Saturday, November 12, 2011

Senate Legislation Would Raise the 500-Shareholder Threshold and Exempt Banks from Registration as Municipal Advisors

Bi-partisan legislation introduced by Senators Pat Toomey (R-PA) and Tom Carper (D-DE) would raise the 500-shareholder threshold for SEC reporting to and exempt banks from SEC registration as municipal advisors. The Private Company Flexibility and Growth Act (S 1824) would raise the current shareholder limit, which was set in 1964, from 500 to 2,000 for community banks and small companies and would exclude employees from this cap. The legislation is designed to give small businesses will have the flexibility they need to focus on long-term growth, job creation and creating better environments for their employees. This legislation is intended to be especially helpful to start-ups and young companies who need to raise capital in order to grow but cannot afford the compliance costs of the current regulations. Senators Mike Johanns (R-Neb.) and Mark Warner (D-Va.) are co-sponsors of S 1824.

In an effort to allay concerns about the broad scope of the SEC registration regime for municipal advisors, the legislation amends Section 975 of the Dodd-Frank Act by excluding banks and persons appointed to or volunteering on a board, commission, committee, or similar function of a municipal entity.

Section 975 of Dodd-Frank establishes a system of dual registration with the SEC and the MSRB that will require covered municipal advisors to comply with rules of business conduct, ongoing education requirements, and a fiduciary duty to their municipal entity clients. It appears to have been intended primarily to regulate financial advisors to municipalities that have not been previously regulated. Thus, the view of the banking industry is that banks, already subject to extensive regulation, are wholly outside the ambit of Section 975.

There have been congressional concerns over the scope of Section 975, while he supports efforts to police this segment of the municipal market, Financial Services Committee Chair Spencer Bachus (R-AL) has said that Section 975 and the SEC proposed regulations implementing the statute, are overly broad and would require appointed, non-ex-officio municipal board members and officials to register with the SEC. In a letter to the SEC, he said that the broad definition of municipal financial products combined with the failure to define ``advice’’ would also result in thousands of bank employees conducting routine business with municipal entities having to register with the SEC

Chairman Bachus noted that many small towns frequently appoint rather than elect their municipal administrators, he noted, and, public university boards of trustees are similarly appointed. In the Chairman’s view, forcing these individuals, who are often volunteers, to register with the SEC would create a significant disincentive for qualified persons to serve their communities.

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