WASHINGTON -- An influential House lawmaker has joined state and local governments in opposing draft sales practice rules for government securities issued by the National Association of Securities Dealers.
Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce telecommunications and finance subcommittee, warned in a letter dated Oct. 7 to Joseph Hardiman, chief executive officer of the association, that the rules "may be inconsistent" with the sales practice provisions of the Government Securities Act Amendments of 1993.
Markey said the rules offered by the dealers last August "would largely relieve NASD members" of their obligation to make suitable recommendations for institutional customers based on a Customer's securities holdings, investment strategy, and other criteria. Final comments on the rules are due Nov. 7.
Markey's comments follow harsh criticism of the rules by the Government Finance Officers Association, which threatened to take its complaints to the Securitie's and Exchange Commission.
Critics say the rules would provide a broad exemption from sales practice rules for determining whether dealers make suitable recommendations to institutional clients.
The revised rules would set sales standards not only for government securities but for corporate Securities and equities, while standards for municipal dealers would continue to be set by the Municipal Securities Rulemaking Board.
Markey said he is concerned that the dealers could end up having two divergent sets of standards on the books, one from the MSRB and a more lax regime for other types of securities.
State and local officials had a long-running feud with dealers about when dealers are responsible for making recommendations involving the purchase and sale of government securities. Markey's subcommittee has documented a number of cases in which municipal governments and others investors were victimized by abusive sales practices.
The government securities law of 1993 sought to protect against such abuses, but in doing so it had to address the complaints of dealers who said that they should not be subject to penalties when they have sophisticated clients capable of making their own investment decisions.
The committee report accompanying the 1993 law said sales practice rules for dealers should encompass "all categories of investors, including governmental investors of public funds," and that "no distinction between investors on basis of size of portfolio shall be made."
The dealers association proposed rules for institutional investors -- a category that would include banks, insurance companies, investment advisers, and any entity with assets of $50 million or more. The latter category would presumably include most state and local governments, according to the government finance officers.
Markey indicated that he agreed with the GFOA that the law does not allow a suitability rule for dealers that makes a distinction among institutional investors based on portfolio size.
The NASD also said the rules would not apply in the case of sophisticated institutional clients capable of making up their own investment decisions. As examples, the dealers said such situations would apply when an institutional customer:
* Has the resources to make an independent investment decision.
* Has one or more experienced professionals on the investment staff.
* Invests through more than one dealer.
* Uses the services of one or more investment advisers.
* Uses alternative market sources of information, including electronic screen services and research material from independent sources.
Markey said it is unclear in what cases such criteria would apply and suggested that a lot of institutional investors might not be protected. He also said he disliked a requirement for institutional investors to issue statements saying they are relying primarily on a dealer's recommendations for a particular investment product in order for the rules to apply.