MSRB Proposes Prohibition on Dealers Acting as Financial Advisor and Underwriter on New Issue of Municipal Securities

ALEXANDRIA, Va., Feb. 9, 2011 /PRNewswire/ -- The Municipal Securities Rulemaking Board (MSRB) announced today that it is seeking to prohibit a broker, dealer, or municipal securities dealer from acting both as a financial advisor to an issuer of municipal securities and as an underwriter for the same new issue of municipal securities. The MSRB filed the proposal with the Securities and Exchange Commission (SEC), along with interpretive guidance on the proposed role-switching prohibition. The changes would affect financial advisors and underwriters on new issues of municipal securities with a final award date of six months or more following SEC approval.

Currently, MSRB rules allow a financial advisor to a municipal securities issuer on a new issue to resign from such role and serve as the underwriter for the same issuer if certain disclosure, relationship termination and consent requirements are met. The MSRB's proposal would prohibit such role-switching 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," said MSRB Executive Director Lynnette Kelly Hotchkiss. "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."

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 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.

The MSRB's proposed interpretive guidance provides, among other things, that a dealer generally would not be considered an issuer's financial advisor for a new issue subject to role-switching restrictions when the dealer provides advice related to the issuance of municipal securities in the dealer's capacity as underwriter, and the dealer clearly identifies itself as an underwriter during the initial stages of a relationship with an issuer.

The MSRB will continue to monitor the new-issue market for the effects of the proposed change on small issuers.

The Municipal Securities Rulemaking Board (MSRB) protects investors, issuers of municipal securities and entities whose credit stands behind municipal securities, and public pension plans by promoting a fair and efficient municipal market. The MSRB fulfills this mission by regulating securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB promotes disclosure and market transparency through its Electronic Municipal Market Access (EMMA) website, provides education and conducts extensive outreach. The MSRB has operated under Congressional mandate with oversight by the Securities and Exchange Commission since 1975.

SOURCE Municipal Securities Rulemaking Board (MSRB)