WASHINGTON Jan 9 The board overseeing the U.S.
municipal bond market on Thursday proposed a strict code of
conduct for financial advisers to cities and states, including a
ban on their role in principal transactions - a change that has
raised concerns in the securities industry.
The Dodd-Frank Act, approved after the 2008 financial
crisis, requires the advisers who consult with municipalities
about selling bonds and buying derivatives to register with the
Securities and Exchange Commission and comply with similar rules
for municipal brokers and dealers.
In a long-awaited proposal on the advisers' fiduciary duties
and business conduct, the Municipal Securities Rulemaking Board
(MSRB) suggested barring advisers from participating in
principal transactions, even if a municipality gives informed
The idea of a ban surprised Michael Decker, who has closely
followed the adviser issue as co-head of municipal securities at
the Securities Industry and Financial Markets Association.
"There is a provision in the proposal that would prohibit
principal transactions if you provide even incidental advice to
a state or local government," he said. "And that's really at
odds with the SEC's approach to a fiduciary standard where, with
certain disclosures and certain caveats, principal transactions
Principal transactions could be buying or selling
securities, managing investments or making pension fund
investments. Underwriting would be excluded.
SIFMA, a trade group, hopes the MSRB will amend the ban in
its final rule, Decker added.
GUARDING AGAINST CONFLICTS
The MSRB, a self-regulatory organization made up of bankers,
issuers and advisers, writes the rules that the SEC and the
Financial Industry Regulatory Authority enforce in the $3.7
trillion municipal bond market.
The board identified principal transactions as "an area of
particular concern." It also said there is a "high potential for
self-dealing in such situations."
MSRB Executive Director Lynnette Kelly said there are "risks
and conflicts inherent in advising a client on critical
financial matters but simultaneously taking an arms-length
posture in a transaction with that client."
"In some other regimes, the conflict from recommending a
transaction and acting as the counterparty is managed through
disclosure and consent," she added in an e-mail to Reuters. "In
this case, to preserve the highest standards of impartiality and
the provision of unbiased advice, the rule has a flat
prohibition against principal transactions."
After it was signed in 2010, the Dodd-Frank law ignited a
fight over exactly who counts as a municipal adviser. The
dispute lasted until the SEC approved a final definition in
September, which allowed the MSRB to begin drafting regulations.
The code of conduct proposed on Thursday will serve as the
nucleus of an extensive regulatory regimen encompassing the
duties of solicitors, political contributions and examinations
The proposal lays out advisers' fiduciary duties and other
responsibilities in representing clients' interests. It suggests
advisers have enough expertise to give advice, disclose
conflicts of interest, document compensation and tell bond
buyers about their affiliations.
It would also prohibit advisers from receiving excessive
compensation, billing for work they did not perform,
misrepresenting themselves in proposals, splitting fees with
underwriters or paying to retain business.
The MSRB is providing a 60-day comment period on the draft
as well as 13 multi-part questions for commenters to address.
The SEC's definition of municipal advisers will go into full
effect on Monday.