U.S. securities regulators are moving to tighten standards governing the conduct of advisers to state and local governments on municipal bonds under a law approved by Congress in 2010.
Draft rules, released today by the Municipal Securities Rulemaking Board, would bar firms from splitting fees with banks, reaping excessive compensation or recommending transactions at odds with clients’ interests.
The regulations, stemming from the Dodd-Frank Act, target companies that guide public officials as they raise money in the $3.7 trillion municipal bond market. The industry came under scrutiny after the 2008 credit crisis, when bond deals hit state and local governments with unexpected costs, and a federal investigation revealed that advisers secretly collected fees from banks to rig the bidding on investment deals.
The regulations are part of a broader push to protect state and local governments. Other rules adopted since the Wall Street crisis imposed restrictions on banks that pitch complex financial transactions to public officials.
The rules released today are similar to those initially proposed in 2011 by the Alexandria, Virginia-based board, which later put them on hold until the U.S. Securities and Exchange Commission issued a legal definition establishing which firms would be covered. The SEC completed that step in September.
More than 900 companies providing financial advice to public officials would be covered by the additional regulations, from little-known regional firms to Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM), according to registrations filed with the rulemaking board. Others include First Southwest Co., PFM Group and Piper Jaffray Cos. (PJC)
Such firms would be required to disclose conflicts of interest that could color their advice and would be barred from recommending transactions unless there’s a reasonable basis to believe they are in their clients’ best interests, according to the proposed rules.
The board typically revises its rules before submitting them to the SEC, which has to approve them before they can take effect. The rulemaking board is seeking public comment until March 10.
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