WASHINGTON — House and Senate conferees reached an agreement early Friday morning to reconcile competing versions of financial regulatory reform legislation, concluding their negotiations after a marathon final day of debate.
Voting along party lines, the House conferees approved the bill 20-to-11 while the Senate conferees voted 7-to-5 in its favor.
The most sweeping changes to financial regulations since the Great Depression, the legislation would significantly alter the way the municipal securities market is regulated.
Although finalized language for the muni provisions was not expected to be available until mid-day Friday, the conferees appeared to have reached an agreement that would allow the Municipal Securities Rulemaking Board to regulate financial advisers and other market intermediaries that are not currently subject to oversight.
House conferees last week backtracked from their preference of giving the Securities and Exchange Commission authority over these advisers — which include non-dealer FAs, swap advisers and brokers of guaranteed investment contracts — after Senate Democrats insisted that the MSRB is best suited to regulate them because of the board’s specialized knowledge of the muni market and because the MSRB already has sufficient staff.
In exchange, however, Senate negotiators agreed to adopt House language that would impose a fiduciary duty on the advisers, requiring them to hold heir clients’ interests ahead of their own.
It is not clear how many advisers would fall under MSRB regulations. A report the board released last year on unregulated market participants said that of the 358 financial advisory shops that participated in at least one primary muni market transaction in 2008, only 98 were registered with the MSRB as dealers. Many of those were small FA shops, market participants said, adding that the broader universe of unregulated advisers likely surpasses 1,000 firms.
As munis were hardly mentioned in the final hours of the negotiations, it remained unclear what happened to several other provisions of interest to the market, including:
— A fiduciary duty on dealers that enter into swap contracts with public entities like states, local governments and pension funds.
— An amendment Senate Banking Committee chairman Christopher Dodd, D-Conn., had discussed introducing to authorize the SEC to direct the Financial Industry Regulatory Authority to collect assessments from muni dealers to fund the Governmental Accounting Standards Board.
— Senate-favored language authorizing the Government Accountability Office to study controversial municipal disclosure issues and ways in which the transparency of municipal trading could be enhanced, as well as an SEC review of the viability of GASB.
The rush to finalize the agreement on the legislation comes ahead of the G-20 Summit in Toronto this weekend, where the Obama administration plans to use the deal as leverage to convince other countries to pursue financial regulatory reforms.
To ensure the package is approved by each chamber next week, lawmakers were expected to post the finalized bill by noon today, so that the full House can sign off on it Tuesday. The legislation must be posted for 72 hours before the chamber can vote on it.
Meanwhile, the Senate was expected to have the 60 votes necessary to overcome procedural attempts to block the measure after conferees agreed to soften some aspects of the legislation, including the so-called Volcker Rule, which restricts proprietary trading by banks with federally insured deposits.
Existing carve outs to the provision for government securities were expanded to allow banks to continue some proprietary trading and investing, allowing banks to invest in a small portion of a hedge fund or private equity fund. The changes also would limit the investments to no more than 3% of a bank’s so-called Tier 1 capital. The provision is named after former Fed chairman Paul Volcker, who proposed it early this year.
The agreements were thought to be sufficient to sway moderate Republicans in the Senate, such as Scott Brown of Massachusetts, as well as group of “centrist” Democrats in the House who are on the fence over the legislation. President Obama hopes to sign the legislation into law prior to the Independence Day holiday next week.
Among other provisions, the bill will establish the nine-member Financial Stability Oversight Council, which will have the authority to impose higher capital requirements on financial institutions or place certain non-bank firms under control by the Fed.
Separately, rating agencies will be subject to greater liability, and could be sued if they recklessly fail to review underlying information used in rating a securities.
Though some banks will be forced to spin off their derivatives businesses or lose access to emergency funds from the Fed, conferees appeared to reach an agreement that would allow some banks to continue to trade interest rate swaps.
The bill generally would require standardized, or routine, swaps to be centrally cleared and traded on a clearing platform. But it would permit the Commodity Futures Trading Commission to create exceptions for swaps that are nonstandardized — or highly tailored contracts — that are not suited for clearing. These would include interest rate swaps used by states and localities.
