MSRB: Dold Bill Would Reduce Protection for Muni Issuers

WASHINGTON — The bill introduced by Rep. Robert Dold, R-Ill., to limit the muni market participants that would be federally regulated as municipal advisors could reduce protection of state and local governments, the chairman of the Municipal Securities Rulemaking Board warned a congressional panel.

In testimony submitted to the House Financial Service Committee’s capital markets panel, which is holding a hearing on the bill on Friday, MSRB chairman Alan Polsky said the measure would exempt certain categories of market participants, like dealers, banks and investment advisors that are already regulated by federal agencies, from being considered municipal advisors without regard to whether their muni advisory-like activities are also regulated.

For example, Polsky wrote, the bill would exclude investment advisors regulated by the Securities and Exchange Commission or states. However, the SEC and states do not regulate investment advisory activities related to the structuring of bond offerings or advice to investment pools of state and local governments, he said.

The bill would exclude banks from being considered as municipal advisors, he said. But bank regulators focus on the safety and soundness of the banking system and do not regulate bank structurings of bond offerings or other bond-related advice to state and local governments, added Polsky, a senior vice president of Dougherty & Co. LLC in  Minneapolis.

Polsky’s written statements were in contrast to those of officials of the American Bankers Association, the Securities Industry and Financial Markets Association, and Bond Dealers of America, which all supported the Dold bill’s exclusion of already-regulated dealer advisors, banks and others from the definition of muni advisor.

“ABA strong believes that Section 975 of the Dodd-Frank Act ... was not intended to cover banks,” Albert C. Kelly, Jr., ABA chairman and chairman and chief executive officer of SpiritBank in Bristow, Okla., told lawmakers in his written testimony.

“Registration would overlay onto the existing comprehensive bank regulatory scheme an entirely new securities-based scheme with enforcement by the SEC,” he said, adding, “The consequences would be severe. In addition to subjecting banks to wholly unwarranted and duplicative regulation and examination, which would cause banks to incur significant costs, local community banks might simply stop taking municipal deposits.”

“The SEC has interpreted the underwriter exclusion from the MA definition narrowly to encompass only the function of price negotiation and purchase of bonds by the underwriters,” said Ken Gibbs, president of the municipal securities group at Jefferies & Co. in New York who was representing SIFMA. That exclusion ”would not cover all of the other services and functions provided by an underwriter in the context of serving a negotiated issuer,” he said.

The result, Gibbs warned, “would be higher costs and poorer transaction execution for state and local borrowers.”

But the MSRB and most of the groups supported the idea of excluding from the definition of municipal advisor appointed members of state and local issuer governing boards. Dodd-Frank excludes elected members of such boards, but the SEC asked market participants whether appointed members of bonds should be excluded.

Tim Firestine, president-elect of the Government Finance Officers Association, told the committee that as chief administrative officer of Montgomery County, Md., he could be classified by the SEC as a municipal advisor who would be subject to MSRB rules. 

“I serve on the board of the [District of Columbia] Water and Sewer Authority and chair of its Finance and Budget Committee,” he said. “We discuss numerous issues, including financial transactions involving both debt issuance and investments. It boggles my mind that my service as a member of a body that determines what should be done to meet constituents’ needs — including the hiring of finance professionals — could make be a regulated municipal advisor.”

Several of the witnesses were concerned that the Dold bill would reverse Dodd-Frank by exempting municipal advisors from having a fiduciary duty to issuers, under which they would have to put issuers’ best interests first, above their own.

Polsky wrote in his testimony that “eliminating the federal fiduciary standard would require municipal advisors to understand the varying standards from state to state” and warned that could result in “uneven enforcement of such standards.”

“Retaining a federal fiduciary standard for municipal advisors would provide the national municipal marketplace with a single, consistent set of rules for municipal advisors who operate locally, regionally and nationally,” he said. “A clear and uniform understanding or their legal duties will give rise to the level of consistency needed to maintain a fair and efficient national market in municipal securities.”

Firestine told the committee in his written testimony, “A fiduciary standard is very important to the issuer community due to varied state standards and a municipal securities market that transcends state lines. A federal standard is essential in order to help protect issuers and eliminate any confusion about what standards apply to their hired municipal advisors.”

Robert Doty, a non-dealer municipal advisor who is president of AGFS, said Dodd-Frank’s fiduciary duty requirement “is absolutely essential to the municipal advisory function.”

“Without the fiduciary duty, tens of thousands of local governments, hundreds of local officials, and hundreds of millions of local taxpayers and ratepayers would be at significant risk — as they have been in the past — of snake oil sales pitches made in disguise by municipal advisors posing falsely as honorable advisory professionals serving solely in the local governments’ best interest.” Doty warned.

Michael Marz, the vice chairman of First Southwest, testifying for the Bond Dealers Association, complained that the MSRB has not yet adopted rule changes subjecting non-dealer municipal advisors to the same of the same requirements as broker-dealers.

“Although underwriters or dealer financial advisors and unregulated muni advisors all play roles together and even similar rules, their level of regulation is dramatically different,” he said.

The MSRB drafted rule changes for municipal advisors, but withdrew them until the SEC defines the term “municipal advisor” in its final registration rules. The commission is not expected to finalize the definition until the end of the year.

But Marz wrote, “The SEC needs to move forward on a definition of municipal advisor so that investors and state and local governments can receive the protection that Congress intended in Dodd-Frank.”

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