On Sept. 12 the House Financial Services Committee, in a bipartisan, 60-to-0 vote, unanimously passed legislation, HR 2827, to clarify the Dodd-Frank Act as it relates to regulating municipal advisors. The committee’s action is notable and welcome for several reasons.
This is only the second time since Dodd-Frank passed two years ago that the committee approved a legislative revision to Dodd-Frank on a unanimous basis, the first being legislation, HR 2779, approved in March related to inter-affiliate swap transactions. The committee’s action on the municipal advisor bill represents a show of bipartisanship that is increasingly rare in Washington.
The legislation addresses serious over-reach by the Securities and Exchange Commission. The municipal advisor provisions in Dodd-Frank were adopted in order to bring municipal FAs, swap advisors, placement agents, GIC brokers and others under federal regulation.
Non-dealer advisors were wholly unregulated before Dodd-Frank, and the actions of errant, unregulated municipal advisors played a role in muni market scandals and rigging bids for the investment of bond proceeds.
The SEC’s December 2010 proposed rule to implement the municipal advisor provisions in Dodd-Frank went far beyond what Congress intended and authorized. Rather than focusing on unregulated advisory firms, the SEC proposed to shoehorn a diverse group of entities — including volunteer members of issuer governing boards, banks, broker-dealers, investment advisors and others — into the definition of municipal advisor.
The result would be higher costs and reduced service for issuers. Many of the parties that would be captured in the SEC’s proposal, like banks and broker-dealers, are already heavily regulated. Indeed, even the municipal advisory activities of banks and broker-dealers have been fully regulated for decades. For others, like issuer board members, regulation for FAs would be inappropriate and harmful.
HR 2827 takes a different approach. The bill approved by the Financial Services Committee creates a bright-line test for determining who is a municipal advisor based on engagement for compensation to provide advisory services.
Under the measure, issuers would know clearly when a FA they hire is regulated, and FAs, dealers and others who provide municipal advisory service would know clearly when the advisor rules apply.
The bill is especially important in its distinction between advisor and dealer regulation. Under the legislation, when a dealer is serving as underwriter, they would fall under broker-dealer rules. When they are serving as a FA, they would be under muni advisor rules.
HR 2827, introduced last year by Rep. Bob Dold, R-Ill., has gone through several iterations. This summer, Dold, working closely with Rep. Gwen Moore, D-Wis., sought input from key stakeholders, members of Congress, regulators and others to address concerns with the original bill.
The measure, as approved by the Financial Services Committee would retain the fiduciary duty for municipal advisors and specify that dealers would be regulated as dealers when serving as underwriters or in similar roles, and as advisors when serving as FAs.
SEC chairman Mary Schapiro earlier this year herself acknowledged that the agency “cast the net too widely” in its proposed rule. The commission received over 1,200 comment letters, mostly from issuer officials, that were overwhelmingly opposed to all or parts of the proposal.
Rep. Maxine Waters, D-Calif., recognizing that Democrats have resisted most changes to the Dodd-Frank Act, said during committee deliberations that “we have worked in a cooperative, bipartisan way” to address legitimate concerns with the act and “this is an example of that.”
Rep. Barney Frank, D-Mass., ranking Democrat on the committee and one of the principal authors of the Dodd-Frank Act, in expressing support for HR 2827, said “we have been informed that the SEC has no objection to this bill.” The measure may be acted on by the full House before Congress leaves Washington this month for its election recess. We hope it does.
HR 2827 represents a strong congressional reaction to the widespread criticism of the SEC’s proposed municipal advisor rule. The bill strikes the right balance in regulating FAs without capturing those to whom FA regulation was never intended to apply. Hopefully, Congress will have the opportunity to see the proposal through to final enactment in the short legislative calendar that remains this year.
It has been two years since the Dodd-Frank Act became law, and non-dealer FAs remain effectively unregulated. It’s time to change that and HR 2827 gives further clarifying direction for the SEC to write an effective regulation to bring these unregulated entities under the regulatory microscope.
Michael Decker is managing director and co-head of the municipal securities division at SIFMA, where he coordinates and develops industry positions and responses to a host of legislative and regulatory matters affecting muni market participants.