WASHINGTON — The Securities and Exchange Commission Monday proposed a lengthy new rule to establish a permanent registration system for municipal advisory firms as well as individual advisers that would replace a temporary system for firms the SEC put in place in September.

The agency is soliciting comments on the 315-page proposal for 45 days after its publication in the Federal Register, which is expected in the coming days.

The SEC estimates that the proposed registration system would initially apply to around 1,000 municipal advisory firms, including sole proprietors. The estimate is based partly on the number of municipal advisers that have registered with the commission under rule under the temporary system. As of October 2010, there were abouot 800 unique electronic registrations under that system.

The SEC also estimates as many as 21,800 individuals would have to register as advisers.

Currently only muni adviser firms and sole proprietors must register with the SEC and the Municipal Securities Rulemaking Board, which operates a separate registration system.

In addition to providing the first guidance from the SEC on the ambiguities of the statutory definitions of the law and who should register as an adviser, municipal advisers would have to submit more detailed information about their advisory work and certify they have met or will meet the qualifications and regulatory obligations required of them.

The proposed rule also includes new books and records requirements that will provide the basis for commission inspections and includes 14 pages of questions for commentators on the definitions in the rule.

As with the "final interim temporary rule" the board proposed in September — which will remain in effect through at least the end of 2011 — Monday's proposed rule stems from provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring that muni advisers be subject to SEC registration and MSRB oversight.

Under Dodd-Frank, the registration requirements apply to all municipal advisers who provide "advice" to "municipal entities" and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guaranteed investment contracts, "investment strategies," or the issuance of municipal securities. It also applies to advisers who solicit business from a state or local government for a third party.

The definition generally does not include: a dealer serving as an underwriter; a registered investment adviser registered under the Investment Advisers Act of 1940 or associated persons; commodity trading advisers registered under the Commodity Exchange Act or persons associated with them who provide advice related to swaps; attorneys offering legal advice or providing "traditional" services; or engineers providing advice.

In a section interpreting the definitions set forth by Dodd-Frank, the SEC said that investment strategies includes, "without limitation, the investment of the proceeds of municipal securities," such as "plans, programs, or pools of assets that invest funds held by or on behalf of a municipal entity, and therefore, any person that provides advice with respect to such funds must register as a municipal adviser" unless it is covered by an exclusion.

In defining investment strategies in this manner, the SEC appears to be aggressively trying to include all pension fund advisers, two market participants said.

Meanwhile, the SEC appeared to adopt very limited exceptions for lawyers and accountants that assist municipal entities. However, it said it would exclude from the definition of muni adviser accountants preparing financial statements, auditing financial statements, or issuing letters for underwriters for or on behalf of a municipal entity or obligated person.

On attorney advice to municipal entities, the SEC said: "Advice which is primarily financial in nature, such as advice concerning the financial feasibility of a project or financing, advice estimating or comparing the relative cost to maturity of an issuance depending on various interest-rate assumptions or advice recommending a particular structure as being financially advantageous under prevailing market conditions, would be primarily financial advice and not services of a traditional legal nature." As a result, lawyers providing such advice would have to be registered as muni advisers.

Though some firms have been hired to assist troubled municipalities for free, the SEC said it would not distinguish between whether an adviser is paid or not in requiring it to register.

"Congress did not distinguish between those municipal advisers who are compensated for providing advice and those who are not compensated for providing advice," the SEC said in the rule. "Thus, consistent with Congress' definition of the term 'municipal adviser,' the commission does not believe the issue of whether a municipal adviser is compensated for providing municipal advice should factor into the determination of whether the municipal adviser must register with the commission."

Under the books and records requirements, advisory firms would have to make and keep current originals or copies of all communications received, and originals or copies of all communications sent, including inter-office memorandums and communications relating to municipal advisory activities, "regardless of the format of the communications."

Advisory firms also would have to keep all check books, bank statements, cancelled checks and cash reconciliations; a copy of each version of the municipal adviser's policies and procedures, if any, in effect at any time within the last five years; and a copy of any document created by the adviser that was material to making a recommendation to a municipal advisory client or that memorializes the basis for that recommendation.

Firms also would be required to keep copies of all written agreements entered into by the municipal adviser with any municipal entity, employee of such an entity or an obligated person or otherwise relating to the business of the adviser.

They would also be required to keep a record of the names of persons who are, or have been in the past five years, associated persons of the municipal adviser and other information such as their names, titles and addresses and the municipal entities or obligated persons with whom the adviser has engaged in advisory activities in the past five years.