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Municipal Advisors Spar With Bond Dealers Over Draft Rule



Two well-funded and powerful lobbies with billions of dollars at stake in the municipal bond market are squaring off against each other over supervision and compliance obligations, as well as self-certification procedures.

The National Association of Independent Public Finance Advisors (NAIPFA) is feuding against the Bond Dealers of America (BDA) over new rules proposed earlier this year by the Municipal Securities Rulemaking Board (MSRB).

Calling this a battle between David versus Goliath may be overstating the case, but whatever the outcome of the battle over the proposed Draft Rule G-44, the losing side isn’t going to be happy.

NAIPFA insists there’s no need to “articulate the supervision and compliance obligation of municipal advisors,” as proposed in G-44, since there’s never been a case of enforcement action against a municipal advisor for dereliction of fiduciary duty.

Furthermore, the NAIPFA says periodic self-certification for municipal advisor representatives provides “no value.”

“Such a requirement would appear to simply create an additional regulatory burden,” Jeanine Rodgers Caruso, NAIPFA president, said in a letter to the MSRB.

Instead, the MSRB should consider exempting sole proprietorships from developing a compliance manual, or even consider delaying the implementation of G-44 altogether, Caruso added.

That’s not sitting well with the BDA.

The BDA sees G-44 as affording too much flexibility to small municipal advisors, some of whom are one-person shops. The G-44 proposal runs the risk of letting small advisors firms “carve out for themselves an accommodation.”

The MSRB must “set forth minimum standards for which all municipal advisory firms must meet when establishing supervisory and compliance procedures,” Michael Nicholas, BDA chief executive officer, said in a letter to the MSRB.

“We believe firms of all sizes and business models should be held to the same standards of service and should be required to meet the requirements of the law,” he said.

No matter how small or what financial challenges they face, one-man shops should not be allowed “purposefully or otherwise,” to dilute their obligations in the face of the rules, he also said.

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Municipal debt is a lucrative $3.7 trillion market, with as much as $450 billion in state and municipal debt obligations issued annually, according to the MSRB.

As many as 900 advisory firms are registered with the MSRB, and those firms range from small shops scattered around the country to blue-chip giants crowding the canyons of Wall Street. Advisors and bond dealers generate millions of dollars in fees and commissions annually every time they engage in a municipal offering.

Nicholas also said that self-certification is critical to certifying whether a municipal advisor plays by the same rules as everyone else. The issue of certification is in the public interest, he also said.

“We are understanding of your concern not to place smaller municipal advisory firms at a competitive disadvantage but these regulations need to apply to all municipal advisors without regard to size, much like the rules for broker-dealers,” Nicholas said.

G-44, proposed by the MSRB to comply with the Dodd-Frank Act, was itself passed in the wake of the financial crisis in 2008 when investors lost trillions of dollars. The bill is designed to bring more rigor to the way in which municipal market participants operate.

For such a large market, watchdogs and critics have marveled at how long it has survived with so little supervision from federal agencies.

Some of the scandals surrounding the municipal markets have truly been ones for the record books.

Robert Citron, a former treasurer of Orange County, lost $1.7 billion of taxpayer funds on derivative investments in the early 1990s. Court documents later revealed he consulted an astrologer for help in guiding the county’s $20 billion investment pool.

Citron’s follies squeezed Orange County into bankruptcy in 1994. Since then, other municipalities have gone belly-up: Stockton, Vallejo, San Bernardino, all in California; Central Falls, R.I.; Jefferson Country, Ala.; Harrisburg, Pa.

In some cases, municipalities’ financial foibles involved old-fashioned incompetence and corruption, and in other cases opacity played a role.

Jefferson County filed for bankruptcy after costs spiraled out of control on auction-rate securities and derivatives debt connected to a sewer system. Last December, the city of Detroit became the largest municipal bankruptcy in history.

MSRB’s proposed rule is modeled on other laws governing federally registered advisors and the conduct of people working for institutions choosing to participate in capital markets.

NAIPFA and the BDA agree on one element of the MSRB’s G-44 draft proposal: delaying implementation of the rule.

NAIPFA has asked for a three-month grace period from the time the rule is adopted. The BDA said that six months is adequate to allow supervisory and compliance obligations to line up with other rules on which G-44 depends.

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is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at

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