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: