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 specific the scope and limits of the municipal advisor provisions, passed the Financial Services Committee today.
"Today, I'm pleased to see the amended version of H.R. 2827 pass the House Financial Services Committee by a vote of 60--0. My colleague and co-sponsor, Representative Gwen Moore (D-WI), and I worked with concerned parties to ensure that we fully considered all viewpoints and we came up with the best possible legislation that could also pass with broad bipartisan support.
"This legislation protects state and local governments by preserving the federal fiduciary duty for municipal advisors, while maintaining a bright line definition that removes confusion in the market.
"We were very pleased with the genuine engagement of parties with from across the industry and with their willingness and generosity in sharing their time, experience, effort, and knowledge with us. While everyone did not agree on every issue, everyone clearly participated in good faith.
"All of these contributions ultimately produced a better, stronger amended bill. We believe that the version passed today addresses the points raised since the subcommittee mark-up, and represents a true bipartisan compromise".
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.
The revised 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)