Cheers to the MSRB

By Cate Long
January 10, 2014

The Municipal Securities Rulemaking Board made a wonderful regulatory push when it issued its proposed rule for the conduct of municipal advisers. Municipal advisers are professionals who are supposed to help state and local governments structure their borrowing and investment activities in the most economically efficient way.

In the past, advisers did not always place the interest of their government clients ahead of all other interests and they had undisclosed conflicts of interest. Basically, local governments could be treated as “muppets” by advisers without any restraint from the law.

In the Dodd-Frank Reform Act, Congress created a new law to protect municipalities and gave new authority to the MSRB to create rules to regulate the activities of municipal advisers. To put the law into effect, the MSRB issued Proposed Rule G-42, and said:

The regulation of municipal advisors and their advisory activities is, as the SEC has recognized, generally intended to address problems observed with the conduct of some municipal advisors, ‘including ‘pay to play’ practices, undisclosed conflicts of interest, advice rendered by financial advisors without adequate training or qualifications, and failure to place the duty of loyalty to their clients ahead of their own interests.’

The most serious problem has been that advisers did not previously have a fiduciary duty to their municipal clients. Here is what the proposed rule includes, according to the MSRB:

[D]raft Rule G-42 subjects municipal advisors to a duty of care in the conduct of their municipal advisory activities…

…Draft Rule G-42 does not permit a municipal advisor to recommend that a client enter into any municipal securities transaction or municipal financial product unless the advisor has a reasonable basis for believing that the transaction or product is suitable for the client.

The law now states that municipal entities cannot be sold bum products. Hooray for taxpayers.

This is only a draft of the new rule. The MSRB has requested comments on 25 questions about the proposed rule (page 25). Comments are being accepted until March 10th.

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