Legislation that would limit proposed regulation of investment advisers to state and local governments drew bipartisan support at a congressional hearing Friday.
At a subcommittee meeting of the House Financial Services Committee, Republicans and Democrats expressed concerns that a proposed Securities and Exchange Commission regulation requiring municipal advisers to register with the agency goes too far.
The SEC proposed the rule, mandated by the Dodd-Frank financial reform law, in December 2010. Since then, the agency has received more than 1,000 comment letters, many from critics who worry that that the draft rule could define too many people — ranging from local officials to bank tellers — as municipal advisers, subjecting them to fiduciary-duty standards and raising financing costs for governments.
Rep. Robert Dold, R-Ill., introduced a
bill that would limit the term “municipal adviser” to those formally hired and paid to provide advice to governments on financing roads, bridges, schools and other public projects. It also would exempt a wide array of market participants, including brokers and municipal securities dealers, and would eliminate federal fiduciary standards for municipal advisers while maintaining state standard-of-care laws.
“We're getting some good bipartisan support for it,” Mr. Dold said in an interview after the hearing, which focused on his bill. “The [SEC] rule-making aspect went far beyond congressional intent.”
Mr. Dold said that he is working with colleagues who have qualms about the fiduciary-duty provision. The bill is scheduled for a subcommittee vote Aug. 1.
“We must clarify and consider different viewpoints on that topic,” Mr. Dold said.
The Dodd-Frank law requires municipal advisers to register with the SEC for the first time in an effort to illuminate the approximately $3 trillion market that includes about 50,000 debt issuers. Last month,
Stockton, Calif., filed for bankruptcy, while Jefferson County, Ala., declared the biggest municipal bankruptcy in history last year.
Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, said the SEC draft rule was too restrictive but added that the law named after him seeks to protect governments from unscrupulous advisers who work with them on complex financing.
“There were people taking advantage of municipalities,” Mr. Frank said at Friday's hearing.
Witnesses at the hearing said that today's municipal finance market is a free-for-all when it comes to investment advice. Nearly anyone can act as an adviser — and some of them are incompetent or nefarious.
In testimony before the committee, Robert Brooks, a professor of finance at the University of Alabama, supported a fiduciary-duty standard of care for municipal advisers.
“That could cure this problem,” Mr. Brooks said.
An industry participant cautioned that market makers, who bring together bond-issuing governments and municipal securities dealers, should remain exempt from fiduciary-duty rules.
Kenneth Gibbs, president of the municipal-securities group at Jefferies & Co. Inc. and chairman of the municipal division of the Securities Industry and Financial Markets Association, said that the SEC proposal is so broad that it could encompass underwriters.
“An underwriter is an intermediary and can't have a loyalty of duty to one side,” Mr. Gibbs said in an interview after he testified at the hearing.
The National Association of Insurance and Financial Advisors also is concerned about the scope of the municipal-adviser rule.
“We see these things expand over time,” Terry Headley, president of Headley Financial Group and former NAIFA president, said in an interview. “It could sweep in some of our members who engage in that market segment.”
It's not clear when the SEC will issue a final rule.
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