House bill takes aim at Rule G-38, SEC disclosure, underfunded pensions

A nearly 30-year-old rule restricting solicitation of municipal securities business would be reconsidered under a Republican environmental, social and governance-related investment bill that also tackles other high-profile muni market issues.

The bill, introduced last week by Rep. Andy Barr, R-Ky., would examine the effectiveness of Municipal Securities Rulemaking Board Rule G-38, which prohibits a dealer from making payments to a third party to solicit municipal bond underwriting business.

Separately, the Securities and Exchange Commission would be required to study ESG-related disclosure by muni issuers, and the U.S. Comptroller would study whether state and local pension plans are "subordinating" the pecuniary interests of participants to ESG factors. The 11-page legislation is co-sponsored so far by Georgia Republican Rep. Rick Allen and Michigan Rep. Bill Huizenga.

The broader aim of the "Ensuring Sound Guidance Act" is mandating that financial advisors prioritize financial factors, and not ESG-related considerations, when making investment decisions. It seeks to overturn the Biden administration's newly inked rule that allows fiduciaries to consider climate change and other ESG-risk factors.

Rep. Andy Barr's Office

The measure is part of a growing partisan clash over the role that ESG should play in investment strategy. The legislative battles are largely playing out among the states, but in recent months have started to move onto the national stage.

"This critical legislation not only guarantees that advisers make prudent investment choices based on financial factors, but also empowers savers to decide how their money is invested, contrary to the Department of Labor's finalized rule," Barr said in a statement. "We must take significant action to protect retail investors and retirees from the cancer within our capital markets that is ESG, which prioritizes higher-fee, less diversified and lower return investments."

Barr's office did not immediately return calls for comment. Barr and Allen introduced legislation of the same name in 2022, under a Democrat-controlled House, which prohibited asset managers from prioritizing ESG factors when making investment decisions, but the bill did not include the muni-related provisions.

The section taking aim at MSRB Rule G-38 would require the SEC to solicit public comment and then conduct a study on the rule's effectiveness "in preventing the payment of funds to elected officials or candidates for elected office in exchange for the receipt of government business in connection with the offer or sale of municipal securities."

The provision includes SEC's Rule 206(4)-5 under the Investment Advisers Act, a "pay to play" ban that prevents investment advisors from providing paid services to a state or local government if the advisor or an associate has made a political contribution in the prior two years.

Among other things, the study would: consider whether Rule G-38 has any "unintended adverse effects;" the frequency and scope of enforcement actions; the degree to which persons subject to the rules "have put into place policies and procedures intended to ensure compliance;" the degree to which state and federal regulations impact the solicitation of municipal securities business; and the degree to which persons subject to the rule "are disadvantaged from participating in the political process."

The SEC would be required to submit the report within a year to the Senate Committee on Banking, Housing and Urban Affairs and to the House Committee on Financial Services.

"The report shall include a discussion of the extent to which persons affiliated with small businesses, as well as persons affiliated with minority and women opened businesses, have been affected by Rule G–38 and Rule 206(4) and a discussion of regulatory or legislative a discussion of regulatory or legislative steps that are recommended or that may be necessary to address any concerns identified in the study," according to the text.

On the ESG muni disclosure front, the legislation would require the SEC to solicit public comment and conduct a study to "determine the extent to which issuers of municipal securities … make disclosure to investors regarding climate change and other environmental factors."

The study would analyze the frequency of ESG-related disclosures, whether the disclosures align with disclosures made by muni issuers "in other contexts or to other audiences other than investors," as well as "any voluntary or mandatory disclosure standards observed by issuers of municipal securities in the course of making such disclosures" and the degree to which investors consider such disclosures in making their investment decisions.

Like with the G-38 rule, the SEC would be required to file a report to Congress within one year that includes a discussion of the "financial risks to investors from investments in municipal securities and whether those risks are being adequately disclosed as well as a discussion of regulatory or legislative steps that are recommended or that may be necessary to address any concerns identified in the study."

On the pension front, the bill would require the U.S. Comptroller to conduct and submit a study on the potential impact of underfunded state and local pension plans on the federal government, including the extent to which such plans "subordinate the pecuniary interests of participants and beneficiaries" to ESG objectives. The Comptroller would also be required to consider any federal legislative and administrative actions that would prevent the pension plans from prioritizing ESG factors.

The Bond Dealers of America said they're keeping an eye on the legislation.

"Congress frequently exercises their oversight responsibilities by legislatively mandating studies of key policy issues and this seems to fall under that category," said the BDA's vice president of federal legislative and regulatory policy Brett Bolton. "We are analyzing the legislation and surveying our members about this, and we will provide feedback to Rep. Barr as appropriate."

The bill, HR 4237 has been referred to the House Committee on Financial Services and the Committee on Education and Workforce.

A press release from Barr's office includes a comment from former SEC Chair Jay Clayton, who said the bill "embodies our time-tested touchstones for investor protection and market efficiency, namely transparent discourse of information important to an investment decision and investor choice.  Investors should know what ESG managers are trying to achieve, their likelihood of success and how much it is expected to cost in fees and returns."

The press release features a list of supporting groups, including many Republican state officials, like Kentucky Treasurer Allison Ball, West Virginia Treasurer Riley Moore, Louisiana Treasurer John Schroder, North Dakota Treasurer Thomas Beadle, South Carolina Treasurer Curtis Loftis, Indiana Treasurer Daniel Elliott, Texas Comptroller Glenn Hegar, North Carolina Treasurer Dale Folwell, Arkansas Treasurer Mark Lowery and Ohio Treasurer Robert Sprague.

The American Petroleum Institute, Heritage Foundation, Americans for Tax Reform and the Texas Public Policy Foundation are also listed as supporters.