WASHINGTON — The Municipal Securities Rulemaking Board’s draft rule on gifts and gratuities could shut down muni advisers, the municipal market’s largest financial adviser is warning.
Public Financial Management Inc. aired its concerns in a comment letter on draft amendments to Rule G-20 on gifts and gratuities, which would expand the existing rule to cover muni advisers as well as broker-dealers.
The draft revised rule, released in February, would bar muni advisers from making gifts and gratuities worth more than $100 per year “in relation to” their muni adviser activities. The existing rule prohibits such payments by broker-dealers “in relation to the municipal securities activities” of the recipient’s employer, such as an issuer.
That discrepancy, with its disparate treatment of payments made by broker-dealers and municipal advisers, has stirred alarm at PFM.
Joseph J. Connolly, PFM’s general counsel, told the MSRB: “PFM strenuously objects to the fact that, if the words of the proposed new Rule G-20 provisions mean what they say, the municipal advisory profession can be made to cease to exist, while the securities business of municipal dealers remains unaffected.”
Specifically, PFM said, the existing rule bars certain broker-dealer payments to issuer employees. But the proposed rule could bar a muni adviser’s payments to any person, in excess of $100, related to the muni adviser’s business, including expenses such as rent, market data, and software.
The existing rule and the draft rule exempt third-party employment and service contracts and “occasional gifts” of meals or tickets to theatrical and sporting events and other entertainment hosted by broker-dealers and municipal advisers.
“In the case of an independent municipal adviser, like PFM, everything we do, and every payment we make, can be said to be 'in relation to [our] municipal advisory activities,’” Connolly wrote. “Every proper expense of a municipal adviser that is a business entity must be deemed to have been made 'in relation to’ its advisory activities,” because that is what the adviser owes to its equity holders, he added.
An MSRB spokesperson declined to comment about draft Rule G-20, saying the board is reviewing the comment letters.
In the notice accompanying the draft rule, the MSRB did not address why it opted to craft the muni adviser gift restrictions more broadly than the broker-dealer restrictions. The adviser part of the rule is keyed to the muni adviser’s activities, while the existing broker-dealer provision focuses on the activities of the recipient’s employer.
The board’s notice said the draft rule would help ensure that muni adviser engagements “are awarded on the basis of merit, and not as a result of gifts made to employees controlling the award of such business.”
Still, PFM urged the MSRB to revise draft Rule G-20 by targeting a muni adviser’s payments to issuer employees who are muni-adviser clients.
“It is inconceivable that the board finds anything in the federal securities laws, including the Dodd-Frank Act, that authorizes [it] to shut down municipal advisers,” Connolly wrote, “and even if the draconian effect of proposed Rule G-20(a)(ii) is an inadvertent mistake, there is nothing in the federal securities laws, and particularly in the Dodd-Frank Act, which would authorize the board to impose on municipal advisers a set of restrictions which [it] does not apply to municipal dealers.”
PFM was the top-ranked FA in 2010, serving as adviser for $57.5 billion in 988 issues, according to Thomson Reuters. The next highest-ranked FA was Public Resources Advisory Group, which was adviser for $31.1 billion in 165 issues. The third-ranked firm, and largest dealer-FA, was First Southwest Co., with $27.86 billion in 721 issues.