Fiduciary Duty Rule for Municipal Advisors

Placement agents who want to help private funds obtain government sponsored investments are required to register with the Municipal Securities Rulemaking Board. Under a proposed rule, they would now be subject to a "fiduciary duty, which shall include a duty of loyalty and a duty of care."

That's good, but seems to be a violation of basic contract law. The placement agent/municipal advisor is hired by the fund manager and should therefore owe its obligations in that direction. At least the MSRB is putting out an interpretative release to help agents/advisors figure out some of the things that will get them in trouble.

Disclosure Obligations. Under Rule G-36, a municipal advisor must disclose all material conflicts of interest of which it is aware after reasonable inquiry, such as those that might impair its ability to satisfy the duty of loyalty to its municipal entity client.

Unmanageable Conflicts. Pursuant to its duty of loyalty under Rule G-36, a municipal advisor must not engage in municipal advisory activities with respect to a municipal entity client if it cannot manage its conflicts in a manner that will permit it to act in the municipal entity's best interests.

Excessive Compensation. [I]n certain cases and depending upon the specific facts and circumstances of the engagement, a municipal advisor's compensation may be so disproportionate to the nature of the municipal advisory services performed as to indicate that the municipal advisor is not acting in the municipal entity's best interests as required by Rule G-36.

Sources:

• Proposed Rule G-36
• Placement Agent Limitations on Gifts
• Pay to Play Rules for Placement Agents
• Placement Agents and the MSRB

For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.

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