MSRB files planned rule change on municipal advisor fiduciary duty

By Jennifer Chiou

New York, Aug. 23 - The Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission a proposed rule change, consisting of proposed Rule G-36 on fiduciary duty of municipal advisors and an interpretive notice for the application of the proposed rule, according to a board notice.

With the passage of Dodd-Frank, the MSRB said that it was expressly directed by Congress to protect municipal entities, hence the proposal of Rule G-36, which reads:

"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."

Specifically, the notice said that the "duty of loyalty" would require the municipal advisor to deal honestly and in good faith with the municipal entity and to act in the municipal entity's best interests without regard to financial or other interests of the municipal advisor.

The notice added that this would require a municipal advisor to make clear, written disclosure of all material conflicts of interest, such as those that might impair its ability to satisfy the duty of loyalty, and to receive the written, informed consent of officials of the municipal entity the municipal advisor reasonably believes have the authority to bind the municipal entity by contract with the municipal advisor.

On top of that, the notice filed in conjunction with the proposal would provide that a municipal advisor may not undertake an engagement if certain unmanageable conflicts exist, including:

• Kickbacks and certain fee-splitting arrangements with the providers of investments or services to municipal entities;

• Payments by municipal advisors made for the purpose of obtaining or retaining municipal advisory business other than reasonable fees paid to a municipal advisor for solicitation activities regulated by the MSRB; and

• Acting as a principal in matters concerning the municipal advisory engagement, except when providing investments to the municipal entity on a temporary basis to ensure timely delivery for closing.

The MSRB also said that, in certain cases, the compensation received by a municipal advisor could be so disproportionate to the nature of the municipal advisory services performed that it would be inconsistent with the proposed Rule G-36 duty of loyalty and would represent an unmanageable conflict under the notice.

Under "duty of care," municipal advisors must act competently and provide advice to the municipal entity after inquiry into reasonably feasible alternatives to the financings or products proposed, unless the engagement is of a limited nature.

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