WASHINGTON — An issuer group urged the Securities and Exchange Commission and the Municipal Securities Rulemaking Board to adopt suitability standards preventing the sale of inappropriate financial products to state and local governments.

The remarks by the Government Finance Officers Association came last week in a comment letter to the SEC on amendments to proposed interpretive guidance for underwriters on the MSRB's G-17 fair-dealing rule.

The amendments would, for the first time, require broker-dealers to disclose to state and local governments that they are not fiduciaries and would prohibit underwriters from telling issuers not to hire financial advisors.

A fiduciary is generally required to put a client's interest ahead of its own.

Although the GFOA said the proposed G-17 amendments would help protect issuers from fraudulent and manipulative acts and practices, and better inform state and local governments about the roles and responsibilities of underwriters and FAs, the group urged the SEC and the MSRB to go even farther.

Specifically, the GFOA said, they should develop in the near future "some type of suitability standard" for financial products sold to state and local governments.

"Such a standard would help all marketplace participants understand the types of financings that may be appropriate for various types of issuers, and would guard against products being pitched or sold to state and local governments that are not appropriate for their entity," wrote Susan Gaffney, director of GFOA's federal liaison center. "This, we know, is a monumental task, but it is one that would benefit the marketplace and help with other rulemaking."

In an interview, Gaffney referred to the evolving regulatory framework as a puzzle, including the SEC's final municipal advisor registration scheme and definition, slated for release by the end of this month, according to the commission's website. "This might be another piece that is needed," she said.

The GFOA's letter also said underwriters should be required to disclose in writing, at the earliest time possible in the relationship, that the issuer "may choose" to engage an independent financial advisor to represent its interests.

The group made a similar request in a comment letter filed with the SEC in October, on an earlier version of the proposed G-17 interpretive notice for underwriters. The MSRB did not incorporate that recommendation into the amendments.

An independent FA also raised concerns about issuers being steered toward unsuitable transactions.

Some FAs and underwriters have in recent years guided "large numbers of unsophisticated issuers into highly risky derivatives transactions in many states," wrote Robert Doty, president of AGFS in Sacramento, Calif.

He urged the SEC to adopt requirements for muni advisors that would be even stronger than the board's G-17 amendments for underwriters.

In September, the MSRB pulled five proposed muni advisor rules that had been pending with the SEC, including proposed guidance on G-17 for muni advisors. The board has said it will repropose the rules after the commission finalizes the muni advisor registration scheme and definition.

But a dealer group and an industry group said the proposed G-17 amendments went too far and could prove costly for broker-dealers.

The Bond Dealers of America said underwriters should not be obligated to tell issuers, as the amendments currently propose, that "unlike a municipal advisor," underwriters are not fiduciaries.

"It is not the role of an underwriter to define or characterize the obligations of other parties, or to contrast them with its own obligations," wrote BDA chief executive officer Michael Nicholas.

The Securities Industry and Financial Markets Association said the amendments should undergo cost-benefit analysis. Unlike many federal agencies, the MSRB, as a self-regulator, is not required to perform such analyses.

In an interview, Leslie Norwood, SIFMA's managing director and co-head of the municipal securities division, said the proposed amendments are too broad because they would apply even if an issuer had engaged an FA, who could inform the issuer about a transaction's risks.

"We see that as being their role in the transaction," Norwood said.

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