The Municipal Securities Rulemaking Board, or MSRB, has proposed a rule and related guidance to govern the fiduciary duty owed by municipal advisors to state and local government clients, and other municipal entity clients.

Under proposed MSRB Rule G-36 and related guidance, municipal advisors would owe a duty of loyalty and a duty of care that would require them to act in the municipal entity’s best interest. Municipal advisors, which provide advice to municipal entities about municipal securities and financial products, would be required to make clear written disclosure of certain conflicts of interests and to receive written consent to any such conflicts by authorized government officials.

The proposed rule also would prohibit an engagement with a state or local government where an “unmanageable” conflict exists, such as kickback payments to the municipal advisor from third parties. The proposed rule also establishes the concept that compensation received by a municipal advisor may be so disproportionate to the nature of the services performed that it represents a violation of the municipal advisor’s duty to act in the best interests of its municipal entity client. 

In terms of a municipal advisor’s duty of care under the proposed rule, a municipal advisor would be required to act competently in providing advisory services to its municipal entity clients and, in general, to consider alternative financings or products. Municipal advisors would also be required to make a reasonable inquiry into the facts relevant to determining whether their municipal entity clients should proceed with a financial course of action, such as issuing municipal securities.

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