Bill to Divert MSRB Funds, Clarify MA Rule Moves to Full House

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WASHINGTON – The House Financial Services Committee on Tuesday voted 30 to 26 to approve a bill that would divert the funding the Municipal Securities Rulemaking Board gets from enforcement actions over muni rules, remove the independence of the Securities and Exchange Commission's Office of Municipal Securities, and allow certain banks to be exempt from controversial liquidity coverage ratio requirements.

The bill, called the CHOICE Act, would move the Office of Municipal Securities back into the commission's trading and markets division, where it was before the Dodd-Frank Act in 2010 required it to be independent and to report directly to the SEC chairman. That shift would allow the SEC chair to provide one less report, according to committee Republicans.

The proposed act now moves to the full House for consideration, but opposition from the Democrats, among other things, could keep the House from taking it up.

Financial Services Committee chair Rep. Jeb Hensarling, R-Texas, introduced the bill as an alternative to Dodd-Frank, which he has said was "a grave mistake Washington foisted upon the American people."

"It has been six years since the passage of Dodd-Frank," Hensarling said in his opening statement during the Tuesday session. "We were told it would lift our economy, but instead we are stuck in the slowest, weakest, most tepid recovery in the history of the Republic."

Republicans on the committee supported the bill during the hearing, but it received strong pushback from Democrats.

The top Democrat on the committee, Rep. Maxine Waters, D-Calif., called the bill "toxic legislation that takes us in the wrong direction." She said that Democrats didn't offer amendments on the bill to not "waste any more time" on a bill that "is simply so bad that it cannot be fixed."

If the bill had been in effect last year, its elimination of MSRB funding from enforcement action fines would have removed roughly $2.65 million out of about $41.33 million of the self-regulator's funding, based on the data in the board's 2015 financial report. Under the bill, the enforcement money would instead go to the Treasury Department for deficit reduction.

Another portion of the bill incorporates legislation from Rep. Randy Hultgren, R-Ill., that sought to respond to perceived confusion among issuers by making clear that the SEC's municipal advisor rule does not require issuers to hire MAs. But market participants have generally agreed that the rule and Government Finance Officers Association guidance are already clear on that point.

One section of the bill would allow certain banks to opt out of liquidity requirements if they maintain a leverage ratio of at least 10% and a composite CAMELS rating of 1 or 2. The opt-out would be good for muni market participants. Currently, the bank liquidity rules generally don't include municipal securities as high quality liquid assets (HQLA) under a required liquidity coverage ratio that would have to be maintained. A simple leverage ratio like the one used in the bill, compares a bank's assets held with its common equity, while CAMELS is a regulatory rating system for banks that assigns a number based on a bank's overall condition, with 1 being the best and 5 being the worst.

The Federal Reserve Board has since proposed rules that would treat some investment-grade muni bonds as HQLA, but the FDIC and OCC have not. Additionally, Rep. Luke Messer, R-Ind., is sponsoring legislation approved by the House that would expand the number of munis that could qualify as HQLA and give them even better treatment than the Fed.

Other portions of the act address operations requirements for the SEC to: establish an enforcement ombudsman to review and evaluate complaints about the enforcement process; allow certain defendants to appear before the SEC after receiving a notice of a planned enforcement action; and publish an annual enforcement and examination plan and give the public an opportunity to comment on it.

John Vahey, director of federal policy for Bond Dealers of America, said the CHOICE Act "includes several valuable regulatory and enforcement oversight provisions that appear positive, including the requirement to perform more comprehensive regulatory cost benefit analyses and greater transparency in the enforcement process."

However, he said middle-market dealers are concerned with other parts of the act that would allow the SEC to charge higher fines. If the act were to become law, the SEC could triple monetary fines in administrative and civil actions where penalties are tied to illegal profits as well as in enforcement cases dealing with repeat violators of laws and rules.

The act also would repeal the Volcker rule, which prohibits banks from trading on a proprietary basis and restricts their investments in hedge funds and private equity. In addition it would increase SEC funding by $50 million each fiscal year until 2021; and allow someone facing SEC charges before an SEC administrative judge to remove the case from the administrative court and transfer it to a federal court.

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