U.S. municipal bond market still unclear on advisers

The law requires those who counsel states, cities and authorities on bond sales to register with the Securities and Exchange Commission, subjecting them to the same regulation as brokers and dealers in the $3.7 trillion municipal bond market.

But when the SEC released in December 2010 a proposed definition of who qualified as an adviser, it received hundreds of comments, almost all saying the definition would ensnare too many people in the regulation, many of whom were only on the periphery for the market. The SEC pulled the proposal and has been revising it.

The Municipal Securities Rulemaking Board, which must build the infrastructure for regulating advisers once the definition is approved, said last summer that it expected a revised version to be released by the end of 2011.

A year later, on Friday, a House of Representatives panel gathered to discuss the delayed definition.

"We have nearly unanimous agreement from everyone concerned -- Democrats, Republicans, regulators, state and local governments and market participants -- that the municipal adviser provisions were a necessary improvement...and will help protect municipalities from bad actors while also leveling the regulatory playing field for market participants," said Representative Robert Dold.

"However, while we have nearly universal support for the legislative intent with respect to the municipal adviser regulation, we also have nearly unanimous opposition to the SEC's proposed rule," he added.

Dold, a Republican from Illinois, introduced legislation that would grant blanket exclusions from the definition.

The bill may stall in Congress. Democrats control the Senate, which would have to pass a version of the legislation, and as Congress nears the November elections members will likely focus on legislation that voters consider pressing.

In recent years, municipalities such as Jefferson County, Alabama, have been pushed into near-financial ruin by complicated schemes involving swaps, derivatives and other securities.

They could have avoided shaky financing "if they had had a trusted financial adviser to help defend against questionable advice," said MSRB Chairman Alan Polsky at the hearing.

The board, a self-regulatory organization that counts advisers among its ranks, would like a definition with more narrow exclusions than those in Dold's bill, mostly limiting exclusions to activities that are "otherwise subject to regulation," Polsky said.

One of the authors of the financial law, Representative Barney Frank, told the hearing he was concerned about the adviser definition.

"The Securities and Exchange Commission rules were too restrictive," the Massachusetts Democrat said.

Earlier this month, Frank sent SEC Chairman Mary Schapiro a letter asking the commission to ensure that community banks providing municipalities traditional products such interest-bearing accounts are not considered advisers.

Frank said regulations should only apply to a bank that structures a debt issuance or that "actively directs the municipality to a specific product."

An SEC spokesman did not respond to questions about the timing of the new proposed definition.

(Reporting By Lisa Lambert; Editing by Leslie Adler)