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Thursday, September 20, 2012

Bill HR 2827 Weakens Taxpayer Protection

HR 2827 in effect routes protection against mass taxpayer fraud and bribery enacted under Dodd-Frank.
I was made aware by blogger Karl Denninger, referring to Rolling Stone article Wall Street Rolling Back Another Key Piece of Financial Reform . What is amazing to me as of 7:48 pm eastern, USA time I did a Google news search for  HR 2827.  Rolling Stone is only news periodical I recognized (rest where blogs, specialty financial news,  etc).
I am not a lawyer, I welcome any lawyers out there to read and clarify how my perception may be wrong on this topic.

From the Rolling Stone article, Quote:
...passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster.      ....
Jefferson County, Alabama was the most famous case – the city of Birmingham went bankrupt after being bribed and goaded into taking on billions of dollars of toxic swap deals – but in fact it was just one of hundreds of similar examples of localities being duped into suicidal financial deals by rapacious banks and financial companies.

For those that don't know, Jefferson County is a bankrupt municipality, thanks to public bribery and unsound loans made to the county.  Public official was convicted of bribery, but the private counter party has not.  Tax payers left with a bankrupt county paying much higher utility bills than neighboring counties. 

Returning to article....  
Here’s how SIFMA describes burden would have been under Dodd-Frank’s original reform:
The consequences of being deemed to be a municipal advisor are very serious.  Providing municipal advice without having registered is “unlawful”—i.e. potentially criminal.  The highest standard of conduct--a fiduciary duty--is imposed.
....
Sound good right? Well HR2827 has clarified  definition of Municipal Advisor"  Full text of HR 2827 here.
SEC. 5. DEFINITION OF MUNICIPAL ADVISOR.
Section 15B(e)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78o-4(e)(4)) is amended to read as follows:
`(4) the term `municipal advisor'--
`(A) means a person (who is not a municipal entity or obligated person, or an employee of a municipal entity or obligated person) that--
`(i) is engaged, for compensation, by a municipal entity or obligated person to provide advice to a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or
`(ii) undertakes a solicitation of a municipal entity;
`(B) includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors, if such persons are described in either of clauses (i) or (ii) of subparagraph (A) and are not excluded under subparagraph (C); and
`(C) does not include, solely as a result of their performing the following activities--
`(i) any broker, dealer, or municipal securities dealer (or person associated with such broker, dealer or municipal securities dealer);
`(ii) any investment adviser registered under the Investment Advisers Act of 1940 or with a State or territory of the United States (or person associated with such an investment adviser);
`(iii) any commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker registered under the Commodity Exchange Act (or person associated with a commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker) who is providing advice related to, engaging in, or arranging any swap;
`(iv) any security-based swap dealer or major security-based swap participant registered under the Securities Exchange Act of 1934 (or any person associated with a security-based swap dealer or major security-based swap participant) who is providing advice related to, engaging in, or arranging any security-based swap;
`(v) any attorney offering legal advice or providing services that are of a traditional legal nature;
`(vi) any engineer providing engineering advice;
`(vii) any financial institution or person associated with a financial institution; or
`(viii) any elected or appointed member of a governing body of a municipal entity, with respect to such member's role on the governing body;'.

Securities Exchange Act of 1934, created after the last Great Depression to prevent future financial issues.  It has been amended quite a bit since then.  Current version  here, and buffered version as of 9-20-12 here.

To ensure the effect of HR2827 is as important as it looks, I took a snippet from SEC 1934 law, to provide context use of MUNICIPAL ADVISOR.

It shall be unlawful for a municipal advisor to  provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products 253 SECURITIES EXCHANGE ACT OF 1934 Sec. 15B or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered in accordance with  this subsection. 

The law was bi-partisan passed the house with vocal role call only, with no record of who voted.  I don't think Senate has passed it YET.
This type of behavior has entered into my Financial Ground Zero series, documenting the  likely crisis ahead.

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