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U.S. Municipal Advisers Face Fee Limits in Dodd-Frank Rules

Aug. 23 (Bloomberg) -- Financial advisers to U.S. state and local governments would be banned from splitting fees with banks or receiving “excessive compensation” under rules proposed by the regulator of the $2.9 trillion municipal bond industry.

The rules advanced today by the Municipal Securities Rulemaking Board for the first time spell out the codes of conduct that will apply to financial advisers under the Dodd-Frank law passed by Congress a year ago. The act gave the board sway over advisers, which previously operated without oversight.

Financial advisers have come under scrutiny since the 2008 credit crisis, when complex, derivative-laden bond deals they encouraged public officials to enter hit taxpayers with unexpected costs. A series of Justice Department criminal cases have also shed light on how advisers received kickbacks in return for letting banks overcharge clients on investment deals.

“We are proposing that municipal advisers be required to put the interests of state and local governments first,” Lynnette Hotchkiss, the executive director of the board, said in a statement today.

“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.”

More Than 1,000

More than 1,000 firms provide financial advice to public officials, from little-known regional outfits to Wall Street banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to registrations made with the Securities and Exchange Commission since last year. Others include First Southwest Co., Public Financial Management Inc. and Piper Jaffray Cos.

Until passage of Dodd-Frank, firms that operated only as financial advisers were largely exempt from federal regulations. The MSRB is working to fill that gap with new strictures on firms aimed at protecting government officials.

The rules proposed today would require advisers to act in the best interests of their clients. Among them are bans on splitting fees with investment banks who also work with their clients as well as on reaping “excessive compensation.”

The MSRB didn’t specify what amount would qualify as excessive except to say that it would be “disproportionate” to the nature of the services performed. Financial advisers previously haven’t faced limits on their fees.

Conflicts of Interest

The new regulations would also force advisers to disclose conflicts of interest.

In some cases, advisers were hired on the recommendations of investment banks whose deals they were brought in to evaluate, which may have given them an incentive to sign off on the transaction. The proposed regulations also address that by requiring advisers to investigate whether their clients would be better served by different types of financings, unless those clients explicitly tell them not to do so.

Criminal prosecutions by the Justice Department have also shown that banks paid undisclosed fees to financial advisers hired by municipalities to solicit bids from banks seeking to reinvest the proceeds of municipal bond deals.

The board’s proposed rules are subject to approval by the SEC. Last week, the board also proposed regulations that would prevent financial advisers from using campaign donations to land work, as bond underwriters are currently enjoined from doing.

To contact the reporter on this story: William Selway in Washington at

To contact the editor responsible for this story: Mark Tannenbaum at

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