[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                      THE IMPACT OF THE DODD-FRANK
                        ACT ON MUNICIPAL FINANCE

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 20, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-148


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 20, 2012................................................     1
Appendix:
    July 20, 2012................................................    37

                               WITNESSES
                         Friday, July 20, 2012

Brooks, Robert, Ph.D., Professor of Finance, and Wallace D. 
  Malone, Jr. Endowed Chair of Financial Management, The 
  University of Alabama..........................................    12
Doty, Robert, President, AGFS....................................    14
Firestine, Timothy, Chief Administrative Officer, Montgomery 
  County, Maryland; and President-elect, Government Finance 
  Officers Association (GFOA)....................................    16
Geringer, Hon. James E., Chair of the Board of Directors, 
  Association of Governing Boards of Universities and Colleges...     9
Gibbs, Kenneth, President, Municipal Securities Group, Jeffries & 
  Company, Inc.; and Member, Board of Directors, and Chair, 
  Municipal Securities Division, the Securities Industry and 
  Financial Markets Association (SIFMA)..........................    17
Keck, Christine, Director, Government Relations, Energy Systems 
  Group (ESG)....................................................    19
Kelly, Albert C., Jr., Chairman and Chief Executive Officer, 
  SpiritBank; and Chairman, American Bankers Association (ABA)...    21
Marz, Michael J., Vice Chairman, FirstSouthwest; and Member, 
  Board of Directors, the Bond Dealers of America (BDA)..........    22
Polsky, Alan D., Chair, Municipal Securities Rulemaking Board 
  (MSRB).........................................................    11

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    38
    Brooks, Robert...............................................    40
    Doty, Robert.................................................    45
    Firestine, Timothy...........................................    50
    Geringer, Hon. James E.......................................    63
    Gibbs, Kenneth...............................................    66
    Keck, Christine..............................................    78
    Kelly, Albert C., Jr.........................................    83
    Marz, Michael J..............................................    91
    Polsky, Alan D...............................................   102

              Additional Material Submitted for the Record

Dold, Hon. Robert:
    Written statement of the American Council of Life Insurers 
      (ACLI).....................................................   117
    Written statement of the National Association of Independent 
      Public Finance Advisors....................................   119
Frank, Hon. Barney:
    Letter to SEC Chairman Mary L. Schapiro, dated July 2, 2012..   125
Moore, Hon. Gwen:
    Letter to Representative Maxine Waters from Beverly Daniel 
      Tatum, President, Spelman College, dated July 9, 2012......   126
Polsky, Alan D.:
    Additional information provided for the record in response to 
      a question from Representative Dold........................   128

 
                      THE IMPACT OF THE DODD-FRANK
                        ACT ON MUNICIPAL FINANCE

                              ----------                              


                         Friday, July 20, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:32 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Lucas, Manzullo, 
Campbell, Posey, Hurt, Dold; Maloney, Moore, and Ellison.
    Ex officio present: Representative Frank.
    Chairman Garrett. Greetings. Good morning, everyone. The 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises is hereby called to order. Today's hearing is 
entitled, ``The Impact of the Dodd-Frank Act on Municipal 
Finance.'' I thank the Members who are here. As chairman of the 
Agriculture Committee, everything is all wrapped up on the farm 
bill, focusing your attention like a laser beam on these other 
issues. So I appreciate your joining us today.
    Mr. Lucas. Will the gentleman yield for just a moment?
    I know the support that is building within your very veins 
to vote for the farm bill will be incredible when the moment 
comes but--
    Chairman Garrett. We are working on it.
    Mr. Lucas. I look forward to that. Thank you, sir.
    Chairman Garrett. We are working on that. And I also thank 
the entire panel for being with us here this morning as well. 
We have a fairly large panel, but that is good. We will turn to 
you shortly, but we will begin with opening statements.
    And so, I will yield myself 3 minutes.
    Today's hearing will examine the impact of the Dodd-Frank 
Act on municipal finance. The size of our Nation's municipal 
securities markets is close to $3 trillion. States, counties, 
cities, and other municipalities use this market to fund things 
like roads, bridges, schools, hospitals, and much more. Our 
local leaders rely on the municipal bond market to gain 
critical access to investment capital needed to finance these 
very important projects.
    The Dodd-Frank Act enacted basically sweeping regulatory 
expansion over the municipal securities market. And while I 
support additional transparency--we all do--and accountability 
with all market participants, it must of course be balanced 
with the need to ensure that local governments, schools, and 
hospitals can still have the appropriate access to the 
marketplace.
    So Title IX of the Act includes a number of provisions that 
will significantly alter the way much of the business in this 
market is conducted. Section 975 of the Dodd-Frank Act requires 
municipal advisors to register with the SEC now and provide new 
rule-writing authorities to the Municipal Securities Rulemaking 
Board (MSRB). So just defining a municipal advisor is critical. 
Because once a market participant has defined an advisor, those 
market participants are subject to a statutory fiduciary duty 
and additional anti-fraud provisions, as well as registration 
in the new--and the MSRB rules.
    The SEC released their first draft of this rule back in 
December of 2010. After over 1,000 mostly negative comment 
letters were received, the SEC has now gone back to the drawing 
board to attempt to redraft a more workable rule.
    And so in this regard, I commend you and Chairman Schapiro 
for acknowledgment of the initial overreach of the agency. I 
look forward to her working with us to address these 
significant concerns that market participants have raised.
    Now one Member, I should also point out here, has 
specifically been working on this topic diligently from the 
outside, and he is right down at the end, Mr. Dold. Thank you 
for your work. You actually have legislation in this area, H.R. 
2827. And what that does--and I am sure you will speak on it 
shortly--is attempt to provide much more clarification around 
the requirements of Section 975.
    I really do appreciate that he has sort of taken the lead 
on this--taken the initiative to go into one of the areas that 
we have not had the opportunity to go into so far. So I thank 
you again for leading on this topic.
    Today, we note that the congressional hearing with the 
Municipal Securities Rulemaking Board since this committee 
became the Financial Services Committee. Unfortunately, much of 
the oversight over the new limitation of Dodd-Frank that needs 
to be done because of the extensiveness of that, we have not 
been able to get into the examination in this area at the level 
that we would like to have.
    So I think it is appropriate that before this committee and 
Congress give the agency new authority and responsibility, they 
at the very least have them before this committee in a formal 
manner to discuss what is being considered. As we have seen 
with so many other areas of Dodd-Frank, the increased breadth 
and scope of the Federal Government into parts of the financial 
market is tremendous.
    We want to make sure that whatever rules finally come out, 
though they have the new authority, do not negatively impact 
upon them and the economy. Our municipal securities market is 
essential to the functioning of the local, State, and county 
governments.
    It is important to get it right and I look forward to 
working again with the members of the panel, the stakeholders 
involved, and certainly Mr. Dold as well, the regulators and 
municipal communities for just that purpose, to make sure that 
we get it right.
    And with that, I will yield back.
    Welcome, and good morning. I recognize the gentleman, Mr. 
Ellison, for 3 minutes.
    Mr. Ellison. Yes, thank you, Mr. Chairman. I certainly 
appreciate the time.
    And I want to thank the panel. I think this is a very 
important topic that we are addressing today. And from my 
standpoint, I would like to see us make sure that when we tweak 
the regulation, that we don't over-tweak the regulation. The 
fact is I don't support blanket assertions that we need fewer 
cops on the beat in the financial market. I think some of the 
things that we saw over the last few weeks have indicated the 
essential purpose of Dodd-Frank as we now approach the 2-year 
anniversary of the bill.
    Not exactly on this topic, but on the general topic of 
Dodd-Frank, we have seen just recently that Barclays Bank paid 
a $455 billion fine for lying to the actual cost of the funds 
to LIBOR. Another 15 banks are being investigated. We have seen 
Wells Fargo settle a $175 million settlement with the 
Department of Justice for steering African-American buyers to 
high-cost mortgages. Bank of America, Countrywide, and Sun Bank 
also settled claims of a similar nature for enormous amounts of 
money. And of course, Capital One was fined $210 million for 
illegal fees charged to consumers by the CFPB.
    Now that doesn't specifically have to do with the hearing 
today, but it does have to do with the general topic of whether 
or not we need more regulation of the financial markets. I 
would say that we need more than we have been getting over the 
last years and I think this makes me feel good about my vote in 
support of Dodd-Frank.
    I think our topic today is important, but from my 
standpoint, I think it is a good thing to make sure we have 
more eyes on the problem, making sure that we have well-
ordered, transparent markets in which investors, consumers, and 
municipalities can have greater confidence.
    If you would indulge me as well, Mr. Chairman, I would like 
to make a special welcome to Mr. Alan Polsky who is my fellow 
Minnesotan. He hails from my district actually and serves as 
the senior vice president of Dougherty and Company, which is a 
Minneapolis, Minnesota-based investment firm. And he has worked 
with Dougherty and Company for 26 years. I am very proud that 
he is here today in his capacity as board chair of the 
Municipal Securities Rulemaking Board. He has played a national 
role in municipal finance both in his current position, and as 
chairman of the board of governors for the National Federation 
of Municipal Analysis.
    And so, I am glad to have all of our witnesses, but I am 
particularly happy to have my own fellow Minnesotan here. I do 
thank you, and I welcome everyone to the panel, especially you, 
Mr. Polsky.
    Chairman Garrett. Thank you, and the gentleman yields back. 
Mr. Dold is recognized for 5 minutes.
    Mr. Dold. Thank you Mr. Chairman. I certainly want to thank 
you so much for calling the hearing, and I want to thank our 
witnesses for your time, your testimony, and your expertise 
today.
    Local and State governments have issued over $3 trillion of 
outstanding municipal securities with individual retail 
investors directly or indirectly holding a large percentage of 
those securities. Our State and local governments rely heavily 
on the municipal securities market to finance hospitals, 
schools, physical infrastructure, utility facilities, 
transportation systems, and other capital projects.
    An efficient municipal securities market must exist for our 
State and local governments to fund most of these critical 
capital projects. And as with any capital market, maintaining 
an efficient municipal securities market requires efficient, 
effective, and smart regulation.
    However, until Dodd-Frank passed in 2010, one particular 
group of municipal securities market participants, nondealer 
financial advisors, remained largely or entirely unregulated. 
While most of these unregulated financial advisors were capable 
and honorable market participants, the absence of efficient and 
effective financial advisor regulations gave them unfair 
regulatory advantages over other market participants, while 
also allowing a few bad actors to remain in the business of 
advising municipalities, in some cases with devastating 
consequences to the municipalities, the taxpayers, and the 
ratepayers.
    Fortunately, Section 975 sought to close that regulatory 
gap and to protect municipalities and their constituents by, 
among other things, expanding the MSRB's regulatory scope and 
by requiring these unregulated financial advisors to register 
with the SEC to become subject to SEC regulation and to become 
subject to the potential severe penalties for regulatory 
violations.
    We have nearly unanimous agreement from everyone 
concerned--Democrats, Republicans, regulators, local 
governments, and market participants--that the municipal 
advisors provisions were a necessary improvement to our 
municipal securities regulation framework and will help protect 
municipalities from bad actors while also leveling the 
regulatory playing field for market participants.
    However, while we have nearly universal support for the 
legislative intent with respect to municipal advisors 
regulations, we also have nearly unanimous opposition to the 
SEC's proposed rule implementing Dodd-Frank's municipal 
advisors provisions. In response to the SEC's proposed rule, 
the SEC received over 1,000 comment letters, most of which were 
highly critical. These critical comment letters came from State 
and local governments and market participants and from various 
other industry groups and individuals who would be improperly 
captured by a comprehensive regulatory framework, even though 
Dodd-Frank certainly never contemplated their inclusion--even 
though municipalities ultimately would be harmed by their 
inclusion.
    The SEC Chairman herself has acknowledged these issues 
exist. In a response to my questions in a previous committee 
hearing, Chairman Schapiro testified that the SEC's proposed 
rule had cast a net far too widely, and that the SEC needed to 
make reasonable carvebacks and not to layer on unnecessary 
burdens.
    Rather than protecting municipalities, the SEC's proposed 
rule would have the unintended and opposite effect of harming 
municipalities and undermining their ability to efficiently and 
inexpensively raise capital to operate their daily activities. 
For example, as I have pointed out along with Chairman Schapiro 
and many of my congressional colleagues, the SEC's proposed 
rule would have the unintended effect of forcing volunteer 
appointed members of government boards and commissions into the 
comprehensive and burdensome SEC regulatory framework.
    Bank tellers, bank branch managers, and their employees 
would become subject to comprehensive and burdensome SEC 
regulations simply by answering a city treasurer's question 
about available deposit accounts for holding bond proceeds. 
Engineering firms and accounting firms, insurance companies, 
and broker-dealers and their employees would similarly subject 
themselves to this comprehensive SEC regulatory framework 
simply by performing their own customary day-to-day services to 
their municipal clients.
    The net result of the SEC's proposed rule would be fewer 
people and organizations willing to serve municipalities and 
higher costs for these same municipalities--all with no 
meaningful improvement in municipal protection. None of these 
potentially negative consequences were contemplated by Dodd-
Frank's legislative intent or statutory text.
    So for these reasons and with broad bipartisan support, I 
have introduced H.R. 2827, which would correct the SEC's 
proposed rule and give the SEC more precise guidance and 
clarify Dodd-Frank legislative intent and legislative text to 
ensure that we aren't unnecessarily harming municipalities and 
others who serve them, while maintaining protection for those 
municipalities.
    I have been pleased to work with both Democrat and 
Republican colleagues and to receive bipartisan co-sponsorship 
from over 35 Members of Congress. However, we are not finished 
with our legislative process, and I think that it is important 
that we hear more from all concerned parties about the SEC's 
proposed rule and H.R. 2827's proposed clarifications.
    As always, we remain open-minded and more than willing to 
listen to and work with all concerned--my colleagues, 
governments, local regulators, and market participants--to 
ensure that we get the best possible balance here.
    H.R. 2827's objective is to maintain Dodd-Frank's statutory 
purposes and policies on protecting municipalities by ensuring 
that all municipal advisors are regulated by also minimizing 
the unintended negative consequences to municipalities and 
other market participants in light of the proposed SEC rule.
    I understand that there have been some expressed concerns 
about H.R. 2827 removing the Federal fiduciary standard to 
instead leave in place the State fiduciary duty standards. I 
think that this is a legitimate point of discussion and we must 
clarify and carefully consider differing viewpoints on that 
topic. I also understand that some have expressed concerns 
about the precise language of the exemption clarifications and 
I am happy to consider all those concerns as well.
    I thank our witnesses today for being here and for your 
testimony. I yield back.
    Chairman Garrett. The gentleman yields back. Thank you very 
much.
    The gentlelady from New York is recognized for 2\1/2\ 
minutes.
    Mrs. Maloney. I thank the Chair for holding this hearing, 
and I thank all the panelists for your participation today.
    As it stands, there are over $3 trillion in outstanding 
municipal securities within a market consisting of more than 
55,000 entities and hundreds of municipal advisors consulting 
with States, counties, and cities on their investment 
decisions. Until the financial reforms were signed into law, 
many if not most municipal advisors were completely unregulated 
at the Federal level and their activities were unchecked.
    This led to several high-profile cases of abuses like that 
of Jefferson County, Alabama, which defaulted just this past 
April on a $15 million payment to bond holders. With municipal 
security default cases like Jefferson County; Stockton, 
California; and Harrisburg, Pennsylvania; it is important to 
keep in mind the vulnerable state of these investments and the 
impact it can have on the economic viability of the 
municipalities that invest in them. The intent of requiring 
registration of municipal advisors in Dodd-Frank is to provide 
transparency and protection to a growing market.
    After its initial proposed rule--municipal advisor rule--
the SEC is currently reviewing over 1,000 comments showing the 
depth of concern on this matter. There have been many concerns 
raised about the scope of the SEC's rule, which SEC Chairman 
Schapiro has acknowledged. She has publicly stated that the 
Commission intends to tailor the final rule to address these 
concerns. That is why agencies have a rulemaking process. And 
that is why Dodd-Frank mandates a rulemaking to implement the 
direction to the SEC to require municipal advisor registration.
    I am pleased to see the process working and I look forward 
to the comments of the panelists.
    I yield back.
    Chairman Garrett. The gentlelady yields back.
    We go to Ms. Moore for 2 minutes.
    Ms. Moore. Thank you, Chairman Garrett.
    I want to thank Chairman Garrett and, of course, Ranking 
Member Waters for holding this important hearing on municipal 
finance.
    And in fact, I would like to ask unanimous consent to 
insert a letter from Spelman College, on behalf of Ms. Waters, 
into the record. It is a comment on the registration of 
municipal advisors under Section 975 of Dodd-Frank.
    Chairman Garrett. Without objection, it is so ordered.
    Ms. Moore. Thank you.
    Section 975 of Dodd-Frank provides, of course, enhanced 
protections for municipal security issuers, taxpayers, and 
ultimately for purchasers of municipal securities. I do agree, 
as others have already said, that this unregulated area created 
quite a problem during the financial meltdown. And I believe 
that Dodd-Frank struck an excellent balance and improved the 
integrity of the $3 trillion municipal market.
    I also agree that there have been some serious concerns 
that the SEC says they are going to address with regard to 
their rulemaking process, their interpretation of Section 975 
of Dodd-Frank, their definition of municipal advisors, and some 
other technical issues, including the application of the 
Volcker Rule. So I have joined my colleagues on a letter to the 
SEC asking them to address some of the problems with the 
proposed rules. And I hope that this hearing--I stayed over and 
didn't go home, because I am eager to hear and have an 
opportunity to be able to provide some clarification.
    Prior to the enactment of Dodd-Frank, these so-called 
independent financial advisors operating in the marketplace, 
about 62 percent of them according to the MSRB, were 
unregistered firms in the marketplace. This was the issue at 
the heart of Section 975, to subject these independent 
municipal financial advisors to registration and to regulation, 
and to create uniform regulatory standards in the municipal 
market when acting in an advisor role to an issuer.
    So I can see that my time has expired. I just want to thank 
Mr. Dold for his leadership on the issue. I look forward to 
working with this committee on the important legislation. And I 
look forward to the testimony of the witnesses.
    Chairman Garrett. The gentleman from Massachusetts is 
recognized for 2\1/2\ minutes.
    Mr. Frank. I first want to say that the most important 
issue, it seems to me, regarding municipal finance is one that 
we took some steps to dealing with, as the representative from 
Montgomery County mentioned, and that is the long-standing, 
wholly unjustified disparity in the criteria the rating 
agencies used in rating municipal securities.
    Municipal securities almost never default. Even in the 
bankruptcies we have recently seen, the bondholders are getting 
paid. In Rhode Island, pensioners are getting put behind 
bondholders. Sensibly, because communities cannot afford the 
contagion that would be there.
    And it has been very clear when the rating agencies rate 
corporate finance, they look at the likelihood of default. When 
they rate municipal finance, they look at, it seems to me 
sometimes, how well-dressed the members of the city council 
are, which is often not so good. And as a result, if you 
measure the ratings against the likelihood of default, the 
result is that municipalities pay an unjustified risk premium.
    Now, I want to put something on the record. Being aware of 
that, and while I am trying very hard to change it, almost all 
of my personal investments are in Massachusetts municipal 
bonds, because they are double-tax exempt, and because the 
rating agencies inaccurately tell people that there is a risk 
of default, which is nonexistent.
    It also seems to me to avoid a conflict-of-interest charge, 
because I can only be accused of trying to help the financial 
stability I have represented. So, that is one I intend to 
continue to work on.
    On the advisor situation, I agree, and I thank the 
gentleman from Illinois who spoke on the Republican side. This 
was necessary. There were people taking advantage of 
municipalities. I have to say when people in Massachusetts said 
to me, ``What do I do when there is this that they have offered 
to me that is so complicated I can't figure it out and I need 
help?'' The answer is almost certainly to walk away from it. If 
it is too complicated for you to understand, it is probably not 
a good thing for you to do.
    But they have the right to do it anyway. And that is why we 
need to have the advisors. But I also agree that the Securities 
and Exchange Commission rules were too restrictive. I had the 
benefit of a good conversation with Cam Fine, the head of the 
ICBA. And I would ask to put into the record a letter I sent on 
July 2nd to Chairman Schapiro, making clear that the normal 
activities of a bank in working with a municipality should not 
trigger a registration requirement. And only if they were 
actually offering active investment advice, or advising on how 
to structure the issuance, should they be an advisor. I think 
that the language--and I appreciate what appears to be in 
agreement--of the law does not support a more intrusive effort 
to put regular banking activities under this provision.
    And I hope the SEC will listen to this. Legislation is 
always possible, but this is a case where legislation shouldn't 
be necessary, because the SEC should be listening to us and 
following the intent.
    Thank you, Mr. Chairman.
    Chairman Garrett. I thank the gentleman.
    For the final word on this, the gentleman from California 
is recognized for 1 minute.
    Mr. Campbell. Thank you, Mr. Chairman. I wasn't going to 
make an opening statement, but I feel that I have to, in my 1 
minute, just make one comment relative to what the ranking 
member of the full committee just said, with which I could not 
disagree more.
    Coming from California, where we have had three municipal 
bankruptcies--we probably will have nine more very soon--and 
looking at the new and I believe correct government accounting 
standard that once municipalities and a lot of special 
districts properly account for their pension health care 
obligations, many of them will be, on paper, insolvent.
    Most of them, in fact, that I know of in California will 
likely be, on paper, insolvent. And I don't think we can 
presume going forward that, in bankruptcies, that these bonds, 
including State bonds of the State of California, which I have 
a great question about--and my disclosure would be I own 
absolutely zero municipal bonds or State bonds whatsoever in my 
portfolio--so that is my disclosure on this.
    But I think we have great concerns about municipal bonds 
and government--
    Mr. Frank. Would the gentleman yield?
    Mr. Campbell. --State and local bonds going forward.
    I would be happy to, with whatever--
    Mr. Frank. I would encourage--if I could have 10 seconds--
that people not assume that because there is a bankruptcy, the 
bondholders are going to be in default--
    Mr. Campbell. But you can't assume--
    Mr. Frank. --what should be measured is the risk to the 
bondholders.
    Mr. Campbell. Reclaiming my time, you can't assume they are 
not going to be in default. And when there is as much trouble 
as there is out there in as many insolvent cities and special 
districts, this is a concern.
    Mr. Frank. I am sorry you don't have any, because I would 
have bought yours if you did.
    Chairman Garrett. And with that colloquy, we will now look 
to the panel. And perhaps, they will have a comment on this 
point that was just raised.
    So we look to our first panelist. Mr. Geringer, welcome to 
the panel.
    Oh, before I allow you to begin, many of you have not been 
on one of our panels before. You will each be recognized for 5 
minutes, and your complete written statements will be made a 
part of the record.
    We look forward to your summary within the 5-minute period 
of time.
    Good morning.

  STATEMENT OF THE HONORABLE JAMES E. GERINGER, CHAIR OF THE 
    BOARD OF DIRECTORS, ASSOCIATION OF GOVERNING BOARDS OF 
                   UNIVERSITIES AND COLLEGES

    Mr. Geringer. Good morning, Mr. Chairman, and members of 
the subcommittee. I thank you for the opportunity to address 
the bill.
    My testimony today is directed solely at a portion of H.R. 
2827 dealing with the definition of municipal advisor, and in 
this case, as it relates to governing board members and staff 
of our higher education institutions. So I hope to simplify 
your work a little bit more this morning, Mr. Chairman, and 
focus in on a particular issue that is of concern to us.
    I represent the Association of Governing Boards of 
Universities and Colleges. We have 1,900 member organizations, 
including Spelman College, and about 40,000 trustees as 
individuals who help govern those boards. I also serve as the 
Chair of the board of trustees of Western Governors University, 
a nonprofit that was organized 15 years ago, and I have served 
two terms as Governor of Wyoming.
    The bill, H.R. 2827, addresses an issue that has been of 
great concern to colleges and universities, in fact, has 
probably sparked many of the negative responses to the SEC 
proposed rule. It is the effects of an overly broad definition 
of municipal advisor. The proposed rules would include all 
State and local governments in some capacity as part of the 
municipal definition, as well as certain private sector 
obligated persons. And the trustees of our higher education 
governing bodies would be included in this overly broad 
definition of municipal advisor.
    To give you an idea, the MSRB would have to come up with 
some criteria, not only for the registration with the SEC of 
these individuals, but well over 100,000 people would have to 
meet some regulatory training or requirement of registration in 
order to serve. That would be an extraordinary burden and it is 
totally unnecessary.
    We commend the SEC for clarifying in the proposed rules 
that elected board members of municipal entities, including our 
elected trustees, would not be required to register. But the 
proposed definition of municipal advisor would include 
appointed trustees of public universities, private nonprofits, 
and trustees of institutionally related foundations, because 
they are not explicitly exempted from the registration 
requirement.
    So we support the goals of the Dodd-Frank Act and the SEC 
in their insurance of appropriate oversight, but we don't think 
it is necessary to have this needless, off-putting regulation 
of trustees acting in their fiduciary capacity. It would 
significantly impact our ability to recruit and retain the 
people who serve our higher education institutions, and 
certainly our Nation.
    The regulation of the board of trustees is unnecessary, 
because they are a governing body, not an advisory body. The 
difference between, on the one hand, the ultimate governing 
body of higher education institutions; and on the other hand, 
an advisor to the institution is legally straightforward and 
basic to longstanding vital principles of institutional 
governance in higher education.
    Regulation of the trustees' conduct under the Dodd-Frank 
Act would be not only contrary to legislative intent, it would 
be inconsistent with longstanding SEC interpretation of an 
advisor. And it is unnecessary because the conduct of trustees 
of colleges and universities and institutionally related 
foundations is already subject to a multitude of laws.
    Trustees must comply with State not-for-profit corporation 
law; fiduciary duty laws; institutional policies, such as 
policies on conflicts of interest; State education law; the 
standards of accreditation bodies; the IRS rules for tax-exempt 
organizations; and multiple other regulatory regimes.
    We don't need one more.
    So for the reasons I have described, the Association of 
Governing Boards supports the provisions of Congressman Dold's 
bill, H.R. 2827, clarifying that certain persons acting in 
their capacity as elected or appointed members of a governing 
body are not municipal advisors.
    But we note, however, that the language only exempts any 
elected or appointed member of a governing body of a municipal 
entity with respect to such member's role on the governing 
body, but does not similarly exempt elected or appointed 
members of a governing body of an obligated person.
    It is that additional category that affects many of our 
trustees of private nonprofit universities, trustees of 
institutional foundations, and others.
    We recognize that the exemption was likely drafted this way 
in light of the fact that the bill also narrows the general 
definition of municipal advisor to only include persons 
providing advice to a municipal entity and not to an obligated 
person.
    But we suggest that you do amend the bill to include the 
definition of municipal advisor that would include people 
providing advice to obligated persons, as under current law. 
And I urge the committee to expand the definition to include 
elected or appointed members of a governing body of an 
obligated person, and to also expand to include the employees 
of obligated persons to ensure that staff members of private 
nonprofit universities and institutionally related foundations 
would not be considered municipal advisors.
    Mr. Chairman, thank you for the opportunity to be here 
today.
    [The prepared statement of Mr. Geringer can be found on 
page 63 of the appendix.]
    Chairman Garrett. And I thank you for your testimony.
    Mr. Polsky is recognized for 5 minutes. And welcome to the 
panel.

   STATEMENT OF ALAN D. POLSKY, CHAIR, MUNICIPAL SECURITIES 
                    RULEMAKING BOARD (MSRB)

    Mr. Polsky. Thank you. My thanks to our Congressman 
Ellison, and my thanks to you, Chairman Garrett, and the 
members of the subcommittee.
    I appreciate the invitation to testify today on behalf of 
the Municipal Securities Rulemaking Board. My name is Alan 
Polsky and I am the current Chair of the MSRB.
    The MSRB is the principal regulator for the municipal 
securities market. And as you know, the municipal market 
provides capital for government projects and operations and 
helps fund a variety of other public purposes.
    Importantly, this market also creates jobs for the local 
economy. The Dodd-Frank Act directed the MSRB to protect State 
and local governments and establish regulations for municipal 
advisors.
    These professionals advise State and local governments 
primarily on the issuance of municipal securities. They raise 
approximately $450 billion in the capital markets each year.
    Municipal finance transactions can involve complicated 
structures, complex derivatives, and intricate investment 
strategies. As you can see by the chart over here on my right, 
these transactions also involve many service providers, 
advisors, and sales teams.
    Municipal advisors play a critical role in helping elected 
officials assess complex financial transactions that can affect 
taxpayers for decades.
    The other important point to note is that in almost all 
cases compensation on a transaction is contingent on its 
completion. This can create situations and incentives that put 
unknowing State and local governments at risk of inappropriate 
and unsuitable transactions and products, at the expense of 
taxpayers and ratepayers.
    Financial Services Committee Chairman Bachus himself has 
noted that conflicts of interest and complexity in the 
municipal market can sometimes trap local officials unable to 
independently assess financing structures by underwriters.
    Meanwhile, there is the potential for unqualified municipal 
advisors to recommend ill-advised or unsuitable transactions. 
These advisors can also have multiple undisclosed ties to other 
market participants that can threaten the integrity of their 
advice to State and local governments.
    The Jefferson County, Alabama, bankruptcy, which has been 
mentioned, municipal bid-rigging convictions and unsuitable 
derivative transactions illustrate the price of gaps in 
regulation.
    The MSRB is concerned above all with protecting State and 
local governments in the context of their municipal finance 
transactions. To carry out this mission, the MSRB reorganized 
its board of directors to include a majority of public 
independent members as well as municipal advisors. Their 
inclusion enables the MSRB to fully assess the risks, costs, 
and benefits of our rules to implement the law as it relates to 
municipal advisors.
    Under the direction of this board, the MSRB has enhanced 
disclosure and transparency measures through regulations and 
enhancements to our public EMMA Web site. These changes protect 
investors, State and local governments, and the taxpayers who 
support that municipal borrowing.
    As directed by statute, the MSRB has advanced draft rules 
for municipal advisors that would establish fair practice 
obligations, eliminate conflicts of interest, and address pay-
to-play.
    The MSRB is also establishing professional standards for 
municipal advisors. Our draft rules would promote conduct that 
is consistent with a municipal advisor's fiduciary duty to its 
State and local government clients.
    Unlike other participants in a municipal finance 
transaction, municipal advisors act as a trusted advisor and 
have a duty of loyalty and care to their State and local 
government clients. MSRB rules will clearly articulate what is 
meant by this duty of loyalty so that State and local 
governments can understand the obligations of their municipal 
advisors.
    I have a brief point now on the issue of the definition of 
municipal advisor. Like Congressman Dold, the MSRB is concerned 
about the effects of an overly broad definition and the need to 
avoid regulatory duplication.
    We recommended several changes to the SEC proposal on the 
scope of the definition that are consistent with H.R. 2827. Our 
written testimony highlights these and suggests how Congress 
can avoid regulatory duplication without putting State and 
local governments at risk.
    I hope I have provided the subcommittee with helpful 
information. And I would be happy to respond to any questions. 
Thank you.
    [The prepared statement of Mr. Polsky can be found on page 
102 of the appendix.]
    Chairman Garrett. And I thank you as well, and I appreciate 
your chart to put it in perspective as well.
    Dr. Brooks, you are recognized for 5 minutes, and welcome 
to the panel.

 STATEMENT OF ROBERT BROOKS, PH.D., PROFESSOR OF FINANCE, AND 
 WALLACE D. MALONE, JR. ENDOWED CHAIR OF FINANCIAL MANAGEMENT, 
                   THE UNIVERSITY OF ALABAMA

    Mr. Brooks. Thank you. I am Robert Brooks, a finance 
professor at the University of Alabama. My area of academic 
work is financial derivatives and financial risk management, 
including municipal derivatives.
    Thank you for the privilege of participating in this event. 
It is an honor for me to be here.
    Before I make a couple of points, I would like to provide a 
perspective on the Jefferson County, Alabama, financial crisis 
to help understand my point of view.
    Since 1998, I have used the 1997 swap transaction between 
Jefferson County, Alabama, and JPMorgan to train my students on 
how not to do a swap transaction. The 1997 swap idea was to 
refinance an existing variable rate bond with a fixed-rate 
bond, then enter into a swap transaction to create a synthetic 
variable rate bond.
    The pitch book suggested significant savings in the form of 
lower interest costs. After millions of dollars of transaction 
costs and fees, the synthetic variable rate paid by Jefferson 
County was dramatically higher than the original variable rate 
bonds.
    I am not aware of any financial institution that would 
refinance their own variable rate into a synthetic variable 
rate and take on more risk.
    The broker of the swap on behalf of JPMorgan and Jefferson 
County had no independent advisor acting in a fiduciary 
capacity for Jefferson County. Although there were many 
independent advisory firms available to provide this service, 
Jefferson County officials did not want it.
    Later, relying on the advice of other financial 
institutions, Jefferson County officials then proceeded to 
enter into over five billion notional amount of swaps tied to 
other failed strategies, based on a heavy debt burden.
    Although there have been several prosecutions in Alabama, 
there has not been much apparent consequence to the financial 
institutions that facilitated this financial devastation.
    Remember that at the time of this activity, Jefferson 
County, as well as financial institutions that facilitated this 
financial devastation, were heavily regulated entities.
    I would like to focus on three points. If regulators frame 
financial risk management, then systemic risk will increase. 
Many concepts within financial risk management are not well-
defined, hence, not well-understood. Remember that finance is a 
social science, not a physical science.
    Market participants' beliefs about how certain financial 
instruments should be valued will influence their value. Most 
finance practitioners have a general understanding of 
``hedging'' but it is surprisingly difficult to pin down.
    For example, the 1997 Jefferson County swap transaction was 
promoted as a hedge of interest rate risk. Within a year, the 
1997 swap transaction was terminated. If entering the swap 
transaction was hedging, what was terminating the swap?
    Therefore, if regulators are allowed to forcefully frame 
the context of financial risk management, then systemic risk 
will actually increase and not decrease.
    Next, hedging is ill-defined due to a lack of benchmarks 
specified in advance. The Dodd-Frank Act documents the 
following permitted activities for banks: risk-mitigating 
hedging activities in connection with and related to individual 
and aggregate positions; contracts and other holdings of a bank 
entity are designed to reduce the specific risk to the bank 
entity in connection with and related to such positions; and 
contracts and other holdings are permitted and hence referred 
to as a bona fide hedge.
    Most banking entities have hundreds of positions with 
exposures to numerous market risks. These same firms have 
multiple stakeholders with different goals and objectives. 
There is no requirement in the Act and, for that matter, in 
other regulated regulations for firm-wide financial performance 
to be clearly defined in advance.
    Therefore, almost any financial derivative transaction 
arguably can be deemed a bona fide hedge. All one must do is 
identify some existing exposure in the firm with the 
appropriate empirical correlation and voila, the derivatives 
transaction is a ``bona fide hedge.''
    But from almost any ethical framework, such as the CFA 
Institute's Code of Ethics and Standards of Practice, many 
financial derivatives transactions today would not pass the 
``bona fide hedge.''
    They would be deemed deceitful and in bad faith.
    Because finance falls in the social sciences, ethics is 
primary and analysis is accidental. Unfortunately for many in 
finance, especially academic finance, analysis is primary and 
ethics is accidental.
    Thank you very much for the opportunity to be here.
    [The prepared statement of Dr. Brooks can be found on page 
40 of the appendix.]
    Chairman Garrett. And thank you, Dr. Brooks.
    Mr. Doty is recognized for 5 minutes. And welcome to the 
panel.

           STATEMENT OF ROBERT DOTY, PRESIDENT, AGFS

    Mr. Doty. Thank you, Chairman Garrett, Congressman Ellison, 
and members of the subcommittee.
    My name is Robert Doty. I am a nondealer financial advisor, 
but I want to make it clear that I don't have any bones to pick 
with the dealer community. I think that it is an honorable 
community filled with competent, honest people.
    I have long advocated the regulation of municipal advisors 
well before Dodd-Frank and, in fact, wrote letters to the SEC 
about that. And I am an advocate for a level playing field. I 
have been an underwriter, a dealer, a bond counsel, an issuer 
counsel, and I am currently a municipal advisor. I have worked 
on several billion dollars of successful transactions in about 
2 dozen States in my career of over 40 years.
    I don't accept contingent fees. And that gives me the 
freedom to advise clients not to create debt. And I have. I 
have told them not to go forward with transactions that I 
didn't feel that they could afford.
    Here is what is at stake. There are 50,000 municipal 
entities out there that are issuers. I have talked with market 
participants. I think 500 is probably a high number to assume 
are sophisticated, and yet the SEC says these people have 
primary responsibility in their transactions.
    But these issuer officials often don't know what to do. 
They are desperate for advice. They need unbiased, sound 
advice. Underwriters are very different because that is an 
adverse role. And they should not be regulated as municipal 
advisors in that capacity.
    But there are tens of thousands of towns and villages and 
special districts, school districts, in your congressional 
districts. These are elected and appointed officials who want 
to balance budgets, fight crime, and control taxes, but they 
are not municipal finance experts.
    When people like me appear before them, we make flowery 
promises. And they accept the promises and they rely heavily 
upon them. It is an unequal relationship, but they place great 
trust in us in connection with their bond issues and with their 
investment products.
    The SEC made a big mistake by including them in the 
definition of ``municipal advisor.'' They are the people who 
need protection. It is very important for all municipal 
advisors, dealers and nondealers, to follow professional 
standards established by the Municipal Securities Rulemaking 
Board as our market's self-regulatory organization. There are 
many dealers on that board. There are issuers on that board and 
investors.
    We need competency testing because competency is an issue 
in this market. And we need continuing education. That is not 
provided by existing rules. The existing rules are good, and I 
have no criticism of them, but they don't provide for 
competency, they don't provide for training, and they don't 
provide a means to get some of the bad apples out.
    Another comment that I have on the bill--I have a concern 
with the last two lines that would allow municipal advisors to 
deal as principals. That is the direct opposite of what we 
should be doing. We should not be in there trying to cross-sell 
services. We should be trying to provide competent advice that 
is focused solely on our client and not in our own interests of 
how we can make more money. We need to look at the financial 
health of the communities, and we need to protect the 
taxpayers.
    An example of cross-selling would be a financial advisor in 
a highly risky transaction wanting to do a feasibility study. 
They should assist the issuer in employing a good feasibility 
consultant, not try to make additional money out of the 
transaction. I think that violates the fiduciary duty.
    Now on the fiduciary duty, the fiduciary duty is important 
for two reasons. It requires us to come forward with sound 
advice, not to remain silent, as happened in Jefferson County. 
Actually, in Jefferson County, there were two advisors. One was 
a bank and one was a nonbank. And what was missing was going in 
front of the entire board and warning them about the risks and 
defining those risks.
    The other is the client's best interest. Dodd-Frank didn't 
invent this fiduciary duty. Here is what the Municipal 
Securities Rulemaking Board said in the 1970s: ``A financial 
advisor acts in the fiduciary capacity as an agent for the 
governmental unit.'' They made several comments like that. The 
board was two-thirds dealers at that time. That was industry 
practice. That was Federal law.
    It has been in effect for 3\1/2\ decades, and they were 
recognizing preexisting industry standards. State law is not 
satisfactory. SIFMA says the current system leaves States free 
to develop their own often conflicting definitions that confuse 
and lead to inconsistent definitions. I urge you, don't go 
backwards. Thank you.
    [The prepared statement of Mr. Doty can be found on page 45 
of the appendix.]
    Chairman Garrett. Thank you. The gentleman yields back. Mr. 
Firestine, good morning. Welcome to the panel, and you are 
recognized for 5 minutes.

 STATEMENT OF TIMOTHY FIRESTINE, CHIEF ADMINISTRATIVE OFFICER, 
 MONTGOMERY COUNTY, MARYLAND; AND PRESIDENT-ELECT, GOVERNMENT 
              FINANCE OFFICERS ASSOCIATION (GFOA)

    Mr. Firestine. Chairman Garrett and members of the 
subcommittee, thank you for the opportunity to speak before you 
this morning. I am Tim Firestine, the chief administrative 
officer for Montgomery County, Maryland, which is located just 
northwest of the District. I also serve as the president-elect 
for the Government Finance Officers Association, which 
represents over 17,000 public finance professionals across the 
United States.
    The Dodd-Frank Act includes a number of provisions that are 
of interest and that are very important to State and local 
governments. This is especially true with respect to those 
provisions that create parity between credit ratings, assign 
municipal and corporate securities, and regulate the 
derivatives market.
    The importance of these two issues cannot be overstated and 
are discussed further in my written testimony. The entire 
community has been impatiently waiting for the SEC to finalize 
the definition of municipal advisor so that the MSRB can 
finally implement these important rules.
    The SEC proposed a municipal advisor definition nearly 19 
months ago that is unworkable in many ways. While a definition 
is needed to capture unregulated advisors who are hired by 
State and local governments, the SEC oddly and unhelpfully 
chose to address whether certain local government officials, 
employees, and board members should be included in this 
definition.
    The proposal includes appointed members of State and local 
governing boards which, as you have heard from some of the 
other speakers, creates significant issues for us. Under the 
proposed municipal advisor definition, I myself could be 
defined as a municipal advisor because of my position as CAO of 
Montgomery County.
    I also serve on the board of the D.C. Water and Sewer 
Authority, and chair its Finance and Budget Committee. We 
discuss multiple issues, including financial transactions 
involving both bet issuance and investments. It boggles my mind 
that my service as a member of a body that determines what 
should be done to meet constituent needs, including the hiring 
of finance professionals, could make me a regulated municipal 
advisor.
    Congressman Dold's bill, H.R. 2027 attempts to remedy this 
problem by specifying that the definition does not include any 
elected or appointed member of a governing body. We support 
this exemption, but we do have concerns with other parts of the 
legislation.
    The SEC's proposed definition could be interpreted as 
problematic when it strives to correctly cover currently 
unregulated independent financial advisors, but the way it is 
written, its proposed definition could also affect dealers who 
do not serve in an advisory manner.
    The proposed definition could interfere with the types of 
discussions that may and should occur between dealers and 
issuers. It is important to note that dealers acting as dealers 
in a transaction play an important role in underwriting our 
bonds, and one where fiduciary duties should not apply.
    Representative Dold's legislation clarifies these questions 
by suggesting various exemptions to the definition, but it 
opens the door too wide. In an attempt to make certain that 
underwriters are not categorized as municipal advisors, the 
legislation could leave issuers vulnerable when they use a 
financial advisor who is affiliated with a dealer firm or when 
an issuer engages in a transaction where, contrary to GFOA best 
practices, they choose not to engage the services of a 
financial advisor.
    We have the same concern with excluding any financial 
institution or person associated with a financial institution. 
Such a broad stroke would appropriately exclude professionals 
within financial institutions such as trustees and 
professionals who provide traditional brokerage and banking 
services. But it also may exclude financial institution 
professionals who provide advisory services that should be 
covered by the definition and subsequent rules.
    There must be a careful balance between the too-strict SEC 
proposed definition and the too-broad solutions found in H.R. 
2827. Forthcoming SEC and MSRB actions must carefully and 
surgically be developed in order to correctly place new 
regulations on independent financial advisors and dealers when 
they are hired to serve as financial advisors on a given 
transaction, as those professionals should have a fiduciary 
duty to the issuer.
    We are hopeful that in the course of their considerable 
delays with getting this accomplished, the SEC will have 
determined a reasonable definition that is workable and 
effective for all parties in the marketplace. Thank you.
    [The prepared statement of Mr. Firestine can be found on 
page 50 of the appendix.]
    Chairman Garrett. And I thank you very much. Mr. Gibbs, 
welcome to the panel. You are recognized for 5 minutes.

  STATEMENT OF KENNETH GIBBS, PRESIDENT, MUNICIPAL SECURITIES 
     GROUP, JEFFRIES & COMPANY, INC.; AND MEMBER, BOARD OF 
   DIRECTORS, AND CHAIR, MUNICIPAL SECURITIES DIVISION, THE 
 SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Gibbs. Thank you, Chairman Garrett, and members of the 
subcommittee. I am grateful to be here, and grateful for your 
time.
    I run the municipal securities business for Jefferies, but 
I am here in my capacity as Chair of the Municipal Division of 
the Securities Industry and Financial Markets Association. We 
are discussing the $3.7 trillion municipal bond market. It is a 
very special market. It is one of the most effective tools for 
financing the Nation's infrastructure. As has been mentioned, 
it serves over 50,000 distinct issuers of municipal securities. 
It is quite unusually global in its capacity to meet the needs 
of both multi-billion-dollar projects and $750,000 projects for 
a local school district in any of your districts.
    Not only that, but the smallest of these issuers are able 
to access many different structures of financing to meet their 
needs--long term, short term, variable, fixed. And they can do 
it in very small size and at interest rates and transaction 
costs lower than in any other market. It is a phenomenal 
market, and it has also historically performed incredibly 
safely for the investment community with much better default 
statistics than any other debt market.
    We are here today to protect that functionality and to talk 
about the regulations, in particular, that have been proposed 
with regard to municipal advisors. In December 2010, the SEC 
proposed a rule to implement the advisor regulation provisions 
of Dodd-Frank, which has raised many serious concerns. We are 
most focused in this testimony on the provision in the statute 
that excludes underwriters from the definition of municipal 
advisor.
    The SEC has taken too narrow a view of the bond 
underwriting process. If the rule goes into effect as proposed, 
it could effectively prevent issuers from obtaining services, 
some of the best and most important services that they have 
historically gotten from the underwriting community, and which 
are commonly provided in association with the bond issuance and 
with the execution of their broader capital programs.
    It is clear to us that Congress intended to exclude 
underwriters from the advisory definition, and the SEC's 
proposal goes against that congressional intent and their own 
statutory authority.
    Representative Dold's bill, H.R. 2827, would make 
clarifications to the statute regarding advisory regulation to 
make it crystal clear that Congress intended for the new 
regulations to apply to previously unregulated municipal 
advisors, not to impose a conflicting layer of regulation on 
already heavily-regulated parties.
    SIFMA supports H.R. 2827 and we urge the subcommittee to 
move quickly to advance the bill through the legislative 
process. I would parenthetically add that we are very 
supportive of Congressman Dold's comments with regard to some 
potential modifications to the bill.
    Another important Dodd-Frank issue related to municipal 
finance is the Volcker Rule. When Congress enacted the Volcker 
Rule to prohibit proprietary trading and certain investments by 
bank funds, you added an exclusion from the restrictions for 
obligations of States and political subdivisions.
    This exclusion is in there because of the safety of these 
investments and because the permission of this investment helps 
keep State and local borrowing costs low and the securities 
liquid.
    Unfortunately, the Volcker Rule regulations proposed by the 
regulators would leave out over 40 percent of the market, all 
bonds issued by State and local government agencies and 
authorities.
    It would also effectively prohibit tender option bonds, 
which are paid by those obligations and also assist in 
financing investor and dealer inventories, which again improves 
liquidity and keeps rates low.
    Most importantly, Congress clearly intended to exclude the 
entire municipal market from the Volcker Rule restrictions, and 
any regulations should respect that intent.
    Finally, Dodd-Frank imposes a new fee levied by FINRA on 
municipal securities dealers to pay the expenses of the 
Governmental Accounting Standards Board (GASB.) That funding 
scheme has weakness to it. It taxes the wrong people. The 
parties much closer to GASB aren't touched: investors; 
auditors; and even issuers. It is just dealers.
    Secondly, it is not levied on bank dealers who are some of 
the most important market participants. Additionally, at the 
moment, it is now nice to be GASB. They simply make their 
funding needs known to FINRA and FINRA collects whatever GASB 
asks for, with no real oversight of their budget or activities.
    It is a blank check. The funding model should be changed.
    In sum, the municipal market can be an example of the 
process working. We urge the subcommittee to act quickly on 
H.R. 2827 and to revisit the GASB funding scheme enacted in 
Dodd-Frank.
    We also urge you to pay close attention to the final 
Volcker Rule to ensure it respects congressional intent with 
regard to excluding State and local government bonds.
    Thank you for the opportunity to present our views and 
contribute to successful implementation of congressional 
intent.
    [The prepared statement of Mr. Gibbs can be found on page 
66 of the appendix.]
    Chairman Garrett. Thank you, Mr. Gibbs.
    Ms. Keck, welcome to the panel. And you are recognized for 
5 minutes.

 STATEMENT OF CHRISTINE KECK, DIRECTOR, GOVERNMENT RELATIONS, 
                   ENERGY SYSTEMS GROUP (ESG)

    Ms. Keck. Thank you, Mr. Chairman.
    Chairman Garrett and members of the subcommittee, my name 
is Christine Keck, and I am an executive with Energy Systems 
Group, known as ESG.
    On behalf of ESG and the energy services industry, known as 
the ESCO industry, I appreciate the opportunity to share my 
views on H.R. 2827 and the rulemaking currently under way at 
the Securities and Exchange Commission regarding the 
registration of municipal advisors.
    Energy Systems Group applauds Congressman Dold for the 
introduction of his important legislation. The Dold bill is a 
positive step in addressing the impact of municipal advisor 
registration to the ESCO industry.
    At the core of our concerns, the proposed rule too narrowly 
defines the advice of the engineering exclusion that the 
engineering exclusion would cover. The advice and services 
ESCOs provide to customers are inexorably linked, and as such, 
should be excluded from the definition of municipal advisory 
activity.
    We are seeking a rule that properly defines the term 
``engineering advice,'' by recognizing the inexorable link 
between the continuum of services ESCOs provide and, in the 
end, appropriately excludes ESCOs from the requirement to 
register as municipal advisors.
    A little bit about my company, Energy Systems Group--we are 
an award winning and nationally accredited energy services 
company that develops energy and infrastructure solutions for a 
broad range of customers, including municipalities.
    ESG is wholly owned by Vectren Corporation, an energy 
services provider based in Evansville, Indiana, which serves 
more than one million customers in Indiana and Ohio.
    ESG has implemented approximately $250 million of energy 
and infrastructure improvements for municipalities. On average, 
municipal work accounts for nearly 25 percent of ESG's annual 
business portfolio.
    Public sector entities, including municipalities, look to 
ESCOs to address their energy maintenance and infrastructure 
needs through projects that generate sufficient energy and cost 
savings.
    When deliberating about the specifics of a project, ESCOs 
can provide critical information municipalities need to make 
qualified judgments about the pros and cons of the proposal.
    This valuable information can include energy audits, cash 
flow analysis of projected savings, and general material on 
available funding options, among other data points.
    Simply put, a potential customer left without this 
information cannot make an informed judgment about whether to 
proceed. The statutory definition of municipal advisor 
specifically excludes engineers providing engineering advice.
    We believe the intent of Congress was clear in that 
engineering services by their nature involve the provision of 
project-related economic information; and, therefore, engineers 
providing engineering advice should be excluded from 
registering as municipal advisors.
    However, the SEC's proposed rule effectively would place 
outside of the statutory exclusion the majority of situations 
in which ESCOs work with local governments.
    The SEC has stipulated in its proposal that cash flow 
modeling or the provision of information and education relating 
to municipal financial products would be deemed municipal 
advisory activity.
    Absent the ability of ESCOs to discuss the cost, savings, 
and financing options of a potential energy project, the 
discussion of engineering itself essentially is useless to a 
customer.
    It is simply impossible to disentangle information about 
engineering and the different processes and technologies 
available to save energy from the cost of that engineering, the 
savings that engineering can provide, and the options for 
funding that engineering.
    Adoption of the proposed SEC rule would threaten the very 
nature of the ESCO industry and significantly impede our 
ability to undertake municipal projects that save taxpayer 
dollars, reduce energy usage, and create jobs.
    The Dold bill seeks to remove ESCOs from entanglement in a 
registration regime that was unintended and would be 
unnecessarily burdensome.
    Our industry has engaged in very constructive dialogue with 
the SEC and we appreciate the Commission's willingness to 
consider the unique and complex nature of municipal energy 
services projects.
    In conclusion, Mr. Chairman, I would like to thank you and 
Congressman Dold and the entire subcommittee for the 
opportunity to provide my views here today.
    The outcome of this issue and the exclusion from 
registration by ESCOs as municipal advisors is critical to the 
vibrancy of the energy services industry and our ability to 
work with municipalities.
    I welcome any questions the subcommittee may have. Thank 
you.
    [The prepared statement of Ms. Keck can be found on page 78 
of the appendix.]
    Chairman Garrett. Thank you, Ms. Keck.
    Mr. Kelly, welcome to the panel, and you are recognized for 
5 minutes.

STATEMENT OF ALBERT C. KELLY, JR., CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, SPIRITBANK; AND CHAIRMAN, AMERICAN BANKERS ASSOCIATION 
                             (ABA)

    Mr. Kelly. Chairman Garrett, and subcommittee members, my 
name is Albert Kelly. I am president and CEO of SpiritBank in 
Bristol, Oklahoma, and chairman of the American Bankers 
Association.
    ABA appreciates the subcommittee's review of an important 
new rule that may soon be issued by the SEC. The rule will 
implement Section 975 of Dodd-Frank requiring registration of 
municipal advisors.
    ABA strongly believes that Section 975 was not intended to 
cover banks whose activities are already highly regulated by 
Federal and State banking supervisors. Rather, we believe 
Section 975 was directed at unregulated entities that provide 
advice to municipalities.
    Requiring banks to register as municipal advisors would 
subject them to a wholly unwarranted and different securities-
based regulatory regime on top of the current comprehensive 
bank regulatory regime.
    The problem is compounded by the fact that the SEC proposal 
goes far beyond just advice related to the securities 
activities of State and local governments.
    It would regulate advice concerning all ``funds held by or 
on behalf of a municipal entity.'' As you know, banks have for 
decades provided a full range of products and services to 
municipalities.
    These services include traditional bank products such as 
deposit accounts, cash management services, and loans.
    By going far beyond the statute, the SEC's proposal would 
capture nearly every bank and every employee who gives such 
advice and force them to register as municipal advisors. 
Therefore, ABA fully supports H.R. 2827 introduced by 
Congressman Dold, which would clarify the focus on unregulated 
entities and remove banks from this ill-conceived proposal.
    If the current proposal is adopted, the practical impact 
will be significant. Any bank employee who may give ``advice'' 
to local governmental bodies such as schools, libraries, and 
hospitals will have to register.
    Let me give you a simple example of how onerous this new 
rule could be. Let us say a teller suggests to the small town 
city clerk to consider an interest bearing account rather than 
a checking account.
    Since the proposal doesn't define the term ``advice,'' that 
teller would have to be registered as a municipal advisor. 
Think of all the bank employees who provide information and 
advice concerning traditional bank products. The burden and 
cost of this duplicative regulatory scheme is enormous.
    Consider another example. Banks, through their trust 
departments, often serve as advisors to municipal pension 
plans. These plans are not related to the municipal securities 
activities nor do they contain the proceeds of municipal 
securities issuances.
    Nevertheless, banks that advise these pension plans would 
be required to register as municipal advisors under the 
proposal. Banks provide this service through their trust 
departments.
    Bank trust departments are regularly examined to ensure 
they are in compliance with the highest fiduciary standards. In 
fact, bank trust departments, indeed, all bank activities are 
examined far more frequently than the investment advisors 
regulated by the SEC.
    In addition, many bank products and services offered to 
municipalities are overseen by State treasurers. It serves no 
public purpose to add an additional layer of securities law 
regulation to such comprehensive bank supervision and 
examination.
    The consequences would be severe. The registration 
reporting and examination requirements would be very costly, 
particularly for community banks. Some banks may decide to stop 
providing basic banking services to municipalities. This means 
that local governments will have to go outside their 
communities for something as simple as a bank account.
    This is particularly true in small towns, such as those in 
my State of Oklahoma. ABA strongly urges this committee to pass 
H.R. 2827, and to conduct oversight of the SEC as it goes 
through the process of issuing the final rule. Such oversight 
would ensure the results do not impose unnecessary costs and 
unintended consequences. Thank you for allowing me to testify 
today.
    [The prepared statement of Mr. Kelly can be found on page 
83 of the appendix.]
    Chairman Garrett. Thank you again, Mr. Kelly.
    And last, but not least, Mr. Marz.

 STATEMENT OF MICHAEL J. MARZ, VICE CHAIRMAN, FIRSTSOUTHWEST; 
  AND MEMBER, BOARD OF DIRECTORS, THE BOND DEALERS OF AMERICA 
                             (BDA)

    Mr. Marz. Chairman Garrett, and members of the 
subcommittee, I am Michael Marz, vice chairman for First 
Southwest Company based in Dallas, Texas. I am also a member of 
the Bond Dealers of America, BDA. BDA appreciates the 
opportunity to testify.
    Based in Washington, D.C., BDA represents the unique 
interests of middle-market, sell side, fixed income dealers. 
Bond dealers like First Southwest are a bridge between public 
infrastructure and investors. These types of public projects 
happen every day, and if the bond issuance occurs with the 
prudent advice of members such as BDA, the public citizens can 
save money.
    BDA supports the Dodd-Frank provisions that: one, require 
the Securities and Exchange Commission to adopt rules requiring 
unregulated municipal advisors to register; and two, require 
the Municipal Securities Rulemaking Board to regulate activity 
of municipal advisors. The SEC and the MSRB so far have failed 
to finalize their rules on these provisions. Today, virtually 
anyone can act as a nondealer municipal advisor regardless of 
qualifications.
    It seems exactly the opposite of what Dodd-Frank intended. 
In order to protect public interest, regulators need to create 
a level playing field by regulating municipal advisors under 
rules similar to those already imposed on regulated dealer 
advisors. In October 2009, SEC Commissioner Elisse Walter said 
that some unregulated municipal advisors were engaged in play-
to-prey practices, failing to disclose conflict of interest and 
failing to place the duty of their clients ahead of their own 
interests.
    Unregulated municipal advisors have been represented in 
high-profile public finance disasters such as the bankruptcy of 
Jefferson County, Alabama, in bond deals in New Mexico, fraught 
with play-to-prey improprieties, and bid rigging that lead to 
the conviction of unregulated municipal advisors. There are two 
steps to preventing such disasters from occurring. The first 
step is for the SEC to get the definition of a municipal 
advisor right. The next critical step is for the SEC and the 
MSRB to regulate independent municipal advisors.
    With respect to the definition of a municipal advisor, the 
SEC has publicly admitted that its proposed definition is 
overly broad. The BDA recommends that the SEC permit an 
underwriter to use a disclaimer to disclose to other parties 
that it is not acting as an advisor. The broker-dealer should 
not be considered a municipal advisor if he or she is acting as 
an underwriter, if they are not being compensated for financial 
advice and disclose that the participation in the transaction 
is arms-length and if they are not a fiduciary to the issuer.
    Once the SEC has identified the appropriate definition of a 
municipal advisor, the next step is to regulate the currently 
unregulated advisors. Although dealer advisors and unregulated 
advisors will play similar roles in advising bond issuers, 
their level of regulation is dramatically different. Allow me 
to read a few requirements from my testimony that describe what 
registered broker-dealers are subject to, as opposed to what is 
not required of unregulated advisors.
    This includes MSRB SEC regulations, audit compliance 
reviews, license requirements, continuing edit testing, 
restrictions on political contributions, gifts and 
entertainment, requirements for record retention, obligation 
requirements for fair dealing, disclosure, compensation of 
third party fees, and conflict of interest. As you can see, 
dealers like myself are heavily regulated even beyond the 
regulations that apply to customer accounts. Unregulated 
municipal advisors simply lack enforcement of any regulation 
and a level playing field of regulation must be implemented.
    These unregulated municipal advisors assist in structuring 
bond issues, determine the fair value price for an issuer to 
help select underwriters as well as provide investment and swap 
advisory services. It is high time that the Commission get 
their definition of municipal advisors back on track. I 
appreciate that many members of this committee want to be 
involved in that solution.
    Last year, Congressman Dold introduced H.R. 2827 to more 
clearly define the scope, especially narrowing the definition 
of a municipal advisor by already excluding dealer advisors, 
elected and appointed officials, and others from the 
definition.
    Clarification of the definition of a municipal advisor is a 
strong step in the right direction. Equally important is the 
need for there to be a set of regulations parallel to those 
already embraced by regulated dealer advisors. These steps will 
ensure that unregulated municipal advisors act in the interest 
of their clients, thereby leveling the playing field with 
regulated dealer advisors to protect the public.
    I appreciate the opportunity to testify.
    [The prepared statement of Mr. Marz can be found on page 91 
of the appendix.]
    Chairman Garrett. And, again, I thank you, and I thank the 
entire panel for your testimony. It was very interesting.
    We will begin with the questioning, and I will start.
    First of all, my takeaway from the panel and this 
discussion, generally speaking, is therefore the absolute 
necessity of Mr. Dold's legislation in light of what we have 
just heard here. We have heard some recommendations as well for 
potential modifications of the legislation.
    I think the gentleman is looking forward to considering 
those. I will yield to the gentleman.
    Mr. Dold. Absolutely. I think that in conversations not 
only with some of the panelists, but also with my colleague Ms. 
Moore and others on the other side, that there are some things 
we need to consider and take into account.
    Chairman Garrett. I am going to take a step back from the 
specific legislation for a minute and just look at the problem 
and the scope of the problem, which we really didn't get into 
too much.
    Mr. Doty, maybe you talked about it a little bit. Try to 
put it in perspective for me, okay? So there are what, 50,000 
issuers out there across the country? Mr. Marz and a few others 
talked about some of the newsworthy, noteworthy cases that have 
come down of late in the press.
    There are one or two or three. But first of all, what is 
the number? So there are 50,000 issuers. How many deals are 
actually made on a yearly basis or on a 10-yearly basis that 
are out there? Is there any ballpark number that we are looking 
at?
    Mr. Gibbs?
    Mr. Gibbs. 15,000.
    Chairman Garrett. 15,000 a year? So over a 10-year period, 
150,000 to 200,000 deals are actually out there, about 150,000. 
We have heard about two or three of these settlement cases. Are 
there a lot more cases that I am just not hearing about? 
Because 2 or 3 out of 200,000 is not very many.
    Mr. Doty. There really are very few defaults.
    I would like to explain the difference between a general 
fund obligation and a general obligation bond, which are vastly 
different. But there really are very few defaults overall. 
There are certain specific market sectors that have much higher 
rates than default. They don't get into the newspapers very 
much. Land secured transactions. Nursing homes have a higher 
rate of default and so on. But the traditional governmental 
securities virtually never default. There are extremely low 
default rates overall for governmental traditional securities.
    Chairman Garrett. Okay, so that is the classification of 
the default. And how many cases do we have of the Jefferson 
County case which is a default and a pure fraud situation? 
Because there are other reasons for a default that are not 
fraudulent where it has nothing to do with having bad 
investment advisor here. It is just the economics of the 
municipality or the deal.
    So what are we talking about as far as--put it in 
perspective just in the sense of the real problem that Dodd-
Frank was dealing with here.
    Mr. Doty. In the traditional governmental sector, I would 
say that if you look for start-up projects, Harrisburg is a 
good example of a start-up project. There was one up in 
Michigan--or Wisconsin, I forget which--the steam utility and 
so on. There, the feasibility study is key. And that is where 
the issues are. These really don't get into the New York Times 
or the Wall Street Journal. They are in the Bond Buyer, but 
there are a few of those around.
    And if you are looking at the traditional governmental 
sector putting aside some general fund issues relating to 
pension obligations and so on, start-up projects are where it 
is going to be.
    Chairman Garrett. Again, just so I am getting a picture of 
what the market is like, what the problem is really like, so we 
have had these, I will say notorious cases that you refer to. 
But they, of course, were prosecuted. They were prosecuted I 
guess under securities fraud legislation and State fraud 
legislation. So those laws are already on the books for those 
cases.
    So was the bottom line--are the regulations that have 
effectually came about because of Dodd-Frank and the way the 
SEC have done--simple way of putting it--is it overkill in 
light of the level of the problem that really exists out there, 
or not?
    Mr. Marz. Chairman Garrett, if I may?
    Chairman Garrett. Yes?
    Mr. Marz. This is not really an issue so much of default; 
it is a lack of advisors who don't have competency and testing 
and--
    Chairman Garrett. Well, that is my question. How does this 
show just what that level of lack of competency is and how is 
it translated into actual--not necessarily defaults but poor--
    Mr. Marz. --higher costs.
    Chairman Garrett. Higher costs. Is there data to show it is 
a--
    Mr. Marz. Yes. It is certainly not something that has been 
litigated, but it can be apparent.
    Chairman Garrett. What--
    Mr. Doty. --Congressman, if I may interject, I agree with 
what he said. He is a dealer and I am not a dealer, but I think 
competency is a big issue. It is not just whether you are going 
to have a default--
    Chairman Garrett. right.
    Mr. Doty. --it is what is the pricing of the bonds? How do 
these bonds work for this issuer? Have you negotiated the best 
terms?
    Chairman Garrett. right--
    Mr. Doty. --There is a big competency issue.
    Chairman Garrett. Should the SEC re-propose a new rule so 
you have an opportunity to formally comment on it before they 
go forward with the final rule? In other words, should we have 
a new rule proposed before simply coming forward with the final 
rule? There is a general consensus of ``yes.''
    Okay. With that, I thank the panel.
    I will yield to the gentlelady from New York.
    Mrs. Maloney. Thank you.
    And I thank all the panelists.
    I would like to ask Mr. Doty and Professor Brooks and Mr. 
Marz to respond to this. And then, I have a secondary question.
    Investment advisors for individuals are already held to a 
fiduciary standard, meaning a duty to serve the best interests 
of their client, including an obligation not to subordinate the 
client's interest to their own. This is a higher standard than 
the suitability standard, which simply requires that the 
recommendations of the broker be consistent with the interest 
of the customer.
    Is there any reason, in your opinion, that investment 
advisors to municipalities should not also be held to a Federal 
fiduciary standard?
    Mr. Doty, Professor Brooks and Mr. Marz?
    Mr. Doty. You said investment advisors. Do you mean 
investment advisors as opposed to financial advisors? Or are 
you talking about investments?
    Mrs. Maloney. I am talking about--yes, both. Aren't they 
both advising the municipalities on what are sane and safe 
investments? And--
    Mr. Doty. I don't want to hog the discussion.
    Mrs. Maloney. If you could respond, please. My time is very 
limited. Very quickly?
    Mr. Doty. Yes, I am sorry.
    As I said, I think there has been a fiduciary duty all 
along. I think it goes back to the mid-1970s when the MSRB made 
those statements. And as I said, at that time, it was two-
thirds dealers, and they were the ones making the statements. 
And I think there has been--
    Mrs. Maloney. Thank you.
    Professor Brooks?
    Mr. Brooks. I think that the key thing to understand here 
is that the industry supplies what the industry demands. And so 
historically, the industry has demanded transaction-based, 
nonfiduciary framework. And what the industry needs to demand 
is a fiduciary-based advisory--somebody on my side of the 
table--to represent the interests of the municipality. And that 
would cure this problem.
    Mrs. Maloney. Okay.
    Mr. Marz?
    Mr. Marz. Yes, madam. I do agree with you. The regulated 
dealer advisor and the regulated investment advisor have 
similar standards. And it is the underregulated advisor that 
has been left out of this and needs to have requirements and 
testing similar to the two that are currently regulated.
    Mrs. Maloney. Okay.
    And the MSRB, Alan Polsky?
    Mr. Polsky. Yes, thank you.
    I think that, as the other gentlemen have suggested, if you 
recall the chart that was held up earlier, there are so many 
parties to the transaction. And the municipal advisor fills the 
key role of being the one who is not at arm's length. It is 
that duty and loyalty and care and that trusted advisor 
relationship that is really critical to a lot of the problems 
that have been suggested here. Who has their best interests in 
mind?
    I think that is what we would like to get on with having 
that discussion and moving forward when we have a definition in 
place.
    Mrs. Maloney. I would like to ask the representatives from 
the ABA, SIFMA, and the MSRB to respond to this question.
    The SEC recently extended the compliance date for its 
temporary municipal advisor registration rule until September 
30, 2012. Has the SEC been using the time provided by the 
extension to engage with your organizations to make sure that 
the municipal advisor rules are workable for the industry, 
while also providing the protection that we wanted to put in 
place under Dodd-Frank reform?
    Mr. Polsky. I will go first. Beginning in 2010, immediately 
after Dodd-Frank was passed and our board was reorganized, we 
began working on a set of core rules for municipal advisors 
that included conflicts of interest, pay-to-play, supervisory 
rules, and professional qualifications. They were done very 
publicly.
    We began the comment process for that, and withdrew those 
rules because of the lack of a definition. We have had many 
conversations, as I think everybody at this table has, with the 
SEC about the definition. Comment letters have gone in and I 
don't know where it stands beyond that. But we have moved 
forward on it as best we could.
    Mrs. Maloney. Okay.
    Mr. Kelly?
    Mr. Kelly. The ABA has engaged several times, myself 
included, in discussions explaining that this was overly broad 
and the impact that we believed this would have by having Betty 
the teller have to register as a municipal advisor simply 
because of the example that I used. We have repeatedly 
requested that be addressed and that there has been an 
acknowledgement of our level of concern, and that has been 
overly broad. But our belief is there has been an unwillingness 
to do that, absent direction from Congress.
    Mrs. Maloney. And SIFMA, very quickly. Yes?
    Mr. Gibbs. It has been very unclear to us where they will 
come out on the underwriter exception, and whether they will 
let go of how narrow they started.
    Mrs. Maloney. My time has expired.
    Thank you.
    Mr. Dold [presiding]. The Chair recognizes the gentleman, 
Mr. Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman.
    In May of 2009, Martha Haines, the head of the Office of 
Municipal Securities, told this committee that establishing an 
effective registration and examination program for municipal 
advisors would be easy, because only 260 nonbanker dealer 
municipal advisors existed. Now clearly, her estimate was 
wrong, and clearly the nature of the rule proposed in Dodd-
Frank Section 975 is going to reach out and capture thousands 
of individuals.
    So if I could, Mr. Kelly, in addition to representing your 
national association, you are a real-world banker back home. 
You participate in the more sophisticated Tulsa market, but 
also in much of rural northeastern Oklahoma. And you have 
commented on the effect that this broad thing would do.
    Could you expand for a moment, if the rule is not 
addressed, if as you said, it applies to Betty the teller, then 
what is going to be the response of financial institutions like 
yours across the country?
    Mr. Kelly. Given the very close relationship that my rural 
banks have with their communities, some communities in which we 
are not in that don't have banks--
    Mr. Lucas. The longstanding level of trust that in many 
cases goes back decades; correct?
    Mr. Kelly. Absolutely. It goes back many decades. And of 
course, the need for the banks to support those activities that 
make a community, that make life being able to be lived. Should 
we, pursuant to our charter, continue to provide that level of 
banking service as we have to all of our communities. We 
believe that out of our 300 employees who stretch through 
northeastern Oklahoma, we have a minimum of 100 of them that we 
would have to register, and possibly up to 150.
    The problem that creates is, as you know, they would have 
to then take a test that shows that they are competent to do, 
which they have no real training in, and just saying go over 
and open an account, which is all they do. And so, the question 
then becomes if we would leave that market depending on how 
much, how complicated that becomes.
    And the difficulty that is going to impose, as well as the 
expense that is going to have, because we have to pay every 
year for every registration. The concern that we have is that 
this is one more layer on an already tremendously large burden 
that all of our community banks are having.
    And frankly, in talking with some of my colleagues, they 
are planning to just withdraw from the market, basically 
saying, you are going to have to go get your municipal deposits 
handled in another place, because they are fearful of opening 
the door to yet one more examination.
    I also would say that, just as an aside, some of my folks 
serve on various and sundry boards. They too would have to be 
registered, not because they are Betty the teller, but because 
they are volunteers. One of them is a volunteer mayor. So they 
would have to be registered if they are going to continue to 
perform those duties.
    Mr. Lucas. So ultimately, the loss is to municipal and 
local government and a lack of expertise that they have a level 
of trust with now--
    Mr. Kelly. It would--
    Mr. Lucas. --of resources?
    Mr. Kelly. At worst, it would drive many of us who have 
been allies and friends as well as providers of banking 
services to these municipalities out of the ability to do that. 
And sadly, that will tear the fabric of those communities as 
well as the robust nature of banking in the communities.
    Mr. Lucas. Thank you, Mr. Kelly.
    I yield back the balance of my time, Mr. Chairman.
    Mr. Dold. The gentleman yields back.
    The Chair recognizes the gentlewoman from Wisconsin, Ms. 
Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And just let me say how much I am appreciating this panel 
with a very complicated topic. And also, I want to appreciate 
the current Chair, Mr. Dold, for his hard work in working with 
me, working together on this.
    I guess I have been asking, as well as I listened to your 
testimony, there have been a lot of things that have occurred 
to me during your testimony that I would like to clarify in my 
brief time.
    I want to start out with Mr. Doty and maybe SIFMA and 
others. The Dold bill does take away the Federal standard. So 
would you be in favor of retaining the Federal fiduciary 
standard? I think Mrs. Maloney was trying to get at that.
    And then, the second question I have for SIFMA, the MSRB, 
and others is if we were to just maybe return to the Federal 
standard and add language to the definition of the municipal 
advisor, something like, ``in the business of providing 
municipal advisory service.'' Add that in. Similar to other 
securities law principles that, instead of excluding broker-
dealers from Section 925, but simply adding that language into 
the definition of an M.A., then of course the MSRB rule G-23 
would kick in and that would clarify it.
    I know Mr. Dold is interested in working this through. Do 
you think that might be a way to satisfy some of the many 
concerns that you all have raised today?
    I will start with Mr. Doty, and then each of you can 
consume my time by responding.
    Mr. Doty. I would be very troubled by taking out the 
fiduciary duty and I would--
    Ms. Moore. But it is. I am saying the Federal for the 
restoring that in the Dold bill.
    Mr. Doty. I would not delete that.
    And I would also look at those last two lines about dealing 
as a principal. I think you have something in mind, but I would 
be more specific about what that is, because right now it is 
unqualified and I don't think it is a good idea.
    The recent action by the MSRB on underwriter disclosures, 
which is becoming effective here in a couple of weeks, requires 
underwriters to make a lot of disclosures about their role to 
issuers and including that they are adverse parties that are 
not obligated to act in the best interest of the issuers and so 
on.
    And so, I think that provides some support for a broader 
concept of underwriter exclusion but not for all broker-dealers 
across-the-board. Because I think that in both the dealer and 
nondealer communities, there are people who could benefit from 
competency training, some continuing education. I think that 
over time, that would be very good for the issuers and the 
testing and the professional standards to guide them. There are 
a few bad apples in both. And that is not to cast aspersions on 
either group, but I think both need improvement. I just 
continue to have this concern about a level playing field, that 
we get this regulation in place.
    And I do want to comment that if the SEC re-proposes it, 
since they are taking so long to come out with a new proposal, 
then that is just going to delay this whole thing, and I fear 
delay it another year.
    Ms. Moore. Okay, can Mr. Gibbs--yes, please.
    Mr. Gibbs. We would be pleased to work with you on the 
fiduciary concept.
    I think the thing actually that is most essential is 
uniformity. And with the structure of our market, I believe 
strongly the MSRB is in the best position to provide the 
guidance as to what the meaning of the fiduciary responsibility 
is.
    And they are in the position, once the definition of who is 
an advisor is settled, to make sure that dealers and nondealers 
are subject to a uniform standard.
    Ms. Moore. Okay. Mr. Polsky?
    Mr. Polsky. Thank you. Yes, if I could just follow on Mr. 
Gibbs' comment.
    I think that you touched on two very important points. We 
have approached it from a scope-based analysis of really how an 
investment advisor works in their capacity.
    And you are absolutely correct to suggest that G-23, which 
was changed last year to prevent an underwriter from acting as 
an advisor on the same transaction, really does bring that 
point home and I think should give some support to the 
marketplace and to this subcommittee that role-switching won't 
go on.
    Ms. Moore. Okay.
    Mr. Chairman, with your indulgence, I just want to comment 
that I do think that we can work things out and give the SEC 
some guidance, given this expert testimony that we have had 
today and our understanding of some of the problems that they 
have seen.
    I yield back.
    Mr. Dold. I appreciate that the gentlelady yields back, and 
I would agree that I think there are some areas that we can 
refine prior to markup and hopefully we can get some more 
support, even, for what I think is an important piece of 
legislation.
    The Chair recognizes the gentleman from California, Mr. 
Campbell, for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman.
    I don't have a specific question so much as a general 
observation upon which any of you may comment.
    Clearly, I think where we are going here is--I think it is 
pretty clear from all of you up here that the existing 
regulatory structure has gone too far.
    So the question is, where do we draw this line? Who is on 
one side of the line and who is on the other side of the line?
    And necessarily for me, my judgment relative to that is 
colored by the fact that I am from California, whereas if I 
were from Oklahoma, like Mr. Lucas and Mr. Kelly, I might have 
a different viewpoint. But given where I am from, there is a 
lot of stress and a lot of strain and a lot of risk.
    I understand, Mr. Doty, your comment about the history of 
failures. And by the way, I am a CPA. I do understand the 
difference between general obligation bonds and other bonds. So 
I do understand that.
    But there aren't any failures until there are. Big 
investment banks that have been around for a hundred years 
didn't ever fail until Bear Stearns and then Lehman, and then 
they were all going to fail. And they had never failed and they 
were all going to fail.
    And of course, we are seeing things in Europe now which 
weren't ever supposed to happen, and never have happened, and 
aren't supposed to happen to major countries. They only happen 
to third world countries.
    And when I look at the situation in California, we have had 
three bankruptcies. We will likely have many more. A lot of 
this is being driven by pension obligations, as was suggested, 
and by health care and other employee obligations. And some of 
this is State law over which the municipalities don't have any 
control that is driving them into these problems.
    I look sometimes at a school board, and you look at who is 
on the school board that is making these decisions and they are 
largely educators, which clearly makes sense. They are often 
paid little or nothing and they are part-time doing this.
    And they are making decisions in an area in which they 
don't have a lot of background and expertise. So who is giving 
them advice? And the advice they are getting is pretty 
important, because they are making a lot of decisions 
relative--in large amounts of money in an area in which they 
don't have a lot of background.
    So all of that concerns me, that as we look at this, we set 
up a structure under which those advisors and that advice is 
something that someone is looking at because I am not sure that 
a lot of them will have the ability to.
    When I look at all of that, I say, we kind of have to be 
careful where we do draw this line. And as I said, given in 
California that I don't know where all this is going to go.
    Sometimes, as you know, something doesn't fail, but because 
there is litigation, I assure you that many of these employee 
associations and unions and so forth are going to fight like 
crazy not to have their pensions and their things invalidated 
and instead to have the bondholders take a haircut.
    And that may not be where the obligations lie in legal 
form, but the thing gets tied up in court for a long time, 
maybe a settlement gets made and so we know there are lots of 
cases where there can be adjustments made that aren't 
technically a default.
    So I do think there is a lot of risk out there that needs 
to be taken into account as we review this. I used up almost 
all my time. If anybody would like to comment on any that, I 
would appreciate it.
    Mr. Marz. Congressman, I support exactly what you are 
saying.
    And if the fiduciary standard is going to have teeth, then 
the people giving advice, the unregulated advisor that is 
taking care of the time of the bond sale, trying to tell the 
issuer if the price is fair. Part of the selection of 
underwriters--those people need to have regulations similar to 
what the broker-dealers do, unlike Mr. Kelly's bank teller.
    Mr. Doty. Congressman, I would like to point out, and you 
may not be aware, that virtually everybody in most municipal 
securities transactions, everybody is paid a contingent fee. 
Nobody gets paid unless that transaction closes. I was really 
happy to hear a reference in Mr. Polsky's testimony to the 
contingent fee.
    I think it is problematic and I think it is not going to be 
possible to just ban it. But I think it is going to be possible 
to regulate it and encourage people to go in so there is 
somebody there talking to that municipality saying, maybe you 
ought to have second thoughts about going forward with this 
transaction. Because right now if anybody does that, they are 
not going to be paid.
    Mr. Geringer. Mr. Chairman, just one brief comment on Mr. 
Campbell's observations.
    Mr. Campbell. Mr. Geringer?
    Mr. Geringer. There almost seems to be an inference that 
elected officials ought to have competency training. So I think 
that is a different issue.
    Mr. Campbell. I will just say that I think expecting 
competency from elected officials may be a bridge too far. So 
that is why we should have better competency from the advisors. 
Yes?
    Mr. Polsky. One comment I would like to make--I think that 
under the board's responsibility to protect State and local 
governments, one of the things we spent a lot of time on over 
the last 2 years is trying to decide what that means.
    And it is--much of this discussion about municipal 
advisors, of course, is key to that. But there is an 
educational component and a market awareness component that we 
have worked on very diligently as well. So I would have you not 
lose sight of those.
    Mr. Campbell. Okay. I am way over my time. I thank you for 
your indulgence, Mr. Chairman.
    Mr. Dold. I certainly thank you for the questions and the 
responses there.
    The Chair recognizes himself for 5 minutes for the purpose 
of questioning. And I want to start out--and my colleague, Ms. 
Moore, who has been certainly instrumental in H.R. 2827, has 
just stepped out but I certainly want to recognize her for her 
help and support.
    And I certainly appreciate you taking your time to be with 
us today, and I certainly appreciate the insight that you have 
provided.
    Mr. Kelly, I certainly take note and I think it is probably 
not unique when we talk about how overly broad legislation, or 
at least some lack of clarity there, will prevent banks or will 
make banks start to walk away from this whole municipal advisor 
or even dealing with municipalities, which I think would 
certainly hurt municipalities and end-users.
    I do want to ask Mr. Gibbs really quickly if I could, what 
effect has the SEC's delay in finalizing the municipal advisor 
definition had on investors in municipal securities?
    Mr. Gibbs. I think the delay really is more impacting the 
issuer community than the investor community, in that, as has 
been pointed out, the unregulated parties still aren't 
regulated.
    And in turn those of us who are already regulated, who the 
overly broad proposals might touch, have begun to try and think 
through potentially curtailing our approach.
    So there is some confusion and shuffling and some of the 
potential improvements that could be there have not been 
realized.
    On the investor side, probably the biggest impact so far 
actually was the topic I mentioned second, which is the Volcker 
Rule, where firms are preparing to reduce their commitment to 
certain aspects of their portfolio and to tender option bonds, 
which provide liquidity in the market because of the form of 
the Volcker Rule that has been proposed.
    Mr. Dold. I am going to go to Mr. Polsky. Does the Federal 
fiduciary standard pursuant to Section 975 preempt State law? 
And if not, should it, to avoid having two arguably different 
fiduciary duty standards operating on the same person at the 
same time with respect to the same activities?
    Mr. Polsky. My understanding is that it does not, that the 
common law that exists across the States would still establish 
a fiduciary duty. However, the standardization or a single 
standard for the entire marketplace I think would bring some 
clarity, sort of following on Mr. Gibbs's comments about where 
we are, as far as the kind of advice that can be provided.
    Mr. Dold. Can you give me just an idea in terms of what an 
overly broad municipal advisor definition would have on the 
MSRB?
    Mr. Polsky. I think it would make our implementation of 
regulations that much more difficult if it was. So much of what 
we do, again, is scope-based or principles-based, if you will, 
and sort of the behavior.
    So if you look at people's various business models, if it 
is too broad, if it is the teller in the bank on Oklahoma, 
clearly that creates a lot of regulatory duplication and 
uncertainty in the marketplace, which I don't think are the 
issues that we are trying to resolve today and going forward.
    Mr. Dold. Can you give us just a little bit more 
explanation about the scope-based approach that you would have 
on the exemptions in H.R. 2827, the proposed legislation?
    Mr. Polsky. I think when I talk about a scope-based 
approach, I am talking less about the activities than who the 
party is. So that whoever you are, if you are rendering 
municipal advice which involves the structuring, timing, 
covenants, whatever components of a transaction which are 
really critical to an underwriting. I think it is that kind of 
a relationship that in my mind is a municipal advisory 
relationship, as opposed to getting the specificity of, again, 
the teller or any sort of interaction or being a public member 
of a board, which is more troublesome.
    Mr. Dold. Okay. And I just have time for probably one more 
question to come right back at you, Mr. Polsky. Is it possible 
that the fiduciary standard for municipal advisors could 
conflict with other standards of care?
    Mr. Polsky. I would prefer to respond to that in writing.
    Mr. Dold. We would welcome the response in writing.
    Mr. Polsky. Thank you.
    Mr. Dold. The Chair's time is expiring, so the Chair 
recognizes the gentleman from Illinois, Mr. Manzullo, for 5 
minutes.
    Mr. Manzullo. Mr. Chairman, thank you for having this 
hearing. Let me ask this question. It is pretty basic.
    From the testimony that I have been able to glean from the 
written documents, and from watching some of this on TV in my 
office while I had other duties to do, there are somewhere 
around 40,000 individuals at 1,900 colleges, universities, and 
affiliated organizations--this is Mr. Geringer's testimony--who 
serve as trustees, and another 50,000 men and women who serve 
as--I am sorry.
    There are about 90,000 people involved, is that correct, 
who serve as trustees at schools and universities?
    Mr. Geringer. Yes, that is true overall. The membership 
that we include is the lower number, around 40,000. But if you 
counted the foundation boards, there are about 45,000 involved. 
There are 50,000 trustees overall who are elected and 
appointed, predominantly appointed. So that is just in the 
higher education community. It does not account for all the 
others mentioned here today, including hospital boards and 
various local government entities.
    Mr. Manzullo. My question is, what impact are these 
regulations going to have upon the availability and the 
willingness to serve of these trustees and future trustees who 
have to live under these regulations?
    Mr. Geringer. We view it as making it very difficult to 
recruit and retain anybody for appointed positions such as 
that. So it would discourage people from engaging and even 
serving in a volunteer capacity, which they do. They are not 
compensated.
    And you take that pool of talent out of the way, 
particularly people who have some financial expertise who can 
hold the financial advisors and in effect the municipal 
advisors accountable. So you would lose the preponderance of 
people who are the most capable of serving on these boards of 
various institutions.
    Mr. Manzullo. Would anybody else care to tackle that 
question? Mr. Gibbs?
    Mr. Gibbs. We are incredibly supportive of that comment and 
think there is broad support for it. If I may, I didn't get a 
chance to respond to a part of a question.
    Mr. Manzullo. That would be fine. Go ahead. That is fine.
    Mr. Gibbs. On the definition of who is an advisor, I just 
have a note of caution or point of view on the scopic 
definition, which is namely that the actual scope and 
functionality between the dealer who is not a fiduciary and the 
advisor who is often has very useful overlap to issuers.
    I just put caution that it not be purely a scopic 
definition and that, again, the underwriter exception is very 
important that it be broad so that the scope of what an 
underwriter covers isn't narrowed, and that we also have some 
concern that issuers not be limited in how they get advice.
    And that one of the best ways to define who is providing 
advice is that it is pursuant to current MSRB regulations, 
someone who is under contract to provide that advice. And that 
if the definition had started from that point, a lot of the 
broader scope that has been of concern in much of the testimony 
today would have been, boom, addressed.
    Mr. Firestine. And if I could just add to the issue of 
appointed officials, it goes well beyond colleges and 
universities. You will note in my testimony that there are many 
regional boards. I think, for example, I serve on the D.C. 
Water and Sewer Authority, but there are many in this area 
where I think it would be difficult if those individuals were 
regulated to find competent people to serve on those boards, 
too.
    Mr. Doty. I am very frustrated that the SEC did this. 
Because it just delays--
    Mr. Manzullo. You can just tell them it is stupid if you 
think so.
    Mr. Doty. I am not going to use that sort of terminology, 
but I am frustrated. And like Mr. Marz, I want this regulation 
in place to reach the nonregulated people like me. And as I 
have said, I think it should include dealers as well--not in 
their underwriting capacity, but it should include dealers as 
well as unregulated people. But it should be a level playing 
field for everybody.
    Mr. Manzullo. Mr. Chairman, thank you. I yield back.
    Mr. Dold. The gentleman yields back. We certainly thank you 
for your questions. The Chair asks unanimous consent to enter 
into the record statements from the ACLI and the National 
Association of Independent Public Finance Advisers. Without 
objection, it is so ordered.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    Before I adjourn the hearing, I just want to thank our 
panel again for taking your time to be with us and sharing your 
expertise. I think it has certainly been beneficial.
    With that, this hearing is adjourned.
    [Whereupon, at 11:21 a.m., the hearing was adjourned.]




                            A P P E N D I X



                             July 20, 2012





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