WASHINGTON — Thirty-four congressmen urged Securities and Exchange Commission chairman Mary Schapiro to exempt broker-dealers and other regulated entities from its proposed municipal advisor definition, warning in a letter Monday that the failure to do so would impose unnecessary regulation and harm issuers by reducing competition.

Twenty-six Republicans signed the letter, including Robert Dold of Illinois, a freshman on the House Financial Services Committee, and Scott Garrett of New Jersey, who chairs the subcommittee on capital markets.

One of the eight Democrats who signed the missive was Rep. Mike Quigley of Illinois who, with Rep. Patrick McHenry, R.-N.C., floated a draft bill earlier this year that would give the SEC authority to direct the timing and content of issuers' primary and secondary market disclosure.

The letter comes as the agency is finalizing its permanent muni advisor registration scheme and definition, which the commission's website states will be released by the end of the month despite market participants' views that it may not be unveiled until early 2012.

The SEC has fielded more than 1,000 comment letters on the muni advisor rule proposal and definition it released a year ago.

"As proposed, the rules would impose wholly unnecessary and duplicative layers of regulation on parties that are already heavily regulated and would impose undue burdens and costs for many market participants," the lawmakers wrote. "Because the proposal would likely drive some parties out of the municipal market or limit the services they provide to states and localities, it would actually be harmful to state and local governments by reducing competition."

In particular, the lawmakers wrote, the SEC's proposed definition "improperly captured" groups such as broker-dealers and their registered representatives, municipal securities dealers, banks and their employees, insurance companies, accounting firms and investment advisors.

They also said the final rule and definition should exempt parties already regulated by the SEC, federal and state bank regulators, state insurance regulators, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority. FINRA and the MSRB regulate broker-dealers.

Earlier this year, Dold had introduced a bill that would provide that certain regulated parties, including broker-dealers and swap dealers, are not also municipal advisors.

Under the Dodd-Frank Act, municipal advisors are fiduciaries, meaning, in general, they must put their clients' interests ahead of their own.

That bill could be part of a broader muni hearing by the Financial Services Committee in the first quarter of 2012, according to Dold's staff.

An industry group welcomed the lawmakers' letter, saying it would help "set straight the scope" of the muni advisor definition.

"It's clear members of Congress, on a bipartisan basis, have grave concerns over the scope of the SEC's broad definition of municipal advisor, and they have appropriately asked the SEC to correct the reach of this proposed rule," Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association's muni securities division, said in a statement.

A consumer advocate, however, said one of the goals of Dodd-Frank was to impose a fiduciary duty on retail market participants such as registered representatives, who have been bound by less stringent customer protection requirements, such as suitability rules.

"You're not going to get [that] by carving out these financial entities who are salespeople, not advisors," said Barbara Roper, director of investor protection at the Consumer Federation of America.

An SEC spokesman, John Nester, did not respond to a request for comment.

A spokesperson for Quigley referred questions to Dold's office.

In testimony before the House Financial Services Committee in September, Schapiro said the proposed muni advisor rule was "perhaps inappropriately wide" and included "otherwise regulated persons who probably we ought not include."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.