House Poised to OK Financial Regulatory Reform Bill

WASHINGTON — The House is poised to approve a massive financial regulatory reform bill today, after considering a series of amendments late into last night.

The bill would regulate over-the-counter derivatives for the first time, create a Consumer Financial Protection Agency, create a multi-agency council to monitor systemic risk, and establish an orderly process for winding down large, failing non-bank financial institutions.

At press time, the House was starting to consider 36 amendments out of nearly 250 that lawmakers submitted to the Rules Committee earlier this week. But the three dozen did not include two controversial measures that directly related to the municipal market.

One, by Rep. Stephen Lynch, D-Mass., would have prohibited states, localities, and public pension funds from entering into swap agreements. Another, by Rep. Randy Neugebauer, R-Tex., would have allowed muni financial advisers already registered and regulated by state securities commissioners or regulators to avoid Securities and Exchange Commission registration and regulation.

Though the House is acting swiftly to approve regulatory reform, the Senate is not expected to approve its proposal until at least early next year, when election-year politics may restrain members from approving contentious legislation. A draft bill floated last month by Senate Banking Committee chairman Christopher Dodd, D-Conn., is being substantially reworked by members of the committee. Industry lobbyists say it is unlikely the committee will have sufficient time to vote on it before the end of the year.

The Lynch and Neugebauer muni amendments met with strong opposition by industry groups when they were proposed earlier this week. The Regional Bond Dealers Association sent a letter Tuesday to House Financial Services Committee chairman Barney Frank, D-Mass, and Rep. Spencer Bachus, R-Ala., the panel’s ranking Republican, warning that the Neugebauer provision would create a “patchwork system of state regulation for advisory professional” that would “not provide the same improvements to public finance services.”

The amendment would have modified a provision of the bill that would require muni FAs for bond issuance and investments of proceeds, swaps, or other products that hedge risks to be registered with, and regulated by, the SEC. The measure would exclude broker-dealers acting as underwriters.

The Lynch proposal would have been more restrictive than the current bill, which would allow governments to be eligible contract participants whose derivative transactions would not have to be exchange-traded, if they have $50 million dollars or more of discretionary investments or their counterparty is a broker-dealer or bank.

House members were expected to approve, along party lines with most Republicans in opposition, a so-called manager’s amendment filed by Frank that would include provisions that could indirectly impact the muni market.

For instance, one provision in the manager’s amendment would make it easier to sue rating agencies registered with the SEC as nationally recognized statistical rating organizations by lowering the NRSRO liability standard from “knowingly or recklessly” to “gross negligence.”

The measure comes as NRSROs have been widely blamed for causing the financial crisis by giving unduly high ratings to tainted mortgage-related securities, without performing any due diligence on the underlying securities. Though many lawmakers support making it easier to sue rating agencies, the NRSROs themselves maintain they are already susceptible to litigation.

A stand-alone amendment by Rep. Pete Sessions, R-Tex., which is not expected to be approved, would have struck from the bill language allowing private parties to sue the rating agencies.

While the managers amendment would require all rating agencies to register with the SEC as NRSROs, another amendment offered by Rep. Scott Garrett, R-N.J., would allow a rating agency to de-register as a NRSRO, provided it certifies that it received less than $250 million during its last full fiscal year in compensation for providing ratings on securities and money market instruments issued in the U.S. The measure appeared to meet with some support among the Democratic leadership.

A separate amendment introduced by Frank and Rep. Steve Cohen, D-Tenn., that was likely to be approved would strike from the legislation language that would allow the Financial Industry Regulatory Authority to regulate investment advisers associated with broker-dealers. FINRA currently does not have that authority. Sources said yesterday that several industry groups strongly supported the amendment.

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