WASHINGTON — Despite a round of aggressive lobbying by non-dealer financial advisers and former Securities and Exchange Commission chairman Arthur Levitt, the municipal market section of the massive financial regulatory bill that Senate Banking Committee chairman Christopher Dodd is expected to release Monday is not likely to be much different than the original draft floated late last year.
The FAs and Levitt have been lobbying the staff of Sen. Bob Corker, R-Tenn., who they urged to impose a fiduciary duty on a broad array of municipal advisers as well as mandate there be an equal number of muni advisers and dealers on the Municipal Securities Rulemaking Board.
Under the original proposal from Dodd, a Connecticut Democrat, the MSRB would have regulatory authority over muni advisers, and they would be guaranteed just one seat on the 15-member board.
While Corker’s staff has indicated they support the changes, staff for Dodd and other committee Democrats have so far refused to include them, people familiar with the lobbying efforts said. It was unclear why, though one source said it is because dealers oppose the changes and have lobbied against them.
However, one source said Dodd’s staff has agreed to add references to “obligated persons” so that financial advisers are regulated on deals in which the issuer of the security is not the borrower.
The lobbying efforts come as Dodd announced at a press conference Thursday that he would unveil his bill without support from Republicans but remains hopeful his negotiations with Corker will still move forward. He said he would still like to bring a bipartisan bill to the Senate floor this spring.
“Our talks will continue and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support very soon,” Dodd said, adding that he would like his committee to pass the measure by the Easter recess.
He indicated that unless the process moves forward beginning next week, financial regulatory reform may get permanently bogged down.
But Corker said at an earlier press conference that Dodd’s decision to release his own version of the legislation came amid political pressure to get a bill passed through the committee before the Senate votes on health care legislation. The vote is expected to take place through the “reconciliation” process that will require a simple majority to pass, bypassing Republicans’ ability to filibuster and further dividing the two parties.
“There was no breakdown,” Corker said yesterday. “What happened was, you were on the five-yard line and the lights went out.”
The standoff between the Democrats and Republicans is said to revolve around the four major sections of the bill — resolution authority for large, systemically important financial institutions that fail, a systemic risk council, consumer protection, and regulation of over-the-counter derivatives.
Corker indicated that the largest gaps are with the OTC derivatives piece, which is being hammered out by Sen. Jack Reed, D-R.I., and Sen. Judd Gregg, R-N.H. He said that neither Dodd nor himself have seen any of the changed language in that section.
Levitt, who met with Corker’s staff this week, said he encouraged senators to significantly expand on the provisions in the muni section including a repeal of the so-called Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934 and restricts the SEC and the MSRB from collecting documents from municipal issuers prior to bond sales.
“As good as the MSRB is, the municipal bond market is like a bazaar,” Levitt said yesterday. “There is still a lack of transparency [and] dealers are taking advantage of municipalities who simply aren’t sufficiently experienced to understand the products that they’re being offered. There is a need for much greater transparency, registration, and oversight by the SEC.”
Levitt added that Congress needs to place a ban on unregulated attorneys and advisers of municipalities that is similar to the one in the MSRB’s Rule G-37 that bans dealers from making significant political contributions to issuer officials. But the Dodd bill is not expected to include such provisions.
As originally drafted in November, Dodd’s bill would allow the MSRB to regulate many currently unregulated market intermediaries, such as non-dealer financial advisers, swap advisers, and guaranteed investment contract brokers. In contrast to a financial regulatory reform bill that cleared the House in December, it would not have imposed a fiduciary duty on these advisers requiring them to put their clients’ interests ahead of their own.
Meanwhile, draft legislation pushed by some market participants this week — some of which may have been supported by Corker’s staff but not Dodd’s — would add several provisions favored by non-dealer FAs that were not included in the Dodd’s original bill.
Under the draft, which was not written by congressional staffers, the MSRB’s board would consist of at least nine “public” individuals. They would include three representatives of institutional or retail investors, three representatives of municipal “entities,” and three members with knowledge of, or experience in, the muni industry that have not received direct or indirect compensation within the past five years from any dealer and advisory firm. The other six slots would be equally divided among advisers and dealers. In other words, dealers would only have three slots on the board, instead of the 10 they have now.
In addition, the proposal more broadly defines the term adviser than Dodd’s November draft to include feasibility and economic consultants, who would have a fiduciary duty to their clients.
Further, both the SEC and the MSRB would have the authority to write rules governing adviser conduct, but if the rules conflict, the SEC rules would take precedence.
As with Dodd’s original draft, the Government Accountability Office would be required to conduct a study of secondary market trading in the muni market, but this proposal also would require the GAO to evaluate the potential for “a centralized trading marketplace for municipal securities and derivatives as a supplement to existing trading mechanisms.”
Another provision in the draft would prohibit the sale of any municipal finance product to “a municipal entity or obligated person” that does not have discretionary assets, minus bond proceeds, at least three times the maximum “potential liability of the entity or obligated person.”
Sources stressed yesterday that the draft legislative proposal is unofficial, and does not have the support of Dodd or his staff.