Defining Moral Hazard
The term ‘moral hazard’ was first used in the 17th century, and was commonly used by insurance companies. They worried that covering their clients’ risk could encourage them to behave in a more risky nature. The terminology spilled over into many other industries, including the financial world.
In the 1960’s, US economists used moral hazard to describe inefficiencies that occur when risks are removed from position of responsibility. But it wasn’t until more recent times when many finance companies who weren’t subject to the same regulatory oversight as banks, did the term evolve to imply immoral behavior or fraud. Moral hazard can occur at any time two parties become involved in a contract or transaction with each other.
Moral Hazard and Regulatory Compliance
Both the Securities Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) are dealing with moral hazard as it relates to the best interest of borrowers, lenders, investors and taxpayers. The Dodd–Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, is a product of federal financial regulatory reform to promote transparency.
According to Cynthia A. Glassman, Commissioner for the SEC, “Financial transparency means timely, meaningful and reliable disclosures about a company’s financial performance. Companies need to provide transparent financials to raise capital. Investors need transparent financials to make informed investment decisions. Therefore, financial transparency is important not only because it is the bedrock of our financial markets, but also because it is absolutely essential to today’s investors.”
Moral Hazard, Ehlers and You
Under the Dodd-Frank Act, municipal advisors are subject to three key requirements: registration, antifraud provisions, and a fiduciary duty to their clients.
Since 1955, Ehlers has been committed to acting in a fiduciary duty, keeping the best interest of our clients and their communities in mind. Investors change, products change, but putting our clients interests above our own has never changed. We will continue to run our business by supporting yours first. After all, without you, there would be no Ehlers.
In light of regulatory compliance, our word is our bond to you that we will continue:
- To be an independent public finance advisory firm. Ehlers has structured our company and developed our four service lines to help clients strategically and tactically build stronger, financially stable communities.
- To be transparent throughout the entire bond sale process. Understanding the role your Ehlers Financial Advisor plays in your debt issuance transaction is critical to ensuring that the public’s best interest are protected and well served.
- To value you and your community. You’re not a just a transaction to us. Ehlers offers a personalized, full service approach to creating financial solutions by providing trusted financial consulting services to our clients.
- To share a common goal: to do outstanding work for our clients and their communities.
The legislation may be new to require a fiduciary responsibility to you by Ehlers, but we have always viewed our relationship with you in this ways, so that won’t change.
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