MSRB Adopts Dealer Role-Switching Prohibition to Eliminate Conflict of Interest in Municipal Securities Underwriting
The Municipal Securities Rulemaking Board, or MSRB, has adopted a significant rule change to address concerns over conflicts of interest by financial intermediaries in municipal bond underwritings. The change prohibits municipal securities dealers from acting as a financial advisor to a municipal entity on a new bond issue and subsequently acting as an underwriter on the same issue.
MSRB Rule G-23 previously allowed a dealer serving as financial advisor for a new issue of municipal securities to resign from such role and serve as underwriter for the same issue if certain disclosure and consent requirements were met. Revised MSRB Rule G-23 prohibits such role-switching for new issues sold on both a negotiated and competitive bid basis.
The revised rule also prohibits a dealer that serves as a financial advisor for a particular issue from serving as the initial remarketing agent for the same issue. The rule will permit a dealer to serve as successor remarketing agent for the issue if the dealer’s financial advisory relationship with the issuer had been terminated for at least one year.
The amendments to the rule will change references in Rule G-23 from “a new issue or issues of municipal securities” to “the issuance of municipal securities” to conform the language of the rule to the language used in Section 15B of the Securities Exchange Act of 1934, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act; however, those changes will not change the meaning or operation of Rule G-23. Further, the amendments will remove the requirement that financial advisory services be provided for compensation under Rule G-23(b), thereby conforming the rule to the provisions of Section 15B(e)(4) of the Exchange Act, which does not require that financial advisors receive compensation in order to be considered “municipal advisors.”
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