As Chief Compliance Officer of Bernardi Securities, Inc., I make a point of attending as many meetings and seminars as I can to keep our firm apprised of new rules, regulations and legislation that affect our organization and clients. Along with serving on FINRA’s Small Firm Advisory Board, I recently attended a joint Municipal Securities Rulemaking Board (MSRB)/Bond Dealers of America (BDA) conference focusing on new regulations in our industry. This market update reviews critical regulatory matters, as well as related events.
Business continuity plan
Hurricane Sandy has highlighted the importance of having a well-organized business continuity plan. Industry regulations require all broker-dealers and market participants to have plans created so that business operations can function during a variety of events. Pershing LLC, our clearing firm based in Jersey City, N.J. has an alternate processing facility in Lake Mary, Fla. that serves as a backup for all functions.
Despite the devastation caused by the hurricane, Pershing’s ability to support our customer functions was never interrupted by the storm. In addition, Bernardi Securities, Inc. has a comprehensive business continuity plan that addresses events which could impact our operations, including an alternate processing facility located in the Chicago northern suburbs. For more information, please visit our business continuity page.
Dodd-Frank legislation for issuers
One element of the Dodd-Frank bill seeks to protect municipal entities when issuing bonds. New rules have been enacted by the MSRB to protect issuers. The new rules are primarily concerned with an underwriter’s:
- Statements and representations to issuers
- Fairness of financial aspects of an underwriting
- Increased required disclosures to issuers
- Timing and manner of providing disclosures
SEC study on municipal securities market
In July, the Securities & Exchange Commission (SEC) published a comprehensive study on the whole of the municipal securities market. The study found that the municipal securities market is extremely diverse, with close to 44,000 issuers and outstanding bonds worth $3.7 trillion. As we have known for some time, the study found that individual or “retail” investors hold 75% of the outstanding securities in a “buy and hold” pattern. Despite the size and strengths of the market, the report also offered the industry structural improvement recommendations regarding transparency and pricing.
New investor suitability rules
New rules have been enacted regarding the suitability of recommendations we offer to you. In addition to the information obtained when your account was opened, we periodically will ask clients if current investment parameters need to be amended – as your financial situation changes – to continue to provide a suitable investment recommendation. You may have recently received portfolio management documents, a Bond Offering Profile (BOP), or an updated account agreement as part of this process. We appreciate your assistance in completing and returning these documents. This information allows us to tailor recommendations we provide to your specific guidelines.
As you may know, cash money market funds are mutual funds which attempt to keep a stable net asset value (NAV) of $1. As we have seen in the recent past, market forces can have a significant effect on the ability for the fund manager to maintain the NAV at $1. In addition, events that close the market, both planned and unplanned (such as Hurricane Sandy), can limit your access to these funds.
Given today’s interest rates, it is worth considering alternate cash investments that may provide an enhanced level of protection. Pershing offers a couple of alternatives for the investment of available funds. One option is to hold available cash in your Pershing cash account. Your cash will be protected by the Securities Industry Protection Corp (SIPC) for up to $100,000 with additional coverage provided by Lloyds of London.
Another alternative offered by Pershing is the ability to invest available cash into bank deposit accounts. Mechanically, the process works almost exactly the same as money market funds, with the cash “sweeping” to and from bank accounts to invest free funds or provide liquidity for purchases or withdrawals. Bank deposit accounts provide FDIC coverage up to $250,000 per deposit and multiple bank deposit accounts can be linked together to provide additional coverage. Additionally, bank deposit accounts are not dollar based mutual funds (such as money market funds) and are not exposed to market fluctuation.
Enhanced broker disclosure
We believe it is important to research the investment professional and company you currently use, or are considering using. FINRA’s BrokerCheck function is a research tool which allows you to obtain public information about any registered firm or individual. The SEC is currently considering adding additional information for the public to see including:
- Educational background
- Licensing information
- Discipline information
Municipal bond market alerts
The MSRB has recently upgraded its Electronic Municipal Market Access (EMMA) website. This website is designed to provide the public with information regarding individual bond issues. You can now subscribe to receive material event and/or financial document alerts on specific bonds that you may hold. This MSRB improvement helps investors keep abreast of the events relevant to municipal bonds held.
If you have any questions regarding the above information, please contact me at (312) 281-2010.
Chief Operating & Compliance Officer
November 14, 2012