[Congressional Record Volume 158, Number 127 (Wednesday, September 19, 2012)]
[House]
[Pages H6125-H6128]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
CLARIFYING PROVISIONS RELATING TO REGULATION OF MUNICIPAL ADVISORS
Mr. DOLD. Mr. Speaker, I move to suspend the rules and pass the bill
(H.R. 2827) to amend the Securities Exchange Act of 1934 to clarify
provisions relating to the regulation of municipal advisors, and for
other purposes, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 2827
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SEC. 1. REGISTRATION OF MUNICIPAL SECURITIES DEALERS.
Section 15B(a)(1)(B) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-4(a)(1)(B)) is amended by striking ``or on
behalf of''.
SEC. 2. MUNICIPAL SECURITIES RULEMAKING BOARD; RULES AND
REGULATIONS.
Section 15B(b)(2)(L) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-4(b)(2)(L)) is amended--
(1) in clause (iii), by striking ``and'' at the end;
(2) in clause (iv), by striking the period and inserting
``; and''; and
(3) by adding at the end the following:
``(v) not regulate as a municipal advisor the activities of
a person referred to in subparagraph (C) of subsection
(e)(4), to the extent that such activities are described
under such subparagraph.''.
SEC. 3. DISCIPLINE OF MUNICIPAL SECURITIES DEALERS; CENSURE;
SUSPENSION OR REVOCATION OF REGISTRATION.
(a) In General.--Section 15B(c)(1) of the Securities
Exchange Act of 1934 (15 U.S.C. 78o-4(c)(1)) is amended to
read as follows:
``(1) No broker, dealer, or municipal securities dealer
shall make use of the mails or any means or instrumentality
of interstate commerce to effect any transaction in, or to
induce or attempt to induce the purchase or sale of, any
municipal security, and no broker, dealer, municipal
securities dealer, or municipal advisor shall make use of the
mails or any means or instrumentality of interstate commerce
to provide advice to or on behalf of a municipal entity or
obligated person with respect to municipal financial
products, the issuance of municipal securities, or to
undertake a solicitation of a municipal entity or obligated
person, in contravention of any rule of the Board. A
municipal advisor, when acting pursuant to an engagement
described in subsection (e)(4)(A)(i), and any person
associated with such municipal advisor, shall be deemed to
have a fiduciary duty with respect to such engagement to any
municipal entity for whom such municipal advisor acts as a
municipal advisor, and no municipal advisor may engage in any
act, practice, or course of business which is not consistent
with such municipal advisor's fiduciary duty or that is in
contravention of any rule of the Board. In issuing
regulations to carry out the previous sentence and subsection
(b)(2)(L)(i), the Board shall--
``(A) require that a municipal advisor act in accordance
with its fiduciary duty to its municipal entity clients, but
only in connection with those specific activities involving
such municipal entity client described under subsection
(e)(4)(A)(i) (and not excluded under subsection (e)(4)(C));
``(B) specify when such duties begin and terminate in
relation to such activities; and
``(C) not prohibit principal transactions by municipal
advisors or the receipt of compensation based on commissions
or other
[[Page H6126]]
standard compensation in relation to the purchase or sale of
a security or other instrument (including deposit or foreign
exchange), except that the Board--
``(i) may issue rules requiring a municipal advisor to only
engage in such transactions or receive such compensation in a
manner that is consistent with the municipal advisor's
fiduciary duty; and
``(ii) may prohibit a municipal advisor that has been
engaged to provide advice with respect to an underwritten
offering of securities from concurrently acting as an
underwriter of such offering.''.
(b) Technical Correction.--
(1) In general.--Section 975(c)(5) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act is amended to read
as follows:
``(5) in paragraph (4), by inserting `or municipal advisor'
after `municipal securities dealer' each place that term
appears;''.
(2) Effective date.--The amendment made by paragraph (1)
shall take effect on the date of the enactment of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, as if
included in such Act.
SEC. 4. DEFINITION OF INVESTMENT STRATEGIES.
Section 15B(e)(3) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-4(e)(3)) is amended to read as follows:
``(3) the term `investment strategies'--
``(A) means plans or programs for the investment of the
direct proceeds of municipal securities (but not other public
funds) that are not municipal derivatives or guaranteed
investment contracts, and the recommendation of and brokerage
of municipal escrow investments, where, with respect to the
municipal advisor offering such plans, programs, or
recommendations, such proceeds of municipal securities and
municipal escrow investments--
``(i) are known or should be known to the municipal advisor
to be comprised of funds or investments maintained in a
segregated account that is exclusively for the purpose of
maintaining such proceeds or escrow investment; or
``(ii) have been identified to the municipal advisor, in
writing, as funds or investments that constitute the proceeds
of municipal securities or municipal escrow investments; and
``(B) does not include--
``(i) merely acting as a broker or principal with respect
to the purchase or sale of a security or other instrument
(including deposit or foreign exchange);
``(ii) providing a list of, or price quotations for,
investment options or securities or other instruments which
may be available for purchase or investment or which satisfy
investment criteria specified by a municipal entity;
``(iii) acting as a custodian;
``(iv) providing generalized information concerning
investments which are not tailored to the specific investment
objectives of the municipal entity; or
``(v) providing advice with respect to matters other than
the investment of funds or financial products;''.
SECTION 5. DEFINITION OF MUNICIPAL ADVISOR.
Section 15B(e)(4) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-4(e)(4)) is amended to read as follows:
``(4) the term `municipal advisor'--
``(A) means a person (who is not a municipal entity or
obligated person, or an employee of a municipal entity or
obligated person) that--
``(i) is engaged, for compensation, by a municipal entity
or obligated person to provide advice to a municipal entity
or obligated person with respect to municipal financial
products or the issuance of municipal securities, including
advice with respect to the structure, timing, terms, and
other similar matters concerning such financial products or
issues; or
``(ii) undertakes a solicitation of a municipal entity;
``(B) includes financial advisors, guaranteed investment
contract brokers, third-party marketers, placement agents,
solicitors, finders, and swap advisors, if such persons are
described in either of clauses (i) or (ii) of subparagraph
(A) and are not excluded under subparagraph (C); and
``(C) does not include, solely as a result of their
performing the following activities--
``(i) any broker, dealer, or municipal securities dealer
registered with the Commission, to the extent that such
broker, dealer, or municipal securities dealer is serving or
is seeking to serve as an underwriter, placement agent,
remarketing agent, dealer-manager, or in a similar capacity,
or is providing advice related to or in connection with any
such activities and not for separate compensation, or any
person associated with such a broker, dealer, or municipal
securities dealer;
``(ii) an investment adviser registered under the
Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or
with any State or territory of the United States that is
providing investment advice (whether or not of a type that
would subject a person to registration under such Act), or
any person associated with such an investment adviser;
``(iii) any person registered under the Commodity Exchange
Act (7 U.S.C. 1 et seq.) or this Act in relation to such
person's activities with respect to swaps or security-based
swaps that is providing advice related to swaps or security-
based swaps, or providing advice that is related to or in
connection with any such activities and not for separate
compensation, or any person associated with such person;
``(iv) a financial institution engaging in any of the
activities referred to in clause (i), (ii), or (iii) pursuant
to an exemption from registration, acting as a dealer or
principal with respect to deposits, foreign exchange, or
identified banking products (as defined in paragraphs (1)
through (5) of section 206(a) of the Gramm-Leach-Bliley Act
(15 U.S.C. 78c(a))), providing other traditional banking or
trust services otherwise subject to a fiduciary duty under
State or Federal law, providing administrative or operational
services or support, or providing advice that is related to
or in connection with any such activities and not for
separate compensation;
``(v) any person subject to regulation by a State insurance
regulator providing insurance products or services or
providing advice that is related to or in connection with any
such activities and not for separate compensation;
``(vi) an accountant (or person associated with such
accountant) providing customary and usual accounting
services, including any attestation or audit service or
issuing letters for underwriters for a municipal entity or
providing advice that is related to or in connection with any
such activities and not for separate compensation;
``(vii) any attorney offering legal advice or providing
services that are of a traditional legal nature;
``(viii) an engineer providing engineering advice; or
``(ix) any elected or appointed member of a governing body
of a municipal entity or obligated person, with respect to
such member's role on the governing body;''.
SEC. 6. DEFINITION OF SOLICITATION OF A MUNICIPAL ENTITY OR
OBLIGATED PERSON.
Section 15B(e)(9) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-4(e)(9)) is amended by striking ``or on behalf
of a municipal entity; and'' and inserting the following: ``a
municipal entity, but communications on behalf of a fund or
other collective investment vehicle shall not be deemed to be
on behalf of any investment adviser that advises or manages
such fund or investment vehicle;''.
SEC. 7. DEFINITION OF MUNICIPAL DERIVATIVE.
Section 15B(e) of the Securities Exchange Act of 1934 (15
U.S.C. 78o-4(e)) is amended--
(1) in paragraph (10), by striking the period on the end
and inserting a semicolon; and
(2) by adding at the end the following:
``(11) the term `municipal derivative' means a swap or
security-based swap in which a municipal entity is a
counterparty; and''.
SEC. 8. DEFINITION OF ON BEHALF OF.
Section 15B(e) of the Securities Exchange Act of 1934 (15
U.S.C. 78o-4(e)), as amended by section 7, is further amended
by adding at the end the following:
``(12) the term to provide advice `on behalf of a municipal
entity or obligated person' means to provide advice to a
person that is known to be engaged by a municipal entity or
obligated person to provide services to such municipal entity
or obligated person in connection with the issuance of
municipal securities.''.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Illinois (Mr. Dold) and the gentlewoman from Wisconsin (Ms. Moore) each
will control 20 minutes.
The Chair recognizes the gentleman from Illinois.
General Leave
Mr. DOLD. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days in which to revise and extend their remarks and
to add extraneous material on this bill.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Illinois?
There was no objection.
Mr. DOLD. Mr. Speaker, I yield myself such time as I may consume.
I rise today in support of H.R. 2827, which would clarify the
definition of a ``municipal adviser'' to reflect the intent of the
United States Congress. This bill received unanimous support and passed
out of the Financial Services Committee with a vote of 60-0. I would
like to urge my colleagues to support this important bipartisan
legislation.
Municipal advisers are consultants who advise local municipalities
about bond issuances, bond-proceed investment, financial derivative
uses, and other financial matters. Like traditional financial advisers,
municipal advisers must comply with an existing legal and regulatory
framework while owing their clients a fiduciary duty.
But before Dodd-Frank, certain municipal advisers were not subject to
any regulations--State, Federal or otherwise. Obviously, this legal and
unjustified discrepancy between regulated and unregulated municipal
advisers created a significant and, I would
[[Page H6127]]
argue, unfair competitive advantage in favor of the unregulated
municipal advisers.
Even more importantly, the regulatory gap gave a few bad actors the
opportunity to take advantage of the State and local government
officials who, like most people, aren't familiar with advanced and
technical financial products. Dodd-Frank section 975 addressed this
problem by requiring these unregulated advisers to register with the
SEC and to follow rules written by the Municipal Securities Rulemaking
Board.
The provisions generally have bipartisan political support as well as
widespread industry support. However, most of us, both Republicans and
Democrats, believe that the SEC's interpretation of the law has gone
far beyond what Congress intended by, among other things, requiring
volunteer members of local governing boards, engineers providing
technical and comparative analysis, and bank tellers to register with
the SEC as municipal advisers. In response to its proposal, the SEC
received over 1,000 comment letters from across the industry that were
overwhelmingly critical of the proposed rule.
This is why I introduced H.R. 2827. H.R. 2827 takes important steps
to address these widely acknowledged concerns and specifies the scope
and limits of Dodd-Frank's municipal adviser provisions.
After introducing our original version of H.R. 2827, we asked
everyone on both sides of the aisle--and industry participants as well
with a wide variety of perspectives--to give us their comments and
suggestions for improving the legislation. My colleague and cosponsor
from Wisconsin (Ms. Moore) and I have spent countless hours working and
listening to all concerned parties to ensure that we have fully
considered all the viewpoints in order to come up with the best
possible legislation that could also pass with broad bipartisan
support. At this time, I certainly want to thank her for all of her
efforts.
Mr. Speaker, there were two concerns about the original version of
H.R. 2827 that were the most significant. The first was that the
original version of the bill would strike the Federal fiduciary duty
for municipal advisers, leaving in place just the State-based fiduciary
duty standards. Second, even when explicitly engaged to provide
municipal adviser services, the original bill would have excluded
certain parties from regulation as municipal advisers.
During the subcommittee markup, Ms. Moore and I articulated our plan
for going forward with the legislation, and we invited more comments
and suggestions from industry and all concerned parties. We were very
pleased with the genuine engagement of the parties from across the
industry and with their willingness to generously share their time,
experience, effort, and knowledge with us. All of these contributions
ultimately produced a better and stronger amended bill. We believe that
this new version of the bill addresses the points raised since the
subcommittee markup while still maintaining our broad coalition of
bipartisan supporters.
This new bill preserves the Federal fiduciary standard and removes
the blanket status exemptions while still maintaining a bright-line
municipal adviser definition. It protects issuers by establishing clear
lines and rules for municipal advisory activity and provides clarity in
the marketplace.
In addition to the amendment's substance, I am very proud of the
process that we've been able to undertake to get us to this point. I
would like to thank my colleague again, Ms. Moore, and her staff for
working with me and my staff, and I thank all of those who worked with
us to get us to where we are in this process. They were so generous in
sharing their time, and I am confident that what we have is a good bill
with which we can move forward. Again, I urge my colleagues to support
H.R. 2827.
With that, I reserve the balance of my time.
Ms. MOORE. Mr. Speaker, I yield myself such time as I may consume.
I think Mr. Dold has dealt very well with very many of the specifics
of H.R. 2827 relating to the regulations of municipal advisers. So,
before I lose people, I want to briefly talk about the process that
brought the bill to this point, and I want to thank a lot of people for
their contributions to the final legislation.
As you've heard, the bill that passed the Financial Services
Committee by 60-0 reflects the legislative process at its absolute
best. It was a collaborative effort between Republicans and Democrats,
issuers and market participants, and very, very diligent staffers on
both sides of the aisle. If there is a single element that is most
responsible for the bill's getting to this point, it is the integrity
of the people involved. It speaks to their professionalism in that they
stayed at the table and negotiated with the singular purpose of getting
to the best result for the municipal market. There were times when the
issues were tough and the disagreements real. There were times when it
would have been very easy for people to just give up and walk away.
{time} 1940
But to the credit of all involved, everyone kept talking and kept
searching for solutions.
Mr. Dold deserves a tremendous amount of credit for his leadership of
this bill. He was consistently willing to engage tough issues in an
open and thoughtful manner. I would also like to thank all of my
colleagues on the committee, Republican and Democrat alike, for their
invaluable input as we negotiated the bill. Finally, I think it is
important that I mention the important contributions of Mr. Frank and
Ms. Waters. At many critical points, both were instrumental in
providing guidance.
H.R. 2827, which passed the House Financial Services Committee 60-0,
almost didn't pass at all as there was so much confusion generated from
the SEC promulgating a rule that initially was very confusing. It's
only the second legislative effort related to Dodd-Frank to pass the
committee unanimously.
Prior to the passage of Dodd-Frank, non-dealer advisers to municipal
governments were unregulated. These unregulated parties were involved
in a number of municipal market scandals that ultimately defrauded
taxpayers. Section 975 brings municipal financial advisers, swap
advisers, placement agents, and GIC brokers under Federal securities
law. It is a goal that is not partisan.
Unfortunately, in 2010, the SEC released a proposed rulemaking
related to section 975 that created massive confusion in the municipal
market regarding how section 975 would be applied in the real world.
H.R. 2827 seeks to clarify section 975 to provide certainty to the
market so that the rules can be implemented and taxpayers can benefit
from the protection it brings. This bill takes a fundamentally
different approach from the SEC and the definition of municipal
advisers. It makes ``municipal adviser'' an exclusionary definition,
rather than trying to outline and define certain transactions which end
up being very vague and overly broad.
Mr. Speaker, how much time is remaining?
The SPEAKER pro tempore. The gentlewoman from Wisconsin has 16
minutes remaining.
Ms. MOORE. It doesn't unnecessarily sweep in the universe of other
professionals or impinge on the relationships of issuers and other
market participants engaged in legitimate and necessary market
activities like underwriting, providing accounting services,
engineering advice, or offering traditional deposits and cash-
management services to municipalities. It is a straightforward approach
that effectuates the goals of 975 while meeting the real world needs of
market participants.
I want to urge all my colleagues to support this important regulatory
legislation. Again, I cannot thank the participants enough who
participated in this bill.
With that, I reserve the balance of my time.
Mr. DOLD. Mr. Speaker, I just want to again thank the gentlelady for
her help and support with regard to this process which, as she aptly
points out, was at times a little strenuous; but I believe in the end
we were able to come together in a bipartisan fashion to produce what I
hope is quality legislation that will be better for municipal advisers
all across the country.
[[Page H6128]]
I reserve the balance of my time.
Ms. MOORE. Mr. Speaker, I yield such time as she may consume to the
gentlewoman from New York (Mrs. Maloney).
Mrs. MALONEY. Mr. Speaker, I rise in support of H.R. 2827 and commend
my good friends and colleagues, Ms. Moore and Mr. Dold and Ranking
Member Frank, and everyone else who worked very hard on this bill and
for their willingness to work in a bipartisan way.
It is helpful to recall that the original Dodd-Frank regulations
relating to municipal bond advisers only came about because of a number
of manmade financial disasters involving municipalities and their
advisers who were unregulated. It was just about a year ago that
Jefferson County, Alabama, filed the biggest municipal bankruptcy in
U.S. history. They joined the ranks of 11 other entities to file a
chapter 9 bankruptcy that year, including Boise County, Idaho; Central
Falls, Rhode Island; and Harrisonburg, Pennsylvania. They all had
unique problems, but one of the things that they had in common was that
they got some pretty costly advice, and it will haunt taxpayers for
years.
This was an area that was completely unregulated before the financial
crisis; and the Dodd-Frank reforms, including the municipal adviser
registration requirement, were enacted to respond to those crises. The
Dodd-Frank reforms require individuals who advise municipalities to
register with the SEC and be subject to regulation by the Municipal
Securities Rulemaking Board. This is a very good thing, but most of us
agree that the SEC's proposed original rule went just a little bit too
far and made the definition of a municipal adviser a little bit too
broad. It was defined in a way that could have potentially captured
those who were not actually providing investment advice.
For example, I know many institutions were concerned that under the
SEC's proposed rule merely providing a bank account to a municipality
could mean that an institution would have to register as an adviser and
be subject to MSRB regulation all because they just provided basic
banking services. As someone who was there during the consideration of
Dodd-Frank, I can tell you that that was not what Congress intended;
however, I was concerned that the original version of this bill went
too far in the other direction, and that could have opened up such a
gaping hole you could have driven a truck full of other people's money
through it. I was concerned that the draft bill eliminated the critical
fiduciary duty standard that we included in Dodd-Frank. The fiduciary
duty is a vital element that ensures that the advisers provide advise
that is in the best interest of the municipality.
I think that with this revised bill we have struck a good balance.
Fiduciary duty is back in, and unintended capture is out. The revised
language clearly and reasonably defines the activities that municipal
advisers engage in and describes the kinds of advice that they provide.
This bill now gives clear legislative guidance to ensure that the goal
of heightened supervision of municipal advisers is realized. It keeps
taxpayers a little bit safer, credit markets more stable, and
regulations a bit fair.
All in all, I would say that it is a job well done, done in a
bipartisan spirit with a great deal of time and commitment. I commend
the two major sponsors who are speaking with us today; and I thank my
good friend, Gwen Moore, for her work on this bill.
Ms. MOORE. I thank the gentlewoman from New York.
I just want to say again that I think we need to credit Mr. Dold, who
is a fairly new Member. We actually listened to Members who were senior
Members and didn't base it on our partisan differences as so often
occurs. We really respected people's experience, and listened to their
advice very earnestly.
Again, I would urge my colleagues to support this legislation, and I
yield back the balance of my time.
Mr. DOLD. Mr. Speaker, I don't have any other speakers, but I do want
to wrap up with a couple of thank-yous.
I certainly want to thank Chairman Bachus for allowing this markup to
move forward, and I certainly appreciated his help and support. I want
to again highlight how this was able to move forward in a bipartisan
fashion, and I certainly want to thank my good friend, Ms. Moore from
Wisconsin, for all of her work and efforts to work with me on what I
hope is going to be a bill that everyone here in this Chamber will
support.
With that, Mr. Speaker, I ask every one of my colleagues on both
sides of the aisle to support H.R. 2827, and I yield back the balance
of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Illinois (Mr. Dold) that the House suspend the rules and
pass the bill, H.R. 2827, as amended.
The question was taken; and (two-thirds being in the affirmative) the
rules were suspended and the bill, as amended, was passed.
A motion to reconsider was laid on the table.
____________________