Municipal Securities Watchdog Relents on the Meaning of Independence

In a quiet victory for reform, the Municipal Securities Rulemaking Board (MSRB) has dropped its proposal to let big-bank employees serve as independent ”public” members of the Board. The MSRB cited “unexpected opposition” to its idea – opposition that came in significant part from Americans for Financial Reform and our member organizations.

Had the MSRB’s proposal gone forward, employees of bank holding companies would have been allowed to dominate this little-known agency, reversing a move towards greater public accountability mandated by the Dodd-Frank Act. The MSRB is supposed to be a first line of defense against the kind of abusive practices that, in the runup to the financial crisis, trapped hundreds of cities and towns in swaps deals and other forms of risky financing that required taxpayers to pay exorbitant fees to Wall Street. Prior to the financial crisis, the MSRB clearly failed to protect municipalities from these abusive practices or even to clearly warn public entities of the dangers of the exotic new financing structures being sold by Wall Street.

To bolster the MSRB’s integrity and effectiveness, the Dodd-Frank Act of 2010 called for a majority of board members to be “independent of any municipal securities broker, municipal securities dealer, or municipal advisor.” In July 2013, however, the board appealed to the Securities and Exchange Commission for permission to loosen the new rule so that it would no longer exclude employees of big banks and major dealers who were not directly involved in municipal securities work.

AFR and our allies opposed this change as fatally undermining the independence that the law called for. As we pointed out in an August letter to the SEC, “this proposal would permit a so-called independent Member to be a current employee or director of a corporate entity that includes a municipal securities broker, dealer, or advisor as a subsidiary or affiliate, so long as the individual was not a current or recent employee of the specific subsidiary active in the municipal markets. For example, a current employee of JP Morgan Chase Bank NA could qualify as a Public Member of the MSRB, simply because they were not currently employed by JP Morgan’s municipal securities broker affiliate.”

Organizations weighing in opposition included AFR members the Consumer Federation of America and AFSCME along with the National Association of Independent Public Financial Advisors and the Government Finance Officers Association.

Now that the MSRB has withdrawn its proposal to weaken the standards of independence, the next step is to make sure that members who genuinely represent the public interest, not the dealer interest in selling risky deals to public entities, are in fact appointed to the Board.

Financial Deregulation Locomotive Slows in the House

Good news: two terrible bills were approved by the House of Representatives last week.

Three-and-a-half years after the Dodd-Frank financial reform law was signed, the “Swaps Regulatory Improvement Act” (HR 992) and “Retail Investor Protection Act” (HR 2374) remind us that the financial industry is still far from reconciled to reforms that threaten its cherished revenue channels. Nor has the industry lost its power to generate political support for measures that benefit Wall Street at the rest of the country’s expense.

The two bills prevailed by margins of 292-122 and 254-166, respectively. But while neither vote was close, they represent progress. In both cases, financial reformers (including members of Congress) spoke up forcefully, got the press to pay closer than normal attention and eventually mobilized enough resistance to make it unlikely that these proposals will advance further.

The first bill, HR 992, takes aim at a section of Dodd-Frank intended to keep banks from using publicly insured deposits to finance their dealings in exotic derivatives. Under the so-called “swaps pushout” provision, derivatives activity will be largely quarantined in company units that, lacking access to the public safety net, will have to come up with their own risk capital.

HR 992 would exempt almost all derivatives from the push-out rule. By doing so, it would once again allow the largest Wall Street banks to make huge sums of money betting with government-backed funds and low-interest Federal Reserve credit, potentially leaving taxpayers to pay for the bets that go wrong.

In the Financial Services Committee, 22 Democrats joined 31 Republicans in voting for the bill, while only six members voted against. One of those six, however, was the ranking member, Maxine Waters of California. And when the bill came before the Agriculture Committee, Collin Peterson of Minnesota, the senior Democrat, declared his opposition in unusual terms, recalling two of “the worst votes I ever made in this place,” which were for deregulation bills that, he now believes, helped bring about the 2008 financial crisis. “I didn’t know any better,” Peterson said, warning his colleagues that a vote for HR 992 would “could come back and haunt you.”

The origins as well as substance of HR 992 came in for scrutiny in the media. TheNew York Times unearthed evidence that most of the bill – 70 of its 85 lines – had been written by a lobbyist for Citibank. In addition, the Times and others reported on the findings of a nonprofit group, Maplight, that House backers of a package of Wall Street-friendly measures including HR 992 “received twice as much in contributions from financial institutions compared with those who opposed them.”

By the time it reached the House floor, the bill had lost much of its bipartisan luster. Eighty percent of the Democrats on the Financial Services Committee had supported it; in the full House, only 20 percent of Democrats voted that way.

The other bill, HR 2374, aims to prevent the Department of Labor from taking action to require retirement fund advisors and trustees to look out for their customers’ best interests (as opposed to their own interests). Wall Street lobbyists had worked hard to build momentum for this proposal. In August, 10 Democratic Senators signed their names to a letter that, echoing the industry line, warned that the DOL’s proposed rule would “limit investor access to education and increase costs for investors, most notably Main Street investors.”

Once again, public-interest advocates responded energetically. In petitions, organizational letters, and briefing sessions for both the House and Senate, opponents emphasized the steep costs of a system that leaves professional dispensers of financial advice free to recommend investments that produce more revenue for them, and less for those they advise. Out of a current total of $10 trillion in retirement assets, according to one recent study, roughly a third is invested in underperforming funds linked to plan trustees. Over a lifetime, American workers can easily lose hundreds of thousands of dollars as a result of such conflicts of interest.

Here, too, what started out as a quiet deal between lobbyists and lawmakers developed into a real debate, thanks to the dogged efforts of the AARP, the Consumer Federation of America, AFSCME, Public Citizen, the AFL-CIO and Americans for Financial Reform, among other reform groups. Significantly, the White House weighed in with a strong letter criticizing the bill and invoking the “v” word (for veto).

In another parallel with HR 992, some of HR 2374’s House supporters turned out to have lifted language as well as arguments from industry lobbyists. By following the trail of hidden email metadata, a reporter for Mother Jones showed that a Dear Colleague letter signed by 28 members of the Congressional Black Caucus had originally been drafted by a paid representative of the financial advisers who stood to benefit from the bill.

One thing led to another. At the outset, at least 60 House Democrats had been expected to vote for HR 2374; with that kind of support, the bill might have made a powerful claim on the Senate’s attention. But in the end, while all the House Republicans voted in favor, only 30 Democrats did. It was a “shockingly bad vote for Wall Street,” one House staffer commented.

Shockingly bad for Wall Street. Yet somewhat reassuring for the political process and the country.

Thanks to the House defections (and the work of the various groups that rallied against these bills), there is little prospect of action in the Senate. Now it’s up to regulators to forge ahead, using the political space they have been given to complete the process of turning two crucial reforms into enforceable rules.

— Jim Lardner

Originally published on


Wall Street's Derivatives Gambit

This week marks an important step forward in the implementation of financial reform. On Monday, the U.S. became the first country in the world to require mandatory clearing of many derivatives contracts, a crucial protection in these previously unregulated markets.

But even as this crucial protection takes effect, Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas.

This loophole could strike at the foundations of financial reform. Almost every major financial scandal involving derivatives – from the collapse of Long Term Capital Management’s Cayman Island operations in the 1990s, to the bailout of AIG’s London-based trades in 2008, to JP Morgan’s recent “London Whale” trading losses – has involved derivatives transactions conducted through a foreign entity. Wall Street banks routinely transact more than half their derivatives through foreign subsidiaries. Through numerous avenues, including an important Congressional vote today, Wall Street is trying to create an “extraterritorial” loophole in derivatives regulation.

Derivatives are essentially bets on future financial moves. Prior to the crisis, the massive markets in derivatives (over $300 trillion in notional value in the U.S. alone) were essentially unregulated, and conducted as simple contracts between any two financial firms. There was almost no public transparency or regulatory oversight of firms’ derivatives books, and no assurances that firms could deliver on the bets they made. This was a major contributor to the financial collapse.

The Dodd-Frank financial reform law of 2010 brought these markets under regulatory oversight for the first time. Although implementation of the rules has been greatly delayed by heavy industry opposition, we are finally beginning to see some progress. As of Monday, the Commodity Futures Trading Commission requires most U.S. derivatives transactions to be conducted through centralized clearinghouses. Clearinghouses specialize in risk management and guarantee performance of the contract. Future regulatory actions should bring close to 90 percent of the market under mandatory clearing.

Wall Street lobbyists are pushing hard to undermine this progress by exempting foreign transactions. If they succeed, entities nominally based in foreign countries but active in U.S. derivatives markets will not have to comply with U.S. derivatives rules. This could potentially include foreign subsidiaries of U.S. banks, the numerous U.S. hedge funds incorporated in places like the Cayman Islands and subsidiaries of major foreign banks that are major dealers in the U.S. markets. Because derivatives markets are global and conducted electronically, a click on a computer keyboard is all it takes for a major bank to route any transaction through a non-U.S. subsidiary. But the risk can still return to impact the U.S. economy.

Industry opponents claim that the rules of foreign countries will protect us in these cases. But no country in the world is as advanced as the U.S. in regulating its derivatives markets. While the U.S. is actively bringing derivatives regulations on line, key elements of oversight are still at least a year away in Europe and elsewhere. And permitting foreign regulation to govern U.S. derivatives transactions would be dangerous in any case. It would create an incentive for global banks to transact their business through whatever jurisdiction has the weakest regulations – a “regulatory haven” to match the tax havens that international corporations already use.

Multiple efforts are underway to undermine international derivatives rules. In Congress, the House will vote today on HR 1256, a bill that would sharply limit the jurisdiction of U.S. derivatives regulators over transactions conducted in foreign markets. This bill is likely to pass the House, having gained the support of a large majority of the Financial Services Committee – but it’s still important for pro-reform forces to register opposition. There should be more resistance in the Senate, where six Senators led by Sen. Sherrod Brown, D-Ohio, recently sent a strong letter to regulators supporting effective international regulation of derivatives markets.

At the same time, both Wall Street and foreign regulators are pressing the Commodity Futures Trading Commission to step back from enforcing its rules overseas. The CFTC is scheduled to begin enforcement next month, on July 12, but industry is pushing for additional and perhaps indefinite further delays. While current CFTC chairman Gary Gensler is a strong supporter of effective regulation, other commissioners, led by Scott O’Malia, favor more delay.

Finally, industry and (astoundingly) some members of Congress are seeking to renegotiate U.S. financial regulations through secretive international trade negotiations, which could allow numerous new international exemptions to be added without any public accountability or oversight.

It’s crucial that these efforts do not succeed. After years of work to implement basic safeguards in the massive shadow markets that crashed the global economy, we can’t let Wall Street sidestep these protections simply by taking its business overseas.

— Marcus Stanley

Originally published on

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