Association for Public Policy Analysis & Management

The Dodd-Frank amendment to Section 15B of the Securities Exchange Act of 1934 added a new requirement that municipal advisors must register with the Securities and Exchange Commission (SEC) and Municipal Securities Review Board (MSRB), effective July 1, 2014. The registration explicitly imposes a fiduciary duty on municipal advisors and prohibits them from serving as underwriters on the same debt issues due to the conflict of interest. Unless qualified for an exemption, an unregistered advice will violate federal securities laws and be sanctioned. Accordingly, the rule is intended to mitigate certain problems with the conduct of some municipal advisors, including pay-to-play practices, undisclosed conflicts of interest, inadequate training or qualifications, and failure to place the duty of loyalty to their clients ahead of their own interests.

The purpose of this paper is to explore the implications of the new requirement on municipal borrowing costs. To address this research question, I estimate true interest costs of monthly municipal debt issues in California from 2013 through 2015, which spans a period of 18 months both before and after the implementation of this new requirement. Using fixed effects regressions, I control for the implementation of the requirement, as well as the passage of time post-implementation, along with standard controls that are well established in the extant literature to evaluate the outcome of interest.

Ultimately, this new requirement is intended to change the way municipal securities market participants behave. The fiduciary duty should discipline and more consistently educate municipal advisors, provide additional protection to borrowers, and result in more accurate and symmetric information for municipal borrowers. The registration requirements may leave in practice only the most qualified professional advisors. Thus, the rule should improve the quality of financial advice and, given that the quality of advice significantly affects new issue interest costs (Allen & Dudney, 2010), potentially reduce municipal borrowing costs. My preliminary results support the hypothesis of reduced borrowing costs.