States and Localities Opposing SEC Regulation of Municipal Bonds

A recent proposal introduced by the Securities and Exchange Commission (SEC) that would require additional oversight of municipal advisors (those that provide advice on municipal bond or how to invest government money)  has states and localities throughout the nation up in arms.  Under the current Wall Street reform law a municipal advisor is required to register with the SEC and the Municipal Securities Rulemaking Board (MSRB) .  Elected officials and government employees are exempt from this requirement. However under the proposal the exemption would not be extend for people serving on state and municipal boards and authorities. Subsequently these individuals-typically volunteers would be subject to the same regulations as municipal advisors. They would have to register with the SEC and MSRB, pay yearly fees, disclose personal financial information,enroll in continuing educational courses, and be subject to annual testing.  If the proposal were to be implemented, state and local leaders are concerned that volunteers would be less inclined would not be willing to subject themselves to the burdensome process. Governing Magazine reports:

If the new regulation becomes permanent, volunteers who serve on boards may also be disinclined to speak as candidly as they once did for fear of liability, given their newly-defined position as “municipal advisors,” says Susan Gaffney, who oversees federal issues for the Government Finance Officers Association.

“If the SEC is trying to address a specific issue, let’s understand what that issue is and determine how it should be addressed, rather than implement an overly broad and terribly disruptive municipal advisor definition,” Gaffney says. “It’s like killing an ant with a sledgehammer.”

Over the last two months, dozens of state and local government bodies have contacted the SEC to express opposition to the rule. They hope to persuade the agency to extend the exemption to volunteers before the commission votes to finalize the rule. It’s unclear when that vote might happen. Until then, governments will have to determine on their own whether volunteers should be subjected to the strict requirements.

Meanwhile, the SEC has not explicitly responded to the wide-ranging criticism from city and state leaders who want to know if there is an ulterior motive to the regulation. Among those who follow the issue, several theories abound. Some speculate the SEC may be using the regulation as a revenue-generating tool; others suggest it’s intended to prevent donors from getting choice slots on influential boards; and some think the SEC simply made an inadvertent mistake.

An SEC spokeswoman declined to comment on the subject.

Regardless, municipal officials say the SEC has misinterpreted Congress’s intention, which was to protect city leaders — including volunteer board members — from unethical advisors. But somehow board members themselves became the target. The regulation “confuses the issue to suggest that those officials — the very intended beneficiaries of municipal advisor regulation — somehow are ‘municipal advisors’ themselves,” several city attorneys wrote in letters to the SEC.

Municipal leaders also say the law is redundant. The National League of Cities wrote in a letter to the SEC that volunteers are already held accountable for their actions via the regular election of officials who appoint them. Many cities already impose ethics codes and other transparency regulations on boards.


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