The National Association of Independent Public Finance Advisors is concerned that a proposed change to the Securities and Exchange Commission's definition of "large accredited investors" may allow some unsophisticated local governments to invest in questionable deals through private placement that they do not fully understand.

In a two-page letter sent to the commission earlier this month, but not released until yesterday, NAIPFA warned that proposed changes to the SEC's Regulation D for offers and sales of securities would "facilitate fraudulent behavior against unsophisticated local governments."

The changes, which were unveiled in August, would, among other things, create a new registration exemption for securities offered to "large accredited investors" with at least $5 million in assets.

But NAIPFA said that would include practically every government, regardless of their financial sophistication.

"Virtually any local governments with streets, water systems, wastewater systems, administration buildings, schools or the like has at least $5 million in assets," says the letter, which was signed by Kathleen Aho, president of both NAIPFA and St. Paul-based Springsted Inc. "Those assets do not relate in any way to investment sophistication or expertise."

The letter notes that having $5 million in investment assets does not imply having expertise because many states manage local government investments through state investment vehicles.

It also says that bond indentures for municipal securities commonly provide for the investment of reserve funds, among other things. But if those investments are "misapplied" in fraudulent private placements, not only could the local government suffer but their investors as well.

"Given such considerations, we respectfully suggest the $5 million test be applied to investments under direct active management by the local governments," the letter concludes.

Robert Doty, NAIPFA vice president and president of American Governmental Financial Services Co. in Sacramento, said yesterday that the letter's intent is to point out that trying to gauge the assets of a municipal government is not the same as gauging the assets of an individual, in terms of assessing sophistication.

An SEC official in the division of corporate finance, which is involved in writing the changes, referred comment to the SEC's public affairs office yesterday, and a spokesman could not be reached as of press time.

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