SEC OKs rule requiring muni advisers to register

The Securities and Exchange Commission unanimously approved a rule Wednesday that would require people who advise state and local governments on financial transactions to register with the commission.
The regulation implements a provision of the Dodd-Frank financial reform law that put municipal advisers under SEC oversight for the first time. An adviser would have to register with the agency if he or she provides guidance on issuing municipal securities, developing investment strategies or using municipal derivatives.
Under a temporary rule approved in 2010, the agency has registered about 1,100 municipal advisers. The final rule will go into effect 60 days after it’s published in the Federal Register. Permanent adviser registration begins July 1.
Regulators want to monitor municipal advisers more closely because they are concerned that cities, towns and states are being harmed by conflicts of interest surrounding complex financial products, such as derivatives, that help finance local building projects and services. Since 2011, Detroit, Stockton, Calif., and Jefferson County, Ala., have all declared bankruptcy.
Prior to the SEC rule, municipal advisers in the roughly $3.7 trillion market had been allowed to operate without meeting conduct, training or disclosure standards, SEC Chairman Mary Jo White said.
“The investors in this market were largely left unprotected from these risks, and suffered losses when municipalities went bankrupt or were otherwise unable to meet their obligations,” Ms. White said. “Protecting our municipal securities markets and investors must be a priority.”
SEC member Luis A. Aguilar said that municipal advisers will have to adhere to a fiduciary duty.
“Municipal advisers will now have to put their clients’ interests ahead of their own,” Mr. Aguilar said. “These rules will serve not only to better protect municipalities and their citizens but also will serve to protect retail investors. This is important because the vast majority of investors who own municipal securities are retail investors.”
The temporary rule drew more than 1,000 comment letters and was criticized by lawmakers for being too broad in the number of people it would force to register with the SEC.
The final rule includes registration exemptions for broker-dealers who serve as underwriters for municipal securities offerings. But brokers advising a municipality on investing proceeds of a securities sale or on municipal derivatives do have to register. The broker-dealer exemption was too narrow in the original proposal, according to the Securities Industry and Financial Markets Association.
Based on the fact-sheet and the SEC commissioner statements on Wednesday, the exemption has been expanded, said Leslie Norwood, SIFMA managing director and co-head of its municipal securities group. She’s going to comb through the full 800-page rule, when it’s posted on SEC website, to see whether they extend as far as SIFMA wants them to go.
“We still have concerns about underwriters pitching transactions, who are responding to issuers’ requests for proposals and similar preliminary and marketing work,” Ms. Norwood said.
Registered investment advisers who provide advice about proceeds of a sale or about escrow investments would not have to register as municipal advisers in order to avoid duplicative registration. Others who are exempt from registration include public officials and employees, attorneys, engineers, banks and accountants.
Unlike legislation that was approved last year by the House Financial Services Committee, the SEC final rule does not make pay a criteria for whether someone is deemed a municipal adviser, according to Paul Maco, a partner at Bracewell & Giuliani LLP. The House bill died in December. Similar legislation has been re-introduced in the House and Senate this year.
“The one word that was missing from the definition of municipal adviser was ‘compensation,’” said Mr. Maco, the first director of the SEC Office of Municipal Securities. “A lot of people were pushing for that.”
Mr. Maco said that whether the new rule works will depend on the how the SEC follows through.
“It’s going to depend on the level of inspection and enforcement,” Mr. Maco said. “It’s unclear who’s going to do it for the large chunk of non-broker-dealer municipal advisers.”
The Municipal Securities Rulemaking Board works with the SEC on regulating the municipal market but it does not have enforcement authority.