SEC Passes Long-Stalled Rule for Municipal Advisory Businesses

The Securities and Exchange Commission approved a rule designating which businesses will be covered by new regulations for state and local government financial advisers, a step pending for three years.

The SEC said the definition of municipal advisers, which will be regulated for the first time as a result of the 2010 Dodd-Frank law, will exclude Wall Street underwriters, attorneys and local-government officials who work on bond deals. Today’s unanimous vote releases the rule for public comment.

The changes are a response to the Wall Street credit crisis, when municipalities were stung by losses on bond and derivative deals pitched by unregulated advisory firms. They came after a U.S. criminal investigation revealed that advisers hired by towns to broker investment deals received kickbacks from banks in return for steering the business their way.

“The final rules that the Commission is considering today set forth clear, workable requirements and guidance for municipal advisers and other market participants, which will provide needed protections for this market,” SEC Chairwoman Mary Jo White said in a statement.

The SEC’s initial definition of adviser was revised following criticism that it was overly broad. Bond underwriters, which are already regulated, pressed to be excluded from the new rules, saying it would impose requirements on them that were incompatible with their dual role to investors and local-government clients when they arrange new bond deals.

The Dodd-Frank law required the Municipal Securities Rulemaking Board, which writes regulations for banks that work in the $3.7 trillion state and local-government bond market, to create similar rules for advisory firms. That process has been on hold as the Alexandria, Virginia-based board waited for the SEC to approve a definition.

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