WASHINGTON — Issuers can take advantage of the independent municipal advisor exemption in order to get the advice of underwriters and other professionals who otherwise would be unable to offer it, according to a
The 10-page GFOA paper is aimed at giving issuer officials the information they need to navigate the new regulatory regime, which places a fiduciary duty on anyone who offers particularized advice to an issuer or borrower about the issuance of munis, muni derivatives, or the investment of muni proceeds.
One of the biggest questions, since the SEC unanimously adopted the rule in September, has been under what circumstances an underwriter could offer advice to an issuer, something dealer groups have argued has been very beneficial to issuers over the years.
The GFOA has already adopted a best practice recommending that issuers retain their own MA for bond deals, but that recommendation has taken on new importance under the SEC's new rule, according to the organization's paper. The SEC rule would exempt an underwriter or other parties to a deal from having to register as an MA and owing a fiduciary duty to the issuer, as long as the issuer certifies in writing that it is relying on the advice of its own MA.
The rule includes an underwriter exemption that allows a dealer to offer certain advice about a particular issuance of munis it has agreed to underwrite, such as preparation for investor road shows or rating strategies, but does not allow advice about bond election campaigns, investment of proceeds, method of sale, or other aspects outside of the underwriting.
"GFOA's best practice recommends that issuers hire a financial advisor," the GFOA paper points out. "Relevant to this rule, doing so will allow the issuer to receive a greater amount of advice from underwriters and other professionals."
The paper also notes that responses to requests for proposals or requests for quotations are not considered to be municipal advice.
"Recent comments by SEC officials indicate that the term RFP may be interpreted broadly and does not have to be a formal RFP process, although it must be a broad outreach for ideas — not just one banker," the paper says.
GFOA already recommends that all governments use an RFP process to engage professionals involved in their bond transactions, the paper notes.
The issuer's process for certifying it has retained an MA differs from the disclosure obligations underwriters have to issuers under the Municipal Securities Rulemaking Board's fair dealing rule.
"In order for the underwriter or other professional to be able to provide certain types of advice to the government under the exemption when the government has hired an independent municipal advisor, the issuer must represent in writing to the underwriter that it has an independent MA for that purpose and that it is relying on that MA for advice," the paper says.
"It is important to note that, since August 2012 and implementation of MSRB Rule G-17, underwriters must send their government clients, a letter outlining their responsibilities related to the transaction (this includes that they do NOT have a fiduciary duty to the government)," the paper continues. "Rule G-17 only requires that the underwriter use reasonable efforts to obtain the issuer's acknowledgement of the required disclosures."
Issuers have been spooked by such G-17 disclosures in the past, and bond lawyers have wondered whether many issuers would be willing to offer written notice that they were relying on their own MA.
The new MA rule takes effect Jan. 13, though MAs already been required to register under a temporary rule. The MSRB is in the process of producing specific rules of conduct drawn from the SEC's work.
