House Financial Services Subcommittee Discusses the Impact of Dodd -Frank on Municipal Finance
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed the Dodd-Frank Act’s impact on municipal finance with industry experts and supervisory authorities. Members also discussed H.R. 2827, introduced by Rep. Robert Dold (R-Ill.), which would amend Section 975 of the Dodd-Frank Act to specify the scope and limits of the municipal advisor provisions.
In his opening remarks, Dold said there is universal support for the intent of Section 975 of Dodd-Frank, but nearly unanimous opposition to the Securities and Exchange Commission’s (SEC) proposed municipal advisors definition. He said the SEC’s proposed rule would have the unintended effect of “harming municipalities and undermining their ability to efficiently and inexpensively raise capital to operate their daily activities.” Dold said his legislation, H.R. 2827, would correct the SEC’s proposed rule, give the SEC more precise guidance, and clarify Dodd-Frank’s legislative intent, while “maintaining protection for municipalities.” In closing, Dold said he is “not finished” with his legislation and is open to all suggestions to improve the bill.
Testimony
In his opening statement, Kenneth Gibbs, Chair of the Municipal Securities Division of the Securities Industry and Financial Markets Association (SIFMA), discussed the implications of municipal adviser regulation, the Volcker Rule, and Title VII of Dodd-Frank on municipal finance. While applauding Congress for bringing municipal advisers “under the regulatory umbrella,” he said the scope of the SEC’s proposed municipal advisor definition is much broader than Congress intended, inappropriately including unpaid members of issuer governing bodies, investment advisers providing counsel on “virtually any public funds,” and others. Additionally, he argued that the SEC’s proposed implementation of a congressionally mandated exclusion for “a broker, dealer, or municipal securities dealer serving as an underwriter” is too narrow and would be “detrimental” for bond issuers. Gibbs praised H.R. 2827 for clarifying language concerning municipal adviser regulation and better elucidating congressional intent.
Noting the unequal application of the proposed Volcker Rule to different parts of the municipal bond market, Gibbs said the rule would cause “substantial confusion” if implemented, discouraging market participation and reducing liquidity. He also expressed concern that the proposed Volcker Rule would “effectively bar banks from establishing tender option bond programs,” hurting state and local government borrowers. Criticizing the requirement of FINRA’s dealer members to fund the Governmental Accounting Standards Board (GASB), he pointed out that the fee represents an “unfair tax on broker-dealers and municipal bond investors who should not be mandated to subsidize the entire expense of financially supporting GASB.” While acknowledging that Title VII regulation has been adapted to better support state and local governments, he questioned whether they will bear “additional regulatory obligations to continue to use derivative products.”
In his opening statement, Alan Polsky, Chair of the Municipal Securities Rulemaking Board (MSRB), provided an overview of MSRB’s implementation of Dodd-Frank regulations and the organization’s response to H.R. 2827. He explained that after Dodd-Frank expanded the MSRB’s jurisdiction to cover state and local municipal bonds activity, the MSRB has worked to establish “fair-practice and other standards” to protect state and local officials who are often “unfamiliar” with the municipal bonds market. He also discussed steps the MSRB has taken to prevent fraudulent municipal adviser activity and promote professional standards, including extending the MSRB’s fair dealing rule to cover the actions of municipal advisers, proposing a rule detailing an adviser’s fiduciary duty, and working to regulate “pay to play” activities.
In regards to H.R. 2827, Polsky recommended avoiding regulatory duplication in the definition of a municipal adviser by taking a “scope-based” approach and limiting the exclusions of activities already subject to regulation. He also cautioned against eliminating a federal fiduciary standard for municipal advisers, stressing the importance of a clear, single, and consistent set of rules for all advisers. In closing, Polsky warned that the legislation could reduce protection of state and local governments because the bill would exempt certain categories of market participants, like dealers, banks and investment advisors that are already regulated by federal agencies, from being considered municipal advisors.
In his opening statement, Robert Doty, President of American Governmental Financial Services, urged Congress to carefully consider the implications that H.R. 2827 will have on local governments, noting that most local officials do not understand municipal finance and cannot be considered sophisticated investors. He stressed the importance of establishing a uniform fiduciary duty standard and recommended competency testing of all municipal advisors to ensure proper protection of governmental entities. Lastly, Doty asked Congress to respect the municipal market’s self-regulatory structure through use of the Municipal Securities Rulemaking Board (MSRB).
In his opening statement, Albert Kelly, Chairman of the American Bankers Association, criticized the SEC’s proposed municipal advisor rule for extending beyond Congressional intent. Kelly said the inclusion of financial institutions in the ruling would significantly increase compliance costs for banks that are “already regulated and have no connection to municipal securities” and in return would restrict access to bank services for small municipalities. In closing, Kelly urged Congress to pass H.R. 2827 and to remove financial institutions from the rulemaking.
In his testimony, Timothy Firestine, Chief Administrative Officer of Montgomery County, Maryland, expressed support for municipal advisory regulation, but criticized the scope of the SEC’s proposed municipal advisor rule. He specifically advocated for an appointed state and local governing board member exemption from the municipal advisor definition, and urged the SEC to preserve the statute’s federal fiduciary standard. Additionally, Firestine expressed support for some of the provisions in H.R. 2827, but warned that other provisions could “open the door too widely” and exempt professionals who should be regulated.
In his testimony, Mike Marz, Member of the Board of Directors of the Bond Dealers of America, urged the SEC to “appropriately and narrowly” define a municipal advisor in accordance with the Congressional intent of Dodd-Frank. He also expressed support for H.R. 2827 and its framework for “cleaning up the ambiguous definition of municipal advisor under Dodd-Frank”. In closing, Marz recommended further legislation be enacted to ensure unregulated municipal advisors maintain a fiduciary responsibility to local governments.
In her opening statement, Christine Keck, Director of Government Relations for the Energy Systems Group (ESG), expressed ESG’s support for H.R. 2827, but said the legislation’s exemption for engineering advice is too narrowly defined. She noted that ESG has engaged in constructive dialogue with the SEC and is hopeful that he SEC will exempt engineering services and advice from its final municipal advisor definition.
In his testimony, James Geringer, Board Chair of the Association of Governing Boards of Universities and Colleges, limited his comments to addressing the SEC’s municipal advisor proposal and urged the Committee to ensure that trustees of colleges and universities do not fall under the municipal adviser definition. He said because trustees are uncompensated volunteers, the regulatory burden of being a municipal adviser would deter many qualified and talented individuals from serving as a trustee. In closing, Geringer expressed support for H.R. 2827, specifically highlighting the legislation’s exemption for elected board members of municipal entities in their proposed rules, but still expressed concern that appointed trustees of colleges and universities could be construed as municipal advisers without further clarification or an explicit exemption.
In his testimony, Robert Brooks, Chair of Financial Management at the University of Alabama, said Dodd-Frank rulemakings on municipal finance must be clear and reasonable to prevent unintended consequences on the market. Regulatory requirements should promote increased transparency in documenting standards to ensure banks comply with their fiduciary duties, he added. Brooks cautioned against the use of “hedging strategies,” stating that without proper benchmarks there is little distinction between “needs-driven” and “view-driven” risk management. In closing, Brooks said that proper self-enforcement within the market is necessary to create an attractive environment for “ethical, innovative and creative professionals”.
Question and Answer
Chairman Scott Garrett (R-N.J.) began the question and answer session by noting the willingness of H.R. 2827 sponsors to consider modifications to the legislation. Rep. Robert Dold (R-Ill.), original sponsor of the bill, agreed with Garrett’s statement, adding that he is working with Rep. Gwen Moore (D-Wis.) on potential changes.
Garrett asked the panel for their opinion on whether the SEC should re-propose its rule detailing the definition of municipal advisor so that interested parties have more time to comment. All of the panelists agreed on the need for a re-proposal.
Rep. Carolyn Maloney (D-N.Y.) asked if there is any reason why investment advisors to municipalities should not be held to the same fiduciary standard as investment advisors to individuals.
Brooks said that “industry supplies what industry demands” and stated that current industry demands reflect a transactions-based non-fiduciary framework. He said the industry should instead demand a fiduciary-based advisory framework.
Maloney followed up by noting that the SEC extended the compliance date for its temporary municipal advisor rule and asked if the Commission is using that time to engage with industry. Kelly responded that the ABA has engaged the SEC several times to explain its concerns with the scope of the proposed municipal advisor definition. He said the SEC has acknowledged these concerns but believes the Commission is unwilling to make substantial changes absent any Congressional action. Gibbs added that there is a lack of clarity among participants as to when the SEC will come out on the final rule.
Moore referenced H.R. 2827 and asked the panelists if they would be in favor of retaining the federal fiduciary standard while “adding language to the definition of municipal advisor to say something along lines of in the business of providing municipal advisory services.” She questioned whether this change would help mediate concerns over the bill among some market participants.
Gibbs replied that SIFMA would be pleased to work with Congress on the fiduciary concept. He said uniformity in the standard is most essential, adding that the MSRB is in the best position to provide the securities industry guidance on the definition.
Moore also expressed her belief that Congress would be able to provide the SEC with certain guidance on the issue through the proposed bill. Dold agreed that changes can be made to better define certain aspects of the legislation.
Dold asked the panelists if the SEC’s delayed fiduciary definition is impacting investors in municipal securities. Gibbs said the issuer community is being more impacted by the delay. He noted that unregulated parties are still not regulated and those who are regulated have started to think about curtailing their activities. He added that the Volcker Rule will have a greater impact for investors.
Dold questioned whether the federal fiduciary standard would preempt state law and asked what impact the SEC’s overly broad definition would have on the MSRB. Polsky said the federal fiduciary standard does not need to preempt state law and a uniform standard would help clarify compliance requirements. He added that an overly broad definition would increase the difficulty of implementing a thorough rulemaking due to regulatory duplication and increased uncertainty in the marketplace.
Dold asked Polsky to elaborate on his recommendation that H.R. 2827 support a scope-based approach to the municipal advisor definition. Polsky explained that the definition should focus more on the activities of an advisor rather than the title that an advisor possesses as it relates to determining who would be subject to certain regulatory obligations.
Gibbs countered that the definition should not be purely scope-based, adding that the scope of an underwriter exemption should be broad and issuers should not face limitations in how advice is received.
For testimony and a webcast of the hearing, please click here.
AT TODAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, members discussed the Dodd-Frank Act’s impact on municipal finance with industry experts and supervisory authorities. Members also discussed H.R. 2827, introduced by Rep. Robert Dold (R-Ill.), which would amend Section 975 of the Dodd-Frank Act to specify the scope and limits of the municipal advisor provisions.
In his opening remarks, Dold said there is universal support for the intent of Section 975 of Dodd-Frank, but nearly unanimous opposition to the Securities and Exchange Commission’s (SEC) proposed municipal advisors definition. He said the SEC’s proposed rule would have the unintended effect of “harming municipalities and undermining their ability to efficiently and inexpensively raise capital to operate their daily activities.” Dold said his legislation, H.R. 2827, would correct the SEC’s proposed rule, give the SEC more precise guidance, and clarify Dodd-Frank’s legislative intent, while “maintaining protection for municipalities.” In closing, Dold said he is “not finished” with his legislation and is open to all suggestions to improve the bill.
Testimony
In his opening statement, Kenneth Gibbs, Chair of the Municipal Securities Division of the Securities Industry and Financial Markets Association (SIFMA), discussed the implications of municipal adviser regulation, the Volcker Rule, and Title VII of Dodd-Frank on municipal finance. While applauding Congress for bringing municipal advisers “under the regulatory umbrella,” he said the scope of the SEC’s proposed municipal advisor definition is much broader than Congress intended, inappropriately including unpaid members of issuer governing bodies, investment advisers providing counsel on “virtually any public funds,” and others. Additionally, he argued that the SEC’s proposed implementation of a congressionally mandated exclusion for “a broker, dealer, or municipal securities dealer serving as an underwriter” is too narrow and would be “detrimental” for bond issuers. Gibbs praised H.R. 2827 for clarifying language concerning municipal adviser regulation and better elucidating congressional intent.
Noting the unequal application of the proposed Volcker Rule to different parts of the municipal bond market, Gibbs said the rule would cause “substantial confusion” if implemented, discouraging market participation and reducing liquidity. He also expressed concern that the proposed Volcker Rule would “effectively bar banks from establishing tender option bond programs,” hurting state and local government borrowers. Criticizing the requirement of FINRA’s dealer members to fund the Governmental Accounting Standards Board (GASB), he pointed out that the fee represents an “unfair tax on broker-dealers and municipal bond investors who should not be mandated to subsidize the entire expense of financially supporting GASB.” While acknowledging that Title VII regulation has been adapted to better support state and local governments, he questioned whether they will bear “additional regulatory obligations to continue to use derivative products.”
In his opening statement, Alan Polsky, Chair of the Municipal Securities Rulemaking Board (MSRB), provided an overview of MSRB’s implementation of Dodd-Frank regulations and the organization’s response to H.R. 2827. He explained that after Dodd-Frank expanded the MSRB’s jurisdiction to cover state and local municipal bonds activity, the MSRB has worked to establish “fair-practice and other standards” to protect state and local officials who are often “unfamiliar” with the municipal bonds market. He also discussed steps the MSRB has taken to prevent fraudulent municipal adviser activity and promote professional standards, including extending the MSRB’s fair dealing rule to cover the actions of municipal advisers, proposing a rule detailing an adviser’s fiduciary duty, and working to regulate “pay to play” activities.
In regards to H.R. 2827, Polsky recommended avoiding regulatory duplication in the definition of a municipal adviser by taking a “scope-based” approach and limiting the exclusions of activities already subject to regulation. He also cautioned against eliminating a federal fiduciary standard for municipal advisers, stressing the importance of a clear, single, and consistent set of rules for all advisers. In closing, Polsky warned that the legislation could reduce protection of state and local governments because the bill would exempt certain categories of market participants, like dealers, banks and investment advisors that are already regulated by federal agencies, from being considered municipal advisors.
In his opening statement, Robert Doty, President of American Governmental Financial Services, urged Congress to carefully consider the implications that H.R. 2827 will have on local governments, noting that most local officials do not understand municipal finance and cannot be considered sophisticated investors. He stressed the importance of establishing a uniform fiduciary duty standard and recommended competency testing of all municipal advisors to ensure proper protection of governmental entities. Lastly, Doty asked Congress to respect the municipal market’s self-regulatory structure through use of the Municipal Securities Rulemaking Board (MSRB).
In his opening statement, Albert Kelly, Chairman of the American Bankers Association, criticized the SEC’s proposed municipal advisor rule for extending beyond Congressional intent. Kelly said the inclusion of financial institutions in the ruling would significantly increase compliance costs for banks that are “already regulated and have no connection to municipal securities” and in return would restrict access to bank services for small municipalities. In closing, Kelly urged Congress to pass H.R. 2827 and to remove financial institutions from the rulemaking.
In his testimony, Timothy Firestine, Chief Administrative Officer of Montgomery County, Maryland, expressed support for municipal advisory regulation, but criticized the scope of the SEC’s proposed municipal advisor rule. He specifically advocated for an appointed state and local governing board member exemption from the municipal advisor definition, and urged the SEC to preserve the statute’s federal fiduciary standard. Additionally, Firestine expressed support for some of the provisions in H.R. 2827, but warned that other provisions could “open the door too widely” and exempt professionals who should be regulated.
In his testimony, Mike Marz, Member of the Board of Directors of the Bond Dealers of America, urged the SEC to “appropriately and narrowly” define a municipal advisor in accordance with the Congressional intent of Dodd-Frank. He also expressed support for H.R. 2827 and its framework for “cleaning up the ambiguous definition of municipal advisor under Dodd-Frank”. In closing, Marz recommended further legislation be enacted to ensure unregulated municipal advisors maintain a fiduciary responsibility to local governments.
In her opening statement, Christine Keck, Director of Government Relations for the Energy Systems Group (ESG), expressed ESG’s support for H.R. 2827, but said the legislation’s exemption for engineering advice is too narrowly defined. She noted that ESG has engaged in constructive dialogue with the SEC and is hopeful that he SEC will exempt engineering services and advice from its final municipal advisor definition.
In his testimony, James Geringer, Board Chair of the Association of Governing Boards of Universities and Colleges, limited his comments to addressing the SEC’s municipal advisor proposal and urged the Committee to ensure that trustees of colleges and universities do not fall under the municipal adviser definition. He said because trustees are uncompensated volunteers, the regulatory burden of being a municipal adviser would deter many qualified and talented individuals from serving as a trustee. In closing, Geringer expressed support for H.R. 2827, specifically highlighting the legislation’s exemption for elected board members of municipal entities in their proposed rules, but still expressed concern that appointed trustees of colleges and universities could be construed as municipal advisers without further clarification or an explicit exemption.
In his testimony, Robert Brooks, Chair of Financial Management at the University of Alabama, said Dodd-Frank rulemakings on municipal finance must be clear and reasonable to prevent unintended consequences on the market. Regulatory requirements should promote increased transparency in documenting standards to ensure banks comply with their fiduciary duties, he added. Brooks cautioned against the use of “hedging strategies,” stating that without proper benchmarks there is little distinction between “needs-driven” and “view-driven” risk management. In closing, Brooks said that proper self-enforcement within the market is necessary to create an attractive environment for “ethical, innovative and creative professionals”.
Question and Answer
Chairman Scott Garrett (R-N.J.) began the question and answer session by noting the willingness of H.R. 2827 sponsors to consider modifications to the legislation. Rep. Robert Dold (R-Ill.), original sponsor of the bill, agreed with Garrett’s statement, adding that he is working with Rep. Gwen Moore (D-Wis.) on potential changes.
Garrett asked the panel for their opinion on whether the SEC should re-propose its rule detailing the definition of municipal advisor so that interested parties have more time to comment. All of the panelists agreed on the need for a re-proposal.
Rep. Carolyn Maloney (D-N.Y.) asked if there is any reason why investment advisors to municipalities should not be held to the same fiduciary standard as investment advisors to individuals.
Brooks said that “industry supplies what industry demands” and stated that current industry demands reflect a transactions-based non-fiduciary framework. He said the industry should instead demand a fiduciary-based advisory framework.
Maloney followed up by noting that the SEC extended the compliance date for its temporary municipal advisor rule and asked if the Commission is using that time to engage with industry. Kelly responded that the ABA has engaged the SEC several times to explain its concerns with the scope of the proposed municipal advisor definition. He said the SEC has acknowledged these concerns but believes the Commission is unwilling to make substantial changes absent any Congressional action. Gibbs added that there is a lack of clarity among participants as to when the SEC will come out on the final rule.
Moore referenced H.R. 2827 and asked the panelists if they would be in favor of retaining the federal fiduciary standard while “adding language to the definition of municipal advisor to say something along lines of in the business of providing municipal advisory services.” She questioned whether this change would help mediate concerns over the bill among some market participants.
Gibbs replied that SIFMA would be pleased to work with Congress on the fiduciary concept. He said uniformity in the standard is most essential, adding that the MSRB is in the best position to provide the securities industry guidance on the definition.
Moore also expressed her belief that Congress would be able to provide the SEC with certain guidance on the issue through the proposed bill. Dold agreed that changes can be made to better define certain aspects of the legislation.
Dold asked the panelists if the SEC’s delayed fiduciary definition is impacting investors in municipal securities. Gibbs said the issuer community is being more impacted by the delay. He noted that unregulated parties are still not regulated and those who are regulated have started to think about curtailing their activities. He added that the Volcker Rule will have a greater impact for investors.
Dold questioned whether the federal fiduciary standard would preempt state law and asked what impact the SEC’s overly broad definition would have on the MSRB. Polsky said the federal fiduciary standard does not need to preempt state law and a uniform standard would help clarify compliance requirements. He added that an overly broad definition would increase the difficulty of implementing a thorough rulemaking due to regulatory duplication and increased uncertainty in the marketplace.
Dold asked Polsky to elaborate on his recommendation that H.R. 2827 support a scope-based approach to the municipal advisor definition. Polsky explained that the definition should focus more on the activities of an advisor rather than the title that an advisor possesses as it relates to determining who would be subject to certain regulatory obligations.
Gibbs countered that the definition should not be purely scope-based, adding that the scope of an underwriter exemption should be broad and issuers should not face limitations in how advice is received.
For testimony and a webcast of the hearing, please click here.