WASHINGTON — The Securities and Exchange Commission will hurt state and local entities if it adopts rules requiring their appointed board members to register with the SEC and possibly the Municipal Securities Rulemaking Board, market participants are warning.
Their warnings come as several attorneys cautioned that their concerns may be overblown because the SEC is just starting on the rules and probably will consider expanding the exemptions.
Even though the commission has generated a furor by proposing to exempt elected, but not appointed, muni officials from the rules, it could still exempt both type of officials, the lawyers said.
In drafting the proposed rules, which will establish a permanent registration system for both muni advisory firms and individual advisers, the SEC “cast a broad net” that “may narrow substantially” after a 45-day comment period that ends Feb. 22, said Paul Maco, a partner at Vinson & Elkins LLP here.
“It’s a new thing and there’s going to be a lot people saying, 'Gee, I never thought they meant me’ or 'Gee, I never thought it could include me,’ ” Maco said. “Those concerns need to be raised because maybe the rule doesn’t — and maybe it shouldn’t — apply to them. And that’s what this process is all about and why the proposal needs to be read carefully.”
“Municipal adviser regulation is an area that hasn’t been subject to federal oversight and it has been a long time since a category of market participants, potentially reaching into so many nooks and crannies, has been regulated,” Maco added.
Another attorney who asked not to be named dismissed the concerns as “hysteria” and noted that even if appointed board members of municipal entities are not exempted, they would have to provide advice on the issuance of muni securities in order to trigger the registration requirements. Voting to authorize the issuance of debt would not be advice and would therefore not trigger the requirements, the attorney said.
Martha Mahan Haines, the SEC’s municipal securities chief, declined to comment beyond the proposed rules where the agency said it “is concerned that appointed members, unlike elected officials and elected ex-officio members, are not directly accountable for their performance to the citizens of the municipal entity.”
As with the temporary registration system for advisers the SEC implemented in September — which will remain in effect through at least the end of 2011 — the proposed rules for permanent registration stem from provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring muni advisers to be subject to SEC registration and MSRB oversight.
Under Dodd-Frank, the registration requirements apply to all muni advisers who provide advice to “municipal entities” and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guaranteed investment contracts, investment strategies, or the issuance of munis. It also applies to advisers who solicit business from a state or local government for a third party.
Though the SEC will require both advisory firms and individual advisers to register, the MSRB, which operates a separate system, is only requiring firms and sole proprietors to do so.
While some have characterized the blowblack as alarmist, Teri Guarnaccia, a partner at Ballard Spahr LLP in Baltimore, said the widespread concern is real. Guarnaccia, chairwoman of the National Association of Bond Lawyers’ securities law committee, noted that the comment letter to the SEC that her panel is drafting has drawn the broadest base of interest among NABL members of any SEC proposal that she can recall.
“The general take of people that I’ve talked to is that it is an inappropriate distinction and there is widespread concern among a variety of attorneys’ clients, from states to housing authorities,” she said.
Steve Ritter, assistant finance director of Huntsville, Tex., told the SEC in a Jan. 10 letter that appointed board members should be treated no differently than elected board members and employees of a municipal entity. Board members, he said, are essentially policymakers rather than consultants or solicitors for a municipal entity.
Vince Sampson, president of the Education Finance Council, which represents nonprofit student loan lenders, said his members are concerned the proposal will decrease their pool of potential board members at a time when their agencies are still determining the roles they will play after the death of the Federal Family Education Loan Program. Under FFEL, which ended last year, state-level agencies issued municipal debt to finance federally guaranteed student loans.
Though Sampson said his members will no longer issue new debt backed by FFEL loans, they could still refund bonds. Several attorneys, including Maco, questioned whether the SEC had made the case for exempting elected but not appointed officials and said it ought to identify specific examples of conduct it is concerned about.