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Capitol Report

Coverage of legislation and regulatory activity that affects higher education

By Matt Hamill

Financial Reform Act Implementation Moves Forward Amid Funding Uncertainty

By one count, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires 11 agencies to conduct 59 studies, write 22 annual reports, and issue as many as 243 separate regulations. The bill's intent is to promote the financial stability of the United States by improving accountability and transparency in the financial system, protecting the American taxpayer by reducing the likelihood of future federal bailouts, and guarding consumers from abusive financial services practices.

Leaders of the House Financial Services Committee recently asked the heads of the 11 federal agencies to tell them just how much it will cost to implement the sweeping new law. However, extra funds to carry out these mandates may not be provided anytime soon.

Not only is the budget question unresolved, but the language describing a new registration mandate has potential implications for board members at colleges and universities. Following is an explanation of these two complicated issues.

Elusive Funding

In December, Congress passed a continuing resolution that maintained agency budgets at FY10 levels until at least March 4, because it has not approved a federal budget for FY11. That continuing resolution did not include the 18 percent budget increase that was authorized by Dodd-Frank for FY11 for the Securities and Exchange Commission, the agency with the largest workload flowing from the legislation. Overall, Dodd-Frank nearly doubles the SEC budget, to $2.5 billion, by 2015.

The language describing a new registration mandate has potential implications for board members at colleges and universities.

Even though the agencies indicate they need more of the funds promised in Dodd-Frank, legislators do not appear poised to respond by providing more money. The GOP majority in the House has made budget cutting a top priority, vowing to roll back nonsecurity discretionary federal spending to 2008 levels and trim at least  $60 billion out of the FY11 budget. In addition, the Dodd-Frank legislation was opposed by virtually every Republican in Congress when it was approved in 2010. Although congressional Republicans may not move to scrap the financial law, the GOP may want to shape the Dodd-Frank implementation through the "power of the purse."

After the continuing resolution was approved in December, SEC administrators said that budget woes are forcing curbs in travel, hiring, and contracting. Yet, the agency—as well as others charged with implementing the law—has steadily been issuing draft rules and conducting the studies called for in the legislation. Continuing funding battles may affect not only the various agencies' ability to complete these regulatory projects, but also curtail their ability to enforce these new rules.

Mandate Raises Questions for Institution Boards

The Dodd-Frank bill included a new registration mandate for individuals and firms that advise state and local governmental entities on certain types of financial transactions, such as the issuance of tax-exempt bonds. On January 6, the SEC published in the Federal Register proposed rules to carry out the new law that would formally establish a process for individuals and firms that act as "municipal advisors." Individuals and firms will be required to register with the SEC and the Municipal Securities Rulemaking Board, if they provide "advice" to the municipal entity regarding the issuance of municipal securities, entering into swap transactions, or any investment strategy relating to state or municipal funds. However, the proposed rules do not define what constitutes "advice."

Nevertheless, the draft rules raise the specter that appointed board members of a municipal bond issuer or other municipal entity that invests governmental funds—such as a public college and university—may be required to register as municipal advisors. Although not specifically discussed, the proposed rules could also be interpreted to require that trustees and certain employees of conduit borrowers of municipal bond proceeds (including independent colleges and universities) register if they provide "advice" to such borrowers relating to the issuance of the municipal security, a related swap transaction, or an investment strategy relating to the municipal bond proceeds.

Possible exclusions. The Dodd-Frank legislation excludes "an employee of a municipal entity" from the definition of "municipal advisor." In the discussion accompanying the proposed rules, the SEC noted that a commenter on the interim rule for registration of municipal advisors had recommended that the SEC clarify that this statutory "employee" exclusion covers any person serving as a member of the governing body of a municipal entity, such as a public college or university.

The SEC agreed that the "employee" exclusion should extend to elected members of a governing body of a municipal entity, and ex officio members who serve on such a governing body by virtue of holding an elective office. The SEC did not take the view, however, that unpaid volunteers sitting on boards be broadly exempted from the "municipal advisor" definition, and declined to use the employee exclusion in the law to categorically exclude appointed members of a municipal entity's governing body from the definition of "municipal advisor."

Under the proposed law, the fact that appointed board members of a public college—as well as board members and employees of a private university that borrows using tax-exempt bonds—are not specifically excluded from the definition of "municipal advisor" does not necessarily mean that they will be required to register as municipal advisors.

The absence of any definition of what constitutes "advice" under the proposed rules makes the impact difficult to determine. The SEC may yet clarify what constitutes "advice" in a manner that makes it clear that a discussion or decision at a board or committee meeting on ways a bond issue may be structured or timed, whether or not to use a swap, or how to invest municipal funds or bond proceeds does not constitute "advice" to the institution served by the board members.

Comments and clarifications. In the proposal, the SEC solicited public comments on a number of questions that bear on who should, and should not, be considered municipal advisors. For example, the rules solicit comments on whether the distinction between appointed board members and elected board members is appropriate. NACUBO is working with other interested associations to file comments to the SEC and will make every effort to ensure that requirements are clarified in ways that appropriately recognize the role of trustees and campus staff.

NACUBO CONTACT Matt Hamill, senior vice president, advocacy and issue analysis, 202.861.2529