The registration regime for municipal advisors proposed by the SEC under Section 975 of the Dodd-Frank Act should exclude banks and bank employees who are simply providing traditional deposit and cash-management services to municipalities, said Senators Scott Brown (R-MA) and John Kerry (D-MA) and Rep. Barney Frank (D-MA). In a letter to the SEC, the three lawmakers noted that Dodd-Frank defines a municipal advisor as any entity that provides advice to a municipal entity with respect to municipal financial products or the issuance of municipal securities. Their understanding of the SEC proposal is that it requires registration in instances where advice is provided about funds held by or on behalf of a municipal entity.
In the view of the Senators and Rep. Frank, this broad requirement would move the regulations beyond the intent of the legislative language and have the unintended consequence of subjecting many banks and bank personnel to onerous regulation regardless of whether they provide the type of advice that would warrant regulation under Dodd-Frank. Many banks provide a broad range of banking services to municipalities, they noted, including deposit, basic cash management, lockbox, and short-term lending services.
Under the proposal, the provision of these basic banking services might unnecessarily lead to a requirement to register as a municipal advisor. A requirement to register, in turn, could force a number of banks with modest levels of public deposits to rethink their willingness to accept and service these deposits due to the costs associated with training personnel to become municipal advisors. Thus, they urged the SEC to clarify the intent of the regulations to ensure that banks and bank employees providing basic deposit and cash management services are not affected by the registration requirement.
In an earlier letter to the SEC, Senator Claire McCaskill (D-MO) said that the proposed regulations cover all types of financial products, including traditional banking products. Consequently, this would require community banks, who sometimes serve municipal customers, to register with the SEC as municipal advisors. As these traditional banking products are well understood and already regulated by federal and state charters, reasoned Senator McCaskill, it does not make sense to impose additional regulatory burdens on the offering of these products. The proposed regulations would impose redundant oversight of traditional banking products, said the Senator, unnecessarily increasing compliance cost for these banks. Thus, the Senator urged the SEC to exempt these products from the proposed rules.
In a separate letter to the SEC, 614 bankers nationwide urged the Commission to revise the proposal that would require the registration of thousands of bankers and their banks as municipal advisors. They said that the proposal goes well beyond what is required Dodd-Frank or the problems that Section 975 was written to solve. In doing so not only would it subject banks to yet one more layer of regulation for the same activities, noted the bankers, but it would increase the cost and reduce the availability of financial services for local municipal governments and other municipal operations, including municipal hospitals, housing authorities, and school districts, among others.
The proposal would label as municipal advisors banks and many bank employees providing essential and traditional bank services to their local municipalities, including day-to-day deposit, cash management, custody, trustee and lending services, which is not what Congress intended. This would result in tens of thousands of bank and banker registrations, major new compliance costs, along with additional, redundant layers of multiple rules by the SEC and Municipal Securities Rulemaking Board for the very same products and services for which they are already comprehensively supervised by the prudential banking regulators. According to the bankers’ letter, the unavoidable effects of the proposal would interfere with their ability to offer the services that they are accustomed to providing and upon which their municipalities rely.