Fiduciary Duty in the Municipal Bonds Market

This article examines whether the imposition of fiduciary duty on municipal advisors affects bond yields and advising fees. Using a difference-in-differences analysis, it shows that bond yields reduce by ∼9% after the imposition of the SEC Municipal Advisor Rule because of 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, the study finds that the average advising fees paid by issuers do not increase after the regulation. Overall, the results suggest that while fiduciary duty may mitigate the principal-agent problem between some issuers and advisors, there is heterogeneity among issuers.