The Securities and Exchange Commission’s (SEC) proposed rule requiring registration of municipal advisors, and the rule's broad definintion of who is a municipal advisor, was one of the main focuses of a Congressional gathering Friday to discuss how Dodd-Frank is affecting municipal finance.
At the hearing of the House Financial Services Capital Markets Subcommittee, “The Impact of the Dodd-Frank Act on Municipal Finance,” panelists and some lawmakers took issue with the as-yet unfinished SEC rule, which was required under Section 975 of Dodd-Frank.
Kenneth Gibbs, president of the Municipal Securities Group at Jefferies & Co., and chairman of the Securities Industry and Financial Markets Association’s (SIFMA) Municipal Securities Division, said the proposed rule includes “numerous provisions that would go against congressional intent and statutory authority."
H.R. 2827, proposed by Rep. Robert Dold, R-Ill., which would amend Section 975 of Dodd-Frank, “would help address these issues by clarifying key provisions of the statute,” Gibbs said.
Rep. Steve Garrett, R-N.J., chairman of the subcommittee, said at the hearing that defining a municipal advisor “is critical because once a market participant is defined as an advisor, those market participants are subject to a statutory fiduciary duty and additional antifraud provisions as well as registration and the new MSRB rules.”
The SEC released its first draft of the rule in December 2010, and Garrett noted that after more than “1,000 mostly negative comment letters were received,” the SEC went back to redraft a “more workable” rule.
Alan Polsky, chairman of the Municipal Securities Rulemaking Board (MSRB), told lawmakers that like Rep. Dold, MSRB is concerned about the effects of an “overly broad" definition of municipal advisor under the SEC’s rule.
In February 2011, Polsky said the MSRB submitted a comment letter to the SEC that recommended several specific changes "related to the efficiency of the proposed municipal advisor registration process and the scope of the definition of municipal advisor.” Consistent with the provisions of Dold's bill, he said, the MSRB also recommended excluding from the definition of municipal advisor not only municipal entities but employees of municipal entities.
One of the main sticking points of the bill is that it calls for eliminating the federal fiduciary duty of municipal advisors.
Polsky of MSRB said that while MSRB recognizes that it’s up to “Congress to determine whether a federal fiduciary duty for advisors is appropriate” in a relationship of trust between a state or local government and a municipal advisor, “a fiduciary duty applies by virtue of common law.”
The existing fiduciary duty may not be a federal one, he said, “but it exists nonetheless, whether labeled formally as a fiduciary duty, a duty of trust, a duty arising from an agent-principal relationship, or any other such other label.” If the federal fiduciary standard were to be eliminated, Polsky continued, “there would still be applicable fiduciary duty standards in each of the 50 states.”