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Banks and financial advisers may be forced to publicly disclose payments made in connection with U.S. state and local-government bond deals, a move aimed at revealing potential conflicts of interest to investors.
The Municipal Securities Rulemaking Board, which crafts regulations for the $3.7 trillion market, is considering whether to require underwriters and advisers to disclose fee-splitting agreements or other incentive payments tied to municipal-finance deals. Banks already must begin reporting such arrangements in August to municipalities under rules approved by regulators.
The disclosures would shed light on hidden incentives offered to banks and advisers in exchange for recommending transactions to government officials. The board, known as the MSRB, said today it is soliciting comments on whether to require disclosures on Emma, a website used to make municipal-bond documents available to investors and the public.
“The MSRB would appreciate feedback from market participants about whether and how we should take steps to address potential conflicts of interest stemming from undisclosed financial relationships among dealers, advisors and third parties,” Lynnette Kelly, the executive director of the Alexandria, Virginia-based board, said in a statement.
Targets would include incentives for third parties who steer business to a particular underwriter or financial adviser, according to the statement. The move follows instances in which U.S. regulators have focused on undisclosed payments between those involved in municipal-finance deals gone bad.
In Jefferson County, Alabama, JPMorgan Chase & Co. in 2009 settled claims made by the U.S. Securities and Exchange Commission concerning undisclosed payments made to local bankers to secure its role in complex bond deals that pushed the county toward bankruptcy. An unrelated Justice Department probe also showed how advisers that helped municipalities invest bond proceeds accepted payments from banks they picked for the work.
With the passage of the Dodd-Frank banking overhaul in 2010, the rulemaking board added regulating financial advisers and protecting state and local taxpayers from Wall Street to its role of writing regulations governing municipal borrowing.
“The MSRB is focused on our expanded mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect state and local government issuers,” Kelly said.
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