WASHINGTON — Rep. Barney Frank puts his money where his mouth is.
The outgoing Massachusetts Democrat, whose personal investments included roughly $900,000 of municipal bonds last year, says there’s little reason for regulators to tighten oversight of general-obligation bonds.
He thinks the Securities and Exchange Commission’s recommendation for legislative authority to regulate the timing and content of issuers’ disclosures for bonds is unnecessary for GOs.
“General obligation — full faith and credit bonds — they should be ignored,” said Frank last week, sitting at a small desk stuffed in the temporary office he will occupy for the remainder of his term, which ends Jan. 3. “They almost never default.”
Frank, who has chaired the House Financial Services Committee and is currently the committee’s ranking Democrat, also thinks it’s unlikely Congress will limit the tax-exempt benefits of munis as part of budget negotiations. Cutting tax expenditures is politically more difficult than raising taxes, he said.
“It’s not going to go anywhere,” he predicted.
Frank’s temporary office — his former quarters are being prepped for an incoming tenant — belies the legislative force the 72-year-old Congressman has shown during his 32 years in office.
Though he’s largely known for supporting community housing initiatives, pro-consumer measures and seeking to rein in big banks, Frank also leaves a mark on the municipal bond market.
His signature legislation, the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act, brought oversight to municipal advisors and subjected them to a fiduciary duty, expanded the MSRB’s mission to include the protection of issuers in addition to investors, and required that the MSRB’s board include a majority of so-called “public members” — those who are not affiliated with brokers, dealers or MAs.
The act also created a “stand alone” Office of Municipal Securities at the SEC, which reports directly to the commission chairman, increases federal oversight of credit rating agencies, places new obligations on retail dealers and restricts proprietary trading by banks of some types of munis.
Some of those provisions, which have not yet been implemented, are contentious in the muni bond community. Many market participants have opposed the measures as overly burdensome and costly; others criticize the slow pace of adoption.
Though he owns nearly $1 million worth of munis, according to records filed with the House clerk, Frank doesn’t think GO bonds need more regulation. He stressed however, that increased oversight of bonds issued by agencies and authorities, which typically are secured by revenue from specific projects, may be warranted.
Asked about the SEC’s recommendation, made in its July 31 muni market report, for legislative authority to regulate issuers’ muni bond disclosures, Frank said, “I don’t think for general obligation bonds that makes the slightest sense.”
The quality of financial disclosures does not relate to whether GO bonds will be paid, he said.
“When I leave office, my instruction to my broker will be to buy the lowest-rated general obligation bonds in America, because they are going to get paid.”
Even bankrupt municipalities rarely miss GO payments, Frank added, noting that Central Falls, R.I., which exited bankruptcy earlier this year, made its payments thanks largely to a 2011 state law giving bondholders debt priority.
“The state of Rhode Island stepped in and screwed retired firefighters ... to pay off bondholders. Every city in Rhode Island, and the state, said, ‘Oh my god, if they default, our rates are going way up,’” he said.
Though defaults on GO bonds are rare, recent events have led some investors to question their security. Earlier this year, for instance, the Alabama state legislature failed to provide fiscal relief to bankrupt Jefferson County, which later announced it would default on GO warrants pending bankruptcy restructuring.
Frank said he is pleased with the Dodd-Frank Act, particularly with provisions that increase derivatives oversight and create the Consumer Financial Protection Bureau.
He said implementing the law has been slow due partly to its complexity. He also blamed “obstructive” Republicans efforts to withhold CFPB funding and “conservative judges” in D.C. circuit court who have ruled against some provisions of the act.
But delays haven’t been a problem, he said, “because none of the bad things we were seeking to prevent have happened.”
A number of muni-related aspects of the act that have yet to be implemented. The SEC, for example, has yet to define MAs, thereby delaying the Municipal Securities Rulemaking Board’s efforts to craft rules for them. Many market participants, including dealers and advisors who support rules for MAs, squabbled over the SEC’s initial definition of MA in temporary registration rules issued in 2010.
Many insiders said that the definition was overly broad, needlessly encompassing employees at banks and non-paid members of municipality’s boards.
Frank agreed. “The SEC overreached, and people over-reacted to the overreach,” he said.
He said he expects the final definition, which SEC officials have said they will release in early 2013, will be similar to that in a bill sponsored by outgoing Rep. Robert Dold, R-Ill.
Introduced in 2011, the Dold bill initially would have defined MAs as those who are “engaged, in writing and for compensation,” by an issuer to provide advice. It exempted underwriters, bankers and swap dealers, as well as those who provide related advice.
The measure passed the House by a voice vote after Frank introduced an amendment that stripped the phrase “in writing,” which he said would have allowed some advisors to evade oversight.
The bill, which had some bipartisan support, was referred to the Senate. But some market participants, like Marcus Stanley, policy director for Americans for Financial Reform, say it includes too many loopholes and may have been misunderstood by House members.
“I don’t think [lawmakers] really understood when they voted for that bill how much of free pass they were giving to big banks and derivatives dealers and others,” he said.
The Dodd-Frank Act also places a fiduciary duty on dealers who provide advice to retail clients, a measure Bond Dealers of America has said is impractical because dealers represent both buyers and sellers. Nicholas said the requirement, which still must be completed by the SEC, could force some dealers out of the retail business.
The muni market has also closely watched the so-called Volcker Rule, a section of the act that restricts banks from proprietary trading securities, including munis issued by agencies and authorities, such as turnpike, housing and sewer authorities. Bonds issued by state and local governments are exempt.
Market insiders want all munis exempt and have said the rule, which is being finalized, could boost issuers’ costs by prohibiting banks from trading those bonds.
Frank, who expects the rule to be completed in the next several months, disagreed, calling such concerns “highly speculative.”
“I would be very much surprised if there is any long-term effect” on demand for the bonds, he said. “There are still plenty of other buyers.”
Opinions of the Dodd-Frank Act aside, market insiders compliment Frank for his willingness to listen and knowledge of financial matters.
“Barney Frank has always had an open door. He understands the marketplace and the issues and has always been willing to sit down and listen and talk,” said Mike Nicholas, chief executive officer of Bond Dealers of America. “He has always been amenable to listening to industry concerns and input.”
“He remains a very fierce competitor on the legislative field, and one that friends and foes, on any given debate, take very seriously,” said Kenneth Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association.
Bentsen, a former Democratic congressman from Texas who served with Frank on the Financial Services Committee, noted that Frank is “no stranger to the muni bond market.”
“It fits within his view that there is a role for the government and the markets to help under-served communities,” he said.
