WASHINGTON — Rep. Robert Dold, R-Ill., is open to dropping his bid to legislatively remove the Dodd-Frank-mandated federal fiduciary duty for municipal advisors if there is a narrowing of who would be considered an MA, an aide said Friday.
“As long as we get the municipal advisor definition correct, with the correct exemptions, then we are less concerned about the federal fiduciary standard,” the aide said.
He added that the suggestion by Municipal Securities Rulemaking Board chairman Alan Polsky to define MAs in terms of activities rather their market participant labels seems to be a “sensible approach.” Under that approach underwriters and bankers would not be considered MAs unless they were engaging in municipal advisory activities.
“But we’re going to want feedback from everyone in the process to make sure [the MA definition] is not overly broad or overly narrow,” the aide said.
Dold wants to limit who would be considered a municipal advisor via his bill, HR 2827, which he introduced last August and now has 35 co-sponsors from both parties. As currently written, the bill would also eliminate the federal fiduciary requirement for MAs. Dold’s aide said the bill could be revised and voted on by the panel during the next few weeks.
During the hearing, subcommittee chairman Rep. Scott Garrett, R-N.J., asked panelists whether the Securities and Exchange Commission should revise and re-propose its MA registration rules, which contain a definition of municipal advisor that has been criticized as too broad. Based on nods from witnesses, Garrett said there was unanimous consent for a re-proposal of the rules.
But Robert Doty, a non-dealer MA who is president of AGFS in Sacramento, later told panel members he does not support a re-proposal because that could delay MSRB regulation of MAs for another year.
“We agree with Doty on that. It’s already been too long,” Mike Nicholas, chief executive officer of Bond Dealers of America, said after the hearing.
The MSRB last year made a series of proposals to apply its rules to MAs but withdrew them until the SEC finalized its definition of MA, an action the commission has said may not occur until the fourth quarter of this year.
Many of the witnesses at the hearing complained that the SEC’s definition of an MA would cover individuals appointed to boards of state and local governments and bank tellers, or as American Bankers Association chairman Albert C. Kelly Jr., put it, “Mary, the bank teller.”
Dodd-Frank exempted issuer employees. The SEC expanded that exemption to cover elected officials and some appointed officials and asked market participants whether the exemption should be further expanded to include, for example, all appointed officials. SEC chairman Mary Schapiro already testified at a hearing earlier this year that the SEC plans to scale back the municipal advisor definition and is not inclined to rope in appointed officials of governmental boards or trustees or bank tellers.
Rep. Barney Frank, D-Mass., the top Democrat on the full committee, also appeared at the subcommittee hearing and noted he detailed his concerns about the SEC definition of MA in a July 2 letter to Schapiro.
Frank said in that letter, “In my view, there are two circumstances in which a bank should be subject to the new registration requirement: if the bank actually structures the issuance, as typically demonstrated by the bank’s name on the prospectus, or if it clearly provides investment advice and actively directs the municipality to a specific product or products.”
But Congress did not intend that simply offering lists of available investment options to a municipality should be considered ‘advice,’” he added. “Municipalities often solicit requests for proposals (RFPs) to better understand the investment options for their securities’ proceeds. Banks often respond to such requests with a set of financial product choices for the municipality. Such responses are, and should be understood by the commission to be, “traditional banking business” and not the provision of investment advice. In such cases, the bank is not telling the municipality how it should invest, and should not be required to register.”
Frank also said he does not want the SEC registration rule to “place unnecessary new compliance burdens on small and medium-sized institutions.”
“The commission should not, for example, adopt a rule that requires bank personnel to monitor lists of municipal issuers (which may be far broader than just city governments) or require bank personnel to inquire as to the sources of funds for deposits coming from such issuers,” he said.
Doty made a pitch for training and competency tests for MAs, contending many state and local governments are “desperate for advice” and are not experts on muni financing. “I think 500 [issuers] is a high number to assume are sophisticated individuals,” he said.
Doty also worried that the Dold bill is so broad it would allow advisors to act as principals that “cross-sell services” in muni financings. An example of this, he said, would be a firm that serves as an MA to an issuer and also does the feasibility study underlying the project to be financed. Later, during a discussion of defaults, he said that governmental bonds typically do not default and when they do, the problem is unusually the feasibility study underlying the bond-financed project.