MSRB floats tough new rules for advisers in the muni market

Regulator aims to impose fiduciary standard, compensation limits in bid to eliminate conflicts of interest

Aug 24, 2011 @ 11:03 am

By Liz Skinner

Financial professionals who advise state and local governments would be required to make only those investment recommendations that are in the municipality's best interests and could not receive “excessive compensation” under tough new rules proposed by an industry regulator.

The Municipal Securities Rulemaking Board, which oversees the $2.9 trillion municipal bond business, also would specifically prohibit municipal advisers from splitting fees with investment banks that provide investments or services to municipalities.

The proposed rules, which must be approved by the Securities and Exchange Commission, spell out the code of conduct that municipal bond advisers must follow as called for under the Dodd-Frank Act. That legislation gave the MSRB power over advisers for the first time.

“We are proposing that municipal advisors be required to put the interests of state and local governments first,” MSRB executive director Lynnette Hotchkiss said in a statement. “This goes a long way in ensuring the interests of state and local governments are protected, and lays a solid foundation for disclosing conflicts of interest and establishing an appropriate duty of care for financial transactions.”

Advisers to some municipalities have been criticized for recommending complex bond deals — including many involving derivatives — that overcharged taxpayers. In some cases, advisers failed to disclose payments that underwriters made to them.

Financial advisers who are registered with the Securities and Exchange Commission — that is, those with at least $100 million in assets under management — already have a fiduciary duty to act in the best interest of clients. The proposed rules would apply to all state-registered advisers and any financial professional who offer guidance to pension plans and Section 529 college savings plans on how to invest their money or structure their bond deals, the MSRB said.

The National Association of Independent Public Financial Advisers, which represents companies that do this work, did not respond to requests for comment on the proposed rules.

The MSRB proposal didn't spell out what “excessive compensation” would mean, but said that compensation paid to a municipal adviser could be “so disproportionate to the nature of the services performed” that it can't be in the best interest of the municipal client.

The board also proposed regulations last week that would prevent financial advisers from using donating money to political campaigns in return for work, something bond underwriters already are banned from doing.

The effective date of the proposed rules is set coincide with the SEC's finalizing of its definition of “municipal adviser.” The commission is expected to come out with the definition in next few months.

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