Muni rules limit dealer roles, spark fiduciary concerns

Author: Danielle Myles | Published: 14 Jun 2011

US-based municipal bond underwriters are grappling with new restrictions on their transaction roles.

Removal of muni bonds’ tax exempt-status and replacement with a new form of the Build America Bond (BAB) programme could be another change underway.

The Municipal Securities Rulemaking Board’s (MSRB) amendment of rule G-23 stipulates a dealer financial advisor on a muni bond issue can no longer subsequently act as an underwriter on the same deal.

The breadth of the May 27 amendment has angered broker-dealer groups. They claim the dual role is necessary for small issues.

These deals have such little competition among underwriters that removing the financial advisor from that pool could reduce the number of bidders to just one or two. Excluding competitive bids, and restricting the prohibition to negotiated bids, could have avoided this situation.

But lawyers point out a possible loophole to the dealer role-switching prohibition. The restriction applies to a...