More On Legal & Compliancefrom The Advisor's Professional Library
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- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The Securities and Exchange Commission passed Wednesday a long-awaited final rule on the definition of who is a municipal advisor, laying the foundation for the regulation of this previously unregulated class of advisors by both the SEC and the Municipal Securities Rulemaking Board.
The agency also floated a controversial proposed rule on executive compensation, which would require public companies to disclose the ratio of its CEO pay to the median compensation of its employees. The SEC voted 3-2 to put the proposal out for public comment.
Under the newly adopted rule advisors to municipal securities will now be subject to audit compliance reviews, licensing, continuing education, written supervisory procedures, restrictions on political contributions and gifts, record retention requirements, and disclosures of third-party fees and conflicts of interest.
The final rule would provide a phase-in period for compliance, with permanent registrations starting on July 1, 2014.
In general, under the final rules, a municipal advisor would be required to register with the SEC if it:
—Provides advice on the issuance of municipal securities;
—Provides advice on certain “investment strategies,” specifically, investments of the proceeds of municipal securities and related municipal escrow investments in refinancings; and
—Provides advice on municipal derivatives.
As SEC Chairwoman Mary Jo White stated during the open meeting, in the wake of the financial crisis, “many municipalities suffered significant losses from complex derivatives and other financial transactions. They entered into these transactions, in many cases, after receiving advice from a group of largely unregulated intermediaries known as ‘municipal advisors.’”
These advisors, White stated, “generally were not required to comply with any particular standard of conduct, they did not have to meet any particular training requirements, and they did not have to disclose any potential conflicts of interest.”
To address the issue, the Dodd-Frank Act created a new regulatory regime for municipal advisors intended to protect municipalities and investors participating in the municipal securities market. As White explained, the Dodd-Frank Act provided that these advisors “are required to register with the SEC, act in the best interests of their municipal clients and, for the first time, be overseen by both the SEC and the Municipal Securities Rulemaking Board.”
Registered investment advisors exempt from registering as municipal advisors would be those that advise on the investment of the proceeds of municipal securities or municipal escrow investments. “This exemption helps ensure the rule does not create duplicative regulation of investment advisors,” the SEC says.
The exemption, however, would not apply to advice on the structure, timing and terms of issues of municipal securities or municipal derivatives. “That is because advice in these areas is outside the focus of investment advisor regulation,” the SEC says.
Jay Goldstone, chairman of MSRB’s board, said after the SEC ruling that “the MSRB is very pleased that we now have clarity on the kinds of financial professionals that are considered municipal advisors.”
Dodd-Frank expanded the MSRB’s jurisdiction to include registration and other aspects of regulation of municipal advisors. Regulatory oversight of municipal advisors will help protect municipal entities that hire municipal advisors and investors that participate in the municipal market.
The SEC’s final guidance on the definition of municipal advisor addresses a number of interpretative issues relevant in determining whether a firm or individual is engaging in municipal advisory activities requiring registration and regulatory compliance. In 2011, the MSRB proposed draft rules for advisors but suspended that process as the SEC finalized its guidance.
The MSRB said that it will now advance 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.
Goldstone said the MSRB will “re-examine the draft rules, revise them if necessary in light of the SEC’s final guidance and seek public comment.” It will also continue to work with the municipal advisory industry to develop a professional qualification exam to establish standards of competency for municipal advisors.
The Securities Industry and Financial Markets Association issued a statement in support of the SEC newly passed rule. Specifically, SIFMA said that it is "encouraged to hear that the SEC has expanded the underwriter exemption, though we will need to further review if this exemption is broad enough so as not to restrict traditional public finance investment banking activity."
SIFMA also said it supports the SEC’s effort to narrow its definition of investment strategies with regard to the investment of funds other than bond proceeds, and to exempt RIAs and certain bank products and services.
Bond Dealers of America CEO Mike Nicholas said in a statement that “subjecting the large universe of currently unregulated municipal advisors to such rules will be beneficial to issuers seeking quality advice, and improve the integrity of the entire municipal marketplace.”
BDA, he said, “will be thoroughly reviewing the rule once it is available, but was pleased this morning to hear SEC commissioners comment on aspects of the rule that preserve the current customary activities of underwriters that are already subject to extensive regulation and oversight for the benefit of issuers.”
Check out Making Sense of the Nonsensical Broker Comp Rule by Jon Henschen on ThinkAdvisor.