Local gov'ts object to SEC municipal adviser plan

Fri Feb 25, 2011 11:46am EST

* Municipalities object to SEC proposed rule on advisers

* SEC rule requires municipal advisers to register

* Public comments say plan is too wide in its scope

* Towns fear rule will hinder volunteerism on boards

By Sarah N. Lynch

WASHINGTON, Feb 25 (Reuters) - States, local governments and public pension funds across the United States are objecting to a proposal by U.S. securities regulators that they say could kill volunteer participation on local boards by imposing burdensome requirements.

The plan by the Securities and Exchange Commission would implement a key provision in the Dodd-Frank financial law that for the first time empowers the agency to oversee advisers who offer financial advice to cities, counties and other municipal entities that float public debt or manage public money.

The proposal would require certain firms or people who offer advice to municipal entities on products or the issuance of securities to register with regulators. It would also hold municipal advisers to a fiduciary standard, meaning they would need to act in the best interest of the municipality.

But critics say the SEC's definition of who must register as an adviser is far too broad and could affect regular citizens who volunteer their time to serve on local boards.

So far, the agency has received more than 600 comment letters from cities, states, pension boards, transit authorities, utility boards and other municipal entities.

"The expansive inclusion of board members and other volunteers who express an opinion into the scope of the proposed rule only serves to micromanage local governments and impose duplicative regulatory burdens," wrote the National League of Cities in a letter to the SEC. "These volunteers are not motivated by private gain but by public service and the betterment of their communities."

Another letter from the state treasurer of Massachusetts says the proposal will "have a chilling effect on informed analysis and debate" and "dissuade talented individuals from either serving on boards or actively participating in board matters."

Historically, municipal advisers were not generally subject to SEC regulations. But the financial crisis highlighted problems that can occur when towns are ill-informed about their investments.

The Dodd-Frank law required the SEC to get a head start on registering municipal advisers before most of the other July 2011 deadlines kick in. Last fall the SEC approved a temporary rule so advisers could begin registering and complying with the regulations until a final rule could be adopted.

So far, about 900 advisory firms have filed registration forms with the SEC. More registrations by individual advisers are expected once a permanent regulatory regime is erected. The temporary rule expires in December, which means the SEC has a good amount of time to read through the comments before issuing a final decision.

The Dodd-Frank law automatically exempts municipal employees from qualifying as municipal advisers, but gives the SEC some wiggle room to flesh out the exemption.

The SEC's plan would extend the exemption to include elected officials, including those who are tapped to serve on boards as ex-officio members. But it does not exempt appointed board members from the definition.

Being an appointed board member does not automatically require registration. But critics fear that failing to exempt appointed board members opens the door for problems.

They say, for instance, that failing to exempt appointed board members unfairly targets a select few people and wrongfully confuses decision makers with advisers.

"There is a fundamental misunderstanding of the individual board member's role," the Fire and Police Pension Association of Colorado wrote. "Put quite simply, the board members are advisees, not advisors." (Reporting by Sarah N. Lynch, editing by Matthew Lewis)

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