State and local leaders say a Securities and Exchange Commission (SEC) plan requiring more oversight of municipal advisors could have the unintended effect of discouraging volunteers from serving on state and local government boards.

Under the Wall Street reform law a "municipal advisor," or someone who provides advice on municipal bonds or how to invest government money, would be required to register with the SEC and the Municipal Securities Rulemaking Board.

That's all well and good, state and local leaders say.

After all, the law exempts elected officials and government employees from the requirement, since they regularly provide input on those matters, and they essentially are the government. There's no need to protect government leaders from themselves.

But a recent SEC proposal says that exemption isn't available to people serving on state and municipal boards and authorities. That means those people -- typically volunteers -- would be subject to the same rules and regulations as any other municipal advisor. They would have to register with the SEC and MSRB, pay yearly fees, disclose personal financial information, take educational courses and be subject to regular testing.

State and local leaders worry that volunteers won't be willing to subject themselves to the rigmarole called for by the SEC, depriving them of valuable input on government affairs. Governments rely on advisory boards, often made of a combination of elected officials, employees and citizens, to tackle a range of subjects from public pensions to land use planning to the arts. The situation would be especially problematic in places where cities and states are required by law to fill those positions with volunteers from the community.

If the new regulation becomes permanent, volunteers who serve on boards may also be disinclined to speak as candidly as they once did for fear of liability, given their newly-defined position as "municipal advisors," says Susan Gaffney, who oversees federal issues for the Government Finance Officers Association.

"It is difficult to contemplate any reason why a citizen would submit himself/herself to the burden of registration solely to volunteer as a member of a city board or commission," wrote Phoenix's finance director and city attorney in a letter to the SEC.

While the rule would almost certainly apply to boards dealing directly with investments, such as public pension boards, others could be affected too. As long as a board has some sort of tangential relationship to financial matters, it might be subject to the regulation, Gaffney says, conjuring up images of the proverbial "little old lady" serving on the library board -- a fixture in communities nationwide.

Gaffney says it's unclear why the SEC wants the rule to apply to volunteers.

"If the SEC is trying to address a specific issue, let's understand what that issue is and determine how it should be addressed, rather than implement an overly broad and terribly disruptive municipal advisor definition," Gaffney says. "It's like killing an ant with a sledgehammer."

Over the last two months, dozens of state and local government bodies have contacted the SEC to express opposition to the rule. They hope to persuade the agency to extend the exemption to volunteers before the commission votes to finalize the rule. It's unclear when that vote might happen. Until then, governments will have to determine on their own whether volunteers should be subjected to the strict requirements.

Meanwhile, the SEC has not explicitly responded to the wide-ranging criticism from city and state leaders who want to know if there is an ulterior motive to the regulation. Among those who follow the issue, several theories abound. Some speculate the SEC may be using the regulation as a revenue-generating tool; others suggest it's intended to prevent donors from getting choice slots on influential boards; and some think the SEC simply made an inadvertent mistake.

An SEC spokeswoman declined to comment on the subject.

Regardless, municipal officials say the SEC has misinterpreted Congress's intention, which was to protect city leaders -- including volunteer board members -- from unethical advisors. But somehow board members themselves became the target. The regulation "confuses the issue to suggest that those officials -- the very intended beneficiaries of municipal advisor regulation -- somehow are 'municipal advisors' themselves," several city attorneys wrote in letters to the SEC.

Municipal leaders also say the law is redundant. The National League of Cities wrote in a letter to the SEC that volunteers are already held accountable for their actions via the regular election of officials who appoint them. Many cities already impose ethics codes and other transparency regulations on boards.