The municipal bond market has been under fire for the last few years. Legislation has been proposed to protect local taxpayers from deals that blow up, more municipalities are filing bankruptcy as a result of municipalities’ inability to balance rising costs with lower tax revenues, and the Dodd-Frank Act has mandated that municipal advisors become fiduciaries.
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But before that term can be applied, a definition of a municipal advisor must be in place. The SEC has been trying—just as it has been trying to define the term fiduciary. It proposed a municipal advisor definition 20 months ago but the definition was unacceptable to the banking, brokerage, and engineering industries.
Some have said that municipal advisors do not need to be under the fiduciary umbrella. This would mean that such advisors would have to register, be examined on a regular basis, and would have to comply with professional standards.
The Municipal Securities Rulemaking Board (MSRB) was originally charged with protecting investors in municipal bonds. Now, it also has a mandate to protect local taxpayers and it is taking that new duty seriously.
Especially in light of recent bankruptcies, the need to protect local taxpayers in those municipalities is coming into focus. Before 2008, imprudent bond deals using derivatives were supposed to decrease borrowing costs for communities. Instead, they added costs after the 2008 crisis because the underlying mathematical basis on which they had been issued had changed.
So, now, even though many of the bonds from those issues have been retired, the derivatives are still running and costing taxpayers money. There is little data on just how many municipalities are stuck with these derivatives and how much they are costing taxpayers on an annual basis.
The argument is that, if a fiduciary mandate
had been in place years ago, such deals might never have been created in the first place.