U.S. muni board divides advisor, underwriter roles
WASHINGTON (Reuters) - The board that writes the rules for the $2.9 trillion U.S. municipal debt market on Tuesday barred financial advisors from switching their roles to become underwriters on the same bond deal.
"This prohibition addresses conflicts of interest, real or perceived, that are too great for disclosure and consent to overcome," said Lynnette Kelly Hotchkiss, executive director of the Municipal Securities Rulemaking Board.
When the board proposed the new rule more than six months ago, it was deluged with complaints from issuers selling the debt along with advisors, brokers and underwriters.
Previously, a firm advising a state, city or other group on a municipal bond issue could resign and then serve as an underwriter on the issue as long as the switch was disclosed to the public.
The financial regulatory overhaul known as "Dodd-Frank" for its congressional authors, calls for advisors to act as fiduciaries and put the interests of clients first. Since it took effect, the board has been scrambling to expand its rules to encompass advisors.
Issuers have said the separation of roles would shrink the number of advisors and underwriters available to work on bond deals. Some said firms would only handle deals from larger issuers, which would leave smaller, and less frequent issuers out in the cold.
Issuers also warned that firms that help create competitive deals often bid on them, and the rule would discourage bidding and create a dearth of competition.
"We have carefully considered the distinct roles involved in bringing a new municipal securities issues to market and this rule change preserves the integrity of the new issue market for the benefit of all market participants," Hotchkiss also said in a statement.
The MSRB is a "self-regulatory organization" made up of banks, issuers and advisors, that writes the rules for market that the federal government, through the Securities and Exchange Commission, enforces.
The Financial Industry Regulatory Authority also enforces some of the rules, and in March said it was looking into underwriters that could have used graft and other means to influence credit rating agencies.
The municipal board said it expects to submit a raft of rules in June for the SEC to approve, including ones defining advisors' fiduciary responsibilities, limiting gifts by advisors and applying a "fair dealing" rule currently used for dealers to advisors.