MSRB seeks comments on municipal advisers' standards of conduct rule

By Toni Weeks

San Luis Obispo, Calif., Jan. 9 - The Municipal Securities Rulemaking Board is seeking comments about a proposed rule on the duties of municipal advisers when providing advice on municipal securities transactions and related products to their clients.

"The MSRB aims to carry out Congress' intent to protect state and local governments from the potentially costly consequences of relying on financial advice of municipal advisers that may lack sufficient expertise and accountability," MSRB executive director Lynnette Kelly said in a press release. "Our proposal would ensure that all municipal advisers adhere to core standards of conduct and that state and local governments have more complete and accurate information regarding the services of municipal advisers."

Proposed Rule G-42 covers specific obligations of municipal advisers, including the duty to exercise due care and make only informed and suitable recommendations to their clients. The proposed rule requires municipal advisers to disclose all conflicts of interest to their clients and to document the nature of their relationship with their clients, including compensation arrangements and the scope of advisory activities to be performed.

The proposal also identifies conduct that would be considered deceptive, dishonest or unfair and provides guidance on the application of the federal fiduciary duty, established by the Dodd-Frank Act, which requires municipal advisers to deal with their state and local government clients with good faith and to put their clients' interests ahead of their own.

The MSRB has provided a 60-day comment period so that as many municipal advisers and other market stakeholders as possible have time to assess the proposed rule. The MSRB is hosting a webinar on the core standards rule on Feb. 6 at 3 p.m. ET.

In addition to seeking comments on draft MSRB Rule G-42, the board is also seeking comment on associated draft amendments to Rule G-8, which encompasses books and records, and Rule G-9, which deals with the preservation of records. Comments may be submitted until March 10 in electronic form (at www.msrb.org/CommentForm.aspx) or paper form (Ronald W. Smith, corporate secretary, MSRB, 1900 Duke Street, Suite 600, Alexandria, Va., 22314).

Sifma comments

In a separate press release, the Securities Industry and Financial Markets Association said that, although it supported MSRB's efforts to educate municipal advisers about their fiduciary duties and looked forward to the MSRB's upcoming rule proposals on municipal adviser regulation, including professional qualifications and testing, restriction of political contributions, restrictions on gifts and entertainment as well as supervision, it was concerned about an aspect of MSRB draft Rule G-42 that would prevent banks and broker dealers from being municipal advisers.

"Municipal adviser regulation in Dodd-Frank was intended to focus on bringing unregulated municipal advisers under a regulatory regime," Sifma managing director, associate general counsel and co-head of municipal securities division Leslie Norwood said in the release.

"Under the proposed rule, if a bank or broker dealer serves a municipal entity or an obligated person serves as a municipal adviser, then that firm and all its affiliates would be barred from engaging in any principal transactions with that client.

"As currently drafted, this proposed ban on principal transactions appears to include even transactions completely unrelated to the municipal advisory agreement."

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