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Securities Law

Opposition to Muni Advisor Bill Surfaces

WASHINGTON — While dealers are pushing for a House committee to approve a pending municipal advisor bill, non-dealer advisors oppose the bill, claiming it contains too many loopholes that would allow firms to engage in advisory activities without being regulated.

The concerns stem from the latest version of H.R. 2827, a bill sponsored by Rep. Robert Dold, R-Ill., that would narrow the definition of muni advisor. The bill is slated to be voted on by the House Financial Services Committee Wednesday.

Congressional staffers, lawmakers and dealer groups have toiled in recent weeks to revise the bill so that it has bipartisan support, according to sources on Capitol Hill. The final version of the bill isn’t perfect, but it has broad support from Republicans, Democrats and a range of muni bond market participants, those sources say.

Dealer groups contend the bill provides much-needed clarification of the definition of an MA, so that it doesn’t cover market participants that are already regulated, and protects issuers without placing undue burdens on industry.

But the bill isn’t without opposition.

The National Association of Independent Public Finance Advisors issued a statement Tuesday opposing the bill.

“We are concerned that H.R. 2827 will make it much more difficult to regulate the parties that need to be regulated as municipal advisors,” the group said. “As written, parties are considered municipal advisors only if they have a written contract and receive compensation. Additionally, H.R. 2827 permits some market participants …to provide advice to municipal entities on matters such as the structure, timing and terms of a municipal securities issuance or financial product without fear of obtaining corresponding fiduciary duties.”

Peter Shapiro, managing director of South Orange, N.J.-based Swap Financial Group LLC, said, “It sounds like this bill would create a giant loophole that [could result] in a lot of abuse.”

“To say this is a consensus bill, and [that] everybody is on board, is not entirely accurate,” said one market participant who is familiar with the measure but did not want to be identified.

Dold introduced the bill in August 2011 in response to widespread industry criticism over the Securities and Exchange Commission’s initial MA definition, which was part of temporary registration rules for MAs that took effect in 2010. Groups said the definition would needlessly encompass appointed members of government boards and those who are already regulated, such as underwriters and even bank tellers. The Municipal Securities Rulemaking Board proposed rule changes and new rules for MAs, but withdrew them, citing the need for a final definition. The SEC has said it will finalize the MA definition and registration rules late this year.

As originally written, Dold’s bill would have narrowed the MA definition and removed the federal fiduciary duty imposed on MAs by the Dodd Frank Act. MAs with a fiduciary duty would have to put issuer clients’ interests first, rather than their own.

The House Financial Services Committee’s capital markets panel approved the bill Aug. 1, after Dold said the bill would be amended to keep the fiduciary duty in place. Dold worked on the bill with Rep. Gwen Moore, D-Wis. Aides to Moore and Dold did not respond to offers for comment.

A final version of the bill obtained by The Bond Buyer late last week, which may have since changed, defines muni advisors as those who are “engaged, in writing and for compensation,” by an issuer to provide advice about muni securities or related products. The bill excepts a number of parties, including underwriters, and dealers who seek to serve as underwriters or work in similar capacities.

Also, dealers that provide advice “related to or in connection with,” underwriting activities would not be considered MAs, as long as they do not receive separate compensation. Further, investment and swap advisors, accountants, attorneys, engineers, appointed or elected members of a municipal entity’s governing body and others would not be considered MAs.

The bill would not repeal the federal fiduciary duty imposed by Dodd-Frank.

One market source warned that the final draft of the bill would allow underwriters to offer free advice to muni issuers, then turn around and underwrite their bonds — undermining the MSRB’s Rule G-23, which prohibits such practices.

While regulators pushed for Dodd-Frank to regulate guaranteed investment contract brokers like those convicted of conspiracy and fraud in ongoing Justice Department bid-rigging cases, not all brokers have had the written agreements required in the definition.

“There are plenty of times when [brokers] are engaged verbally,” Shapiro said.

The Government Finance Officers Association did not offer a response for comment, but criticized an earlier version of the bill.

“Such a broad exclusion from the definition could mean that a professional who is both a dealer and a financial advisor might never have to meet important and necessary regulatory criteria because he or she already is regulated as a dealer,” Timothy Firestine, chief administrative officer of Montgomery County, Md., told the House panel on behalf of GFOA in July.

Market participants also cautioned that the exception for advice “in connection with” underwriting could give brokers too much discretion, allowing them to avoid regulation. “What this does is say [that] underwriters can do whatever [they] want and [regulators] cannot deem [them] a municipal advisor,” a source said.

Shapiro said, “The wholesale concept [of an exception for underwriters] is dangerous” for issuers.

Robert Brooks, a finance professor at the University of Alabama who also testified before the panel in July, noted in an interview that the revised bill would except a wide array of market participants and doubted it would do much to protect issuers.

“By the time the ink is dry, [market participants] will figure out how to get around this,” he said.

But Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, said the bill provides much-needed clarification. It also retains the fiduciary duty and subjects those who advise conduit borrowers to regulation, which addresses concerns participants raised earlier this year, he said.

“It’s to everyone’s advantage to know when they are being regulated, and for municipal entities to know when they are dealing with a regulated entity,” he said.

Decker said the phrase “in writing and for compensation” ensures that only those working as actual advisors are regulated. He said parties will not need formal contracts to meet the standard — emails or letters would do.

Decker said dealers cannot serve as muni advisors and underwriters in the same deal under the MSRB’s Rule G-23. The amended bill reinforces G-23 with a provision that “explicitly” states that the MSRB may prohibit an MA from “concurrently acting” as an underwriter on the same deal, he added.

Decker said the phrase “in connection with” addresses criticism of the original bill, which included a “blanket exclusion” for dealers in all circumstances. The revised exception limits those who can claim it, and “doesn’t apply when a dealer is serving as an advisor,” he said.

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