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Securities Law

SIFMA Issues Paper Urging Underwriters to Disclose Issuer Designation of their Counsel

MAR 27, 2013 4:31pm ET
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The Securities Industry and Financial Markets Association has issued a best practice paper recommending that underwriters disclose in official statements when issuers designate firms to serve as underwriter’s counsel.

The group took the action after hearing that issuers are inserting themselves into the selection of underwriter’s counsel with increasing frequency, said Leslie Norwood, co-head of municipal securities at SIFMA.

“This best practice recommendation came about as a result of a concern from the underwriting community,” she said.

The SIFMA paper states that underwriter’s counsel is typically responsible for drafting bond purchase agreements and sometimes official statements, assisting underwriters in meeting their legal obligations, and rendering a legal opinion on certain matters related to the transaction. Because attorneys owe a duty to their clients, Norwood said, having issuers select an underwriters’ counsel could create conflicts of interest.

“There may be an issue when a lawyer is chosen by the other party,” she said.

The recommendation largely agrees with, and borrows from, a 2009 recommended practice issued by the Government Finance Officer’s Association. In that paper, GFOA stressed that issuers have a “legitimate but limited” role in the selection of underwriter’s counsel.

“Specifically, the role of the issuer should be to ensure that underwriter’s counsel is competent, has no conflicts of interest, and that the costs are reasonable,” the GFOA recommendation states.

But the SIFMA paper takes the position a step further in urging that any issuer role in the selection of underwriter’s counsel be disclosed in documents available to investors. Norwood said that potential conflicts of interest arising from issuers choosing underwriter’s counsel could be of importance to investors.

The Municipal Securities Rulemaking Board has harbored concern about this issue since Sept. 3, 1998, when it issued a regulatory notice stating that “underwriters must be free to select their own counsel and to reject the imposition of counsel in circumstances where they lack the basis for placing their complete confidence in such counsel.”

The MSRB notice states that underwriters and their counsel are “adverse” to issuers on a variety of issues related to the transaction, including some related to investor protection. The board had been told that issuer influence on the selection of a particular counsel was sometimes difficult to resist, and that some underwriters had so little faith in their designated counsel they privately consulted other firms on sensitive issues, including disclosures.

“The potential for conflict of interest is inherent in the issuer’s selection of the counsel whose particular responsibilities may include advocating decisions that the issuer may oppose or may perceive as not in its best interest,” the MSRB decided.

Norwood said SIFMA hopes to begin a constructive dialogue with its new recommendation.

“We feel this best practice recommendation will at least start a conversation with the issuer clients,” she said.

Laura Lockwood-McCall, director of the debt management division at the Oregon State Treasury and a member of the GFOA’s governmental debt management committee, said that Oregon always asks what firms its underwriters are using but does not choose or offer firms for selection by the underwriters. She added that her state hires its own disclosure counsel to draft official statements, leaving underwriters counsel to draw up bond purchase agreements and advise the underwriter.

“The role of underwriters counsel becomes more narrow,” she said. “I can’t say that’s how everybody does it, but that’s how we’ve worked it through.”

Lockwood-McCall said that if issuers have an interest in the selection of underwriter’s counsel, it is probably mainly because disclosure regulation holds issuers responsible for the information in preliminary and final official statements.

“It’s their document,” she said.

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Who is being protected? Investors or the Underwriter? SIFMA proposes to protect the Underwriter how? By disclosing in the Official Statement how Underwriter's Counsel is selected? Protect the Investor? How does it differ from Issuers selecting Bond Counsel? How does it differ from a competitive sale when there is no Underwriter's Counsel? If all an Investor has to worry about is how Underwriter's Counsel is selected, then I think the regulators can pack their bags as there is not much left to do. Investors should be more concerned about the independence and competency of the Underwriter that is selected by the Issuer, and expect that competent Underwriters will protect themselves - "privately consulted other firms", and competent Underwriter's Counsel firms will do their job (regardless of how they are engaged). If a deal does not have a competent Underwriter and Underwriter's Counsel, then then Investor should be more worried about that than how they were hired.
Posted by rsli | Thursday, March 28 2013 at 9:52AM ET
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