Earlier this year, the U.S. Securities and Exchange Commission (SEC) approved a revised rule that brings municipal advisors under the same regulations that apply to investment bankers.
This means restricting political contributions to issuer officials to prevent municipal advisors from engaging in pay-to-play practices, or undue financial pressure as part of contracts and work.
“In the Great Recession, the impression was that some of those advisors were not dealing with cities and counties and states fairly,” said Bart Hildreth, professor of public management and policy at Georgia State University and a former member of the Municipal Securities Rulemaking Board.
The MSRB, which oversees the municipal securities industry, revised the pay-to-play rule as part of the regulatory response to a congressional decision that all municipal advisors needed to register with the SEC.
This brought municipal advisors under the Dodd-Frank Act, imposing a fiduciary duty that requires them to put the interest of those they are advising ahead of their own.
On Aug. 17, the regulation took effect.
“I happen to think it’s a reasonable approach to a problem that’s been identified,” said Hildreth, who will be teaching an upcoming course on issues in debt management and issuance for the Center for State and Local Finance.
The question, Hildreth, added, will be whether the rule is upheld as constitutional. Since before its approval, groups have threatened to challenge the rule, saying it restricts political speech and violates the First Amendment to the U.S. Constitution.
The previous pay-to-play rule already has already been challenged several times, and those challenges rejected. The Georgia Republican Party is among two currently challenging the new, revised ruling.
At present, the SEC is arguing that it is shielded from litigation because it did not actually take action to approve the revised regulation. It was deemed approved after a 45-day period, in which the SEC took no action.
According to this view, “you can’t just theoretically go after the court system with a problem, you have to have a real problem, and so far no one has been found to be in violation of pay-to-play for municipal advisors,” Hildreth said.
In the meantime, municipal advisors – as well as debt issuers – should become well aware of the new regulation and its implications for their business.
Hear more from Hildreth next month, when he teaches an executive education course in debt management at Georgia State University’s Andrew Young School.
The course will cover various aspects of debt management, including debt policy, bond type selection, debt structuring, and disclosure responsibilities.