On Sept. 19, the U.S. House of Representatives passed HR 2827, the Dold Amendment, in a stunning display of bipartisanship, while failing to recognize the breadth of the law's deregulatory effect.
The National Association of Independent Public Finance Advisors is opposed to the passage of the Dold Amendment for several reasons. The amendment serves to effectively codify the regulatory environment which existed prior to Dodd-Frank by eroding the issuer protections that were put in place, subjecting issuers to the same abuses Dodd-Frank intended to curtail. In addition, HR 2827 will only further prolong the issuance of a final rule defining the term "municipal advisor."
We agree that the Securities and Exchange Commission exceeded Congress' intent by including municipal officials and appointed individuals serving in their official capacities within the definition of a municipal advisor. However, HR 2827 goes well beyond addressing this concern. This legislation is not a clarification of Dodd-Frank; it is major rollback of a large portion of the issuer protections put in place by the act and is a step back in time.
The municipal advisor provisions of Dodd-Frank were adopted to protect the interests of municipal entities, taxpayers and the public through the regulation of market participants who provide certain kinds of advice to municipal entities and obligated persons. Prior to Dodd-Frank, dealer-advisors and non-dealer advisors were by and large unregulated under federal law with respect to the advice they provided to municipal entities.
Although neither financial advisors nor broker-dealers are entirely without culpability, it was broker-dealers - often acting as though engaged as financial advisors - that played a role in municipal market scandals such as bid-rigging of guaranteed investment contracts and the sale of toxic financial products to unsophisticated municipal entities.
Dodd-Frank was intended to prevent these abuses by causing individuals providing certain kinds of advice to municipal entities to obtain fiduciary obligations.
HR 2827 takes a different approach, but one which has been tried unsuccessfully before. The amendment creates a bright line with respect to classifying most market participants as municipal advisors while creating a specific exclusion for a select group of others.
Under HR 2827, underwriters or placement agents, unlike nearly all other market participants, will be able to provide advice with respect to the timing, structure and terms of a municipal securities issuance or municipal financial product without being deemed muni advisors.
The measure makes clear that broker-dealers will not be regulated as municipal advisors so long as they are not specifically engaged as MAs for compensation. As a result, some underwriters and placement agents will once again refer to themselves as the issuer's "financial advisor," causing confusion among less sophisticated municipal issuers as to the role being played by these transaction participants.
Potentially more troubling, however, is the impact that HR 2827 will have on undermining the Municipal Securities Rulemaking Board's Rule G-23's prohibition on the underwriting of municipal securities by broker-dealers who serve as the issuer's financial advisor on the same transaction, the so called practice of "switching."
The prohibition on switching was premised on the determination that municipal advisors cannot balance their fiduciary duties to the issuer while subsequently acting as the issuer's underwriter.
The new legislation, however, requires that for fiduciary duties to inure to the benefit of the issuer, the advisor must obtain compensation for its advisory services. This substantial deviation from Dodd-Frank will curtail the MSRB's and SEC's ability to prevent "switching," where the underwriter is engaged as a "financial advisor" on a voluntary or uncompensated basis, and will likely require the MSRB to amend Rule G-23 accordingly. This was not the intent of Dodd-Frank, and likely was not the intent of the House when it voted in favor of HR 2827.
The proposed bill extends well beyond the scope of the criticism leveled against the SEC by the vast majority of the over 1,200 comment letters received by the commission, which primarily focused on the SEC's inclusion of appointed and volunteer board members within the scope of the muni advisor definition. The SEC is entirely capable of addressing these concerns without further legislative action.
The Dold Amendment is not a clarification of Dodd-Frank, but rather a reversal of it. It returns us to earlier days when abusive practices were the norm, not the exception. As such, HR 2827 should be subject to a motion to reconsider in the House of Representatives, while the Senate should relegate the matter to the table.
Colette Irwin-Knott is president of NAIPFA. She is a partner
at H. J. Umbaugh & Associates, with offices in Indiana and Michigan.
She has been an expert witness and speaker on municipal bond
matters and has served as financial advisor on numerous
financings for local governments throughout Indiana.
