Senate Approves Massive Financial Overhaul

WASHINGTON — The Senate voted 60 to 39 Thursday to approve sweeping changes to the financial regulatory system that will significantly alter the landscape of municipal securities regulation.

The Senate approved the massive bill, which was designed to address the causes of the 2008 financial crisis, with only three Republican supporters after meeting a 60-vote procedural hurdle to end debate on the measure Thursday morning.

The three were Sen. Scott Brown from Massachusetts and Sens. Olympia Snowe and Susan Collins from Maine.

Sen. Russ Feingold of Wisconsin was the only Democrat to oppose the legislation, saying that it “fails to adequately protect the people of Wisconsin from the recklessness of Wall Street.”

President Obama is expected to sign the bill into law by early next week. It cleared the House by a vote of 237 to 192 on June 30.

The Obama administration and federal regulators praised the bill following its passage, arguing it takes significant steps to resolve problems that were at the heart of the financial crisis, such as the lack of any regulation for over-the-counter derivatives.

Federal Reserve Board chairman Ben Bernanke summarized many of the big-ticket items in the bill, noting in a laudatory statement that it would strengthen supervision of systemically important financial institutions, give the government resolution authority to wind down failing financial firms, and create an interagency council to detect and deter emerging threats to the financial system.

The scope of the bill is broad and it will take regulators years to implement its provisions, including the muni-related ones, some of which mandate six-month to two-year studies rather than action.

For instance, the bill would give the Government Accountability Office 24 months to study muni disclosure and the controversial issue of whether Congress should repeal the so-called Tower Amendment, which restricts the ability of the Securities and Exchange Commission or the Municipal Securities Rulemaking Board to collect documents from issuers prior to bond sales.

In addition, top Democrats have acknowledged that another bill will be needed to clean up the financial overhaul legislation, in which many complicated provisions were decided near the end of a marathon 20-hour session late last month.

“The best that can be said about this bill is that it’s a good first step, it’s the first round,” said William Daly, senior vice president of government relations at the Regional Bond Dealers Association, speaking generally about the bill’s provisions.

Daly said it’s “a good thing” that federal regulators will oversee non-dealer muni financial advisers for the first time, but noted “there’s a lot in that area that the MSRB and the SEC are going to have to flesh out.”

Specifically, advisers would have register with the SEC and comply with a fiduciary duty rule, business conduct standards, examinations and continuing education requirements established by the MSRB.

The board will also be reconstituted as a majority-public self-regulator, and must draft guidelines to ensure the independence of its public members.

In a lengthy statement, the MSRB said that its members and staff have been working “to ensure a smooth and effective transition to a majority public board” beginning Oct. 1, the start of its new term and the effective date for its recomposition. Also on that date, the board will obtain the authority to write rules and standards for advisers as well as to assist the SEC and the Financial Industry Regulatory Authority in the enforcement of its rules, among other new powers.

The MSRB said it will soon file with the SEC the administrative rule changes related to the transition, which will be coordinated with a rulemaking program designed to ensure “careful but prompt development of rules fulfilling the MSRB’s expanded mission.”

“The MSRB will develop rules in the areas of fair practices and fiduciary duties, pay-to-play and other conflicts of interests, gifts, disclosures, professional qualifications, continuing education, and other areas identified by the new governing board,” the board said in a release.

“An important element of this rulemaking program will be an outreach effort to key market participants, including investors and municipal entities that the MSRB’s rules are designed to protect, as well as municipal advisors, broker-dealers and banks subject to MSRB rules,” the board added. “The outreach effort will allow all participants to provide significant input to the MSRB during this transition period.”

Robert Doty, president of American Governmental Financial Services in Sacramento, said the bill is “very positive,” though “much is to be determined in terms of its actual administration.”

“There were a number of changes made at the least minute that vastly improved it,” Doty said. “Overall, the market is going to benefit tremendously from this bill assuming it is administered properly.” He added that he hopes the MSRB will reopen the membership process now that the parameters of a majority-public board are finalized.

Steve Apfelbacher, president of the National Association of Independent Public Finance Advisors and of Ehlers and Associates Inc. in Roseville, Minn., said: “For FAs, the most significant outcome of regulation is the FA’s fiduciary duty to the issuer. Independent FAs realized they always had this duty. Underwriter FAs will now have to decide if they are FAs or underwriters. They can not be both on the same transaction.”

His comments reference one of the most controversial MSRB rules, G-23, which allow a dealer-FA to resign as FA on a transaction and underwrite the deal as long as he discloses that his switching of roles may create conflicts of interest. NAIPFA has long argued that there is a conflict and that the rule’s current language wrongly suggests that one may not exist. SEC chairman Mary Schapiro recently urged the MSRB to prevent dealers from such role switching.

Some market participants were concerned that the bill’s muni provisions were muddled, particularly the “uniform ratings” section that falls short of requiring that ratings of municipal securities are based primarily, or at all, on the default risk, a goal of many issuers.

“It’s unclear how far this takes us down the road to fairness for taxpayers,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer.

Specifically, the provision requires the SEC to pass rules requiring that rating agencies designated as nationally recognized statistical rating organizations adopt and enforce policies that merely “assess” the probability that an issuer will default, fail to make timely payments, or otherwise not make payments to investors in accordance with the terms of a security.

While the rules also would require NRSROs to apply rating symbols in a consistent manner for all types of securities, there is no requirement that the symbols reflect default assessments. In addition, the provision ends with language allowing NRSROs to use special symbols to denote different types of securities.

“So what does that do, really?” Dresslar asked. “The question is, does [the legislative language] create the potential for the rating agencies to treat municipals differently and to hold them to a higher standard, like they’ve been doing for decades? We haven’t been able to get clarification” from congressional staff, he added.

Though Moody’s Investors Service and Fitch Ratings have voluntarily recalibrated their municipal ratings to a uniform or global scale earlier this year, issuers have said the legislation is needed to ensure that they do not revert back to their old, dual-scale system. For its part, Standard & Poor’s has long maintained that it already uses a uniform scale across all major credit sectors, though it has upgraded thousands more municipal credits than it has downgraded in recent years as a result of an updated default study.

Paul Rosenstiel, the former California deputy state treasurer who is now a principal at De La Rosa & Co. in San Francisco, said that Moody’s recalibration this year is widely seen as a “halfway move” because the municipal credits did not shift upward as much as they would have under a 2007 proposal in which Moody’s “mapped” municipal credit ratings to the scale it used for all other credits.

“In some ways that has left more uncertainty as to what the ratings means,” he said. “It’s clear that the mapping standard was likelihood of default and loss given a default, but it’s less clear what the standard is now. Legislation could help clarify and enforce standards.”


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