or unsuitable investments.

The original proposal, which was released for comment on Dec. 23, drew more than 40 comments from investors and people in the industry, many of whom voiced concerns over what kind of information would be collected and how it would be secured.

The Financial Services Institute Inc., which represents more than 100 independent financial services firms, lauded the change.

“While we still have concerns with data security, costs and other unintended consequences of the proposal, we applaud Finra’s response to industry concerns,” FSI president and chief executive Dale Brown said in a statement. “We will continue to work with them as this proposal is considered.”

The comment period for the proposed design of the CARDS system was previously extended to March 21.

By Mason Braswell

Mar 4, 2014 @ 2:33 pm

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to consolidate its multiple registration requirements and forms for municipal securities dealers and municipal advisors. The change will make it easier for regulated entities to meet the new and ongoing registration requirements.

MSRB rules require firms under its regulatory jurisdiction to register with the MSRB and provide certain identifying and contact information before engaging in municipal securities and advisory activities. The MSRB amended its rules to create a simplified electronic registration process under a single rule, MSRB Rule A-12.

“As part of the MSRB’s ongoing effort to enhance regulatory efficiency, the MSRB developed this streamlined registration process to make it easier for municipal securities dealers and municipal advisors to identify, understand and comply with MSRB registration requirements,” said MSRB Executive Director Lynnette Kelly. The new process also improves the efficiency with which the MSRB collects necessary information about regulated entities.

The MSRB’s consolidated registration rule becomes effective on May 12, 2014 for all municipal securities dealers and municipal advisors seeking to register with the MSRB. New registrants will access electronic Form A-12 through MSRB Gateway, the secure access point for all MSRB Market Transparency submission services, applications and the associated forms.

Also beginning May 12, firms that are currently registered with the MSRB under the previous requirements will have 90 days to verify, update and complete their registration information, which will be transferred to the new form automatically by the MSRB. The MSRB will provide these firms with additional information and resources to assist them in transitioning their registration information to the new form by the compliance deadline of August 10, 2014.

View the Regulatory Notice:

http://www.msrb.org/~/media/Files/Regulatory-Notices/Announcements/2014-05.ashx?n=1

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested public comment on proposed supervisory and compliance obligations for municipal advisors when engaging in municipal advisory activities. Establishing a supervision rule is a key step in the MSRB’s development of a regulatory framework for municipal advisors, as directed by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Establishing baseline supervisory requirements for municipal advisors will help ensure that they and their personnel comply with all applicable securities laws, with an emphasis on the critical goal of preventing compliance issues in the first place,” said MSRB Executive Director Lynnette Kelly. “The regulatory framework the MSRB is developing is aimed at protecting state and local governments and other municipal entities that rely on the services of municipal advisors, and a supervision rule lays the foundation for the rest of that framework.”

The MSRB’s supervision proposal, draft Rule G-44, draws on the strengths of analogous supervision rules for other areas of the securities industry but takes into account the diversity of the municipal advisory population, including small or single-person firms. The draft rule takes a primarily principles-based approach, applying the standard that policies be reasonably designed to achieve compliance with the rules applicable to municipal advisors. The rule specifically requires that municipal advisor firms have written supervisory procedures and that they designate a chief compliance officer to be responsible for compliance functions and personnel to be responsible for supervision, but also provides detailed supplementary material to accommodate and guide the application of the rule for small and single-person firms.

The Dodd-Frank Act charged the MSRB with developing standards of conduct and qualification for municipal advisors to help safeguard the interests of state and local governments that engage the services of municipal advisors. The MSRB earlier this year requested comment on a proposal to establish core standards of conduct for municipal advisors. Future MSRB rule proposals for municipal advisors will include measures to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of municipal advisors acting as solicitors. The MSRB also is developing a comprehensive professional qualifications program, as well as appropriate fees to be charged to municipal advisors.

The MSRB’s draft supervision rule for municipal advisors incorporates the MSRB’s preliminary economic analysis of the benefits, burdens and potential regulatory alternatives, and the MSRB requests comment on that analysis in addition to all aspects of the proposed rule.

View the Request for Comment here:

http://www.msrb.org/~/media/Files/Regulatory-Notices/RFCs/2014-04.ashx?n=1

Comments on the draft supervision rule should be submitted to the MSRB no later than April 28, 2014.

The MSRB is hosting an educational webinar on the main aspects of the proposed supervisory and compliance requirements on March 20, 2014 at 3:00 p.m. ET.

Register for the webinar:

https://www2.gotomeeting.com/register/535817330

What governments need to know about where they should go to seek financial advice.

When the federal government creates totally new regulations, it can generate a fair amount of confusion. That’s what’s happening with the definition for Municipal Advisors, a new category of financial advisors specifically tailored for municipalities.

The backstory to this regulation is a long one. The condensed version is that the 2008 financial crisis showed regulators that governments needed someone looking out for their interests in financial transactions with Wall Street – and only their interests.

Historically, it’s common for those orchestrating the trransaction to also dish out advice and counsel to the municipality entering into the deal. The problem with this model is that while most underwriters or brokers are fair and reasonable, there are many who are not.

Among the more famous bad examples, Jefferson County, Ala., officials were wooed in 2008 into entering into a complicated interest rate swap deal. The deal was orchestrated by a J.P Morgan Chase banker who (along with some county officials) later pleaded guilty to corruption charges related to the deal. The swap plan ultimately backfired and led Jefferson County into bankruptcy in 2011.

Regulations in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, passed as a response to the recession, establilshed that municipalities would have their own advisors who were regulated. The act left it up to the Securities and Exchange Commission to actually define what a municipal advisor is and is not.

Fast forward to today, and it’s becoming apparent that idea is easier said than done. After a long wait, the SEC this past fall issued its definition for who constitutes a municipal advisor. Essentially, a municipal advisor is a qualified financial professional (i.e., a banker or financial consultant) who counsels municipalities on financial deals like bond offerings. That person must be registered through the SEC as a municipal advisor and cannot have any other interest in the deal. The problem? Well, even with nearly 800 pages of explanation, there is still a lot of room for questions. (Originally slated for January, the SEC delayed implementation of this rule unil July.)

For one, notes federal securities lawyer Paul Maco, municipal advisors are a new class of advisors. But because governments have so often sought advice from other financial professionals, making them defacto municipal advisors, creating a new line in the sand can be confusing. “This is a new group of regulated people dropped into a regulated area with different categories among them,” says Maco, an attorney with the internatinonal firm Bracewelll & Giuliani. “So [for example], there’s naturally some overlap between investment advisors or between broker/dealers.”

The rule seeks to eliminate that overlap with this key difference: municipal advisors have an explicit fiduciary responsibility to solely their government clients. In other words, they are looking out only for the government’s interests and have no other connection to a deal. In the same way a prospective homeowner would want her own real estate agent and wouldn’t want to use the seller’s agent, municipalities now must get advice on a transaction from someone who won’t benefit financially in any way from the deal.

The concept seems to make sense but in practice it’s proving to be difficult; governments are accustomed to getting advice from those assisting them in a financial deal. Issuers that are used to calling up their banker and asking her opinion about a transaction must seek counsel elsewhere. That banker can communicate market trends, ideas and issues. But anything considered actionable is off the table. “There’s a lot of misunderstanding about what a financial advisor does or what a broker-dealer does,” says Susan Munson, founder of the Fixed Income Academy, an online school that seeks to educate buyers and sellers in the bond (fixed income) market. “How they get compensated – that’s where their allegiances are,” she said.

Munson, who was an account executive with Merrill Lynch’s Institutional Advisory Division before founding the academy, added that brokers or financial service providers may only be selling investments their company wants them to focus on. While they may still offer up unbiased advice in that realm, their view is limited.

“It boils down to, if people [have] a fiduciary duty, they have to behave in a certain away,” she said. “There’s [now] a standard of care you have to put ahead of your own – you can’t advise them of anything not in their best interests.”

There are exceptions. One applies to the Request for Proposals process – professionals who are not a government’s municipal advisor can offer up advice in a proposal response. Another exception: If a government already has an advisor in place for a transaction, and that is made clear in writing, underwriters and other professionals involved in that same transaction can also give advice. But here, there has been yet another snag – according to the rule, issuers in this situation must still “rely on” the advice from their municipal advisor.

“So people are now saying what does ‘rely on’ mean?” says Susan Gaffney, who served as the Government Finance Officers Association’s Federal Liaison Center director for more than a decade. “Does it mean always use? Mostly use? Everybody’s struggling with what does this all mean and does this change how I approach an issuer?”

The gray areas are getting much of the attention (and consternation) now from municipalities and financial professionals tasked with living in the confines of the new rule come this summer. But the goal of the rule – to create a bright line between what constitutes advice and what doesn’t and who really should be providing that to the issuer – is one that ultimately has government’s best interest at heart.

“There’s going to be near-term pain over the understanding and getting this in place,” says Matt Posner, an analyst for Municipal Market Advisors. “But it’s for long-term good. We should have responsible advisors and we should be able to educate those advisors and make them better.”

BY LIZ FARMER | FEBRUARY 25, 2014

[email protected] @LizFarmerTweets

The Municipal Securities Rulemaking Board (MSRB) has made fee changes to several of its data subscription products and services and made other technical amendments. The changes, which take effect April 1, 2014, relate to the MSRB’s Electronic Municipal Market Access system (EMMA®), Real-time Transaction Reporting System (RTRS) and Short-Term Obligation Rate Transparency System (SHORT System).

View the Regulatory Notice at:

http://www.msrb.org/~/media/Files/Regulatory-Notices/Announcements/2014-06.ashx?n=1

WASHINGTON — The Securities and Exchange Commission has approved a new rule that will require underwriters of 529 college savings plans to submit more in-depth financial information to the Municipal Securities Rulemaking Board twice a year.

New Rule G-45 on reporting of information on municipal fund securities will require primary distributors or underwriters of 529 plans to submit information including assets, contributions, distributions, fees and expenses, and performance data to the board within 60 days of June 30 and December 31 each year.

These are college savings plans are established by states under Internal Revenue Code section 529 that allow parents or other individuals to invest in state trusts to accumulate funds to pay for the expected higher education expenses of beneficiaries.

The SEC decided that the new rule passed muster, and approved it Feb. 21, with an effective date of Feb. 24, 2015. Implementation of the rule will occur with the first submission of Form G-45 due by August 30, 2015, which is 60 days after the end of the reporting period of January 1 – June 30, 2015.

The MSRB originally filed the proposed rule with the SEC in June 2013, along with proposals to amend its Rules G-8 on books and records and G-9 on preservation of records to require underwriters to maintain the information required to be reported on new Form G-45 for six years. The board said the rule would help it better oversee the characteristics and risks of the 529 plan market. The MSRB currently collects some information about 529 plans such as preliminary offering documents and continuing disclosure information, but not the information on assets, fee structure, performance data, and other aspects required under the newly-approved G-45.

The rule went through some changes by the MSRB, in response to comments that the definition of underwriter was not acceptable. The Investment Company Institute argued that a plan’s program manager, record-keeper, investment manager, custodian or state sponsor generally are not broker-dealers and would not qualify as underwriters under the rule. ICI requested that the MSRB clarify that those entities would not be considered underwriters if they provide services to the plan on behalf of it or its state sponsor. The College Savings Plan Network, an affiliate of the National Association of State Treasurers, also specifically requested in comments that a state sponsor not be treated as an underwriter.

The MSRB amended the proposal last month to clarify that state sponsors would probably not be underwriters, and that other entities would have to determine based on their own unique circumstances whether they are underwriters or not.

Dealers said they were concerned that underwriters might be required under the rule to report information they had no ability or no legal right to collect, and that some of the information might be proprietary in nature and damaging to a plan if made public.

The MSRB responded to those comments, seeking to assure underwriters that they would not be required to submit any information that was illegal for them to collect and that the MSRB would study the new disclosures internally. A new request for comment will go out if the MSRB seeks to publish such information, the board said.

View the Regulatory Notice:

http://www.msrb.org/~/media/Files/Regulatory-Notices/Announcements/2014-03.ashx?n=1

BY KYLE GLAZIER

FEB 24, 2014 2:42pm ET

The Committee discussed Municipal Advisor Rule and FINRA Proposed Margining Amendments.

On Friday, February 21, 2014, the BDA held a Legal & Compliance meeting at the offices of Raymond James in Memphis, TN from 12:30 – 4:30pm.  At the meeting, member firms gathered to foster discussion as each separately drafts written supervisory procedures in order to meet the parameters of certain topical rules and proposed regulations. Specifically, the committee discussed:

• SEC Final Municipal Advisor Rule
• FINRA’s Proposed Amendments to Rule 4210 on Margining
• MSRB Proposed Rule G-42 on duties of municipal advisors and
• MSRB Proposed Rule on Best Execution

The L&C meeting attendees discussed the ongoing challenges they are up against in the face of these proposed and final rules.  They agreed to craft a document for distribution among all BDA member firms so they may use it as a resource while drafting internal procedures.

Regarding the Muni Advisor Rule, L&C Committee Members:

• Discussed recurring questions stemming from the first round of SEC FAQs;
• Shared ongoing concerns at individual firms and discussed submission of questions to the SEC for their anticipated second round of FAQs;
• Discussed the rule’s exceptions and the positives and negatives for each;
• Discussed timing for being able to rely on an exception and what to do if there is none in place and
• Made a decision that the BDA would produce a checklist for firms to use when looking for additional resources to assist in your compliance efforts.

Regarding the FINRA Proposed Margin Amendments, L&C Committee Members:

• Reviewed documents containing a summary of the rule, including outstanding questions for consideration as we draft BDA’s comment letter;
• Discussed outstanding “problem areas” we foresee if the rule were to go into effect as is;
• Discussed what firms should be looking at while doing an internal assessment regarding their compliance needs in implementing the rule;
• Review of what our firms have done to date as far as either putting a system in place or subscribing to a third party system;
• Discussion of the impact at the retail level and especially as that relates to the sub-account level;
• Made a decision to create a checklist for firms to use as they consider how they will comply with the rule when it goes into effect and
• Decided also to distribute an internal document related to the outstanding third party vendor options which are available, including detailed information about each.

With regard to their discussion surrounding MSRB Proposed Rule G-42 and Best Execution, L&C members:

• Reviewed their past comment letters;
• Discussed their approach and process for the next set of comment letters, including the decision to host additional issue-specific conference calls to dig deeper into these issues as the comment letter deadline approaches.

The BDA Legal & Compliance Committee will take the information learned at this meeting and produce an internal document so that all BDA firms can be on the same page with what they believe are integral components of the rule(s) and to be sure member firms are considering certain specific and high level elements as they draft internal procedures.

Banks and trust officers could get tripped up over several pending regulatory developments as Dodd-Frank Act rule-making winds down, Phoebe Papageorgiou, senior counsel of the American Bankers Association, said today.

New requirements to register as municipal advisors, money market reform, and concerns from the Consumer Financial Protection  Bureau over senior designations might catch the banking industry by surprise, Papageorgiou said at the ABA’s Wealth Management and Trust Conference in San Diego.

Banks may have to register as municipal advisors if they advise municipal entities on the issuance of securities or “municipal financial products,” she said.

A municipal advisor is a new registration category arising from Dodd-Frank, Papageorgiou said.

Municipal entities could be local governments, school boards, as well as universities and hospitals that receive bond proceeds, she said. “Thousands of entities could be municipal entities” under the law.

Banks need to be careful managing proceeds of municipal bond offerings, Papageorgiou said, including proceeds of pension obligation bonds if a bank advises a municipal plan.

“The act of managing those proceeds could capture you” under municipal advisor rules and subject banks to additional SEC and MSRB oversight, she said.

The ABA is asking the SEC to carve out an exception for pension obligation bonds. “We say, once [the money] is in a pension plan, it’s no longer a proceed, and you no longer have to register,” Papageorgiou said.

Banks already get exemptions from the municipal advisor rules for deposit accounts, extensions of credit, or bond indenture trustee services provided to municipal entities.

Trust departments could also be impacted by the SEC’s pending money market reform, Papageorgiou said.

Bank trust departments use money market funds for pooled trust accounts and want to continue offering the funds for cash balances, Papageorgiou said. But banks may not be able to use the SEC’s proposed retail money funds in trust accounts unless they could track individual withdrawals to ensure compliance with the $1 million limit on daily redemptions. Banks anticipate that the accounting would be too complex to accomplish that oversight, she said, so may have to use government money market funds, which would have no withdrawal limits under the SEC plan.

“The question is, are there enough of those [government funds] out there,” Papageorgiou said. “We have a lot of concerns here.”

Separately, a CFPB report on senior designations recommended that the SEC establish some standards for certifications aimed at older investors and add some enforcement capability for their misuse.

“It’s interesting that [the CFPB] put out a number of recommendations to the SEC, but not to banking agencies,” Papageorgiou said, even though people in the banking industry are using senior designations.

The CFPB has an office focused on vulnerable populations—students, retirees and military personnel, she added.

FINANCIAL ADVISOR

FEBRUARY 27, 2014 • DAN JAMIESON

U.S. securities regulators proposed stricter rules on brokers in the $3.7 trillion municipal-debt market designed to prevent investors from being shortchanged when trading state and local government bonds.

The rules, released today by the Municipal Securities Rulemaking Board, would require that brokers seek to trade at the most favorable prices possible for clients in the municipal-bond market, which lacks a centralized exchange. Brokers would have to check prices on various platforms before trading.

The Alexandria, Virginia-based board, known as the MSRB, said the step may boost competition among brokerage firms and lower trading costs for investors. Similar requirements already exist in the corporate bond market.

The proposal would need to be approved by the Securities and Exchange Commission. The SEC said in 2012 that stricter rules could lead to fairer prices for buyers and sellers of state and local government bonds.

The municipal-bond market is dominated by individual investors seeking the tax-exempt income generated by state and local government debt. Such investors hold $1.6 trillion, or 44 percent, of outstanding municipal bonds, according to the Federal Reserve Board.

Many such securities, sold by local school boards and other infrequent borrowers, aren’t often traded, which can make it difficult for individuals to determine what the market price should be.

The existing rules in the municipal market require brokers trade with their customers at “fair and reasonable” prices, the MSRB said. The proposed regulations would require that brokers seek prices that are “as favorable as possible under prevailing market conditions” by gauging trading on electronic platforms with firms that act as middlemen for brokers, and other potential buyers, before executing trades.

The rule wouldn’t apply to certain institutional investors, such as money-management firms that are better equipped than individuals to monitor prevailing prices.

To contact the reporter on this story: William Selway in Washington at [email protected]

WASHINGTON — Dealer groups are unsure whether the Municipal Securities Rulemaking Board’s proposed best execution rule is tailored enough for the municipal market, but are pleased it would exempt sophisticated professionals.

Draft Rule G-18, which the MSRB released Wednesday, would require broker-dealers to “use reasonable diligence in seeking to obtain for their customer transactions in municipal securities the most favorable terms available under prevailing market conditions.”

Based on the Financial Industry Regulatory Authority’s Rule 5310 for equities and corporate debt, the rule goes a step beyond the current Rule G-18 on execution of transactions, which requires dealers to “make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions.”

The proposal also seeks to alter the MSRB’s proposed Rule G-48 on sophisticated municipal market professionals to make clear that the best execution obligations would not apply to sophisticated municipal market participants, which need less protection.

“That’s something right off the bat we were happy to see,” said Bond Dealers of America senior vice president of government relations Susan Collet. BDA among others suggested an SMMP exemption be included in any best execution proposal.

Although the SEC recommended in its 2012 comprehensive report on the municipal market that the MSRB adopt a best execution rule, dealers have said attempting to impose a “trade-by-trade” pricing mandate on them would be unreasonable in a market as illiquid and opaque as the muni market. The muni space does not have a single location where all pricing information is quickly available.

Collet said BDA is not yet sure whether the MSRB’s efforts to create a rule with aspects more unique to the muni market are sufficient. The MSRB proposal notes the rule must be tailored for the muni market, so a dealer could demonstrate it met its obligations for specific munis by reviewing information to determine the current market for them or similar munis. That wording is not included in the FINRA rule.

Another muni-specific aspect of the proposed rule is its treatment of broker’s brokers. Unlike the FINRA rule, draft Rule G-18 would not require dealers to show why it was reasonable to use a broker’s broker.

The Securities Industry and Financial Markets Association last year floated an “execution with diligence” proposal that would have required dealers to use “reasonable diligence” to get a “fair and reasonable” price for customers. Randy Snook, SIFMA’s executive vice president of business policies and practices, thanked the MSRB for considering that proposal but said SIFMA shares BDA’s uncertainty about the rule’s suitability for the muni market.

“Developing a higher standard is in the best interest of investors and the municipal market, and is something SIFMA has been focused on for the past year,” Snook said. “SIFMA appreciates the MSRB’s consideration of our ‘execution with diligence’ proposal.  We also appreciate that the MSRB, in its proposal, noted that a failure to have actually obtained the most favorable price will not necessarily mean that the dealer failed to use reasonable diligence.  We are reviewing the MSRB’s best-execution proposal, particularly with regard to the extent it reflects the unique characteristics of the municipal securities market as FINRA 5310 is, at its core, an equity market rule.  SIFMA is committed to working with the MSRB on this issue and will provide more substantive comments after a full review with our members.”

The MSRB said it was shooting for a principles-based rule that will protect investors without imposing a strict pricing standard on dealers. The board is seeking public comments on several questions related to the rule proposal. Among these are whether the same goal could be better achieved through alternative regulatory measures, whether a best execution standard is a worthwhile goal, what effect the rule might have on the efficiency of transactions, and what additional costs the rule might impose on dealers.

If a best-execution standard was adopted, dealers would need to establish or revise compliance policies and written supervisory procedures, as well as implement additional monitoring and surveillance. Dealers who are not subject to the FINRA rule would probably be the most affected and bear the highest costs, the MSRB said in the notice on its proposal.

The MSRB asked that public comments on the proposal be submitted by March 21. The rule would have to be filed with, and approved by, the SEC before it could take effect.

BY KYLE GLAZIER

FEB 19, 2014 3:33pm ET

The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission to adopt new MSRB Rule G-45, on reporting by 529 college savings plan underwriters of information on municipal fund securities. The SEC also approved electronic Form G-45, as well as associated amendments to MSRB Rules G-8, on books and records, and G-9, on preservation of records.

View the SEC approval order:

http://www.sec.gov/rules/sro/msrb/2014/34-71598.pdf

The effective date for the rule change is February 24, 2015. Accordingly, 529 plan underwriters will be required to first submit Form G-45 by August 30, 2015, which is 60 days after the end of the reporting period of January 1 – June 30, 2015. Thereafter, reporting must be made by no later than 60 days following the end of each semi-annual reporting period ending on June 30 and December 31 of each year. Performance data, however, will be submitted annually by no later than 60 days following the end of the reporting period ending on December 31.

The SEC approved two rule changes related to FINRA Rule 8312 (FINRA BrokerCheck Disclosure). First, the SEC approved amendments to permanently make publicly available in BrokerCheck information about former associated persons of a FINRA member firm who were registered on or after August 16, 1999, and who have been the subject of an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement. Second, the SEC approved amendments to include in BrokerCheck information about member firms and their associated persons of any registered national securities exchange that uses the Central Registration Depository (CRD) for registration purposes. Both rule changes will become effective on June 23, 2014.

The text of the rule amendments is set forth in Attachment A.

Questions concerning this Notice should be directed to FINRA’s Gateway Call Center at (301) 590-6500.

View the full Notice:

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p447595.pdf

The Municipal Securities Rulemaking Board (MSRB) today requested public comment on a proposal to establish for the first time explicit requirements for municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors. If ultimately approved, the proposed “best-execution” standard would provide benefits for investors, promote competition among dealers and enhance market efficiency.

Comments on the best-execution rule proposal should be submitted to the MSRB no later than March 21, 2014.

The MSRB is hosting an educational webinar on the main aspects of the proposed rule on March 6, 2014 at 3:00 p.m. ET.

Register for the webinar:

http://www.msrb.org/~/media/Files/Regulatory-Notices/RFCs/2014-02.ashx?n=1

New York, NY, February 19, 2014-SIFMA today released the following statement from Randy Snook, executive vice president, business policies and practices, SIFMA, on the MSRB’s proposal to establish a best-execution rule for municipal securities transactions:

“SIFMA appreciates the proposal issued by the MSRB today.  We and our members share the MSRB’s goal of improving execution standards for dealers and promoting fair and reasonable pricing for investors.  Developing a higher standard is in the best interest of investors and the municipal market, and is something SIFMA has been focused on for the past year. SIFMA appreciates the MSRB’s consideration of our ‘execution with diligence’ proposal.  We also appreciate that the MSRB, in its proposal, noted that a failure to have actually obtained the most favorable price will not necessarily mean that the dealer failed to use reasonable diligence.  We are reviewing the MSRB’s best-execution proposal, particularly with regard to the extent it reflects the unique characteristics of the municipal securities market as FINRA 5310 is, at its core, an equity market rule.  SIFMA is committed to working with the MSRB on this issue and will provide more substantive comments after a full review with our members.”

The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

Release Date: February 19, 2014

Contact: Katrina Cavalli, 212.313.1181, [email protected]

For more information, visit http://www.sifma.org.

WASHINGTON — Fitch Ratings said Thursday that it expects a gradual unwinding or restructuring of tender option bond programs over the next few months since they were not exempted from the Volcker Rule.

The rating agency said it will continue to monitor developments in the $70-$80 billion TOB market as market participants try to find alternative structures of financings before the rule goes into effect on April 2014, and conformance is required by July, 2015.

TOB programs have historically been used to provide short-term tax-exempt munis to money market funds.

In a typical TOB program, the sponsor will deposit a fixed-rate bond or note into a trust, which will issue two new certificates — a floating rate certificate and a residual certificate.

The floating rate certificate will have a tender option, through a liquidity facility that is typically issued by the program’s sponsor or an affiliate and shortens the maturity of the bond or note so it becomes eligible to be purchased by a tax-exempt money market fund.

TOB programs account for about 25% to 30% of the assets of muni money market funds.

But under the Volcker Rule, banks and their affiliates will no longer be able to sponsor a TOB program, own a residual certificate issued by a TOB trust, or provide credit enhancement, liquidity, or remarketing services these programs.

“Fitch expects a gradual unwinding of the programs as liquidity facilities expire,” the rating agency said. “Under this scenario , there would likely be some increase in supply side pressure arising from tax-exempt money market funds tendering their floating rate certificates to liquidity banks and the liquidity banks looking to sell the previously deposited bonds or notes into the market.”

The Securities Industry and Financial Markets Association is talking to members about the impact of TOB programs not receiving an exemption, David Cohen, SIFMA associate general counsel said Thursday. SIFMA has formed a working group, comprised of both buy- and sell-side members, to explore ways in which municipal financings can be done in compliance with the final Volcker Rule, he said, adding, “We are in the preliminary stages and are hopeful that a compliant structure can be effected with minimal market impact.”

SIFMA had urged federal regulators to exempt TOB programs from the definition of a “covered fund” like a hedge fund, arguing that because the underlying asset in the trust is a state or local bond, a TOB should be treated as such.

BY LYNN HUME

FEB 6, 2014 6:03pm ET

U.S. banks poured more than $200 billion into state and local-government debt since the onset of the financial crisis six years ago, boosting their share of the $3.7 trillion market to a two-decade high.

Now, if federal regulators have their way, California Treasurer Bill Lockyer says banks next year will have more incentive to buy debt sold by Saudi Arabia or Botswana than U.S. municipalities. The result, he says: higher costs for taxpayers.

California, Georgia and New York City are among issuers pressing regulators, including the Federal Reserve, to ease a rule that may curb buying by banks. The regulation, intended to guarantee that banks have enough easy-to-sell assets during a cash crunch, wouldn’t let them use munis to satisfy the requirements, giving the companies less reason to hold the debt.

“Anything that reduces demand for our bonds could have a negative impact,” said Diana Pope, who oversees debt sales for the Georgia State Financing and Investment Commission in Atlanta. “Banks are a big part of our market and anything that limits what they can invest in affects us.”

Banks propped up demand last year as Detroit’s record bankruptcy filing and bets that interest rates were set to rise led investors to pull money from local-debt mutual funds. Munis logged their biggest annual loss since 2008, pushing benchmark 10-year yields to a two-year high of 3.15 percent in September. The yield was 2.67 percent yesterday.

Growing Share

In the first nine months of 2013, banks added $41 billion of munis, Fed data show. That left them with $404 billion as of Sept. 30, or about 11 percent of the market. It was their biggest share since 1990 and double their holdings at the end of 2007, when they accounted for about 6 percent of the total.

“The bank bid has played a very important role in the market’s performance since the credit crisis,” said Matt Posner, an analyst who tracks regulatory issues for research firm Municipal Market Advisors, based in Concord, Massachusetts. “If this rule is put in place, many of these banks would have to curb their purchases.”

The proposed rules are pending before the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. They are part of the broader overhaul of securities oversight ushered in by the 2010 Dodd-Frank law, intended to prevent a repeat of the credit crunch.

Changes Possible

The regulators are reviewing public comments on the proposal, which may result in changes.

Greg Hernandez, an FDIC spokesman; and Eric Kollig, a spokesman for the Fed, declined to comment. Bill Grassano, a spokesman at the OCC, said the agency “doesn’t comment on proposed rules, but keep in mind that we do consider all comments.”

Separate regulations released last year, aimed at curbing banks’ speculative bets, will also bar investments known as Tender Option Bond programs, which use borrowed money to buy debt and have spurred demand for munis. Banks have been trying to figure out how to overhaul such funds to keep them operating.

The reserve rules have yet to be decided on and would be phased in starting on Jan. 1. They mandate how much the largest banks must hold in what regulators view as high-quality, liquid assets during times of financial stress.

Not Munis

Such assets would include Treasuries, bonds of foreign governments and other securities, including some stocks and corporate bonds. Municipal obligations wouldn’t count because regulators said they didn’t consider them easy enough to sell.

That exclusion may cause banks to reduce munis in favor of securities that meet the requirements, Fitch Ratings said on Jan. 30. The New York-based company said banks that operate as dealers, the market’s middlemen, may hesitate to commit money to trading of local debt, potentially making it harder for investors to transact in the securities.

In a Dec. 27 letter to regulators, Citigroup Inc.’s Howard Marsh, head of munis for the New York-based bank, said the rule would result in unnecessary “and in many instances unbearable” increases in financing costs for public works.

Danielle Romero-Apsilos, a bank spokeswoman, declined to comment.

Upheaval Potential

Kenneth Naehu, who oversees bonds for Banyan Tree Asset Management in Los Angeles, said the rule hasn’t gotten enough attention from investors.

“This is a real thing that I don’t think the market understands yet,” he said. “There is a potential for serious upheaval.”

Michael Decker, who lobbies on municipal bond issues for the Securities Industry & Financial Markets Association, a Wall Street trade group, echoed the concern.

“I don’t think there would be an instantaneous sell-off,” he said. “But I think it would be a discouragement, and over time you’d see banks play a less significant role in the market.”

In letters to regulators, state and local officials urged reconsideration of the muni exclusion.

New York City Comptroller Scott Stringer argued in a letter that the market is broad enough to meet regulators’ requirements, and that muni prices fell less than top-rated corporate debt during the credit crisis.

Banks bought $145 million of an $896 million New York bond sale completed last month, Stringer said.

Lockyer, whose state is the largest issuer of munis, also wrote to regulators last month asking for the proposed regulation to be amended. In an interview yesterday, he said the rules may raise risk at banks.

“The rule would provide greater incentives for U.S. financial institutions to do business with foreign governments than with more creditworthy U.S. municipal issuers,” he said in his letter. Keeping it “would increase borrowing costs for municipal issuers” and heighten volatility in the market for their debt.

By William Selway  Feb 12, 2014 5:00 PM PT

To contact the reporter on this story: William Selway in Washington at [email protected]

To contact the editor responsible for this story: Stephen Merelman at [email protected]

Washington, DC—(ENEWSPF)—February 10, 2014. A former Bank of America executive pleaded guilty today for his participation in a conspiracy and scheme to defraud related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.

Phillip D. Murphy, the former managing director of Bank of America’s municipal derivatives products desk from 1998 to 2002, pleaded guilty today before U.S. District Judge Max O. Cogburn Jr. in the U.S. District Court for the Western District of North Carolina to participating in a fraud conspiracy and wire fraud scheme with employees of Rubin/Chambers, Dunhill Insurance Services Inc., also known as CDR Financial Products, a broker of municipal finance contracts, and others.  Murphy also pleaded guilty to conspiring with others to make false entries in the reports and statements originating from his desk, which were sent to bank management.

Murphy was indicted by a grand jury on July 19, 2012.  According to the indictment, Murphy participated in a wire fraud scheme and separate fraud conspiracies that began as early as 1998 and continued until 2006.

“By manipulating what was intended to be a competitive bidding process, the conspirators defrauded municipalities, public entities and taxpayers across the country,” said Brent Snyder, Deputy Assistant Attorney General of the Antitrust Division’s Criminal Enforcement Program.  “Today’s guilty plea reaffirms the Antitrust Division’s continued efforts to hold accountable those who corrupt and subvert the competitive process in our financial markets.”

Public entities seek to invest money from a variety of sources, primarily the proceeds of municipal bonds that they issue, to raise money for, among other things, public projects.  Public entities typically hire a broker to conduct a competitive bidding process for the award of the investment agreements and often for other municipal finance contracts.

According to the charges, Murphy conspired with CDR and others to increase the number and profitability of investment agreements and other municipal finance contracts awarded to Bank of America.  Murphy won investment agreements through CDR’s manipulation of the bidding process in obtaining losing bids from other providers, which is explicitly prohibited by U.S. Treasury regulations.  As a result of the information, various providers won investment agreements and other municipal finance contracts at artificially determined prices.  In exchange for this information, Murphy submitted intentionally losing bids for certain investment agreements and other contracts when requested, and, on occasion, agreed to pay or arranged for kickbacks to be paid to CDR and other co-conspirator brokers.

Murphy and his co-conspirators misrepresented to municipal issuers that the bidding process was competitive and in compliance with U.S. Treasury regulations.  This caused the municipal issuers to award investment agreements and other municipal finance contracts to providers that otherwise would not have been awarded the contracts if the issuers had true and accurate information regarding the bidding process.  Such conduct placed the tax-exempt status of the underlying bonds in jeopardy.

“Mr. Murphy’s actions undermined the public’s trust when he conspired to manipulate a competitive bidding process,” said Richard Weber, Chief, IRS Criminal Investigation (IRS-CI).  “IRS-CI has experienced great success in unraveling significant and complex financial frauds as we work in close collaboration with our law enforcement partners.”

“Mr. Murphy ripped off hard working American taxpayers and cash-strapped municipalities all in pursuit of his own lucre,” said George Venizelos, Assistant Director in Charge of the FBI’s New York Field Office.  “Let this serve as a reminder to others who are entrusted to act in the public’s best interest; your lack of candor won’t go without notice.”

Murphy pleaded guilty to two counts of conspiracy and one count of wire fraud.  The fraud conspiracy carries a maximum penalty of five years in prison and a $250,000 fine.  The wire fraud charge carries a maximum penalty of 30 years in prison and a $1 million fine.  The false bank records conspiracy carries a maximum penalty of five years in prison and a $250,000 fine.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Including Murphy, a total of 17 individuals have been convicted or pleaded guilty.  Additionally, one company has pleaded guilty.

The prosecution is being handled by Steven Tugander, Richard Powers, Eric Hoffmann, Patricia Jannaco and Stephanie Raney of the Antitrust Division.  Assistant U.S. Attorneys Kurt Meyers, Michael Savage and Mark Odulio of the U.S. Attorney’s Office for the Western District of North Carolina have also provided valuable assistance in this matter.  The guilty plea announced today resulted from a wide-ranging investigation conducted by the Antitrust Division’s New York office, the FBI and the IRS-CI.  The division coordinated its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

Today’s guilty plea is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorney’s offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants.  For more information on the task force, visit www.stopfraud.gov .

Anyone with information concerning bid rigging and related offenses in any financial markets should contact the Antitrust Division’s New York Field Office at 212-335-8000, the FBI at 212-384-5000 or IRS-CI at 212-436-1761, or visit www.justice.gov/atr/contact/newcase.htm.

10 Feb 2014 12:30 Written by Press Release Category: Federal and International

Rule change would stop brokers from placing conditions on settlements stipulating that customers agree not to oppose brokers’ move to clear record

It may become harder for financial advisers and brokerage firms to expunge investor complaints from their disciplinary records.

Finra Rule 2081, which was approved by the Financial Industry Regulatory Authority Inc. on Thursday, will prevent firms and brokers from placing conditions on settlements stipulating that customers agree not to oppose an expungement request, the regulator said. The rule will now go to the SEC for further review.

“While we are committed to providing an effective means for a registered person to expunge allegations that are false — which is something I strongly believe in — Finra feels that expungement of dispute information shouldn’t be bargained for through settlement negotiations or otherwise,” said Finra chairman and chief executive Richard Ketchum in a summary video posted to Finra’s website.

Finra does not disclose how often expungement is used as a condition of settlement, but the rule comes as pressure had been mounting from investor plaintiffs’ attorneys and Congress.

The concern was that it was too easy for brokers to scrub customer complaints from Finra’s Central Registration Depository, which maintains a record of such complaints and regulatory and disciplinary actions. Much of the database is publicly available through Finra’s BrokerCheck database, the regulator said.

The Public Investors Arbitration Bar Association, which represents investors in arbitration cases, published a highly publicized study last October that claimed brokers are able to obtain expungement in around nine out of 10 cases resolved by settlement or a stipulated award.

Several senators, including Sen. Jack Reed, D-R.I., and Sen. Charles Grassley, R-Ia., had also chimed in with letters to Finra seeking more information about the frequency of expungements granted in settlements.

But others in the industry felt that the controversy was overblown, saying that expungements were difficult to obtain.

During the five-year period from 2007 to 2012, Finra erased disputes in less than 5%, or 838 cases, of the total 17,765 customer disputes filed, the self-regulator said.

Those who seek expungement must obtain court approval validating any arbitration award granting expungement before an event can be erased.

Some attorneys who help brokers obtain expungements felt that the process could inconvenience customers and brokers who are legitimately pursuing expungement. Marc Dobin of the Dobin Law Group P.A. said that many times the agreement not to oppose expungement was tacked onto a settlement after the terms, including the monetary amount, had been negotiated.

“They’re actually going to inconvenience the customer more if the customer’s now going to be a constant player after the settlement of the case,” he said.

The proposal will be sent to the Securities and Exchange Commission, where it will be subject to public comment before a final decision on adoption will be made.

By Mason Braswell

Feb 13, 2014 @ 2:35 pm EST

Revives proposal that would require brokerages to link to regulator’s database, including disciplinary background info

Finra on Thursday advanced a revised proposal that would require brokerage firms to include a link on their websites and other online communications to BrokerCheck, the database that includes broker disciplinary records.

The Financial Industry Regulatory Authority Inc. would require brokerage firms to display links to BrokerCheck, “on any member firm’s website that is available to retail investors” and, in many other cases, when a firm displays a broker’s profile or contact information.

The rule proposal, which has moved to a public comment period, came as part of a trio of decisions by Finra’s 24-member Board of Governors that could reshape how investor disputes with brokers are settled and publicly reported.

Finra has been looking to pass a rule that would more widely publicize BrokerCheck for more than a year.

At issue is more than an Internet hyperlink. The proposal reignites a contentious debate between brokerage firms and Finra, the regulator whose operations they finance. Many brokers consider BrokerCheck to be a scarlet-letter repository, presenting the public with a distorted picture of their professional lives and cataloguing years of marginal details and meritless grievances by clients.

But some groups have been pushing for more information to be disclosed on BrokerCheck, and say a clear and comprehensive disciplinary history helps consumers make an informed decision when choosing an adviser. Groups such as the Public Investors Arbitration Bar Association, which represent investors in litigation against brokers, say not enough consumers know that BrokerCheck exists.

David Neuman, a lawyer who represents investors at Stoltmann Law Offices, said the revised rule is good news.

“Just putting that info in the customer’s hand will certainly be helpful, and maybe they’ll think twice if their broker has a number of complaints or other remarks on his record,” he said.

In April, facing industry pressure, Finra withdrew a proposal that would have required Finra members to include a link to the individual’s BrokerCheck page.

Some securities lawyers said the rule was too vague and costly to implement and monitor, saying that brokers could not, for instance, include a link to BrokerCheck in a Twitter post, given the platform’s space limitations.

But the rule announced on Thursday did not mention including a link to an individual’s BrokerCheck page, and it excluded “an online interactive electronic forum … such as a … Twitter feed.”

Bryan M. Ward, a partner at Sutherland Asbill & Brennan, said the rule is likely to increase compliance costs and requests for expungement, a process that erases brokers’ disciplinary history from BrokerCheck.

“There’s so many different media and so many different ways and it’s ever changing, in terms of how brokers are communicating with clients,” he said. “Twitter is not anything like what it was five years ago.”

BrokerCheck tracks basic information about brokers, as well as records from disciplinary hearings, allegations of misconduct by clients and the result of arbitration or court cases relating to their work. Unless they are expunged, the records include allegations that were settled or dismissed.

Currently, brokers are required to provide to customers annually in writing the BrokerCheck hotline number and Finra website address.

By Trevor Hunnicutt

Feb 13, 2014 @ 12:28 pm EST

WASHINGTON — The Securities and Exchange Commission plans to take action on many of the recommendations in its 2012 municipal market report as well as strengthen its oversight of municipal advisors, according to its draft strategic plan released Monday.

The 42-page document lays out the SEC’s “mission, vision, values, and strategic goals” for fiscal years 2014 through 2018. Among the topics covered is the nearly two year-old comprehensive muni market report, which was written after a lengthy examination of the market spearheaded by then-commissioner Elisse Walter. That 165-page report recommended a number of both legislative and regulatory changes that Congress and the SEC could make to strengthen transparency in the market.

Among the recommendations for the SEC and the Municipal Securities Rulemaking Board were to require muni dealers to disclose to customers markups and markdowns of riskless principal transactions, and to encourage the use of alternative trading systems.

“The SEC plans to pursue many of the recommendations highlighted in the July 2012 Report on the Municipal Securities Market through a combination of SEC, MSRB, and [Financial Industry Regulatory Authority] initiatives, in an effort to enhance the market structure for all fixed income securities, including taxable and tax-exempt securities,” the draft plan states. “This effort will include initiatives aimed at promoting transparency and the development of new mechanisms to facilitate the provision of liquidity, as well as initiatives to improve the execution quality of investor orders.”

SEC commissioner Michael Piwowar said last week that he is working with the commission’s Office of Municipal Securities on the need to disclose markups and markdowns in riskless principal transactions. The MSRB is working on some other aspects of the report, such as the expansion of MSRB’s EMMA website to become a comprehensive central transparency platform and the development of a best execution rule requiring dealers to seek the best price for their customers. The SEC has oversight of the MSRB and must approve its rule proposals.

The plan notes the SEC’s mandate, under the Dodd-Frank Act, to regulate municipal advisors, and states that the commission will focus on getting MA’s properly registered. The plan is open for public comment until March 10.

BY KYLE GLAZIER

FEB 3, 2014 4:14pm ET

WASHINGTON — The Public Finance Network, elected public officials and dealer groups are urging bank regulators to categorize municipal securities as high quality liquid assets in a proposed rule, warning the failure to do so would significantly harm the municipal market and state and local governments.

The rule, as currently proposed, “will have significantly negative effects on the municipal securities market and communities across the country,” warned the Public Finance Network, which consists of 17 muni market groups.

“Failing to qualify municipal bonds as HQLA would significantly reduce the appeal of municipal securities for banks to underwrite these securities and investors to purchase them, resulting in increased borrowing costs for state and local governments and [public sector entities] to finance desperately needed infrastructure projects,” said a letter sent by the groups, which include the National Association of State Treasurers and National League of Cities.

The groups’ concerns stem from a rule that the Federal Reserve System’s Board of Governors, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed in October to strengthen the liquidity positions of large financial institutions so they can better withstand periods of economic and financial stress.

The proposed rule would require large banks to maintain a minimum liquidity coverage ratio, defined as the ratio of HQLA to total net cash outflows. Assets would qualify as HQLA if they could be easily and immediately convertible to cash with little or no loss of value during a period of liquidity stress.

The regulators proposed three classes of HQLA: Level 1, which would include sovereign securities, including U.S. government securities and U.S. government-guaranteed securities; Level 2A, securities issued by U.S. government-sponsored enterprises and certain other sovereign entities; and Level 2B, investment-grade corporate debt with certain characteristics and equities in the Standard & Poors 500 Index.

The regulators said they did not include munis in any of these categories because they “these assets are not liquid and readily-marketable in U.S and thus do not exhibit liquidity characteristics necessary to be included in HQLA under this proposed rule.”

But the groups strenuously disagreed. Michael Decker, managing director and co-head of munis at the Securities Industry and Financial Markets Association, urged the banking regulators to include investment-grade munis as Level 2A liquid assets. “While it is true that not all municipal securities trade every day, which is also the case for investment-grade corporate and … GSE debt securities, the municipal market is nonetheless liquid in that it is always possible to obtain executable price quotes from dealers for any transactions of virtually any size,” he said in a letter to the regulators.

In 2012 daily trading volume in the U.S. muni market averaged $11.3 billion, compared to $22.6 billion for corporate bonds. However, on the basis of average daily trading volume in relation to total volume outstanding, 0.31% of total outstanding munis traded each day versus 0.25% of outstanding corporate bonds, Decker said. Trading volume in the muni market tends to remain fairly constant within a range, while subject to some seasonality and variation based on issuance activity and other factors, he added.

Bond Dealers of America chief executive officer Michael Nicholas said, “We disagree that municipal bonds are not readily marketable in U.S. markets.”

“Municipal securities are known as the second safest available investment, aside from U.S. Treasuries, with state and local governments having nearly a zero default rate, and meeting the agencies’ qualifications for limited price volatility, high trading volumes and deep and stable funding markets,” the network said. The proposed rule “favors foreign debt securities over U.S. state and local debt securities, and in doing so threatens to increase costs for national infrastructure development, three-quarters of which is financed through tax-exempt bonds,” it said.

New York City Comptroller Scott Stringer warned, “The proposed rule will likely result in decreased bank appetite for investment grade municipal securities” and hurt the city because large banks are significant purchasers of its debt. In a $896 million bond sale completed last month, bank purchases totaled $145 million or 16.2% of its fixed-rate offering, Stringer said.

“Banks have also made direct purchases and/or provided necessary liquidity support for the city’s variable rate demand bonds, providing lower-cost funding to make our capital program more affordable,” he added.

Connecticut Treasurer Denise Nappier said the proposed rule would “make the holdings of municipal debt by large banks less attractive and have a negative impact on the demand for municipal bonds.”

“The availability of bank credit and bank direct purchase alternatives for state and local governments will likely decrease and grow more costly,” she added.

John Pranckevicious, chief financial officer of The Massachusetts Port Authority, also called for munis to be treated as Level 2A HQLA, saying this would be necessary to “avoid any unintended and unnecessary increases in the cost of improving municipal infrastructure and engaging in new public works projects, which are vital not only to the authority and the New England region, but to the health of the U.S. air transport system.”

SIFMA’s Decker also said it makes no sense to assume that, in a financial crisis, such as the one in 2008, there would be 100% outflows for liquidity facilities extended to tender option bond financing and deposits collateralized by munis. Experience shows they should instead be 30% and 25%, respectively he said.

BY LYNN HUME

FEB 3, 2014 5:07pm ET

To make it easier for investors and other municipal market participants to find important information about municipal securities, the Municipal Securities Rulemaking Board (MSRB) tomorrow will unveil an improved design and organization of its Electronic Municipal Market Access (EMMA®) website. The MSRB considered input from a broad spectrum of stakeholders to inform the changes. EMMA’s updated homepage and navigation should help all municipal market participants discover ways to use the website to make more informed decisions in the municipal market.

Learn more at:

http://msrb.org/msrb1/EMMA/pdfs/EMMA-Homepage-2014.pdf

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today unveiled improvements to the navigation and design of its Electronic Municipal Market Access (EMMA®) website, making it easier for investors and other municipal market participants to find important information about municipal securities.

“Since 2008, EMMA has served as the official, free source of data and disclosure documents for virtually all municipal bonds,” said MSRB Executive Director Lynnette Kelly. “EMMA’s new look is designed to help users access information more easily and discover new ways to use EMMA to make more informed decisions in the municipal market. In the coming months, we will be making additional changes that will further enhance the market’s ability to evaluate trade prices for municipal securities.”

Enhanced features available on the EMMA website today include:

• Easier Browsing. A pilot feature allows investors and other market stakeholders to browse a searchable directory of all state, city, county and other municipal securities issuers in a particular state. Clicking on any issuer name will display a consolidated view of all available information about that issuer’s securities, including trading activity, disclosure documents and contact information for investors.
• Goal-Based Approach to Navigation. Many EMMA users know what they are looking for but not how to find it on the website. EMMA now features a rotating carousel that spotlights key ways to use EMMA, from finding trade prices for a specific municipal security to exploring data on market-wide trends for the $3.7 trillion municipal market.
• Daily Market Recap. A snapshot of the most actively traded fixed rate municipal securities from the previous trading day provides a glimpse of the dynamic municipal market, which averages 40,000 trades a day. In the coming months, this feature will be updated with interday trade information.
• Clean, Modern Design. EMMA’s new look streamlines the overall appearance of the website and integrates new multimedia resources such as videos about the municipal market.
• One-Click Access to Essential Tools. The new EMMA homepage maintains popular features such as the Quick Search function and direct links to EMMA Dataport, the secure application through which issuers and municipal finance professionals submit data and documents to EMMA in compliance with MSRB rules.

Many of the MSRB’s enhancements to EMMA align with the recommendations of the Securities and Exchange Commission’s July 2012 report on the municipal securities market. The MSRB also considered feedback from EMMA users and conducted a series of focus groups to ensure all changes to EMMA support the MSRB’s ongoing effort to improve the usability of the website.

The MSRB recently expanded its user engagement through the formation of the EMMA Development Advisory Group, a panel of volunteers from across the municipal marketplace that will offer regular input on potential enhancements to EMMA.

“The MSRB welcomes feedback from EMMA users and other municipal market stakeholders on the latest changes to the website and how we can continue to improve the transparency of the municipal market,” Kelly said.

Date: February 7, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer

(703) 797-6600

[email protected]

WASHINGTON — The Securities and Exchange Commission is examining the extent to which dealers using alternative trading systems and broker’s brokers are engaged in anti-competitive practices such as blocking or filtering out competitors from being able to bid on their municipal securities.

The SEC’s Office of Compliance Inspections and Examinations has sent letters to the ATS’, broker’s brokers and dealers seeking trade information, sources said.

Thomas Vales, chief executive officer and chairman of TMC Bonds, formerly TheMuniCenter, an alternative or non-exchange, trading system for municipal bonds, confirmed that he received a letter from the SEC but declined to comment further.

Officials from the other two biggest muni ATS’ — Tradeweb Direct, whose parent company is Tradeweb Markets, which acquired BondDesk Group in November, and KCG BondPoint, a division of KCG Americas, a subsidiary of KCG Holdings, Inc. — would not comment. SEC officials also would not discuss the letters or exams.

The exams may be a precursor to efforts by the SEC and Municipal Securities Rulemaking Board to get ATS’ and broker’s brokers to play a major role in improving muni price transparency.

In its report on the municipal securities market, released in July 2012, the SEC recommended it amend its Rule ATS, and the MSRB consider proposing rules, that would require ATS’ and broker’s brokers to publicly disseminate their best bid and offer prices. The report said they also should be required to disseminate, on a delayed and non-attributable basis, responses to “bids wanted” auctions. Ideally, the information would be posted on the MSRB’s Electronic Municipal Market Access of EMMA system, which provides disclosure and trade data to retail investors and other market participants for free.

But any anti-competitive activity would skew the pricing information from ATS’ and broker’s brokers. The fewer the bids for a muni bond, the less likely the buyer will get the best price.

The SEC said ATS’ and broker’s brokers are key to pre-trade price transparency because they most often are used by dealers trying to buy munis for retail customers.

Retail investors who want to buy munis typically ask a dealer to identify bonds with credit, payment, tax, maturity or other characteristics that meet their needs, the SEC said in its report. A dealer may recommend munis from its own inventory or try to obtain munis from other dealers, through a broker’s broker that brokers transactions between dealers, or through an ATS, an electronic trading platform that has participating dealers.

“To the extent there is pre-trade price transparency in the municipal securities market, the staff understands that it tends to be provided through electronic networks operated by broker’s brokers, ATS’ or similar trading systems,” the SEC report said.

These platforms account for a substantial portion of muni trades, but represent only a small percentage of dollar volume, which suggests they are used primarily for smaller-retail-size orders, the SEC said. Larger institutional trades tend to be executed through more traditional means, such as direct-voice negotiations with a muni dealer or voice brokerage and do not generate any pre-trade price transparency apart from the negotiation process, it said.

ATS’ and broker’s brokers tend to be ‘inventory-based,’ providing information only on the municipal securities their participating dealers would like to sell, and perhaps the prices sought (i.e. offers),” the SEC said. “Unlike a limit order book on an equities exchange or equity ATS, municipal securities ATS’ typically provide no information on the participants who would like to buy or the prices at which they would be willing to do so (i.e. bids).”

Legitimate Uses

Dealers sometimes block, screen or filter out other dealers for legitimate credit, regulatory or legal reasons.  For example, a dealer putting out bids for bonds through an ATS might not want to sell to another dealer that historically doesn’t follow through on its bid or has a bad reputation or legal issues.

But when a dealer merely wants to block other dealers from seeing its inventory and the munis it’s offering, that’s seen as anti-competitive.

The SEC noted these limitations in its muni report. The information from ATS’ and broker’s brokers is not widely accessible to the public for several reasons, the commission said. First, the trading interest reflected on these systems is generally only available to their participating municipal bond dealers and is not available or transparent to non-participants such as retail investors, it said. While some participating dealers may share information with certain customers, this is done solely at their discretion.

Second, these systems may allow participating dealers to limit the dissemination of their trading interests only to a subset of other muni bond dealer participants, the SEC said.

“For example, some ATS’ permit a participant to apply filters so that their interest in a particular municipal security is conveyed only to its preferred trading partners,” the commission said.

The MSRB raised similar concerns in interpretative guidance it issued in December 2012 on its Rule G-43 on broker’s brokers and warned these firms that regulators will be on the lookout for anti-competitive practices.

The MSRB noted that G-43 “permits a broker’s broker to limit the audience for a bid-wanted at the selling dealer’s discretion, a practice sometimes referred to as ‘screening’ or ‘filtering,’ because the MSRB recognizes there may be legitimate reasons for this practice.”

However, the MSRB noted, “such screening may reduce the likelihood that the high bid represents a fair and reasonable price” and warned, “Selling dealers should therefore be able to demonstrate a reason that is not anti-competitive (e.g., credit, legal, or regulatory concerns), rather than trying to eliminate access by a competitor, for directing broker’s brokers to screen certain bidders from the receipt of bid-wanteds or offerings.”

The board suggested, as a compliance measure, that a selling dealer might want to maintain a list of firms it would be unwilling to accept as a counterparty and the reasons why.

Broker’s Brokers Consortium

Meanwhile, 10 broker’s brokers have formed a consortium, called Municipal Bond Information Services, to provide pre-trade pricing information — offers and bids — on an anonymous basis to customers. Representatives of that group said they recently met with SEC officials to describe what they are doing and get some feedback.

Ron Valinoti, founder of Triangle Park Capital Markets Data, an information services company that is managing business operations for MBIS, said the group was incorporated in August, has been collecting pricing data for several weeks, and is currently lining up customers to sign contracts to take the data.

Valinoti says he expects customers will include: institutional investors; firms on the buy-side such as mutual funds, which must calculate net asset values on a daily basis; and firms that provide research services to retail investors either directly or through investment advisors, such as Morningstar and Yahoo Finance.

The trade data, which can be captured every five minutes and made available as often as every 30 minutes, can provide pricing transparency and be used to check information from pricing services or other sources, he said.

“We’re trying to help address the concerns that were raised in the SEC’s muni report to Congress. We’re trying to take a proactive approach” by making pre-trade pricing information available, Valinoti said.

The broker’s brokers in the group include: Associated Bond Brokers, Inc.; Butler Muni; Hartfield, Titus & Donnelly; RW Smith and Associates; Regional Brokers, Inc.; Sentinel Brokers Company, Inc.; Stark Municipal Brokers; Tradeweb Markets; Tradition Asiel (North America) Inc.; and Tullett Prebon Financial Services.

BY LYNN HUME

FEB 7, 2014 3:09pm ET

A proposed rule could give arbitrators more authority in referring cases for disciplinary action

A hotly debated rule change that the Financial Industry Regulatory Authority Inc. has proposed to the Securities and Exchange Commission could allow arbitrators to direct cases to Finra’s enforcement division before the case has closed.

Currently, arbitrators must wait until the case has concluded before they can report concerns to Finra’s Department of Enforcement, which is responsible for suspending, sanctioning or taking other disciplinary action against firms and individuals.

But Finra said that making arbitrators wait could delay the ability to take action against a bad actor or hamper its ability to collect evidence.

“Finra is concerned that the current rule’s requirement that arbitrators in all instances must wait until a case is concluded before making a referral could hamper Finra’s efforts to uncover threats to investors as early as possible,” according to the proposed rule change. “Finra is proposing, therefore, to broaden the arbitrators’ authority under the Codes to make referrals during the hearing phase of an arbitration in those extremely rare circumstances in which investor protection requires that the referral not be delayed.”

All initial pleadings for arbitration cases are also filed with and reviewed by Finra’s enforcement department, but in a small number of cases, new evidence can come up during a hearing that may warrant immediate disciplinary action, according to Marc Dobin of the Dobin Law Group PA.

The self-regulator has spent the past four years in a back-and-forth with the industry over how to handle those instances where an arbitrator learns information that could present a clear and present danger.

Finra submitted two similar proposals in 2010 and 2011, but they were withdrawn or replaced after drawing significant opposition from commenters, who took issue with the implementation.

The concern is whether an arbitrator’s disclosure of a possible investor protection issue could unnecessarily bias the rest of the panel against the respondent, Mr. Dobin said.

“It’s similar to a jury where they tell you not to discuss anything about the case until it is over,” he said. “It makes it harder to settle case if you’re on the respondent’s side if your arbitrators have said, ‘Oh by the way, we think what we’ve heard so far is so bad that we’re telling enforcement about it.’”

The original proposal, filed with the SEC in 2010, would have required the entire three-person arbitration panel to withdraw if one of the arbitrators made a mid-case referral. But commenters voiced concerns that this could unfairly affect the investor or claimant who would have to make their case a second time and incur additional expenses.

The latest proposal seeks to limit the disruption of a midcase referral.

According to the most recent draft, arbitrators will refer their claims to the director or president of enforcement, and then the director is required to notify the parties involved in an arbitration proceeding that the referral had been made.

The parties would then have the opportunity to request the recusal of that individual arbitrator.

But in an effort to add another layer of protection for the claimant, Finra stated that an arbitrator’s referring a claim for disciplinary action shouldn’t be considered proof of bias, and it is still up to the arbitrator whether to resign from the panel even after a party has filed a motion for recusal.

“This means that the entire panel could remain after a party’s recusal motion, and the case could proceed as normal,” the proposal stated. “The investor would be less likely, therefore, to experience procedural disadvantages, significant delays, and increased costs, because Amendment No. 1 minimizes the possibility that the arbitration would start anew.”

Final action could still be a way off. This proposal will go before the SEC where it will be on display for public comment, and then it will be subject to additional review by the commission before a final vote there on whether to approve the rule change.

By Mason Braswell

Feb 3, 2014 @ 1:30 pm

WASHINGTON — The Municipal Securities Rulemaking Board plans to propose a rule that, for the first time, would establish a best-execution rule for dealers in the municipal market, MSRB officials said Tuesday, calling it “a very significant development for the municipal market.”

Recapping the results of their meeting in Atlanta late last week, the officials told reporters in a conference call that the proposed rule would require dealers to use “reasonable diligence” to provide the “most favorable terms” for munis given market conditions. It would be based on the Financial Industry Regulatory Authority’s Rule 5310 for equities and corporate debt, and would not apply to dealer trades with sophisticated municipal market professionals who require less protection.

“A best-ex rule is a key step to complement dealers’ current obligations to achieve a price that is fair and reasonable,” said MSRB board chair Dan Heimowitz. “The MSRB is committed to improving the structure and efficiency of the municipal market for the benefit of retail investors.”

Heimowitz said the proposed rule would be put out for comment in the coming weeks, though he said the timing is difficult to pin down in part because the MSRB will need to conduct an economic analysis of it under a formalized cost-benefit analysis it recently put in place.

As described by Heimowitz and MSRB executive director Lynnette Kelly, the proposed rule would go a bit beyond the “execution with diligence standard” that the Securities Industry and Financial Markets Association proposed last year. SIFMA’s proposal would have required dealers to use reasonable diligence to get a “fair and reasonable” price for customers.

But more in line with SIFMA’s proposal, the MSRB rule would not necessarily require dealers to get the absolute best price on each transaction and would provide dealers a variety of ways to demonstrate “reasonable diligence” in meeting the new obligation.

The board also will ask the SEC to approve a $300 annual registration fee for each municipal advisor professional that would kick in the second quarter of the year. Heimowitz said the MSRB estimates it will collect about $2 million per year from these fees, which would be assessed in parallel with the July 1 effective date for the SEC’s final registration rule, Kelly said.

In addition, the MSRB will propose a supervisory rule for MAs and a one-time professional qualifications exam.

The supervisory rule will be principles-based and will take into consideration the diversity of the MA population, including small and single-person firms, the MSRB said.

In preparation for the professional qualifications exam, the MSRB plans to survey MAs on their core activities to show which areas need testing. It will then develop a study outline, which must be approved by the SEC. The board hopes to implement a pilot exam program later this year or early next. Heimowitz said the proposed rule will not include a grandfather clause exempting established advisors from taking the test.

The board did not come to a decision about continuing education requirements for MAs he said.

All of the MA rules will apply to dealer as well as non-dealer MAs, though dealer-MAs have for years been subject to the same MSRB rules that applied to dealers.

The Dodd-Frank Act mandated a fiduciary duty for MAs to put their clients’ interests first and subjected them to federal regulatory oversight. The MSRB is building from both that legislation and from the Securities and Exchange Commission’s MA registration rule adopted last year.

BY KYLE GLAZIER

FEB 4, 2014 2:01pm ET

(Reuters) – The compensation that dealers receive in U.S. municipal bond trades is once again in regulators’ crosshairs, with a member of the Securities and Exchange Commission saying on Monday that he is investigating how to give investors more information about markups.

SEC Commissioner Michael Piwowar, a Republican sworn in last August, is calling for retail investors to have a better sense of dealer markups – or compensation – in “riskless principal transactions.”

Most individual investors are in the dark about how much dealers add to prices in trades.

In its sweeping report on the $3.7 trillion municipal bond market released more than a year ago, the SEC recommended requiring dealers to disclose markups, saying the lack of information put individual investors at a disadvantage. Since then, the commission has fallen quiet on the issue.

Regulation is hazy on dealer compensation. Dealers must disclose their remuneration if they act as agents facilitating trades, but not if they act as principals in the trade. For most trades in the municipal bond market, dealers are “riskless principals” purchasing securities from their customers and immediately reselling them to other dealers.

Piwowar told a meeting of the U.S. Chamber of Commerce that he asked the commission’s municipal securities office “to work with me to develop a few proposals to improve how the fixed-income markets operate,” highlighting markups as an area of concern.

Piwowar took an in-depth look at dealer compensation when he worked at the SEC as an economist, and his academic research on markups was frequently cited in the commission’s 2012 report.

“We engaged in a lot of conversations with the dealers and the dealers were saying things like ‘we commit capital to this market,'” he told reporters after the meeting.

“But we started looking at the data and a lot of these transactions look like they might be riskless principal transactions where the dealers aren’t actually committing any capital,” he said. “If they simply mark it up from where they bought it at, they don’t have to disclose what the markup is.”

Recording the markup would “enable investors to have better information,” he added.

Piwowar did not give details about the proposals, or when they might be released.

In recent years, federal regulators have expressed concerns that individual investors, the “mom and pop” buyers that support the municipal bond market, do not have adequate information about the debt they use for income. An investigation by the Government Accountability Office concluded that those investors often paid more for bonds than banks and other institutions because of this lack of information.

The SEC enforces the rules for the market written by the Municipal Securities Rulemaking Board, a self-regulatory organization made up of banks, issuers and advisers. But FINRA, or the Financial Industry Regulatory Authority, has traditionally overseen markups and fined banks for not dealing fairly with their customers when they have tacked on excessive amounts. In one case in 2011, FINRA fined a bank for markups as large as 8.49 percent. Typically, they are closer to 2 percent.

“When you think about the number of securities in the market, the number of participants, the number of issuers, the spreads in these markets – I really think we can get more bang for our buck in terms of our resources and helping retail investors understand these markets better,” Piwowar said.

He added that the coming flood of retiring baby boomers and current uneasiness about the direction of interest rates should inspire deeper consideration of pricing.

WASHINGTON Mon Jan 27, 2014 2:51pm EST

The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission of a proposal to streamline and consolidate into a single rule existing obligations of municipal securities dealers related to fair pricing. Under the proposal, most pricing obligations would be contained in revised MSRB Rule G-30 on prices and commissions, including duties and guidance under current MSRB Rules G-18 on execution of transactions and G-17 on fair dealing.

View the rule filing:

http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/~/media/Files/SEC-Filings/2014/SR-MSRB-2014-01.ashx

The proposal addresses, among other things, maintenance margin and variation margin requirements, risk limit determinations, concentrated exposures, and exemptions for de minimis transfer amounts and for transactions cleared through registered clearing agencies. You can find the full Regulatory Notice here and the proposed rule amendment available here.

A summary of the proposed amendments follows:

The proposed rule change provides that all members would be required to collect variation margin for transactions in Covered Agency Securities when the current exposure exceeds $250,000;

Members would be required to collect maintenance margin for transactions with non-exempt counterparties;

The proposed amendments apply to “Covered Agency Securities,” including TBA transactions for which the difference between the trade date and contractual settlement date is greater than one business day, inclusive of ARM transactions; Specified Pool Transactions, for which the difference between the trade date and contractual settlement date is greater than one business day; and transactions in CMOs issued in conformity with a program of an Agency, for which the difference between the trade date and contractual settlement date is greater than three business days;

Transactions cleared through a registered clearing agency, and subject to the margin requirements of that clearing agency, will not be subject to the proposed requirements;

The proposal provides that for transactions with exempt counterparties, maintenance margin will not be required;

If variation margin is not posted to secure the mark to market loss within five business days from the date the loss was created, the member is required to promptly take liquidating action, unless FINRA grants the member an extension; and

The proposal provides that for transactions with non-exempt accounts, members must collect variation margin and must collect maintenance margin equal to 2 percent of the market value of the securities.

The comment period expires February 26, 2014.  The BDA will be submitting a comment letter to FINRA on these proposed amendments.  Please reach out to us if you would like to be a part of that process.

Comment Period Expires: February 26, 2014

Executive Summary

FINRA is seeking comment on proposed amendments to FINRA Rule 4210 to establish margin requirements for transactions in the To Be Announced (TBA) market. The proposal, designed to reflect the growth of the TBA market and to replace current interpretive materials under Rule 4210 that have become outdated, is informed by the set of best practices adopted by the Treasury Market Practices Group (TMPG) of the Federal Reserve Bank of New York (FRBNY). Consistent with the overarching goal of many regulatory initiatives since the financial crisis, the proposal aims to reduce counterparty credit risk. The proposal would accomplish this in the TBA market by addressing, among other things, maintenance margin and variation (also referred to in the proposed rule language and this Notice as mark to market) margin requirements, risk limit determinations, concentrated exposures, and exemptions for de minimis transfer amounts and for transactions cleared through registered clearing agencies. The proposed rule amendment is available as Attachment A at www.finra.org/notices/14-02.

View the full notice at:

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p439087.pdf

Questions regarding this Notice should be directed to:

Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;

Peter Tennyson, Director, Broker-Dealer Operations and Financial Responsibility, at (646) 315-8403;

Adam H. Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961.

WASHINGTON — The Municipal Securities Rulemaking Board will discuss draft rules creating a best execution standard for broker-dealers and establishing supervisory and compliance requirements as well as fees for municipal advisors during its next meeting Jan. 29-31 in Atlanta.

Best execution has been a concern for dealer groups, who have warned that a corporate bond-style rule requiring dealers to seek the best prices for their customers would not work in the more opaque and illiquid muni market.

The Securities Industry and Financial Markets Association had suggested an “execution with diligence” standard that would have been less stringent and would not result in a rule violation as long as a dealer made a reasonable effort to get a fair deal for a customer under prevailing market conditions.

MSRB executive director Lynnette Kelly has said that although the rule is based on an existing Financial Industry Regulatory Authority rule, it will be specific to the municipal market.

The board will also discuss a draft supervisory and compliance rule for municipal advisors, the MSRB announced. This rule is among several that dealer-affiliated financial advisors have been bound by for years but which will be new for non-dealer FAs and which will apply to anyone who provides targeted muni-related advice to a state or local government. MA regulation was mandated by the Dodd-Frank Act, and the MSRB is building from both that legislation and from the Securities and Exchange Commission’s MA registration rule adopted last year. The supervisory rule is likely to be similar to the board’s Rule G-27 on supervision for dealers, which requires written policies and procedures designed to ensure compliance with MSRB rules, among other mandates.

Besides the two draft rules, the MSRB announced the board will also discuss two other concepts related to MA rulemaking. One topic will be the development of professional qualifications standards for MAs, another rule that has an existing dealer counterpart. The board will also discuss the topic of municipal advisor fees. Board chairman Dan Heimowitz has said the MSRB will prioritize the development of MA rules this year, and that he is hopeful of having a strong framework of rules in place when a new chairman replaces him in October.

The meeting will shortly follow an educational outreach event the MSRB will host in Atlanta on Jan. 28. Separate sessions will cover municipal advisor regulation, improving transparency of municipal bond prices and the availability of educational resources for state and local governments that issue bonds, the MSRB has said.

BY KYLE GLAZIER

JAN 22, 2014 1:15pm ET

Jan 13 (Reuters) – U.S. regulators on Monday gave municipal advisers until July 1 to register with the Securities and Exchange Commission, making a last-minute concession to the securities industry, which had complained firms did not have time to digest a definition of advisers spanning 700 pages.

The definition, approved in September, was scheduled to take full effect on Monday.

It is the first step in fulfilling the Dodd-Frank Act’s requirement that those who consult with municipalities about selling debt or buying derivatives register and also comply with a fiduciary standard in which the municipalities’ interests come first.

The Securities Industry and Financial Markets Association had asked last week for a one-month delay in the effective date. In a statement on Monday, SIFMA President Ken Bentsen welcomed the postponement, saying it gives firms time to develop compliance programs and training.

The extension will allow advisers to analyze and understand guidance that the SEC released on Friday clarifying parts of the definition, said Allen Robertson, president of the National Association of Bond Lawyers.

“We believe that the delay in light of the breadth and complexity of the muni adviser rules is appropriate,” he said, adding he expects further SEC guidance on obligated persons and the investment of proceeds under the definition to come out soon.

The SEC and the Municipal Securities Rulemaking Board have recently begun a full-court press to strengthen oversight of the advisers, who escaped federal scrutiny until the Dodd-Frank Act became law in 2010.

The MSRB, a self-regulatory organization that writes the rules the SEC enforces, unveiled a proposed rule last week addressing advisers’ fiduciary duties. It expects to release specific directives in five key areas this year, including the duties of solicitors.

Robertson said the delay in registration would likely not have an impact on the MSRB’s timing.

The initial proposed definition of who had to register was universally criticized as too broad when it was released more than two years ago and spawned more than 1,000 public comment letters. The SEC pulled the proposal and then crafted a final definition that relies more on a person or firm’s activities than on a job title or role.

Under a temporary placeholder rule, more than 1,100 advisers have registered with the SEC since September 2010. On Friday alone, the SEC posted 13 registrations. (Reporting By Lisa Lambert; Editing by Dan Burns, Nick Zieminski and Dan Grebler)

July 1, 2014, is the date when the first set of municipal advisors will be required to register under new rules the US Securities and Exchange Commission (SEC) finalized last year.

The SEC adopted the final rules, under the Dodd-Frank Act, on September 18, 2013, which require municipal advisors to register with the commission if they provide advice to municipal entities or certain other persons on the issuance of municipal securities, or about certain investment strategies, or municipal derivatives.

However, accountants do not have to register as municipal advisors if they provide accounting services that include audit or other attest services, preparation of financial statements, or issuance of letters for underwriters, according to the rules.

The new registration guidance was supposed to take effect on January 13, which concluded a sixty-day period that the final rules were published in the Federal Register. However, the start date was pushed back by almost six months to “give market participants additional time to analyze, implement, and comply with the final rules,” the SEC stated on Monday.

Kenneth Bentsen Jr., president of the Securities Industry and Financial Markets Association (SIFMA), agreed that the new registration deadline will give firms the time they need to fully review the SEC’s guidance and incorporate it into compliance programs and employee training.

“The new compliance date will also give the industry additional time to identify accounts of municipal entities and obligated persons that contain proceeds of municipal securities,” he said in a written statement on January 13.

State and local governments that issue municipal bonds frequently rely on advisors to help them decide how and when to issue the securities and how to invest proceeds from the sales. These advisors receive fees for the services they provide.

Prior to the passage of the Dodd-Frank Act in 2010, municipal advisors were not required to register with the SEC like other market intermediaries. According to the SEC, this left many municipalities relying on advice from unregulated advisors, and they were often unaware of any conflicts of interest a municipal advisor may have had.

After the Dodd-Frank Act became law, the SEC established a temporary registration regime, and more than 1,100 municipal advisors have since registered with the SEC.

On January 10, the SEC’s Office of Municipal Securities issued interpretive guidance to address questions from market participants regarding the implementation of the final rules on municipal advisor registration.

The staff guidance, in the form of answers to frequently asked questions, covers the following topics:

• The advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters.
• The request for proposals/request for qualifications exemption.
• The exemption for independent municipal advisors.
• The exclusion for registered investment advisers.
• The underwriter exclusion, including engagements as underwriters.
• Issuance of municipal securities and post-issuance advice.
• Remarketing agent services.
• Opinions by citizens in public discourse.
• The effective date of the final rules and the compliance period for using the final registration forms.

Posted by Jason Bramwell on Jan 14 2014

Jan 10 (Reuters) – The Securities and Exchange Commission on Friday closed potential loopholes in its new regulation on the financial advisers to U.S. states and cities and resisted calls to slow down creating oversight of a group that has long escaped government scrutiny.

The securities industry had asked the SEC for a one-month delay in enacting its full definition of exactly who counts as a municipal advisor, which is set to go into full effect on Jan. 13.

The Securities Industry and Financial Markets Association said firms did not have time to digest the final rule, which spans more than 700 pages and was approved last September.

The SEC released guidance late Friday that held firm on next week’s effective date. From there, regulators will build up an extensive regulatory regimen encompassing advisers’ fiduciary duties, compensation and qualifications.

“We continue to encourage the SEC to delay the Jan. 13 effective date…to give the industry sufficient time to incorporate this guidance into compliance programs and employee training,” SIFMA President Kenneth Bentsen said in a statement.

The Dodd-Frank Act signed in 2010 requires those who consult with municipalities about selling debt or buying derivatives to register with the SEC, putting them under the same regulation as brokers and dealers, and also requires them to carry out fiduciary duties involving putting clients’ interests first.

Determining exactly who is an adviser has been key to carrying out the law. The SEC largely looks at a firm or individual’s activities to make the classification.

In detailed question-and-answer form, the guidance addressed scenarios where someone may not be sure about qualifying as an adviser, where someone may unintentionally fall subject to the regulation, or where someone may want to give up the adviser role.

The guidance drove home the point that a broker-dealer cannot switch from the role of adviser to underwriter once an issuer decides to go ahead with a deal.

“It owes a fiduciary duty to the municipal entity with respect to that issue and must not take any action inconsistent with its fiduciary duty to the municipal entity,” according to the guidance.

Also, issuers must state they have selected a broker-dealer as an underwriter on a bond sale, confirming they know the firm does not have an adviser’s fiduciary responsibility.

The SEC drew a distinction between general information and advice, saying that an underwriter could include facts in business pitches without having to register as an adviser, but could not make recommendations.

In the same light an underwriter may discuss omissions from offering documents and lapses in past disclosure filings without being considered an adviser, and may meet with clients without having an adviser present.

The SEC initially laid out the parameters of who counts as an adviser nearly three years ago, but had to pull that definition after it was universally criticized as too broad.

Now that the final, more narrow definition is in place, the Municipal Securities Rulemaking Board, a self-regulatory organization that writes the rules the SEC enforces, is racing to create a regimen on carrying out the Dodd-Frank provision.

More than 1,100 firms have registered as advisers since 2010, mostly under a temporary placeholder rule. The pace has picked up since the final definition was approved – with 41 firms and individuals registering since Sept. 19.

Fri Jan 10, 2014 6:03pm EST

By Lisa Lambert

Jan 14 (Reuters) – Two U.S. economic and policy heavyweights – former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch – on Tuesday called for more stringent federal oversight of state and local borrowing in the municipal bond market.

Issuers in the century-old municipal market have long guarded their ability to issue bonds against federal intervention using the Tower Amendment, a part of securities law that bans the Securities and Exchange Commission from requiring them to file bond documents ahead of sales.

In a report on state budgets, Volcker and Ravitch said the amendment should be “revisited so the SEC can require issuers to comply with sensible disclosure requirements as well as with robust accounting standards.”

Currently, the amendment limits the SEC’s jurisdiction to fraud “and no other body has the affirmative obligation or authority to require full transparency and disclosure of risk,” the pair wrote in a statement introducing the final report of the State Budget Crisis Task Force that they chaired.

Ravitch did not say how the amendment should be revised or if it should be eliminated.

“I don’t think the SEC is God’s answer to every problem, but I think the more disclosure the more the public is protected,” he told reporters.

In July 2012, the task force released its first report on the budget and economic problems that forced states into fiscal tailspins during and after the 2007-09 recession.

The final report on Tuesday touched on many of the same themes – the need for long-range budgeting; the importance of strong federal relations; problems with low reserves and underfunded pension systems; and stressed healthcare funding. But it went beyond to look at finance, debt and reporting.

The task force recommended giving states strong oversight of local governments in advance of financial emergencies, and it called for helping states “develop rules for the creation of concise, timely and readable financial reports.”

Municipal bond disclosures, including annual financial statements, are frequently filed late and the SEC noted in an exhaustive 2012 report on the market that the information is often stale. In recent cases, the commission has charged that issuers lied about or omitted important financial details.

“The convoluted, sprawling nature of state financial statements make them of limited use for all but individuals with extensive training,” the report said. “Both budgetary and asset-based financial reporting should be easily accessible.”

Because the task force is loaded with financial experts including former Federal Reserve Vice Chairwoman Alice Rivlin and former Treasury Secretary George Schultz, it could help boost skepticism about the Tower Amendment. But it is not the first to tilt a spear at the provision.

More than five years ago, the SEC decided to take a narrower definition of the amendment and warned issuers they could not hide behind it completely. Then, in 2012, the SEC suggested Congress give it additional powers that would “meaningfully enhance disclosure practices by municipal issuers.”

Last year, the commission toughened municipal enforcement by increasing the number of cases brought against municipalities and setting new, strict precedents for prosecuting issuers and broker-dealers. The most notable case was against Harrisburg, Pennsylvania, over lack of disclosure and false public statements.

Investment advisers who provide state and local governments with advice on using municipal derivatives in their investment portfolios won’t have to register with the Securities and Exchange Commission as muni advisers.

The SEC made a distinction between financial advisers who use security-based swaps as investments in muni pension plans, for instance, and those who advise municipalities on using derivatives to hedge risk in muni debt securities offerings in a Jan. 10 list of Frequently Asked Questions.

There are about 1,315 SEC-registered investment advisers who have muni clients.

The clarification on muni adviser registration prevents an unnecessary increase in regulation, according to the Investment Adviser Association.

“We are pleased these activities are not subjected to another duplicative and potentially conflicting regulatory regime,” said IAA general counsel Karen Barr.

The FAQs also draw brighter lines regarding how much a broker-dealer can communicate with a municipality about bond offerings before becoming a muni adviser and being disqualified as the underwriter of the issue, according to Paul Maco, a partner at Bracewell & Giuliani.

“As a result, underwriters and bond lawyers don’t have to worry about acting as a municipal adviser without registering as one as long as they follow the guidance they’ve been given,” said Mr. Maco, former director of the SEC Office of Municipal Securities.

The Dodd-Frank financial reform law requires that muni advisers register with the SEC.

The final registration rule was to have gone into effect Monday. Instead, the SEC delayed compliance requirements until July 1.

The provision of Dodd-Frank designed to put SEC oversight on muni advisers addresses congressional concerns that lax regulation in muni markets led to substantial losses for state and local governments that used complex derivative products.

But market participants need more time to figure out how the 777-page rule, which was first proposed in December 2010 and finalized last September, will affect them, Mr. Maco said.

“It’s a completely new group of registered people and activity,” he said. “Between Friday afternoon [when the FAQ was published] and Monday is not enough time for entities to change their business model or get themselves into compliance.”

Also last week, the Municipal Securities Rulemaking Board proposed a rulethat would place a fiduciary duty on muni advisers and require them to disclose all conflicts of interest.

The compliance delay also was welcomed by the IAA, which said that some SEC-registered advisers have an affiliated bank that serves as a trustee to a fund in which municipalities can invest. If municipalities put proceeds from a bond sale into the fund, it could require the adviser to register as a muni adviser.

The extension gives the advisory firm more time to determine whether money from muni securities sales is flowing into the funds.

“It’s been proving to be a huge challenge,” Ms. Barr said.

By Mark Schoeff Jr.

Jan 14, 2014 @ 12:09 pm (Updated 4:49 pm) EST

WASHINGTON — Dealer groups are warning the Municipal Securities Rulemaking Board that its proposal to require at least an hour of annual municipal securities training for their staffs could actually result in less efficient training and could be confusing, in addition to raising compliance burdens.

The MSRB proposal would alter the continuing education requirements laid out in the board’s Rule G-3 on classification of principals and representatives to require a minimum of one hour of training focused on municipal securities for professionals whose jobs primarily focus on munis. Firms are already required to offer continuing education to their staffs, but are not required to provide training specifically targeted to work in the municipal market. Comments on the proposal were due Monday.

Mike Nicholas, president and chief executive officer of Bond Dealers of America, warned in his letter that the one-hour training requirement could end up backfiring despite the good intentions of the MSRB. “While the MRSB does not want this one-hour requirement to be seen as the sole training criteria for ‘covered persons’ as defined in the proposed rule, this may well be an unintended result,” Nicholas wrote.

Instead, the BDA letter suggests the MSRB consider publishing an annual list of training topics based on current market issues, and require firms to incorporate at least one into their training programs.

The rule proposal would require such training of dealer firm employees engaged in muni business regardless of whether or not they have contact with customers, and Nicholas added that providing evidence of training completion for an expanded group of professionals could prove onerous.

“Additional recordkeeping is likely to be required possibly in the form of a certificate for each professional who has completed the continuing education requirement,” he wrote. “The BDA would suggest the MSRB consider how to minimize the effects of demonstrating compliance with new continuing education requirements.”

The Securities Industry and Financial Markets Association commented that the MSRB is essentially seeking to de-harmonize its rule with a similar Financial Industry Regulatory Authority rule without offering an adequate explanation.

Further, wrote SIFMA managing director and associate general counsel David Cohen, the MSRB offers no good reason to expand training to “back office” personnel with no customer contact. The MSRB should be focusing its efforts on establishing a “minimum threshold” of training for newly-regulated non-dealer municipal advisors, he said.

Tamara Salmon, senior associate counsel for the Investment Company Institute, also commented that the proposal is inconsistent with FINRA’s rule. In addition, Salmon wrote, the proposal offers no guidance on how firms should determine which of their employees would be covered by the rule and offers no economic justification for the proposed changes, which she suggested is a violation of MSRB’s new economic analysis policy.

Firms were supportive of MSRB’s proposal to no longer require them to designate a “financial and operations principal” since it is a requirement imposed on dealers by other regulators and therefore duplicative.

BY KYLE GLAZIER

JAN 14, 2014 2:36pm ET

Alexandria, VA – To protect state and local governments and investors, the Municipal Securities Rulemaking Board (MSRB) today advanced a cornerstone of its regulatory framework for municipal advisors by publishing a proposed rule on the duties of advisors when providing advice on municipal securities transactions and related products to their clients. The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing standards of conduct and qualification for municipal advisors to help safeguard the interests of state and local governments that engage the services of municipal advisors.

“The MSRB aims to carry out Congress’ intent to protect state and local governments from the potentially costly consequences of relying on financial advice of municipal advisors that may lack sufficient expertise and accountability,” said MSRB Executive Director Lynnette Kelly. “Our proposal would ensure that all municipal advisors adhere to core standards of conduct, and that state and local governments have more complete and accurate information regarding the services of municipal advisors.”

The MSRB’s rule proposal sets forth specific obligations of municipal advisors, including the duty to exercise due care and make only informed and suitable recommendations to their clients. The proposed rule requires municipal advisors to disclose all conflicts of interest to their clients and to document the nature of their relationship with their clients, including compensation arrangements and the scope of advisory activities to be performed. The proposal identifies certain conduct that would be prohibited as deceptive, dishonest or unfair practices. Further, the proposal provides guidance on the application of the federal fiduciary duty, established by the Dodd-Frank Act, which requires municipal advisors to deal with their state and local government clients with the utmost good faith and to put their clients’ interests ahead of their own.

To ensure that the industry and public have adequate time to respond to the proposal, the MSRB is using a 60-day comment period. “The MSRB wants to hear from as many municipal advisors and other market stakeholders as possible on the details of this proposal,” Kelly said. “As a self-regulatory organization, the MSRB will rely on this input to ensure that it establishes appropriate and necessary guidance for municipal advisors on their obligations to their clients.” The MSRB is hosting an educational webinar on the core standards rule on February 6, 2014 at 3:00 p.m. ET. Register for the webinar.

The MSRB will be advancing a series of municipal advisory rule proposals and professional qualification standards following the approval by the Securities and Exchange Commission in September 2013 of a final registration rule for municipal advisors that defined the scope of municipal advisory activities that are subject to federal regulation. Future MSRB rule proposals for municipal advisors will include supervision requirements for municipal advisory firms and their employees; measures to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of municipal advisors acting as solicitors.

The rule proposal on municipal advisor duties incorporates the MSRB’s preliminary economic analysis of the benefits, burdens and potential alternatives, and the MSRB requests comment on that analysis in addition to all aspects of the proposed rule.

“The MSRB plans to continue to engage the municipal advisory community, dealers and others through outreach and education as it develops this regulatory framework,” Kelly said. Market participants and other interested persons can stay up to date on the MSRB’s rulemaking, outreach and education initiatives in this area by visiting the Resources for Municipal Advisors section of the MSRB’s website.

Date: January 9, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer

(703) 797-6600

[email protected]

New York, NY, January 9, 2014- SIFMA today released the following statement from Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s municipal securities division, on the MSRB’s request for comment on draft MSRB Rule G-42, on duties of non-solicitor municipal advisors:

“SIFMA is pleased that the MSRB has released its request for comment on the standards of conduct for municipal advisors.  We feel that all municipal advisors need to understand the scope of their duties and how the term ‘fiduciary duty’ will be defined for this context. However, we are concerned with a key aspect of this rule proposal.

“Municipal advisor regulation in Dodd-Frank was intended to focus on bringing unregulated municipal advisors under a regulatory regime. Banks and broker dealers that provide any advice to a municipal entity or obligated person would be prohibited from offering principal services as such as, banking services, brokerage accounts, commodities trading, and swaps executions under today’s rule proposal.  Under the proposed rule, if a bank or broker dealer serves a municipal entity or an obligated person serves as a municipal advisor, then that firm and all its affiliates would be barred from engaging in any principal transactions with that client. As currently drafted, this proposed ban on principal transactions appears to include even transactions completely unrelated to the municipal advisory assignment.

“We are concerned that this would limit issuer choice by effectively preventing banks and broker dealers from being municipal advisors.  This proposal is also incongruous with the SEC’s staff recommended uniform fiduciary standard of conduct, which would permit acting as a fiduciary and a principal under certain situations.

“SIFMA looks forward to the MSRB’s upcoming rule proposals on municipal advisor regulation including professional qualifications and testing, restriction of political contributions, restrictions on gifts and entertainment and supervision.  SIFMA feels strongly that until the full series of rules for municipal advisors takes effect, issuers are not fully protected and the playing field for dealer and non-dealer advisors is not level.”

Release Date: January 9, 2014

Contact: Katrina Cavalli, 212.313.1181, [email protected]

WASHINGTON — The Municipal Securities Rulemaking Board on Thursday released a new draft rule that would govern the conduct of municipal advisors, and requested public comments on whether it should extend a fiduciary duty standard to cover all of an MA clients, including conduit borrowers as well as issuers.

Neither the Dodd-Frank Act nor the Securities and Exchange Commission’s MA registration rule approved in September extends the full fiduciary duty to “obligated persons” such as conduit borrowers.

The draft Rule G-42, called “Duties of Non-Solicitor Municipal Advisors,” codifies the language of the Dodd-Frank Act, which imposes a fiduciary duty on MA’s to put their client’s interest first before their own. The draft rule says MAs owe both a duty of loyalty and a duty of care to their municipal entity clients.

The MSRB said in its 36-page notice, that the goal of the draft standards is to promote “higher ethical and professional standards” for MAs.

The duty of loyalty is defined in the rule as requiring the MA to deal in the “utmost good faith” with municipal entities such as issuers and serve their best interests “without regard to the financial or other interests of the municipal advisor.” MAs would owe the duty of care to all clients, and would also be bound by the MSRB’s Rule G-17 on fair dealing.

The rule lays out the broad principles of MA duties to clients, but also includes many more specific conduct rules, some which have already been set by the SEC, such as those on recordkeeping.

MAs would be required to possess adequate expertise to assist their clients. They would need to disclose in writing all “material conflicts of interest” at the outset of their municipal advisory relationship. An MA would need to disclose whether and how much liability insurance it carries, which would pay out in the event of improper judgments or negligence, or must state that it carries no coverage. The MSRB asks for public comments on whether it should require MAs to have such insurance.

MAs also would have to disclose at the beginning of the relationship any legal or disciplinary event that might affect the client’s evaluation of them.

The draft rule contains the equivalent of a suitability rule for MAs, providing that advisors must have a reasonable basis to believe their recommendations are suitable for their clients. In that vein, the rule includes a “know your client” obligation which would require MAs to use “reasonable diligence” to know essential information about their clients. However, the draft does not provide an exhaustive list of what that information might be, except to say that it includes information necessary to the advisory relationship and required in order to comply with laws and rules.

Fee-splitting arrangements between MAs and other providers of services to clients would have to be disclosed at the outset of their relationships, but would be prohibited between MAs and underwriting firms. The rule would also bar MAs from engaging in any transaction in a principal capacity with a client, essentially barring any non-fiduciary business relationship running concurrent to the municipal advisory agreement.

There would be a presumption under G-42 that a municipal advisor would review the official statements of its issuer clients’ bond offerings. But the MA would not be required to conduct such a review if both parties agree it is not necessary. Any agreement about an OS review would need to be included in the documents establishing the relationship, and those documents would have to be updated to reflect any change in the scope of services provided by the MA.

MAs would be required to review third party recommendations provided to their municipal clients, if this is within the scope of the advisory activities agreed upon at the outset of the relationship.

The MSRB also said it would amend its Rules G-8 on books and records and G-9 on preservation of records to reflect the SEC’s requirement that MAs retain for at least five years records of all communications, policies and procedures, the names of associated persons, and any other material documents dealing with its clients. The records could be retained electronically.

The MSRB’s notice requests many comments, including whether or not all fee-splitting arrangements should be prohibited, whether MAs should be required to obtain written acknowledgement that a client received the necessary disclosures, and whether MAs should have to disclose all legal or disciplinary actions related to individuals not working with clients.

The MSRB is providing an extended comment period of 60 days, with comments due by March 10.

BY KYLE GLAZIER

JAN 9, 2014 1:00am ET

The Municipal Securities Rulemaking Board (MSRB) is requesting public comment on draft MSRB Rule G-42, on standards of conduct and duties of municipal advisors when engaging in municipal advisory activities other than the undertaking of solicitations. The MSRB is also seeking comment on associated draft amendments to Rules G-8, on books and records, and G-9, on the preservation of records. Comments should be submitted no later than March 10, 2014.

http://msrb.org/~/media/Files/Regulatory-Notices/RFCs/2014-01.ashx?n=1

WASHINGTON — The Municipal Securities Rulemaking Board on Thursday released a new draft rule that would govern the conduct of municipal advisors, alarming broker-dealers who fear a prohibition on business outside of an advisory relationship with an issuer could push dealer-affiliated MAs out of the market.

The draft Rule G-42, called “Duties of Non-Solicitor Municipal Advisors,” codifies the language of the Dodd-Frank Act, which imposes a fiduciary duty on MA’s to put their client’s interest first before their own. The draft rule says MAs owe both a duty of loyalty and a duty of care to their municipal entity clients.

It would prohibit MAs and their affiliates from engaging in any other transaction in a principal capacity with a client, which some market participants read as barring MAs from engaging in any non-fiduciary business relationship running concurrent to the municipal advisory agreement. It would not affect Rule G-23’s prohibition on underwriter role-switching, but is intended to ensure the highest level of objectivity among MAs.

This particular provision is a major sticking point for broker-dealers, who have long maintained that the MA section of Dodd-Frank was intended to rein in unregistered non-dealer advisors.

“We were stunned to see that the MSRB took the opposite approach,” said Leslie Norwood, associate general counsel and co-head of the municipal securities group at the Securities Industry and Financial Markets Association.

Norwood said the draft rule’s ban on acting as a principal in transactions outside the advisory relationship essentially pushes bank-affiliated MAs out of the market, because the fact that their banking arms might manage accounts for a municipal entity locks them out of being that entity’s MA.

“We feel it unnecessarily limits issuer choice,” Norwood said. “It really makes no sense to us.”

Norwood, however, added that SIFMA is glad that the MA regulations have some more “meat and definition” on this rule, and that the group remains eager for the MSRB to complete other rules which will subject non-dealer advisors to the same level of regulation dealer-affiliated advisors are subject to under existing MSRB rules.

Neither Dodd-Frank nor the Securities and Exchange Commission’s MA registration rule, which was approved in September and takes effect on Jan. 13, extends the full fiduciary duty to “obligated persons” such as conduit borrowers. But the MSRB has asked for public comments on whether it legally can, and should, extend the fiduciary duty to cover all MA clients, including conduit borrowers.

The MSRB said in its 36-page notice, that the goal of the draft standards is to promote “higher ethical and professional standards” for MAs. The fiduciary duty, or duty of loyalty, is defined in the draft rule as requiring the MA to deal in the “utmost good faith” with municipal entities such as issuers and to serve their best interests “without regard to the financial or other interests of the municipal advisor.”

MAs would owe a “duty of care” to all clients, and are also be bound by the MSRB’s Rule G-17 on fair dealing.

MSRB executive director Lynnette Kelly said the rule is based on a large body of existing regulations.

“We drew on concepts established in our rules for municipal securities dealers, as well as the Investment Advisors Act of 1940,” Kelly said during a press call. “We believe the proposal is workable for municipal advisors of all sizes.” The rule lays out the broad principles of MA duties to clients, but also includes many more specific conduct rules, some which have already been established by the SEC, such as those on recordkeeping.

MAs would be required to possess the expertise to assist their clients. They would need to disclose in writing all “material conflicts of interest” at the outset of their municipal advisory relationship.

An MA would need to disclose whether and how much liability insurance it carries, or that it carries none. The MSRB has asked for comments on whether it should require MAs to have such insurance. MAs also would have to disclose at the beginning of the relationship any legal or disciplinary event that might affect the client’s evaluation of them.

Susan Collet, senior vice president of government relations at the Bond Dealers of America, said BDA is happy to have the first of the MA rules available for comment, and will look carefully at the principal transaction prohibition and the question of extending a fiduciary duty to cover obligated persons.

National Association of Bond Lawyers spokesman Bill Daly also said his group would be examining the rule very closely.” NABL is very pleased that the MSRB has gotten this important rule out so quickly and we want to congratulate them and thank them for their work,” Daly said.

National Association of Independent Public Finance Advisors president Jeanine Rodgers Caruso said NAIPFA will address specific concerns at a later date. “We appreciate the MRSB’s concept release and their willingness to allow ample time for comment on this important rule,” she said. “While many aspects of the release reflect what was in the MSRB’s 2011 proposal, there are additional mattes included within this release that merit thoughtful consideration.”

However, sources said the draft rule’s liability insurance provisions could also be a problem and that this kind of insurance isn’t even available in some states.

The draft rule contains the equivalent of a suitability rule for MAs, requiring advisors to have a reasonable basis to believe their recommendations are suitable for their clients. In that vein, it includes a “know your client” obligation that would require MAs to use “reasonable diligence” to know essential information about their clients. Such information would include anything necessary for the advisory relationship or required for compliance with laws and rules.

Fee-splitting arrangements would be prohibited between MAs and underwriters, but would be permitted for MAs and other providers of services to clients if disclosed at the outset of their relationships.

There would be a presumption that an MA would review the official statements of its issuer clients’ bond offerings, but the MA would not be required to do so if both parties agreed it was unnecessary. Agreement about an OS review would need to be included in the documents establishing the relationship, and those documents would have to be updated to reflect any change in the scope of services provided.

The MSRB said it would amend its Rules G-8 on books and records and G-9 on preservation of records to reflect the SEC’s requirement that MAs retain for at least five years records of all communications, policies and procedures, the names of associated persons, and any other material documents dealing with its clients.

The MSRB’s notice requests many comments, including on whether or not all fee-splitting arrangements should be prohibited, whether MAs should be required to obtain written acknowledgement that a client received the necessary disclosures, and whether MAs should have to disclose all legal or disciplinary actions related to individuals not working with clients.

The MSRB has set a comment deadline of March 10.

BY KYLE GLAZIER

JAN 9, 2014 3:45pm ET

WASHINGTON — Two groups are asking the Securities and Exchange Commission to delay the municipal advisor rule compliance deadline until July 1 for asset managers who manage swaps or securities-based swaps in the portfolios of their municipal clients.

The Securities Industry and Financial Markets Association’s Asset Management Group and the Investment Advisor Association made the request, and also asked for an exemption from the rule, in a Jan. 2 letter to SEC muni chief John Cross. They argued that traditional asset managers only recently found out that they could be included in the new municipal advisor regulatory regime, which is slated to become effective on Jan. 13. They said asset managers will need until July 1 — the date when all MAs will need to be registered under the final rules — to prepare for compliance.

The problem arose, SIFMA said, because these portfolio managers believed they were exempt from the final MA rule until they studied it and determined that including a single swap or security-based swap within the portfolios of their municipal entity clients” could trigger MA registration requirements.

The final rule includes an exemption for swap advisors registered with the Commodity Futures Trading Commission, but those advisors will still have to register with the SEC as MAs if their portfolios include one or more securities-based swaps, said Matthew Nevins, managing director and associate general counsel for SIFMA’s asset management group. Asset managers not registered with the CFTC had believed they would be exempt because securities-based swaps would make up a fraction of their portfolios, he added.

“It took us by surprise that this rule could pick up asset managers,” Nevins said in an interview.

While SIFMA hopes the SEC grants this “time-limited” relief to asset managers so they can prepare for compliance, the group would like an interpretation of the MA rule that keeps them out of the regime entirely.

“We believe that the rule is properly interpreted to exclude registered investment advisers to the extent they engage in traditional asset management, including managing portfolios of municipal entity clients that may include swaps or security-based swaps,” SIFMA said in the letter. “This interpretation would prevent duplicate regulation of the same activity by the SEC under the [Investment] Advisers Act and by the [Municipal Securities Rulemaking Board] under its rules (as well as the SEC under the Exchange Act) and even potential triplicate regulation for some investment advisers that are also commodity trading advisors registered with the CFTC,” the groups said.

Nevins added that SIFMA is also hoping for some relief on the issue of pooled investment vehicles, which can include muni bond proceeds. Nevins said asset managers are having tremendous difficulty determining if these pools contain such proceeds and therefore require the manager to be an MA, The SEC should either grandfather all existing investment vehicles and grant them an exemption, or should allow a “good faith effort” to suffice in determining if they include municipal bond proceeds or not.

The SEC is expected to release further MA rule guidance any day. Nevins said he is not sure whether it will address the issues raised in the letter, but said he is confident the SEC is understanding of SIFMA’s concerns.

BY KYLE GLAZIER

JAN 8, 2014 2:38pm ET

WASHINGTON—U.S. securities regulators, under pressure from Congress to prevent a repeat of financial debacles in municipalities like Detroit and Jefferson County, Ala., are set to propose a series of rules to rein in advisers that help states and localities raise cash in the $3.7 trillion municipal-bond market.

The Municipal Securities Rulemaking Board, a self-regulator for the muni-bond market, is expected this week to propose the first of a long-delayed set of rules for municipal advisers aimed at better protecting taxpayers from the types of complex transactions that soured during the financial crisis. Many unsophisticated local governments didn’t fully understand those transactions, which primarily involved so-called interest-rate swaps to hedge against higher borrowing costs.

The advisers targeted by the rules are firms, sometimes affiliated with banks, hired to work with states and localities to time, market and price municipal-bond deals and related transactions. But most advisers are unaffiliated with banks and were previously unregulated.

Lawmakers and regulators say they pushed to increase oversight of municipal advisers in the wake of tumult in localities like Jefferson County, where officials and Wall Street firms repeatedly used interest-rate swaps as a vehicle for kickbacks and other types of fraud. The 2010 Dodd-Frank financial law requires the advisers to register with the Securities and Exchange Commission and adhere to MSRB rules.

Matt Fabian, managing director at the research firm Municipal Market Advisors, said the rules could help municipalities avoid repeating mistakes that have caused financial turmoil in cities like Detroit, where the structure of swaps contributed to the now-bankrupt city’s problems. Under the coming rules, which set broad standards of conduct, a swap adviser would have to better understand and disclose the risks of such transactions to their clients.

Efforts to regulate advisers have taken far longer than lawmakers originally intended, in part because it took the SEC, which oversees the MSRB, until September to complete the definition of a municipal adviser and set up a permanent registration system. The final SEC rule spans 700 pages and goes into effect next week.

The coming MSRB rules are partly aimed at ensuring a level regulatory playing field between advisers affiliated with banks, such as Goldman Sachs Group Inc., GS -0.60% and so-called independent advisers that are unaffiliated with banks or brokerages. Bank- and brokerage-affiliated firms have long had to adhere to a set a conduct and pay-to-play restrictions that didn’t apply to independent advisers, which are typically small firms that employ three or four individual advisers.

The MSRB, which operates a separate registration system, says 928 firms are registered as municipal advisers. Of those, 224 are affiliated with banks or brokerages while 704 are “independent” firms.

Thomas Johnsen, a principal at Fieldman, Rolapp & Associates, an independent advisory firm based in Irvine, Calif., said advisers support the coming rules but worry about the affordability of compliance costs, especially for smaller firms.

The first set of MSRB rules seeks to ensure municipalities have competent advisers and establishes standards of conduct. Firms would have to possess expertise to advise on complex swaps transactions, disclose any conflicts of interest and adhere to a “duty of care” to act in the interests of their clients. They also would have to disclose the risks tied to a bond deal or related transaction, such as a swap.

In coming months, the agency also plans to propose supervisory provisions for advisory firms, restrictions on political contributions to local officials who can award bond business and limits on gifts and gratuities advisers can receive from clients. The MSRB also is developing a professional qualification exam similar to the exams brokers must pass.

The MSRB will collect public comments on all the proposals, and the SEC must sign off on them before they can go into effect.

By ANDREW ACKERMAN

Jan. 6, 2014 6:55 p.m. ET

Write to Andrew Ackerman at [email protected]

Annual list of priorities has old favorites as well as some new areas of concern

Finra’s opening salvo of 2014, its annual list of examination priorities, sent a clear message to broker-dealers, especially those dealing in complex products: Don’t expect any relief in the new year.

The document, which Finra’s approximately 4,200 member firms will review carefully to shape their compliance efforts in the coming year, re-emphasized common trouble spots for broker-dealers, while also ratcheting up enforcement in key areas, including interest-rate-sensitive products and rogue brokers.

“It’s kind of like, ‘We’re going to look at everything like we always do every time,’” said Daniel Wildermuth, chief executive of Kalos Financial.

PRODUCT CONCERNS

Nontraded real estate investment trusts, complex structured products, emerging-markets investment funds, mortgage-backed securities, long-duration bond funds and municipal securities are among Finra’s priorities in its monitoring program, according to the letter, which was posted on its website last Thursday.

Complex structured products have made the list every year since Finra began sending the letter out in 2006 under the National Association of Securities Dealers, so their inclusion came as little surprise, according to Joe Halpern, who runs Exceed Investments, a product development company focused on structured investments.

“Structured products will be on this list forever,” he said. “This whole list is a fair list of the complex products out there.”

The new twist this year was Finra’s focus on fixed-income products and hedging products that could be susceptible to interest rate volatility. The regulator included investments such as long-duration bond funds and emerging-markets debt on its list of concerns.

“Finra remains concerned about the suitability of recommendations to retail investors for complex products whose risk-return profiles, including their sensitivity to interest rate changes, underlying product or index volatility, fee structures or complexity may be challenging for investors to understand,” Finra’s letter stated.

Mr. Wildermuth, whose firm focuses on alternative investments and structured products, said he agrees with Finra’s concerns that investors might not understand the impact of rising rates on these products, but he also said that Finra’s regular inclusion of these products on its watch list continues to make it tough on firms that seek to employ these strategies legitimately.

“I don’t disagree with interest rate sensitivity, but I do disagree with the assumption that they’re boxing you into a corner that anything you do is suspect or suspicious,” he said.

Executives at Mr. Wildermuth’s firm have found themselves trying to keep ahead of regulator demands. The firm hosts weekly two-hour due-diligence meetings and he said that one of the most helpful practices has been increasing its record keeping.

In the end, brokers have to take Finra’s focus in stride, said the head of an industry trade group for the nontraded real estate investment trusts.

“There’s not anything out of the ordinary there that has us concerned,” said Kevin Hogan, president and chief executive of the Investment Program Association. “I don’t think there’s undue scrutiny. It’s their recognition that this product is not a mainstream stock or bond. There’s some complexity.”

Mr. Hogan agrees with Finra that selling complex products requires enhanced training for sales representatives.

“Education and training is important to this industry in particular,” Mr. Hogan said.

Steven Thomas, director of compliance at Lexington Compliance, a division of RIA in a Box, said that financial advisers need to be even more careful with hedging products, what he calls “land mines” in a volatile interest-rate environment.

“If you haven’t been vigilant in documenting why you’ve been recommending these products and strategies, you better reassess your process and procedures. Otherwise, you’re going to get tagged [by Finra] for putting your clients in unsuitable investments,” said Mr. Thomas, former chief compliance officer for South Dakota. “If you’ve planted the land mines, you better not step backward.”

ROGUE BROKERS

Finra also said that it will expand a program implemented last year to target rogue brokers who land at new firms after being disciplined or fired.

“When Finra examines a firm that hires these high-risk brokers, examiners will review the firm’s due diligence conducted in the hiring process, review for the adequacy of supervision of higher-risk brokers — including whether the brokers have been placed under heightened supervision — based on the pattern of past conduct, and examiners will place particular focus on these brokers’ clients’ accounts in conducting reviews of sale practices,” the Finra letter states.

Mr. Thomas supports Finra’s crackdown on brokers who have a history of disciplinary problems.

“There’s not enough legitimate and accurate reporting about why someone has left a firm,” Mr. Thomas said. “Firms are afraid of defamation of character lawsuits.”

But he cautioned that the pipeline between the insurance and securities industries is not being monitored well enough, allowing problem insurance brokers to restart their careers at securities firms.

“There is not a national reporting system for insurance bad apples,” Mr. Thomas said.

InvestmentNews

By Mark Schoeff Jr. and Mason Braswell

Jan 3, 2014 @ 12:50 pm (Updated 3:57 pm) EST

The Municipal Securities Rulemaking Board (MSRB) today published its 2013 Annual Report, which highlights the MSRB’s progress in key priority areas, including enhancing regulatory efficiency, improving financial disclosure by state and local governments, and increasing municipal market transparency. The report also includes financial highlights for the organization for the fiscal year that ended September 30, 2013, and a link to access full audited financial statements on the MSRB’s website.

http://www.msrb.org/msrb1/pdfs/MSRB-2013-Annual-Report.pdf

WASHINGTON — The Securities Industry and Financial Markets Association is very concerned about the imminent effective date of the new municipal advisor rule, warning both that federal regulators have not given banks enough time to comply and that the rule remains unclear absent additional guidance.

SIFMA members were handed too large of a compliance burden when the Securities and Exchange Commission approved its new MA rule in September, Leslie Norwood, managing director, associate general counsel and co-head of the muni group along with Michael Decker, who is also a managing director, both said in an interview.

The SEC specified that the rule become effective 60 days after its publication in the Federal Register, an action that was delayed by a government shutdown but eventually took place in November. The rule now becomes effective Jan. 13.

Decker said that larger firms may have hundreds of bankers who need to be trained in the new compliance regime, which imposes a fiduciary duty on, and requires the registration of, individuals and firms who provide municipalities with particularized advice about issuing bonds, muni derivatives, or muni escrow funds.

SIFMA members also will have a lot of work to do in investigating the funds they manage to determine whether they contain bond proceeds and whether those funds therefore are subject to the new regime, Norwood said. This could involve interviewing state and local officials and other time-consuming processes, she explained.

“It is not as simple as just checking,” she said.

The MA rule, which codifies language included in the Dodd-Frank Act, came under fire from the underwriting community almost immediately after its release and unanimous approval. SIFMA and other dealer groups remain concerned that the rule as written will prevent some necessary communication between underwriters and issuers, a claim non-dealer financial advisors have dismissed.

Norwood said SIFMA is awaiting further guidance from the SEC, especially regarding the scope of the underwriter exemption. The rule allows underwriters to offer certain kinds of advice once they are engaged to underwrite a specific muni offering.

The SEC has said it would release more guidance, and market participants expected it would come before the rule’s effective date, but so far none has materialized.

Some lawmakers have spoken up in support of SIFMA’s position, including House Financial Services Committee member Rep. Steve Stivers, R-Ohio. Stivers penned a letter to the SEC last month urging the commission to “make it clear that a dealer providing particularized ideas, analysis, information, proposals or other communications that might otherwise be deemed ‘advice’ under the rule not be precluded from underwriting a bond transaction that might arise from that communication” as long as the dealer complied with applicable Municipal Securities Rulemaking Board rules.

“It has definitely gotten the attention of the Hill,” Decker said.

SIFMA maintains that the MA provision in Dodd-Frank was only meant to bring non-dealer financial advisors under regulation, not to restrict the activities of dealers and other entities already governed by MSRB rules.

“Congress never intended that,” Decker said.

The issue has flared up recently as some issuers have refused to consider advisory services from dealer-affiliated FAs. Both Los Angeles and the Greater Texoma Utility Authority in Texas have recently solicited business exclusively from non-dealer FAs. Norwood said dealer-FAs would be a more logical choice for issuers, since they are currently governed by more rules designed to protect issuers and investors. The MSRB is working on rules that will apply to all MAs, but non-dealer advisors are currently are governed by the fiduciary duty and the board’s Rule G-17 on fair dealing.

BY KYLE GLAZIER

JAN 3, 2014 12:01pm ET

WASHINGTON — The Depository Trust Co. has submitted to the Securities and Exchange Commission a flat fee increase for multi-CUSIP municipal bond transactions, rather than the higher per-CUSIP fees it discussed earlier that riled market groups.

The new fee structure, which was effective Jan. 1, raises from $500 to $800 the fee DTC collects per issue with more than one CUSIP. Single-CUSIP transactions, which are not as common in the muni market, will remain unchanged at $350 per transaction.

Although the rule is already effective, the SEC can suspend it at any time within 60 days of its Dec. 23 filing based on public comments it receives. The commission is accepting comments during this time.

The Government Finance Officers Association, Securities Industry and Financial Markets Association, and National Association of Public Finance Advisors had protested in 2012 after hearing that the Depository Trust & Clearing Corp., which oversees the DTC, was considering a fee structure of $200 for the first CUSIP on a transaction and $150 for each additional CUSIP.

David Cohen, managing director and associate general counsel at SIFMA, said the new fee represents a favorable outcome compared with the per CUSIP structure initially discussed, despite not being ideal.

“This proposal from SIFMA’s perspective is not perfect, because it is a fee increase,” Cohen said, but added that SIFMA is still pleased that the DTC “refined” its earlier plan.

The fees jumped considerably three years ago, when multi-CUSIP transaction fees rose to $500 from $200, a spike that also outraged some sectors of the market.

The groups warned in 2012 that the new fee increase being discussed at DTC would lead to huge cost increases that would especially burden small issuers. An issuer of bonds with 20 different maturities, for example, would have paid $3,050 in fees under the initially discussed fee schedule. It would be $800 under the current one.

Nathan Howard, a lawyer at Affinity Law Group, LLC in St. Louis who serves as counsel to NAIPFA, was also pleased with the result.

“We’re very happy that DTC only increased their fees a minimal amount,” he said.

DTC’s filing indicated it believes that the fee schedule is equitable and will not disadvantage any market participant.

“DTC does not believe that the proposed rule change will have any impact, or impose any burden, on competition,” the filing reads. “The proposed changes will align DTC’s fees with the costs of delivering services to its participants, and the revised fee schedule will apply equally to all DTC participants in accordance with their use of DTC’s underwriting service.”

BY KYLE GLAZIER

JAN 7, 2014 2:30pm ET

CHICAGO — Detroit emergency manager Kevyn Orr said he asked the Securities and Exchange Commission to investigate the city’s interest-rate swaps amid “serious questions” about the legality of the financings.

Orr made the remarks Friday in testimony at a key hearing on the city’s proposed settlement with its swap counterparties. Despite misgivings about the original swaps and a 2009 provision that tapped casino revenues as collateral to the swaps, Orr is pushing for court approval to settle with the swap counterparties.

Bankruptcy Judge Steven Rhodes adjourned the hearing late Friday. Creditors who are challenging the deal will present closing arguments Monday morning.

The trial resumes as the city heads into key negotiations with bondholders Monday and Tuesday. It’s set to meet with holders and insurers of the city’s unlimited-tax and limited-tax general obligation bonds as well as water and sewer bonds in mediation sessions in New York.

Detroit’s swaps settlement with the counterparties, UBS AG and Merrill Lynch Capital Services Inc. has sparked the most opposition yet from municipal bond insurers and some debt holders in the historic bankruptcy case.

Opponents to the settlement include bond insurers Syncora Guarantee Inc. and Ambac Assurance Corp. and the city’s two pension funds.

Rhodes was set to rule on a settlement in mid-December, but suspended the hearings after an impasse with Detroit attorneys, who refused to disclose the legal arguments behind their decision to settle. Rhodes ordered the city back into negotiations with the banks to win a better deal.

A revised settlement, which is the subject of the current hearing, would have the city pay $165 million to UBS and Merrill Lynch to terminate the swaps, valued at roughly $248 million. The original deal called for a $230 million payment.

The city plans to secure a $285 million debtor-in-possession loan from Barclays PLC to pay off the swaps and use the remainder for various city services. The DIP financing is also part of the current trial, but did not come up much in testimony on Friday, according to local accounts.

Bond insurers, led by Syncora, which wraps some of the interest-rate swaps and the pension certificates they hedge, argue that the deal is too favorable to the banks in part because the original swap financings and the use of casino revenues as collateral violated state law.

Detroit emergency manager Kevyn Orr, in testimony Friday and in court documents, admitted that the city also had “serious questions” about the legal uncertainty surrounding the original financings. He said he even asked the Securities and Exchange Commission to investigate the deals.

“There were strong arguments,” Orr said. “But there are strong countervailing factual arguments.”

In the end, Orr said he decided the risks were too high, with the city’s odds of winning a legal battle at “more or less 50-50,” while tying up the casino revenue.

An Orr spokesman said that Orr asked the SEC to look into the swaps “a few months ago.”

“The SEC informed him that the commission has a four-year window to ‘look back’ on securities deals and that time period had passed,” Orr spokesman Bill Nowling said in an email, referring to the 2005-2006 pension certificate sale and the concurrent swaps. “The commission also said it had previously looked at the swaps deals and determined that it would not open a full investigation,” Nowling said.

Terminating the swaps is crucial for the city’s recovery, Orr said. “The city cannot plan unless it removes this potential risk from the table,” he testified.

Ambac also argued that the value of the swaps — and any termination payment — continues to fall in the city’s favor as interest rates rise, and so the $165 million payment does not represent a significant discount.

In closing arguments, Jones Day attorney Corinne Ball told Rhodes the city believes it has met its burden in proving that the settlement is in the best interest of the city and its creditors. The legality of the decision to pledge gaming revenue remains uncertain, Ball admitted. “Is it black and white on either side? No, we don’t think so. We thought it was litigable,” Ball said, according to the Detroit Free Press.

Earlier Friday, Ambac asked Rhodes to force the city to turn over its analysis of the legality of the swaps and the collateral, but Rhodes denied the motion.

The judge also denied Ambac’s later request that he immediately reject the swaps settlement with a “directed finding.”

BY CAITLIN DEVITT

JAN 3, 2014 5:33pm ET

Firm Must Repurchase $94 Million From New Jersey Family

An arbitration panel has ordered Wells Fargo WFC +0.73%  & Co.’s brokerage unit to repurchase about $94 million in municipal auction-rate securities from a New Jersey family.

James Cohen and the trust of the late Robert Cohen, who founded the Hudson News newsstands, accused Wells Fargo Advisors of fraud, negligence and breach of fiduciary duty related to investments in municipal auction-rate securities, or MARS.

These securities, once touted as safe, froze up during the financial crisis, causing many brokers headaches and investors considerable losses. Firms ranging from E*Trade Securities ETFC +2.47%  LLC to Oppenheimer were forced to buy back auction rate securities from investors in recent years.

The Cohens, who filed their case in November 2011, sought damages of $20 million for investments in MARS starting in March 2008.

A Financial Industry Regulatory Authority Inc. arbitration panel ordered the buyback at par value but denied the Cohens compensation and punitive damages, according to the award dated Dec. 24.

“We are disappointed with the decision and are reviewing it,” a spokesman for Wells Fargo said.

A lawyer for the Cohens wasn’t available for comment.

By MATTHIAS RIEKER

Dec. 27, 2013 2:56 p.m. ET

(Reuters) – The city of Miami on Friday lost its bid to dismiss a lawsuit by the U.S. Securities and Exchange Commission that accused the city of fraud by making misleading statements and omissions in connection with municipal bond offerings.

U.S. District Judge Cecilia Altonaga in Miami, Florida, said she was not convinced the SEC’s complaint was a “shotgun pleading,” rejecting the city’s claims the agency failed to allege any false or misleading statement.

“Those general allegations support each claim for relief and identify the relevant events, misrepresentations, and omissions advanced by the SEC,” Altonaga wrote.

The judge also rejected arguments the SEC failed to show that any of the alleged misstatements or omissions were material to investors, saying there was “just enough” to prevent such a finding.

Miami Mayor Tomas Regalado in an interview said the city “sort of expected this ruling.” He promised to continue litigating, but also said Miami was willing to settle the case.

“What I hope is that we can get a settlement that would not affect the positive outlook that we have in the bond offerings of the city now,” he said.

In a separate ruling Friday, Altonaga also declined to dismiss the SEC’s fraud claims against Michael Boudreaux, a former budget director for the city. Boudreaux had contended that as a public official he had qualified immunity from civil liability.

Benedict Kuehne, a lawyer for Boudreaux, said in an email that his client “remains confident that his hard work will be recognized as being without fault, no matter the extraordinary level of scrutiny exercised by the SEC.”

Representatives for the SEC did not respond to a request for comment.

The SEC sued Miami and Boudreaux in July amid a crackdown by the agency on issuers in the $3.7 trillion municipal bond market for failing to provide investors accurate and timely information.

The lawsuit said that beginning in 2008, Miami and Boudreaux made misleading statements about interfund transfers in three 2009 bond offerings for $153.5 million.

The SEC also accused the administration of the city, which has a population of 414,000 people, of violating a 2003 cease-and-desist order entered into with the agency over similar misconduct.

Since the SEC filed the lawsuit in July, the city hired a new budget director, and a trio of top finance staff resigned in late August. In response to the allegation, the city has also offered to bring in a new finance team under a revamped structure.

The city is also under SEC investigation in a probe focused on $500 million in bonds that the city and county sold to pay for the Marlins’ new baseball park in Little Havana.

The lawsuit came two months after the SEC similarly sued Florida’s South Miami for fraud, saying it did not disclose issues with the tax-exempt status of two bond deals.

It was one of a number of actions the SEC has taken this year against municipal issuers.

In May, the SEC brought a landmark case accusing Pennsylvania’s capital city of Harrisburg of making misleading statements outside of disclosure documents.

A month earlier, it accused Victorville, California, and others of defrauded investors by inflating the value of property used to secure a 2008 bond sale.

The SEC in March settled securities fraud claims against Illinois for misleading investors about its pension problems.

Most recently, the SEC announced in November a $20,000 settlement with the Greater Wenatchee Regional Events Center Public Facilities District, a municipal corporation formed by nine cities in Washington state.

The settlement, which resolved claims it misled investors in a bond offering financing an events center and hockey arena, was the first time the SEC had assessed a financial penalty against a municipal issuer.

The case is Securities and Exchange Commission v. City of Miami, Florida, U.S. District Court, Southern District of Florida, No. 13-22600.

BY NATE RAYMOND AND ZACHARY FAGENSON

Fri Dec 27, 2013 7:45pm EST

WASHINGTON — The Financial Industry Regulatory Authority has identified the suitability of the bonds of distressed municipalities for investors, as well as municipal advisor activity, as areas it will focus on in 2014.

FINRA on Thursday published its annual report on its regulatory and examination priorities, which it said lists the primary drivers of its activities for this year.

The self-regulator’s 11-page open letter to its dealer-members focuses heavily on suitability, including the suitability of risky munis for retail investors. Municipal securities rules require a dealer to make an effort to confirm that a financial product is suitable for a customer. FINRA expressed some concern about the exposure to rising interest rates of debt of distressed municipalities, such as Detroit.

“FINRA examiners will especially focus on accounts with concentrations in interest rate sensitive securities and disclosures or omissions of material facts when these products are recommended,” FINRA said in the letter.

As interest rates rise, the letter continues, municipalities may be forced to roll over their retiring debt that was issued at historically low rates and issue new debt at the higher rates.

“These incremental factors could exacerbate financial distress in municipalities already straining under the burden of falling tax receipts,” FINRA’s letter warned. “Most at risk would be those issuers with significant debt maturing in the near-to-mid-term, unrated issuers, and those with less capital and liquidity to absorb the additional expense.”

The authority will also focus on something new in 2014 when it looks at MA activity.

The Securities and Exchange Commission finalized its MA registration rule in September, and also made FINRA responsible for monitoring and enforcing the rules of advisors who are already regulated as broker-dealers by FINRA. The final rules become effective Jan. 13. The Municipal Securities Rulemaking Board is working on rules, including a muni-specific fiduciary duty rule. MAs are already subject to the fair dealing rule and have a fiduciary duty to put clients’ interests first. They also must be registered with the SEC.

In addition, FINRA said it would be expanding a program aimed at checking “recidivist brokers” who have displayed a pattern of behavior that could “harm investors as well as the reputation of the securities industry and financial markets.” Examiners will look at firms’ due diligence in hiring practices, and focus closely on the accounts of these “high risk” brokers, FINRA said.

BY KYLE GLAZIER

JAN 2, 2014 3:10pm ET

WASHINGTON — The Securities and Exchange Commission’s enforcement division is expected to focus next year on holding municipal bond issuer officials personally accountable and making sure both issuers and underwriters understand the importance of disclosure policies and procedures.

A series of 2013 cases, including actions against Harrisburg, Pa., South Miami, Fla., and the Greater Wenatchee Regional Events Center Public Facilities District in Washington State, offer a blueprint of what the commission may do in the coming year, SEC officials, private securities lawyers and other market participants said.

“You will see our increased focus on municipal issuers and issuer officials,” said LeeAnn Gaunt, chief of the SEC enforcement division’s municipal securities and public pensions unit. Gaunt took over the unit several weeks ago after working on the muni team since 2010 and spending 13 years in the SEC’s Boston office.

The commission will make public a number of enforcement actions in the coming year. “We have a healthy pipeline,” she said.

Gaunt said the SEC’s 2012 comprehensive report on the municipal market remains “a useful guidepost” to where the commission’s efforts will be focused. That report flagged concerns regulators continue to have about the muni market, including the lack of both pricing transparency and disclosure in the secondary market.

Disclosure

“The enforcement division will continue to focus in on disclosure,” said Elaine Greenberg, a lawyer at Orrick, Herrington & Sutcliffe LLP’s Washington D.C. office. Greenberg is the former chief of the SEC’s municipal securities and public pensions enforcement unit.

She left the commission in July after presiding over several of the precedent-setting cases. She drew particular attention to the Wenatchee case, the first time the SEC ever collected a financial penalty from a municipal issuer.

The Wenatchee district agreed to pay $20,000 to settle charges it misled investors by falsely claiming no independent revenue estimates for an arena had been conducted, when in fact they had. Greenberg said the case could be a “harbinger” of things to come.

“It’s very instructive of where the SEC appears to be focused,” she said.

The case could be a preview of 2014 actions in two ways, according to Greenberg. First, the action shows that the SEC is willing to extract financial penalties from municipal issuers if the money can be obtained without affecting taxpayers, In Wenatchee, the money came straight from arena operating funds.

Second, Greenberg said, the case is a good indication that the SEC will bring action against underwriters who fail to do their due diligence and even a wider range of transaction participants. In the Wenatchee proceeding, the commission also went after underwriter Piper Jaffray & Co. as well as the developer, Global Entertainment. Individuals at Piper and Global were also charged and involved in settlements.

“The SEC is most likely going to continue to scrutinize their conduct,” Greenberg said of deal participants who have not traditionally faced SEC penalties.

Greenberg said the SEC will probably continue to bang the drum on pension and other post-employment benefits, or OPEB, liabilities. The topic has become increasingly hot as more and more municipalities have been forced to face growing pension and OPEB liabilities. The bankruptcy judge’s ruling on Detroit has raised the specter that pension benefits can be cut in bankruptcy proceedings.

Greenberg added that, in 2014, an issuer official might be charged with fraud in the secondary market, something that did not happen in 2013. The SEC’s 21(a) report on Harrisburg warned that issuer officials could face charges if they spread false information to the market, as Harrisburg’s mayor did in a “state of the city” address. The mayor was not charged. Harrisburg was, however, a unique case in that the city had not been filing proper disclosures for extended periods of time and forcing investors to rely on such informal information as a speech.

Individuals

The muni market should watch out for an increased focus on individuals, according to Paul Maco, a securities lawyer at Bracewell & Giuliani.”I think the signals have been pretty clear,” Maco said. “That is one of the possibilities the Harrisburg 21(a) report warned about.”

Maco noted several other indications in 2013 that individuals would come under fire in the coming year, including SEC commissioner Daniel Gallagher’s statement to The Bond Buyer that “municipalities don’t commit frauds, people do.” Maco said the SEC charged some individuals in the secondary market years ago, and looks to be pivoting back that way as a refresher.

“It is, in a way, shifting back and reminding officials,” Maco said. He added that there is no reason to think 2014 will not be as active in enforcement as 2013, given Gaunt’s background knowledge and experience working in the unit.

“Their new director is someone very familiar with the area, and doesn’t need any on-the-job learning,” he said.

John McNally, a lawyer at Hawkins, Delafield & Wood LLP, said the SEC’s recent muni actions clearly present a “theme” that market participants should expect to continue in 2014.

“The core message from the SEC’s enforcement actions is the importance of written disclosure controls and disclosure training,” McNally said, pointing out that SEC actions against New Jersey, Illinois, and Harrisburg all cited the importance of issuer disclosure training, while the more recent Wenatchee case made the same point for underwriters.

“The key is that written disclosure controls and training serve not only to enhance the quality of disclosure but also to establish a defense were misleading disclosures to occur,” he said.

McNally said the National Association of Bond Lawyers has undertaken a project aimed at providing guidance to the market on that very issue, and that it is likely to be available in the first quarter.

Another issue the SEC might explore is issuers’ failure to disclose deferred infrastructure maintenance, according to McNally. Governmental Accounting Standards Board accounting and reporting standards require municipal entities to report the true cost of unmade repairs, but governments are not actually bound to adhere to GASB standards unless they want a clean audit opinion. Issuers that say they are following the GASB standards, however, must do so or they could face fraud charges.

John Grugan, an attorney with Ballard Spahr LLC, said 2014 could be notable for an increased enforcement scrutiny on underwriters for shoddy due diligence, as well as additional investigations of “gatekeepers” such as lawyers and accountants.

“The SEC already has provided some indications about the areas it will focus on in 2014,” Grugan said. “The SEC, for some time now, has highlighted its enforcement actions against gatekeepers, such as lawyers, audit committee members, and accountants, but recently the SEC increased its scrutiny of underwriters and named underwriters as defendants in several cases in which [it] claims greater due diligence should have been undertaken. Additional enforcement actions charging gatekeepers can be expected as the SEC continues to dedicate additional resources to its municipal securities investigations.”

“Similarly, as the city of Harrisburg matter illustrates, the SEC now is examining secondary market disclosures, and it seems certain that the SEC will dedicate similar energy to its review of continuing disclosures,” he said.  “Further, the SEC announced a renewed focus on accounting fraud this fall, and this focus complements the SEC’s already-established enforcement efforts with respect to pension plan accounting and pension funding and related disclosures.  Additional investigations in these areas seem likely, as well.”

Municipal Advisors

While it seems clear the SEC is prepared to take a hard line on issuer and underwriter disclosures, as well as unfair pricing and pay-to-play violations as they occur, what is less certain is how the enforcement division will interact with the municipal advisor community.

MAs must register or re-register with the SEC beginning in July under the commission’s registration rule, which was approved in September. The rule itself becomes effective Jan. 13, but MAs have had to be registered under a temporary rule and have owed a federal fiduciary duty to their clients since the passage of Dodd-Frank in 2010.

Gaunt said the SEC could bring charges against MAs who break the fiduciary duty, and forthcoming rules from the Municipal Securities Rulemaking board will add specificity to the law. The MSRB has said one of its first priorities in 2014 will be a MA-specific fiduciary duty law.

Robert Doty, president and proprietor at municipal bond consulting firm AGFS, said he expects the SEC to flex its muscles in the MA space, but possibly not based on the basis of fiduciary duty.

“I would expect there to be enforcement actions against municipal advisors,” Doty said.

Dodd-Frank contains a broad antifraud provision that applies to muni advisors, Doty said, which could allow the SEC to take action. But other experts viewed the probability of enforcement cases against MAs as less likely.

“This is a whole new registrant population,” Greenberg said. “I think this may present opportunities for enforcement actions down the road.”

The coming year might be too soon for the SEC to take such action in the absence of MSRB rules, she added.

“It’s something that people should be on the lookout for down the road,” Greenberg said.

Maco agreed that the time for tough action against MAs is probably further away than the coming year, “The greater activity should be on guidance,” he said. “This is just the beginning. There is a lot more to come.”

Once the MSRB has written rules for the fiduciary duty, supervision, and gifts and gratuities, then the SEC might be more inclined to step in, according to Maco.

“It will probably be a few years,” he predicted.

Greenberg also said market participants should keep an eye on the possibility of enforcement actions against public-private partnerships after the South Miami enforcement case. In that case, the SEC took the city to task for not disclosing that the tax-exempt status of the bonds it used to fund a parking facility might be compromised.

P3s are growing in popularity in the U.S. particularly in Texas, Florida, and Virginia. The line between public and private use can get blurry, and that could be dangerous for municipalities, developers, officials, and other transaction participants who fail to be very straightforward about any tax issues they might have.

“As more of these deals get done, it presents a risk,” Greenberg said.

The coming year may also be a deciding one for a number of convicted bid-riggers, following the successful appeal and overturned convictions of a trio of General Electric bankers in November.

Dominick Carollo, Steven Goldberg, and Peter Grimm escaped prison on the grounds that the federal prosecutors did not move quickly enough to indict them for alleged fraud committed near the turn of the millennium, two of three judges of the U.S. Court of Appeals for the Second Circuit ruled.

Former UBS AG bankers Peter Ghavami, Gary Heinz, and Michael Welty were convicted in August 2012 as part of the same government investigation, and their lawyers are currently reviewing the appeals court’s decision to see how it might be applicable to their case. A key party, CDR Financial Products founder David Rubin, was also convicted and is scheduled for sentencing next month.

Anthony Sabino, a Mineola, N.Y., white-collar defense attorney and St. John’s University law professor, said the overturned verdicts could open up a host of possibilities for the other convicted men.

“Frankly, I’m worried that this ruling will weaken future white collar crime cases because it draws a premature line as to when a conspiracy stops,” Sabino said. “Sure, most bad guys go for the fast buck, but this holding almost encourages crooks to be patient. Only time will tell.”

The ruling “opens up the door to a number of procedures to toss out their convictions, purely on the legal grounds at the heart of this case,” he added.

Sabino noted that even previously convicted men who took plea bargains have been freed in similar circumstances, such as when some Wall Street floor traders were set free following the Second Circuit’s decision in U.S. v. Finnerty in 2007.

U.S. Department of Justice attorneys have been silent on its plans for the muni bid-riggers, declining multiple requests for comment.

BY KYLE GLAZIER

DEC 30, 2013 11:33am ET

WASHINGTON – The Financial Industry Regulatory Authority (FINRA) announced today that it fined Barclays Capital Inc. $3.75 million for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years.

Federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as “Write-Once, Read-Many” or “WORM” format) to prevent alteration. The Securities and Exchange Commission has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the “primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.”

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, account records and other similar records—in WORM format. The issues were widespread and included all of the firm’s business areas, thus, Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

Brad Bennett, Executive Vice President and Chief of Enforcement, said, “Ensuring the integrity, accuracy and accessibility of electronic books and records is essential to a firm’s ability to meet its compliance obligations. The format errors in this case made it nearly impossible for Barclays to verify that these key materials remained in an unaltered condition.”

FINRA also found that from May 2007 to May 2010, Barclays failed to properly retain certain attachments to Bloomberg emails, and additionally failed to properly retain approximately 3.3 million Bloomberg instant messages from October 2008 to May 2010. In addition to violating FINRA, SEC and NASD rules and regulations, this adversely impacted Barclay’s ability to respond to requests for electronic communications in regulatory and civil matters.

Finally, Barclays failed to establish and maintain an adequate system and written procedures reasonably designed to achieve compliance with SEC, NASD, and FINRA rules and regulations, as well as to timely detect and remedy deficiencies related to those requirements.

In concluding this settlement, Barclays neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The investigation was conducted by Eric Adams and Katrina Laperuta, under the supervision of Michael Choi and Richard Best.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2012, members of the public used this service to conduct 14.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.

Wall Street banks are trying to prevent the Volcker Rule from forcing them to wind down funds that use borrowed money to bet on the $3.7 trillion municipal-bond market.

The rule, named for former Federal Reserve Chairman Paul Volcker and approved by regulators last week, limits banks’ ability to run investments known as tender-option bond funds. The investments form a $70 billion segment of the local-debt market, according to the Securities Industry and Financial Markets Association. The funds issue short-term securities and use the proceeds to buy longer-maturity local-government obligations, profiting from the difference in interest rates.

The purchases help lift demand for tax-exempt debt by giving investors a way to make leveraged bets on munis. Banks are searching for ways to restructure the funds to keep them in compliance with the law, which goes into effect in 2015.

“This affects trading desks and investors alike and they are working to find a solution,” said Vikram Rai, a municipal-bond analyst with Citigroup Inc. in New York. “There could be some restructuring that could happen so that business is continued as usual.”

Banks create tender-option bond funds for institutional investors seeking higher returns from munis, which pay lower yields than other debt because their interest is exempt from federal income tax. The vehicles issue short-term debt to money-market funds and use the proceeds to buy securities. Some of the investment returns go toward repaying the short-term debt, with investors pocketing whatever is left over.

The debt is typically backed by banks, which agree to repurchase it, so it can be sold at low interest rates to money-market funds.

The new regulations don’t take effect until mid-2015. Sifma, the New York-based trade group that represents banks and investors, is researching ways to allow the funds to keep operating once the new rules kick in.

“Sifma is in an exploratory phase now, working with sell-side and buy-side Sifma members to come up with a solution,” David Cohen, managing director and associate general counsel at the group, said in an interview. “We expect to be able to do that.”

Citigroup’s Rai said he expects that such changes will be found, and he doesn’t anticipate that funds will be required to unwind their investments.

“I don’t think we’ll see any forced selling,” he said.

One potential option would be for banks to bring in a third party to take over the job of backstopping the short-term debt issued by the funds, J.R. McDermott, head of short-term and liquidity products at New York-based Morgan Stanley, said on a conference call yesterday.

Lawyers are also examining whether the funds are permissible under certain exemptions in securities laws, he said.

“A lot of this is really in discovery mode right now, there’s not a lot of solutions in the marketplace,” McDermott said. “Everybody is obviously treating this with the utmost of urgency.”

By William Selway and Brian Chappatta  Dec 17, 2013

To contact the reporters on this story: William Selway in Washington at [email protected]; Brian Chappatta in New York at [email protected]

To contact the editor responsible for this story: Stephen Merelman at [email protected]

Banks Scramble to Reshuffle Their Portfolios

The effects of the week-old Volcker rule are being felt thousands of miles from Wall Street as small and midsize banks begin to sell debt. Other institutions are looking for new ways to finance muni bonds.

Financial institutions and investors are scrambling to line up a new way to finance municipal-bond investments, with the week-old rule set to curtail banks’ dealings in so-called tender-option bonds—a $75 billion niche of the market for debt issued by cities, states and local governments.

Meanwhile, more than a dozen small and midsize banks likely will need to sell collateralized debt obligations under a Volcker rule provision limiting certain risky bank investments, according to analysts. Zions Bancorp of Salt Lake City said Monday it would have to sell some CDOs, and that it would take a $387 million charge to write down the value of the securities.

Zions’ move shows that five years after the financial crisis, some banks continue to hold significant chunks of risky, hard-to-value assets on their books, fueling uncertainty among investors about their true financial health.

The developments are the latest fallout from the formal adoption last week of the Volcker rule limiting risk-taking by federally insured depository institutions.

The rule, part of the 2010 Dodd-Frank financial regulatory overhaul, will force giant banks to rethink virtually every aspect of their trading activities. Many banks already have sold, wound down or spun off restricted activities such as proprietary-trading desks that make wagers with the bank’s own money.

But the rule also is forcing changes at institutions thousands of miles from Wall Street, validating fears that unintended consequences from the rule could harm the financial industry and the U.S. economy.

“Regulators have been as methodical as they can be,” said Clifford Rossi, a finance professor at the University of Maryland’s business school. “But it’s a daunting task for regulators to think through every aspect to make sure there isn’t some hidden risk that they hadn’t thought of.”

In a tender-option bond transaction, banks, hedge funds and others use short-term borrowings to fund the purchase of long-term muni bonds. The hope is that they will profit from the difference in the interest they pay lenders—often money-market funds—and what they earn on the muni bonds.

The market is a fraction of the $3.7 trillion municipal-debt universe, but the debt has been popular with large investment firms such as OppenheimerFunds, Nuveen Asset Management and Eaton Vance, which often used the debt in leveraged strategies that aim to boost returns using borrowed money.

The Volcker rule, adopted in response to the 2008 financial crisis, will end large banks’ participation in tender-option bonds as they are currently structured, which likely will reduce trading and curb the issuance of new bonds, said critics. Existing deals may have to be unwound.

Banks will be working “feverishly” to come up with other options for financing municipal bonds, said Margaret Sheehan, a partner at law firm Ashurst LLC who argued for an exemption on behalf of banks including J.P. Morgan Chase & Co., Wells Fargo & Co. and Deutsche Bank AG.

The Securities Industry and Financial Markets Association is forming a working group to find another way for its members to use leverage to invest in municipal debt, said David Cohen, managing director and associate general counsel at Sifma.

The trade group had said in its comment letter to regulators in February 2012 that “a disruption of tender option bonds will disrupt the municipal market.”

Tax-exempt money-market funds have been the main buyers of floating-rate debt issued under tender-option bond programs, comprising 20% or more of some funds’ assets. Assets in these types of money-market funds have shrunk to $257.4 billion from a peak of $483.8 billion, said Peter Crane, president of Crane Data LLC. The pool of investments that money market-mutual funds are able to buy has been shrinking, he said.

Banks and their attorneys are poring over the 953-page Volcker rule, which limits bank investments in CDOs backed by trust-preferred securities, or Trups.

Many small institutions issued the securities before the financial crisis through CDOs, which pooled the securities with those issued by other banks. The banks that acquired them saw them as a good investment partly because of steady interest payments they stood to receive.

Zions’ projected write-down means that it is currently valuing at least some of its CDOs above fair value, reflecting the price at which it could sell them in the market. The write-down stems in part from a change in the bank’s accounting treatment for the investments.

“This is not something that we had anticipated, nor do we think we reasonably could have anticipated based on what was in the proposed rule,” Zions Chief Financial Officer Doyle Arnold said on a conference call with investors Monday.

Most other banks probably won’t have to take significant write-downs, banking analysts said, in part because unlike Zions they don’t have CDOs they were intending to hold until they matured. The Volcker Rule’s requirement to sell those CDOs forced Zions to reclassify them, in a way that required the bank to re-value them and record part of its write-down.

Kevin Petrasic, a partner with the law firm Paul Hastings LLP who is advising banks on the Volcker rule, said the challenge for banks will be avoiding a “shotgun divestiture” of assets.

“What institutions will be doing is trying to figure out optimal timing,” he said.

Municipal advisor regulations are likely to be the focus of intense debate in 2014, as the Municipal Securities Rulemaking Board labors to release rules and broker-dealer groups continue to push for interpretations favorable to underwriters.

Dealer groups, non-dealer financial advisors, securities lawyers, issuer groups, and regulators all expect the implementation of MA rules to take center stage in the coming year. They don’t anticipate much muni securities legislation in Congress.

The Securities and Exchange Commission released its MA definition in registration rules in September, finally fulfilling a mandate handed down by the Dodd-Frank Act in 2010. But even with the SEC’s work substantially complete, 2014 could be the “year of the municipal advisor” as various groups jockey for position to lobby regulators and rally public opinion to their sides.

MSRB chairman Dan Heimowitz said the board will give priority to MA rulemaking during the year, his last with the self-regulatory organization.

“It’s going to be the focus of a big part of our time in 2014,” Heimowitz said in a recent interview.

An initial milestone that could come up in the first quarter of 2014 is the MSRB’s release of a fiduciary duty rule, the cornerstone of the Dodd Frank mandate. The law places this duty on all firms or individuals giving particularized muni bond or derivatives advice to a municipal entity, meaning that municipal advisors must put the interest of issuers and other municipal entity clients ahead of their own.

Many MSRB municipal advisor rules were written two years ago when the SEC released a draft rule that it was forced to revise amid industry criticism that the language was too broad. Heimowitz and MSRB executive director Lynnette Kelly have said that the previously developed rules create a good base for the development of updated ones, including for the fiduciary duty requirement.

“We have a substantial amount of the board work done toward getting a draft out,” Heimowitz said.

Once that rule is out and is approved by the SEC, the board could turn to work on other rules governing other MA conduct, such as supervisory requirements and limits on gifts, gratuities, and political contributions, Heimowitz said. The professional qualifications exam for MAs is something he highlighted as being much helped by the work of the MSRB staff. A rule dictating that is unlikely to be out this year, though “we hope to make a substantial amount of progress,” he said.

Susan Collet, senior vice president of government relations at the Bond Dealers of America, agreed that the dialogue about MA regulation will now shift heavily to the MSRB, but said the SEC might still feel the need to chime in if it feels further interpretations or guidance are necessary.

Almost immediately after the SEC unanimously approved its MA definition, dealer groups and non-dealer FAs began sniping back and forth over its workability. Dealers have taken the position that the rule will restrict their abilities to offer certain types of advice to issuers at the risk of being unable to do underwriting business with that issuer, while non-dealer FAs maintain that the rule contains enough exemptions to prevent necessary communication between issuers and underwriters from being impeded.

Continued disagreement about what the rule, which takes effect on Jan. 13, does or does not allow is likely to prompt more guidance from the SEC.

“It may not be the last we hear from them,” Collet said.

Collet added that she didn’t expect quick action from the MSRB, but that dealer firms will be putting together compliance regimes in the opening weeks of 2014.

Leslie Norwood, associate general counsel and co-head of municipal securities at the Securities Industry and Financial Markets Association, said the dialogue about the rule is likely to continue as firms begin to implement the SEC rule, especially between the industry and the MSRB. Heimowitz has said the board plans to provide for public comment on all its MA rulemaking, and may utilize an expanded 60-day comment period on some rules.

“We feel this rule will take up a lot of the year,” Norwood said of the MA regulations. “The MSRB has a lot of work to do.”

Norwood said that SIFMA will continue efforts aimed at making sure non-dealer advisors and dealer-affiliated advisors have to play by the same rules.

“It’s going to be our goal to make sure there is a level playing field,” she said. Dealers claim their advisory firms are subject to all of the MSRB rules while MAs are mostly waiting for the MSRB rules. They are already subject to a fiduciary duty and to the MSRB’s Rule G-17 on fair dealing.

Jeanine Rodgers Caruso, president of the National Association of Independent Public Finance Advisors, agreed that the SEC would probably have more to add to the conversation on MA regulation. Caruso said she expects dealer groups to look for changes to the SEC rule.

A draft letter circulated to SIFMA members earlier this year indicated that the group would try to put pressure on federal regulators and lawmakers to alter or reinterpret the rule. The group has not followed through with a public campaign but NAIPFA issued sent an “open letter” to SEC chair Mary Jo White saying they support the rule and do not think changes are needed.

“Broker-dealer groups will continue to push for legislative changes to the municipal advisor rules,” Rodgers Caruso said.

She added that she doubts the MSRB would be able to get some of the key MA rules functioning until late in the year.

“Although the MSRB will likely release various rules, we don’t anticipate that the more complex rules, such as fiduciary duty and fair dealing, will be in place before the third quarter of 2014,” she said.

Robert Doty, president and proprietor of municipal bond consulting firm AGFS, said the MA rules will be a major story in 2014 as the industry adjusts to being regulated for the very first time.

“I really think it’s going to be a major shock to the industry, and I think there will be a lot of fallout from it,” Doty said.

He added that the onset of the regulations will lead to a slow weeding out of MAs who are not qualified or competent. Though there are many good financial advisors providing MA services, Doty said, there are many others who leave much to be desired and there are not enough good ones to serve all the municipal clients who could benefit from non-dealer advice.

Those changes could start in 2014, but will probably take much longer, he said, adding, “I think it’s going to take years.”

As large as the MA rule looms in 2014, there are other potential regulatory events that muni market participants will be watching for. One is the implementation of the Volcker Rule, which received joint approval from the SEC and other federal agencies earlier this month. The final rule contained a ban on proprietary trading, but exempted municipal securities, after several industry groups submitted comments urging that all munis, and not just state and local general obligation bonds, be exempt from the rule. However, the rule doesn’t exempt tender option bonds, causing dealers and other observers to warn that it will hurt the market in the coming year.

TOBs are securities issued by a special purpose trust into which bonds deposited. The trust issues floating rate securities, which are sold to money market funds, and inverse floating rate securities retained by the fund that sets up the trust.

SIFMA and other groups have told the SEC that TOB transactions are far more sound than risky private equity or hedge fund deals. Banks say the bar will hurt the market by reducing liquidity. SIFMA is exploring alternatives to TOB transactions, which is something Norwood’s co-head of municipal securities Michael Decker said will be “a big focus” next year.

William Oliver, an industry liaison with the National Federation of Municipal Analysts, agreed that Volcker could pinch the market next year.

“That’s clearly a potential negative,” he said.

Collet said it is hard to know right now how the Volcker Rule will affect munis, but said it should become clear soon.

“The implications of the Volcker Rule will be more apparent next year,” she said.

Another area of interest is the creation of a best execution standard, which Kelly has said could be proposed for public comment following the board’s January meeting.

The MSRB previously requested comment on whether it should create a best-ex rule, which would require dealer firms to make an effort to execute transactions with prices as favorable as possible for their customers, as required in the corporate bond marketplace. SIFMA and BDA have argued that the illiquid and opaque nature of the muni market makes it unrealistic to expect corporate-style regulation to be efficient, but the MSRB did not embrace SIFMA’s milder “execution with diligence” rule proposal. Norwood said SIFMA looks forward to working with the MSRB on that rule.

Collet said the best-ex proposal will come early next year and is likely to involve all the key market regulators. The SEC would have to approve the new rule, and the Financial Industry Regulatory Authority may be involved in the dialogue as the author of a very similar rule for corporate bonds.

“I would expect the MSRB to put something out on that, and the SEC will have a view on that I am sure, as well as FINRA,” Collet said.

Few market participants expect much legislative activity, and one Congressional aide said the securities discussion on Capitol Hill has largely gone quiet in favor of tax issues. Collet said some committees might hold hearings about municipal default and bankruptcy issues as the Detroit saga continues to unfold.

“For securities, I think it will be a fairly quiet year,” Norwood said of the legislative outlook.

Issuers will also be awaiting the fate of money market mutual funds, for which the SEC has proposed reforms intended to curb the systemic risk. The SEC has proposed moving most MMFs to a floating net asset value from the current stable NAV of $1 per share. It also has proposed funds have liquidity fees and gates to discourage redemptions.

The proposals are aimed at preventing runs on MMFs such as the one that occurred during the financial crisis in 2008 when the Reserve Primary Fund “broke the buck” and led investors to pull more than $300 billion from prime money market funds.

Issuer officials have complained that forcing MMFs to adopt a floating NAV would limit the ability of municipalities to use MMFs as an investment vehicle. Other market participants, and even some lawmakers, have also said MMFs are huge holders of muni bonds and the changes could cause a ripple effect through the market. Dustin McDonald, director of the federal liaison center at the Government Finance Officers Association, which has many members who invest in MMF, said the GFOA will be working on this issue along with the MA rule.

Heimowitz and Kelly said that the MSRB will continue to expand its outreach programs in 2014. Beyond rulemaking, the MSRB is active in investor and issuer education. Heimowitz said the board will be holding outreach events in both Atlanta and Chicago this year. Kelly said the group will probably ramp up its new media efforts to evolve beyond solely printed materials.

“We are spending a lot of time on videos,” Kelly said. “That is really a new component of our education program.”

The board will also host seminars and webinars on different topics, the MSRB leaders said.

–Mike Cherney

BY KYLE GLAZIER

DEC 26, 2013 10:41am ET

WASHINGTON — The Securities Industry and Financial Markets Association has released some best practice guidance designed to help firms comply with the Municipal Securities Rulemaking Board’s Rule G-43 on broker’s brokers.

Rule G-43, which was approved by the Securities and Exchange Commission in June 2012 and became effective on Dec. 22, 2012, affirms a broker’s broker’s duty to make a reasonable effort to obtain a fair and reasonable price for municipal securities and reminds selling and bidding dealers of their fair-pricing obligations. The MSRB also issued a related interpretative notice for dealers using the services of a broker’s broker.

Broker’s brokers serve as intermediaries between broker-dealers seeking to buy and sell municipal securities on behalf of customers. They help provide liquidity in the secondary market.

An alternative trading system is not considered to be a broker’s broker if it meets a series of conditions.

David Cohen, SIFMA managing director and associate general counsel, said the SIFMA guidance originated with the group’s broker’s brokers committee.

“They felt there were some gaps and the market would benefit from some uniform practices,” he said. “We thought it was helpful to develop some uniform practices [in areas] that G-43 was silent on as well as to highlight the fair-dealing obligations of all of the parties in the bid-wanted process.”

The guidance, for example, stresses that if dealers selling munis use the bid-wanted process for price discovery, with no intention of selling the bonds through the process, they run the risk of violating Rule G-17 on fair dealing.

It also warns of possible G-17 violations from the practice of “pennying up,” under which a dealer selling munis does not provide a competitive bid prior to the collection process, and then purchases the munis afterward for its own account at prices exceeding the high bid obtained by the broker’s broker by a very small amount.

In addition, SIFMA says a selling dealer may want to make a broker’s broker aware that it will be in competition with the broker’s broker “to avoid any appearance of impropriety should the selling dealer decide to internalize the bid without executing the sale to the high bidder in the bid-wanted” process.

BY LYNN HUME

DEC 16, 2013 4:35pm ET

The Securities and Exchange Commission is making it clear: Government leaders who issue misleading financial information are putting themselves at risk.

Several recent actions by the Securities and Exchange Commission (SEC) against states and municipalities have highlighted the potential risk to government leaders who fail to disclose financial information on a timely basis or who issue information that might mislead investors. And the risk goes beyond liability for their jurisdictions: In some cases the federal regulator could hold public officials personally liable.

This March, the SEC charged the state of Illinois with securities fraud for misleading investors about serious problems with the state’s pension fund. A month later, the SEC accused the city of Victorville, Calif., a city official, the related Airport Authority and the city’s bond underwriter of securities fraud in connection with a $13.3 million bond sale in 2008. In May, the SEC brought actions against the cities of South Miami, Fla., and Harrisburg, Pa., alleging that investors were harmed by incomplete and misleading financial disclosures. And in July the SEC accused the city of Miami and its former budget director of securities fraud.

In a warning to government leaders across the country issued in connection with the Harrisburg case, the SEC took the unusual step of issuing a strongly worded report that clarifies and strengthens disclosure requirements under federal securities laws. That report explicitly highlights the risk to government officials of being held personally liable for securities fraud in connection with secondary market trading of municipal securities.

That was not an idle threat, as the charges of security fraud against the city of Miami and its former budget director demonstrate. The SEC alleged that the former budget director had sought to deceive investors and bond-rating agencies regarding the city’s financial health by transferring funds from other city accounts to hide deficits in the city’s general fund. The SEC also alleged that Miami had made material misrepresentations in its 2007 and 2008 Comprehensive Annual Financial Report (CAFR) and in communications with rating agencies in 2009.

The SEC’s actions come at a time of increased public focus on the strength of the municipal bond market. Investors have been attracted to municipal bonds because they were seen as relatively safe and in some cases had tax benefits. But as the 2008 financial crisis spread, the financial contagion quickly had an impact on state and local tax bases, with a devastating effect on the financial positions of states and municipalities. Because of the risk of harm to investors in municipal bonds, the SEC has turned an increasing focus on state and local governments — and on their leaders and executives.

What does this all mean for state and local government officials?

• It’s never been more important to create — and maintain — institutional awareness of continuing disclosure obligations. States and municipalities should have complete and updated securities disclosure policies in place, and they should regularly train relevant employees and officials on the policies and related legal requirements under the federal securities laws.

• The CAFRs and Material Event Notices required under Municipal Securities Rulemaking Board rules and other continuing disclosure obligations must be filed on a timely basis.

• Government leaders and executives must be mindful of their obligations under federal securities laws, including the risk of personal liability for securities fraud. Public statements on financial matters should be balanced, measured and accurate.

The SEC’s recent actions highlight a sea change in the agency’s approach to enforcement regarding state and municipal securities issuers. Government leaders and executives should embrace the SEC’s recent actions as a teaching moment — an opportunity to recalibrate their understanding of their responsibilities under the federal securities laws.

BY IVAN KNAUER,JOHN SNODGRASS | DECEMBER 19, 2013

A group of non-dealer advisors on Wednesday released a guide for issuers and municipal advisors, saying it is designed to clear up misconceptions about the Securities and Exchange Commission’s municipal advisor rules.

The National Association of Independent Public Finance Advisors posted the four-page guide on its website.

At the same time, the Government Finance Officers Association announced it plans to provide an Internet training course, called “SEC Municipal Advisor Rule: Understanding the Future of the Issuer — Financial Advisor and Underwriter Interaction,” for issuers and public finance professionals on Jan. 15.

The “instructor” for the GFOA course will be John Cross, director of the SEC’s Office of Municipal Securities.

The MA rules, which take effect on Jan 13, require MAs to register with the SEC and to comply with Municipal Securities Rulemaking Board rules. An MA is defined as a firm or person who provides particularized advice about muni bonds to an issuer or other municipal entity. MAs have a fiduciary duty to put their clients’ interests first, before their own.

Explaining the guide, NAIPFA president Jeanine Rodgers Caruso, said: “It is our goal as municipal advisors to protect the interests of issuers, which includes making sure that issuers understand the new regulatory environment, what they can and cannot do, and what their professionals can and cannot do.”

Caruso said that while the SEC rules “may be not perfect, they are not overly burdensome and will achieve the SEC’s goal of protecting issuers.”

The NAIPFA guide provides answers to 16 questions or assumptions made about the rules.

Broker-dealers have complained that the rules will constrain them from providing the kind of advice that they have been giving issuers for years.

NAIPFA disagrees, saying in the guide that a dealer can provide certain advice to an issuer without being considered an MA including, information that is: of a factual nature without subjective assumptions, opinions, or views; not particularized to a specific or type of municipal entity; widely disseminated for use by the public, clients, or market participants other than municipal entities or obligated persons; or educational.

“Issuers can still talk with broker-dealers (i.e. underwriters) or bankers,” NAIPFA said in the guide. “There will, however, likely be a minor shift in terms of the manner in which those conversations occur.”

The communication “will become more formalized than in the past,” the guide said.

For example, a broker-dealer could recommend a type of financing to an issuer without being considered an MA if it meets one of three exemptions: the recommendation is in response to a request to a request for proposals or qualifications, the issuer has engaged the broker-dealer as an underwriter, or the issuer has hired an independent registered municipal advisor and makes the dealer aware of that in writing.

The term independence means the MA must not be, currently or within the past two years, associated with the dealer or underwriter relying on the exemption.

Dealer-financial advisors have complained that they are on an un-level playing field with MAs because MAs are not subject to the same rules that they are, including rules against hiring outside consultants or engaging in pay-to-play practices.

In its guide, NAIPFA says that since 2010 MAs have had a fiduciary duty to put clients’ interests first and have had to comply with the MSRB’s Rule G-17 on fair dealing. The MSRB is developing rules and rule changes for MAs, but that process could take months or even years.

The guide says that, unlike with an underwriter or banker, the role of an MA does not end once debt is issued. Its fiduciary duties extend whenever services are provided and continue for the life of an issue, NAIPFA says.

View the NAIPFA MA Rule Guide at:

http://naipfa.com/wp-content/uploads/2013/12/MA-Misconceptions-Final.pdf

BY LYNN HUME

DEC 18, 2013 4:13pm ET

One provision of the finalized Volcker Rule could cause headaches for states and localities that issue bonds.

The municipal market received a vote of confidence with the newly finalized Volcker Rule but one provision that eliminates a common bank investment tool could cause some headaches for states and localities that issue bonds.

U.S regulators finalized the rule, part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, last week. The new reform restricts certain risky investments (like hedge funds) by banks. The first draft of the rule in 2011 included most types of municipal securities in such trading prohibitions. The final draft last week left them out, a move that “signals a recognition of their importance to public infrastructure creation and economic growth,” said analyst Matt Fabian of Municipal Market Advisers. (Three-quarters of the nation’s public infrastructure funding each year comes from municipal bonds.) This could actually help demand in the municipal market, he added.

But one aspect of the rule could put a damper on investmetn in municipal bonds. In limiting banks’ investments in hedge funds and other high risk vehicles, regulators also included what’s called Tender Option Bonds, or TOBs. These bonds represent a small fraction of the municipal market (about $75 billion of the $3.7 trillion market), and are short term bonds issued to hedge funds and banks to cover long-term investments. Short term borrowing has typically yielded very low interest rates while rates on longer-term bonds has been higher. So, banks hope to pocket the difference between the two rates as profit.

Regulators acknowledge that by limiting this investment option in the market, they are potentially burdening municipal bond issuers. There “may be an increase in financing costs to municipalities as a result of a decrease in demand for the types of municipal securities” typically financed with TOBs, the rule says. Without this financing mechanism, some municipalities may have to offer higher interest rates in order to sell their bonds.

But there is hope, said Thomas Jacobs, an analyst at Moody’s Investor Service. Although some banks will look to unwind these types of investments between now and the July 2015 implementation date for the rule, others will likely be looking for a way to work around the rule. Jacobs views the TOBs as an untended consequence of the Volcker Rule.

“I think someone didn’t want to start providing a lot of exemptions to [the rule] so they’re essentially telling people, ‘You have to find another way to do it,’” Jacobs said. “Once someone finds a way, I can’t think of a reason for a regulator to say, ‘That offends me.’ That violates the spirit of what they’re trying to do.”

BY LIZ FARMER | DECEMBER 18, 2013

Battered by rising interest rates and credit concerns over Detroit and Puerto Rico in 2013, the muni market may face additional obstacles next year as regulatory limits on broker dealers could crimp liquidity.

Such regulations as those stemming from the Dodd-Frank Act and the Basel Accords could discourage broker-dealers at banks from participating in the buying and selling of munis, bond investors and analysts said.

Less broker-dealer participation in the marketplace could limit the market’s ability to steady itself during periods of selling pressure, said Priscilla Hancock, managing director, municipal strategist at JPMorgan Asset Management.

“The biggest restriction we’re going to see impact liquidity is not so much individual buyers, because it still appears to us that banks and insurance companies may buy munis,” she said. “The bigger issue is broker-dealers, who traditionally provide liquidity when there are outflows.”

Matt Fabian, managing director at Municipal Market Advisors, agreed. Major rule changes that restructure many of the ways the muni market does business will ramp up regulatory uncertainty and change the status quo, he said. Although it’s unclear exactly how these, including the Securities and Exchange Commission’s municipal advisor rules and the Municipal Securities Rulemaking Board’s plans to propose best-execution rules, will play out in the marketplace.

Dodd-Frank required municipal advisors to be registered with the Securities and Exchange Commission and to become subject to Municipal Securities Rulemaking Board rules.

The MSRB is expected to propose a best-execution rule similar to that of the Financial Industry Regulatory Authority, which would require dealers to use “reasonable diligence” to determine the best venue for trading a security and to trade it so the resulting price to the customer is as favorable as possible given prevailing market conditions.

“It’s regulators taking control of the muni market with the momentum from Dodd-Frank and other post-crisis initiatives, like Basel III,” Fabian said. “It’s going to be harder for dealers to continue to commit capital in our sector. Profits are down, uncertainty is higher, and it becomes more difficult to keep dealers committed to the market. So, if we can get through 2014 with the same number of market participants as we have now, it’ll be a victory.”

Basel III, approved by U.S. regulators in July with staggered effective dates through March 2018, includes standards for how much capital banks have to hold against investments in specific financial products.

The Federal Reserve Flow of Funds report for the third quarter shows that the muni holdings of brokers and dealers have been shrinking since 2010, to $18.3 billion from $40 billion. In addition, the muni market itself has shrunk to $3.69 trillion in bonds outstanding, from $3.72 trillion one quarter earlier.

Traditionally, broker-dealers would step in and buy when muni bond funds sell, Hancock said. They’ve provided liquidity and facilitated customer transactions by making markets through risking their own capital.

But regulations have ramped up pressure on broker-dealers, Hancock added. The Volcker Rule mandated by Dodd-Frank, which was approved this month by federal regulators, restricts banks from trading their own money. Though municipal securities are exempt, tender option bond programs are not, and the rule will compel broker-dealers to limit risk on their own portfolios.

The pressure on broker-dealers will filter out into the market, Hancock said. Rising rates could precipitate outflows from bond funds, which pushes rates higher.

Cheaper bonds should, in turn, generate more demand, driving down rates. And lower rates may prompt issuers to come to market. But then more supply would again put pressure on yields.

But there are forces to counter this cycle, she added. Higher taxes in 2013 could encourage more investing in tax-exempts. Also, higher rates mean less incentive fewer refundings from issuers.

“So, if new-issue supply is limited,” she said, “that’s helpful.”

The muni market won’t enter 2014 with tailwinds, as it suffered through a down year by most measures. For starters, the average muni bond fund returned negative-3.658%, according to Morningstar, Inc.

The Bank of America Merrill Lynch US Municipal Master Index fell over the year to date. It underperformed the Treasury/Agency Index by 28.4 basis points, negative-2.919% against negative-2.635%, according to a Dec. 13 research report.

Demand suffered. Weekly reporting muni bond mutual funds recorded outflows of $55.1 billion through the week of Dec. 11, the worst outflows Lipper FMI has seen. They far outpaced the $15 billion in outflows funds reported in both 1994 and 2011.

Issuance has fallen 14.7% on the year through November to $301 billion, compared with $352.9 billion through the same period last year, Thomson Reuters numbers show.

Damaging credit headlines from Detroit, Chicago and Puerto Rico alarmed investors, particularly retail buyers, and applied an upward pressure to yields.

Triple-A tax-exempt yields on the year through Wednesday rose 93 basis points at the 10-year and 130 basis points at the 30-year. By comparison, the 10-year Treasury yield rose 105 basis points over the same span, while 30-year jumped 85 basis points.

Contemplating these storm clouds, muni participants expanded and contracted the lens when discussing other weak points in the market.

Given the dysfunctional nature of Washington, munis’ bond with Treasuries and the interest-rate cycle remain their biggest issue, said Gene Gard, co-portfolio manager of the Dupree Municipal Bond Fund Family. But muni ratios to Treasuries present good news, he added.

“There’s some cushion there,” Gard said. “As far as municipal ratios to Treasuries, they’re still pretty favorable in that, the ratio is above its historic normal range.”

On the yield curve, the shorter part represents the most vulnerable segment when compared with the long end, said Ashton Goodfield, portfolio manager at Deutsche Asset and Wealth Management.

The yield curve for both tax-exempts and Treasuries should flatten out in 2014, she added, leading to outperformance at the long end.

“We think the short end, at the five-year, is much less attractive,” Goodfield said, “because of absolute yields and relationships to Treasuries, where the ratio’s about 79% five-year and 107% at the long end.”

BY JAMES RAMAGE

DEC 19, 2013 12:03pm ET

Last week, GFOA President Tim Firestine weighed in on the discussion among municipal market participants about the SEC’s final rule defining the term municipal advisor. In a Bond Buyer op-ed, Firestine said: “The SEC’s final rule aims to set a clear line between advice and the underwriting of bonds. Differentiating these two practices is key to the implementation of the municipal advisor rule and will encourage best practices by issuers and other professionals, resulting in a stronger municipal market.” The piece goes on to discuss the “vocal opposition, primarily from the broker/dealer community, that this rule will stifle the ability to have important conversations and a flow of ideas between underwriters and issuers.” Mr. Firestine continued, “I believe these concerns are exaggerated, and are unhelpful to having the market move forward with finding appropriate ways to adapt to the new rule.” GFOA members can read the op-ed here.

http://gfoa.org/downloads/FirestineOpEd.pdf

WASHINGTON—The Financial Industry Regulatory Authority (FINRA) issued a Regulatory Notice soliciting comment regarding an innovative proposal called Comprehensive Automated Risk Data System (CARDS). CARDS will involve account reporting requirements that would allow FINRA to collect, on a standardized, automated and regular basis, account information, as well as account activity and security identification information that a firm maintains as part of its books and records.

In its first phase, the CARDS program will increase FINRA’s ability to protect the investing public by utilizing automated analytics on brokerage data to identify problematic sales practice activity. FINRA plans to analyze CARDS data before examining firms on site, thereby identifying risks earlier and shifting work away from the on-site exam process.

“The information collected through CARDS will allow FINRA to run analytics that identify potential “red flags” of sales practice misconduct and help us identify potential business conduct problems with firms, branches and registered representatives,” said Susan Axelrod, FINRA’s Executive Vice President of Regulatory Operations.

FINRA’s Regulatory Notice discusses the CARDS concept without specific rule language, to solicit comments on the appropriate design of CARDS and related costs. The core principles in FINRA’s recently released Framework Regarding FINRA’s Approach to Economic Impact Assessment for Proposed Rulemaking will guide the CARDS rulemaking process and help reduce unnecessary burdens to the industry.

“FINRA’s new Framework will result in a more transparent and rigorous rulemaking process. FINRA will consult with key stakeholders and provide clarity about the objectives and potential impacts of the proposal,” said FINRA’s Chief Economist Jonathan Sokobin.

As currently envisioned, once CARDS is implemented, clearing firms (on behalf of introducing firms) and self-clearing firms would submit in an automated, standardized format, and on a regular basis, specific information relating to their customers’ accounts and the customer accounts of each member firm for which they clear.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business—from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.

The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission to enhance protections for investors in municipal securities against unexpected changes in bond authorizing documents while preserving issuers’ legitimate interest in updating those documents.

The amendments to MSRB Rule G-11, on primary offering practices, generally prohibit municipal securities dealers from providing consent to changes to authorizing documents. The amendments also will enhance transparency regarding the practice of obtaining bondholder consents from dealers, and will take effect February 3, 2014.

The changes seek to ensure that investors are protected from situations in which an underwriter, which may own bonds momentarily during the initial distribution process but does not share the same economic interests as bondholders, could agree to changes to the authorizing documents in lieu of the bondholders. The amendments include several carefully defined exceptions to the prohibition to provide potential options for amending bond authorizing documents where other appropriate safeguards for investors exist.

“We are pleased that the final rule adequately balances the need to protect investors and the need for issuers to update bond authorizing documents,” said MSRB Executive Director Lynnette Kelly.

The change to MSRB Rule G-11 furthers the MSRB’s mission of protecting both investors in municipal securities and the municipal entities that issue them.

View the SEC approval order:

View the regulatory notice:

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) welcomed the harmonization of treatment of municipal securities under the so-called Volcker Rule on proprietary trading with how municipal securities are treated under existing federal securities laws. As passed, the provisions of the Volcker Rule avoid making artificial distinctions between municipal securities issued by state and local governments and those issued by their agencies or authorities. The MSRB believes that such distinction would not have served the purposes of the Volcker Rule and would have created regulatory complexity due to divergent treatment under the various applicable federal securities laws.

“The MSRB is pleased that the federal financial regulators agreed with the MSRB’s analysis and amended the initial proposal to avoid an unnecessary bifurcation of the municipal market,” said MSRB Chair Dan Heimowitz. “Exemption of all municipal securities as defined by the Securities Exchange Act ensures that the municipal market will not be splintered unnecessarily as a result of the Volcker Rule.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated the development of a federal rule to restrict an insured depository institution and its affiliates from engaging in proprietary trading, among other provisions.

In a January 2012 comment letter to the five federal regulators jointly developing the Volcker rule, the MSRB urged that all municipal securities be treated equally under the governmental obligations exemption. The regulatory agencies – the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the U.S. Department of the Treasury Office of the Comptroller of the Currency – adopted a final rule that reflects the MSRB’s recommendation. The rule adopted today becomes effective April 1, 2014.

BOSTON — Additional guidance from the U.S. Securities and Exchange Commission should provide some clarity to how the proposed trading restrictions under its new municipal advisor registration rule apply to municipal issuers, according to a securities industry official.

“The SEC plans some additional guidelines on the rule and that’s really going to provide some flexibility regarding how the rule will apply,” said Michael Decker, a managing director at the Securities Industry and Financial Markets Association, which represents hundreds of securities firms, banks and asset managers. “We’ve talked with the SEC with regard to the rule, and they seem amenable to some flexibility.”

“Looking as it stands, it puts some pretty severe restraints on bankers to provide deal ideas or comment to a specific issue,” Decker said Thursday at the third annual Massachusetts investor conference at the Boston Convention and Exhibition Center.

Decker expects a statement from the SEC within days.

State Treasurer Steven Grossman gave the keynote address in the morning, citing the conference as a tool for enhanced disclosure. Grossman, a Democratic candidate for governor in 2014, has emphasized expanded disclosure since taking office in 2011. Related moves have included an annual investor conference and frequent investor calls, a new investor website and technical enhancements.

“Federal issues are overriding to all we do,” said Scott Jordan, Massachusetts undersecretary of administration and finance.

Earlier in the day, investors discussed market trends in transportation, higher education and new variable-rate products such as floating rate notes.

Nat Singer, a managing director at Swap Financial Group LLC, said new instruments reflect a changing landscape.

“When I think of the short-term market, it’s the opposite of what our parents told us about how tough they had it, how they had to walk five miles to school through the snow and the rain. Short-term is exactly the opposite,” said Singer. “You used to be able to slap on an insurance policy and sell an asset. You could rate the security with a cheap letter of credit. Then, 2008 happened.”

BY PAUL BURTON

DEC 13, 2013 11:26am ET

U.S. financial regulations that curb banks’ ability to speculate with their own money included an exemption for the $3.7 trillion municipal bond market after issuers complained the rules could increase borrowing costs.

The Volcker Rule, issued today by regulators, allows banks to invest in securities issued by states, localities and government agencies. A draft version would have barred the practice with debt sold by agencies and authorities. The Municipal Securities Rulemaking Board has estimated that such issuers account for about 40 percent of municipal bonds.

The change is a victory for borrowers and municipal securities dealers that pressed regulators to broaden the exemption. Without it, agencies that sell bonds for public works projects said they might have faced higher borrowing costs by eliminating banks as investors.

“That was a potential problem that has been avoided,” said Matt Fabian, an analyst who tracks tax-exempt securities for Municipal Market Advisors, which is based in Concord, Massachusetts.

The ban on most types of proprietary trading — banks using their own money to speculate in securities markets — is part of the Dodd-Frank Act, approved by Congress in 2010 in response to the credit crisis. The limits are intended to prevent another taxpayer-funded bailout. The rules exempt securities that pose less risk than corporate stocks and bonds.

Regulators’ Proposal

Agencies that run water, mass transit systems and school districts often sell municipal debt. In 2011, regulators proposed barring bank investments in such debt. The step drew opposition from bond underwriters as well as government officials, who argued that investments in such securities pose little risk to banks.

Wall Street banks have been closing proprietary trading units in preparation for the rules, and the Federal Reserve gave them until mid-2015 to comply.

Bond underwriter trade groups applauded the decision to allow them to keep investing in municipal securities.

“Had all municipal bonds not been excluded from the rule, the result would have been a more difficult environment for communities raising capital and decreased liquidity in the municipal market,” said Kenneth Bentsen, president of the New York-based Securities Industry and Financial Markets Association, which represents banks, in a statement.

By William Selway and Darrell Preston December 10, 2013

Alexandria, VA – Following a review of its professional qualification program for municipal securities dealers, the Municipal Securities Rulemaking Board (MSRB) today requested public comment on a proposal to require dealers to ensure that members of their staff primarily engaged in municipal securities business annually receive training in municipal securities.

The proposed change to the continuing education requirements for dealers set out in MSRB Rule G-3 would require a minimum of one hour of training focused on municipal securities for professionals primarily engaged in municipal securities activities. Currently, dealer firms are required to offer continuing education to their staff based on the firm’s assessment of its overall needs, but there are no existing obligations under MSRB rules to provide targeted training on municipal securities to dealer personnel.

“The MSRB recognizes that many dealers already offer continuing education programs that include municipal securities components,” said MSRB Executive Director Lynnette Kelly. “The MSRB’s proposal seeks to set a minimum baseline for this type of continuing education to ensure that firms consider the particular training needs of staff responsible for understanding municipal securities products and complying with MSRB rules.”

The request for comment seeks to reinforce the need for dealer staff primarily engaged in the municipal securities business to stay abreast of issues that affect their job responsibilities and informed about product and regulatory developments.

The MSRB also today provided notice of planned changes to two categories of municipal securities professional qualification. Upon approval by the Securities and Exchange Commission (SEC), the MSRB would no longer require the “Financial and Operations Principal” designation since it is a requirement imposed on dealers by other regulators and therefore duplicative of other regulation. Also, those individuals who have been qualified to engage in municipal fund securities activities, such as sales of 529 college savings plans, by passing a Limited Representative examination, would only be permitted to engage in sales-related activity, pending SEC approval.

The MSRB fosters competency of municipal market professionals and compliance with MSRB rules through professional examinations and continuing education requirements.

Date: December 13, 2013

Contact: Jennifer A. Galloway, Chief Communications Officer

(703) 797-6600

[email protected]

WASHINGTON — The Securities and Exchange Commission should provide guidance to broker-dealers assuring them that they will not be restricted from giving advice to issuers in their roles as underwriters, a congressman told SEC chairman Mary Jo White in a recent letter.

Rep. Ander Crenshaw, R-Fla., who chairs the House Appropriations Committee’s subcommittee on financial services and general government, wrote to White to express concern that the SEC’s recently-released municipal advisor registration rule will prevent dealers seeking to act as underwriters from giving advice to issuers about bonds for fear of being prevented from underwriting them later.

The MA rule, mandated by the Dodd-Frank Act, imposes a federal fiduciary duty on any entities that provide particularized advice about muni bonds to an issuing authority or conduit borrower, a duty to put the issuer’s interests first, which dealer firms have long held to be incompatible with the role of an underwriter.

The rule takes effect Jan. 13.

“I encourage you to clarify that dealers who declare their roles as bond underwriters when initiating communication with an issuer in compliance with Municipal Securities Rulemaking Board rules, will not be prohibited from underwriting bonds as a result of providing specific recommendations to bond issuers,” Crenshaw wrote.

MSRB Rule G-23 on the activities of financial advisors prohibits firms from serving as financial advisor and underwriter on the same bond issue, but some market participants contend it is unclear if registered MAs under the new regulatory regime would be prohibited from doing the same thing.

The issue has emerged as a central concern for dealer groups, non-dealer advisors, and the National Association of Bond Lawyers, though SEC officials have said the MA rule and G-23 are not the same thing.

The SEC’s MA registration rule allows a dealer firm engaged as underwriter on a bond issuance to provide certain advice about that specific security. The rule also allows an underwriter to provide advice if an issuer has retained and is relying on the advice of its own MA. Many market participants are eagerly awaiting guidance from the SEC before the rule’s effective date.

“A successful negotiated bond issuance relies on communication among the issuer, the underwriter, and other members of the financing team from the earliest stages,” Crenshaw wrote. “Issuers depend on underwriters to provide ideas, analysis, information and proposals that can minimize financing costs for state and local taxpayers. I appreciate your attention to this matter and I look forward to seeing the commission’s interpretive guidance on the MA rule.”

BY KYLE GLAZIER

DEC 9, 2013 4:03pm ET

David Sirianni, Oppenheimer Holdings Inc. (OPY)’s head municipal bond trader, was fined $100,000 and suspended for 60 days by the Financial Industry Regulatory Authority for overcharging customers.

Sirianni marked up bonds as much as 16 percent from July 2008 through June 2009, Finra said today in a statement. New York-based Oppenheimer also was ordered to pay a $675,000 fine and $246,000 in restitution. The brokerage and the trader settled the case without admitting to the allegations, Wall Street’s self-regulator said in the statement.

“Finra has no tolerance for firms or individuals who charge customers excessive markups,” Thomas Gira, Finra’s head of market regulation, said in the statement.

The investigation involved 89 transactions in which the brokerage added more than 5 percent to the cost of the bonds, Finra said. Oppenheimer didn’t disclose the markups to its customers, according to the regulator. The firm’s supervisory system didn’t flag the trades for review because it looks at same-day markups and in these cases the bonds were held at least overnight, Finra said.

Oppenheimer altered its procedures to make sure that customers get fair prices on municipal bonds, according to Mary Beth Kissane, a spokeswoman for the firm at WalekPeppercomm. Finra’s claims involve a small number of trades, she said.

Sirianni declined to comment when reached by phone.

In one instance cited by the regulator, Oppenheimer bought Dowling College revenue bonds for 52.35 cents on the dollar on Dec. 9, 2008, and then sold them the next day for 14 percent more. On Dec. 11, Oppenheimer bought more securities of the Oakdale, New York-based college for 52.85 cents and 52.5 cents, which it flipped at a 13 percent markup.

Oppenheimer’s stock fell 0.8 percent today to $23.28.

NEW YORK (Reuters) – Goldman Sachs Group Inc has won a court order blocking a North Carolina utility from moving forward with an arbitration before the Financial Industry Regulatory Authority over the extent the bank misled it about auction-rate securities.

U.S. District Judge Paul Engelmayer in Manhattan entered a preliminary injunction Monday preventing North Carolina Municipal Power Agency Number One from proceeding with the arbitration.

In making his ruling, Engelmayer pointed to decisions earlier in 2013 by two different judges in New York presiding over similar cases over auction-rate securities, in which the arbitrations were blocked because of forum selection clauses in broker-dealer agreements.

“The court agrees with their analysis and reasoning; and applies them here,” Engelmayer wrote.

Lawyers for Goldman and the North Carolina utility did not respond to requests for comment.

The case was one of a number filed in the wake of the global financial crisis of 2007 and 2008 by large institutions and investors seeking to bring cases before FINRA.

While arbitration has historically been seen by critics as defense-friendly, some plaintiffs viewed FINRA as attractive because of the speed it hears cases and the difficulty defendants face in overturning an arbitration award on appeal.

Of the 10 largest U.S. securities arbitration awards, seven were issued since 2008, according to Securities Arbitration Commentator Inc.

The case against Goldman stemmed from the North Carolina utility’s issuance of $149.7 million in auction-rate securities underwritten by the bank.

Auction-rate securities were a type of bond in which interest rates were set through bidding by investors. The market for the securities froze in February 2008 when banks ceased propping it up with support bids.

The agency, which provides wholesale power to 19 cities in North Carolina, filed the arbitration in December 2012 accusing Goldman of misrepresenting its role in supporting the market.

The bank, through lawyers at Sullivan & Cromwell, subsequently filed a federal lawsuit seeking to block the arbitration.

Among other arguments, the bank contended that the North Carolina utility waived its right to arbitrate by signing a broker-dealer agreement containing a forum selection clause requiring disputes to be litigated in federal court in New York.

‘PRECLUDE ARBITRATION’

In a 17-page decision, Engelmayer said the agreement “provides ‘positive assurance’ that the parties intended to preclude arbitration.”

Engelmayer also found the auction-rate securities issuance “constitutes a ‘transaction contemplated’ by the broker-dealer agreement and, as such, falls within the scope of the forum selection clause.”

He said the claims were also tied to the broker-dealer agreement. Goldman acted not just as underwriter but also broker-dealer, he said.

“NCMPAI cannot wish away the terms of the broker-dealer agreement when its claims are based on Goldman’s actions as a broker-dealer,” Engelmayer said.

The ruling follows a similar case in which Goldman blocked an auction-rate securities arbitration brought by Golden Empire Schools Financing Authority and Kern High School District in California.

Engelmayer relied in large part on that case, decided by U.S. District Judge Richard Sullivan in February, as well as a decision in May blocking an arbitration by a related North Carolina utility against Citigroup Inc.

The claimants in both Goldman cases and the Citigroup dispute are all represented by James Swanson, a lawyer at Fishman Haygood Phelps Walmsley Willis & Swanson.

The firm has brought several other big cases before FINRA against banks related to auction-rate securities. And while judges in New York have tended toward blocking the arbitrations, other courts have been receptive to the arguments of Fishman Haygoods’ clients.

In January, the 4th U.S. Circuit Court of Appeals allowed Carilion Clinic of Roanoke, Virginia, to proceed with an arbitration against UBS AG and Citigroup over $234 million in auction-rate securities.

A month later, a judge in Minneapolis refused UBS AG’s request to enjoin an arbitration by Allina Health System arising out of $125 million in auction-rate securities it issued in 2007.

The case is Goldman Sachs & Co v. North Carolina Municipal Power Agency Number One, U.S. District Court for the Southern District of New York, No. 13-01319.

For Goldman Sachs: David Braff and Matthew Schwartz of Sullivan & Cromwell.

For North Carolina Municipal Power Agency Number One: James Swanson of Fishman Haygood Phelps Walmsley Willis & Swanson; and Peter Mougey and James Kauffman of Levin Papantonio Thomas Mitchell Rafferty & Proctor.

By Nate Raymond

NEW YORK (Reuters) – Bank of America Corp has agreed to pay $20 million to settle a lawsuit in which investors accused it of rigging bids for municipal securities, court papers filed on Wednesday show.

The settlement is part of litigation that began in March 2008, and that alleged Bank of America and other banks conspired to artificially fix prices and manipulate markets for so-called municipal derivatives.

Plaintiffs including the City of Baltimore, and the Central Bucks School District and Bucks County Water & Sewer Authority in Pennsylvania said this activity violated antitrust law, and caused them to receive lower interest rates than they would have in a competitive marketplace.

In a filing in the U.S. district court in Manhattan, lawyers for the municipal entities called the settlement “significant and of substantial benefit to the class.”

They added that Bank of America faced less liability than other defendants because it cooperated sooner, including by reporting misconduct to the U.S. Department of Justice.

More than one dozen people have pleaded guilty in the Justice Department probe.

Wednesday’s unopposed settlement requires court approval. It follows earlier settlements of $44.6 million by JPMorgan Chase & Co, $37 million by Wells Fargo & Co and $6.5 million by Morgan Stanley, court papers show.

Bank of America, JPMorgan, Wells Fargo, General Electric Co and UBS AG have settled related claims brought by various state attorneys general, the papers show.

The total payout for Bank of America is $82.5 million, including the earlier settlement, court papers show.

Bank of America, the second-largest U.S. bank, is based in Charlotte, North Carolina. A spokesman declined to comment.

The case is In re: Municipal Derivatives Antitrust Litigation, U.S. District Court, Southern District of New York, No. 08-02516.

(Reporting by Jonathan Stempel in New York; Editing by Steve Orlofsky)

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Oppenheimer & Co., Inc. $675,000 for charging unfair prices in municipal securities transactions and for failing to have an adequate supervisory system. FINRA also ordered Oppenheimer to pay more than $246,000 in restitution, plus interest, to customers who were charged unfair prices. In addition, FINRA fined Oppenheimer’s head municipal securities trader, David Sirianni, $100,000, and suspended him for 60 days.

Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “FINRA has no tolerance for firms or individuals who charge customers excessive markups. Oppenheimer charged customers unfair prices in numerous municipal securities transactions and failed to properly supervise municipal securities transactions with its customers.”

FINRA found that from July 1, 2008, through June 30, 2009, Oppenheimer, through Sirianni, priced 89 customer transactions from 5.01 percent to 15.57 percent above the firm’s contemporaneous cost. In 54 of those transactions, the markups exceeded 9.4 percent. Sirianni purchased municipal securities from a broker-dealer on Oppenheimer’s behalf, held the bonds in inventory for at least overnight, and then made the bonds available for resale at an unfair price to the firm’s customers. Sirianni was responsible for determining the prices paid by customers in the 89 transactions.

Oppenheimer failed to detect the unfair prices charged. Oppenheimer’s supervisory system was deficient because supervisory personnel relied solely on a surveillance report that only captured intra-day transactions to review the fairness of markups/markdowns in municipal securities transactions. From at least 2005 through June 30, 2009, if an Oppenheimer trader purchased municipal securities and held those securities in inventory for a day or longer, the subsequent sales to customers would not populate the firm’s surveillance report or be subjected to a fair pricing review.

In concluding this settlement, Oppenheimer and Sirianni neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Three former General Electric Co. (GE) bankers won an appeal of their convictions for defrauding cities and the federal government in a bid-rigging scheme involving municipal bonds.

The federal appeals court in Manhattan reversed the 2012 convictions of Steven Goldberg, Peter Grimm and Dominick Carollo on Nov. 26, without immediately providing a reason. The men were ordered released from prison the next day.

The three were found guilty in May 2012 of conspiracy to commit fraud by manipulating auctions for municipal bond investment contracts. U.S. District Judge Harold Baer sentenced Goldberg to four years and Grimm and Carollo to three years in federal prison.

The defendants appealed, claiming the government waited too long to charge them and that Baer should have declared a mistrial after a key prosecution witness disappeared and tried to kill himself before defense lawyers were able to complete their cross-examination. The witness, Adrian Scott-Jones a former broker for Tradition NA, was later sentenced to 18 months in prison for his role in the case.

A three-judge panel of the appeals court reversed the convictions, saying an opinion will be issued “in due course.”

The government claimed that from August 1999 to November 2006 the men gave kickbacks to brokers hired by local governments to solicit bids, win auctions and increase their profits. The charges grew out of a five-year investigation by antitrust prosecutors into the $3.7 trillion municipal bond market.

Bond Money

The case focused on guaranteed investment contracts, which cities buy with the money raised from selling bonds. The arrangement lets the cities earn money on the funds until they’re used for projects such as waste treatment plants, hospitals and roads.

The appeals case is U.S. v. Grimm, 12-04310, U.S. Court of Appeals for the Second Circuit (Manhattan). The lower-court case is U.S. v. Carollo, 1:10-cr-00654, U.S. District Court, Southern District of New York (Manhattan).

By Bob Van Voris – Dec 2, 2013 1:19 PM PT

Pity the municipal bondholder. Between Detroit’s bankruptcy and the rising concerns over unfunded pensions in Illinois and elsewhere, it has been a rough year for many muni bond investors. While the Standard & Poor’s municipal bond index has recovered from its September lows, it is still off 2.7 percent for the year.

A big problem for investors in this $3.7 trillion municipal market — mostly individuals — is that financial disclosures by states, cities and other issuers of tax-exempt debt can be decidedly inadequate.

Securities laws require issuers of municipal debt to provide the information investors need to make informed decisions when buying or selling these instruments. But lax disclosure practices remain, making it hard to spot signs of problems like those hobbling some states and cities. Disclosures about the soundness of public pensions, for example, can be essential to weighing the health of municipal bond issuers that are responsible for funding them.

Investors aren’t the only ones who need more information. This was on full display last week, when a judge in Detroit suggested in a groundbreaking ruling that the city’s pensioners would not get priority in the city’s bankruptcy, and their retirement pay could be considered an unsecured obligation.

John R. Mousseau, executive vice president and director of fixed income at Cumberland Advisers, a money management firm in Sarasota, Fla., said: “Detroit’s pensioners may be as eligible to take a haircut as the city’s bondholders or vendors. This development should demand more disclosure.”

But better disclosure practices among tax-exempt issuers are slow in coming, investors say.

If issuers make material misstatements or omit information, they can face civil or criminal penalties. The Securities and Exchange Commission has brought eight cases contending disclosure failings by municipal issuers this year.

A large case last March involved accusations that the state of Illinois misled investors about its unfunded pension. From 2005 to 2009, a period when the state issued $2.2 billion in bonds, the S.E.C. said Illinois failed to warn investors about the pension system’s woes and “the resulting risks to the state’s financial condition.”

Among the details missing from the state’s offering statements and filings, the commission said, were those relating to the contributions made by the state to its various pension funds. The commission said investors were not told that the state was contributing far less to the pensions than was required each year. Last week, the Illinois Legislature voted to shore up the pensions by raising the retirement age for some workers and lowering cost-of-living adjustments. The state is facing a pension shortfall of $97 billion.

Illinois settled with the S.E.C., but the agency did not impose fines or penalties. The S.E.C. doesn’t typically exact penalties in such cases, its officials said, because the money would come out of a state or city budget, making matters worse.

Disclosures about pensions in the muni arena rank high as an S.E.C. concern, according to John J. Cross III, director of its Office of Municipal Securities. “Our office expects to take a good hard look at pension disclosure issues,” he said. “It is a major concern because of the magnitude of unfunded municipal pension liabilities and the size and opaqueness of the investment portfolios.”

But the S.E.C. can’t dictate disclosure rules related to accounting, Mr. Cross explained. “We can’t mandate line-item things, but we could highlight more of what we think is appropriate to address material disclosure issues in the pension area as simply and clearly as possible.”

If issuers took the initiative on greater transparency, they’d most likely benefit from reduced borrowing costs, Mr. Mousseau said. Investors who feel confident that they understand the risks in a muni bond will accept a lower interest rate on that security, he explained. “Fewer unknowns in a world fraught with headline risk are a good thing,” he said.

Many people who put money in municipal securities are individual investors looking for a small but safe return, not a big gain on a risky investment. So investors not only need more information from tax-exempt issuers, they also need that information to be relatively simple. That’s the view of Chris Tobe, a public pension consultant and a former trustee of the Kentucky Retirement System. He is also author of “Kentucky Fried Pensions — Worse than Detroit.” He added: “Bad financial practices are a signal of stress down the road and should be disclosed. Investors need to be able to discern between good actors and bad actors.”

A crucial metric that should be found in issuers’ offering statements and filings is one cited by the S.E.C. in the Illinois case: the shortfall in annual contributions that are needed to keep a pension fully funded. Known as annual required contributions, or ARC, many states fail to meet them.

This has the effect of masking an issuer’s financial troubles, Mr. Tobe said. “There almost needs to be a bold statement saying the state is not paying 100 percent of its ARC payments,” he said.

He cites a December 2011 offering statement for $72 million of bonds issued by the University of Illinois. Nowhere does it detail the shortfalls in state contributions to the university system’s pension fund in recent years. Investors seeking this information must go to the Illinois State Universities Retirement System website.

On that website are annual reports and other revealing filings. The fiscal 2012 report shows that for the last five years, Illinois has contributed only 60 percent of the university system’s annual required contributions, on average. With each year the state pays less than the required contributions, the pension fund goes deeper into the hole.

The system has 200,000 members in the defined-benefit plan, 45,548 of whom are retired. The pension’s assets available to pay out benefits fell from 44.3 percent to 42.1 percent in 2012, the report said. The system’s actuarial liability is $19.2 billion.

I asked officials at the Illinois State Universities Retirement System if they planned to offer investors more clarity in future bond offering statements, given the S.E.C.’s recent case against the state.

Thomas Hardy, executive director for the office of university relations, said the pension’s unfunded liability is not the obligation of the university under current state law. But, he said, the Illinois university system’s filings would start including figures on unfunded pension liabilities in its 2015 fiscal year, which begins next July. It will do so to comply with new accounting rules issued by the Governmental Accounting Standards Board, he said.

That’s a good thing. But many pension problems remain hidden from view. Bondholders lose because “they don’t get the interest rate they deserve for the risks they are taking,” Mr. Tobe said. “While issuers play these games, it’s investors who feel the losses.”

By GRETCHEN MORGENSON

Published: December 7, 2013

H.R. 1105 is a step backward from the Dodd-Frank progress made to date, administration says

The Obama administration told members of Congress Tuesday that it would veto H.R. 1105, the Small Business Capital Access and Job Preservation Act, which would amend the Investment Advisers Act of 1940 to exempt nearly all private equity fund advisors from registration.

The bill is up for a vote Wednesday afternoon on the House floor.

There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in place—and to recognize that examiners are not the enemy.

Differences Between State and SEC Regulation of Investment Advisors

States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm.  States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.

“The legislation effectively provides a blanket registration and reporting exemption for private equity funds, undermining advances in investor protection and regulatory oversight implemented by the Securities and Exchange Commission under Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” the administration told Rep. Robert Hurt, R-Va., the bill’s sponsor, and its 12 co-sponsors.

The administration said that it was “committed to building a safer, more stable financial system,” and that H.R. 1105 represented “a step backwards from the progress made to date, given that private equity fund advisors have been filing reports with the SEC for over a year.”

Moreover, the administration said that the bill’s passage “would deny investors access to important information intended to increase transparency and accountability and to minimize conflicts of interest.” H.R. 1105 “would exempt private equity funds from the disclosure requirements that the Congress laid out in Wall Street Reform to allow regulators to assess potential systemic risks.”

Private equity funds are already subject to less stringent reporting requirements than other types of private funds and to an annual, rather than quarterly, filing requirement.

In addition, private fund advisors with less than $150 million in assets under management are exempted from registration and subject only to recordkeeping and reporting requirements.

By Melanie Waddell, ThinkAdvisor

Washington Bureau Chief

Investment Advisor Magazine

New York, NY, December 5, 2013 – SIFMA today submitted a letter to Mary Jo White, chair of the Securities and Exchange Commission (SEC), in response to her recent statement on the SEC’s review of Securities Industry Processors (SIPs) following the August 22nd SIP outage that led to a halt in trading of NASDAQ-listed securities.

SIFMA commends the SEC’s leadership in examining this vital market structure issue and its call for the self-regulatory organizations (SROs) to work with broker-dealers as they craft proposals for enhancing SIPs. In addition, SIFMA appreciates the SROs’ initial engagement with our members as they formulated their preliminary proposals. SIFMA’s letter provides the Association’s viewpoint on the five workstreams for enhancing SIPs.

SIFMA’s letter also notes more broadly that the August 22nd SIP outage is a symptom of the outdated system by which critical market data is controlled and distributed. SIFMA urges the SEC to work with the SROs and industry members to examine SIPs more broadly and develop action plans that (1) revamp governance, (2) increase transparency in operations, and (3) provide for increased efficiencies.

“The events of August 22nd highlight the critical nature of the SIPs in maintaining fair and orderly markets and the need for regulators and market participants to collaborate to make sure the markets are operationally resilient,” said Randy Snook, executive vice president, business policies and practices. “Further, we believe the time is time is right for a broader review of SIPs to address concerns with transparency and governance. The current system for distributing market data was developed over 30 years ago. It’s time to reevaluate what’s best for the markets.”

SIFMA believes it is imperative that the broker-dealer and investment communities play an active and substantive role with the SROs as the SIP enhancement process moves forward from identifying preliminary concepts to developing concrete proposals. Collaboration between SROs and the broker-dealer community is essential to crafting comprehensive proposals that strengthen the resiliency of equity market structure in the United States.

SIFMA’s letter, which includes detailed comments on the five SIP workstreams identified by the SEC, is available here:

http://www.sifma.org/issues/item.aspx?id=8589946502

The MSRB is advancing a regulatory framework for municipal advisors that includes rules for professional conduct, professional qualification examination requirements as well as education and outreach to municipal advisors. In light of the September 18, 2013 final registration rule from the Securities and Exchange Commission (SEC) defining who is a municipal advisor, which takes effect January 13, 2014, the MSRB has prioritized the development of municipal advisor rules in five key areas. They are: fiduciary duty and fair dealing standards of conduct of municipal advisors to municipal entities and obligated persons; supervision requirements for municipal advisory firms and their employees; rules to address the potential for pay-to-play activities by municipal advisors; limitations on gifts and gratuities to employees of municipal securities issuers and other market participants; and duties of solicitors.

The MSRB will seek public comment before proposing rules to the SEC for approval. The MSRB also is continuing to work with the municipal advisory industry to develop a professional qualification exam to establish standards of competency for municipal advisors.

Want to prepare your practice for potential changes in the year ahead? Keep your eye on these five areas

As I attempt to look at what’s on the 2014 horizon in terms of regulation, compliance and other best practices, I can’t overcome the feeling of déjà vu. Or perhaps I am just repeating myself.

Many of the topics here — a fiduciary standard, industry reorganization, arbitration methods — are not new. Yet, after years of effort, the months ahead might finally lead to changes in these hotly debated areas. Or not. Here are my predictions:

1. FIDUCIARY STANDARD

Sticks and stones may break my bones, but a fiduciary will never hurt me.

Acting in the best interest of the client does not have to be to the detriment of the financial advisor. A commission-based product may be in the best interest of the investor. A fee-based product may be in the best interest of the investor. Whether a financial advisor makes a fee or a commission, the financial professional is being compensated for services.

Fiduciaries can break laws and steal client money. Commissioned reps can have the highest of ethics. (And vice versa.) So it is not the label or the law that makes one honest; it is if one is actually honest that counts.

Let’s get beyond the in-fighting. The SEC should adopt a fiduciary standard for all financial services professionals, albeit with allowances for differences between investment advisor representatives and broker/dealer representatives. All financial advisors should have full disclosure of services, fees, conflicts of interest, and act in the best interest of the client. Send the lawbreakers to jail.

2. HARMONIZATION

Brokerage and advisory services are indistinguishable to investors.

Here is my ideal futuristic shape of the industry: We will be under one regulatory regime. No longer will we have the broker/dealer and registered investment advisor industries. There will be one registration for the company, one fee, one filing. One registration for reps, one fee, one grand-slam exam. One full-disclosure document used by all to replace the Form ADV.

Wealth management, life planning, financial planning, asset management, or simple buy-and-sell securities recommendations will be done under one roof. There will be a choice of fee structures, based on client suitability. Some specialist firms will continue to exist — with wealth management on one side of the spectrum and traditional brokerages on the other — but they will all fall under one regulatory scheme. The Financial Advisory and Investment Transaction Services Act of 2023 (FAITS Act) and its rules and regulations will be streamlined. Under this imaginary FAITS Act, some rules will apply for transactional trades, and other rules will apply for services that are advisory in nature — but all under one coordinated act.

Hmmm … I actually made this prediction 10 years ago. So I am adding on another 10 years to my dream regime.

3. ARBITRATION CLAUSES

You may believe arbitration is the civil way to resolve a dispute, but it could bring on the wrath of the state regulators.

When your client wants to pick a fight with you, would you rather get your day in court in front of a jury, or face a panel of arbitrators? It is not uncommon to see mandatory pre-dispute arbitration agreements in broker/dealer and investment advisor contracts.

It is not my job, in the space of this article, to counsel you on your choice of forum. Broker/dealers utilize arbitration clauses under the good graces of FINRA. Federally covered registered investment advisors will find the SEC sitting on the fence on this matter. State registered investment advisors may find that these clauses are (or soon will be) prohibited in some states.

The North American Securities Administrators Association (NASAA) announced its strong support for the Investor Choice Act of 2013 (H.R. 2998), which would (if passed) prohibit the use of mandatory pre-dispute agreements by broker/dealers and registered investment advisors.

The Investor Choice Act would not in any way prevent investors from voluntarily electing to resolve a dispute through arbitration or mediation after the facts and circumstances of the dispute have been discovered. The Investor Choice Act may die in committee.

The SEC has authority, under the Dodd-Frank Act, to either ban arbitration clauses in advisory contracts or, at a minimum, commence a study of the use of pre-dispute arbitration. The SEC has not acted in the three years since the Dodd-Frank Act was passed, much to the dismay of NASAA.

4. BUSINESS CONTINUITY PLANS

How will you get back up and running if your office becomes uninhabitable? Your files disappear? Your staff can’t get to work? Your phone lines go down?

It has been approximately 10 years since both the SEC and FINRA adopted rules for investment advisors and broker/dealers to implement a business continuity plan (BCP). The BCP addresses events that could cause a significant business disruption and how the business will regain functionality within the shortest possible time span.

Yet, year after year, disaster after disaster (think Katrina and Sandy), financial advisors are still getting caught off guard without a viable BCP in place. The SEC, CFTC and FINRA recently issued a joint advisory to suggest effective practices. The SEC Office of Compliance Inspections and Examinations issued a separate risk alert for investment advisors.

5. IDENTITY THEFT

Can you spot the red flags for identity theft and prevent losses from your client accounts?

The Federal Trade Commission’s (FTC) Red Flags Rule implemented obligations imposed by the Fair and Accurate Credit Transactions Act of 2003 (FACT Act). Many firms are already in compliance based on this original FTC rule; others firms hesitated to adopt policies, believing the FTC rule did not apply to them.

SEC Regulation S-ID recently implemented provisions in the Dodd-Frank Act, which amended the FACT Act and directed the SEC (and the CFTC) to adopt rules for identity theft red flags. For those firms that now need to come into compliance with the SEC rule, it was effective May 20, 2013, with a final compliance date of Nov. 20, 2013.

The Red Flags Rule requires specified firms to create a written identity theft prevention program (ITPP) that is designed to identify, detect and respond to red flags — patterns, practices or specific activities — that could indicate identity theft.

The Red Flags Rule requires firms to prepare an ITPP if they are either a “financial institution” or a “creditor” and offer “covered accounts.” It’s important to look closely at how the rule defines “financial institution” and “creditor” because the terms apply to groups that might not typically use those words to describe themselves.

An investment advisor who directly or indirectly holds transaction accounts and is permitted to direct payments or transfers out of those accounts to third parties is an example of an SEC-regulated entity that could fall within the meaning of the term “financial institution.”

Investment advisors who have the ability to direct transfers or payments from accounts belonging to individuals to third parties upon the individuals’ instructions — or who act as agents on behalf of the individuals — are susceptible to the same types of risks of fraud as other financial institutions. And individuals who hold transaction accounts with these investment advisors bear the same types of risks of identity theft and loss of assets as consumers holding accounts with other financial institutions. If such an advisor does not have a program in place to verify investors’ identities and detect identity theft red flags, another individual may deceive the advisor by posing as an investor.

By Nancy Lininger

DOL’s fiduciary rule for retirement plans due out in August

The Securities and Exchange Commission is pursuing a rule that would raise investment-advice standards for brokers — just not in the near future.

But that is enough to give fiduciary-duty advocates hope.

The SEC put the rule on a 2014 regulatory agenda that included 43 items.

It was slated for “long-term action” without a specific timetable. Topics in the “proposed-rule stage” and “final-rule stage” were higher on the priority list.

Meanwhile, the Labor Department indicated on its 2014 priority list that in August it would re-propose its fiduciary-duty rule for investment advice pertaining to retirement plans. The measure was first floated in 2010 but withdrawn after fierce financial industry protest that its requirements would drive brokers out of the market for individual retirement accounts.

The SEC took off its list for next year a rule regarding mutual fund distribution fees.

The regulatory outlook, which was released last week by the Office of Management and Budget, covers a time period from now until next October. Neither agency has to follow the agenda strictly.

It can act on items that don’t currently appear.

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a regulation that would require brokers to act in the best interests of their clients when providing retail investment advice — a more stringent standard than the suitability requirement that now governs sales of investment products. Investment advisers must act in the best interests of their clients.

The SEC is conducting a cost-benefit analysis of a potential fiduciary-duty rule.

Although action isn’t imminent on a proposal, one advocate noted that it is one of the few non-mandatory Dodd-Frank provisions that appears on the 2014 regulatory agenda.

“There is real interest in this at the SEC,” said Neil Simon, vice president for government relations at the Investment Adviser Association.

“It is a priority but not a top priority,” he said. “I do believe in time they will proceed.”

The SEC Investor Advisory Committee on Nov. 22 urged the commission to advance a fiduciary-duty regulation. That move, however, didn’t appear to move fiduciary duty up on the SEC’s regulatory agenda.

For 2013, it was listed under the heading of “pre-rule stage” – a designation that is about the same as “long-term action.”

“They’ve been looking at it for long time,” said Nancy Lininger, founder of The Consortium, a compliance consultant for investment advisers and brokers.

“Obviously, it’s not high on the list,” she said. “I thought [the IAC vote] would be the kick in the butt that would get the SEC going, but I guess not.”

The SEC and Labor Department agendas demonstrate that each regulator continues to move at its own pace regarding their fiduciary-duty rules. In October, the House passed a bill that would require the Labor Department to delay its rule until the SEC has acted.

“Maybe extending the timeline just a bit will allow them to get their ducks in a row and line up support for the proposal,” Mr. Simon said.

By Mark Schoeff Jr.

The Department of Labor’s redraft of its fiduciary rule was said to be on Labor Secretary Thomas Perez’s desk in mid-November, so it’s likely the redraft could be at the Office of Management and Budget by year-end, with a proposed regulation out by April or May, said Brian Graff, executive director of the American Society of Pension Professionals and Actuaries (ASPPA) and the National Association of Plan Advisors (NAPA).

As Phyllis Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration, said Oct. 29 at ASPPA’s annual conference, EBSA is coming “very close” to finishing its work on the reproposed rule.

Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.

Advertising Advisor Services and Credentials

Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs’ advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.

In his comments at the Schwab IMPACT conference in Washington, Graff noted the problems he sees with the DOL’s fiduciary reproposal.

“It’s not so much that more people will be fiduciaries” under the proposal, Graff said, “but how they will get paid.” From an enforcement standpoint, DOL will get at the fiduciary problem “by limiting forms of compensation.”

The potential limit on compensation will affect the small-business market in that if a small business “doesn’t have a [401(k)] savings plan, who’s going to sell them a plan if they won’t get paid?”

Another problem, Graff said, is DOL including IRAs in the reproposal—which Borzi has confirmed will happen. If the definition of fiduciary advice is the same for retirement plans and IRAs, the DOL “will not have the authority to enforce” the IRA portion, Graff said, as IRAs are the jurisdiction of the Internal Revenue Service. The IRS, he said, has six employees devoted to IRAs.

“If there’s no enforcement teeth, [DOL] could be creating a Wild West.”

By Melanie Waddell, ThinkAdvisor