MSRB Adopts Dealer Role-Switching Prohibition

signatureThe Municipal Securities Rulemaking Board (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 Executive Director, Lynnette Kelly Hotchkiss, was quoted as saying, “This prohibition addresses conflicts of interest, real or perceived, that are too great for disclosure and consent to overcome.  We have carefully considered the distinct roles involved in bringing a new municipal securities issue to market and this rule change preserves the integrity of the new issue market for the benefit of all market participants.”

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 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 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.