Legislation introduced in the House would clarify that Section 975 of Dodd-Frank requiring SEC registration does not include dealers, banks, investment advisors, members of public governing bodies, and others who either were already regulated before the enactment of Dodd-Frank or are appointed, volunteer public servants. HR 2827 would also eliminate the federal fiduciary standard for municipal advisors.
According to the sponsor of HR 2827, Rep. Robert Dold (R-IL), the intent of Congress in enacting Section 975 was to impose a regulatory structure on previously unregulated companies that are active in the financial markets. The Dodd-Frank Act requires the SEC to adopt rules mandating that municipal advisors register with the Commission.
According to Rep. Dold, SEC proposed regulations implementing Section 975 go far beyond what Congress intended and impose new and duplicative regulations on financial market participants that are already heavily regulated. In his view, the SEC proposal would require that parties as diverse as banks, dealers, investment advisors, and appointed, unpaid members of public governing bodies register as municipal advisors and come under the full regime that will govern municipal advisor activity.
In response to its proposal, he observed, the SEC has reportedly received over 1,000 comment letters overwhelmingly critical of the rule. For example, in a letter to the SEC, banking associations said that the proposed regulations would subject banks to one more layer of regulation for the same activities and label as municipal advisors banks and many bank employees providing traditional bank services to their local municipalities, which is not what Congress intended in Dodd-Frank. In a similar letter to the SEC, Senators Scott Brown (R-MA) and John Kerry (D-MA) and Rep. Barney Frank (D-MA) said that the registration regime for municipal advisors proposed by the SEC under Section 975 should exclude banks and bank employees who are simply providing traditional deposit and cash-management services to municipalities,
In a separate letter to the SEC, Financial Services Committee Chair Spencer Bachus (R-Ala) said that the proposed regulations are overly broad and would reach significantly more people than Congress intended. For example, Chairman Bachus said that the broad definition of municipal financial products combined with the failure to define ``advice’’ would result in thousands of bank employees conducting routine business with municipal entities having to register with the SEC.
Hr 2827 would clarify that an advisor must be formally engaged in writing for compensation and clarify that certain parties who are already regulated, including brokers, dealers, swap dealers, major swap participants, futures commission merchants, banks, and other financial institutions, are not also municipal advisors for Dodd-Frank Section 975 purposes. Similarly, the legislation would exclude elected or appointed members of state or local government governing bodies. The measure would specify that providing advice to obligated persons, private, non-governmental entities that may raise capital through the municipal securities market is not an activity of municipal advisors.
The legislation would also clarify that the definition of investment strategy excludes certain routine activities or activities that are already regulated. These activities include merely acting as a broker or principal on a securities trade, providing a list of price quotations or valuations, acting as a custodian, providing generalized investment information that is not tailored to a particular municipal entity, and providing advice other than that related to investment of public funds, although such advice could cause an entity to be a municipal advisor through some other provision. HR 2827 also clarifies what funds constitute the proceeds of a bond issue.
Finally, HR 2827 would eliminate the federal fiduciary standard for municipal advisors. Traditional municipal advisors, as clarified by the amendments in the bill, already have a fiduciary duty to their state and local government clients through state law. According to Rep. Dold, eliminating the federal fiduciary provision would help ensure that non-advisors are not inadvertently subject to a fiduciary standard where that standard would not be appropriate. The scope of regulatory authority regarding municipal advisors is also clarified.