WASHINGTON — Issuers and their attorneys are fighting a provision in the Securities and Exchange Commission’s proposed rules for municipal advisers that would require appointed board members of municipal entities to register with both the SEC and the Municipal Securities Rulemaking Board if they advise on the issuance of municipal securities.
They warn that if the rules are approved, they would have a chilling effect on the ability of state officials to find volunteers willing to serve on the boards of bond-issuing authorities.
In addition to submitting to SEC and MSRB registration, these appointed board members would be subject to fiduciary duties, pay-to-play, and other rules the MSRB plans to implement. Volunteers would find these rules unduly burdensome, issuers claim.
“It’s a bizarre distinction that the SEC created in the release,” said Len Weiser-Varon, a shareholder at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC. He noted the proposed rules would only require registration for appointed, not elected, members of issuer or borrower boards.
“Board members are the clients of advisers, they’re not the advisers,” Weiser-Varon said. “They’re the people who act on behalf of a municipality or conduit borrower. It just makes no sense to treat them as advisers who have to register.”
He added that employees of conduit borrowers also would need to register if they provide “advice” to the borrowers related to munis.
“It’s an astounding overreach,” said Robert Lenna, executive director of the Maine Health and Higher Education Facilities Authority and the Maine Municipal Bond Bank.
Many states already have statutory provisions concerning the fiduciary responsibility of volunteer board members of such authorities, he said.
“So not only is the SEC reaching down deep into the day-to-day operations of state governments, but this would just be redundant,” he said.
Lenna added that his board members receive $55 per monthly meeting, plus gas reimbursement, as payment for their work.
Since the MSRB currently charges advisers $600 in initial and annual registration fees, most volunteers would have to fork over the bulk of their remuneration from the state if they were required to register as advisers.
As with the temporary registration system for advisers the SEC implemented in September — which will remain in effect through at least the end of 2011 — the proposed rules for a permanent registration system stem from provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring that muni advisers be subject to SEC registration and MSRB oversight.
Under Dodd-Frank, the registration requirements apply to all municipal advisers who provide advice to “municipal entities” and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guaranteed investment contracts, “investment strategies,” or the issuance of municipal securities. It also applies to advisers who solicit business from a state or local government for a third party.
The definition excludes employees of “municipal entities,” but not employees of conduit borrowers.
In addition, neither the law nor the proposed SEC rules explain if appointed board members receiving a salary would count as employees.
“That’s an area that the SEC could flesh out,” said one market participant who asked not to be named.
Though the SEC agreed that the employee exclusion should extend to elected members of a governing body of a municipal entity, and ex-officio members who serve on the governing body because they hold elective office, the SEC said it was not persuaded that unpaid volunteers siting on boards should be categorically exempted from the municipal adviser definition, Weiser-Varon said in a public finance alert distributed earlier this week.
In declining to extend the exemption to volunteers in the proposed rules, the SEC said it “is concerned that appointed members, unlike elected officials and elected ex officio members, are not directly accountable for their performance to the citizens of the municipal entity.”
An SEC spokesman declined to comment for this story. But a market participant said there are a number of situations going back 35 years where appointed officials, particularly for special districts, have found themselves or their issuers the subject of SEC enforcement actions for accepting bribes or not disclosing conflicts of interest, among other things.
Weiser-Varon faulted the SEC for not referencing its rationale in the proposal.
“The justification for the distinction in the release was simply that elected board members are accountable to the public and appointed ones aren’t, which has no apparent bearing on whether they should or shouldn’t be registered as municipal advisers,” he said. “If there were some applicable case support for this proposition, my guess is it would have been referenced in the release.”
Weiser-Varon added that unless or until the proposed rules are finalized in a manner that requires such registration, the commission should indicate that neither appointed municipal board members nor obligated person board members or employees need to register as municipal advisers.
The SEC is seeking comments on the proposal for 45 days after its publication in the Federal Register, possibly this week.
