WASHINGTON — Scrambling before a House vote scheduled for Wednesday night, public interest and other groups sent letters to lawmakers opposing a municipal advisor bill they fear will roll back critical components of the Dodd-Frank Act.
Seven groups, led by Americans for Financial Reform, urged lawmakers to vote “no” to H.R. 2827, a bill sponsored by Rep. Robert Dold, D-Ill., which would narrow the Dodd-Frank Act’s definition of municipal advisor.
The bill would define MAs as those who are engaged to provide advice to municipalities for compensation and would impose a fiduciary duty on them so that they have to put their issuer clients interests first, before their own. But the bill would exempt individuals who provide advice “related to or in connection with” a number of activities, including underwriting and banking.
“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 [Securities and Exchange Commission] to address any outstanding issues.”
The letter was 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.
Marcus Stanley, policy director for Americans for Financial Reform, said the bill includes numerous loopholes, and that the groups are particularly worried about the exemptions for those providing advice related to underwriting and other activities.
The bill “expands the exemptions by specifying not only the activities ... but any advice that is related to or in connection with any such activities,” Stanley said in an interview. “Given the recent record of scandals in municipal finance, from bid-rigging to Jefferson County, Ala., to swap blowups, this is not an area where we need more loopholes.”
Stanley said the bill has been rushed through Congress, giving the groups limited time to write a response.
The bill was introduced in August 2011, but went through substantial changes in recent months. It was approved unanimously by the House Financial Services Committee last week.
The bill initially removed the federal fiduciary duty imposed on MAs by Dodd-Frank, but Dold removed that provision following a meeting of the House Financial Services Committee’s capital markets panel in August.
The amended bill leaves the fiduciary duty in place, but narrows the definition of municipal advisor.
Bond Dealers of America and the Securities Industry and Financial Markets Association support the bill.
In a recent interview, SIFMA co-head of municipal securities Michael Decker said the bill provides needed clarification of the MA definition and fixes the regulatory “overreach” of the SEC’s initial MA definition, which was part of temporary MA registration rules that took effect in 2010 and expire at the end of this month.
The SEC has said it will complete its final MA definition by the end of this year, but some sources say there could be further delays.
“H.R. 2827 represents a strong congressional reaction to the widespread criticism of the SEC’s proposed municipal advisor rule. The bill strikes the right balance in regulating FAs without capturing those to whom FA regulation was never intended to apply,” Decker wrote in commentary published in the Sept. 17 edition of The Bond Buyer.
But Stanley said the Dodd-Frank Act already contains a number of exemptions, including those for underwriters, registered investment advisors, registered swap advisors, engineers and lawyers.
Municipal market participants have called Dold’s bill a “message bill” that is intended to encourage the SEC to finalize its MA definition.
Stanley said he expects the bill will pass because lawmakers haven’t had enough time to consider it.
“The hope is [that] in the Senate we can get this to be considered more closely,” he said.
Stanley also warned that, if passed into law, the bill would create significantly delay the SEC’s final version of MA. In the meantime, he said, MAs will continue to be largely unregulated.
“This will send the SEC back to the drawing board,” he said.
