By Cyril Tuohy
Municipal advisors are balking at the costs and some of the burdens associated with proposed rules governing supervisory and compliance obligations for advisors seeking to do business in the municipal bond market.
The new rules, proposed by the Municipal Securities Rulemaking Board (MSRB), are part of a regulatory framework designed to bring more order and structure to a traditionally opaque and unregulated part of the securities market.
Municipal debt is a $3.7 trillion market. As many as 900 companies, from sole proprietorships to big, prestigious and powerful Wall Street stalwarts like Goldman Sachs Group, have registered as municipal advisors.
MSRB’s draft Rule G-44 would require a new set of written supervisory procedures, designating one or more advisor principals responsible for supervision, designating a chief compliance officer and conducting an annual review of compliance policies.
MSRB has also proposed draft amendments to Rule G-8 and Rule G-9, which govern record-keeping procedures among advisors.
Small, independent financial advisors say they stand to lose the most under the adoption of G-44.
“The MSRB needs to consider the rules in the context of the whole,” said Jonathan Roberts, sole proprietor of Roberts Consulting in Aurora, Ohio. “In separation I would agree — none of these rules is too much burden by itself. But from the totality of all rules perspective — I must say a sole proprietor is going to struggle.”
In a letter to the MSRB, Jeanine Rodgers Caruso, president of the National Association of Independent Public Finance Advisors (NAIPFA), said that even though G-44 strikes the “appropriate balance between principles-based and a prescriptive approach to supervision,” sections of the multipart rule are “vague and ambiguous.”
Other parts of G-44, such as requiring municipal advisors to complete periodic self-certification, are onerous, Caruso said.
“Such a requirement would appear to simply create an additional regulatory burden,” Caruso wrote in a letter to the MSRB. “Further, we do not believe that such a requirement will result in clients of a municipal advisor achieving any appreciable benefits.”
Caruso also said the costs of implementing any rules in terms of out of pocket expense and the time eaten up by compliance activities will “either be directly or indirectly passed on the municipal and obligated persons,” and that those costs will in-turn be passed on to clients.
“Notably, these costs will be disproportionately borne by small municipal advisor firms and there is little likelihood that these firms have the financial capacity, or desire, to absorb these costs internally,” said Caruso.
As part of its economic analysis, the MSRB said it had taken into account costs associated with drafting the proposed rules contained in G-44, and that the proposed rules are designed to give the smallest of advisors some leeway.
“The MSRB is sensitive to the costs imposed by its rules and has sought to tailor the draft rule and draft amendments so as not to impose unnecessary or inappropriate costs and burdens on municipal advisors,” the MSRB said in Regulatory Notice 2014-04 posted on its website.
The MSRB said its economic analysis does not take into account all the costs associated with G-44, “but instead focuses on the incremental costs attributable to its implementation that exceed costs associated with the baseline state.”
Costs associated with G-44 would be “most pronounced as the supervisory and compliance programs are implemented for the first time,” the MSRB said. At the same time, G-44 allows small advisors and “advisors with other particular traits, to reasonably vary their supervisory procedures as appropriate,” the MSRB said.
Though no specific cost estimates were provided in relation to Draft Rule G-44, Linda Fan, managing partner of Yuba Group Advisors in New York, said that in previously submitted comments in relation to another rule, Draft Rule G-42, estimated costs related to that rule would have cost the seven-member advisory firm as much as $90,000 for the first six months of this year, or about $12,000 per employee.
Estimated costs were in connection with registration fees, time allocated to training staff members and municipal bond issuers, third-party consultants, time allocated to educating clients, attending webinars, disclosures and updating employee handbooks, and information technology fees in connection with email server upgrades, Fan said.
Future costs for professional testing, studying and lost wages in connection with G-42 were estimated at $89,000, she also said.
“Since at least three of us will also be required to take a supervisory test, the two-tiered approach to professional requirement increases our estimate by another $38,000 to over $125,000 just for the professional requirements,” she said.
Draft Rule G-42 covers the fiduciary duties incumbent on “nonsolicitor” municipal advisors. Draft Rule G-44, if adopted, would be put into effect after the adoption of G-42, according to the MSRB.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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