MSRB Chair Heimowitz Steers Board into Uncharted Waters

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WASHINGTON — Dan Heimowitz went into public finance after his hometown suffered a major financial crisis. Decades later, he is at the helm of a self-regulator overseeing rulemaking for a brand new class of regulated firms and individuals in the municipal market.

Heimowitz, a managing director at RBC Capital Markets, is leading the Municipal Securities Rulemaking Board through uncharted waters as it works to create new rules governing municipal advisors, an entire group of muni market professionals never before regulated. He has served on the board since 2011 and will depart when a new group is seated on Oct. 1 2014

The native New Yorker, who still lives on Manhattan's upper east side, became determined to follow a public finance career after seeing the city struggle mightily during its financial crisis in the 1970s.

"I grew up in New York. It was always a love of mine. It was always something I really cared about," Heimowitz said. "The subways were barely running. There was graffiti all over them. Crime was pretty rampant. There was constant discussion about the bridges being totally inadequately serviced. The Brooklyn Bridge might fall down. The Manhattan Bridge might fall down. It was pretty bad."

Experience
Heimowitz earned a master's degree in city planning from Harvard University. He said he thought public finance would be where he could most affect the fortunes of local governments. He served on a Massachusetts capital formation task force created by then-Gov. Michael Dukakis, and was recruited in 1977 by a fellow member of the group to work for a bank in the commonwealth. When Heimowitz said he would prefer to return to New York, his friend told him he should look into a career at the rating agency, Moody's Investors Service.

"He said you ought to think about Moody's. I said I've heard of it, don't really know much about it," Heimowitz said.

But Heimowitz decided his goals and education meshed well with a career in credit analysis and took the advice.

"So I went down to Moody's and got hired, and spent 19 years there," he said.

Heimowitz said he did "almost every kind" of credit analysis at Moody's, eventually heading the public finance side of the business from 1990-1996. During his tenure at the rating agency, he used his graduate school exposure to computers to help modernize the company's archaic index card-based system.

He then headed to Lehman Brothers, spending about a decade there before leaving just a few months before it imploded in 2008.

"Everyone compliments me on my timing, because I left six months before there was no Lehman," he joked.

Heimowitz joined RBC in 2007 and said he still most loves working with local governments, which are having what he called "a very difficult time." That love of public finance work is key in his mind for the longevity of a career in the field. While acknowledging that his path in the industry has been extremely straight forward, he says those who fall into munis have to love it. "Those who don't love it don't last," he added.

The muni market is a microcosm of the economy writ large, Heimowitz said. The middle class is struggling and that is really hurting municipalities.

"I think it's having a profound effect on the abilities of local governments to collect taxes," he said. "You combine that with a lot of legacy things: all the infrastructure that is in disrepair and needs maintenance; benefits; pension plans, which have become a thing of the past on the corporate side but which are still a part of the municipal world, an important part of the municipal world. It becomes very difficult."

According to Heimowitz, there are two ways to look at a stressed municipality such as Detroit, which filed for bankruptcy earlier this year after struggling for decades with a shrinking tax base and rising obligations. It could be a new start or, because of the bankruptcy judge's ruling that pension benefits could be cut, it could be a betrayal of a promise city workers expected to be kept.

Heimowitz's former colleagues speak highly of him.

Ronald A. Stack, a managing director of public finance at Wells Fargo Securities, and a former MSRB chairman himself, worked with Heimowitz at Lehman for over 10 years. Stack said Heimowitz's rating agency experience made him a great asset to the public finance group on many occasions because he understood the agencies and how they would react.

"He always had his credit hat on and was a resource for the entire department," Stack said.

Stack said the MSRB is no small responsibility, and consumes a lot of board members' time. Although the chairman has no power to take unilateral action, the chair is a leader who builds consensus amongst the board members. Board members respect a chairman with good leadership abilities and a strong knowledge of the industry, which Stack said Heimowitz certainly possesses.

"He is a person of the highest integrity," Stack added. "He has great experience in all facets of our work."

Municipal Advisor Rules
Heimowitz and the rest of the board are operating under federal mandates that require they do certain work, such as writing municipal advisor rules that stem from the Dodd-Frank Act and the Securities and Exchange Commission's MA definition in final registration rules released earlier this year.

Dodd-Frank required MAs to be registered with the SEC and to become subject to MSRB rules. It imposed a fiduciary duty on MAs to put clients' interests before their own. When the SEC released an initial MA registration rule in 2010, the MSRB began to write rule changes and new rules for MAs. But the board pulled them back when the SEC withdrew its initial registration rule due to industry criticism that it was too broad.

Heimowitz said the initial work on those proposals will not simply be trotted back out in response to the SEC's adoption of a final MA definition, but that they provide a good base for the board to get much of the MA rules done in the coming year.

"There was a lot of good work done, and a lot of thought," he said. "It allows us to move relatively quickly .... We've sort of done the basics. I wouldn't say that we've dumped it, but we're not just going to rubber stamp it and roll it out."

The MSRB is very aware of the intense debate raging around how various exceptions included in the SEC's definition of MA will work in practice, according to Heimowitz. Broker-dealers have protested the rule will constrain their abilities to provide the kinds of advice to issuers that they have been offering for years.

Under the rule, a firm or other entity offering particularized advice to an issuer or conduit borrower must register as an MA and owes a fiduciary duty to its client.

Non-dealer FAs have countered that the rule will do nothing to hamper the flow of information and say it allows underwriters to offer advice about specific securities they have been engaged to underwrite. In addition, the rule contains a wide exemption from registration if the issuer is relying on the advice of its own MA.

"We're completely aware of all the discussion coming out of all sides of the industry, from the MA community, from the underwriting community, that there are concerns, that there is some confusion about how the exceptions are going to work, what an underwriter can do and remain an underwriter," said Heimowitz.

He said he hopes SEC will issue guidance that will help, but that the MSRB could comment if there is confusion about the board's responsibilities or rule proposals.

The board has been criticized over the composition of its 21 members. Dodd-Frank required the MSRB to have a majority of public members. The board has 11 public members and 10 representatives of regulated entities. Some market participants, particularly in the issuer community, have complained that some so-called public members have close dealer ties and are unlikely to represent the public interest over those of broker-dealers.

When Build America Mutual co-founder Robert Cochran was announced as a new public member last fall, some issuers and non-dealer FAs said it was outrageous for a member of the Bond Dealers of America board to be considered a public member. A few even called for his resignation.

Heimowitz was unruffled by the controversy. "It is incredibly impressive how all 21 members understand the mission of the board," he said. "We get very strong support from the regulated members for more regulation."

He added that anyone with a deep expertise in public finance is likely to have some industry ties on his or her resume, and the law requires a certain level of public finance sophistication for board members.

"I'm not uncomfortable with anyone who is in the room right now," he said.

Heimowitz said the MA rules package could likely be a highlight of his time at the MSRB. After that, he said he plans to continue doing the work he loves.

He has no political aspirations, in part because he lives in the nation's largest city and even local offices are high-profile.

"I live in New York," he joked. "Local isn't so local."

There will certainly be long-term projects that will remain unfinished when he departs the MSRB at the end of October, but Heimowitz said he believes the board can make considerable headway on the MA rules before then.

"Having a basic set of regulations for a whole new regulated group in the MAs is a pretty big accomplishment," he said.

The board will first tackle the key issue of what it means to have a fiduciary duty, and will then move on to other rules that dealer financial advisors are already required to adhere to, such as those rules on gifts and gratuities and professional standards.

"I'll feel very proud if I leave and the MA package is well underway," Heimowitz said. "I think it's doable. I think we'll get there."

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