Firm eyes restricting sales of tax-exempt instruments to clients with e-mail addresses; construed as checking up
With regulators increasingly scrutinizing the practices surrounding the sale of municipal bonds, Wells Fargo Advisors LLC is discussing restricting the sale of such bonds to only those investors who have e-mail addresses.
Over the past several months, the Securities and Exchange Commission, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority Inc. all have proposed rules and guidance about what kinds of disclosures brokers need to make to investors when selling municipal bonds. Specifically, regulators want to make sure that advisers convey any material information associated with a municipal bond issuer to investors.
“The key is that there is a process in place to gather and distribute material event information,” Malcolm Northam, director of fixed income regulation at Finra, said during a panel discussion this morning at Finra's Fixed Income Conference in New York. The agency has heard too often from brokers saying, “‘That bond was AAA when I sold it, that's good enough,'” he said.
By allowing brokers to sell municipal bonds only to clients with e-mail addresses, Wells Fargo would be able to confirm not only that brokers disclosed material events about municipal bond issuers, but that clients received those notices, Craig Noble, director of fixed income trading at Wells Fargo Advisors, said during the panel discussion.
“This is the only way to avoid a client coming back and saying, ‘My broker never told me that,'” Mr. Noble 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. “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 feel that by requiring e-mail addresses from customers, the brokers are essentially checking up on them. “No broker wants to send an e-mail verifying that they said what they said,” Mr. Noble said.
Not all firms believe that requiring e-mail addresses from customers is the right 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 J.J.B. Hilliard W. L. Lyon LLC, which has 410 brokers selling municipal securities. “A lot of investors are older people — especially those who are looking for fixed-income investments,” Mr. Ringo said, noting that these older investors may not be as technologically literate as their younger counterparts.
J.J.B. Hilliard has found that in those instances when it does e-mail information to clients, only 10% to 15% of those investors actually open the e-mails.
Mr. Noble believes, however, that most of the wealth lies with baby boomers, who do have e-mail. “If the investors are older than that, there becomes a new question of should a 75-year-old be buying a municipal security,” 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 municipal bond sales to investors with e-mail, Mr. Northam said.
