The Securities and Exchange Commission chairman told House committee members that the agency proposed an overly broad definition of municipal advisor, while the top Democrat on the panel said the Dodd-Frank Act went too far by authorizing the creation of a new SEC muni securities office.

Their remarks were made at an oversight hearing held by the House Financial Services Committee on the need to restructure the SEC to make it more efficient and effective.

Near the end of the hearing, Rep. Blaine Luetkemeyer, R-Mo., told SEC chairman Mary Schapiro, a witness, that his banking constituents were complaining the SEC’s definition of muni advisor was too broad and might cover bank officials.

“When we proposed the municipal advisor definition, my personal view is that we cast a bit too wide a net and we brought into that definition otherwise regulated persons who probably we ought not include, at the end of the day,” Schapiro responded, adding that the rule’s coverage was “perhaps inappropriately wide.”

Schapiro said the SEC has gotten thousands of comment letters and that while the staff hasn’t made recommendations, the commission is “working through those issues.”

The definition, which appears in the SEC’s proposed permanent registration rules for muni advisors, has been extremely controversial, drawing criticism from dealers, issuers and lawmakers. The SEC proposed the rules late last year and is expected to finalize them before year-end.

Bankers complained the definition would apply to bank employees that provide essential and traditional services such as cash management, custody, trustee and lending services. Issuers warned it would include individuals appointed to state and local governing boards.

Committee chairman Rep. Spencer Bachus, R-Ala., sent one of those letters, urging the SEC not to include as advisors appointed governmental administrators and board members, many of whom volunteer their services.

Four other lawmakers — Sens. Jack Reed, D-R.I., Michael Bennet, D-Colo., Orrin Hatch, R-Utah, and Rep. Steve Stivers, R-Ohio  —  also sent a letter warning the broad definition could have a “chilling effect” on governments and even cause them to shut down some functions.

Meanwhile, Barney Frank, D-Mass., a committee member and a namesake of Dodd-Frank, suggested the act may have gone too far in calling for stand-alone offices that report to the chairman, such as the one on municipals.

“I am now prepared to reconsider the extent to which we were as prescriptive as we were last year in the bill with regard to the SEC. I think one of the things we can perhaps work together on is to find ways to convey our sense of the importance of particular activities, without necessarily having a separate entity,” Frank said, citing muni securities as one example.

The Boston Consulting Group, hired by the SEC to examine its operations, structure and need for reform to comply with a Dodd-Frank mandate, issued a report in March that questioned the need for the muni office. Other committee members also questioned the need for a separate SEC office for credit rating agencies.

Much of the hearing focused on two pieces of legislation. One, issued by Bachus, which he said is a legislative discussion draft — the SEC Modernization Act — would restructure the SEC. The other,  HR 2308, the SEC Regulatory Accountability Act, was introduced by Sen. Scott Garrett, R-N.J., in June and would require cost-benefit analyses of SEC rules or orders before they are issued.

Schapiro told Bachus that while she agrees with parts of his draft, she has “real concern” that it would limit the commission’s flexibility.

The SEC chief expressed greater concern about Garrett’s bill, which she said would apply to the commission’s enforcement actions and “be very damaging to the enforcement program.”

In addition, the measure’s requirement to “assess the best ways of protecting market participants” could conflict with the SEC’s mission of protecting investors, Schapiro said.

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