SEC Adopts Temporary Rule Forcing Registration for Muni Finance Advisers

The Securities and Exchange Commission is requiring local-government financial advisers to register with the agency by October, a step toward regulating firms that guide borrowers in the $2.8 trillion municipal bond market.

The SEC said today that it adopted a temporary rule regarding the registration so that it can be met by Oct. 1, a deadline required under the financial regulatory overhaul signed by President Barack Obama in July.

The changes to the U.S. financial-regulatory rules, the broadest since the Great Depression, will expose firms that advise state and local officials to greater oversight. Previously unregulated, the advisers helped steer governments toward interest-rate swap deals that backfired after the credit market crisis began more than three years ago, exposing municipalities to billions of dollars in unexpected costs.

“We have acted expeditiously to create a temporary registration system to gather key data and provide transparency about municipal advisers,” SEC Chairman Mary Schapiro said in a statement. “As a result, regulators, investors and state and local governments will have a much better understanding of those who provide services in the municipal market.”

The added oversight also comes as the Justice Department is conducting a criminal investigation into whether banks and financial advisers conspired to pay local governments below- market rates on investment deals.

Guilty Pleas

Those who have pleaded guilty to charges in the case include three former employees of CDR Financial Products Inc., a Los Angeles-based advisory firm; a former banker with UBS AG; and the former chief executive officer of a Great Neck, New York, company that ran auctions for local governments.

The legislation signed in July subjects firms that advise on derivatives, bond sales and investments subject to rules drawn up by the Municipal Securities Rulemaking Board. The board now sets the regulations for banks that underwrite state and local government bonds.

Lynnette Hotchkiss, the executive director of the Alexandria, Virginia-based board, said in July that it may take years to set the rules for the financial-advisory industry. The board’s rules are enforced by the SEC.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net.

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