MSRB rules are designed to promote fair, efficient and transparent transactions; to prevent fraudulent, manipulative and other unfair practices; and to minimize dealer and advisor conflicts of interest. MSRB rules that protect investors can be categorized into the following areas:
Fair Dealing
MSRB rules require securities firms, banks and municipal advisors to deal fairly with all persons, including municipal entities, and prohibit unfair or deceptive practices. The MSRB has interpreted its fair dealing rule, MSRB Rule G-17, to require securities firms’ and banks to honor the commitments made to a municipal issuers regarding distribution of the issuer’s securities.
The MSRB has proposed an interpretive notice of MSRB Rule G-17 regarding the application of MSRB Rule G-17 to municipal advisors in their dealings with obligated persons or their solicitations of business from municipal entities on behalf of others. The MSRB also has proposed an interpretive notice regarding underwriters’ fair dealing duties to municipal entity clients, including disclosure of transaction or product risks, and conflicts of interest.
Pay to Play
MSRB Rule G-37 seeks to sever any connection between political contributions to issuer officials and the awarding of underwriting contracts to municipal securities dealers to ensure bond business is awarded on the basis of merit. The MSRB has proposed a similar “pay to play” rule, draft MSRB Rule G-42, for municipal advisors.
Municipal market professionals that seek to influence the award of business by government officials by making or soliciting political contributions to those officials distort and undermine the fairness of the process by which government business is awarded. These practices can harm municipal entities and their citizens by resulting in inferior services and higher fees, as well as contributing to the violation of the public trust of elected officials.
Fiduciary Duty
Pursuant to the Dodd-Frank Act, municipal advisors owe a federal fiduciary duty to their municipal entity clients. The Dodd-Frank Act requires the MSRB to adopt rules to prohibit municipal advisor conduct that is inconsistent with a municipal advisor’s fiduciary duty. The MSRB has proposed MSRB Rule G-36, which would provides that a municipal advisor’s fiduciary duty to its municipal entity client includes a duty of loyalty and a duty of care.
Role-Switching
MSRB rules seek to restrict real and perceived conflicts of interest. The MSRB made changes to MSRB Rule G-23 that would prohibit a municipal securities dealer from acting both as financial advisor to an issuer of municipal securities and as an underwriter for the same new issue of municipal securities. This rule addresses the potential conflict of interest created by allowing advisor and underwriter role-switching.
Gifts
MSRB Rule G-20 prevents municipal securities dealers from attempting to induce other organizations active in the municipal market to engage in business with such dealers by means of personal gifts given to employees of the organizations. The MSRB has proposed that this rule also apply to municipal advisors. Proposed MSRB Rule G-20 seeks to ensure that engagements of municipal advisors are awarded on the basis of merit and not as a result of gifts made to employees controlling the award of such business.