MSRB Proposes Fiduciary Duty Rule for Municipal Advisors

Date: August 23, 2011

Contact: Jennifer A. Galloway, Chief Communications Officer 
              (703) 797-6600
              jgalloway@msrb.org

MSRB PROPOSES FIDUCIARY DUTY RULE FOR MUNICIPAL ADVISORS 

Alexandria , VA The Municipal Securities Rulemaking Board (MSRB) today proposed a rule and related guidance to govern the fiduciary duty owed by municipal advisors to state and local government clients, and other municipal entity clients. The proposal is a key element in new regulations to safeguard the interests of state and local governments and other municipal entities in municipal finance transactions.

“We are proposing that municipal advisors be required to put the interests of state and local governments first,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “This goes a long way in ensuring the interests of state and local governments are protected and lays a solid foundation for disclosing conflicts of interest and establishing an appropriate duty of care for financial transactions.” 

Under proposed MSRB Rule G-36 and related guidance, municipal advisors would owe a duty of loyalty and a duty of care that would require them to act in the municipal entity’s best interest. Municipal advisors, which provide advice to municipal entities about municipal securities and financial products, would be required to make clear written disclosure of certain conflicts of interests and to receive written consent to any such conflicts by authorized government officials.

The proposed rule also would prohibit an engagement with a state or local government where an “unmanageable” conflict exists, such as kickback payments to the municipal advisor from third parties. The proposed rule also establishes the concept that compensation received by a municipal advisor may be so disproportionate to the nature of the services performed that it represents a violation of the municipal advisor’s duty to act in the best interests of its municipal entity client. 

In terms of a municipal advisor’s duty of care under the proposed rule, a municipal advisor would be required to act competently in providing advisory services to its municipal entity clients and, in general, to consider alternative financings or products. Municipal advisors would also be required to make a reasonable inquiry into the facts relevant to determining whether their municipal entity clients should proceed with a financial course of action, such as issuing municipal securities.

The MSRB is proposing that the fiduciary duty rule for municipal advisors and related guidance be effective on the effective date of the Securities and Exchange Commission’s (SEC) definition of the term “municipal advisor” under the Securities Exchange Act or at a later date as approved by the SEC.


The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.