WASHINGTON — State, local, nonprofit and other groups are flooding the Securities and Exchange Commission with complaints that its definition of muni adviser in proposed registration rules is overly broad and would disrupt their bond financings and other activities.
At issue are rules the SEC proposed Dec. 22 to require muni advisers to register with it, a requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank exempted governmental employees from the definition of muni adviser and the SEC went one step further in its proposed registration rules by excepting elected officials as well.
But the SEC did not exempt appointed officials from the adviser definition, saying that while "employees and elected members are accountable to the municipal entity for their actions," appointed members "are not directly accountable for their performance to the citizens of the municipal entity."
The SEC did, however, ask for public comments on whether the scope of its definition was appropriate.
The commission has since been deluged with almost 100 comments warning that its definition could constitutionally interfere with states rights and prevent citizens from voluntarily participating on governmental boards.
The National League of Cities told the SEC in a three-page comment letter dated Feb. 22 that, by not exempting appointed officials, the agency would require registration of board members of municipal and regional organizations and authorities, regional utilities that invest reserves, joint-power agreement organizations that run transit authorities, special districts, relief associations, state bond pools and members of the NLC's public finance consortium.
"The expansive inclusion of board members and other volunteers who express an opinion ... only serves to micro-manage local governments and impose duplicative regulatory burdens as an answer to unsubstantiated and undefined issues," said Donald Borut, the group's executive director. "Registration, with its burdensome paperwork and associated costs, will have a chilling effect on the ability of local governments to obtain the highest quality volunteer participation for municipal authorities."
The National Association of State Treasurers said in a Feb. 16 letter that to distinguish between elected and appointed board members would be "unauthorized by the Dodd-Frank Act and [constitute] a constitutionally impermissible interference in the rights of states to order their own administrative affairs."
The preference for elected officials "betrays a lack of familiarity with the diversity of actual state and local practices," said Kelly Schmidt, the group's president and treasurer of North Dakota. She noted that treasurers from nine states, the District of Columbia and Puerto Rico are appointed, while treasurers from four states are elected by legislatures and the balance are directly elected.
"Many counties utilize the voluntary services of constituents with particular areas of expertise," the National Association of Counties executive director Larry Naake said in a Feb. 16 letter. "To view these volunteers as advisers to the county rather than as members of the governing body itself is a position we cannot agree with."
The Government Finance Officers Association, which has 17,000 members, told the SEC in a Feb. 22 letter that the SEC's definition of muni adviser is improperly and unnecessarily broad and will thwart the ability of its members to make appropriate and responsible governmental and financial decisions for their communities.
There is no evidence that Congress intended the definition of muni adviser to include board members and there were no public hearings on the issue, according to Susan Gaffney, director of the GFOA's federal liaison center in Washington, who signed the letter.
Gaffney said in the letter that the SEC's stance runs counter to two directives from President Obama. One is a May 2009 memorandum he sent to the heads of federal agencies cautioning them against taking any actions that pre-empt state law.
"We believe that by defining as municipal advisers — and therefore mandating the registration of — members of state and local governing bodies, the federal government effectively is pre-empting state laws that already exist," Gaffney said in the letter.
Obama also signed a Jan. 11 executive order that calls for federal agencies to take into account the costs and benefits of rules. The government has not taken the costs of these rules into account, she said.
The GFOA urged that all members of a governing body be exempt from the definition of muni advisers.
The Council of Infrastructure Financing Authorities said many of its members are state entities that operate under the direction of a governing board, created by statute, that consists of public members appointed by a governor.
"The proposed rule will have an undermining, adverse impact on the constitution and functioning of such boards," CIFA said in a Feb. 17 letter signed by executive director Rick Farrell. "The registration requirement will, at a minimum, thwart deliberative discussions regarding the issuance of bonds, financings and investments by appointed board members; a result at odds with the goals of transparency, accountability and a sound decision-making process.
"More likely, citizens willing to serve as board members out of a sense of civic obligation with little or no compensation will fund the burdens, financial and otherwise, of registration a critical impediment to such service," the letter said. "These members bring a diverse background, experience, and expertise to board deliberations and there is a significant public policy benefit derived from that diversity."
The National Association of Health and Educational Facilities Finance Authorities, which represents 40 state authorities that issue conduit bonds for nonprofit education and health care institutions, said the proposed definition of muni adviser "would have a severely deleterious effect on the proper functioning of nonprofit financing across the United States."
It's breadth "is improper, unnecessary, and raises serious federalism and constitutional issues," the association said in a letter dated Feb. 17 that was filed by Charles Samuels, a lawyer with Mintz Levin Cohn Ferris Glovsky & Popeo PC, which represents the group.
The association said the SEC's rationale for including appointed officials in its definition of muni advisers "is flawed."
"State authorities report to higher public officials such as governors, treasurers, state auditors and controllers and legislative oversight committees, but do not report to the citizens at large any more or less than SEC commissioners do," the letter said.
In addition, while Dodd-Frank seeks to regulate muni advisers to protect the entities they advise, "municipal entities are governed by, and act through, their boards," the letter said. "It is not reasonable to think that the Dodd-Frank Act intended to protect municipal entities from their own governing bodies."
The Bond Dealers of America warned the proposed rules "have the potential to dramatically alter the services offered to municipalities and certain market participants interact with municipalities."
In a four-page letter dated Feb. 22, Michael Nicholas, the BDA's chief executive officer, said the proposed rules may affect broker-dealers because they do not clearly delineate when dealers are excluded from the definition of municipal adviser.
"The proposed regulations seek to clarify that an underwriter is not excluded from the definition of 'municipal adviser' if it acts in a capacity other than as an underwriter," Nicholas wrote in the letter. "The potential that a dealer will run afoul of this limitation is a great concern."
If the SEC determines that an underwriter provided advice to a municipal entity outside its capacity as an underwriter and was thus, a muni adviser, the underwriter will have owed a fiduciary duty to that municipal entity, therefore altering the legal framework under which the underwriter thought it was operating.
Additionally, the proposed rules appear to significantly expand the definition of municipal financial product so that any individual who gives advice with respect to plans, programs, or pools of assets that invest any funds of the municipality must register as a municipal adviser, Nicholas said, adding: "We do not believe that this is appropriate given the language of the Dodd-Frank Act."
"Because the proposed rules do not define the term advice, they also could result in those who sell or offer to sell investments to municipalities being considered advisers," he wrote in the letter. "The BDA believes that this interpretation would go far beyond anything that Congress intended."
