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Dold Legislation to Amend the Municipal Advisor Provision of Dodd-Frank Passes the House with Bipartisan Support

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Location: Washington, DC

U.S. Congressman Robert Dold's (IL-10) bill, H.R. 2827, which would clarify the language of Section 975 of the Dodd-Frank Act to more clearly specify the scope and limits of the municipal advisor provisions, passed the United States House of Representatives unanimously last night.

"I am pleased to see this bill pass the House. I want to thank my colleague and co-sponsor, Representative Gwen Moore (D-WI)," said Rep. Dold. "We worked with concerned parties to ensure that we fully considered all viewpoints and we came up with the best possible bipartisan legislation. This legislation preserves the federal fiduciary duty, and removes the blanket status exemptions, while still maintaining a bright-line municipal-advisor definition. It protects issuers by establishing clear lines and rules for municipal advisory activity and provides clarity in the marketplace. We were very pleased with the genuine engagement of the parties from across the industry and with their willingness to generously share their time, experience, effort, and knowledge with us. All of these contributions ultimately produced a better and stronger bill that I am confident we can move forward. "

"As you've heard, the bill that passed the Financial Services Committee by 60-0 reflects the legislative process at its absolute best. It was a collaborative effort between Republicans and Democrats, issuers and market participants, and very, very diligent staffers on both sides of the aisle," said Rep. Moore. "If there is a single element that is most responsible for the bill's getting to this point, it is the integrity of the people involved. It speaks to their professionalism in that they stayed at the table and negotiated with the singular purpose of getting to the best result for the municipal market. There were times when the issues were tough and the disagreements real. There were times when it would have been very easy for people to just give up and walk away. But to the credit of all involved, everyone kept talking and kept searching for solutions. Mr. Dold deserves a tremendous amount of credit for his leadership of this bill. He was consistently willing to engage tough issues in an open and thoughtful manner. I would also like to thank all of my colleagues on the committee, Republican and Democrat alike, for their invaluable input as we negotiated the bill. Finally, I think it is important that I mention the important contributions of Mr. Frank and Ms. Waters. At many critical points, both were instrumental in providing guidance."

Background Information: Section 975 of the Dodd-Frank Act (P.L. 111-203) includes provisions to regulate "municipal advisors." Municipal advisors (MAs) are consultants who provide advice and other services to state and local governments in the context of issuing bonds, executing swap contracts, investing bond proceeds, and performing other financial activities. Municipal advisors include municipal financial advisors, swap advisors, guaranteed investment contract (GIC) brokers, placement agents, and others. Before Dodd-Frank, many municipal advisors were not subject to any regulation and this regulatory gap created a significant and unfair competitive balance in favor of the unregulated municipal advisors in relation to their regulated competitors. More importantly, this regulatory gap allowed a few dishonest municipal advisors to deceive and severely damage municipalities, all while conflicts of interest and other important information remained undisclosed to municipal officials. On December 20, 2010 the Securities and Exchange Commission (SEC) published a proposed rule to implement the municipal advisor registration provision of the Dodd-Frank Act that was too broad and proved unworkable. Industry groups, Democrats and Republicans believed that the SEC's proposed definition extended far beyond what Congress intended. The SEC received over 1,000 comment letters, most of which expressed serious concerns and were critical of the proposed rule. Rep. Dold introduced H.R. 2827 in August of 2011 to address these concerns. However, some members of Congress and stakeholders expressed concerns with elements of H.R. 2827 as originally introduced. Rep. Dold and Rep. Gwen Moore (D-WI) crafted a revised H.R. 2827 and offered an amendment in the nature of a substitute. The two most significant concerns expressed with respect to H.R. 2827 as introduced were: (1) the original version of the bill would strike the federal fiduciary duty for MAs; and (2) the original bill would exclude certain parties from regulation as MAs even when explicitly engaged to provide MA services. Both issues are addressed in the substitute amendment. The substitute amendment was drafted with significant input from and collaboration with municipal market participants and many groups that had written comment letters to the SEC regarding the proposed rule, including financial advisors, accountants, engineers, banks, underwriters, and issuers.

H.R. 2827:

● Clarifies that the Municipal Securities Rulemaking Board's (MSRB) regulatory authority over MAs extends only to an entity's MA activities. The MSRB and other regulators would continue to have authority over those entities' other activities to the same extent as under current law. (Section 2)

● Specifies that MAs have a fiduciary duty to their municipal entity clients and specifies when such duties begin and terminate in relation to MA activities.(Section 3)

● Clarifies the definition of MA to create a bright-line test for who falls under the definition based on an engagement and compensation. (Section 5)

● Clarifies the definition of "investment strategies" so that regulation as a MA extends to activities related to the investment of bond proceeds, as intended by Congress in Dodd-Frank. Also specifies that certain routine brokerage activities do not constitute "investment strategies." (Section 4)

● Specifies that MAs could engage in principal transactions with their clients, subject to MSRB regulation. This is consistent with the fiduciary duty that applies to registered investment advisors. (Section 3)

● Clarifies the definition of "solicitation" so that MA treatment would apply fully to solicitations directly on behalf of investment advisors and not with respect to the investment funds they manage. (Section 6)

● Provides a definition of "municipal derivative," which was undefined in Dodd-Frank. (Section 7)

● Provides a definition for "on behalf of," which was undefined in Dodd-Frank. (Section 8)


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