The Securities and Exchange Commission approved a rule barring financial advisers to state and local governments from engaging in deceptive practices, one of the first steps to regulate the business.
The decision applies the Municipal Securities Rulemaking Board’s so-called fair dealing rule to those advising officials who oversee debt issuance and investments. It bars deceptive, dishonest or unfair practices by bond dealers. The change takes effect immediately, the board said today in a statement.
The rulemaking board gained power over the previously unregulated consultants with the passage of the Dodd-Frank law. Such advisers once recommended derivative trades known as swaps that proved costly when the 2008 financial crisis struck, and several face charges for conspiring with bankers to make local governments pay above-market rates for investments purchased with money raised with municipal bonds.
“The MSRB’s fair-dealing rule is an essential rule of conduct for protecting investors in municipal securities and the municipal entities that issue them,” Lynnette Hotchkiss, the board’s executive director, said in a statement. “We are pleased that we now have this fundamental rule in place.”
Rules made by the industry’s self-regulatory organization, based in Alexandria, Virginia, are subject to SEC review and approval.
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