Municipal adviser bill could further delay definition -SEC

WASHINGTON, March 20 Wed Mar 20, 2013 5:44pm EDT

WASHINGTON, March 20 (Reuters) - Legislation currently in the U.S. House of Representatives could further slow the process of defining municipal advisers, said the head of the municipal bond office at the Securities and Exchange Commission on Wednesday.

If the bill passes, "we'd have to start over," said John Cross on the sidelines of a National Association of State Treasurers meeting.

"It would still be a high priority. Just, in terms of process, we would need a new rule proposal under the new statute," he said.

Cross said he preferred for the Congress to allow the commission to finish creating a definition before approving any legislation, adding "we sort of feel like we're close."

The Dodd-Frank financial reform law required new oversight of those who advise the cities, states and authorities selling municipal debt.

The SEC's proposed definition of who exactly counted as an adviser was universally panned in the $3.7 trillion municipal bond market as being too broad. The commission pulled the proposal but, more than two years later, has still not released a new version.

Commenters said that a wide definition risked ensnaring too many people such as volunteers or board members in cumbersome regulation, ultimately paralyzing the market. But regulators are concerned that one that is too narrow could create loopholes that negate the intent of Dodd-Frank - to make sure issuers', and the public's, interests are protected.

In February, Representative Steve Stivers, a Republican from Ohio, introduced a bill that more narrowly defines advisers. Similar legislation had passed the House last year, but the Senate never took up corresponding legislation.

"We have carefully considered the theme in that bill," said Cross.

He did not explain the reasons for the delay, but Cross, who started in the Office of Municipal Securities late last year after a long tenure at the U.S. Treasury's Office of Tax Policy, said the definition to be unveiled would be more narrow than the original proposal.

In January the Securities Industry and Financial Markets Association said a definition would likely be released in the first half of 2013.

As soon as the SEC releases the definition, the Municipal Securities Rulemaking Board will "be poised to put out a series of initial rules for the municipal adviser," the board's executive director, Lynnette Kelly, told the treasurers' meeting on Tuesday.

The MSRB writes is a self-regulatory organization made up of bankers, issuers and advisers that writes the rules the SEC enforces.

Kelly said the most important step after the definition is approved will be the development and launch of a professional qualification licensing exam, required under Dodd-Frank.

Other rules could define the federal fiduciary duty advisers have to clients, fair dealing responsibilities, and limitations on gifts and gratuities, as well as "pay to play" restrictions on using donations to gain business, she said.

But these will take time to implement, she cautioned.

"It's a multi-year effort, but those are the sorts of the rules the board is thinking about," she said.

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