WASHINGTON — The Municipal Securities Rulemaking Board has filed a proposed rule and interpretive notice with the Securities and Exchange Commission that detail how municipal advisors would have to comply with their fiduciary duty to put issuers’ and other clients interests first.
Muni advisors acquired a fiduciary duty to clients on Oct. 1, 2010, under the Dodd-Frank Wall Street Reform and Consumer Protection Act. But proposed Rule G-36 and the interpretive notice, which contain requirements for carrying out that provision, would not take effect until either the effective date of the SEC’s final registration rules that define the term “municipal advisor,” or a later date, if that is when the commission approves the proposed rule.
Proposed Rule G-36 is very simple and states: “In the conduct of its municipal advisory activities on behalf of municipal entity clients, a municipal advisor shall be subject to a fiduciary duty, which shall include a duty of loyalty and a duty of care.”
But the interpretive notice, which is similar to the draft the MSRB issued in February, contains detailed requirements for carrying out that duty, including that muni advisors disclose manageable conflicts of interest and obtain written consent for them from issuers, pension funds or other municipal entities.
However, municipal advisors would not have fiduciary duties to corporate borrowers in conduit deals.
Muni advisors would be prohibited from engaging in activities that create unmanageable conflicts of interest, such as kickback or fee-sharing arrangements. They also would be barred from acting as principals with issuers on the same transactions on which they are advising, except in certain specified circumstances. The list of exceptions has expanded in the proposed rule filed with the SEC.
Advisors also would have to disclose their compensation and are warned they would violate the rule if they obtain “excessive compensation.”
The proposed rule warns advisors that they must only undertake engagements where they have the necessary expertise. A municipal advisor, for example, would not be able to advise an issuer on a swap unless it has sufficient knowledge to be able to evaluate the transaction, its risks, pricing and appropriateness.
Advisors also would have a duty to investigate and advise issuers on alternatives to proposed financing structures.
However, the proposed rule would permit a muni advisor to limit the scope of an engagement to which its fiduciary duty would apply. For example, if an advisor was retained to advise an issuer on pricing in connection with a financial structure that the issuer had already decided was appropriate, the advisor would not have to advise the issuer on the appropriateness of the financial structure. But the advisor would have to disclose the limitations of its engagement to the issuer.
The proposed rule also would make clear that an advisor is not a guarantor.
