WASHINGTON — Municipal market participants are irked that the Securities and Exchange Commission has further extended temporary registration rules for municipal advisors, saying the lack of a final MA definition has allowed market abuses to continue unchecked for years.
Their frustration follows the SEC’s announcement late last week that it would extend its temporary registration rules until Sept. 30, 2013.
Non-dealer financial advisor Robert Doty, president of the Sacramento-based consulting firm AGFS, called the extension “deeply disturbing.”
MAs continue to be “openly engaging” in conflicts of interest, such as managing bond ballot campaigns and then indirectly collecting payments from underwriters that contribute to those campaigns, he said.
The SEC has taken nearly two years to finalize a definition that should be relatively simple, he said.
“[The SEC] says it considers the muni market to be important, and I cannot imagine why ... the commission cannot produce a definition that a reasonably literate, normal human being could write in an afternoon before going out for an early dinner,” Doty said.
“Clearly this is a disappointment for the market,” said Alan Polsky, chair of the Municipal Securities Rulemaking Board. “The continued lack of clarity of who [is] a municipal advisor and the resulting regulatory gaps are of great concern to the MSRB.”
Polsky added that despite the SEC’s delay, federal law includes an MA definition.
Dodd-Frank defines an MA as someone who provides advice to, or on behalf of, an issuer or conduit borrower with respect to muni financial products, including muni derivatives, guaranteed investment contracts and investment strategies, or someone who provides advice on the issuance of munis, including the structuring, timing, and terms. The definition includes someone who “undertakes a solicitation of a municipal entity.” It also includes “financial advisors, [GIC] brokers, third-party marketers, placement agents, solicitors, finders, and swap advisors.”
MAs do not include firms acting as underwriters, investment advisers registered under the Investment Advisers Act of 1940, or commodity trading advisors, registered under the Commodity Exchange Act.
Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, called the SEC delay “disheartening” in a statement, saying MA regulations are a key component of the Dodd-Frank Act.
“The SEC needs to finalize the rule and to start enforcing the protections for issuers that drove the need for this rule in the first place,” she said.
Gaffney added that the market has long waited for rules that would create regulatory parity between dealers and MAs.
“We continue to believe that prompt passage of a final rule by the SEC is key and lament anything that would delay that process,” she said.
The SEC first issued temporary MA registration rules, including an initial MA definition, in September 2010. The rules, which required MAs to register with the SEC, were set to expire at the end of 2011 but were extended through Sept. 30 of this year. MAs must also register with the MSRB.
Meanwhile, the SEC proposed final MA rules, including a final MA definition, in December 2010. But the proposal proved controversial, drawing nearly 1,000 comment letters. Many market participants said the proposed definition would needlessly encompass appointed members of state and local government boards, as well as those already regulated, like advisors at banks and dealers.
The MSRB had drafted or proposed several rule changes or rules that would apply to MAs, but later withdrew them, citing the need for a final definition from the SEC.
Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, said “it’s disappointing that we are now two years after [the Dodd Frank Act] and the SEC has not finalized the rule.”
He called the current regulatory structure unequal, noting that dealer-affiliated MAs are regulated but non-dealer advisors are not.
But Decker and others said the extension could give the SEC time to improve its proposed definition.
“Its better to live under the temporary rule for another year than live under a badly-written permanent rule,” he said.
Decker hopes the SEC looks to a pending municipal advisor bill, H.R. 2827, for guidance in writing the final definition.
Susan Collet, senior vice president of government relations at Bond Dealers of America, agreed that the SEC now has time to evaluate the bill from Rep. Robert Dold, R-Ill. “The bill provides needed clarity as to the distinct role of underwriters, and sets the stage for the regulation of currently unregulated municipal advisors — a step that is urgently needed,” she said.
The bill, which was introduced by Dold in August 2011, passed the House Wednesday. Supporters say the bill was written to correct perceived problems with the SEC’s definition. It would define MAs as those engaged in muni advisory activities for compensation and creates exceptions for underwriters, bankers and swap dealers, as well as those who provide advice “related to or in connection with” those activities.
Dealers support the Dold bill, saying it would curb the SEC’s overly-broad definition, but non-dealer MAs, public interest and labor groups said the bill contains too many loopholes and would allow underwriters and other to engage in MA activities without having to register or comply with MA rules.