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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

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 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

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 

Page

VI 

Polsky, Alan D.: 

Additional information provided for the record in response to a question 

from Representative Dold ............................................................................. 128 

(1) 

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 

2 

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. 

3 

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 DoddFrank. 

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 diVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
4 

rectly 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 

5 

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 21⁄2 minutes. 

6 

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 Jeffer- son 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 

7 

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 21⁄2 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. 

8 

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. 

9 

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 reVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
10 

lated 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.] 

11 

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. 

12 

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 

13 

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. 

14 

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 

15 

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 31⁄2 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. 

16 

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. 

17 

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 historiVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
18 

cally 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. 

19 

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, muVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
20 

nicipal 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. 

21 

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. 

22 

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 

23 

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 highprofile public finance disasters such as the bankruptcy of Jefferson 

County, Alabama, in bond deals in New Mexico, fraught with playto-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 brokerdealers 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 levVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
24 

eling 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. 

25 

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. 

26 

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? 

27 

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. 

28 

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. 

29 

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-theboard. 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. 

30 

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. 

31 

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 

32 

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 liquidVerDate Nov 24 2008 18:28 Dec 18, 2012 Jkt 076119 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\76119.TXT TERRI
33 

ity 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. 

34 

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— 

35 

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.] 

(37) 

A P P E N D I X 

July 20, 2012 

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76119.001

OPENING STATEMENT 

CHAIRMAN BACHUS 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

"The Dodd-Frank Municipal Advisor Rule and H.R. 2827" 

July 20, 2012 

Thank you, Chairman Garrett, for convening this hearing to examine the 

impact of Section 975 of the Dodd-Frank Act, which governs the oversight of 

municipal advisors. I also want to thank Congressman Dold for introducing a 

bipartisan bill that would refine this provision and capture the truly unregulated 

who may be offering financial advice to municipalities. 

Section 975 of Dodd-Frank directs the Securities and Exchange Commission 

to establish an effective registration and examination program for municipal 

financial advisors. This is an entirely worthy goal and one I support, especially as I 

have seen in Jefferson County, Alabama how unscrupulous municipal advisors 

pocketed the lucrative fees associated with the county's sewer bond offerings while 

ignoring the welfare of the taxpayers. 

However, even though I agree with the goal of Section 975, I cannot support 

the SEC's proposed rules to implement it because the SEC's proposal would require 

thousands more to register with the SEC than Congress ever intended. 

For example, the proposed rule's broad definition of "municipal financial 

products" combined with the failure to define the word "advice" would require 

thousands of bank employees who conduct routine business with municipal entities 

to register with the SEC. 

Additionally, the proposed rule would require appointed, non-ex officio 

municipal board members and officials to register with the SEC. Many small towns 

frequently appoint, rather than elect, their municipal administrators. Similarly, 

boards oftrustees of public universities are appointed. Forcing these individuals, 

who often volunteer their time and expertise, to register with the SEC would create 

a significant disincentive for qualified individuals to serve their communities. 

Finally, the SEC's rule ignores an explicit exemption contained in Section 975 

for "engineers providing engineering advice" to municipal entities. 
39 


76119.002

Given these and other examples, it is unsurprising that SEC Chairman 

Schapiro acknowledged in an April 25, 2012 Financial Services Committee hearing 

that the SEC "cast the net too widely" in its proposed rule. While I take some 

comfort from Chairman Schapiro's acknowledgement, I do not believe Congress can 

just sit back and hope that the Commission gets it right the second time. 

That is why I support Congressman Dold's bill, which would ensure that 

"non-broker-dealer financial advisors" register with the SEC without forcing 

thousands of others to comply with this rule. 

I thank our witnesses for appearing this morning and I yield back the 

balance of my time. 
40 


76119.003

Testimony of Robert Brooks, Ph.D., CFA 

Wallace D. Malone, Jr. Endowed Chair of Financial Management 

The University of Alabama 

before the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

July 20, 2012 

The Impact of the Dodd-Frank Act on Municipal Finance 

Chairman Garrett, Ranking Member Waters and Members of the Committee: 

Good morning. I am Robert Brooks, a finanee 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. 

I would like to make eight brief points regarding the impact of the Dodd-Frank Act on municipal 

finance. Beforehand let me offer a unique perspective on the Jefferson County, Alabama 

financial crisis to help understand my point of view. 

Synopsis of the Jefferson County, Alabama financial devastation 

Since 1998 I have used the 1997 swap transaction between Jefferson County, Alabama and J. P. 

Morgan to train my students on how not to do a swap transaction. The 1997 swap idea, promoted 

by Raymond James Financial, Inc., was to refinance an existing variable rate bond with a fixed 

rate bond and then enter a swap transaction to create a synthetic variable rate bond. The 

Raymond James Financial, Inc. pitch book suggested significant savings in the form oflower 

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 to a higher synthetic 

variable rate and take on more risks. Raymond James Financial, Inc. brokered the swap on behalf 

of J. P. Morgan 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 over $5 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 (1997 through 2003), Jefferson County as 

well as financial institutions that facilitated this financial devastation were heavily regulated 

entities. 
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76119.004

I would now like to offer eight brief points regarding the impact of the Dodd-Frank Act on 

municipal finance. 

1) Regulatory burden must be reasonable 

The compliance burden placed on municipal advisory firms must be reasonable and every effort 

should be made to avoid duplication and unintended consequences. We would not want to drive 

the highly ethical and skilled professionals out of this industry. For example, if a derivatives 

advisory firm provides quality services to a variety of entities, at this moment it is unclear under 

the Dodd-Frank Act whether the derivatives advisory firm would have to register with the 

Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission 

(CFTC) and/or the Municipal Securities Rulemaking Board (MSRB). One unintended 

consequence might be that other registrants, such as registered investment advisors and 

commodity trading advisors, would now be able to offer municipal derivatives advisory services 

regardless of their competency in that arena. 

2) Regulatory ambiguity promotes tyranny 

Ambiguous laws and regulations may result in tyrannical enforcement where particular 

regulators arbitrarily bring enforcement actions. Since I live in Alabama, I would like to use the 

local university rivalry to emphasize this important point. Suppose you encountered the 

following speed limit sign on an Alabama interstate, "Drive At A Reasonable Speed." This 

ambiguous law instantaneously creates the potential for the Alabama highway patrol to 

arbitrarily bring enforcement actions. 

There is the potential that on Alabama's west side of the state, cars with The University of 

Alabama vanity tag would receive fewer speeding tickets and on the east side of the state, cars 

with Auburn University vanity tag would receive fewer speeding tickets. If you have a 

University of Tennessee vanity tag, you might think twice about driving on that Alabama 

interstate at all! 

On the more serious side, every effort should be made to make legal compliance crystal clear, 

such as "Speed Limit 70." In that way, law abiding firms will have certainty regarding their 

compliance. The present high level of ambiguity in the Dodd-Frank Act might result in 

enforcement actions against innocent or unsuspecting parties. This risk is a strong deterrent for 

young finance professionals entering municipal finance. 

3) Regulations need to improved transparency 

Every International Swaps and Derivatives Association (lSDA) confirmation letter that I can 

recall contains explicit language related to representations, specifically non-reliance, 

evaluation/understanding, and status of parties. In essence, this portion of the derivatives 

documents state that each counterparty has made their own independent judgment or is relying 

on its own advisors. Most importantly, there is an explicit denial of a fiduciary relationship 

between the two counterparties. 

In reality, often derivatives ideas emanated from financial institutions pitching the transaction. 

The idea was "sold" to the municipality based on some sort of convincing pitch book where 

benefits arc emphasized and well-known risks are omitted. Due to other demands, the municipal 

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76119.005

representatives rely on and trust the financial institution. From the municipality's perspective, 

there is a practical fiduciary relationship. 

The municipal officials trust the representations of the financial institution's professionals. 

Ultimately, finance is and has always been a trust business. Historically, banks often had the 

word "trust" in their corporate name. The solution may lie more in financial institutions reembracing their ancient fiduciary responsibilities, rather than the rule of law attempting to place 

layer upon laycr of complex and ambiguous regulations. 

At a minimum, financial institutions should embrace transparency by clearly documenting the 

services they are providing, providing clear identification of conflicts of interest, written 

documentation of all their compensation sources and strongly recommend that municipalities 

tind their own independent, capable advisor who is willing to act as their fiduciary. 

4) Important role of municipal finance industry demand 

The municipal finance industry historically has demanded transaction-driven financial consulting 

services. Commission hungry and ethically questionable derivatives salespeople are not the best 

source of ideas for creative and innovative solutions to complex municipal finance problems. It 

should be suspect that oftcn the very idea promoted by a financial institution would never be 

done at that same financial institution. The municipal entity's leaders should demand a vibrant 

set of municipal advisory firms that embrace their fiduciary duty to the municipal entities they 

serve. 

Consider the following analogy: Suppose I am experiencing heart problems (say pressure from 

appearing at a congressional hearing) and have the choice of two different cardiologists. Dr. Red 

Cuttem only receives compensation ifhe conducts open-heart surgery. Dr. Green Soy is paid for 

whatever services are provided, including her time for routine office visits. Who is more likely to 

provide the unbiased advice that diet and exercise will solve my heart problems? 

The municipal professional associations should be at the forefront ofleading a cultural change. 

The municipal finance advisory providers will adapt their business model to whatever their 

customers demand. 

5) Important role of self-enforcement 

Like most communities, self-enforcement is an excellent deterrent for criminals. Remember I 

live in Alabama where hunting is very popular, giving pause to many would-be intruders. For 

example, if a large financial institution is found to have ravaged a specific municipality through 

malicious derivatives advice, then through industry-wide self-enforcement, that particular 

financial institution should find itself unable to create demand for their services. This loss of 

market share, coupled with severe regulatory enforcement action, would provide a healthy 

deterrent. The municipal industry, perhaps through its professional organizations, should provide 

a clear message to those institutions that instigate harm on municipalities. 

6) If regulators frame financial risk management, then systemic risk increases 

Many concepts within financial risk management are not well defined and hence, not well 

understood. Remember that finance is a social science, not a physical science. For example, 

3 
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76119.006

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 was hedging, what was terminating the swap? 

As another example, consider two general approaches to interest rate risk management, viewdriven and needs-driven. Interestingly, financial institutions seek to balance out their interest rate 

risk using asset liability management techniques (needs-driven). These financial institutions do 

not attempt to manage interest rate risk by guessing where rates are going. Surprisingly, these 

same financial institutions will place a derivatives salesperson on a plane to pitch a view-driven 

derivatives transaction on an unsuspecting municipal official. It seems reasonable that the 

financial institution pitching the derivatives deal should be willing to do it themselves if they 

were facing similar circumstances. Clearly, there are a wide variety of ways to frame the interest 

rate risk management task. 

Therefore, ifregulators are allowed to forcefully frame the context of financial risk management, 

then systemic risk is actually increased and not decreased. 

7) Hedging is ill-defined due to the lack of benchmarks specified in advance 

The Dodd-Frank Act documents the following permitted activity for banks. "Risk-mitigating 

hedging activities in connection with and related to individual or aggregated positions, contracts, 

or other holdings of a banking entity that are designed to reduce the specific risks to the banking 

entity in connection with and related to such positions, contracts, or other holdings" are 

permitted and hence referred to as a bona fide hedge in the Act. 

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, or for that matter in any other related regulations, for firm-wide financial 

performance benchmarks to be clearly defined in advance. Therefore, almost any financial 

derivatives 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, a 

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 do not pass as a "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 financc, analysis is primary and ethics 

is accidental. 

For students of the human condition, it would come as no surprise that corporate as well as 

municipal executives today assert that the activities of their entities are "bona fide hedges" in the 

Dodd-Frank Act sense. If these executives, however, were asked to justifY their hedging 

transactions to their aging parents, they would struggle to do so without blushing. Without any 

4 
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76119.007

preconceived and clearly stated financial risk management benchmarks, whether a municipal 

entity is on course or not is meaningless. 

8) Municipal finance carcer need to be attractive 

It is a given that the regulatory environment governs how municipal finance is practiced day-today, but what may not be obvious is that it also influcnces who chooses to enter this vocation. If 

the municipal finance landscape resembles a prison environment, then we should not be 

surprised that many highly ethical, competent, creative professionals opt for an alternative 

finance profession. If the financial landscape instead encourages innovation and creativity where 

selt~enforeement is reliable, then we will observe more highly ethical professionals opting for the 

municipal finance profession. 

In summary, the municipal financc industry historically has been regarded as dubious by many 

finance professionals, there appears to be little downside risk for criminals and no real 

representation of interests of the tax paying public. We must resolve the numerous existing 

structural problems in municipal finance so there exists an attractive environment for highly 

ethical, innovative and creative professionals to entcr and serve the municipal finance industry. 

There are many young professionals today interested in this type of public service. We should 

create an attractive environment for them to flourish. 

5 
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76119.008

TESTIMONY OF ROBERT DOTY ON H.R. 2827 

Before the 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON CAPITAL MARKETS 

AND GOVERNMENT SPONSORED ENTERPRISES 

Hearing on The Impact ofthc Dodd-Frank Act on Municipal Finance (July 20, 2012) 

Chairman Garrett, Representative Waters and Members of the Committee, thank you for 

inviting me to testify before you this morning regarding H.R. 2827 and its potential impacts upon 

local governments across the nation. I am Robert Doty, a municipal advisor. For almost 40 years, 

I have dedicated my career to working with local governments both as a dealer representative 

and a nondealer financial advisor, as well as a bond counsel and issuer counsel in municipal 

securities transactions. I have advised and assisted many local governments benefiting from the 

issuance of billions of dollars of municipal securities in two dozen states. I have worked closely 

with hundreds of state and local officials and believe firmly that I understand well their interests 

and needs. 

With all due respect, I wish to raise certain very serious concerns that you may wish to 

consider and regarding which you may wish to exercise substantial care before proceeding with 

this legislation. 

I urge you to recognize the municipal market's self-regulatory structure through the 

Municipal Securities Rulemaking Board as the best way to resolve issues and to define 

appropriate municipal advisory roles and relationships by means of negotiation among 

representatives of the varying market sectors. The members and staff of the MSRB are 

experienced market professionals and business people who understand very well how to balance 

costs against benefits of self-regulatory decisions. (Incidentally, there are more than twice as 

many dealer representatives on the MSRB as there are nondealer advisors.) 

In particular, based upon my almost 40 years of experience in working directly with local 

governments, I am concerned that local governments will lose extremely important protections 

from which they benefit through municipal advisor regulation, ifH.R. 2827 is passed by 

Congress in its present form. 

The municipal advisory role is intended to be a role of providing competent and unbiased 

advice to local governments, and tied very closely to that, includes a fiduciary duty to the issuer. 

This is quite different and distinct from serving in the adverse roles of an underwriter, a bond 

trader or a financial product marketer. That is one important reason why separate and robust 

municipal advisor regulation is needed. 

Please understand that I consider many representatives of both dealers and nondealer 

advisors to be honorable and competent providers of municipal advice. I also recognize, 

however, that there are financial advisors both affiliated with and separate from dealers who lack 

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76119.009

the necessary competence and, in a few cases, who may be conflicted in providing advice, 

sometimes unfortunately without disclosure. Some dealers and nondealer municipal advisors 

sometimes do not always act with their clients' best interests at heart. The forthcoming 

rulemaking by the MSRB in this area will go a long way to address these issues and develop a 

truly level playing field in which the same rules apply to both dealer and nondealer advisors. 

Without that true level playing field, I fear that local governments and investors will suffer 

substantial harm. That can, in turn, create substantial economic damage to local economies and 

detract from the prospects for national economic recovery. 

To understand better the nature of the municipal advisory role, you may wish to hear about 

some of the municipal advisory services that I have provided to clients over the years. Because I 

have not accepted contingent fees for almost 20 years, I have been able to advise my clients in an 

unbiased manner NOT to issue bonds and NOT to incur more debt when doing so would have 

been unwise. My services have incIuded-

• Assisting local government clients in obtaining efficient, economical 

financing 

• Assisting local government clients in structuring sound securities issues 

• Assisting local government clients in employing strong, competent 

underwriters, bond counsel and other finance professionals 

• Assisting local government clients in avoiding unwise covenants and 

structures that would have placed the clients at great risk 

• Warning a local government client NOT to attempt an acquisition of a 

private utility company, when doing so would have been costly and 

highly risky 

• Assisting a small local government client, newly formed, but with sound 

revenues, to obtain financing 

• Warning another local government client NOT to borrow for a project 

the client could not afford, even when a lender was willing to loan funds 

• Assisting several clients in working out defaulted bond issues that were 

causing the clients substantial economic harm, when earlier advisors had 

failed to warn about significant risks 

I am convinced that effective municipal market self-regulation-with informed and full 

participation by dealer and nondealer advisors, issuers and investors-is the best way to define 

appropriate relationships, to resolve issues and to implement appropriate rules. 

Because not all municipal advisors-whether dealers or nondealers-are not fully 

competent and some fai I to recognize, or even ignore, conflicts of interest and their local 

government clients' best interests, I believe that testing the advisors' competence and knowledge 

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76119.010

of their advisory responsibilities, as well as providing continuing education and professional 

standards to guide them, are extremely crucial for the protection of state and local governments. 

The Municipal Securities Rulemaking Board has been very constructive in its approach, 

currently waiting for the SEC's finalization of the municipal advisor definition prior to acting 

with rulemaking over municipal advisors. Once the SEC acts, the true level playing field can be 

implemented appropriately thorough the MSRB's market self-regulation. 

Who are the people who are protected by this municipal market self-regulation? 

The SEC estimated that there are 50,000 municipal issuers in the country. The Municipal 

Securities Rulemaking Board estimated 80,000. Joseph Mysak, a noted municipal expert with 

Bloomberg, indicated based upon Census data that there are more than 90,000 municipal entities 

in the country, although not all of them are issuers of municipal securities. The officials of the 

vast majority of the issuers are not sophisticated regarding municipal finance. 

So, the MSRB's rules will help protect numerous governmental entities. Ensuring that 

bonds issued by these jurisdictions is done properly, with competent assistance from financial 

advisors, and at the lowest yield possible, also helps reduce the burden to taxpayers. One central 

goal is to minimize state and local property taxes and local utility rates, for example. 

The officials of these local governments -hundreds of thousands of officials charged with 

protecting the public interest-are elected or appointed on the basis of their commitment to the 

public interest including, among other things, concerns such as the following-

• Reducing taxes 

• Eliminating budgetary deficits and balancing budgets 

• Spending taxpayers' money wisely 

• Efficient and economical management and operation 

• Reducing utility rates 

• Filling pot holes 

• Fighting crime 

• Contro lling traffic 

• Collecting garbage 

• Preventing and fighting fires 

• Improving education for our children, and 

• Many more local agendas determined at the local level by local citizens 

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76119.011

With few exceptions, they definitely are NOT municipal finance experts. After all, 

municipal finance is a highly arcane area of expertise that very few people understand. 

These public officials are mayors, city council and county commission members, school 

superintendents and school board members, managers and board mcmbers of local agencies and 

special districts. They are in every congressional district. They are Republicans and Democrats. 

They are people of all political persuasions. They are people upon whom you rely for advice and 

support. Overwhelmingly, they believe that, when they perform their roles appropriatelythrough due diligence looking into experience and backgrounds of the municipal advisors they 

employ-they have performed their roles as they should and have served the public interest. 

Many members of this honorable body have served as local officials and have made 

decisions such as those outlined above. The SEC's proposed municipal advisor definition, 

erroneously in my opinion, included appointed members of state and local governing boards. The 

inclusion of these board members, really gets it wrong. 

Those officials place great trust in the municipal advisors they select. Not being municipal 

finance experts they make decisions to employ, and therefore must rely, out of sheer necessity, 

upon the municipal advisors they choose. They are led to believe and expect competent, 

disinterested and honest advice solely in the local governments' best interests. This is why a 

fiduciary standard on advisors is so essential. 

The fiduciary duty of municipal advisors-including the duty to exercise due care, the duty 

of loyalty to avoid conflicts of interest, and the duty to provide sound advice solely in the local 

governments' best interests-is absolutely essential to the municipal advisory function. 

For emphasis, unlike underwriting and trading relationships, the fiduciary duty is the very 

heart of a municipal advisor's role and responsibilities. 

Without the fiduciary duty, tens of thousands of local governments, hundreds of thousands 

of local officials, and hundreds of millions of local taxpayers and ratepayers would be at 

significant risk-as they have been in the past--of snake oil sales pitches made in disguise by 

municipal advisors posing falsely as honorable advisory professionals serving solely in the local 

governments' best interests. 

When these people are unmasked-usually when their unsound advice already has caused 

harm to local communities-most of the time it is far too expensive for local governments and 

local officials, with severely limited budgets, to spend literally millions of dollars in seeking to 

correct these wrongs. Almost always, local governments, realizing the substantial costs and risks 

of litigation, make the difficult and painful choice simply to move on and to lick their wounds. 

The losses, of course, are borne unfortunately by local taxpayers and ratepayers. 

Such mistakes harm not only local citizens and taxpayers. The mistakes also harm 

investors when unwise securities offerings are brought to market. Two-thirds of 

municipal securities are owned by retail investors directly or through mutual funds. 

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These investors can lose their savings when unsound, poorly-considered municipal 

securities are released into the market. Municipal advisors have the responsibility of warning 

local governments against such transactions, and at the same time, also protecting investors. 

It is far better for these wrongs simply to be prevented through competency testing and 

continuing education of all municipal advisors and through reasonable professional standards. 

It is far better, through market self-regulation on a true level playing field, to weed out those 

municipal advisors-both dealers and nondealers-who would abuse their relationships of trust 

with local governments in your congressional districts and other districts across the nation. 

I urge you to give full, careful consideration to all of the implications ofH.R. 2827. I urge 

you to support the municipal securities market's self-regulatory mechanism. I urge you to 

support a true level playing field in which all municipal advisors serve solely the best interests of 

tens of thousands of local government clients in your districts and across the nation. I urge you to 

consider carefully the potential for harm that would result for local governments, taxpayers, 

ratepayers, investors, and the public interest by failing to recognize the essential character of the 

municipal advisors' fiduciary duty and by restricting the municipal market's self-regulation of all 

municipal advisors. 

Thank you again for your courtesy and for inviting me. 

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76119.013

TESTIMONY 

TIMOTHY FIRESTINE 

CHIEF ADMINISTRATIVE OFFICER 

MONTGOMERY COUNTY, MARYLAND 

on behalf ofthe 

Government Finance Officers Association 

Committee on Financial Services 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

U.S. House of Representatives 

July 20, 2012 

Chainnan Garrett, Ranking Member Waters and Members of the Subcommittee, thank you for 

the opportunity to speak before you this morning. I am Tim Firestine, Chief Administrative 

Officer of Montgomery County, Maryland. I currently also serve as President-Elect of the 

Government Finance Officers Association (GFOA), which represents over 17,000 public finance 

professionals across the United States who are responsible for the budgeting, accounting, 

investing and debt management for their cities, counties, special districts and states. Prior to 

becoming CAO in Montgomery County, I was the County's Finance Director for 15 years and 

also served for 12 years in various management positions in the County's Office of Management 

and Budget. I began my public finance career in Allegheny County, Pennsylvania. The subject 

of this hearing is important to me as a public finance professional and to our entire membership. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes a number of 

provisions that arc of interest to state and local governments. As you will read in my testimony, 

these include - and the GFOA supports - parity between the credit ratings assigned to municipal 

and corporate securities and regulating the derivatives market. We also support the federal 

regulation of municipal advisors, which is the focus of to day's hearing. 

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Regulation ofMnnicipal Advisors 

Under Title IX of the Dodd Frank Act, advisors to state and local governments will be regulated 

for the first time under the authority of the Municipal Securities Rulemaking Board (MSRB). 

The GFOA supports such regulation and believes its purpose should be to ensure that state and 

local governments have access to qualified advisors who meet appropriate business standard 

requirements, are independent of conflicts of interest, have a federal fiduciary standard to their 

state and local government clients (e.g. issuers of municipal securities), and provide suitable 

financial solutions for each particular government's situation. 

The past two years have demonstrated that defining what constitutes a municipal advisor is not a 

simple task. This is most clearly shown by the Securities and Exchange Commission's (SEC) 

inability to finalize the definition of municipal advisor. The SEC's proposed municipal advisor 

definition from 19 months ago is problematic on a number of fronts. The legislation being 

discussed today, H.R. 2827, would remedy some of these problems, but it also would cause 

additional problems for state and local governments. 

The proposed legislation would solve a major issue by exempting from the proposed municipal 

advisor definition any state or local government employee or members of its governing board. 

Unfortunately, the SEC's proposed definition of municipal advisor exempts only elected board 

members and employees serving their own entity. It does not exclude appointed members of 

state and local governing boards where borrowing and investment issues are discussed. Captured 

by such a definition, tens of thousands of Americans appointed to a state or local government 

board, usually without pay, could be considered to be municipal advisors. This would have a 

chilling effect on both the willingness of citizens to serve on these boards and the day-to-day 

governance of the governmental entity. It is worth noting that numerous state and local 

government associations!, individual governments, those in the public service, and many within 

I Organizations opposing the inclusion of appointed members of state and local governing boards in the municipal 

advisory definition include - the National Governors Association, National Association of Counties, National 

League of Cities, U.S. Conference of Mayors, International City/County Management Association, National 

Association of Local Housing Finance Agencies, Council oflnfrastructure Authorities, National Association of State 

Auditors, Comptrollers and Treasurers, and Council oflnfrastructure Authorities. 

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Congress wrote to the SEC opposing this part of the proposed definition. 

Under the proposed municipal advisor definition, I personally could be classified as a municipal 

advisor. In my position as CAO of Montgomery County, I serve on the board of the DC Water 

and Sewer Authority and chair its Finance and Budget Committee. We discuss numerous issues, 

including financial transactions involving both debt issuance and investments. It boggles my 

mind that my service as a member of a body that determines what should be done to meet 

constituents' needs - including the hiring of finance professionals -could make me a regulated 

municipal advisor. 

It is unclear why the SEC proposed such a broad definition, although we have heard of vague 

and unsubstantiated references to concerns about appointed board members acting improperly as 

a member of a governmental board. We ask that the SEC focus on any specific problems it 

believes exists and develop appropriate rules that would rid the market of bad actors ifit can be 

shown that current laws and regulations are inadequate. The SEC's definition of municipal 

advisor uses a sledgehammer when a chisel is needed and has created great uncertainty to those 

who serve in the public sector and to the municipal securities market. The SEC needs to act 

quickly to fully and clearly exempt appointed members of state and local governing boards from 

the definition of municipal advisors. 

As I mentioned, H.R. 2827, attempts to remedy this problem and does so by specifying the 

definition does not include "any elected or appointed member of a governing body of a 

municipal entity with respect to such member's role on the governing body." We applaud this 

section of the legislation but find other exemptions to the municipal advisor definition within the 

bill problematic, as discussed below. 

The SEC's proposed definition covers municipal advisors who are currently unregulated, but as 

drafted, it could interfere with the types of discussions that could and should occur between 

dealers and issuers. Conversely, the legislation introduced by Congressman Dold could open the 

door too widely and allow for such sweeping exemptions that some professionals could avoid 

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appropriate regulations. 

Certainly, independent financial advisors should be regulated and included in the municipal 

advisor definition. Dealers, when having disclosed to the issuer their intention to serve as 

underwriter and not financial advisor on a particular financing, should not be unnecessarily 

constrained by the municipal advisor definition when discussing with issuers such matters as 

market dynamics and various financing options. However, dealers that choose to occasionally 

work as financial advisors should have additional obligation through regulations imposed on 

them when they serve a government as a financial advisor even though they may already be 

regulated as a dealer. The existence of a fiduciary obligation to the issuer is a distinct difference 

between the financial advisor and the underwriter functions. Merely because a dealer is 

regulated as an underwriter should not suggest that it is able to fulfill the unique fiduciary 

responsibilities that come with being a financial advisor. H.R. 2827 indicates that if a 

professional is already regulated, no further regulations should apply. Such a broad exclusion 

from the definition could mean that a professional who is both a dealer and a financial advisor 

might never have to meet important and necessary regulatory criteria because he or she already is 

regulated as a dealer. 

Another area that needs careful consideration is how to craft the municipal advisor definition to 

ensure that when the issuer does not engage the services of a financial advisor in a negotiated 

sale (an action discouraged by GFOA Best Practices), the dealer does not present itself as a 

trusted advisor to the issuer, but instead maintains that it has an arm's length relationship with 

the issuer. Current MSRB rules state that a dealer cannot deter the issuer from hiring an advisor 

and the dealer must state that it does not have a fiduciary duty to the issuer. However, both the 

SEC's definition and the subsequent MSRB rules need to carefully consider that when there is a 

dealer and not a financial advisor in a transaction, the dealer must not violate these rules and 

specifically does not present itself as having the issuer's best interest preeminent versus the 

dealer's self interest. Especially in this circumstance, H.R. 2827 may allow the exemptions to 

the municipal advisor definition to be so wide that adequate protections may not be in place for 

the issuer. 

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76119.017

H.R. 2827 also tries to remedy concerns that the SEC's definition of municipal advisors includes 

professionals working for financial institutions. The proposed solution in the legislation would 

appropriately excludes professionals within financial institutions such as trustees and 

professionals who provide traditional brokerage and banking services, but again, the exemption 

in the legislation may be too broad and exclude financial institution professionals who provide 

advisory services that should be covered by the municipal advisor definition and subsequent 

rules. 

We also have concerns that H.R. 2827 would eliminate the federal fiduciary standard. We 

strongly disagree with this approach, as a uniform and federal standard should be in place, in 

order to ensure that all advisors adhere to the same standard. A fiduciary standard is very 

important to the issuer community due to varied state standards and a municipal securities 

market that transcends state lines. A federal standard is essential in order to help protect issuers 

and eliminate any confusion about what standards apply to their hired municipal advisors. 

Changes to MSRB Mission 

The MSRB's mission has changed to include the protection of municipal entities in addition to 

its longstanding mission to protect investors. The GFOA has stated in writing to the MSRB that 

we believe its mission is to include the needs and perspective of issuers when it is developing 

regulations for broker/dealers and municipal advisors. We do not believe that the MSRB should 

act in a direct manner that does or appears to advise, regulate, or impose itself on issuers of 

municipal securities outside of what is necessary and beneficial to help issuers use and 

understand the repository for disclosure documents - the Electronic Municipal Market Access 

(EMMA) system and the various rules over dealers and financial advisors that ultimately affect 

issuers and their transactions. 

Since 20 I 0, the MSRB has completed a considerable amount of rulemaking that has been 

beneficial to the marketplace and issuers of municipal securities. While most of the rulemaking 

for municipal advisors is pending SEC action, the MSRB has drafted appropriate rulemaking for 

advisors to ensure that some type of framework is in place over these professionals. We believe 

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76119.018

the MSRB is well poised to propose, finalize and implement these rules, once the SEC completes 

its work on the municipal advisor definition. 

The MSRB has altered three rules related to dealers that are particularly helpful to issuers of 

municipal securities Rules 0-23 (on dealer-financial advisors), 0-17 (on fair dealing), and 0-

34 (on information about new issues). 

Rule G-23. Prior to recent changes to Rule 0-23, a dealer firm that also provides financial 

advisory services, could, with disclosure to the issuer, resign from being the financial advisor in 

a transaction in order to turn around and become the underwriter of these bonds. OFOA has long 

advised our members to clearly and cleanly separate the duties of the financial advisor and the 

underwriter so as to avoid the clear and absolute conflict of interest that arises when a financial 

advisor recommends a negotiated sale, and then resigns in order to underwrite the bonds in that 

negotiated sale. The MSRB rightly changed Rule 0-23 so that a financial advisor is prohibited 

from resigning and becoming the underwriter in that transaction. We believe this has been very 

beneficial in protecting issuers of municipal securities by ensuring that the financial advisor on a 

transaction carries out its fiduciary duty to the issuer by recommending, among other things, the 

appropriate method of sale (competitive vs. negotiated) for a financing, free from the absolute 

conflict of interest that arises when the dealer-affiliated financial advisor has the option of 

resigning as advisor in order to underwrite bonds in a negotiated sale. 

Rule G-17. Next month, due to MSRB's action on its Rule 0-17, underwriters will have to make 

certain disclosures to an issuer. These include stating in writing that the underwriter does not 

have a fiduciary responsibility to the issuer, disallowing the underwriter from deterring the issuer 

from hiring a financial advisor, disclosing any third party arrangements or possible conflicts of 

interest and disclosing risks associated with the proposed transaction. 

We support this interpretation of the Rule and believe the implementation of these new standards 

next month will help better define the role of the underwriter to the issuer and, along with similar 

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76119.019

and forthcoming rulemaking pertaining to financial advisors, provide issuers and the marketplace 

with a better understanding of the roles of finance professionals. 

Not-Reoffered (UNRO") Designation. The MSRB has approved a rule that is awaiting SEC 

action that would disallow the use of the term "not reoffered eNRO)" in conjunction with the 

reporting of bond sale results, unless such designation is accompanied with the price or yield at 

which such bonds were sold. The NRO designation has often been used by dealers when 

referring to maturities of a bond issue that have been pre-sold or are otherwise not available to 

the general public. We have responded to the MSRB that the NRO designation without 

corresponding yield information masks the price at which these bonds are sold and therefore 

renders the information useless to the marketplace for developing pricing comparables. This 

practice has been especially common in competitively-sold bond issues, where true market 

pricing is most likely to be revealed. Issuers and investors benefit from improved pricing 

transparency. 

Consideration of Suitability Standards. Another issue that underlies much of the above 

rulemaking and the bond and derivatives markets in general is whether there should be a 

suitability standard regarding the types of financial products that can be pitched and sold to state 

and local governments by all types of professionals, including dealers and financial advisors. 

While financial advisors have a fiduciary responsibility to municipal entities that would be 

stronger than a suitability requirement when advising governments, consideration of additional 

rulemaking addressing this issue may be needed. This is especially the case with dealers and 

should be reiterated with financial advisors, especially those who advise obligated persons rather 

than municipal entities. While developing a suitability standard may be difficult to appropriately 

define and administer - it could go a long way in ensuring that governments use financial 

products and issue bonds in a manner that best fits their jurisdiction. 

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76119.020

Changes to MSRB Board Composition 

We support the changes made to the composition of the MSRB that make it a public-member 

majority board. The MSRB acted swiftly in 2010 to effect this requirement, and the larger 

number of board members - 21 has helped the MSRB respond to various congressional 

mandates with a broader perspective. We are especially pleased that the Board has three 

members from the issuer community, when the Act calls only for "at least one member" from our 

sector. 

Regulating the Derivatives Market 

The GFOA has longstanding recommendations and policy urging members to use caution when 

deciding whether to use derivatives, either as investment vehicles or in conjunction with bond 

transactions. We fully support the Dodd Frank Act's regulation of this market under Title VII. 

Regulations to protect governments, especially small governments, will be in place this fall. 

Mandatory use of a swap advisor with a fiduciary duty to the issuer is especially helpful to 

governments and authorities who use these products. Had such regulations been in place earlier, 

many governments may have avoided being sold products that were not suitable for their 

jurisdictions. The GFOA has developed an Advisory on the Use of Derivatives and Establishing 

a Derivatives Policy, along with a Derivatives Checklist to aid issuers in determining the 

questions they should be asking in conjunction with such transactions. These documents are 

currently being updated to reflect the new regulations, but the bottom line remains the same 

without specific policy related to the use of derivatives, and a solid and ongoing understanding, 

education, and monitoring by finance staff about these types of structures, they should be 

avoided by state and local governments. We believe relatively few governments have the 

internal policy direction and staff expertise to make derivatives suitable for their entity. As 

events of the past few years have demonstrated, many issuers, and for that matter, broker-dealers 

and advisors, have failed to appropriately understand and anticipate the risks associated with 

these products with devastating financial consequences to state and local governments in many 

cases. 

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76119.021

While we are pleased that the SEC and CFTC published final swaps regulations last week, this 

market will need continuous monitoring, to ensure that the regulations live up to their intentions 

and work appropriately in this sector. We would also like to see more detailcd information about 

specific derivative transactions in the public domain, and hope that the MSRB's authority to 

develop information systems can address this issue in the future. 

Another topic that should be reviewed is how the recently uncovered L1BOR scandal is affecting 

outstanding swaps, and how the apparent manipulation of that index cost governments that were 

involved in various interest rate swaps where the index was used, as well as other financial 

products. 

Credit Rating Agency Changes 

The Dodd-Frank Act imposes numerous new rules affecting credit rating agencies that will help 

state and local governments, both with respect to ratings on the issuer's own securities as well as 

ratings on securities in which state and local governments invest their surplus cash. As was 

discussed before this Committee in May of 2009, developing uniform meaning for all credit 

ratings, regardless of the sector, is imperative to help investors understand the creditworthiness 

of various products. As has been demonstrated over and over again by the rating agencies, 

municipal debt is of far better credit quality than similarly-rated corporate debt, yet for years, it 

has been, as a class, underrated. The default level among municipal securities has historically 

been a fraction of that of corporate bonds. However, many rating agencies have applied a more 

rigorous scale to municipal securitics than to corporates. Such lower ratings have likely cost 

governments, especially small governments, as lower ratings translate directly into higher 

borrowing costs. We also believe the intent of the Act was to base the criteria used for ratings on 

the default risk and ultimate recovery experience for specific types of credits and market sectors. 

Such criteria only reinforce the fact that the muni sector, especially governmental debt, has 

historically proven to be safer than the corporate sector. SEC rulemaking is pending on this 

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matter, and we encourage it to follow through on these changes to rating practices and 

methodologies. 

There are many other regulations that have been and will be imposed on rating agencies that will 

be beneficial to state and local governments and global investment and issuer communities alike. 

However, we are troubled by certain business practices that some of the rating agencies have 

undertaken since the passage of the Act. This includes a significant increase in the cost of ratings 

and the development of new rating contracts that are unnecessarily confusing at best and 

seriously disadvantageous to issuers at worst. We are especially concerned that some of these 

contracts attempt to deflect responsibilities of the rating agencies through indemnification 

clauses that result in the direct opposite effect that the Act intended - that the rating agencies 

accept greater responsibility and provide more transparency about their methodologies and 

business practices. 

An area not addressed in the Dodd Frank Act, but certainly in the spirit of the law, is to have the 

credit rating agencies automatically post ratings directly to the MSRB's Electronic Municipal 

Market Access (EMMA) system - the repository for all municipal securities. A direct feed of 

ratings in rcal-time that can be freely accessed would be beneficial to the entire market and the 

public at large. The MSRB has been working to have the credit rating agencies send data feeds to 

EMMA, but one agency, Moody's Investors Service, has yet to participate in this initiative. 

This is especially troubling, because we have recently seen many municipal bonds downgraded, 

not because of their own credit, but because the rating was tied to a bank or bond insurer that was 

downgraded; however Moody's did not directly alert the bond issuer of the downgrade. Such 

business practices are troubling and confusing. One remedy is to have credit ratings sent to 

EMMA so that the most up-to-date information is publically available. With this change, issuers 

should be relieved of their material event obligation to report rating changes to EMMA, since 

issuers are often the last to be made aware of changes to their bond ratings. 

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We also applaud the possibility of additional competition that may be forthcoming in our sector. 

Additional players in this arena who have met requirements specified by the SEC will likely 

enhance the work of all rating agencies and benefit those who must obtain ratings in order to sell 

their securities. 

Voleker Rule 

GFOA, along with numerous other state and local government organizations, has responded to 

rulemaking related to the Vo1cker Rule and its impact on municipal securities. Specifically, we 

urged the agencies to exempt from the Rule all municipal securities, rather than only the 

obligations of states and political subdivisions, as proposed. 

The proposed rule appropriately seeks to exempt municipal securities from the section related to 

banking institutions engaging in certain proprietary trading activities in keeping with the statute 

and Congress' intent. However, (he proposed rule included a too narrow definition of municipal 

obligations that would be excluded from the Rule. We urged the regulators to use the municipal 

securities definition in the 1934 Securities Exchange Act, as they've done in the past, so that 

there is not a bifurcation in the market, and perhaps a limit on the types of bonds that banks can 

underwrite and sell. 

Other Issues 

Money Market Mutual Funds 

The GFOA and numerous other state and local government associations have expressed 

opposition to the SEC's interest to develop unnecessary and likely disruptive changes (0 rules 

governing money market mutual funds. This is especially true with proposals to change the 

stable net asset value to a floating net asset value, which would be harmful to local and state 

governments. State and local governments use MMMFs to handle their cash management and 

investment responsibilities, and the funds are the largest purchaser of short term municipal 

securities. Needless and harmful changes to fund rules could cause significant disruption in our 

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ability to safely manage our citizen's money and could increase borrowing costs if these large 

purchasers reduce their buying power of municipals. 

CUSIP Numbers 

The GFOA has been working with other market participants to shed light on the troubling and 

opaque practices used by the CUSIP Service Bureau and the companies that own or administer 

this system - American Bankers Association, Standard and Poor's and McGraw Hill Companies. 

Specifically, in order to allow for the municipal market (or any securities market) to run 

smoothly, and as required by numerous SEC rules, an identifying number of the security is 

needed in order for the bonds to be sold, as well to enable investors to easily find information 

about these bonds, and for the issuer of the bonds to submit required financial information to 

applicable repositories. In essence, this identifying system acts like a public utility, and walks 

like a public utility but is NOT a public utility - it is part of a private enterprise that is apparently 

outside of SEC jurisdiction. This is especially disconcerting when certain parameters are 

imposed on both issuer and investors of securities in their ability to use CUSIP numbers in their 

work to learn more about a security, either through public systems such as EMMA, or other 

research vehicles. 

We recommend that this Committee, as well as the SEC, look at opportunities to provide needed 

regulatory oversight over the identifying system of securities. In particular, full access to CUSIP 

numbers should be available to the marketplace and easy to access electronically. These changes 

would help ensure that the market functions as seamlessly and efficiently as possible. Of note, 

European Union financial regulators have recently investigated the practices of counterparty 

entities to the CUSIP Service Bureau and have settled charges to curb anti-competitive practices. 

Conclusion 

The Dodd Frank Act contains many important provisions for the municipal market. This is 

especially true regarding the regulation of municipal advisors, which is the focus oftoday's 

hearing. In order to implement these important changes to the municipal market, the SEC should 

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act appropriately to complete its work on a municipal advisor definition that exempts appointed 

state and local governing board members from the definition, while retaining a federal fiduciary 

standard that should be imposed on those providing advice to state and local governments, 

whether they are independent financial advisors or financial advisors affiliated with a dealer 

firm. The municipal advisor definition should be completed by the SEC as soon as possible so 

that the MSRB can develop essential rulemaking that will provide a proper and fair regulatory 

landscape for the advisors and dealers that serve state and local governments. 

Unfortunately, the legislation discussed today, while seeking to provide appropriate exemptions 

in order to make the SEC's proposed definition workable, goes too far in its questto do so. If the 

legislation were enacted as introduced, many state and local governments would find themselves 

unprotected from some problematic market practices due to the lack of regulations over various 

professionals, as well as not being able to depend on an important federal fiduciary standard for 

municipal advisors. 

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76119.026

Testimony ofthe Honorable James E. Geringer, 

Board Chair of Association of Governing Boards of 

Universities and Colleges 

House Committee on Financial Services 

Subcommittee on Capital Markets and 

Government Sponsored Entities 

July 20, 2012 

Wash!ngton, D.C 20036 

P 202296.8400 F 782.223.7053 

Chairman Garrett, Ranking Member Waters, Members of the Subcommittee on 

Capital Markets and Government Sponsored Entities, I thank you for granting me 

the privilege of testifying before your Subcommittee in this timely and important 

hearing regarding H.R. 2827, which clarifies provisions of the Dodd-Frank Act 

concerning the registration of municipal advisors. 

I am testil'ying today in my position as Chair of the Board of Directors of the 

Association of Governing Boards of Universities and Colleges. AGB is the only 

national association that serves the interests and needs of all academic governing 

boards, boards of institutionally related foundations, and campus CEOs and od,er 

senior-level campus administrators on issues related to higher education 

governance and leadership. We serve more than 40,000 individuals at over 1,900 

colleges, universities, and affiliated organizations. 

I also serve as Chair of the Board of Trustees of Western Governors University, and 

have had the honor of serving two terms as Governor of the State of Wyoming. 

H.R. 2827 addresses an issue that has been of great concern to colleges and 

universities over the last year and a half, relating to the implementation of certain 

provisions of the Dodd-Frank Act relating to persons acting as municipal advisors. 

The Dodd-Frank Act created a new regulatory regime for municipal advisors, 

induding a requirement that municipal advisors register with the SEC. In January of 

2011, the SEC issued proposed rules defining the term "municipal advisor" for 

purposes of these provisions. 

Unlike corporate directors, trustees of public and non-profit colleges and 

universities are not compensated for their board service. They are unpaid 

volunteers who devote their time, experience, and talent to serving the public 

interest. In total, approximately 50,000 men and women serve as volunteer trustees 

of public and private colleges and universities in the United States. An additional 

www.agborg 
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45,000 volunteers serve on the boards of institutionally related foundations, which 

are private charitable organizations that raise and manage funds for public colleges 

and universities. The service of these individuals protects institutional 

independence and autonomy and is essential to effective governance. 

Although we commend the SEC for clarifying in the proposed rules that elected 

board members of municipal entities, including elected trustees of public colleges 

and universities, will not be required to register as municipal advisors, we have 

been concerned that the proposed definition of "municipal advisor" could be 

construed to include appointed trustees of public universities, trustees of private 

non-profit universities, and trustees of institutionally related foundations, who are 

not explicitly exempted from the registration requirement. Trustees who discuss 

municipal financial products at board meetings and authorize institutional 

participation in municipal securities offerings could mistakenly be viewed as 

providing "advice" (a term neither the Dodd-Frank Act nor the proposed rule 

defines) to an "obligated person" and thus become subject to regulation as 

municipal advisors. 

We support the goals of the Dodd-Frank Act and the SEC of ensuring appropriate 

oversight of advisors to municipal entities and conduit borrowers. However, it is 

imperative that the quality of institutional governance not be compromised by 

counterproductive, needless, burdensome, and off-putting regulation of trustees 

acting in their fiduciary capacity. Such a result would conflict with Congressional 

intent and interfere with trustees' fiduciary responsibilities. It would also 

significantly hinder the ability of public and private colleges and universities to 

attract and retain highly qualified trustees with financial expertise, to the detriment 

of these institutions, their students and faculty, and the nation. 

To regulate trustees as municipal advisors is to misunderstand profoundly their role 

and legal status. The board of trustees of a university is a governing body, not an 

advisor. The difference between, on the one hand, the ultimate governing body of a 

higher education institution and, on the other hand, an advisor to the institution, is 

both legally straight-forward and basic to long-standing, vital principles of 

institutional governance in higher education. 

Regulation of trustees' conduct under the Dodd-Frank Act would be not only 

contrary to legislative intent and inconsistent with longstanding SEC interpretation 

of "advisor," it is also unnecessary. The conduct of trustees of colleges, 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; IRS rules for tax-exempt organizations; and 

multiple other regulatory regimes. 
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Whereas municipal advisory firms may be able to offset the burdens of regulatory 

compliance, volunteer trustees are differently situated. Institutions of higher 

education are challenged to attract the most highly qualified volunteers to invest 

uncompensated time in trusteeship. A perception that trustees may be deemed 

municipal advisors would exacerbate this challenge, particularly with regard to 

recruitment of persons with financial expertise. 

For reasons I've described, AGB supports the provisions in H.R. 2827 clarifying that 

certain persons acting in their capacity as elected or appOinted members of a 

governing body are not municipal advisors. We note, however, that the language in 

H.R. 2827 only exempts "any elected or appointed members 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," such as trustees of private non-profit universities, and trustees 

of institutionally related foundations. 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. If, however, the Bill were to be amended to include 

in the definition of "municipal advisor" persons providing advice to obligated 

persons (as under current law), we would urge the Committee to expand the 

exemption to include elected or appOinted members of a governing body of an 

obligated person, with respect to such member's role on the governing body, in 

order to ensure that the exemption covers trustees of private non-profit universities, 

and trustees of institutionally related foundations. In that event we also would urge 

that the exemption for employees of municipal entities be Similarly expanded to 

include employees of obligated persons, to ensure that staff members of private 

non-profit universities, and of institutionally related foundations, would not be 

considered municipal advisors. 

Again, I thank you for this opportunity. 

James E. Geringer 
66 


76119.029

Invested in America 

Statement af Kenneth Gibbs 

Member, Board of Directors and Chair, Municipal Securities Division 

Securities Industry and Financial Markets Association 

Before the 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Committee on Financial Services 

U.S. House of Representatives 

July 20, 2012 

Hearing on the Impact of the Dodd Frank Act on Municipal Finance 

Chairman Garrett, Ranking Member Waters and other subcommittee members, thank you for the 

opportunity to be here. I am Kenneth Gibbs and I am President of the Municipal Securities Group at 

Jefferies & Company, Inc. in New York. I appear here today not on behalf of Jefferies, but in my capacity 

as a member of the Board of Directors of the Securities Industry and Financial Markets Association 

("SIFMA"),' where I also serve as Chairman of the Municipal Securities Division. I am pleased to be here 

to discuss the impact of the Dodd-Frank Act ("DFA") on municipal finance. 

The $3.7 trillion municipal bond market is a vital sector of our capital markets. Our federal system of 

government places a number of responsibilities on states and localities, including education, 

development of public infrastructure and promoting health care and affordable housing, among others. 

Many of these functions require significant long-term capital investments, and much of that capital is 

raised in the municipal bond market. One of the extraordinary features of the market is the breadth of 

issuers that are able to access the marker efficiently. Issuers from the largest states and cities to the 

smallest towns and school districts are able to access capital with maturities of up to 30 years or more at 

low fixed rates, and with a diversity and flexibility of structure and credit. This degree of market access 

is unheard of in other countries or even in other sectors of our own finanCial markets. The median size 

of a municipal bond issuance last year was under $6 million, and thousands of issuers sold bonds of less 

than $10 million. At the same time, the municipal market continues to be one of the safest available to 

1 The Securities Industry and Financial Markets Association brings together the shared interests of hundreds of 

securities firms~ banks and asset managers. SIFMA's mission is to support a strong financial industry, investor 

opportunity, capital formation, job creation and economic growth, while building trust and confidence in the 

financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global 

Financial Markets Association. For more information, visit www.sifma.org. 

Washington I New York 

1101 New York Avenue. 8th Floor I Washington. OC 20005-4269 I P: 202.962.7300 I F: 202.962.7305 

www.slfma.org ! VWNtI.investedinamerica.org 
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Statement of Kenneth Gibbs 

Page 2 

investors, with a default rate well under 0.5 percent, while uniquely respecting the sovereignty of its 

issuing constituents. 

It is important for the municipal market to function soundly and efficiently in order to protect investors 

and other market participants and to ensure the lowest possible cost of financing for state and local 

governments and their citizens. Efficient and effective regulation is a vital component of a sound 

market. 

The DFA includes a number of provisions that are having, or will have, an effect on municipal finance, 

the municipal bond market, and municipal market participants. Now that it has been two years since the 

enactment of the DFA, it is appropriate for Congress to review the effects and consequences of the Act. 

In that regard, we commend Chairman Garrett for calling this important hearing and we are grateful to 

participate. 

My testimony today will focus on four general areas: 

Section 975 of the DFA relating to the registration and regulation of municipal advisors ("MA"), 

including H.R. 2827, legislation to amend those provisions; 

The "Volcker Rule" as it relates to municipal securities; 

Section 978 of the DFA related to funding for the Government Accounting Standards Board; and 

Provisions of Title VII of the DFA in the context of swaps used in relation to municipal finance. 

Regulation of Municipal Advisors 

Section 975 of the DFA includes provisions that establish a regulatory framework for MAs. MAs are 

consultants that provide advice to state and local governments with regard to financial transactions such 

as bond issuance, use of derivatives, investment of bond proceeds and other activities. Before the DFA, 

MAs who were not broker-dealers were wholly unregulated, one of the last unregulated parties active in 

the financial markets. Regulations that apply to broker-dealers and municipal securities dealers who 

provide MA services, on the other hand, have encompassed MA activities for many years. It was 

appropriate, therefore, for Congress to bring MAs under the regulatory umbrella. SIFMA supported and 

actively advocated for the inclusion of MA regulation in the DFA because we believe it is important to 

level the regulatory treatment for dealer and non-dealer MAs and to ensure that non-dealer MAs are 

appropriately policed with respect to competency, conflicts of interest, interaction with bond issuers 

and other areas. 

In its work leading to the enactment of the DFA, the Financial Services Committee examined the issue of 

unregulated municipal advisors. In a hearing on May 21, 2009, the Committee heard testimony on H.R. 

2550 (111lh Congress), the Municipal Advisers Regulation Act. At the hearing, both then-Chairman Frank 

and Ranking Member Bachus expressed support, at least conceptually, for regulating MAs, with thenRanking Member Bachus stating "Mr. Chairman, of the measures that are the subject of today's hearing, 

the legislation, your legislation to regulate unregulated municipal financial advisors is one that I could 

accept, with some changes. We are in agreement with the basic premise that the SEC should require 
68 


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Statement of Kenneth Gibbs 

Page 3 

individuals who advise municipalities to register as investment advisors.'" Key elements of H.R. 2550 

were eventually incorporated into the DFA. 

On September 1, 2010, after the enactment of the DFA, the Securities and Exchange Commission ("SEC) 

published an interim final temporary rule to implement the MA registration requirements of Section 975 

of the Act.' The interim final temporary rule is much broader in scope than what was intended by 

Congress in enacting the MA provisions of the DFA and goes far beyond simply regulating previously 

unregulated advisors. It also left many key questions unanswered in terms of what constitutes "advice" 

provided to municipal entities, the scope of the fiduciary duty of MAs, and the scope of the "investment 

strategies" provision of the DFA, among others. Because the SEC has not yet completed work on the 

final municipal advisor registration rule, key elements of the interim final temporary rule are still in 

force. 

One illustration of the breadth of the interim final temporary rule in relation to Congress' original intent 

with regard to MA regulation is the number of entities that have registered with the SEC as MAs since 

the rule took effect. In testimony before the u.s. Senate Committee on Banking, Housing and Urban 

Affairs in March 2009-before the enactment of the DFA and before the SEC's temporary municipal 

advisor registration rule-the Municipal Securities Rulemaking Board ("MSRB") indicated that 260 nondealer municipal financial advisors participated in at least one municipal securities transaction in 20084 

As of July 17, 2012, under the SEC'S temporary municipal advisor registration rule, 1,132 firms have 

registered as municipal advisors.' One reason the number of registered municipal advisors so far 

exceeds the number of advisory firms actually active in the market is that the SEC's temporary rule is so 

much broader, and farther-reaching than Congress considered in 2009 when the DFA was being 

conceived. 

On December 20,2010, the SEC published a proposed rule on Registration of Municipal Advisors6 (the 

"Proposed Final Rule"). The SEC's Proposed Final Rule goes much farther than Congress intended when 

the DFA was being drafted. Rather than being limited to previously unregulated municipal advisors, the 

Proposed Final Rule would encompass in the definition of MA a wide breadth of entities and activities 

that are outside Congress' intent, outside the scope of the statute, and outside the scope of what 

2 Committee on Financial Services, U.S. House of Representatives, One Hundred Eleventh Congress, hearing 

transcript on "legislative Proposals to Improve the Efficiency and Oversight of Municipal Finance," May 21, 2009, 

Serial No. 111·37, page 3. 

3 Securities and Exchange Commission, "Temporary Registration of Municipal Advisors," Release No. 34-62824, 

September 1, 2010. 

4 Testimony of Ronald A. Stack, Chair, Municipal Securities Rulemaking Board, before the Committee on Banking, 

Housing and Urban Affairs, United States Senate, March 26, 2009, page 27. 

5 U.s. Securities and Exchange Commission, "Municipal Advisor Temporary Registration Forms Received," at 

https:f/tts.sec.gov/MATR/. The MSRB also has a parallel registration rule. It is interesting to note that not all firms 

that registered as MAs registered with both the SEC and the MSRB. 

6 U.s. Securities and Exchange Commission, "Registration of Municipal Advisors," Release No. 34-63576, December 

20,2010. 
69 


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Statement of Kenneth Gibbs 

Page 4 

market participants generally understand to be MA activities. Some examples of activities and entities 

covered by the SEC's Proposed Final Rule but outside the scope of the statute include, among others: 

Certain appointed, unpaid members of issuer governing bodies, such as, for example, volunteer 

members of a local government board or commission/ 

Banks providing "traditional banking services" or "investment advisory services" such as deposit 

accounts or trustee services;" 

Investment advisors or others who provide advice regarding the investment of not only the 

proceeds of municipal securities, as provided in the statute, but virtually any public funds such 

as pension funds or Section 529 college savings plans;9 and 

Broker-dealers or banks serving as or seeking business as underwriters with respect to many 

services and functions typically performed by investment bankerslO 

SIFMA provided extensive comments to the SEC on its Proposed Final Rule, which outline numerous 

other areas where the proposal goes beyond congressional intent or statutory authority. 11 The SEC has 

received over 1,000 comment letters on the Proposed Final Rule, many from state or local officials, with 

the overwhelming majority opposed to all or part of the proposal. 

Focusing on the role of underwriters and the bond issuance process, Congress in the DFA explicitly 

excluded from the definition of MA "a broker, dealer, or municipal securities dealer serving as an 

underwriter." However, the SEC's proposed implementation of that exclusion is too narrow and would 

be detrimental for bond issuers. In a "negotiated" bond sale, a bond issuer typically selects one or more 

dealer firms to serve as underwriter, often through a competitive "request for proposals" process. 

Sometimes before the selection process begins, investment bankers present ideas or suggestions that 

mayor may not result in transactions. After the selection, the selected underwriter typically provides 

many services to the issuer leading up to the pricing and sale of bonds and sometimes after the closing. 

These services can include help with structuring, sizing or timing the capital program or sale, performing 

calculations or analysis regarding the credit terms or other features, interaction with rating agencies, 

pre-marketing the bonds to investors and other functions. Underwriters are generally not compensated 

separately for these services, but ratherthese services are part of the overall process of underwriting 

bonds in a negotiated sale. Congress would not have included an underwriter exclusion to the MA 

definition in the statute if their intention was to cover investment banking activities such as 

recommendations and suggestions on the structure, timing, terms and other similar matters in the 

definition of MA. 

7 Id., page 41. 

8 Id., page 42. 

9 Id., page 26. 

10 Id., page 31. 

11 Letter from Leslie M. Norwood, SIFMA, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 

February 22, 2011. 
70 


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Statement of Kenneth Gibbs 

Page 5 

The SEC has interpreted the underwriter exclusion from the MA definition narrowly to encompass only 

the function of price negotiation and purchase of the bonds by the underwriters. The proposed 

interpretation ofthe underwriter exclusion would not cover all the other services and functions 

provided by an underwriter in the context of serving a negotiated issuer. If adopted as proposed, the 

Proposed Final Rule would limit the ability of state and local governments and other municipal securities 

issuers to obtain services necessary for, and typically provided in the context of, the bond issuance 

process. The result would be higher costs and poorer transaction execution for state and local 

borrowers. 

Moreover, treating the value-added services typically proVided by underwriters in the context of 

negotiated underwritings as MA services is incompatible with the role of underwriter for two reasons. 

First, the DFA imposes a fiduciary duty on MAs with respect to their issuer clients. While a fiduciary 

relationship is acceptable for MAs-indeed, MAs have had a fiduciary duty to their issuer clients under 

state laws for many years-it is at odds with the role underwriters play in bond sales. Underwriters are 

arm's-length counterparties, particularly in the context of the price negotiation and sale. A "buyerseller," counterparty relationship is fundamentally incompatible with the role of a fiduciary, which 

generally entails a duty of loyalty and the requirement to place the needs of the client first. 

Underwriters, on the other hand, serve as a bridge between issuers and investors and must consider the 

needs and requirements of both parties when negotiating the price of a new bond issue. 

The SEC's Proposed Final Rule would also potentially result in a confusing array of standards of conduct, 

which is particularly troubling in the context of a rule designed to clarify roles. A firm hired as an 

underwriter on a negotiated transaction would declare itself an underwriter under MRSB rules. That 

dealer could bear a fiduciary duty to the issuer with respect to advice leading up to the pricing. That 

fiduciary duty would end when the price negotiation began. 

Most important, the SEC has not provided any justification or basis for treating investment banking 

services as MA activity. Nowhere in the legislative history associated with the MA provisions in the DFA 

is there any indication that Congress intended the definition of MA to include investment banking 

services. Indeed, Congress explicitly excluded underwriters from the definition. The SEC has simply 

interpreted that exclusion inappropriately narrowly. 

Now that the DFA is two years old and the SEC's Proposed Final Rule has been out for 19 months, we are 

hopeful that the SEC will act quickly to finalize the rule in a manner that respects Congress' intent and 

the scope of the SEC'S authority underthe statute. 

H.R.2827 

On August 26, 2011 Rep. Bob Dold (IL-lO) introduced H.R. 2827, legislation which would amend the DFA 

to ensure that the statutory definition of MA incontrovertibly reflects Congress' original intent. The bill 

now has 35 cosponsors, both Republicans and Democrats. The bill includes several tailored, sensible 

amendments to the DFA that would prevent any regulatory misinterpretation: 
71 


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Statement of Kenneth Gibbs 

Page 6 

The bill would specify that a party is a MA when that party "is formally engaged, in writing and 

for compensation, by a municipal entity to provide advice." This is the generally accepted means 

of defining the advisory role among market participants, and MSRB rules mandate a written 

agreement for advisory services. 

The bill would exclude from the definition of MA parties that either are already excluded under 

the statute currently or were already regulated before the DFA, such as broker-dealers and 

banks, among others. 

• The bill would exclude from the MA definition "any elected or appointed member of a governing 

body of a municipal entity." 

The bill would clarify the definition of "investment strategy" so that it encompasses only the 

proceeds of bond issues, as Congress intended, and would exclude from the definition of MA 

certain activities and services such as serving as custodian or acting as a broker without 

providing advice, again consistent with Congressional intent. 

• The bill would ensure that certain communications between a municipal entity and a pooled 

investment fund would not cause the fund's manager to be treated as a MA; and 

In short, H.R. 2827 would clarify language in Section 975 of the DFA to ensure, as Congress intended, 

that the statute encompasses those activities performed by municipal financial advisors who were 

unregulated before the DFA was enacted, and excludes those parties and activities that are already 

heavily regulated. SIFMA supports H.R. 2827 and urges Congress to act on the bill quickly. 

The Volcker Rule ond Municipal Finance 

Section 619 of the DFA creates a new Section 13 of the Bank Holding Company Act ("BHCA"), known as 

the "Volcker Rule," generally prohibiting any banking institution from engaging in certain proprietary 

trading activities or from acquiring or retaining an ownership interest in, sponsoring, or having certain 

relationships with "hedge funds" and "private equity funds". Federal regulators including the Board of 

Governors ofthe Federal Reserve System, the Federal Deposit Insurance Corporation, the Office ofthe 

Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures 

Trading Commission (the "Agencies") have since issued proposed rules to implement Section 61912 

(collectively, the "Volcker Rule Proposal"). SIFMA has raised significant, substantive concerns with 

various aspects of the Volcker Rule Proposal, especially with the "market making" exception to the rule. 

Our general comments are embodied in a letter we filed together with other associations on February 

13,2012.13 In addition, SIFMA's Municipal Securities Division filed a letter focusing on the effects of the 

12 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge 

Funds and Private Equity Funds, 76 Fed. Reg. 68,846 (proposed Nov. 7, 2011) and Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Covered Funds (proposed 

Jan. 13, 2012). 

13 SIFMA, The Clearing House Association, The Financial Services Roundtable and the American Bankers 

Association, "Comment Letter on the Notice of Proposed Rulemaking Implementing the Volcker Rule - Proprietary 

Trading," February 13, 2012. 
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Statement of Kenneth Gibbs 

Page 7 

Volcker Rule Proposal on municipal finance. l4 Those statements describe our views on the Volcker Rule 

Proposal in considerable detail. 

In sum, with respect to the effects of the Proposed Volcker Rule on municipal finance, there are two 

general areas of concern. The first relates to a provision in Section 13(d)(l)(A) of the BHCA that exempts 

from Volcker Rule restrictions trading in, among others, "obligations of any State or of any political 

subdivision thereof." Congress included this exemption in the DFA in recognition that municipal 

securities are extraordinarily safe investments and generally do not pose substantial risks for banks and 

in order to help maintain a liquid and active market for municipal securities, thereby keeping state and 

local financing costs low. Unfortunately, the Agencies have proposed to interpret "obligations of any 

State or of any political subdiviSion thereof" too narrowly." Congress clearly intended to exclude the 

full municipal securities market from Volcker Rule restrictions, and the proposed rule violates that 

intent. The proposed interpretation would also artificially bifurcate the market by excluding bonds 

issues directly by state and local governments but not excluding bonds issued by state and local agencies 

and authorities. 

The MSRB estimates, based on information from Thompson Reuters, that in calendar year 2011, 41.4 

percent of municipal securities issued were sold by agencies and authorities'6 and would not be 

excluded from Volcker Rule restrictions. Many of these agency and authority bonds are for vital 

government functions such as water and sewer systems, pu blic power systems, hospitals and 

universities and similar types of facilities. In many cases, bonds issued by agencies and authorities are 

no riskier, and may even be less risky, than bonds issued directly by governments. In other 

circumstances, the choice of whether to issue bonds by a government directly or through an agency or 

authority is based on convention or local statute and has no bearing on credit or other risk or on how 

the bonds are considered by the market. 

Excluding one segment of the municipal market from Volcker Rule restrictions while subjecting another 

to the restrictions would cause substantial confusion. It is not always obvious from looking quickly at a 

security whether it is issued by a government directly or by an agency, and there is a Significant "grey 

area" between government and agency bonds. We are concerned that some banks, rather than facing 

the risk of violating the Volcker Rule by trading restricted municipal securities, would simply avoid the 

municipal market altogether, reducing liquidity. Moreover, banks are one of the few remaining sources 

of institutional demand in the municipal market, and discouraging their participation in the market 

could result in higher borrowing costs for municipal bond issuers. Most important, we believe Congress 

intended for municipal securities generally to be excluded from Volcker Rule restrictions. Hence, we 

'4 letter from David L Cohen, SIFMA, to the Board of Governors of the Federal Reserve System, the Federal 

Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Securities and Exchange 

Commission on "Comments on Volcker Rule Proposed Regulations," February 13, 2012. 

15 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge 

Funds and Private Equity Funds, 76 Fed. Reg. 68,846, page 68,878, footnote 165. 

'6 letter from the Municipal Securities Rulemaking Board Re: Restrictions on Proprietary Trading and Certain 

Interests in, and Relationships with, Hedge Funds and Private Equity Funds, January 31, 2012, page 2. 
73 


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Statement of Kenneth Gibbs 

Page 8 

have urged the Agencies to exclude from Volcker Rule treatment all municipal securities as defined in 

Section 3(a)(29) of the Securities Exchange Act of 1934. 

Our second area of concern relates to the treatment of tender option bonds ("TaBs") under the 

Proposed Volcker Rule. TaBs are financial products created by dealers or other market participants by 

depositing fixed-rate municipal securities in a pass-through trust and selling interests in the trust to 

investors. The TaB interests generally are floating-rate securities and are supported by a feature where 

investors can sell their interests to a remarketing agent or bank at face value periodically. Creating a 

TaB also generally results in creating a residual class of TaB interests that is almost always retained by 

the bank or dealer that sponsored the transaction. The residual interests generally entail no more risk 

to the holder than the underlying securities themselves. TaBs' features combined often make them 

compliant with SEC Rule 2a-7 and eligible for investment by money market mutual funds. They also 

satisfy investor demand for short-term-like municipal investments, which tend to be in short supply in 

the market, particularly in current conditions. TaBs actually give investors greater security than the 

underlying bonds because they are fully supported by liquidity facilities. Moreover, TaBs provide a 

source of demand for municipal securities that has the effect of lowering borrowing costs for borrowers. 

TaB volume can run into the hundreds of billions of dollars, depending on market conditions, and can 

represent an important source of demand. In addition, TaBs are an important means for bond dealers 

to finance their inventories, which improves liquidity for investors. The TaB market has existed for over 

20 years, and TaBs generally performed well during the financial crisis. 

The Proposed Volcker Rule would prohibit bank investment in "covered funds." As proposed by the 

Agencies, covered funds would functionally include TaB trusts, effectively prohibiting banks from 

holding TaB residual interests. The proposed rule would effectively bar banks from establishing TaB 

programs. Those hurt by this prohibition would include state and local government borrowers, which 

would lose an important source of demand fortheir securities, and money market mutual funds and 

their shareholders, which would lose an important source of low-risk, high-quality investments. We 

have urged the Agencies to treat TaB interests in the same manner as municipal securities and exclude 

TaBs from Volcker Rule restrictions. 

Funding for the Governmental Accounting Standards Board 

Section 978 ofthe DFA authorizes the SEC to require the Financial Industry Regulatory Authority 

("FINRA") to collect a fee from its members to fund the Governmental Accounting Standards Board 

("GASB"). On May 11, 2011 the SEC issued such a direction to FINRA 17 and on February 23, 2012 the SEC 

approved FINRNs Rule to implement a new tax on dealers to fund GASB18 ("FINRA Rule"). 

Unfortunately, the new fee structure effectively represents a "blank check" for GASB, which is 

particularly troubling given that there is little oversight over GASB's budget or activities. 

17 U.S. Securities and Exchange Commission, "Order Directing Funding for the Governmental Accounting Standards 

Board," Notice No. 33-9206, May 11, 2011. 

1& Financial Industry Regulatory Authority, "GASB Accounting Support Fee," Regulatory Notice 12-15, March 2012. 
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Statement of Kenneth Gibbs 

Page 9 

GASB is the accounting standards setter for state and local governments and government agencies and 

authorities. Unlike the Financial Accounting Standards Board ("FASB"), however, GASB does not fall 

under the oversight of the SEC, and there is no statutory or regulatory requirement that governments 

comply with GASB Generally Accepted Accounting Principles ("GAAP"). According to the U.S. 

Government Accountability Office ("GAO"), over the period 2006-2009, GASB was funded through a 

combination of "voluntary financial contributions" and the sales of subscriptions and publications by 

FASB and GASB.19 Since the adoption of the FINRA Rule, dealers have received invoices for the funding 

of GASB, and the tax on dealers has become GASB's principal funding source. The fee imposed by the 

FINRA Rule is based on each FINRA dealer's municipal securities trading activity as reported to the 

MSRB's Real-time Trade Reporting System ("RTRS"). While we support and appreciate the role that 

GASB plays in the market, we feel strongly that requiring FINRA's dealer members to fund GASB is 

wholly inappropriate: 

The fee imposed by the FINRA Rule is an unfair tax on broker-dealers and municipal bond 

investors who should not be mandated to subsidize the entire expense of financially supporting 

GASB. 

There are many other end users of GASB's accounting and financial reporting standards, such as 

non-debt issuing municipalities, financial advisors, banks, bank dealers, insurance companies, 

rating agencies, mutual funds, legislative/governmental staff, and taxpayer organizations that 

get a "free ride" under FINRA's fee. 

• The fee imposed by the FINRA Rule prOVides Virtually unlimited funding for GASB. GASB simply 

tells FINRA how much funding they need for a given year, and FINRA structures the tax to raise 

that much revenue. There is no direct or indirect independent budget oversight in effect 

"taxation without representation" with no incentive for transparency or fiscal discipline. 

Many municipal bond obligors are not GASB reporting entities. Many municipal bond obligors 

are private non-profit corporations, and thus are subject to the rules of FASB, not GASB. The fee 

imposed by the FINRA Rule makes no distinction between bonds issued by GASB obligors, bonds 

issued by FASB obligors and bonds with obligors who follow neither set of standards. It would be 

inappropriate to tax transactions in bonds issued by obligors that do not utilize GASB standards. 

The fee imposed by the FINRA Rule unfairly burdens certain dealers and is not allocated 

equitably. Any accounting support fee should be business model/operationally neutral, and 

FINRA's fee is not. Not all trades reportable to the RTRS involve customers. Additionally, under 

certain circumstances multiple assessments are charged from a single purchase and sale. Supply 

chains that involve multiple dealer trades are more heavily impacted. Finally, the municipal 

securities transactions of bank dealers'-who comprise a significant portion of trading activityare not covered by FINRA's proposal, as they are not FINRA members. 

19 U.S. Government Accountability Office, "Dodd-Frank Wall Street Reform Act: Role of the Governmental 

Accounting Standards Board in the Municipal Securities Markets and Its Past Funding," Briefing for offices of the 

Committee on Banking, Housing, and Urban Affairs, United States Senate, and the Committee on Financial 

Services, House of Representatives, January 12 and 13,2011, page 29. 
75 


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Statement of Kenneth Gibbs 

Page 10 

The breadth of our concerns regarding the FINRA Rule is outlined in our comment letter on the 

proposed rule filed with the SEC.'o 

While we recognize that the SEC and FINRA are bound by the restrictions of the statute, we maintain 

that imposing a fee on dealers to fund GASB is inappropriate. FASB is funded primary by fees paid by 

corporate securities issuers. This approach is appropriate since corporations and other businesses are 

the primary users and beneficiaries of FASB's work. We urge Congress to consider a statutory 

amendment to the GASB funding provision of the DFA to change the way GASB is funded, perhaps based 

on the FASB model, as well as to impose independent oversight of GASB's budget. 

Derivatives Regulation and Municipal Finance 

Title VII of the DFA includes substantial new regulations relating to products and participants in the 

market for over-the-counter swaps. These new regulations cover a wide range of products and 

activities, many of which have implications for state and local governments that use swaps as a 

component of their financing and swap dealers who transact with states and localities. SIFMA's 

Municipal Securities Division has focused mostly on two areas, the business conduct standards in 

Section 731 of the DFA and the mandatory clearing requirements in Section 723. 

Section 731, related to business conduct standards, imposes significant new regulatory obligations on 

swap dealers and major swap participants with respect to swap counterparties. These obligations are 

heightened in the context of swaps executed with "special entities," a term that includes state and local 

governments. Swap dealers are now required to make disclosures to counterparties covering such areas 

as, among others, information about the material risks and characteristics of the swap and any material 

incentives or conflicts of interest that the swap dealer or major swap participant may have in connection 

with the swap. The obligations for swap dealers executing swaps with special entities under Title VII are 

even stricter and include, among others, a requirement that the swap dealer has a reasonable basis to 

believe that the counterparty has an independent representative that has sufficient knowledge to 

evaluate the transaction and risks; is independent ofthe swap dealer; and undertakes a duty to act in 

the best interests of the counterparty it represents as well as other factors. If the swap dealer is also 

serving as an "advisor" to a special entity counterparty, that dealer has a duty to act in the best interests 

of the counterpartY' among other requirements. 

On February 17, 2012, the Commodity Futures Trading Commission ("CFTC) published the final rules 

implementing the business conduct standards in Section 731.21 SIFMA had urged the CFTC in general to 

construct the business conduct rules in such a way as to preserve the ability of state and local 

governments to execute swap contracts when appropriate. We have some concerns with the final 

20 Letter from David L. Cohen, SIFMA, to Elizabeth M. Murphy, SEC on SEC File No. SR-FINRA-2011-073: Notice of 

Filing of Proposed Rule Change Relating to Establishing a Governmental Accounting Standards Board Accounting 

Support Fee, January 30, 2012. 

21 Commodity Futures Trading Commission, "Business Conduct Standards for Swap Dealers and Major Swap 

Participants With Counterparties," Federal Register, Vol. 77, No. 33, February 17, 2012, page 9734. 
76 


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Statement of Kenneth Gibbs 

Page 11 

business conduct rule, which we continue to raise with the CFTC. However, the rule in general, while 

imposing substantial new obligations on swap dealers, will allow state and local governments to 

continue to execute swaps when warranted. 

Section 723 of the DFA generally requires swaps to be cleared through derivatives clearing organizations 

("DCOs"), a function that will require counterparties to a swap contract to maintain margin accounts at 

the DCOs. Rules and practices governing states and localities effectively prohibit governments from 

tying up public funds in margin accounts. Fortunately, the DFA includes a provision exempting "end 

users" from the mandatory clearing requirements if the end user is not a financial entity, is using swaps 

to hedge or mitigate commercial risk, and notifies the Commission, in a manner set forth by the 

Commission, how it generally meets its financial obligations associated with entering into non-cleared 

swaps. Earlier this month the CFTC finalized its rules implementing the end user clearing exception. 22 

We had urged the CFTC during the consideration of the rule to ensure that states and localities are not 

"financial entities" and that interest rate and other risks generally hedged and managed by states and 

localities would be included in "commercial risk." The final rule appears to have addressed those 

concerns. 

While the new regulations governing municipal swaps are not unmanageable, a key question is whether 

swap dealers and state and local governments will bear the additional regulatory obligations required to 

continue to use derivative products. We continue to monitor other areas of swap regulation, such as 

the antiCipated rules governing margin requirements for uncleared swaps, to ensure that the new rules 

preserve the ability of state and local governments to execute swaps when appropriate. 

Conclusion 

The DFA includes a number of provisions which will have a significant effect on the municipal securities 

market. Among these are regulation of municipal advisors, the Volcker Rule, a new funding scheme for 

GASB, and regulation of over-the-counter swaps. We have been working with regulators to help ensure 

that implementation of these elements of the DFA will allow the market to function smoothly while 

ensuring that Congress' intent is fully realized. However, important issues remain unresolved: 

The SEC has not yet finalized its municipal adVisor registration rule, and the proposed final rule 

includes numerous provisions that would go against congressional intent and statutory 

authority, including issues related to the underwriter exclUSion. H.R. 2827 would help address 

these issues by clarifying key provisions in the statute. 

The Volcker Rule, as proposed by the financial regulatory agencies, would take too narrow an 

approach to the municipal securities exclusion in the statute and, if adopted as proposed, would 

bifurcate the market and increase borrowing costs for states and localities with no benefit to 

bank safety and soundness. 

22 Commodity Futures Trading Commission, "End-User Exception to the Clearing Requirement for Swaps," available 

at www.cftc.gov!LawRegulation!DoddFrankAct!Rulemakings!DF _11_EndUserlssLlNK!federalregister071012. 
77 


76119.040

Statement of Kenneth Gibbs 

Page 12 

The GASB funding provision in the DFA is misguided because it imposes the funding obligation 

on FINRA-member dealers, parties that have little to do with GASB's activities. The FINRA rule 

related to GASB funding provision is also unfairly implemented because it fails to tax non-FINRA 

dealers and is inappropriately based on trading activity. It also provides a virtually unlimited 

funding source for GASB with little oversight over its budget or activities. We urge Congress to 

revisit the entire approach to GASB funding. 

SIFMA looks forward to continuing to work with regulators and Congress to help ensure that the reforms 

embodied in the DFA are fairly and efficiently implemented. Thank you for the opportunity to present 

our views. 
78 


76119.041

Testimony of Christine Keel< 

Director of Govemment Relations 

Energy Systems Group 

Before the Subcommittee on Capital Markets and Govemment Sponsored Enterprises 

Committee on Financial Services, U.s. House of Representatives 

July 20, 2012 

Chairman Garrett, Ranking Member Waters, members of the Subcommittee, my 

name is Christine Keck and I am an executive with Energy Systems Group (ESG). On behalf 

of ESG and the energy services (ESCO) industry, I appreciate the opportunity to share my 

views on H.R. 2827 and the rule making underway at the Securities and Exchange 

Commission (SEC) regarding the registration of municipal advisors. 

Energy Systems Group applauds Congressman Dold for the introduction of his 

important legislation. We support the objective of the bill, which attempts to exclude those 

who provide engineering advice from registration as a municipal advisor - including energy 

services companies. This was the original intent of Congress when it passed the Wall 

Street Reform and Protection Act. 

Congressman Dold's legislation is a positive step in addressing the impact to the 

ESCO industry of the proposed rule under consideration at the SEC. The rule proposed 

recognizes that engineers provide advice as part of engineering services, but we believe it 

too narrowly defines the advice that the engineering exclusion would cover. As I will 

explain in my testimony today, 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 interprets the term "engineering advice: 

recognizes the inexorable link between the continuum of services ESCOs provide and, in 

the final analysis, appropriately excludes ESCOs from the requirement to register as 

municipal advisors. 

Energy Systems Group 

Energy Systems Group is an award-winning and nationally-accredited energy 

services company that develops innovative and self-funding energy and infrastructure 

solutions for a broad range of customers, of which municipalities account for a substantial 

amount of contracted work. ESG is wholly-owned by Vectren Corporation, an energy 
79 


76119.042

services provider serving more than 1 million customers in Indiana and Ohio based in 

Evansville, Indiana. 

Founded in 1994, ESG has implemented over $i3 billion in projects for more than 

300 customers throughout the United States and U.S. Virgin Islands. ESG is headquartered 

in Newburgh, Indiana and operates through local offices in the Midwest, Mid-Atlantic, 

Southeast and Southwest United States. ESG is licensed to do business in 39 states, the 

U.S. Virgin Islands and Puerto Rico. 

ESG has completed or 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. This is not inconsistent with the rest 

of the industry, where other ESCOs also undertake a significant amount of municipal work. 

Energy Systems Group is accredited by the National Association of Energy Service 

Companies (NAESCO) as an energy services provider. During the last twenty years, 

NAESCO-member companies have delivered thousands of Guaranteed Energy Savings 

Projects across the US and in a number of other countries. NAESCO member projects have 

produced: 

$408 in projects paid from savings 

$508 in savings - guaranteed and verified 

380,000 person-years of direct employment 

$25 billion of infrastructure improvements in public facilities 

420 million tons of C02 savings at no additional cost 

ESG's comprehensive offering, which is typical of NAESCO member ESCOs, includes 

facility-wide audits, energy and facility project development, engineering and design 

services, implementation, operations and maintenance services and measurement and 

verification of savings. 

Through our core business of performance contracting and extensive network of 

utility partnerships, ESG provides innovative solutions for the modernization of buildings 

and energy infrastructures in the government, education, healthcare and commercial 

sectors. ESG also designs, builds and operates waste-to-energy facilities and cogeneration 

plants and offers a full range of renewable energy technology solutions such as solar, wind 

and geothermal. 
80 


76119.043

ESG has developed a particular expertise and success in developing energy 

conservation projects for municipal governments. Through performance contracting, ESG 

assists local governments in overcoming major barriers that often prevent the 

implementation of infrastructure and energy saving improvements. Performance 

contracting is a turnkey service through which comprehensive energy efficiency, renewable 

energy and distributed generation measures are made possible and often is accompanied 

with guarantees that the savings produced by a project will be sufficient to finance the full 

cost of the project. 

Energy Services Companies 

The energy services industry serves a vital role to its customers by providing energy 

solutions that furnish low-cost, state-of-the-art power and energy efficiency services. 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, allowing for further investments to be made in clean energy and other 

engineering projects. 

Typically, an energy services company will review a customer's current energy 

sources and uses and then will propose engineering solutions designed to reduce the 

customer's energy costs and upgrade the physical infrastructure. If the proposal is 

accepted, the ESCO will build and install the energy project. Providing these services 

requires ESCOs to maintain expertise in both managerial and technical aspects of the 

engineering projects. 

ESCOs provide prospective customers general information and educational material 

about potential energy services projects. Potential customers need this information to 

make a qualified judgment as to the viability and workability of the proposed project. In 

general, this "engineering advice" often includes: 

Preparation of energy audits, engineering diagrams, and technical reports; 

Cash flow analysis of projected savings; 

General information on available funding options and various government and 

utility financial incentive programs available to assist in the implementation of 

the project; and 

Information on potential funding sources, for which ESCOs are not 

compensated. 

The world of energy services is complex and evolving rapidly - both in terms of the 

many types of projects that may be undertaken and the various financial incentive 
81 


76119.044

programs available to assist in the implementation of those projects. The information I 

have outlined often is provided during the course of deliberations about the specifics of a 

project. It simply is impossible to disentangle information about engineering (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 financing that engineering. 

Registration of Municipal Advisors with the Securities and Exchange Commission 

The statutory definition of municipal advisor, as included in Section 975 of DoddFrank, 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 and accompanying comments effectively would 

place outside of the statutory exclusion the majority of situations in which engineering 

firms, including energy services companies, work with local governments to develop and 

implement energy savings and other projects. The SEC has stipulated in its proposal that 

cash-flow modeling or the provision of information and education relating to municipal 

financial products, even if incidental to the provision of engineering advice, would be 

deemed municipal advisory activities. 

Cash-flow modeling and feasibility studies, which include a contemplation of 

financing - municipal or otherwise - are inexorably linked in the continuum of engineering 

services. Absent the ability of ESCOs to discuss the costs, savings and financing options of 

a potential energy project, the discussion of engineering itself essentially is useless to a 

customer. 

Adoption of the proposed SEC rule would threaten the very nature of the ESCO 

industry and impede significantly our ability to undertake municipal projects that save 

taxpayer dollars, reduce energy usage and create jobs. In addition, it would place ESCOs -

unnecessarily and contrary to the intent of Congress - under the regulatory framework of a 

financial services regulator, which has little or no understanding of the predominant 

engineering activities and services offered by an energy services company. 

The Dold bill seeks to remove ESCOs from entanglement in a registration regime 

that was unintended and would be unnecessarily burdensome. At a time when 

governments at all levels are seeking greater energy efficiency and innovative cost-savings 

measures, our public policy should help facilitate the very projects ESCOs undertake with 

municipalities - not hinder them. 
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76119.045

Our industry has engaged in constructive dialogue with the SEC and we appreciate 

the commission's willingness to consider the unique and complex nature of municipal 

energy services projects. We will continue to educate the SEC about our business practices 

and encourage the Commission to adopt a final rule that clearly exempts ESCOs from 

registration and regulation requirements that apply to municipal advisors. 

Conclusion 

Mr. Chairman, in conclusion I would like to thank you and the entire Subcommittee 

for the opportunity to provide my views here today. The outcome of the proposed rule and 

the exclusion from registration by ESCOs as municipal advisors is critical to the vibrancy of 

the energy services industry and our ability to assist municipalities in their endeavor to 

achieve lower-cost and more efficient energy. 

I am willing to take any questions the committee may have. 
83 


76119.046

July 20, 2012 

Testimony of 

Albert C. Kelly, Jr. 

On behalf of the 

American Bankers Association 

before the 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

of the 

Committee on Financial Services 

United States House of Representatives 

~I American 

Bankers 

Association 
84 


76119.047

July 20, 2012 

Testimony of 

Albert C. Kelly, Jr. 

On behalf of the 

American Bankers Association 

before the 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

of the 

Committee on Financial Services 

United States House of Representatives 

July 20, 2012 

Chainnan Garrett, Ranking Member Waters, and members of the Subcommittee, my name is 

Albert C. Kelly, Jr., Chainnan and Chief Executive Officer, SpiritBank, Bristow, Oklahoma, I am 

also the chainnan of the American Bankers Association. ABA represents banks of all sizes and 

charters and is the voice of the nation's $14 trillion banking industry and its two million employees. 

I appreciate the subcommittee taking the time to review an important new rule that may soon 

be issued by the Securities and Exchange Commission (SEC) requiring registration of companies 

that provide advisory services to municipalities, 

ABA strongly believes that Section 975 of the Dodd-Frank Act (Dodd-Frank) was not intended 

to cover banks. Instead, it established a regulatory scheme for unregulated entities providing advice 

to municipalities with respect to the municipal financial products defined by Congress, e.g., 

municipal derivatives, guaranteed investment contracts, or investment strategies which include 

plans or programs for the investment of the proceeds of municipal securities. 

However, the SEC has proposed rules that interpret the scope of the "municipal financial 

products" in Section 975 far beyond the securities activities of state and local governments to reach 

all "funds held by or on behalf of a municipal entity." This would mean that giving advice about 

traditional bank products such as deposits and loans could trigger registration as municipal advisors 

by most banks and each of their employees who may give "advice" to local governmental bodies 

such as schools, libraries, hospitals, etc. 

C\):) i American Bankers Association 
85 


76119.048

July 20 2012 

Let me give a simple example of the unintended consequences that the proposed rule, if 

finalized, would bring about. The term "advice" is not defined in the SEC's proposal. Thus, we do 

not know whether a suggestion by a teller that the local librarian may wish to consider an interestbearing account, rather than a checking account, would mean that the teller would have to be 

registered as a municipal advisor. 

Registration would overlay onto the existing comprehensive bank regulatory scheme an 

entirely new securities-based regulatory scheme with enforcement by the SEC. The consequences 

would be severe. In addition to subjecting banks to wholly unwarranted and duplicative regulation 

and examination, which would cause banks to incur significant costs, local community banks might 

simply stop taking municipal deposits. 

This means that local governments may have to go outside their communities-particularly 

in small towns, such as in my state of Oklahoma-for something as simple as a bank account. 

Thus, rather than protecting municipalities, such a rule would raise costs and make it more difficult 

to find basic financial services from their local banks. 

ABA's members provide a full range of products and services to state and local governmental 

bodies including deposit accounts, cash management, loans, credit facilities, employee benefit, trust, 

advisory services, custody, securities lending, liquidity facilities for debt programs, servicing 

municipal debt programs, securities processing and agency services, and other capital market 

services. In addition, many bank employees serve their communities through appointments to or 

volunteering for local boards and commissions in capacities which may include providing advice 

with respect to municipal financial products. Under the SEC's proposal, these employees would be 

rewarded for their voluntary services to their communities by being required to register as 

municipal advisors in their individual capacity. 

ABA fully supports legislation (RR. 2827) introduced by Representative Robert Dold (R-IL) 

that would clarify what constitutes a municipal advisor and would remove financial institutions 

from the proposed ill-defined definition. In the absence of this legislation we would strongly urge 

this Committee, as you are doing today, to conduct oversight of the SEC as it goes through the 

process of issuing a final rule. Such oversight would assure the results do not impose unnecessary 

costs and unintended consequences. 

~ ! American Bankers Association 
86 


76119.049

July 20 2012 

In my testimony today, I would like to focus on three key issues: 

>- The proposed rule goes beyond statutory intent. 

>- The final rule should avoid unnecessary regulatory duplication. 

>- Small communities would have reduced access to basic banking services under the 

current proposed rule. 

I will discuss these items in detail below. 

I. The Proposed Rule Goes Beyond Statutory Intent 

ABA strongly believes banks were not intended to be covered by the provisions in Section 975. 

This sentiment is shared by members of Congress, including Congressman Kenny Marchant, former 

Vice-Chair of the Financial Institutions Subcommittee, who wrote to the SEC stating that the 

proposed rule goes beyond statutory intent. It seemed from the outset that the SEC agreed the focus 

would be narrow, as well. Martha Haines (the former head of the SEC's Office of Municipal 

Securities) had stated in a 2009 hearing before the rulemaking began that the focus would be on the 

260 non-broker-dealer advisors. Congressman Bachus, Chairman of the full Financial Services 

Committee, reminded the SEC of that statement in a letter he wrote in 2009. 

Aside from the letters and the hearing record, there are several points that illustrate that the 

focus of municipal advisor regulation should not be on regulated banks. First, Section 975 is an 

amendment to the Securities Exchange Act of 1934, which is intended to regulate transactions in the 

U.S. securities markets and the conduct of participants in those markets. In the Gramm-LeachBliley Act, Congress determined that banks should be able to continue to engage in traditional bank 

activities, already comprehensively regulated under the federal banking laws, without registering 

with the SEC as broker-dealers and subjecting themselves to the supervisory, examination and 

recordkeeping regime applicable to securities brokers and dealers. Indeed, Congress codified that 

determination in Section 3(a)(4)(B)(i)--(x) of the Exchange Act l by providing an express exemption 

from broker-dealer registration for a bank that effects transactions in identified banking products or 

other enumerated activities, including deposit-taking and lending, sweep accounts, trust and 

I 15 V.S.c. §78c(a)(4)(i)-(x). 

~ i American Bankers Association 4 
87 


76119.050

July 20. 2012 

fiduciary, investment adviser, safekeeping and custody, municipal securities, and transfer agency 

activities. This exemption was later implemented in Regulation R? 

The SEC proposal would impose a wholly duplicative securities·based regulatory regime on the 

very activities that Congress determined were sufficiently regulated under banking law as to not to 

warrant SEC regulation. Such a regime serves no public purpose and would impose substantial costs 

on banks that will necessarily be passed on to municipal clients. The bottom line is that unless the 

final rule exempts bank activities, it is the municipalities-the very entities intended to be protected 

by Section 975-that will be harmed. 

ABA's view is also supported by the statute itself. We believe that Congress did not include an 

exemption for banks because Congress was not thinking of banks ' provision of advice to 

municipalities when it considered Section 975. This view is borne out by the fact that Section 975 

amends a statute that provides for examination and enforcement by the bank regulators for those 

banks that act as municipal dealers. Had Congress been thinking of banks as municipal advisors, it 

surely would have provided for similar examination by the bank regulators. The fact that it did not 

is, we believe, because Congress did not intend banks-which are already comprehensively 

regulated-to be covered by a duplicative securities·based regulatory regime. Nor did Congress 

provide for a "separately identifiable department" or SID of a bank for municipal advisor activities 

as it did with respect to municipal dealer activities. A SID permits banks to segregate municipal 

dealer activities from the rest of the bank. 

Another illustration of the fact that Congress was not thinking of banks when considering 

Section 975 is that the statute provides an exemption from registration for advisers who are required 

to register under the Investment Advisers Act. Banks that provide investment advice to any 

person-including municipalities-are exempt Ii'om registration under the Investment Advisers 

Act, because that activity is already sufficiently regulated under banking law. The fact that Section 

975 exempts registered advisers because they are already regulated is strong evidence that the same 

was intended for banks. 

We believe Congress' goal was to regulate entities whose municipal advisory activities were 

not subject to regulation and to do so by imposing only a single regulatory program on such 

activities. Heretofore unregulated financial advisors would be regulated by the SEC and the MSRB. 

The SEC's proposal, by contrast, would impose on bank municipal advisory activities a second and 

'17 C.F.R. Part 247. 

~ i American Bankers Association 
88 


76119.051

July 20, 2012 

differcnt layer of regulation on top offederal bank regulation of those advisory activities, unlike the 

path followed for registered investment advisers, 

II. The Final Rule Should Avoid Unnecessary Duplication 

Banks provide depository services for municipalities or municipally owned entities. such as our 

local towns, schools, municipal hospital, airport, fire department, conservancy districts, water 

districts and others. In addition to providing depository and check services to these entities, banks 

also provide payroll ACH origination, ACH billing, municipal bond support, and more. It is not 

unusual for many different employees to assist these entities with CD renewals, payroll origination, 

payment of warrants and other activities that seem to be the target of their registration as proposed. 

Subjecting large numbers of community bank employees to SEC registration, supervision and 

examination in order to continue to provide basic banking is nothing short of ridiculous. We are not 

providing these entities with "securities" advice, nor are we conducting any other activities that fall 

under the traditional registration guidelines of the SEC, And, these same employees would be 

required to take continuing education to remain registered and would be subject to a fiduciary duty. 

Moreover, it is very common for bank employees to serve on one or more unpaid volunteer 

boards for these entities, including city council, city hospital board, city hospital foundation board, 

school board and city zoning board among others. Under the proposed rules, these employees would 

also be subject to registration as individuals and would have to comply with the full regulatory 

scheme described above, If this regulation is made final, it is likely that bank employees will have 

to stop some of these activities. This makes no sense and makes our communities poorer, 

Let me make this very clear. All of the products and services described above-and more that 

my bank is too small to providc'-I1re already regulated and have no connection to municipal 

securities or "municipalfinancial products" as defined in Section 975 or intended by Congress to 

be reached by the provision. All of the above bank products are regulated extensively already, and 

the institutions providing them are supervised and regularly examined by the federal bank 

regulators, 

Some of these products are offered within a bank trust department. For example, banks may 

serve as advisors to municipal pension plans. Individual municipal employees contribute their own 

funds to such plans-they are not related to the municipality'S securities activities; nor do such 

funds contain the proceeds of municipal securities issuances. The trust departments of banks that 

~ 1 American Bankers Association 6 
89 


76119.052

July 20. 2012 

provide advice to municipal pension plans must adhere to the highest standards of fiduciary 

common law. Moreover, bank trust departments are regularly examined in accordance with such 

requirements. Indeed, they are examined far more frequently than are investment advisers regulated 

by the SEC. In addition, many bank products and services offered to municipalities are overseen by 

state treasurers. To impose on these traditional bank products and services an overlay of securities 

law regulation when offered to municipalities serves no public purpose. 

In addition, the MSRB has proposed guidance on the fiduciary duty of municipal advisors (now 

withdrawn until the SEC finalizes its registration rule) that would prohibit, as a conflict of interest, a 

bank that provides a service to a municipality from offering any other service as principal to the 

municipality. This would lead to absurd results. For example, under the proposed rule, a bank that 

provided advisory services to a municipal pension plan would be unable to offer deposit accounts to 

that municipality. 

Recordkeeping reporting requirements present another enormous problem should the rule be 

adopted. The current reporting requirements for banks have long been in place and are tailored to 

bank structure, capital requirements, and banking activities. The municipal advisor regulatory 

scheme, by contrast, is a securities-based regime based on traditional investment adviser structures. 

The cost of complying with a markedly different recordkeeping and reporting system would be 

substantial and would necessarily be passed on to customers. Further, because of the dispersion 

throughout a bank of business with municipalities, the entirety of a bank's record keeping would 

become subject to SEC oversight, a result so unnecessarily duplicative of the banking agencies' 

functions that it begs the question as to what public purpose can be served by such excessive reach. 

We believe that the SEC, in its final rule, must state clearly that banks are not covered by 

Section 975, thus avoiding duplicative oversight by yet another regulatory agency. 

III. Small Municipalities Wonld Have Reduced Access to Basic Banking Services 

Let me use another illustration to help you understand just how onerous this new rule could be, 

if it is implemented in its current form. It is quite common for someone from a public entity to come 

into a bank branch asking how to set up a simple service, such as a deposit or sweep account. 

Tellers in that office could give them the basic information about these accounts, although often a 

branch manager would fill them in on the details. 

~ 1 American Bankers Association 7 
90 


76119.053

July 20 2012 

If this proposal is made final as is, these two activities-both the basic explanation of a deposit 

account and the detailed one--could require both the teller and the branch manager to be registered 

as municipal advisors. Not only would they both have to be registered, along with the bank, but the 

bank itself would then have to undergo scrutiny by yet another regulator-with its own unique set 

of regulatory standards. 

Moreover, if the final rule does not exempt banks and, further, does not provide a definition of 

advice, banks could be required to register thousands of employees, each of whom would be subject 

to continuing education requirements established by the MSRB and each of whom would be subject 

to a fiduciary duty to municipal customers. 

Our compliance office is already facing an uphill battle to implement the plans needed to 

ensure we are compliant with all of the new rules coming from Dodd-Frank. If a new registration, 

reporting and compliance obligation were to be added, many banks would have to seriously 

consider whether to continue to provide services--cven simple depository services-to the 

government entities in our community. 

It makes no sense whatsoever to create a duplicative system that will end up raising the cost of 

services to municipal entities, reducing the services available, or forcing some banks to exit the 

market completely to avoid registration. Such outcomes are unnecessary and benefit neither the 

bank nor its community. 

Conclnsion 

Section 975 is the result of Congress' intent to impose a regulatory regime on municipal 

advisory activities that were not previously regulated. To overlay onto traditional bank activities an 

additional, markedly different securities law regulatory regime and an additional regulator is not in 

the public interest. It will not provide additional protections for municipal govemments, but rather 

will increase the cost and impair the availability of bank products and services to those bodies. An 

exemption from registration as municipal advisors must be provided to banks. 

We strongly support H.R. 2827 which would clarify what constitutes a municipal advisor and 

would remove financial institutions from the proposed, ill-defined and inappropriate definition. We 

urge Congress to enact this important piece of legislation. 

Thank you for considering our comments. I am happy to answer any questions. 

~ i American Bankers Association 
91 


76119.054

Bffi Bond 

Dealers of 

Amenca 

Written Statement of 

Michael J. Marz 

Vice Chairman 

FirstSouthwest 

and 

Member, Board of Directors 

Bond Dealers of America 

Submitted to 

the 

Committee on Financial Services 

~l Dup(>ll! Circk, ;i\r. Suile i3fi 

"""uu~.w". DC 21,036 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

United States House of Representatives 

Hearing on the Impact of Dodd-Frank on Municipal Finance 

Friday, July 20, 2012 

1. Introduction 

I am Mike Marz, the Vice Chairman of FirstSouthwest, and a member of the Board of 

Directors of the Bond Dealers of America (BDA). I am also a former Chairman of the BDA. 

have attached to this statement a brief personal resume as well as a general description of 

FirstSouthwest. 

This statement is submitted on behalf of the Bond Dealers of America. The BDA 

appreciates the opportunity to participate in this hearing. The BDA, with fifty three members 

1 
92 


76119.055

headquartered coast to coast, is the Washington, DC, based organization that represents securities 

dealers and banks focused on the U.S. fixed income markets. The BDA is the only organization 

representing the unique interests of national, middle-market, sell-side, fixed-income dealers. In 

addition to federal advocacy, the BDA hosts a series of meetings and conferences specific to 

domestic fixed income, and spearheads industry cooperation on economic surveys and on market 

practice documents. Additional information about the Bond Dealers of America can be found at 

www.bdamerica.org. 

Today I will speak from the perspective of fixed-income dealers about why it is so 

important to get the implementation of Dodd-Frank "right," including striking the right balance 

in defining and regulating municipal advisors. While our discussion today is about fairly 

complex rules, I would like to put my job in simple terms to help emphasize why bond dealers 

like me play an important role in this policy discussion. Bond dealers are a bridge between the 

infrastructure that serves the public day in and day out, and investors who seek financial security 

in purchasing the bonds that make public works possible. For example, in my home state of 

Texas, FirstSouthwest helped the Dallas Independent School District save $150 million in 

interest payments through a carefully structured issue of Build America Bonds. We also 

coordinated bonds that will finance three light rail lines in Houston's inner city, and helped the 

city of Dallas with a cost effective bond issue that will allow them to make improvements to 

water sewage projects. These types of projects happen every day across the country and if the 

issuances occur with the prudent advice, structuring and marketing of bond issuances that BDA 

members provide, governments and their citizens save money while enjoying the benefits of 

public infrastructure. 

2 
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76119.056

II. Regulation of Municipal Advisors 

The BDA has concerns regarding how the Dodd-Frank Wall Street Reform Act of2010 

(Dodd-Frank or DFA) is being implemented, and we are working with regulators to ensure the 

"Volcker Rule" does not create unintended consequences for the municipal securities market. 

will focus this testimony, however, on our support for DFA Section 975 that requires the 

Securities and Exchange Commission (SEC or Commission) to adopt rules mandating that 

municipal advisors register with the SEC. Section 975 also requires the Municipal Securities 

Rulemaking Board (MSRB) to adopt rules governing the behavior and activities of municipal 

advisors. Our comments are focused on the differences between the comprehensive regulatory 

regime applicable to broker dealers, particularly those acting as financial advisors ("regulated 

dealer advisors"), and the continuing complete lack of regulation of independent financial 

advisors ("unregulated municipal advisors"). 

Almost two years after the enactment of Dodd-Frank and despite the requirement for new 

rules for municipal advisors, virtually anyone can act as a non-dealer municipal advisor to an 

issuer of municipal securities, regardless of qualifications, political contributions, or conflicts of 

interest, while more and more restrictions are focused on broker dealers, including regulated 

dealer advisors. This seems exactly the opposite of what Dodd-Frank intended. We believe that 

in the case of rules for financial advisors, regulators of the municipal securities industry should 

3 
94 


76119.057

create a level playing field for currently unregulated municipal advisors and broker dealers 

acting as advisors, recognizing that both provide important services -- in some cases, the same 

services -- that issuers desire. 

By way of background, in October 2009, SEC Commissioner Elisse Walter delivered a 

speech where she said she found the conduct of some municipal advisors "alarming" and that 

they were engaging in "pay to play" practices, that there were undisclosed conflicts of interest, 

that advice was rendered by advisors without adequate training or qualifications, and that there 

was a failure to place the duty ofloyalty to their clients ahead of their own interests. 

Commissioner Walter asked for the authority to regulate these independent municipal advisors 

and in Section 975 of Dodd-Frank, the Commission received such authority. Supporting this 

sense of urgency, unregulated municipal advisors have represented clients in high-profile public 

finance disasters, such as the bankruptcy of Jefferson County, Alabama and New Mexico bond 

deals that were fraught with pay-to-play improprieties and bid rigging that led to the convictions 

of CDR Financial Products executives - unregulated municipal advisors - on wire fraud and 

conspiracy charges. 

The SEC has not made progress to date in resolving the problems that alarmed 

Commissioner Walter. The first step is for the SEC to issue a definition of municipal advisor 

that is narrowly and appropriately focused on those who advise on the issuance of municipal 

bonds and on the investment of bond proceeds. Until that occurs, the Commission cannot 

undertake step two: regulate independent municipal advisors to stop pay to play, require conflicts 

to be disclosed, and impose adequate professional standards. In BDA's view, defining 

4 
95 


76119.058

"municipal advisor" and regulating those advisors should be the focus of the Commission's 

rulemaking initiative. 

A. Definition of Municipal Advisor 

BDA has joined with many in the municipal bond community pointing out that the 

definition of municipal advisor proposed by the SEC pursuant to Dodd-Frank is overly broad and 

ambiguous. While the SEC has indicated they recognize this, they have yet to correct it. For 

example, the SEC's proposed regulations (Release No. 34-63576) fail to exclude appointed and 

volunteer municipal board members from the definition of municipal advisors. Moreover, the 

proposed regulations do not define the term "advice," which has implications for bond dealers 

and municipalities alike. Volunteer and appointed members of the boards ofa municipal entity 

would be subject to considerable doubt as to whether their activities result in "advice." 

Likewise, it would not be clear whether underwriters provide information constituting "advice" 

which could require registration as a municipal advisor. On the other hand, Dodd-Frank 

exempts underwriters from the term "municipal advisor" -- but it isn't clear how to distinguish 

between a municipal advisor and an underwriter. 

The goal for the SEC should be to provide a simple mechanism for regulators and industry 

participants to determine if they are acting as a municipal advisor. BDA recommends that the 

SEC and other applicable regulators implement an approach that permits a party to use a 

disclaimer to disclose to other parties that it is not acting as an advisor. The fundamental 

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characteristic of an advisor under Dodd-Frank is that there is not an arm's length relationship. If 

the client is provided with a disclaimer that the relationship is in fact ann's length, then it has no 

basis for assuming an advisory relationship. Similar to the approach taken under the swap rules, 

a broker dealer would not be considered to be a municipal advisor if (l) the broker dealer is 

acting in the capacity of an underwriter, (2) the broker dealer is not being separately 

compensated to provide financial advice, and (3) the broker dealer discloses to the issuer that it is 

participating in the transaction on an arm's length basis and is not a fiduciary to the issuer. We 

believe that the rule should make it very clear when such a disclaimer must be presented. We 

also believe the disclaimer should be required no earlier than when an underwriter provides its 

materials to an issuer for a proposed issuance or in a response to a request for proposals. 

B. Regulating Municipal Advisors 

Once the SEC has identified a more narrow and appropriate definition of municipal 

advisor, the next step is for the SEC and MSRB to appropriately regulate the current unregulated 

municipal advisors. The regulatory approach should include testing and licensing, supervision, 

compliance examinations, record keeping, restrictions on political contributions and other 

requirements that already apply to regulated dealer advisors. 

i. Roles of Regulated Dealer Advisors, Underwriters and Unregulated Muni 

Advisors 

To explain why regulation is needed, it may be helpful to describe the roles that regulated 

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dealer advisors and underwriters (functions performed by BDA members) and unregulated 

municipal advisors play in public finance transactions. A great many issuers use either dealer 

advisors or unregulated municipal advisors and underwriters in combination. The underwriter 

can purchase a bond issue in order to sell those bonds to investors, thus directly facilitating the 

issuer's efficiency in raising funds. An unregulated municipal advisor can help to structure the 

bond issue, determine the fair value price for the issuer and help to select the underwriter, as well 

as provide investment advice, swap advisory services or arbitrage rebate. Dealer financial 

advisors can play those roles as well, but have the advantage over unregulated financial advisors 

of being part of firms that participate in the buying and selling of municipal securities every day, 

thus having real-time current market knowledge. While unregulated financial advisors may 

serve as a pricing agent for the bond, they lack the real-time market data to directly or most 

accurately determine the price. The value to issuers of the market experience of broker dealers 

should not be underestimated and is the reason many issuers choose to hire regulated financial 

advisors. 

ii. Closing the Regulatory Gap 

Although underwriters or dealer financial advisors and unregulated muni advisors all play 

roles together and even similar roles, their level of regulation is dramatically different. Let me 

describe the differences between the compliance and regulatory measures required of bond 

dealers, including dealer financial advisors, and what is required of unregulated municipal 

advisors that lack the same obligation dealers have for fair dealing (although unregulated muni 

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advisors have a fiduciary duty at the state level and per the Dodd-Frank bill). The chart below 

outlines standards imposed upon broker dealers by the MSRB and SEC and which are not 

required of unregulated municipal advisors. 

Regulated Broker-Dealer Unregulated 

Regulatory Requirements Advisors Municipal Advisors 

MSRB Regulation x 

SEC Regulation x 

Regular and Random Audit x 

Compliance Reviews 

Licensing Requirements x 

Continuing Ed Testing x 

Written Supervisory x 

Procedures 

Restrictions on Political x 

Contributions 

Restrictions on Gifts and x 

Entertainment 

Record Retention x 

Requirements 

Obligations and Requirements x 

for Fair Dealing 

Disclosures on Compensation, x 

Third Party Fees and Conflicts 

of Interest 

FINRA* X 

'ProvIdes ad:htional reqUIrements for broker deak>r firms handlIng customer money. 

As this chart demonstrates, dealer advisors are heavily regulated even beyond the 

regulations that apply due to handling customer accounts. Municipal advisors simply lack 

regulation, and while it does not make sense to subject them to all of the restrictions applicable to 

broker dealers, a similar set of comprehensive regulations must be implemented. Municipal 

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advisors do have a state level fiduciary duty but that is not a replacement for regulation as can be 

seen by the Jefferson County case and other cases of bad actors in the public finance arena. And, 

while Dodd-Frank states that municipal advisors have a fiduciary obligation, it has in no way 

been given practical effect in the case of unregulated municipal advisors. As one example, the 

protection provided to a party who engages a fiduciary, if that fiduciary fails to carry out its 

fiduciary obligation, is compensation for losses for which the fiduciary is responsible. But 

without advisor capital requirements, and given that many of these unregulated firms have 

minimal assets, the fiduciary standard can not impose consequences that make the advisor's 

fiduciary responsibility to an issuer have practical meaning. 

III. SEC Rulemaking Initiative and H.R. 2827 

As mentioned above, on December 20, 20 10, the SEC issued proposed rules to implement 

the provisions of Section 975 of the DFA. As also set forth above, the BDA is of the view that 

the SEC's proposed rules went far beyond the narrowly focus definition of municipal advisor 

intended by Congress. Even SEC Chairman Schapiro acknowledged as such in testimony before 

the House Financial Services Committee. 

It is past time for the Commission to get this rulemaking initiative back on track. Many 

members of this Subcommittee signed a letter to Chairman Schapiro on December 19, 2011, 

recommending that "the Commission should promptly scale back the scope and application of 

the proposed rules to define the term 'municipal advisor' as Congress intended." The BDA 

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agrees. 

Last year, Congressman Dold introduced H.R. 2827, which emphasizes that the 

Commission should bring its municipal advisor rulemaking initiative back on track as soon as 

practicable. H.R. 2827, which is now cosponsored by 35 other House Members, would clarify 

the language ofDFA Section 975 to more clearly specify the scope and limits of the SEC's 

municipal advisor rulemaking definition. The BDA supports H.R. 2827, especially the part of 

Section 1 that would exclude already regulated dealer advisors, elected or appointed members of 

state or local governing bodies and others from the definition of municipal advisor. We also 

support the part of Section 2 that clarifies what funds constitute the types of funds and 

investments that are subject to the municipal advisor rules. 

Clarification of the definition of a municipal advisor under H.R. 2827 is a strong step in the 

right direction if combined in the future with step two: a set of regulations parallel to those 

already embraced by regulated dealer advisors. These two steps will ensure that unregulated 

municipal advisors aet in the interest of their clients. This will help prevent fraud that has, under 

the Jefferson County and CDR examples, harmed cities and the citizens they serve. 

IV. Conclusion 

The SEC needs to move forward on a definition of municipal advisor so that investors and 

state and local governments can receive the protection that Congress intended in Dodd-Frank. 

The first step to fix this situation is for the SEC to define who is a municipal advisor, 

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appropriately and narrowly. The second step, simply stated, is for unregulated municipal 

advisors to be appropriately regulated. 

By significantly cleaning up the ambiguous definition of municipal advisor under DoddFrank, we believe that H.R. 2827 may provide the SEC with the boost they need to proceed with 

the rulemaking initiative required by Section 975 of Dodd-Frank almost two years ago. 

Again, the Bond Dealers of America appreciates the opportunity to submit this written 

statement to the Subcommittee on Capital Markets and Government Sponsored Enterprises. If 

you have any questions or need any further information, please either contact myself, or contact 

Mike Nicholas, the Chief Executive Office of the BDA, at 202-204-7901 or at 

mnicholas@bdameriea.org. 

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-

III MSRB 

Municipal Securities 

Rulemaking Board 

Written Statement of Alan D. Polsky 

Chair 

MUNICIPAL SECURITIES RULEMAKING BOARD 

Testimony on The Impact of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act on Municipal Finance 

House Subcommittee on Capital Markets and Government Sponsored Enterprises 

Washington, D.C. 

July 20, 2012 

Good morning Chairman Garrett, Ranking Member Waters and members of the Subcommittee. 

I appreciate the invitation to testify today on behalf of the Municipal Securities Rulemaking 

Board (MSRB). My name is Alan Polsky and I am Chair of the MSRB. I am also scnior vice 

president of Dougherty & Co., LLC, a Minneapolis, Minnesota-based investment banking firm. 

The MSRB was created by Congress in 1975 as the principal regulator for the municipal 

securities market with the mandate to protect investors and the public interest. By adopting a 

principles-based approach to regulating municipal securities dealers, operating retail-oriented 

information disclosure systems and establishing professional standards for municipal securities 

professionals, the MSRB has effectively created protections for retail investors in the $3.7 

trillion United States municipal securities market. 

The MSRB also acts as an independent resource and expert on the municipal securities market 

for policymakers such as Congress and the U.S. Department of the Treasury as well as other 

federal and state regulators including the Board of Governors of the Federal Reserve and the 

Internal Revenue Service. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) 

included multiple provisions that affect the municipal market and the MSRB. The provisions 

relating to the MSRB's rulemaking and related activities became effective on October 1,2010. 

Specifically, Section 975 broadened the mission of the MSRB to include the protection of state 

and local governments, as well as certain private sector obligated persons such as 

universities and hospitals - that access the capital markets through the issuance of municipal 

bonds. The MSRB, of course, also continues to pursue its original mission of protecting 

investors and the public interest. 
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Section 975 of the statute expanded the MSRB's responsibilities to include the regulation of 

municipal advisors. Municipal advisors include businesses and individuals that advise 

municipal entities concerning municipal financial products and municipal securities, as well as 

businesses and individuals that solicit certain types of business from municipal entities on 

behalf of unrelated broker-dealers, municipal advisors or investment advisors. Municipal 

securities dealers performing municipal advisory services were previously subject to MSRB 

regulation because of their municipal securities dealer activities. Under the new law, however, 

other municipal advisors are subject to MSRB regulation for the first time. 

The MSRB's Board of Directors was reorganized under our amended authorizing statute to be 

made up for the first time of a majority of public, independent members and to include 

municipal advisor representatives. Previously, the Exchange Act required that the MSRB be 

governed by a board with a majority of industry members. Under the new structure, effective 

October I, 2010, the MSRB is required by statute to maintain a balance of regulated and nonregulated Board members, with investors, municipal entities, securities dealers, bank dealers 

and municipal advisors each having representation on the MSRB Board of Directors. 

Protection of State and Local Governments 

Over the last two years under its majority public Board, the MSRB has acted to enhance 

disclosure and transparency measures to comply with the new law to protect a broader array of 

participants in the municipal market. The MSRB has undertaken its expanded mandate to 

strengthen protections for state and local governments and the taxpayers who support 

municipal borrowing. 

The role of the MSRB in protecting state and local governments is critical because these 

entities raise, through the issuance of bonds, notes and other debt obligations, an average of 

nearly $450 billion in the capital markets each year.! The municipal bond market has evolved 

from one in which states and municipalities offered traditional, general obligation fixed rate 

bonds to finance specific projects to one that involves the use of various security structures, 

complex derivative products and intricate investment strategies, and the presence of an everexpanding group of service and product providers, advisors and sales teams. 

Many of the bond transactions undertaken by state and local governments are complex 

transactions involving sometimes dozens of financial, legal and other players, each of whom 

represents his or her own interests and often has conflicts tied to an additional and often 

invisible set of market participants. Moreover, compensation of participants in a municipal 

finance transaction in almost all cases is contingent on the completion of the deal, creating 

incentives that put unknowing state and local governments at risk of inappropriate and 

unsuitable transactions and products - at the expense of taxpayers and ratepayers. 

1 Thomson Reuters SOC Platinum database on new municipal issuance from 2007-20 II 

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In the vast majority of cases, state and local government officials are unfamiliar with the 

mechanics of a municipal finance transaction. At the local level, many are part-time staff. As 

public servants, these individuals are responsible for representing the interests of their 

communities, their taxpayers and their ratepayers, but in many cases, they lack the experience 

and/or expertise needed to assess the terms of the structures presented to them by financial 

professionals recommending structures and products. Transactions involving interest rate 

swaps and other complex structures further complicate the situation. In cases such as these, 

state and local governments can hire a municipal advisor or advisors but need to have the 

confidence that they represent their best interests. 

As Committee Chairman Spencer T. Bachus wrote in 2009, "Although local governments 

frequently tap the municipal finance market to raise funds to pay for long-term projects, 

conflicts of interest and complexity in the municipal finance market can sometimes trap the 

unwary, particularly when local officials lack the expertise to independently assess the terms of 

the financing structures proffered by sophisticated underwriters.,,2 

State and local governments are not the only ones who can lack expertise. Unqualified 

municipal advisors recommending ill-advised or unsuitable transactions to state and local 

governments can compound the challenges they face. Like underwriters of municipal securities, 

these advisors can have multiple undisclosed ties to other market participants that can threaten 

the integrity of the advice given to state and local governments. Until now, many market 

professionals acting as financial advisors to state and local governments have, by and large, 

been exempt from meeting any standards of quality, professionalism and expertise. 

High profile examples like the Jefferson County, Alabama bankruptcy, 3 municipal bid-rigging 

convictions obtained by the U.S. Department of Justice,4 unsuitable derivative transactions sold 

to local governments5 and guarantees provided by localities for corporate projects that have 

2 Federal Policy Responses to the Predicament of Municipal Finance, Congressman Spencer T. Bachus, Cumberland 

Law Review, 2009. 

; In re Jefferson County, Alabama Chapter 9 Case No. II-05736-TBB-9, U.S. Bankruptcy Court for the Northern 

District of Alabama (November 9, 201 J) ("Jefferson County Bankruptcy"). 

4 See, e.g, U.S. v. Carollo, lO-cr-00654, U.S. District Court, Southern District of New York (July 27,2010); U.S. v. 

Rubin/Chambers, Dunhill Insurance Services Inc., 09-CR-0 I 058, U.S. District Court, Southern District of New 

York (October 29,2009). Allegations regarding bid rigging have been raised in other venues as well. See also SEC 

Complaint 1, SEC v. J.P. Morgan Securities LLP, Case No. 2:11-cv-03877 (D.N.J. July 7, 2011) (alleging fraudulent 

bidding practices by J.P. Morgan Securities in at least 93 municipal bond reinvestment transactions); SEC Litigation 

Release No. 21956, Securities and Exchange Commission v. UBS Financial Services Inc. (May 4, 20 II) (alleging 

fraudulent bidding practices by UBS Financial Services in at least 100 municipal bond reinvestment transactions); In 

the Matter of Bane of America Securities LLP, Exchange Act Release No. 63451 (December 7, 2010) (alleging 

fraudulent bidding practices by Bane of America Securities in at least three municipal bond reinvestment 

transactions). 

5 Jefferson County Bankruptcy. 

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defaulted6 illustrate the price of gaps in regulation of the municipal securities market. Local 

governments, rather than being able to tum to a trusted financial advisor to help defend against 

questionable advice, practices and complex products, in these cases instead received advice of 

questionable quality from unregulated financial advisors. 

Many states, counties and communities across the country face this same alignmcnt of 

professionals that, rather than serving the best interests of their state or local government 

clients, can serve to provide an avenue for taking advantage of financially less sophisticated 

public servants. 

With a Congressionally mandated role to protect state and local governments, the MSRB has 

assessed and is amending its existing regulations for banks, broker-dealers and municipal 

securities dealers to explicitly protect state and local governments. These changes are intended 

to ensure that dealers follow rigorous fair-practice and other standards, and that state and local 

governments have the information they need to make appropriate decisions. 

The MSRB has also developed the framework for a principles-based regulatory regime that 

would establish regulations for municipal advisors and protect state and local governments. 

These include draft rules on conflicts of interest, including pay-to-play. 

I'd like to go in to some more detail about these draft rules so the Subcommittee has an 

understanding of the philosophy and consistency of the approach to municipal advisor 

regulation compared to that of dealers, and how the MSRB's draft rules would establish fair 

practice and other rules for the two groups of financial professionals with arguably the most 

extensive influence and contact with state and local governments. 

Draft Municipal Advisor Rules 

The MSRB is directed by statute to adopt rules for municipal advisors in a number of areas, 

including, among other things: (I) prevent fraudulent and manipulative acts and practices, 

promote just and equitable principles of trade, enhance mechanisms of a free and open market, 

and protect investors, municipal entities, and obligated persons; (2) prescribe means reasonably 

designed to prevent acts, practices, and courses of business that are not consistent with a 

municipal advisor's fiduciary duty to its municipal entity clients; (3) prescribe professional 

standards; (4) provide continuing education requirements; and (5) provide for periodic 

compliance examinations. The MSRB is directed to not impose a regulatory burden on small 

municipal advisors that is neither necessary nor appropriate to the public interest and the 

protection of investors, municipal entities and obligated persons, provided that there is robust 

protection of investors against fraud. 

Beginning in October 2010, the MSRB undertook an extensive outreach effort to solicit input 

6 See, e.g., Report of the Missouri House Interim Committee on Government Oversight and Accountability Mamtek 

Report, (February 2012) and Yvette Shields, Lombard Draws on Reserves, The Bond Buyer (January 5, 2012). 

4 
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from market participants and the public on the type and nature of regulations needed to protect 

state and local governments. At the same time, the MSRB conducted extensive analysis of its 

existing rules for municipal securities dealers and studied the nature of the professional services 

provided by municipal advisors. 

Following this outreach and analysis, the MSRB began to lay the foundation for municipal 

advisor regulation under our expanded statutory mandate. As onc ofthc MSRB's initial 

municipal advisor rules, the MSRB extended its fair dealing rule, MSRB Rule G-17, to cover 

the actions of municipal advisors. MSRB Rule G-17 provides that, in the conduct of its 

municipal securities and municipal advisory activities, each dealer and municipal advisor must 

deal fairly with all persons and may not engage in any deceptive, dishonest or unfair practice. 

This "fair dealing" rule is key to defining the relationships of dealers and municipal advisors 

with investors and issuers, serving as the core to the MSRB's principles-based approach to 

regulation and as the basis for numerous enforcement actions to address misbehavior in the 

marketplace. 

Also, since October 1,2010, Section 975 of the Dodd-Frank Act has imposed a federal 

fiduciary duty on municipal advisors to state and local governments when providing financial 

advice. Specifically, the MSRB proposed a new rule and an associated interpretation covering 

the details of an advisor's fiduciary duty. The proposed regulation would, consistent with the 

obligations of other types of fiduciaries under federal or state laws, require municipal advisors 

to act consistent with the basic duties of loyalty and care by, among other things, acting in the 

best interests of their state or local government clients and disclosing all material conflicts of 

interest. The proposed regulations would address these basic duties in the context of the 

relationships and activities between state and local governments and their municipal advisors. 

The proposed rule notes, for example, that municipal advisors must not undertake an 

engagement when an unmanageable confliet exists, must not charge excessive compensation, 

and must review reasonably feasible alternatives to proposed products and transactions when 

advising their state and local governments of a particular financing. 

Prohibiting conflicts of interest on the part of financial professionals that can undennine the 

integrity of the municipal market is an important aspect of many MSRB regulations. One fonn 

of conflict of interest in the municipal market can arise if financial professionals seek to 

influence the award of business by state and local government officials by making political 

contributions to those officials or soliciting contributions on their behalf. This activity can have 

a negative impact on market fairness and public confidence in municipal capital markets. 

In 2011, the MSRB proposed a rule that would regulate so-called "pay to play" activities of 

municipal advisors, as well as finns and individuals that solicit certain business from municipal 

entities on behalf of others. Modeled after MSRB rules in place since 1994 for municipal 

securities dealers doing business with state and local governments, the proposed rule seeks to 

sever any connection between political contributions to municipal officials and the awarding of 

advisory service business to municipal advisors. Like municipal securities dealers, municipal 

advisors would be prohibited from engaging in business with municipal entities for two years if 

the finn or their municipal professionals make certain political contributions to state or local 

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government officials with authority to hire such municipal advisors. The proposed rule would 

also institute requirements designed to prevent circumvention through indirect activities and 

would require quarterly disclosures of certain information concerning municipal advisor 

political contributions to the MSRB, which would make the information available to the public 

through its website, at www.msrb.org. 

The MSRB proposed several other rule changes designed to ensure that state and local 

governments are protected from potentially unfair conduct on the part of municipal advisors. 

These draft rules include: (l) restricting the use of gifts to curry favor with employees 

controlling the award of municipal business; (2) establishing basic standards offairness and 

accuracy in advertising and other promotional materials; (3) providing guidance on fair practice 

duties toward obligated persons; and (4) establishing basic supervisory requirements for 

municipal advisors based in part on existing municipal securities dealer supervisory 

requirements but simplified and appropriately tailored in recognition that most municipal 

advisors are small firms with less complex structures. 

Finalization of the MSRB's proposed municipal advisor rules have been put on hold pending 

completion by the Securities and Exchange Commission (the SEC) of its pending rule proposal 

to more clearly delineate the breadth of professionals covered under the new statutory 

definition of municipal advisors. The MSRB expects to complete its initial phase of municipal 

advisor rulemaking outlined above following resolution of the definition by the SEC. 

Professional Qualifications of Municipal Advisors 

In addition developing draft rules for municipal advisors to implement Section 975 of the 

Dodd-Frank Act, the MSRB began the process of establishing minimum professional 

qualifications for municipal advisors. This work started in October 2010 when the MSRB 

began conducting outreach events and focus groups to gather input from municipal advisors 

and others about the development of a professional qualification examination for assessing the 

competency of entry-level municipal advisors. The MSRB subsequently organized a municipal 

advisor examination working group to consider all comments received by the MSRB, assess 

commonalities in municipal advisory activities, provide additional input and assist in the 

drafting of a content outline for an examination. 

Prior to finalizing the initial qualification exams after final SEC rulemaking on its definition of 

municipal advisor, the MSRB will survey registered municipal advisors about the proposed 

examination content to ensure it is properly tailored to their functions in the marketplace. 

Expanded Obligations for Underwriters 

As part of the MSRB's implementation of Section 975, the MSRB also reviewed the existing 

obligations of underwriters of municipal securities to state and local governments. As a result 

of this assessment, the MSRB determined that additional protections for state and local 

governments were necessary. These important new protections, in the form of a new 

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interpretive notice to MSRB Rule G-17 on fair dealing, take effect August 2, 2012. 

The interpretive notice significantly clarifies the different roles, responsibilities and 

relationships of the financial professionals involved in municipal bond deals, and highlights for 

state and local governments the risks and characteristics involved in complex municipal 

financings. 

Beginning August 2, 2012, an underwriter must disclose to its state or local government client 

that an underwriter's primary role is to purchase securities for distribution in an arm's-length 

commercial transaction and that it has financial and other interests that differ from those of its 

client. While the nature of this relationship may be clear to some, state and local governments 

that are not in the capital markets on a regular basis may not be aware that an underwriter and 

an issuer have an arms-length relationship. On the other hand, municipal advisors have a 

fiduciary duty to act in the best interests of their state and local government clients. 

As part of the MSRB's effort to clarify the difference in these relationships to the issuer, the 

interpretive notice requires an underwriter to disclose that, unlike a municipal advisor, it does 

not have a fiduciary duty to its state or local government clients and, therefore, is not under a 

duty to subordinate its own financial or other interests to those of its clients. The underwriter 

must also disclose to the state and local government client any third-party relationships that 

may introduce conflicts of interest, including payments or profit-sharing arrangements with 

third parties, as well as the issuance or purchase of credit default swaps on the issuer's 

securities. 

The new interpretive notice also requires underwriters to disclose the material financial 

characteristics and risks of complex municipal' securities financings to help ensure that state 

and local governments understand the features, risks and characteristics of transactions 

recommended by an underwriter so they can make the best decision for their particular 

situation. 

The MSRB continues to reevaluate other existing dealer regulations in light of the explicit 

mandate to protect state and local governments, and is considering changes where necessary. 

This effort includes addressing rules related to ensuring that underwriters honor the intention of 

state and local governments in selling certain portions of their bonds to retail investors and also 

to improving the availability of current information about initial offering prices or yields of 

new issues of municipal securities, among others. 

Market Transparency, Education and Outreach 

Part of the MSRB's effort to safeguard state and local governments over the last two years has 

been to make them aware of information that helps them make appropriate decisions. The 

MSRB's Electronic Municipal Market Access (EMMA) website, at http://emma.msrb.org, has 

dramatically improved the availability of information about the municipal market. This free, 

public website operated by the MSRB is the official source of municipal market documents and 

7 
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data, helps state and local governments evaluate trading activity, and provides them with a free 

and centralized avenue for disseminating disclosure documents and related information on their 

municipal securities to their investors, taxpayers and other stakeholders. The EMMA website 

houses offering documents for almost every municipal security issued in the United States, 

secondary market disclosures that provide valuable information about the issuer of a bond 

throughout its life, real-time trade prices, interest rates and liquidity documents for variable rate 

securities, and other relevant information, including current credit ratings from rating agencies 

agreeing to makc such information freely available to the public. 

EMMA provides enormous benefits to investors, state and local governments, and other market 

participants because it ensures free, convenient and easy access to information that is essential 

for making investment and other decisions related to municipal securities. EMMA has been 

embraced by all categories of municipal market professionals, including regulated municipal 

securities dealers and municipal advisors, state and local governmental issuers, institutional and 

retail investors, other professionals that support issuers, and the general public. EMMA has 

been recognized broadly by the national financial press as a critical tool for retail investors who 

seek to be self-directed investors or who simply want more information about their investments 

or a way to check on the quality of service their brokers or investment advisors are providing. 7 

In 2011, the MSRB also began expanding its online tools for state and local governments, 

including videos and fact sheets about what to expect when working with municipal securities 

dealers and advisors, the continuing disclosure obligations of state and local governments, and 

using the EMMA website to communicate with investors. 

The MSRB has also engaged in a proactive effort to communicate with state and local 

government issuers regarding the development of rules for municipal advisors and how the 

MSRB can effectively protect state and local governments through regulation and market 

transparency. This type of outreach by the MSRB has encouraged further discussion of the 

most efficient and effective means of ensuring the fairness and transparency of the municipal 

market for all participants. 

********** 

Response to H.R. 2827 

The MSRB has been asked by this Subcommittee to provide its views with regard to 

Congressman Robert Dold's bill, H.R. 2827, that would amend Section 975 of the Dodd-Frank 

Act, and more generally on Titles VII and IX of the Dodd-Frank Act. 

7 See, e.g., Forbes Magazine, "Finally, An Easy Way To Get Timely Municipal Bond Data," July 9, 2012; Smart 

Money, "Muni Bonds Require More Attention Nowadays," July 10,2012; Wall Street Journal, "A Site to Check 

Municipal Bond Ratings," November 19,2011; New York Times, "In Uncertain Times, Municipal Bonds Call for 

Caution," October 18, 2011; New York Times, "Fresh Air in the MUDi Market," August 20, 2009. 

8 
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Congressman Robert Dold's bill to amend the Securities Exchange Act to clarify provisions 

relating to municipal advisors addresses the definition of municipal advisors and certain related 

definitions, and proposes to eliminate the federal fiduciary standard for municipal advisors. The 

MSRB would like to provide the Subcommittee with information useful in its consideration of 

the implications of the HR 2827's proposed expanded exclusions from the municipal advisor 

definition and removal of the federal fiduciary standard. 

Section 975 of the statute currently provides a broad definition of municipal advisor. However, 

before the statute was established, many market professionals acting as financial advisors to 

state and local governments had, until 2010, been exempt from meeting any standards of 

quality, professionalism or professional conduct. This regulatory gap resulted in an array of 

firms and individuals that could simply declare themselves financial advisory professionals and 

begin advising state and local governments on capital market financings ranging from the tens 

of thousands of dollars to many billions of dollars. The skills, experience and professionalism 

of these financial advisors have ranged from the highest-minded expert professionals, on one 

end of the spectrum, to advisors that have no basis professional or ethical - to be relied upon 

to provide qualified and un-conflicted advice to the public sector. It is important to ensure that 

the professionals on whom state and local governments rely for independent advice are 

properly qualified and regulated. 

Putting aside, for the moment, the nuances of Section 975 in terms of the definition of 

municipal advisor, the MSRB is well positioned to assume the task of addressing the statutory 

requirement to ensure that state and local governments are adequately protected. 

Definition of Municipal Advisor 

In December 20 I 0, the SEC issued a rule proposal to establish a permanent registration regime 

for municipal advisors (Proposed Exchange Act I 5Ba I-I). The proposed rule was intended, in 

part, to provide greater clarity on the definition of municipal advisors. This proposal proved to 

be rather controversial, resulting in over 1,000 comment letters questioning many aspects of the 

definition. 

Like Congressman Dold, the MSRB is concerned about the effects of an overly broad 

definition of municipal advisor. In February 2011, the MSRB submitted a comment letter to the 

SEC8 that recommended several specific changes related to the efficiency of the proposed 

municipal advisor registration process and the scope of the definition of municipal advisor. 9 

Consistent with the provisions ofHR 2827, the MSRB also recommended excluding from the 

definition of municipal advisor not only municipal entities and employees of municipal entities, 

8 MSRB Comment Letter to the Securities and Exchange Commission on Proposed Rules on Registration of 

Municipal Advisors (File No. S7-45-1O), February 22,2011. 

9 For example, tne MSRB recommended an approach to municipal advisor registration tnat parallels the current 

process undertakcn by tne SEC for registering municipal securities dealers, wnich would reduce considerably the 

burden on individuals associated witn municipal advisors and streamline the process at the firm level. 

9 
111 


76119.074

but also any member of the governing body of a municipal entity regardless of how the 

membership is determined. This exclusion would apply when the employees or members were 

acting within the capacity of their jobs. The MSRB further recommended excluding similar 

employees, directors and officers of obligated persons from the definition of municipal advisor 

when they are acting on their own behalf and providing internal advice with respect to 

municipal financial products or the issuance of municipal securities. 

More generally with regard to the definition of municipal advisor, the MSRB understands the 

need to avoid regulatory duplication - that is, requiring professionals to comply with two 

different rulebooks covering the same sets of activities. The MSRB offers two general 

observations we believe will help achieve the elimination of regulatory duplication without 

creating regulatory gaps. Such gaps should be avoided since they could result in regulatory 

arbitrage at the expense of the protection of state and local governments. 

When creating exclusions for professionals already subject to another regulatory regime, it is 

important to consider whether these regulatory regimes specifically cover these professionals' 

municipal advisory work with state and local governments. A comprehensive "scope-based" 

approach that limits exclusions to activities otherwise subject to regulation could represent a 

solution to the challenge of regulatory gaps. 

II.R. 2827 takes a scope-based approach for certain categories of exclusions but not for others. 

For example, its exclusion of SEC- or state-registered investment advisers is not scope-based, 

raising the likelihood that certain activities engaged in by investment advisers - such as, for 

example, advice to a state or local government on the structuring of a bond offering or of other 

plans, programs or investment pools - would be exempted from the coverage of the municipal 

advisor provisions. However these activities also would not be regulated under investment 

adviser regulations promulgated by the SEC and the various states since new issue or other 

program structuring advice to state and local governments would likely not be viewed as 

investment advice subject to the existing regulatory schemes of the SEC and the states. 

The exclusion for financial institutions provided for in H.R. 2827 also creates the potential for 

regulatory gaps with respect to advice provided to state and local governments. Banking 

regulations are designed to address, first and foremost, the safety and soundness of the banking 

system, but are not designed to regulate the structuring of a bond offering or other non-banking 

activities and services that financial institutions may provide to state and local governments. 

On the other hand, we believe H.R. 2827's approach to an exclusion from the definition of 

municipal advisor for those professionals involved with swaps or security-based swaps 

(collectively referred to as "swaps") is scope-based and therefore appropriately addresses the 

need to protect state and local governments. The exclusion for municipal advisors registered 

with the Commodity Futures Trading Commission (the CFTC) or the SEC would be limited in 

scope to their advice on, engagement in, or arrangement of a swap and is not likely to create a 

significant regulatory gap. This depends on the existence of SEC and CFTC rules applicable to 

these professionals covering the provision of advice to a state or local government (referred to 

10 
112 


76119.075

under Title vn of the Dodd-Frank Act as "special entities") with respect to swaps. This scopebased exclusion would appropriately continue to treat these professionals as municipal advisors 

if their advice to state or local governments relates to matters other than their swap activities. 10 

The MSRB therefore believes that the best approach with respect to exclusions to the definition 

of municipal advisor would be to make them all scope-based, so that these entities are excluded 

only when the activities they undertake are otherwise subject to regulation that provides for the 

protection of state and local governments. 

The MSRB's second observation on regulatory duplication relates to H.R. 2827's exclusions 

from the definition of municipal advisor to associated persons of market participants. Because 

thc term "associated person" under the federal securities laws can include any person within 

entities under common control of a corporate parent such as a bank or financial holding 

company, a blanket (that is, non-scope-based) exclusion for associated persons could result in 

their day-to-day municipal advisory activities having no regulation whatsoever - either as a 

municipal advisor, an investment adviser or a financial institution because the regulation of the 

parent company may not address the municipal advisory services to state and local 

governments. Such a scenario could reduce protection of state and local governments and again 

raise the possibility of certain professionals benefiting from regulatory arbitrage. 

The Subcommittee should also consider that a wholly unintended and undesirable result of a 

blanket, non-scope-based exclusion for associated persons could be that only those municipal 

advisory firms that are fully unaffiliated with larger corporate parents - the vast majority of 

which are very small businesses - would be subject to regulation as municipal advisors while 

firms that are part of large financially-oriented corporate families would be left unregulated. 

This would be the antithesis of the Congressional determination that regulation of municipal 

advisors be designed not to impose a regulatory burden on small municipal advisors given that 

their larger competitors would be free of all regulation. 

Federal Fiduciary Duty 

I would now like to address the issue of a federal fiduciary duty for municipal advisors and 

H.R. 2827's elimination of this duty. The MSRB is concerned, above all, in protecting state and 

local governments in the context of their municipal finance transactions. We recognize that it is 

up to the Subcommittee and Congress to determine whether a federal fiduciary duty for 

advisors is appropriate and think that we can offer helpful considerations in that determination. 

In a relationship of trust bctween a state or local government and a municipal advisor, a 

fiduciary duty applies by virtue of common law. I I The existing fiduciary duty may not be a 

10 To further reduce the potential for regulatory duplication and regulatory gaps, the MSRB recommends that the 

SEC and CFTC, which are directed under Title VII of the Dodd-Frank Act to coordinate their regulatory activities 

with one another with respect to swaps, should be further directed to coordinate their regulatory activities with the 

MSRB with respect to swap activities involving special entities, where expertise on the specific needs of state and 

local governments resides within the federal securities regulatory expertise of the MSRB. 

11 
113 


76119.076

federal one, but it exists nonetheless, whether labeled fonnally as a fiduciary duty, a duty of 

trust, a duty arising from an agent-principal relationship, or any other such other label. 

If the federal fiduciary standard were to be eliminated, there would still be applicable fiduciary 

duty standards in each of the fifty states. Each state could fashion appropriate laws taking into 

account the unique needs of the localities within its jurisdiction. Municipal advisors would 

continue to be required to comply with the separate state laws in each of the jurisdictions in 

which they practice. Eliminating a federal fiduciary duty would reinforce state fiduciary duty 

laws and perhaps encourage more vigorous state-level enforcement in effectively preventing 

scandals in the municipal market. However, eliminating the federal fiduciary duty would 

require municipal advisors to understand the varying standards from state-to-state. Uneven 

enforcement of such standards that depend on the degree of vigor in pursuing enforcement 

from state-to-state also would continue. 

Retaining a federal fiduciary standard for municipal advisors would provide the national 

municipal marketplace with a single, consistent set of rules for municipal advisors who operate 

locally, regionally and nationally. A clear and unifonn understanding of their legal duties will 

give risc to the level of consistency needed to maintain a fair and efficient national market in 

municipal securities. A federal fiduciary duty would also provide state and local governments 

with a clear understanding and expectation of the obligations of their municipal advisors. 

MSRB rules would articulate clearly what is meant by this duty of loyalty. 

As I mentioned earlier, once the SEC moves forward with a definitional rule for municipal 

advisors, the MSRB will re-release draft rule proposals relating to how such federal fiduciary 

rule would be applied. Rulemaking on the federal fiduciary standard and on other key 

municipal advisor rule proposals was suspended precisely to provide municipal advisorsonce they know who they are - with the opportunity to study the proposals and to provide 

meaningful comments to the MSRB prior to the rules being filed with the SEC to complete the 

rulemaking process. 

Retaining a federal fiduciary duty will enable municipal advisors and other market participants 

to provide their analysis and suggestions for better refining these regulatory proposals -

particularly with regard to questions of balancing the benefits of a rigorous set of regulatory 

standards with the relative burden of compliance with such new standards, as well as potential 

consideration of alternative approaches to achieving the same objectives. The ability of the 

marketplace to engage in a conversation with the MSRB regarding the appropriate construction 

and application of a federal fiduciary duty is far greater than the ability of market participants 

to influence any necessary evolution of common law fiduciary standards upheld by state courts 

J J Although in the past these duties arising out of the relationship of trust have not always been well understood, the 

fact that such relationship exists and gives rise to specific duties has become increasingly clear in recent years, 

whether through enforcement actions, the enactment of the federal fiduciary duty itself or the extensive discussions 

regarding fiduciary standards since enactment of the statute. Elimination of the federal fiduciary standard in the 

statute would not ultimately be successful at reducing the expectation of adherence by municipal advisors to statebased fiduciary obligations owed to state and local governments. 

12 
114 


76119.077

in the context of specific legal proceedings. 

Elimination of a federal fiduciary duty for municipal advisors would not change the MSRB's 

mandate to protect state and local governments. It will continue to fulfill its mission to include 

the adoption of rules on the advisory activities of municipal advisors for the purpose of, among 

other things, protecting state and local governments. This mission includes rulemaking 

authority with respect to standards of fair dealing, conflicts of interest (including pay-to-play 

activities), professional qualifications, continuing education, supervision, recordkeeping and a 

range of other areas. The MSRB will, as mandated by Congress, adopt a rigorous, wellbalanced set of municipal advisor rules designed to provide the full range of protections that 

state and local governments, obligated persons, investors and the general public deserve and are 

entitled to under the Exchange Act. As the Subcommittee wrestles with the issue of how to best 

fulfill this mission, please carefully consider the vital need for municipal advisors to have the 

obligation to act in the best interest of their state and local government clients. 

I hope that I have provided the Subcommittee with helpful information with respect to your 

consideration of a federal fiduciary duty for municipal advisors, the merits of scope-based 

exclusions to the definition of municipal advisor, our overall views on their regulation and the 

importance of moving forward with implementation of Section 975 of the statute. 

13 

76119.078

rnMSRB 

State and 

Local 

Governments 

(Taxpayers) 

Professionals Involved in a 

Municipal Bond Financing Transactio

Underwriter(s) 

Underwriting Selling Group Othe

Syndicate Members Couns

Municipal Members 

Advisor(s) 

Feasibility Auditor Truste

Consultant 

Underwriter's 

Counsel 

Credit Rating Disclosu

Enhancer Agencies Couns

Bond 

Counsel 

The chart illustrates the complexity and number of professionals* involved in a municipal bond financing transaction. I

almost every case, compensation of these professionals is contingent on the closing of the bond deal. In the vast majo

of cases, state and local government bond issuers are unfamiliar with the mechanics of the financing transaction. 

"'see reverse for description of responsibflities 

76119.079

Responsibilities of Professionals Involved in a Municipal Financing Transaction 

State or local Government Issuer 

Municipal entity that sells its securities to the public. 

Underwriter(s) (also known as Senior Manager, lead 

Manager or Bookrunner) 

Forms a syndicate to distribute securities to the public. The 

underwriter allocates securities among other firms in the 

group but is itself generally responsible for the largest share of 

the issue. 

Municipal Advisor 

Retained by an issuer in a fiduciary capacity to assist in 

executing a municipal bond transaction, purchasing a financial 

product or other activity. 

Underwriter's Counsel 

Acts as the legal advisor to the underwriter, underwriting 

syndicate and selling group members. 

Bond Counsel 

Represents the interests of investors in a bond transaction and 

issues an opinion as to the legality of the bonds. 

Underwriting Syndicate 

A group of investment banking firms that purchases a new 

issue of securities from the issuer and distributes them to 

investors. 

Selling Group 

Assists in the distribution of a new issue of securities but does 

not participate in the profits or liabilities of the unde

syndicate. 

Feasibility Consultant 

Writes the feasibility report prepared for revenue bo

which is generally included in the preliminary and fin

statements. 

Credit Enhancers Companies that provide a substitute for or a support 

as bond insurance or a letter of credit - to enhance 

issuer's credit, in exchange for a fee or premium. 

Auditor 

Is responsible for examining the issuer's financial rec

reports, and delivers an opinion on those financial re

Rating Agencies 

Companies that grade securities so as to indicate the 

the securities for the investors. 

Trustee/Paying Agent 

An appointed institution that manages assets for the 

of the bondholders according to the terms of the tru

indenture. 

Disclosure Counsel/Other Counsel 

Takes responsibility for preparation of the prelimina

final official statements. Other counsel may include s

counsel, bank counsel and borrower's counsel. 
117 


76119.080

IACLI 

Financial Security ... for life. 

American Council of Life Insurers (ACLI) Statement for the Record 

House Financial Services Committee 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

"The Impact of the Dodd-Frank Act on Municipal Finance" 

July 20, 2012 

The American Council of Life Insurers (ACLI) is pleased to submit this statement for the hearing 

record expressing the concerns of the life insurance industry about a rule proposed by the Securities 

and Exchange Commission (SEC) establishing a registration program for "municipal advisors." The 

stated purpose of the proposed rule is to implement Section 975 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (the Dodd-Frank Act). 

The American Council of Life Insurers is a Washington, D.C.-based trade association with more than 

300 legal reserve life insurer and fraternal benefit society member companies operating in the 

United States. ACLI advocates in federal, state and international forums. Its members 

represent more than 90 percent of the assets and premiums of the U. S. life insurance and annuity 

industry. In addition to life insurance, annuities and other workplace and individual retirement plans, 

ACLI members offer long-term care and disability income insurance, and reinsurance. Its public 

website can be accessed at www.acli.com. 

ACLI member companies administer retirement plans established by municipalities for their 

employees, including defined benefit, defined contribution, 403(b) and 457 plans. As described 

below, the proposed rule represents a profound and costly change for life insurers, municipalities, 

and their employees in the regulation of government retirement plans. The proposed rule would layer 

new municipal advisor regulations onto existing regulatory regimes to which life insurers, brokerdealers, and investment advisers are already subject. This duplication of existing regulation is both 

unnecessary and counterproductive. 

Furthermore, the proposed rule is contrary to Congressional intent and to the plain terms of Section 

975 of the Dodd-Frank Act. The SEC has made an overly broad interpretation of Section 975, 

proposing to apply the municipal advisor registration requirement to broker-dealers marketing 

insurance contracts that fund government plans and potentially to the investment advisers 

managing assets underlying those contracts. The stated purpose of this broad application is to 

implement the Dodd-Frank provision and thereby address a perceived gap in municipal financial 

transactions. 

However, the Dodd-Frank Act did not alter the definition of "municipal securities," which continues to 

be defined under the Securities Exchange Act of 1934. There is no evidence of Congressional intent 
118 


76119.081

2 

to expand the definition of municipal securities to include retirement or similar services provided by 

life insurers, broker-dealers marketing insurance contracts that fund government plans, or 

investment advisers managing assets underlying those contracts. To the contrary, Congress 

specifically intended Section 975 to address the market for municipal securities and previously 

unregulated market participants and unregulated financial transactions in that space. The delivery 

and management of government retirement plans were not intended to be covered by Section 975. 

In addition, neither the products and services provided by life insurers, nor the broker-dealers and 

investment advisers described above, represent a regulatory gap needing to be addressed by the 

proposed rule. Life insurers are subject to extensive product, operational, market conduct, financial 

condition, and solvency regulation by the states. Variable products offered by life insurers are 

regulated by the SEC. Broker-dealers affiliated with life insurers are regulated under the Securities 

Exchange Act of 1934, and investment advisers are regulated under the Investment Advisers Act of 

1940. According to the Employee Benefit Research Institute's Fundamentals of Employee Benefit 

Programs, "Constitutional and contractual law guarantees, which may be expressed in state statutes 

and decisional law, afford members of public employee retirement plans many of the protections 

granted to members of ERISA-regulated plans by federal statutory law. In fact, it is safe to say that 

public employees have protection that is comparable with that of private-sector employees today, 

although from different sources."' As a result, there is no compelling reason to add another regulator 

and regulatory regime in this area. 

ACLI welcomes the recognition by SEC Chairman Mary Schapiro that the proposed rule is overly 

broad. However, definitive action is necessary to prevent added costs or disruptions to the delivery of 

retirement plans to public employees across the country. ACLI supports the legislation authored by 

Representative Robert Dold, H.R. 2827, which would clarify the definition of a municipal advisor. 

ACLI thanks Representative Dold and the Subcommittee for its leadership on this important issue. 

ACLI encourages the Subcommittee to continue to exercise its oversight authority over the SEC as it 

engages in any final rulemaking in this area. ACLI believes that the proposed rule should be 

withdrawn in its entirety and revised in a manner consistent with Congressional intent and the plain 

terms of Section 975. 

Thank you for convening this important hearing and for your consideration of the views of ACLI and 

its member companies. 
119 


76119.082

National Association ofIndependent 

Public Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292 • 209.633.6265 Fax 

www.naipfa.com 

Testimony for the Record 

OnH.R.2827 

Submitted to the Subcommittee on Capital Markets, U.S. House of Representative, 

Washington, D.C. 

By Colette Irwin-Knott - President, National Association of Independent Public 

Financial Advisors 

July 20, 2012 

Introduction 

Mr. Chairman and Members of the Subcommittee: 

On behalf of the National Association of Independent Public Financial Advisors and its 

members, we are pleased to submit written testimony for the record in opposition to 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 ("H.R. 2827" or the 

"Bill"). The National Association of Indcpendent Public Finance Advisors respectfully 

urges Congress to not pass H.R. 2827. We propose, instead, leaving unchanged those 

portions of the Securities Exchange Act of 1934 that would be affected by H.R. 2827. 

The National Association of Independent Public Finance Advisors ("NAIPF A") was 

founded in 1990 as a professional organization representing the interests of indcpendent 

public fmance advisory firms who provide public fmanee advice to municipal entities and 

obligated persons. Our membership is comprised of thirty-two member firms 

representing clients on approximately 3,000 bond issues equating to nearly $75 billion in 

municipal securities issuances annually. These firms are considered "independent" by 

virtue of their laek of affiliation with any broker, dealer or municipal securities dealer. 

As distinguished from brokers, dealers, and municipal securities dealers, our member 

firms are able to offer a wide variety of consulting services to both issuer and obligated 

persons without the underlying conflicts of interest that accompany these other market 

participants while performing similar functions. 

Background 

Prior to the enactment of Section 975 of Title IX of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010 (the "Dodd-Frank Act" or the "Act"), any 

individual, regulated and otherwise, could provide advice to or on behalf of municipal 
120 


76119.083

National Association of Independent 

Public Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292' 209.633.6265 Fax 

www.naipfa.com 

entities or obligated persons with respect to municipal fmancial products or the issuance 

of municipal securities (including advice with respect to the structure, timing, terms and 

other similar maters concerning such fmancial products or issues). This led to the 

widespread reliance by municipal entities and obligated persons upon the advice they 

receive from broker-dealers who were free to, and did, act without regard to the interests 

of these entities whcn providing advice. In response, Congress determined through their 

enactment of the Dodd-Frank Act, which thereby amended the Securities and Exchange 

Act of 1934 (the "Exchange Act"), that all individuals who provide advice to or on behalf 

of municipal entities or obligated persons with respect to municipal fmancial products or 

the issuance of municipal securities, including advice with respect to the structure, 

timing, terms and similar matters ("Municipal Advisory Services"), including brokerdealers, should to be classified as "Municipal Advisors" and have accompanying 

fiduciary duties vis-a-vis the advice they provide to municipal entities or obligated 

persons. Notably, under the Act, broker-dcalers would only be considered Municipal 

Advisors to the extent that they provide Municipal Advisory Services. In fact, the Act 

specifically excludes broker-dealers from the definition of Municipal Advisor when the 

broker-dealer is engagcd by a municipal entity or obligated person as an "underwriter" as 

that term was defined in Section 2(a)(II) of the Exchange Act. In this regard, the Act 

makes clear that broker-dealers serving as underwriters would be excluded from the 

defmition of Municipal Advisor and corresponding fiduciary responsibilities. 

The Act's amendments to the Exchange Act were largely in response to concerns that 

individuals, some of whom may have already been regulated in one capacity or other, 

wcre essentially unregulated with respect to the advice they provided to municipal 

entities and obligated persons. Prior to enactment of the Dodd-Frank Act, many market 

participants would provide advice to the issuer with respect to the structure, timing and 

terms of a securities issuance in order to lead the issuer towards the issuance of a 

particular kind of security or manner of sale without regard to what may have been in the 

issuer's best interest. Various broker-dealers acted in this manner to effectively engage 

in self-dealing; broker-dealers who provided what now would be considered Municipal 

Advisor Services were under no obligation to provide these services in a manner 

designed to serve the municipal entity's or obligated person's interest and instead were 

able to unduly influence these entities into undertaking a course of action designed to 

benefit the broker-dealer's own interests. In addition, broker-dealers providing 

Municipal Advisory Services engaged in practices, documented by regulatory actions and 

court cases, which could be considered inappropriatc in light of the reliance placed upon 

these entities by municipalities and obligated persons, such as: 

Failing to clearly disclose fees charged to munieipal entities and obligated 

persons; 

Charging excessive fees to municipal entities and obligated persons; 
121 


76119.084

National Association of Independent 

Pnblic Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292·209.633.6265 Fax 

www.naipfa.com 

Pay-to-play arrangements and excessive gift giving to employees and officials of 

municipal entities or obligated persons; 

Excessive or impermissible political contributions to municipal officials; 

Utilizing and recommending exotic, synthetic or otherwise inappropriate financial 

products to unsophisticated municipal entities or obligated pcrsons; 

Rigging bidding processes to win business from municipal entities and obligated 

persons; and 

Reconunending the issuance or refinancing of bonds without a justifiable benefit 

to the municipal entity or obligated person. 

We believe that these practices led to unnecessarily high interest rates as well as the 

issuance of variable rate demand obligations and derivatives by unsophisticated market 

participants. The issuance of these unsuitable products by municipalities and obligated 

persons allowed broker-dealers to expand the underwriting fee they obtained upon 

issuance. These higher ratcs and fees negatively impacted issuers as well as the 

taxpayers and ratepayers responsible for making payments on this debt. At the time of 

enactment, it was hoped that the Dodd-Frank Act would curtail the worst of these abusive 

practices. 

Commentary on H.R. 2872 

In essence, H.R. 2827 codifies the environment that existed prior to the enactment of the 

Dodd-Frank Act in which broker-dealers were given the unfettered ability to influence 

municipalities and obligated persons without regard to the interests of those entities. The 

Bill accomplishes this by leaving in place the Act's definition of Municipal Advisor 

while revising the exclusion from the definition for broker-dealers. The Act, although 

specifically excluding any broker, dealer, or municipal securities dealers, limited this 

exclusion to those broker-dealer serving as underwriters as that term is defined in Section 

2(a)(11) of the Securities Act of 1933 (the "Securitics Act"). By contrast, H.R. 2827 

eliminatcs the limiting language containcd within the Dodd-Frank Act and instead creates 

a broad exclusion from the definition of Municipal Advisor for any broker-dealer by 

virtue of their role as underwriter. 

This revision is extremely troubling as it will essentially put in place a regulatory system 

whereby the prior offenders are given free reign to return to the abusive practices of the 

past. As in the past, municipal entities will again rely upon the advice they receive from 

broker-dealers, which could lead to the same improper self-dealing, and the higher 

interest rates and fees were which customary in the pre-Dodd-Frank Act environment, all 

of which will be detrimental to the municipal entities and, ultimately, their taxpayers. 
122 


76119.085

National Association ofIndependent 

Public Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292 ·209.633.6265 Fax 

www.naipfa.com 

What is more, the exclusion carved out by H.R. 2827 for broker-dealers is hard to justify 

in light of the other exclusionary measures of the Dodd-Frank Act as well as the Bill. 

Shortly after enactment of the Dodd-Frank Act, the Securities and Exchange Commission 

("SEC") put forth Release No. 34-63576 - Registration of Municipal Advisors 

("Release"). In this Release, the SEC attempted to clarify the provisions of Section 

15B(e)(4)(C) of the Exchange Act, which sct forth an illustrative list of individuals 

excluded from the definition of municipal advisor. This section, for all intents and 

purposes, mirrors that of H.R. 2827, except for those provisions relating to brokerdealers. 

In the Release, the SEC clarified the type of advice that can bc provided by the various 

market participants without fear of classification as Municipal Advisor. The Release 

includes precise unequivocal statements regarding the exclusions contained within § 

15B(e)(4)(C) of the Exchange Act, a sampling of which arc as follows: 

Investment Advisers. Investment advisers were excluded under §J5B(e)(4)(C) if 

the advice they provide falls within the Investment Advisers Act. The SEC went 

on to state that "a registered investment adviser or an associated person of a 

registered investment adviser would not have to register as a 'municipal advisor' 

with respect to the provision of any investment advice subject to the Investment 

Advisers Act." Conversely, an investment adviser "must register [ ... J as a 

municipal advisor if the adviser or associated person engages in any municipal 

advisory activities that would not be investment advice subject to the Investment 

Advisers Act." 

Commodify Trading Advisors. Commodity trading advisors were excluded under 

§15B(e)(4)(C) if the advice they provide is advice related to swaps, but "a 

commodity trading advisor [ ... J must register with the Commission as a 

municipal advisor if the commodity trading advisor [ ... J engages in municipal 

advisory activities that do not include advice related to swaps." 

Attornevs. Attorneys were excluded under §J5B(e)(4)(C) if they are providing 

legal advice or if they provide services that are of a traditional legal nature, and 

arc excluded from classification as Municipal Advisor "unless the attorney 

engages in municipal advisory activities." 

Engineers. Engineers were excluded under § 15B( e)( 4)( C) if the advice provided 

is engineering advice. However, the Commission concluded that the "exclusion 

docs not include circumstances in which the engineer is engaging in municipal 

advisory activities [ ... J even if those activities are incidental to the provision of 

engineering advice." 
123 


76119.086

National Association ofIndependent 

Public Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292 • 209.633.6265 Fax 

www.naipfa.com 

Accountants. Although not specifically excluded under §15B(e)(4)(C), the 

Commission stated that accountants, like individuals specifically excluded under 

§15B(e)(4)(C), arc exempt if they provide non-municipal advisory services. The 

SEC noted that some accountants do engage in municipal advisory activities and 

therefore an exclusion would not be appropriate. However, accountants who 

provide services, such as "preparing financial statements, auditing financial 

statements, or issuing letters for underwriters for, or on behalf 04 a municipal 

entity or obligated person," are not engaged in municipal advisory activities and 

are therefore excluded from the definition of municipal advisor. 

When providing Municipal Advisory Services, broker-dealers should be classified as 

Municipal Advisors and treated no differently under the law than other market 

participants performing similar functions who would be classified as Municipal Advisors. 

Like some of the other market participants, broker-dealers are already regulated with 

respect to particular kinds of conduct, and likc othcr market participants, broker-dealers 

may have interactions with municipal entities and obligated persons in which advice is 

provided and relied upon by the municipal entities or obligated persons. However, under 

H.R. 2827, unlike these other market participants, broker-dealers would not be classificd 

as Municipal Advisors with corresponding fiduciary duties when they provide Municipal 

Advisory Service. 

It is not in the interest of the municipal market, or municipal entities or their taxpayers to 

create an exclusion for broker-dealers that breaks from the clear delineations put forth by 

the SEC in connection with the other exclusions contained within §15B(e)(4)(C) of the 

Exchange Act. That is, every exclusion existing under § 15B(e)(4)(C) and those set forth 

in H.R. 2827, except for the new proposed exclusion for broker-dealers, is inapplicable 

where the individual provides Municipal Advisory Services. Whereas, the broad 

exclusion for broker-dealers will open the door for potential improprieties and will allow 

virtually any individual wishing to escape their fiduciary responsibilities to simply 

register as a broker, dealer, or municipal securities dealer, including, financial advisors 

who otherwise would clearly fall within the definition of Municipal Advisor. As such, 

NAlPF A is very concerned that this rule will undermine each and every protection put in 

place by the Dodd-Frank Act as individuals will be able to circumvent the fiduciary 

duties that otherwise would be owed to municipal entities. 

In addition, the revisions outlined in H.R. 2827 are unwarranted given that the regulations 

set to be promulgated as a result of the Act have either not been enacted or have yet to be 

written. As such, the proposed adoption ofH.R. 2827 is premature as the full impact, or 

lack there04 of the Dodd-Frank Act and corresponding regulations has yet to be felt. 

Therefore, at this time, NAiPFA would urge restraint on the part of Congress to allow for 
124 


76119.087

National Association ofIndependent 

Pub lie Finance Advisors 

P.O. Box 304 

Montgomery, Illinois 60538.0304 

630.896.1292' 209.633.6265 Fax 

www.naipfa.com 

the full implementation of the Dodd-Frank Act. In turn, this will allow for a more full 

and accurate analysis of the impact of the Act as well as the potential benefits or 

ramifications of adopting a bill such as H.R. 2827. 

Enforcement 

The delineations set forth in the Dodd-Frank Act and the Release with respect to the 

exclusions from the definition of Municipal Advisor, allow for proper enforcement of the 

law by virtue of individuals' obtainment of fiduciary duties. In other words, as enacted, 

the Act provides for the SEC or other enforcement agency to hold individuals 

accountable when they act inappropriately or without the requisite knowledge or 

experience when providing Municipal Advisory Services. Under H.R. 2827, no similar 

mechanism exists with respcct to brokcr-dealers; broker-dealers are excluded from the 

definition of Municipal Advisor regardless of their activities. This Bill throws into 

question whether a broker-dealer can ever be held accountable, let alone obtain fiduciary 

responsibilities, as a result of the advice it provides to a municipal entity or obligated 

person. This has in the past and, upon passage ofH.R. 2827, will again in the future lead 

to abuses which will ultimately be detrimental to the municipal market, municipal entities 

and their taxpayers. 

Further, in light of the recent revelations with respect to the massive trading losses at J.P. 

Morgan Chase and the Barclays Capital LIBOR scandal, now more than ever, our 

Country needs to have in place strong regulatory measures to curtail the abuses and 

harmful business practices of the past while, on a going forward basis, protecting the 

intcrests of investors and taxpayers. 

Conclusion 

NAIPFA docs not support the passage of H.R. 2827 and would instead encourage 

Congress to allow for the full implementation of the Dodd-Frank Act prior to enacting 

any revisionary measures relating thereto. Furthermore, NAIPFA is concerned that the 

enactment of H.R. 2827 will give immunity to broker-dealers to freely engage in the 

practices of the past that led to one of the worst fmancial crises in this Country's history. 

This tacit endorsement of the past will be detrimental to not only municipal entities and 

their tax/ratepayers, but also the Country as a whole. As such, NAIPFA urges Congress 

to reject H.R. 2827 and allow the provisions of the Dodd-Frank Act relating to Municipal 

Advisors to remain unchanged at this time. 
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76119.088

SPENCER BACHUS, Al, CHAIRMAN 

Honorable Mary L. Schapiro 

Chairman 

illlliteo $ltnKs' JI?Otl5e of J."e~\'tseJltatibcJl' 

QI:olllll1ittee 011 jfillfmda[ ~I'r\)imi 

1l)a51)ill(1ton, ]Di[. 20515 

July 2,2012 

Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549 

Dear Chairman Schapiro: 

BARNEY FRANK, MA, RANK1NG MEt,,1BER 

I write to express serious concerns about the Commission's proposed rule on municipal advisor 

registration. The proposed rule could be read to result in a registration requirement in cases where a 

bank is simply engaged in traditional banking activities. The Wall Street Reform Act clearly did not 

intend that result, nor does the statutory language support it. I appreciate your connnehts before the 

Financial Services Committee that the final rule should be tailored to exclude such "traditional 

banking business" activities. I expect the fmal rule to correct that problem. 

I am particularly concerned that the Comruission has not adequately differentiatod between 

advising a municipality about how to invest the proceeds of an issuance and merely offering a 

municipality a menn of products from which to choose. In my view, thel'e are two circumstances in 

which a bank should be subject to the new registration requirement: if the bank actually structures the 

issuance, as typically demonstrated by the bank's name on the prospectus, or jfit clearly provides 

investment advice and actively directs the municipality to a specific product or products. 

But Congress did not intend that simply offering lists of available investment options to a 

municipality should be considered "advice." Municipalities often solicit requests for proposals (RFPs) 

to better understand the investment options for their securities' proceeds. Banks often respond to such 

requests with a set of financial product choices for the municipality. Such l'esponses are, and should be 

understood by the Commission to be, "traditional banking business" and not the provision of 

investment advice. In such cases, the bank is not telling the municipality how it should invest, and 

should not be required to register. 

I am also concerned that the rule not place unnecessary new compliance burdens on small and 

medium-sized institutions. The distinctions drawn should be sufficiently precise and clear to allow 

banks to readily demonstrate compliance. The Comruission should not, for example, adopt a rule that 

requires bank personnel to monitor lists of municipal issuers (which may be far broader than just city 

governments) or l'equire bank personnel to inquire as to the sources of funds for deposits coming from 

such issuers. It would be extremely difficult and burdensome for banks to demonstrate compliance 

with such requirements, and the statute did not contemplate their being imposed. 

~.~-,--

(~F;:NK Ranking Member 
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76119.089

l.AJ Spelman C(lllew~ 

OFFICE OF THE PRES IDENT 

Phone: 401-270·5;)()! 

Fax: 104·270¥50!! 

July 9, 2012 

The Honorable Maxine Waters 

2344 Rayburn House Office Building 

U,S, Housc of Representatives 

Washington, DC 20515 

HEVERLY DAN1EL TATUM, Ph D 

Pn!sidenl 

Re: Registration of Municipal Advisors under Section 975 of the Dodd-frank Wall Street Reform and 

Consumer Protection Act 

Dear Congresswoman Waters: 

As president of Spelman College, I want to thank you for your steadfast commitment to the mission of 

historically Black colleges and universities and your continuing leadership in Washington, As you know, 

in recent years, there are a number of HBCUs that have been struggling to survive while there are others, 

like Spelman, that continue to thrive. A study of those who are thriving will reveal thc presence of a 

strong governing Board, a Board that not only makes wise choices in terms of selecting presidential 

leadership but also a Board that takes seriously its obligation to provide fiscal oversight as a governing 

body, It is hard to find really talented Board members willing to devote the time and energy needed - as 

unpaid volunteers - to provide effective governance, yet those arc exactly the kind of Board members 

HBCUs need. 

[ am writing to you today because the proposed rule regarding the registration of municipal advisors 

currently under consideration by the SEC will make it much more difficult for institutions likc mine to 

recruit and retain the Board members that make the difference between surviving and thriving. While I 

appreciate the efforts of the SEC to regulate those professional advisors who sell their financial advice in 

the marketplace, I am concerned about the blanket application of such regulation to non-profit governing 

boards, Such overreach will have unintended consequences for colleges and universities like my own 

who rely upon the unpaid volunteer service of trustees to provide fiduciary oversight as pm1 of our 

governance structure. 

As you know. Spelman College is the global leader in the education of women of African descent. One 

of only two historically Black colleges for women, Spelman has flourished in an increasingly competitive 

higher education context in part because we have been able to attract highly accomplished men and 

women to our Board of Trustees who have been willing to give countless hours of their time and talent, 

without compensation, to ensure the well-being of the College, As detlned by our by-laws, "The Board of 

Trustees shall oversee and control the propCt1y, business and affairs of Spelman College," While the role 

of the Board of Trustees is one of overall governance rather than one of active day-to-day administration 

(a responsibility delegated to the president of the institution), the Board is indeed a decision-making body 

that has responsihility for the fiscal health of the institution, Trustees arc not "advisors," they are 

decision-makers, and they take on that responsibility out ofa love for the mission oflhe institution, not 

for personal gain, 

Indeed, our regional accreditation requires that we clearly delineate a conflict of interest policy for our 

trustees as well as officers of the College, which explicitly forbids behavior which might be construed as 
127 


76119.090

in self~interest rather than in the interest of the institution. Effective functioning of a college or university 

Board is often the difference between those institutions that thrive and those that flounder. That said, thc 

skill level and sophistication of the Board members is a critical factor in the capacity to function 

effectively. Requiring unpaid volunteers like these to register with the SEC as a condition of their 

volunteer service will surely make it more difficult for us to recruit the kind ofthoughtful and 

accomplished trustees we need, particularly those with financial expertise. To the extcm that colleges and 

universities would have to provide administrative support to (he Board members as they document their 

compliance with the SEC regulations, this regulation threatens to increase administrative costs at a time 

when we are trying to contain overhead and reduce costs to students. 

I am aware that the Association of Governing Boards of Universities and Colleges (AGB), of which 

Spelman College is a member, has suggested that the proposed rule be modified to specifically exclude 

from the definition of municipal advisor the following categories of individuals: 

Any member of the governing board o1'a municipal entity acting in their official capacity; 

Any member of the governing hoard of an obligated person acting in their official capacity; 

Any employee of a municipal entity acting within the authorized scope of their employment; 

Any employee of an obligated person acting within the authorized scope of their employment. 

I would like to express my ardent support for this suggested modification. I believe that providing 

explicit clarification regarding to whom the rule applies, and perhaps most importantly, to whom it does 

not apply, will help us avoid the unintended consequence of harming the governance of colleges and 

universities across the country at a time when we need strong educational institutions more than ever. 

I have expressed this point of view in a !etter 10 Ms. Elizabeth Murphy, Secretary oflhe U.S. Securities 

and Exchange Commission, and to Representative Scott Garrett, Chair of the Subcommittee on Capital 

Markets and Government Sponsored Enterprises. Given your role on Financial Services, I thought it 

especially important that you knew how critically impOltant this issue is to (he long-term health of 

institutions like Spelman College. If I can provide any additional insight into this issue from the 

perspective of colleges and universities, please do not hesitate to contact me. As always, I appreciate 

your advocacy on behalf of our educational institutions. 

Thank you for your consideration of these concerns and the suggested AGB modification of the language. 

Respectfully submitted, 

Beverly Daniel Tatum, Ph.D. 

President 
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Response of Alan D. Polsky 

I believe that the MSRB's suggested "scope-based" approach to the exclusions from the definition of municipal advisor for 

professionals otherwise subject to different legal or professional standards would eliminate the need for courts to· detennine 

whether the federal fiduciary duty for municipal advisors could potentially conflict with such other standards of care. For 

example, excluding a registered investment adviser from the definition of municipal advisor insofar as such investment adviser is 

engaging in investment advisory activities subject to federal or state duties would eliminate any potential conflict between the 

federal municipal advisor fiduciary duty and such other federal or state duties, while continuing to treat such investment adviser 

as a municipal advisor to the extent of its municipal advisory activities outside the scope of its federal or state-regulated 

investment advisory services also would not give rise to any such conflict. 

o