Fiduciary Duty in the Municipal Bonds Market

TL;DR

This paper investigates how the SEC's fiduciary duty regulation for municipal advisors impacts bond yields, advising fees, and market behavior, revealing yield reductions for larger municipalities but heterogeneous effects across issuer sizes.

Contribution

It provides empirical evidence on the effects of fiduciary duty regulation in the municipal bonds market, highlighting heterogeneity among issuers and the lack of increase in advising fees.

Findings

Bond yields decrease by ~9% after regulation due to lower underwriting spreads.

Larger municipalities are more likely to recruit advisors and see yield reductions.

Advising fees do not increase on average after regulation.

Abstract

I examine whether the imposition of fiduciary duty on municipal advisors affects bond yields and advising fees. Using a difference-in-differences analysis, I show that bond yields reduce by $\sim$9\% after the imposition of the SEC Municipal Advisor Rule due to lower underwriting spreads. Larger municipalities are more likely to recruit advisors after the rule is effective and experience a greater reduction in yields. However, smaller issuers do not experience a reduction in offering yields after the SEC Rule. Instead, their borrowing cost increases if their primary advisor exits the market. Using novel hand-collected data, I find that the average advising fees paid by issuers does not increase after the regulation. Overall, my results suggest that while fiduciary duty may mitigate the principal-agent problem between some issuers and advisors, there is heterogeneity among issuers.