The Securities and Exchange Commission is still months away from finalizing its definition of municipal advisor, but is poised to step up muni bond enforcement efforts in general, the head of the SEC's Office of Municipal Securities told bond lawyers meeting here.
Although the MA definition remains his office's top priority, the rule has fallen behind his initial estimate of the first quarter of the year for completion and will not go before the SEC chairman for "several months" as the muni office pours over 1,000 comment letters, Cross told those attending the National Association of Bond Lawyers' 13th annual Tax and Securities Law Institute.
"It's a huge project," Cross added.
Muni market participants, who criticized the initial proposed definition of MA as being too broad, have been urging the SEC to finalize it the definition taking into account their complaints. The Municipal Securities Rulemaking Board has withdrawn all of its proposed rules for MAs and stopped work in that area until the SEC finalizes the definition of an MA. As a result, dealer-financial advisors complain they are subject to more regulatory restrictions that non-dealer FAs.
But even though the MA definition remains elusive, Cross said the SEC's presence will be felt in the coming months with more and more enforcement actions aimed at pushing market participants toward more uniform disclosure practices and price transparency.
"I expect a bigger footprint of the SEC," Cross said.
Cross' office also wants to promote more voluntary changes within the industry, both by getting more institutional investors involved in the market and encouraging more voluntary "industry self-help" on regulations, he said.
"The municipal market is unique in that it's so heavily retail," Cross told the audience who came to hear him and Georgetown professor John Buckley talk about the future of the muni market. Buckley is former counsel for the Democrats on the House Ways and Means Committee.
More voluntary disclosure would help get institutional investors into the market, Cross said. He added that his office has heard some issuers have trepidation about liabilities they may face over voluntary disclosures, and that he will work to assuage those concerns. A great unknown for the market remains what will happen when the Federal Reserve "turns off the spigot" creating artificially low interest rates, he added.
The top SEC muni regulator also addressed the "Municipal Advisor Oversight Improvement Act of 2013," introduced in mid-February by Rep. Steve Stivers, R-Ohio, suggesting it might be premature. That bill has been maligned by Americans for Financial Reform, who argue that it will let big banks and swap dealers escape Dodd-Frank fiduciary requirements, but it enjoys the support of dealer groups and some lawmakers on both sides of the aisle.
Stivers' bill would define MAs as those engaged with issuers to provide financial advice for compensation, with exemptions for dealers seeking to be underwriters as well as those providing related advice, as well as bankers, swap dealers and governmental board members. It is essentially the same as a bill introduced last Congress by then-Rep. Bob Dold, R-Ill., who failed in his re-election bid last year. That legislation died in the lame duck session in the Senate.
Cross said that even as the new bill works its way through Congress, his preference would be for a hold on that kind of legislation.
"We would prefer to finish our rulemaking before Congress revisits that area," Cross said.