WASHINGTON — The House of Representatives passed a bill late Wednesday that would narrow the definition of municipal advisor and exempt a number of market participants from being subject to MA registration and other rules.
The bill, H.R. 2827, had support from dealer groups like Bond Dealers of America and the Securities Industry and Financial Markets Association. But others, including nondealer MAs, public advocacy organizations and labor groups said the revised MA definition could erode protections afforded to state and local governments by the Dodd-Frank Act.
Rep. Robert Dold, R-Ill., introduced the bill in August 2011. It was passed last week by the House Financial Services Committee by a unanimous vote and approved by a voice vote in the House.
Supporters have hailed the bill as a bipartisan measure that could address regulatory "overreach" by the Securities and Exchange Commission, which created an initial MA definition in temporary MA registration rules that took effect in 2010. Those rules expire at the end of this month, but could be extended.
"This legislation appropriately clarifies the scope of regulatory oversight on municipal advisors," SIFMA executive vice president of public policy and advocacy Ken Bentsen said in a press release. He said the bill "will ensure proper regulatory oversight of municipal advisors without subjecting already regulated entities to an additional, unnecessary layer of regulation."
"We urge the Senate to consider this legislation before the end of this Congress," Bentsen said.
SIFMA, BDA and others had warned that the Dodd-Frank definition would needlessly encompass appointed members of state and local government boards and those who are already regulated, such as underwriters and even bank tellers.
H.R. 2827 would define MAs as those engaged in muni advisory activities for compensation and would subject them to a fiduciary duty, meaning they must put clients' interests ahead of their own.
Municipal Securities Rulemaking Board Executive Director Lynnette Kelly said Thursday, “The MSRB recently testified before the House Subcommittee on Capital Markets about the impact of gaps in regulation to the municipal securities market and the importance of protecting state and local governments. The House bill reflects the need to ensure that these gaps are addressed and we are eager to put in place the appropriate regulations for municipal advisors.”
Opponents claim the bill contains too many loopholes, noting that it creates exceptions for underwriters, bankers and swap dealers, as well as those who provide advice "related to or in connection with" those activities.
Marcus Stanley, policy director for Americans for Financial Reform, said the bill, if it becomes law, could significantly delay the SEC's final MA definition.
"This bill is a rewrite of the muni-advisor definition and statute. It would [create] a significant delay .... It would lead to both a later and a weaker definition," he said in an interview.
Stanley said House lawmakers might not have wholly understood the potential implications of the bill and that his group will work to ensure Senate members are informed.
"Given what we have seen in the [way] of scandals in finance, the Senate has to take a closer look," he said. "I think Congress and the Senate's focus needs to be in getting the SEC to complete their MA definition and not sending them back to the drawing board with ill-considered stuff like this."
Stanley's group and six others sent a letter to House lawmakers Wednesday urging them to vote against the bill.
"The exemptions added by H.R. 2827 would certainly result in many financial entities claiming that they do not owe any fiduciary duty to respect taxpayer interests, even if they are in fact acting as advisors and not as arms-length underwriters or counterparties," said the groups' letter. "We urge you to oppose H.R. 2827 because it weakens accountability for financial advice to municipalities, harms communities, and is unnecessary given the authority of the SEC to address any outstanding issues."
The letter was also signed by American Federation of State, County & Municipal Employees, the AFL-CIO, the Consumer Federation of America, the Leadership Conference on Civil and Human Rights, Public Citizen and the United States Public Interest Research Group.