Industry observers think the Securities and Exchange Commission will have to backtrack on a proposal to increase the number of people regulated as municipal advisers.
The controversial proposal, mandated by the Dodd-Frank legislation as a way to address abuses involving municipal underwritings, was published for comment in December.
Since then, a growing chorus of critics has denounced the proposal as a serious case of regulatory overreach.
As it stands now, Section 975 of the Dodd-Frank Act requires that investment advisers, banks, dealers and appointed, unpaid members of public governing bodies register with the SEC as municipal advisers to be regulated by the Municipal Securities Rulemaking Board. It also would subject them to limits on pay-to-play rules governing political contributions — and stiff penalties for violations.
It also created the municipal adviser category, a registration and record-keeping regime for people advising municipal entities on bond issues and investing the proceeds. It includes a fiduciary duty for municipal advisers and anti-fraud jurisdiction over municipal advisers.
As a result of the outcry, observers expect that the SEC will narrow the proposal and reissue the plan, possibly before year-end.
“They're really looking to re-evaluate what's covered and what's not” by the proposal, with an eye toward limiting who would be covered, said Clifford Kirsch, a partner at Sutherland Asbill & Brennan LLP, who represents the Committee of Annuity Insurers, which opposes to the proposal.
The proposal “goes much further than what was anticipated in Dodd-Frank,” he added.
The SEC has said it defined a municipal adviser “with a very broad intent, so they could tailor it back as necessary” without having to republish the rule for comment, said Leslie Norwood, managing director at the Securities Industry and Financial Markets Association and co-head of its municipal-securities group.
Indeed, in its proposal, the SEC asked a number of questions about who should be covered by the rule. The agency must address comments in formulating final rules.
Political pressure to curtail the proposal's scope grew this summer, leading a number of senators and House members from both political parties to urge the SEC to narrow the rule.
ONEROUS REGULATION
In June, Rep. Barney Frank, D-Mass., co-author of the Dodd-Frank law, wrote the SEC, warning that the proposal had the “unintended consequence” of subjecting banks to “onerous regulation.”
Banks could be covered by the simple act of depositing bond proceeds.
Last week, the MSRB temporarily yanked all six of its own proposed rules covering municipal advisers.
The MSRB said that since it was unclear who would be covered, some firms and individuals didn't have a chance to comment on those proposals.
“The municipal-adviser thing is a very important piece of Dodd-Frank, but a lot of people haven't paid attention to it,” said W. Hardy Callcott, a partner at Bingham McCutchen LLP, who represents engineering companies that might have to register as municipal advisers.
NEW BILL
Last month, Rep. Robert Dold, R-Ill., introduced HR 2827, which seeks to limit the Dodd-Frank provision by narrowing the definition of a municipal adviser, clarifying the definition of an investment strategy and eliminating the federal fiduciary standard for municipal advisers. The bill has been referred to the House Financial Services Committee.
The SEC declined to comment on how it might revamp its proposal.
“We wouldn't have details about what the final [municipal adviser] rules would entail until they're presented to the commission for adoption,” SEC spokesman Kevin Callahan wrote in an e-mail.
Feedback so far has been almost universally critical.
The proposal is intended to regulate previously unregistered individuals who advise municipalities in issuing bonds and investing the proceeds. But industry groups were outraged when the SEC's proposal expanded coverage to anyone advising public pension funds and other investments for municipal entities.
The SEC received almost 1,100 comment letters on the proposal.
Investment advisers and brokers would normally be exempt, but if they advised municipal entities on investments, they could cross the line, Mr. Callcott said.
“Drawing those lines would be difficult to do,” he said.
However, only SEC-registered advisers would be exempt, not smaller state-registered advisers.
BROAD MANDATE
A host of other groups are concerned about the proposal, as well.
County associations, which represent counties before state legislatures, are worried that they could be covered because they recommend vendors to their members.
Appointed members of governing bodies such as retirement plan boards or municipal-transportation departments also would be covered under the proposal.
Accountants and actuaries said they, too, could fall under the rule.
“It could cover all types of contacts with state and local governments,” Ms. Norwood said.
Separately, the SEC last fall began a temporary registration program for municipal advisers.
The program, which was not as far-reaching as the December proposal, expires at the end of this year but could be extended if needed, observers said.
Email Dan Jamieson at [email protected]
