WASHINGTON — A House Financial Services subcommittee will hold a hearing July 20 to discuss a bill that would eliminate the fiduciary duty imposed on municipal advisors by the Dodd-Frank Act and limit the firms that would be regulated as municipal advisors.
The bill, HR 2827, introduced by Rep. Robert Dold, R-Ill., in August 2011, would limit the term “municipal advisor” to include only advisors who are formally engaged in work by an issuer, and would exclude brokers, dealers, state-registered investment advisors, swap advisors, financial institutions and elected or appointed members of issuers’ governing bodies. It would also amend other muni-advisor provisions in the act.
The hearing, which will be held by the capital markets subcommittee, will review the bill as well as Dodd-Frank’s impact on muni advisors. A spokesperson declined to release the names of witnesses who will testify, saying the list has not been finalized.
The Dodd-Frank Act requires the Securities and Exchange Commission and the Municipal Securities Rulemaking Board to register muni advisors and regulate their activities. It subjects advisors to a fiduciary duty, meaning they must act in their clients best interests and put them ahead of their own.
In 2010, the SEC issued temporary registration rules and a temporary definition of municipal advisor. The MSRB then filed a series of rule changes for municipal advisors with the SEC, but withdrew them last year, citing the need for the commission to adopt a final definition on muni advisor. The SEC has said it expects to finalize the definition later this year. Many market participants said the proposed definition was too broad. The SEC received almost 1,000 comment letters, most of them protests.
Dold’s staff did not return calls for comment, but a release announcing the bill said the SEC’s proposal would impose rules on already-regulated entities, and others.
“The SEC’s proposal would require that parties as diverse as banks, dealers, investment advisors and appointed, unpaid members of public governing bodies register as municipal advisors and come under the full regime of rules,” the release said.
Robert Doty, an non-dealer-affiliated financial advisor based in Sacramento, Calif., called Dold’s bill “very dangerous for the issuer community.”
He said Dodd-Frank’s fiduciary duty provision is critical because municipal issuers often rely on advisors for impartial financial advice. Officials at many small issuers typically focus on issues like fixing roads and improving schools, not on complex financing arrangements, Doty noted.
Many issuer officials “do not have financial sophistication. The last thing they are, are experts in municipal finance,” he said. “The heart, the centerpiece of financial advisor work, is the fiduciary duty.”
Doty said regulators would make a “serious mistake” if they exempt dealer-affiliated advisors from the regulations.
“The role of a [municipal advisor] is vastly different from the role of an underwriter,” he said. “Without the Dodd-Frank Act, there is no regulation directed at this financial service .... We need the federal law.”
Mike Nicholas, chief executive of Bond Dealers of America, called the hearing an “encouraging” step, considering that the SEC has “failed to move” on its final definition. He said Dold’s bill could simplify the Dodd-Frank requirements and lead to a final SEC definition and, ultimately, MSRB rules.
The BDA has been a staunch advocate of regulating non-dealer-affiliated advisors. The rules are needed to create a “level playing field” between non-affiliated advisors and dealer-affiliated advisors, who are already regulated, said Nicholas.
Leslie Norwood, co-head of munis at SIFMA, said Dodd-Frank aimed to regulate previously unregulated advisors. But because language in the act was unclear, the SEC had leeway to propose regulation “that goes far beyond the intent.”
Norwood said the bill would clarify Congress’ intent and ensure that muni advisors who are already regulated under securities, commodities and banking laws do not face additional regulation.
