AUSTIN — The Securities and Exchange Commission’s muni chief defended a proposal to register state and local appointed board members as municipal advisers, calling it an effort to respond to abuses in the area.
“We’ve seen some practices in the past among a few appointed officials that have caused us concern,” Martha Mahan Haines told bond lawyers meeting here. “We’re not intending to interfere with the normal activities of state and local government officials.”
Haines stressed that these were personal views and not necessarily those of the commission or its staff.
Speaking on two panels at the National Association of Bond Lawyers’ Tax and Securities Law Institute, Haines made the remarks because the SEC has been deluged with criticism about its proposed registration rules.
The SEC has received nearly 700 letters during its two-month public comment period, which ended on Feb. 22. Many of them — including letters from five members of Congress from both sides of the aisle — urged the SEC to reconsider its proposal to register appointed board members, warning it could discourage citizens from serving in public positions and jeopardize governmental operations.
Haines addressed what she said was “considerable confusion” over this issue. “Let me be very clear,” she said. “We did not propose that all appointed officials in the country must register with the commission.”
In particular, she said the SEC is concerned about two types of potential abuse by appointed board members.
In the first scenario, she said, a friend of the governor is appointed to serve on a board, not even one necessarily with oversight of bond issues. Because he has the governor’s ear, though, he criss-crosses the state, making recommendations to other boards about whom to hire as transaction participants and what kinds of bonds to issue.
“That’s what we’re worried about,” Haines said. “We’re not worried about the ordinary official in the ordinary course of business for his own board.”
The second scenario, she said, was recently brought to her attention by a bond lawyer. He and his firm were slated to be hired to work with a governmental issuer. At a public meeting, the chief financial officer stood up and introduced the lawyer and firm. But an appointed official from another part of the government, who was also at the meeting and wielded a lot of clout, was not happy with the proposed law firm and pushed for another firm to be hired. That firm was retained.
“That’s advice,” Haines said.
Overall, whether an appointed board member qualifies as a “muni adviser,” and is thus subject to registration requirements and regulatory oversight by the SEC and the Municipal Securities Rulemaking Board, including being held to the standard of a fiduciary, is a fact-based inquiry, Haines said.
Though she declined to give bright-line guidance or respond to specific fact patterns, especially since the commission has not yet issued a final rule, she said it is not the SEC’s intent to dissuade people from serving on boards.
Haines also said she and her eight-member team, consisting of staff from her office as well as the SEC’s trading and markets division, are reading all the comment letters and logging them onto a spread sheet.
Still, during the 75-minute panel, Haines fielded some aggressive questioning about issues that have surfaced in several comment letters, including threshold concerns about terms and exclusions in Dodd-Frank, such as the meaning of “advice” and “investment strategies” and the scope of an exclusion for attorneys.
As for advice, which Dodd-Frank left undefined, Haines said the commission staff is not looking to supply a definition.
In an interview later in the day, Haines noted the Investment Advisers Act of 1940 does not define advice.
In a striking public exchange between panel members, Peg Henry, the MSRB’s deputy general counsel, asked Haines for guidance about the term “investment strategies,” seeking clarification about whether it might encompass recommendations by brokers about how a muni entity should invest its general funds.
Under the Dodd-Frank, a muni adviser is a person who provides advice about “municipal financial products,” which the statute defines as muni derivatives, guaranteed investment contracts, and investment strategies. The statutory definition of investment strategies includes plans or programs for the investment of proceeds of municipal securities.
The SEC adopted a broader approach in its proposed rules, saying investment strategies include plans or programs for the investment of proceeds, as well as plans, programs or pools of assets that invest funds held by or on behalf of a municipal entity.
Haines said the commission staff looked to Dodd-Frank’s statutory language, as well as its policy of protecting issuers, to develop its definition.
“We couldn’t come up with a policy reason to distinguish between bond proceeds and other investments,” she said.
Reflecting an area of great concern to the bond lawyers attending the two-day session, Haines and Henry fielded several inquiries about whether and when attorneys might have to register as municipal advisers.
Under Dodd-Frank, attorneys offering legal advice or services of a traditional legal nature are exempt as muni advisers. Some attorneys have expressed concerns about how to distinguish between legal advice and other advice that might subject them to muni-adviser registration and regulations.
In a comment letter filed with the SEC last week on its proposed adviser registration rules, the MSRB suggested that attorneys who provide financial advice, such as an opinion on the financial feasibility of a project or financing, be treated as muni advisers.
Teri Guarnaccia, a partner at Ballard, Spahr LLP in Baltimore, asked Henry for clarification, saying attorneys don’t live in a world in which they place legal advice and business advice into separate silos.
Henry said the MSRB is concerned that in some states, attorneys are informing municipal entities they do not need to hire a financial adviser because the attorneys can handle everything. The major factor in determining whether an attorney is an adviser is what the client understands, she said.
In response to an audience member’s question about what attorneys have to disclose to clients, Haines said the SEC is not trying to put them “between a rock and a hard place.”
The SEC will work with NABL to figure out how and where to draw the line for attorneys, she said, adding:“I think we shouldn’t overreact to this.”
She also acknowledged the comment letters have been “incredibly helpful, even though there are so darn many of them.”
In a separate panel on Thursday, regulatory officials and bond lawyers focused on Dodd-Frank rulemaking and coordination among the MSRB, the SEC, and the Financial Industry Regulatory Authority.
In response to a question from Paul Maco, a partner at Vinson & Elkins LLP, Haines said the SEC might consider adding interim guidance, such as answers to frequently asked questions about the proposed adviser registration rules, to the SEC’s website.
Addressing concerns about regulatory redundancy, which have been raised in some comment letters, Haines said the SEC staff is coordinating with FINRA and MSRB officials, who she speaks with at least once a week.
“At least,” Peg Henry quipped.
Haines said the SEC is moving forward with writing a report on the muni market, even though a series of planned field hearings has been put on hold due to budget constraints. Commission staff are meeting with market participants informally, she said, adding that hopefully the report, and a long-anticipated update of the SEC’s 1994 release on muni-market disclosure, will be issued before the end of the year.
