House conferees meeting to hammer out compromise financial regulatory reform legislation potentially handed the Securities and Exchange Commission at least two significant victories Wednesday: the authority to self-fund its operations without annual appropriations from Congress as well as the authority to register and regulate municipal financial advisers.
But at press time, Senate Banking Committee chairman Christopher Dodd, D-Conn., signaled that Senate conferees would seek to block the House side’s proposed changes to FA regulations, which would replace muni language approved by the Senate last month that is part of the conferees’ “base text.” Specifically, the base text would require unregulated advisers to register with the SEC but adhere to regulations set by the Municipal Securities Rulemaking Board.
Dodd said that the MSRB is best suited to regulate FAs because of their specialized knowledge of the muni market and because they already have sufficient staff. In contrast, the SEC only has two full time attorneys dedicated to muni regulatory issues.
In another development late Wednesday, Dodd said he was offering an amendment at the request of Sen. Bob Corker, R-Tenn., that would authorize the SEC to direct the Financial Industry Regulatory Authority to collect assessments from muni dealers to fund the Governmental Accounting Standards Board. The board is currently funded through voluntary contributions from states and localities, and the sales of its publications, but is constantly short of funds and its dependence on issuers is seen as a conflict.
Issuer and securities dealer groups have signaled their opposition to the GASB funding proposal.
Meanwhile, in seeking to replace the Senate’s language on FA regulation, the House also would jettison Senate language requiring the SEC to create a permanent Office of Municipal Securities whose director would report directly to the SEC chairman, as well as provisions calling for three municipal market-related studies on disclosure, trading, and market transparency, and the viability of the Governmental Accounting Standards Board.
Ahead of the House conferees’ vote on the FA provisions, House Financial Services Committee chairman Barney Frank, D-Mass., leader of the House-Senate conference, said many members “feel strongly” that there should be a fiduciary duty imposed on advisers to municipalities, a provision included in the House language but not in the base text.
Earlier in the meeting, Rep. Paul Kanjorski, D-Pa., echoed those remarks and said that the country is “replete with the experiences of municipalities of all sizes that have been abused” by wrongly assuming that financial firms placed their clients’ interests ahead of their own.
While the SEC has long sought authority over FAs, the House conferees’ agreement with the base text allowing the agency to self-fund its operations is an even bigger victory. SEC chairman Mary Schapiro has argued self-funding is crucial to effective regulation.
Other supporters argue it would enhance the agency’s independence, which has occasionally been compromised in the past by lawmakers threatening to cut its appropriations if it pursued controversial proposals their constituents did not support.
For the current fiscal year, which ends Sept. 30, the SEC is expected to receive $1.1 billion of appropriations.
That amount would be more than covered by the $1.5 billion in registration and transaction fees the agency is expected to receive from the entities it oversees, but those fees must currently be remitted to the Treasury Department.
The self-funding proposal was criticized by Republican conferees, who warned the SEC should not lose oversight from the appropriations committees because it failed to detect the Bernie Madoff ponzi scheme as well as the collapse of Bear Stearns and Lehman Brothers.
Several Republicans also highlighted an April SEC inspector general’s report that revealed more than two dozen commission employees spent hours of time in front of their government computers watching pornography.
In addition to bringing up the porn report, Rep. Scott Garrett, R-N.J., said that giving the SEC the authority to set its own budget was akin to giving free reign to an irresponsible child who wastefully spends money yet asks for more.
Garrett argued that the commission’s purse strings ought to be tightened, not loosened.
But Kanjorski contended that self-funding would significantly improve the culture and climate at the SEC, which has for too long been dependent on cyclical funding levels from Congress, unlike other financial regulators.
Democrats also rejected an amendment proposed by Garrett that would have prevented the SEC from providing its own funding.
However, the House conferees agreed to adopt another amendment sponsored by Garrett that would create an SEC “ombudsman” that would report directly to the chairman and function as a liaison between the commission and the public.
They also adopted an amendment promoted by Rep. Maxine Waters, D-Calif., that would allow investors to pursue civil law suits against individuals and firms that aid and abet securities fraud violations.
The measure comes in response to a Supreme Court decision last year, Stoneridge Investment Partners v. Scientific-Atlanta, that explicitly barred investors from suing third parties such as banks and accountants that aided and abetted — but did not directly participate in — fraudulent misconduct. Currently, only the SEC can pursue charges against third parties who aid and abet securities fraud.
Republicans on the panel, led by Rep. Ed Royce of California, challenged the amendment and proposed that Waters’ language only go into effect after the SEC had a chance to study the matter.
But his proposal was defeated, as was a separate measure that would have required the losers in such civil suits to pay legal damages to the third-party defendants.
In addition, House conferees adopted language to the regulatory reform bill that would require the SEC to hire an independent consultant “of high caliber” to “examine its internal operations, structure, funding, and the need for comprehensive reform.”
Several Republican conferees suggested that having the SEC essentially study itself presented too many potential conflicts, but a GOP amendment to have the Financial Crisis Inquiry Commission conduct the review failed. Kanjorski said the SEC’s study could be used as a model for other federal regulators.