Finance Reform Act Affects State and Local Governments in Many Ways: The Wall Street Reform and Consumer Protection Act Includes Many Provisions Related to Municipal Securities, as Well as New Regulations for Advisors Hired by State and Local Governments

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On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act (PL 111-203, known as the Dodd-Frank Act). The law brings sweeping changes to the nation's financial services industry, including new financial product consumer protection laws, new requirements for financial institutions, the regulation of previously unregulated financial markets (such as swaps), and new responsibilities for credit rating agencies.

The law will affect state and local governments in a variety of ways, both directly and indirectly. Most notably, it includes many provisions related to municipal securities, as well as new regulations for advisors hired by state and local governments--including public pension funds. An overview of some of the most significant provisions are highlighted below.


Assesses a New Bond Fee to Pay for GASB. A fee will be assessed on new bond issuances to provide a stable revenue stream to support the Governmental Accounting Standards Board (GASB). The amount remitted to the GASB cannot be greater than its annual budget, and the legislation states that the Securities and Exchange Commission (SEC) cannot directly or indirectly involve itself with the GASB's budget, its technical agenda, or the setting of generally accepted accounting principles. The Government Accountability Office (GAO) is also to complete a study on the role and importance of the GASB and the manner in which it has been funded. The GAO must consult with state and local government representatives, including finance officers, for this report.

Limits Debit Card Interchange Fees. The Act requires the Federal Reserve to develop and implement "reasonable and proportional" interchange fees for debit card transactions, in an effort to limit the amount of fees that issuing banks can charge merchants for such transactions. The House and Senate conference committee agreed to a carve-out from these regulations for federal, state, and local government-administered payment programs that use prepaid debit cards. The act also allows merchants to offer discounts to customers who pay with cash, checks, of debit cards, and to permit a minimum purchase threshold up to 10 dollars.

Requires the Use of Universal Rating Symbols by Credit Rating Agencies for All Securities. The rating agencies must define and disclose each rating symbol, then apply the symbols uniformly to all securities (e.g., a AA corporate rating means the same thing as a AA municipal security rating). Furthermore, the rating must be based on the probability that an issuer will default or otherwise not make timely payments in accordance with the terms of the security.

Changes the Board Composition of the MSRB. Effective October 1, 2010, the Municipal Securities Rulemaking Board (MSRB) must consist of a majority of independent board members who are not associated with any broker, dealer, municipal securities dealer, or municipal advisor. Within the composition of the independent board members, at least one must be a municipal securities issuer, at least one must be an institutional of retail investor, and at least one must be a member of the public who has knowledge of of experience in the municipal securities industry.

Regulates Financial Advisors. Municipal financial advisors must now register and be regulated by the MSRB. Before this law, non-broker/dealer municipal financial advisors (including swap advisors, GIC brokers, and placement agents) have been unregulated.

Puts Fiduciary Responsibility on Municipal Financial Advisors. The MSRB will develop new fiduciary duty standards for municipal financial advisors (including swap advisors, GIC brokers, anal placement agents), requiring that the interest of their clients rises above their own interest.

Changes the MSRB's Mission. Since its creation in 1975, the MSRB's mission has been to protect investors. Because of its new authority to regulate municipal financial advisors, its mission has changed to protect investors "and municipal entities or obligated persons. …


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