MSRB Proposes Guidance on Fair Dealing Obligations of Municipal Advisors to Obligated Persons and State and Local Governments

Date: August 24, 2011

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


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission (SEC) of a notice that would establish fair dealing obligations of municipal advisors when providing advice to obligated person clients or when soliciting business from state or local governments or other municipal entities (such as public pension funds) on behalf of third parties. The proposal is one of a series of rulemaking initiatives the MSRB has filed with the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Today’s notice sets forth detailed guidance for municipal advisors on the application of MSRB’s “fair dealing” rule, MSRB Rule G-17, which requires municipal advisors to deal fairly with all persons and prohibits engaging in any deceptive, dishonest or unfair practice. Rule G-17 covers municipal advisors’ engagements with obligated persons and advisors’ solicitation of municipal entities.

“Today’s proposal would provide obligated persons and state and local government entities that are solicited by municipal advisors many of the same safeguards provided under the MSRB’s fiduciary duty initiatives,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “We believe these regulations are key in fulfilling the MSRB’s mission to protect these market participants.”

Obligated persons include entities whose credit stands behind municipal bonds, such as a university or hospital. The MSRB’s proposed guidance on fair dealing would require municipal advisors that recommend a municipal securities transaction or municipal financial product to an obligated person client to make a determination that the transaction or product is suitable for such client, to advise the client about the material risks and characteristics associated with the transaction or product, and to disclose any incentives and material conflicts of interests, such as third-party payments, as well as the amount of all direct and indirect compensation.

The proposal would prohibit certain behavior related to compensation, such as kickback arrangements with third parties, among others. The MSRB’s proposed guidance would require all representations by municipal advisors to municipal entity clients be truthful and accurate, and not omit material facts.

Some municipal advisors solicit business from municipal entities, such as a public pension plan, on behalf of third parties. The MSRB’s proposed guidance on fair dealing would require solicitors to disclose to municipal entities all of the material facts related to the solicitation, such as the solicitor’s compensation and any relationships the solicitor has with employees or board members of the municipal entity or its officials. The proposed guidance would prohibit kickbacks and fee-splitting arrangements with third parties and would provide that lavish gifts and gratuities to government officials may be a deceptive, dishonest or unfair practice.

The MSRB is proposing that the fair dealing obligations for municipal advisors be effective on the effective date of the SEC's 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.