WASHINGTON — The House Financial Services Committee passed a municipal advisor bill Wednesday after striking a requirement that MAs have written agreements with issuers, one of the bill’s most contentious provisions.

The amendment, introduced by Rep. Barney Frank, D-Mass., eliminated the phrase “in writing” from the MA definition in the bill, which was introduced last year by Rep. Robert Dold, R-Ill. The measure now defines an MA as a person who “is engaged, for compensation,” by a municipality to provide finance advice. 

However, lawmakers did not alter another controversial measure in the bill: an exception from the MA definition for dealers that provide advice “related to or in connection with” underwriting.

Critics have complained this will allow an underwriter to provide a range of advice to an issuer without being considered as an MA, which would have a fiduciary duty to the issuer and would have to meet MA rules.

The committee also approved a “technical correction” to the bill that would allow municipal advisors to be registered with the Securities and Exchange Commission under their firm’s name. Lawmakers said the SEC requested the change.

The bill passed with Democratic and Republican support and can now go to the full House for a vote, but sources would not speculate when.

Senate lawmakers have not introduced similar legislation, and some sources contend the Dold bill will never be approved by both chambers but will rather serve as a “message bill,”  designed primarily to guide the SEC as it finalizes a definition of a municipal advisor.

Frank told the committee Wednesday that he is “pleased the SEC, I think, will be following our lead.”

In an interview, Frank called his amendment an “anti-evasion” measure that would make it difficult for market participants who provide muni advice to escape oversight. “If you say it has to be in writing, some unscrupulous [people] will find a way” to provide advice without a written agreement, he said.

Sources who declined to be identified said some muni market groups have avoided controversy by not publicly opposing a bill they believe will not become law.

But Colette Irwin-Knott, president of the National Association of Independent Public Finance Advisors, called Frank’s amendment “a step in the right direction.”

The group had warned that the earlier version of the bill, which defined MAs as those whose advisory engagements with issuers are “in writing,” would allow participants to avoid rules by advising without a written agreement.

Irwin-Knott said the group continues to have concerns about the bill’s exception for advice provided “in connection” with underwriting. NAIPFA has warned that the bill could allow market participants to provide advice without having to meet the federal fiduciary duty required under the Dodd-Frank Act.

The exception applies only when dealers do not receive separate compensation for the advice. Sources say they hope the SEC, when it finalizes its definition, will consider underwriters’ “management fees” to be compensation. They noted that underwriters commonly charge these fees when issuers do not have separate advisors.

The Government Finance Officers Association, which opposed exemptions in previous versions of Dold’s bill, did not respond to a request for comment.

Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, said the “bill strikes the right balance in correcting the overreach in the SEC’s proposed rule.”

He said Frank “made a good point.” The earlier definition could have created an opportunity for some participants to skirt the rules, according to Decker.

“We are very happy with the outcome,” he said. “As amended [it] serves everybody’s purpose.”

Dold introduced the bill in response to criticism that the SEC’s initial municipal advisor definition — which was part of temporary MA registration rules put in place in 2010 — was too broad.

Market participants said that the definition would needlessly apply to bank tellers, engineers, attorneys and appointed or members of issuers’ boards. Under Dold’s measure they would not be municipal advisors.

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