The proposal, pushed by House Financial Services Committee chairman Barney Frank, D-Mass., is said to reflect skepticism among House lawmakers towards self-regulators in general, though not the MSRB in particular. But it is unclear if Frank has the backing of the Senate conferees.
Spokesmen for Frank as well as Senate Banking Committee chairman Christopher Dodd, D-Conn., who is also a conferee, did not respond to requests for comment. Dodd’s staff has strongly backed the MSRB, which they credit with the development of the Electronic Municipal Market Access, or EMMA, site.
Market participants speculated that the Frank proposal is likely to easily gain support from a majority of the House conferees.
Under conference rules, the 12 Senate conferees can then vote to accept the House proposal to make it part of the final reform bill or offer their own counter-proposal, which would then have be approved by their House colleagues.
Specifically, the House proposal would require that muni financial advisers for bond issuance as well as for swaps, the investment of bond proceeds, or other products used to hedge risk be registered with, and regulated by, the SEC. Unlike the “base text” language, it would impose a fiduciary duty on these advisers requiring them to hold their clients’ interests ahead of their own.
The House language would eliminate a proposed mandate in the “base text” for the SEC to create a permanent Office of Municipal Securities whose director would reports directly to the SEC chairman. Currently, the commission’s muni office is housed within its division of markets and trading and has two only full-time employees — Martha Mahan Haines, its chief, and Mary Simpkins, senior special counsel.
In addition, the House proposal does not include language in the base text that would require the Government Accountability Office to conduct studies on municipal disclosure and trading and require the SEC to study the role and funding of the Governmental Accounting Standards Board. It also does not contain a base text provision that would allow the MSRB to assist with enforcement actions or share fines collected by FINRA for violations of board rules.
Some financial advisers praised the House proposals, arguing that they could not continue to provide independent advisory work on behalf of issuers while being regulated by the board, even though the base text would require the MSRB to have a majority of public members.
“The Senate language would outlaw truly independent advice by definition because of the strong influence of underwriters over the board and the board’s prior reluctance to enforce a financial advisor’s fiduciary duty,” said Robert Doty, president of American Governmental Financial Services in Sacramento.
Peter Shapiro, managing director at Swap Financial Group, acknowledged that many advisory firms would prefer to be regulated by the SEC, but said his firm has not had experience with the MSRB. “We welcome a thoughtful regulatory environment and think the SEC or MSRB would be able to do it well,” he said.
Because his firm advises both municipalities as well as other swap participants like corporations, Shapiro said he expects the firm will have to be dually registered with the SEC as well as the Commodity Futures Trading Commission, which would share regulatory authority over derivatives with the commission. Shapiro said he hopes these agencies are able to coordinate their regulatory efforts and are mindful about keeping the regulatory and paperwork burdens as small as possible.
Shapiro also said that under whatever regulatory scheme ultimately comes together, the educational and test taking for advisers should be tailored to those who provide advice to issuers rather than investors. He noted that both the Series 7 exam for general securities representatives and the Series 52 exam for municipal securities representatives address an adviser’s responsibility to investors, not issuers or borrowers.
Steve Apfelbacher, president of Ehlers & Associates Inc. in Roseville, Minn., as well as the National Association of Independent Public Finance Advisors, said: “NAIPFA supports the House decision to regulate municipal advisers with the SEC. We believe this is the right approach and will best manage conflicting adviser/underwriter interests.”
But Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, said: “The MSRB is the better entity to regulate FAs because they have 35 years of experience regulating municipal dealers and because they have an established rulebook that could be adapted and applied to FAs quickly.”
“However, the most important outcome is that FAs become regulated and that their rules track those for broker-dealers as closely as practical,” he added. “Only then will the playing field be level for all entities providing municipal issuers financial advisory services, and municipal issuers will have the protection of having their financial advisors be regulated.”
The MSRB declined to comment on the House proposal.
Meanwhile, Republican staffers on Capitol Hill yesterday said there is support on both sides of the aisle for a separate amendment that had been floated by Sen. Mike Enzi, R-Wyo., and Sen. Bob Corker, R-Tenn., to create a stable source of funding the GASB, though it was not clear if the amendment will have any traction in conference.
The amendment was introduced last month prior to the Senate’s passage of its regulatory reform proposal, though it never came up for a vote. Corker, a conferee, is not expected to repropose the amendment, but some one else could.
Specifically, the amendment would authorize the SEC to direct FINRA to collect assessments from muni dealers to fund GASB. The board currently receives voluntary contributions from states, localities, and the sales of its publications, but is constantly short of funds and its dependence on issuers is seen as a conflict.
Republican supporters of the legislation, concerned about financial stresses on states and local governments, see a financially stable GASB as one method of developing an efficient secondary market for the trading of municipal securities — and the first of many steps toward ensuring issuers adhere to comparable financial accounting standards.
Though GASB is the setter of generally accepted accounting standards for states and localities, the SEC has estimated that thousands of issuers do not adhere to its standards consistently, so stable funding would also ideally be accompanied at some point in the future with a mandate that states and localities adhere to its standards, staffers said.
However, the Government Finance Officers Association is believed to opposes the measure, while the Securities Industry and Financial Markets Association, in a letter to Dodd and Frank last week, warned “it is not appropriate to impose a fee on dealers to fund GASB, a board that does not oversee the activities of broker dealers.”
GASB spokeswoman Chris Klimek declined to comment. GFOA executive director Jeffrey Esser was unavailable.