Financial professionals advising state and local governments would be relegated to acting in a municipality's best interests when making investment recommendations, and could not receive “excessive compensation,” under tough new rules proposed last Tuesday.
The Municipal Securities Rulemaking Board, which oversees the $2.9 trillion municipal bond business, also would 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.
“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,”MSRB executive director Lynnette Hotchkiss said in a statement.
STANDARD OF CARE
Some advisers 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 SEC already have a fiduciary duty to act in the best interests of clients. The proposed rules would apply to all state-registered advisers and any financial professionals offering 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 Finance Advisors, 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 couldn't be in the best interests of the municipal client.
The board also proposed regulations last week that would prevent financial advisers from 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 to coincide with the SEC's finalizing of its definition of “municipal adviser” sometime in the next few months.
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