Muni-Bond Advisers Face Limits as Proposed Rule Heads to SEC

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The municipal-bond market’s regulator asked the U.S. Securities and Exchange Commission on Wednesday to approve a rule that bars financial advisers to state and local governments from reaping excessive fees.

The Municipal Securities Rulemaking Board’s Rule G-42 stems from the Dodd-Frank Act, which was approved by Congress in 2010. It would also prohibit advisers in the $3.6 trillion market from splitting fees with banks and implement standards concerning the suitability of transactions, the disclosure of conflicts and acting in their clients’ best interest.

“This rule will further Congress’ intent to build a framework of federal oversight for the advice state and local governments count on when considering municipal securities transactions,” MSRB Executive Director Lynnette Kelly said in a statement.

The rules were initially proposed by the MSRB in 2011. The SEC must sign off on the Alexandria, Virginia-based board’s rules before they can take effect. The MSRB requested that the change be implemented six months after it’s approved.

The advisory industry came under scrutiny after the 2008 credit crisis, when bond deals hit state and local governments with unexpected costs. Many of the approximately 740 firms registered with the MSRB have been unregulated at the federal level, the board said.

“Anytime you go from zero regulation to any kind of regulatory regime, there’s likely to be some impact,” Kelly said via telephone. “There may be professionals who decide for whatever reason to exit the industry.”

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