Municipal Bond Rule Languishes After Two Years in Legislature

The following is an excerpt from an article in 

The New York Times
Tuesday, August 14, 2012

Municipal Bond Rule Languishes After Two Years in Legislature

By MARY WILLIAMS WALSH

Financial reform was supposed to help protect local taxpayers from getting burned by municipal bond deals. But a measure that would require municipal bond advisers to put the interests of taxpayers first has been bogged down in a rule-making quagmire in Washington for nearly two years.

What’s more, a House bill, sponsored by Representative Robert J. Dold, Republican of Illinois, would eliminate the measure.

As part of the wide-ranging regulatory changes that followed the financial crisis of 2008, the Dodd-Frank Act included a provision that would make municipal advisers “fiduciaries,” meaning they must show an undivided loyalty to the communities that hire them, putting local residents’ interests ahead of their own.

That’s a much higher standard than the one for the banks that underwrite municipal bonds. The law in that case takes for granted that underwriters are looking out for their own interests in bond deals, and requires only that they deal fairly and not mislead.

Making advisers fiduciaries would be “the first time in the history of the securities laws that issuers of the securities have been protected,” said Robert W. Doty, president of AGFS, a consulting firm in Sacramento. He is a registered municipal adviser and favors the fiduciary mandate. But before that provision can take effect, the law calls for the Securities and Exchange Commission to define “municipal adviser.”

The S.E.C. proposed a definition 20 months ago, but it was swiftly beaten back by the banking, brokerage and engineering industries, among others. Opponents argued that the S.E.C. was overreaching and that they were already regulated and should not be given a new mandate.

In addition to serving as fiduciaries, municipal advisers would have to register with the commission, meet professional standards and allow periodic inspections. As fiduciaries, they would have to speak out when they see something amiss, even if it means going against powerful political forces and financial incentives.

Mr. Dold’s bill, introduced last summer, now has 35 other sponsors from both parties. In addition to ending the fiduciary mandate, it would exclude banks and other financial institutions from being deemed municipal advisers, even though bankers often do advise municipalities. A group of engineers that provide cost-benefit studies for municipal energy projects, typically financed with bonds, has also been calling for its members to be excluded.

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