MuniLand

Senator Wicker, meet Senator Warren

By Cate Long
November 9, 2012

This week, former Harvard Law professor Elizabeth Warren rode to her election night victory in Massachusetts with an eight point margin as the people’s senator. Now, as she moves closer to her swearing-in at the Old Senate Chamber in early January, the political wags are speculating whether she will be given a seat on the Senate Banking Committee. Warren herself has said that she is in discussion with Senate leadership about her committee assignments, according to Reuters:

Senate Majority Leader Harry Reid likely won’t start considering committee assignments until the new year. Still, one Senate Democratic aide predicted that if Warren wants to be on the banking panel, the odds are good she’ll get it.

“The leadership and committee chairmen usually work together to try to accommodate incoming senators’ preferences, within reason,” the aide told Reuters. “If Senator-elect Warren indicates she’d like to serve on the banking committee, given her prominent work on those issues, she would certainly have a very good shot.”

My money is on Senator-elect Warren joining those other financial reform powerhouses on the Senate Banking Committee. Senators Jack Reed (D-RI), Sherrod Brown (D-OH) and Jeff Merkley (D-OR) who have worked to rein in the power of Wall Street. Warren would add significant depth to that bench.

Warren can work in a bipartisan way. She did when she helped push the Consumer Financial Protection Bureau through the legislative process. There is an immediate issue, which relates to protection of municipal entities, that Warren could address with her new colleague across the aisle, Senator Roger Wicker (R-MS).

Wicker sponsored S3620 to clarify provisions in Dodd-Frank relating to the regulation of municipal advisors. Wicker’s legislation would essentially exempt securities dealers from a fiduciary responsibility to towns and other municipal borrowers when giving advice on how to structure a bond offering or municipal derivative. Matt Taibbi, in his colorful style, shakes it out when he writes about the House equivalent to Wicker’s legislation:

So basically, if you’re underwriting a municipal bond for a city or a town, and you happen also to give the city or town advice about some deadly swap deal that will put the city into bankruptcy for the next thousand years, you don’t have a fiduciary responsibility to that city or town. The banks’ view is that being asked to perform the merely-technical function of underwriting a bond is very different from advising someone to take on an exotic swap deal – so if a bank is mainly an underwriter and happens to offhandedly recommend this or that swap deal, it just isn’t fair to drop this onerous financial responsibility, this weighty designation of municipal financial advisor, on its shoulders.

This is a very fine point of law, but it opens the way for underwriters and other securities professionals to continue past practices.

The danger of exempting securities dealers, especially those who act as underwriters to municipal issuers, was perfectly illustrated in a comment letter to the MSRB on proposed changes to Rule G-23 from Nathan R. Howard, a municipal advisor at WM Financial Strategies:

Because, historically, underwriters were permitted to provide recommendations and guidance to municipal entities, municipal entities often considered their underwriter to be a trusted advisor. Consequently, even if underwriters only provide “information”, it is very likely that municipal entities will believe that underwriters are acting in their best interest.

For example, if historically an individual has obtained recommendations and guidance from an attorney regarding legal matters, and now that attorney is no longer licensed, but provides information without disclosing it in writing…the individual will likely believe that the attorney is still his trusted advisor, and will perceive this information to be advice.

Good luck to Senator Warren in whatever role she plays in the U.S. Senate. She will be a strong and vigilant activist for consumers and municipal entities. The U.S. Senate, where laws are shaped and polished, is the epicenter of our common law and a place that sorely needs a advocates for the people. Stir it up, Senator Warren.

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