Nov. 10 (Bloomberg) -- The U.S. municipal bond market may face tighter regulation including a new registration requirement for non-bank advisers to state and local governments, under legislation proposed by Senate Banking Committee Chairman Christopher Dodd.

The plan also would strip majority control of the Municipal Securities Rulemaking Board from investment banks and securities dealers, according to a draft released today by Dodd, a Connecticut Democrat. The change would provide seats on the board, which makes rules for the $2.8 trillion municipal bond market, to issuers, investors and financial advisers.

Such oversight is opposed by the National Association of Independent Public Finance Advisors, which doesn’t believe the MSRB is the right authority for its members, said Keith Curry, past president of the association.

“The MSRB isn’t the appropriate regulator because of the MSRB’s history of being controlled by brokers and dealers,” said Curry, managing director of Public Financial Management in Newport Beach, California, the market’s largest advisory firm.

The Alexandria, Virginia-based MSRB in February proposed being given authority over advisers, citing on-going state and federal investigations into their role in interest-rate swaps, guaranteed investment contracts and other municipal services. The advisers collect fees and influence the decisions of municipal bond issuers. They aren’t subject to the same rules on campaign contributions and other activities that govern investment banks and securities dealers.

CDR Investigation

On Oct. 30, CDR Financial Products Inc. founder David Rubin and two employees of the Beverly Hills, California-based company were indicted by a U.S. grand jury in New York City for allegedly taking kickbacks that allowed firms to excessively profit on investments sold to local governments.

The MSRB declined immediate comment on Dodd’s proposal, according to an e-mail from spokeswoman Jennifer Galloway.

In bringing advisers under MSRB rules, Dodd’s plan gives them a voice on the MSRB board. The proposal would change the MSRB so it is composed of eight public members and seven banks, including one financial adviser. The current board is made up of 10 banks and securities dealers and five public members. Dodd also requires issuers and investors to be represented among the public members.

Market Regulation

In the U.S. House, the Investor Protection Act of 2009, designed to improve regulation of financial markets was approved by the Financial Services Committee Nov. 4. It would also change the composition of the MSRB’s board to give more control to non- bank members and require regulation of non-bank financial advisers.

The House legislation would empower the SEC to regulate advisers rather than putting oversight in the hands of underwriters, said Robert Doty, a municipal finance adviser at American Governmental Services in Sacramento, California.

“The MSRB has a weak record when it comes to protecting issuer interests in receiving advice that is independent of the underwriters in municipal securities offerings,” Doty said in an e-mail. “This is a very dangerous proposal that would undo much of the effort to improve the municipal market.”

Former MSRB Executive Director Christopher “Kit” Taylor questioned whether issuers should have a voice on the MSRB board because their interests may be adverse to those of investors who the MSRB is supposed to protect.

Including Issuers

“Is this the Issuer Relief Act?” asked Taylor, now a consultant in Alexandria, Virginia, in a phone interview. “Issuers resist everything. If we’d have had more issuers on the board, we wouldn’t have gotten as far as we did in providing more information for investors.”

Dodd’s plan to overhaul regulation of U.S. securities markets also would require the Government Accountability Office to study municipal bond market disclosure and recommend changes, including possibly lifting the Tower Amendment that grants municipalities latitude on the timeliness of their disclosure and what they must tell investors.

“If you don’t lift the Tower Amendment, then you don’t improve disclosure,” said Taylor. “There is no way for investors to know what they’re buying.”

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

Last Updated: November 10, 2009 15:37 EST