An industry group and a consumer group have urged the Securities and Exchange Commission to revise proposed rules governing transactions between swap dealers and customers, arguing the proposal either goes too far and would weaken key issuer protections, or does not go far enough to protect dealers.

The remarks come in comment letters filed with the SEC Monday on a plan that would craft business-conduct standards for security-based swap dealers and participants.

Though the SEC’s proposal indirectly affects the municipal securities market, it falls within a broad push among financial regulators to boost transparency in the swaps market.

The SEC’s proposal came six months after the Commodity Futures Trading Commission proposed parallel business-conduct standards for swaps, swap dealers, and major swap participants, including most muni bond-related swaps.

The CFTC has not yet issued a final version of its proposed rule. Industry groups and swap dealers warned earlier this year that its proposed standards would force swap dealers to stop entering into swaps with state and local governments.

The SEC and CFTC are coordinating swaps rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the proposed business-conduct standards.

In a 42-page comment letter, dated Aug. 29, a consumer group said the SEC’s proposed standards were contrary to Dodd-Frank’s intent and would undermine the CFTC’s efforts to protect state and local governments that enter into swaps.

“These proposed rules are neither consistent with congressional intent nor commensurate with the severity of the problems they are intended to address,” wrote Barbara Roper, director of investor protection for the Consumer Federation of America.

In particular, she said, the group was “dismayed” that the SEC proposal would “substantially weaken” the CFTC’s proposed business-conduct standards, potentially giving “leverage” to those “attempting to undermine the CFTC effort” and making it more difficult for the CFTC to “defend its effort to adopt appropriate reforms.”

The SEC’s proposed business-conduct standards would impose heightened obligations on security-based swap dealers and participants who act as counterparties to “special entities,” including state and local governments and public-sector pension funds.

Specifically, a security-based swap dealer would need to have a reasonable basis to believe the state or local government had a qualified independent representative acting as an advisor in the transaction. A security-based swap dealer would also need to act in the best interests of the governmental unit or pension.

According to the consumer group, though, the SEC’s proposal would only require security-based swap dealers to provide “suitable” advice to a state or local government or pension, and would not require them to act in the special entity’s “best interests.” As such, Roper warned, the commission’s approach was “completely inadequate.”

But the Securities Industry and Financial Markets Association voiced a different concern, saying aspects of the SEC’s proposal could cause unintended harm to state and local governments by restricting or delaying their ability to enter into security-based swaps or increasing the costs of such transactions.

In a 21-page comment letter, dated Aug. 29 and signed by Timothy Cameron, managing director of the asset management group, SIFMA asked the SEC to create a “safe harbor” from a provision that would prohibit dealers from entering into security-based swaps with a municipality within two years of making a political contribution to an official of the entity.

The safe harbor would apply when a state or local government is represented by a qualified independent representative that affirmatively selects the dealer.

SIFMA also urged the SEC to clarify its proposal by stating that compliance with the proposed business-conduct standards would not cause security-based swap dealers to be treated as municipal advisors.

Without that certainty, such dealers “may not be willing” to enter into security-based swaps with state and local governments or public pensions, SIFMA said.

Under Dodd-Frank, a municipal advisor is held to the standard of a fiduciary, meaning it must put its client’s interests ahead of its own.

Meanwhile, efforts among some lawmakers on Capitol Hill to revise Dodd-Frank continued.

Last week, Rep. Robert Dold, R-Ill., a member of the House Financial Services Committee, introduced a bill that would provide that certain already-regulated parties, including broker-dealers and swap dealers, are not also municipal advisors under Dodd-Frank, according to a statement released by his office.

The bill would also eliminate the fiduciary standard for muni advisors, the statement said.

“While the Dodd-Frank Act had good intentions, the broad scope under which it was written brings unintended consequences,” Dold said in the release. “There is no reason for duplicative burdens that only further add delay and costs to an already-regulated industry.”

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