By Cyril Tuohy
For the first time, the Securities and Exchange Commission (SEC) has adopted a permanent “registration regime” for municipal advisors who operate in and around the lucrative $3.7 trillion municipal debt marketplace.
The registration rules, adopted by unanimous vote, are intended to corral municipal debt advisors, underwriters and broker-dealers, define their duties, and carve out certain exemptions. Municipal advisors will be required to register with the SEC on a staggered basis beginning July 1, 2014.
Since 2010, more than 1,100 municipal advisors have registered under the SEC’s temporary registration rules. The SEC said the temporary rules will be extended to allow advisors to remain registered through the compliance period.
“These rules set forth clear, workable requirements and guidance for municipal advisors and other market participants, which will provide needed protections for investors in the municipal securities market,” said Mary Jo White, SEC chairman, in a statement announcing final passage of the rule on Sept. 18.
New registration procedures, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, clarify who is and isn’t a “municipal advisor,” and offer guidance on when a person is providing “advice,” the SEC said.
The rules also exempt certain employees and appointed officials of municipal entities, and narrow the application of the term “investment strategies,” the SEC also said.
Exemptions under the rules are based on the activities of the advisor rather than the type of “market participant” category under which an advisor falls, such as an underwriter or broker-dealer. This is designed to avoid giving one company or advisor an unfair competitive advantage, according to the SEC.
Compared with federal government debt markets that sell hundreds of billions of dollars in U.S. Treasury securities every year, municipal debt markets remain relatively unsupervised, providing a bonanza to the connected firms that donate to political campaigns.
In a world where elected and appointed officials routinely vote on millions of dollars in public spending, the way some local officials have sought fit to spend taxpayer dollars has at times literally been out of this world.
In one of the more memorable episodes in the history of providing municipal investment advice, Robert Citron, a former treasurer of Orange County who lost $1.7 billion of taxpayer funds on derivative investments in the early 1990s, consulted an Indianapolis astrologer for help in guiding the county’s $20 billion investment pool, according to court documents.
Strictly speaking, the astrologer would have been considered a municipal advisor. The reality, of course, is far less colorful and way more tedious.
Appointees to local water authorities, sewer improvement districts and bi-state toll bridge commissions quietly go about their business and listen to executive directors, accountants, treasurers and consultants testify about raising debt, and then adjourn to ponder the bond issue’s repercussions on the local tax rate.
Still, the amount of money at stake is enormous. With an average of about $450 billion in state and municipal debt obligations issued annually, according to the Municipal Securities Rulemaking Board (MSRB), there’s enough to feed an entire food chain of consultants, advisors, underwriters and broker-dealers many times over.
Thousands of advisors every year make a lucrative living dispensing advice to local governments in one way or another. Much of the advice is sound, even if in the case of an elementary school expansion, bidders on the project are few.
But there’s more than enough evidence to show that over the years local officials have received plenty of bad advice. Stockton, Vallejo, San Bernardino, all in California; Central Falls, R.I.; Jefferson Country, Ala.; Harrisburg, Pa., have all filed for bankruptcy protection in recent years. Last summer, Detroit filed for bankruptcy in the largest municipal bankruptcy ever.
In testimony submitted over the past year in connection with the SEC’s registration rule, opponents pleaded with regulators not to make the rule too broad lest it would alienate citizens, many of whom serve pro bono, from public service.
In response, House lawmakers introduced the Municipal Advisor Oversight Improvement Act of 2013. The bill, sponsored by Rep. Steve Stivers, R-Ohio, has won bipartisan support and seeks to amend the Securities Exchange Act of 1934 by exempting from registration a host of duties conducted by elected and appointed leaders serving in their official capacities.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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