The Municipal Securities Rule Making Board filed a proposal with the SEC that would prevent brokers, dealers or municipal securities dealers from serving as both a financial issuer and an underwriter for the same new issue of municipal securities.
If approved by the SEC, the ban would impact financial advisors and underwriters of new issues of municipal securities with a final award date of six months or more.
The problem, in the opinion of the MSRB, is that currently a financial advisor to a municipal securities issuer on a new issue can simply resign from that role and become an underwriter for that same issuer so long as he or she meets certain disclosure and consent requirements.
The proposed ban on role-switching would apply for new issues sold on both a negotiated and competitive bid basis.
"We have come to believe that the conflict of interest, whether actual or perceived, inherent in switching roles from financial advisor to underwriter is not in the best interest of the municipal market," MSRB Executive Director Lynnette Kelly Hotchkiss said in a statement.
"By eliminating the potential for role-switching, the MSRB is supporting an environment that will ensure dealers operate with the highest professional standards when acting in either of these distinct roles," she added.
While broker-dealers and financial advisors brace for a the eventuality of an SEC-mandated fiduciary standard sometime in the near future, regulators and many of the firms and advisors they monitor are looking for more effective and efficient methods to increase transparency and eliminate even the possibility of a conflict of interest across the full spectrum of investment vehicles and products.
The proposal would also prohibit a dealer who serves as a financial advisor for a particular issue from serving as a remarketing agent for the same issue but would allow a dealer to serve as a successor remarketing agent for the issue if the dealer's financial advisory relationship with the issuer has been terminated for at least one year.
Also, the ban would not cover dealer-financial advisor purchases of newly issued securities from an underwriter for either its own or a customer account unless the purpose of the transaction was to circumvent the proposed role-switching prohibition, MSRB officials said.
The MSRB's proposal additionally would prohibit a dealer that serves as a financial advisor for a particular issue from serving as a remarketing agent for the same issue. The proposal, however, would permit a dealer to serve as a 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 role-switching prohibition would not cover dealer-financial advisor purchases of newly issued securities from an underwriter for its own or a customer's account, unless the purpose of the transaction is to contravene role-switching restrictions.
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