MSRB Tells SEC Muni Board Members Aren't Advisers

WASHINGTON — Governing board members of municipal entities should not be considered municipal advisers who would have to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board and comply with board rules, the MSRB told the SEC Wednesday.

"There is no evidence that Congress sought to provide authority to the MSRB or the commission over the internal affairs of municipal entities," the board said in an 18-page comment letter signed by chairman Michael Bartolotta, vice chairman of First Southwest Co. in Houston.

The MSRB letter comes as state and local government groups and other muni market participants have bombarded the SEC with letters complaining that including governing board members as muni advisers would disrupt their bond financings and other activities.

Congress' decision not to amend the so-called Tower Amendment "suggests that [it] specifically intended for municipal entities' internal affairs to remain outside the reach of commission and MSRB authority," the board told the SEC.

The amendment, which prohibits the SEC and MSRB from requiring issuers to file documents with them before they sell munis, was added in 1975 to the Securities Exchange Act of 1934.

State bond banks and revolving funds also should not be considered muni advisers when they are essentially municipal entities providing advice to other muni entities such as state and local governments, the MSRB said.

"There is no evidence that Congress intended to provide for the regulation of state and local intragovernmental or intergovernmental affairs," the board wrote.

The MSRB also urged the SEC to more narrowly define "investment strategies" so that it would not pertain to advice given with respect to the investment of state and local government general funds.

Dealer groups have been concerned that the SEC would treat as muni advisers brokers who recommend securities for state and local government general funds.

Much of the controversy over the SEC's proposed muni adviser registration rules stems from different definitions of two terms — muni adviser and investment strategies — in the Dodd-Frank Wall Street Reform and Consumer Protection Act and in the SEC's more expansive interpretation of the act in the proposed rules.

The MSRB and Commodity Futures Trading Commission also have proposed rules designed to implement Dodd-Frank requirements that contain these terms, even before the SEC has finalized definitions of the terms in its rules.

In a 56-page comment letter dated Feb. 22, the Securities Industry and Financial Markets Association raised concerns about possible regulatory overlap and redundancy of all of these rules. It said the SEC "must ensure that there is continuous coordination internally" as well as among it, the MSRB and the CFTC, as the muni-advisory regulatory scheme develops.

The group urged the SEC to prod the MSRB and CFTC to delay their proposed rules until the commission issues final municipal adviser registration rules and interpretive guidance that include definitions of muni adviser and related terms.

The MSRB also told the SEC that "strengthened coordination of regulatory activities among the board, the commission and the CFTC would promote a more efficient and effective implementation of Dodd-Frank and would reduce the compliance burden on market participants."

The board was particularly concerned that small advisers could become subject to two regulatory regimes if they are treated as commodity trading advisers for derivatives and muni advisers for related municipal transactions.

Dodd-Frank, which requires muni advisers to register with both the SEC and MSRB and comply with boardrules, defines a muni adviser as someone who provides advice to or on behalf of a municipal entity or other borrower with respect to municipal financial products or the issuance of muni securities.

Dodd-Frank exempts municipal entities as muni advisers. The SEC goes one step further in its proposed rules for a permanent registration system for advisers and says elected officials also would be exempt.

But the SEC does not exempt appointed officials from being muni advisers. In its proposed registration rules, the agency says they "are not directly accountable for their performance to the citizens of the municipal entity."

The act states municipal financial products include muni derivatives, guaranteed investment contracts and investment strategies.

It defines investment strategies to include plans or programs for the investment of proceeds of municipal securities.

The SEC went further in its proposed muni adviser registration rules, saying investment strategies also include plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity.

SIFMA told the SEC that its proposed muni-adviser rules are "overly broad and confusing," could harm municipal entities and borrowers, and would subject regulated entities — such as banks, brokers and investment advisers — to "burdensome, overlapping, duplicative and unnecessary requirements and potential liabilities."

SIFMA said the SEC's definitions of muni adviser and investment strategies are much broader than the Dodd-Frank definitions.

"By proposing expansive interpretations, the SEC risks transforming [Dodd-Frank] into a wide-ranging program of duplicative regulation that will impact large portions of the banking, brokerage and investment advisory industries," SIFMA told the SEC. "There is no evidence of legislative intent" for such a broad expansion "or to create new responsibilities for banks, brokers and investment advisers with regard to municipal entities" or borrowers.

For muni advisers, SIFMA said, the definition should apply only when a person "actually advises" a muni entity or borrower about products and activities identified in Dodd-Frank, such as muni derivatives, GICs and plans or programs for the investment of the proceeds of municipal securities.

Noting that municipal entities and borrowers have a "wide range of advisory relationships" with banks and broker-dealers, SIFMA said a person should not be a municipal adviser merely because a municipal entity or borrower has a bank, trust or brokerage account containing proceeds of municipal securities or public funds.

As for investment strategies, SIFMA said the SEC should carve out an exception for regulated entities, such as banks and trust companies. Otherwise, banks and trust firms may try to avoid muni adviser registration requirements by pulling back on many services they currently provide to municipal clients.

These services could include providing advice about deposits, certificates of deposit and checking accounts as well as acting as trustees for public-sector pension plans.

"In fact, anecdotal evidence suggests such a withdrawal from the marketplace is already occurring," SIFMA said in its letter, without providing any specific examples.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.