B-Ds unveil game plans related to muni disclosure

As regulators increase scrutiny of municipal bond sales, Wells Fargo Advisors LLC, J.J.B. Hilliard W. L. Lyons LLC and Commonwealth Financial Network are among the broker-dealers that are considering changes in how financial advisers disclose material events about muni bonds to clients.

In September, the Financial Industry Regulatory Authority Inc. and the Municipal Securities Rulemaking Board issued guidance about what brokers need to do to stay abreast of material events related to muni securities and how to communicate these events to clients.

One of the problems that Finra has come across in its examinations is that sometimes a broker will say, “That bond was AAA when I sold it,” Malcolm Northam, director of fixed-income regulation at Finra, said during a panel discussion Monday at the regulator’s Fixed Income Conference in New York. “That’s not good enough,” he said.

And continued disclosure of material information about muni bonds to customers is likely to become a mandate for all brokers once the Securities and Exchange Commission’s fiduciary standard of care is finalized, said Ernesto Lanza, general counsel at the MSRB.

“Under the fiduciary standard of care, brokers’ entire relationships with the customers would change, and they would have to disclose these events on an ongoing basis,” he said.

That would be no small task, said Matt Fabian, managing director at Municipal Market Advisors. As of March 8, there were already 28,119 filings from muni bond issuers, according to MMA.

“It’s an immense logistical issue,” Mr. Fabian said. “Municipal bonds are a much heavier lift for brokers.”

One problem is that brokers aren’t compensated to stay on top of all the material information related to muni securities, Mr. Fabian said.

“There is no trail fee like brokers get when they sell mutual funds,” he said.

Many broker-dealers already struggle with how they can verify that their advisers communicate material information to clients on a real-time basis.

Wells Fargo Advisors, for instance, is discussing restricting the sale of such bonds to only those investors who have e-mail addresses so that it can confirm that brokers disclosed material events about muni bond issuers on a continuing basis and that clients received those notices, Craig Noble, director of fixed-income trading at the firm, said during the panel discussion.

“This is the only way to avoid a client coming back and saying, “My broker never told me that,’” he said after the discussion.

Given how much turnover goes on in the brokerage community, it can be very difficult for firms the size of Wells Fargo, which has 15,000 brokers, to confirm continued communication of material events, Mr. Noble said.

‘HUGE PUSH-BACK’

“The issue is: How do we back up that these conversations happened and verify it?” he said.

Mr. Noble conceded that the idea has received “huge push-back from brokers” who think that requiring e-mail addresses from customers makes it seem as if they are checking up on clients.

“No broker wants to send an e-mail verifying that they said what they said,” Mr. Noble said.

But not all firms think that requiring e-mail addresses from customers is the way to go.

“We find that our client base is aging along with the broker population,” said Wesley Ringo, senior vice president and chief compliance officer at Hilliard Lyons, which has 410 brokers who sell muni securities. “A lot of investors are older people, especially those who are looking for fixed-income investments,” he said, noting that older investors may not be as technologically literate as younger ones.

Hilliard Lyons has found that in instances when it does e-mail information to clients, just 10% to 15% of those investors actually open the e-mails.

The firm has adopted a checklist for its brokers to use, though it isn’t as “onerous” as the one recommended by Finra in its September regulatory notice, Mr. Ringo said during the panel discussion.

Although there was push-back from brokers over the checklist, the firm overcame it through education and communication, he said.

In January, Commonwealth began requiring all its registered representatives, 90% of whom are also registered investment advisers, to complete a checklist before selling muni bonds to clients. The checklist, which is based largely on the one that Finra recommended in its September regulatory notice, asks brokers to make sure that they have collected all the pertinent information on a muni bond and shared that with clients.

“Traders won’t place a trade unless they have confirmation from the adviser that they went through the checklist,” said Paul Tolley, chief compliance offficer at Commonwealth.

Advisers then have to file the checklists with the client’s records.

Commonwealth is sending out the Finra regulatory notice to its 1,400 advisers on a quarterly basis to remind them of their continued disclosure requirements, Mr. Tolley said.

REAL-TIME INFORMATION

“We strongly encourage them to document these ongoing disclosures in advisory accounts, and even if they aren’t advisory accounts, we ask them to note these disclosures,” he said.

But even with checklists, Mr. Noble said that he thinks that all broker-dealers ultimately will require clients’ e-mail addresses so that they can receive real-time information.

“The client may go to another firm, but eventually, everyone will do this,” he said.

Wells Fargo doesn’t have a timeline for when it will make a decision on the issue.

Finra has no plans to require that broker-dealers restrict muni bond sales to investors with e-mail, Mr. Northam said.

Some broker-dealers worry that all of the requirements around continuing disclosure may force some brokers out of the business of selling muni bonds.

“It could make some brokers ask if they still want to be in this business and could inhibit retail investors from having access to these products,” said Don Winton, chief operating officer at Crews & Associates Inc., a muni bond underwriter with 150 brokers who sell the offerings.

E-mail Jessica Toonkel at [email protected].

Related Topics: Commonwealth Financial Network LLP, Financial Industry Regulatory Authority, Wells Fargo & Co.