WASHINGTON — Securities and Exchange Commission chairman Mary Schapiro told lawmakers Wednesday that the agency is considering whether to exempt all muni issuers, not just states, counties and cities, from federal regulators’ joint Volcker rule proposal.
The remarks, in testimony before the House Financial Services Committee, came as dealer and industry groups criticized the plan, released in November by the SEC and banking regulators. The groups warn the proposal would bifurcate the municipal market because it exempts bonds issued by states, counties, cities and other units of government, but not bonds issued by turnpike authorities, water and sewer districts, school districts and housing authorities.
The Volcker rule, mandated by the Dodd-Frank act, generally would prohibit banks from trading on a proprietary basis and restrict their investments in hedge funds and private entities.
During the hearing, Rep. Michael Grimm, R-N.Y., asked Schapiro why the proposal exempted some, but not all, municipal securities.
Schapiro said munis don’t raise the same concerns about short-term trading that other proprietary trading does, and acknowledged concerns the commission may have approached munis too restrictively.
“And we have flagged that in the proposal and sought comments directly on whether we should use a broader definition of government obligations, like the definition of municipal securities under the [Securities Exchange Act of] 1934, to provide a broader exemption,” she said.
The 1934 law, unlike the Volcker proposal, defines municipal securities to include specialized governmental entities, such as water and sewer districts, as well as states and municipalities.
Throughout the four-hour hearing, lawmakers sparred about the scope of the Volcker proposal, with Republicans warning it would trigger job losses and impair market liquidity and Democrats suggesting criticism of its economic impact may be overstated.
Rep. Spencer Bachus, R. Ala., who chairs the committee, said the proposal would cause hundreds of thousands of lost jobs.
“These jobs are going to go overseas,” he said. “They’re going to go to Canada.”
But Rep. Barney Frank, D-Mass., the namesake of the financial reform law and the top Democrat on the committee, said lawmakers and others have sought to delay the Volcker proposal have added to the regulatory uncertainty about which they complain.
“So what are they asking for?” he said. “More uncertainty.”
Comments on the joint Volcker rule proposal are due Feb. 13.
Separately, Rep. Luis Guttierez, D-Ill., asked Schapiro about the costs of complying with the proposed rule.
The SEC has asked for “very broad” comments about compliance costs, including the effect on broker-dealer competition and disincentives to engage in market making or underwriting, as well as industry data about overall costs, Schapiro said.
“Benefits, as you know, are much harder to quantify,” she said. “Every rule has that challenge for us. The benefits to the public tend to be general and diffuse. And costs are much more easy to identify, at least, if not necessarily to quantify.”
In a separate panel comprised of industry participants, academics and a consumer advocate, Alexander Marx, head of global bond trading at Fidelity Investments, said the Volcker proposal would harm muni market liquidity overall and “unreasonably hamper” issuers’ ability to raise capital.
Marx urged regulators to revise the proposal by exempting states, state agencies and their political subdivisions, “to prevent unreasonable impairment of the municipal securities market.”
Later, Rep. James Renacci, R-Ohio, asked Marx about reduced market liquidity and what it would mean to retail investors. The proposal would drive up transaction costs “precipitously higher,” depending on the asset classes, Marx said.
“It’s going to cost the issuers, whether they’re corporations or municipalities, to give our customers the protection they need,” he said.
