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Banking Industry Urges SEC to Clarify that Banking Products Are Not Within Embrace of Registration Regime of Sec. 975 of Dodd-Frank

By Jim Hamilton

In a comment letter to the SEC, the banking industry said that the Commission?s proposal to require registration and supervision for municipal advisors unnecessarily goes far beyond the legislative intent of the Dodd-Frank Act. While the industry supports the goal of ensuring that market participants providing investment advice to municipalities are appropriately regulated, the proposal goes beyond legislative intent or public policy need by purporting to regulate already-regulated traditional banking products, such as deposit, cash management and lending activities, and trust and custody products with or on behalf of municipalities. The letter was signed by representatives of the American Bankers Association, the ABA Securities Association, and the Clearing House Association.

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, banking products, already subject to extensive regulation, are wholly outside the ambit of Section 975, in the view of the banking groups.

The associations urged the SEC to clarify in the regulations that traditional banking products and services are not covered by Section 975. The failure to do so, they cautioned, would likely force banks to increase the cost or limit their services to municipal entities as a result of this new mandate to register as municipal advisors, along with the attendant ongoing compliance costs. The groups said that the proposal has already driven community banks to reevaluate the services provided to municipalities.

Section 975 exempts from registration as municipal advisors, firms and individuals that are registered as investment advisers under the Investment Advisers Act. However, banks that are not required to register under the Advisers Act pursuant to a statutory exemption would nevertheless be caught by the planned implementation of Section 975. Thus, the associations urge the Commission to provide a comparable exemption from the requirements of Section 975 for advisory activities that would be exempt were banks required to register as advisers under the Advisers Act.

The associations also pointed out that the recordkeeping and reporting requirements established under the bank regulatory regime, which have long been in place, are tailored to banking activities. The municipal advisor regulatory scheme, by contrast, is a securities-based regime based on traditional investment adviser structures. In the industry?s view, the cost of complying with a markedly different recordkeeping and reporting system would be substantial and would necessarily be passed on to customers. Further, because of the dispersion throughout a bank of business with municipalities, the entirety of a bank?s recordkeeping would become subject to Commission oversight, a result unnecessarily duplicative of the banking agencies? functions.

In the Gramm-Leach-Bliley Act, noted the associations, Congress determined that banks should be able to continue to engage in traditional bank activities without registering with the SEC as broker-dealers. Congress codified that determination in the Exchange Act by providing an express exemption from broker-dealer registration for a bank that effects transactions in identified banking products or other enumerated activities, including deposit-taking and lending, sweep accounts, trust and fiduciary, investment adviser, safekeeping and custody, municipal securities, and transfer agency activities, as later implemented in Regulation R.

In the associations? view, neither the statutory language of Section 975 nor its legislative history indicate that Congress intended to upend the determinations concerning traditional bank activities that it made in Gramm-Leach-Bliley. Indeed, Section 975 was primarily directed at establishing a regulatory scheme for persons unregulated with respect to providing advice to municipalities about certain complex transactions, namely, municipal derivatives, guaranteed investment contracts, the issuance of municipal securities, or investment strategies with respect to the proceeds of such issuances. Thus, in any final rule, the Commission should state clearly that neither Section 975 nor its implementing regulations reach traditional bank products and services, including but not limited to those defined in Section 3(a)(4)(B)(i)?(x) of the Exchange Act.

Full post as published by Jim Hamilton's World of Securities Regulation on February 23, 2011 (boomark / email).