Regardless of the fate of the infrastructure bill being debated in Congress, 2022 is poised to be a record year for municipal bond issuance.
As the regulator of this $4 trillion market, the Municipal Securities Rulemaking Board (MSRB) is currently projecting upward of $500 billion of new issuance next year. Many state and local government issuers will turn to advisors to help them determine whether and how to go to market, and to provide a range of other municipal advisory services.
Municipal advisor registration and qualification standards provide important safeguards for the state and local governments that rely on the advice of these professionals, but only if the rules are being followed.
The presence of unregistered — and potentially unqualified — advisors providing municipal advisory services to state and local governments and other municipal entities is a cause for concern and greater regulatory scrutiny.
Unregistered municipal advisor firms not only compete unfairly against their regulated counterparts who must comply with MSRB rules, they are unlikely to be putting the interests of their issuer clients ahead of their own, consistent with the fiduciary duty established by Congress with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This was a recurring theme across all five of the regional town halls the MSRB held this summer with more than 260 participants from municipal advisor firms across the country.
We heard loud and clear from market participants that some firms are engaging in municipal advisory activities without registering with the MSRB and the Securities and Exchange Commission (SEC). We are working with the SEC to identify firms that are engaging in unregistered municipal advisory activities, as this activity puts issuers and investors at risk.
The SEC, which created the registration requirements for municipal advisors in 2013, recently brought an enforcement action against an unregistered firm providing municipal advisory services in the first ever case enforcing the MSRB’s core conduct rule for municipal advisors, MSRB Rule G-42. This enforcement action began with a referral by the MSRB.
Last week, the MSRB partnered with the SEC and the Financial Industry Regulatory Authority (FINRA) to host a virtual compliance outreach program for municipal advisors and discussed when an exemption from municipal advisor registration requirements may apply.
For example, an engineering firm would be exempt from the registration requirements when giving advice to its issuer client with respect to project feasibility studies, rate models and funding schedules. But registration requirements would be triggered if that same engineering firm provides advice regarding municipal financial products or the structure, timing or terms of an issuance.
The SEC encouraged market participants to closely read the adopting release and FAQs about the municipal advisor registration rule, available in the quick links at sec.gov/municipal.
For its part, the MSRB is entrusted by Congress to protect issuers, investors and the public interest as well as to ensure the fairness and efficiency of the municipal market. Our rules for municipal advisors establish core standards of conduct for how municipal advisors exercise their fiduciary duty to their municipal entity clients.
MSRB rules also establish baseline professional qualifications for municipal advisors, including a new requirement that as of November 30, 2022, every municipal advisor firm must have a supervisory professional qualified with the MSRB’s Series 54 Municipal Advisor Principal Qualification Examination.
The MSRB provides issuers with the ability to check whether a firm providing municipal advisory services is properly registered with both the MSRB and SEC, and that the individuals working at these firms have the appropriate professional qualifications. Check the qualification status of your municipal advisors by visiting the MSRB’s website at www.msrb.org.
And if you become aware of or believe that a firm is providing municipal advisory services without proper registration or that municipal advisors do not have the proper qualifications, then please let us know. Together, we can ensure the integrity of our market. If you see something, say something!
Mark Kim is the Chief Executive Officer of the Municipal Securities Rulemaking Board.