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U.S. municipal adviser rule unveiled; raises transaction worries
January 10, 2014 / 12:16 AM / in 4 years

U.S. municipal adviser rule unveiled; raises transaction worries

WASHINGTON, Jan 9 (Reuters) - 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 consent.

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 are allowed.”

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.


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 for advisers.

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.

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