First Southwest to Protest Issuers That Bar Dealers as FAs

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BRADENTON, Fla. — Two large issuers in Broward County, Fla., changed procurement policies recently to seek only independent non-dealer financial advisors but altered course after receiving protests from First Southwest Co.

The 2011 adoption of Municipal Securities Rulemaking Board rule G-23, prohibiting dealer-financial advisers from switching roles and becoming underwriters in the same muni transactions, has drawn attention to a practice that is now recognized for having the potential to create conflicts of interest.

Growing recognition about that potential conflict may have prompted the Broward County government and the Broward County School District to seek only independent financial advisors.

Both issuers altered course recently, and opened their solicitations to dealer-FAs after receiving protests from First Southwest.

The issuers declined to talk with The Bond Buyer due to pending procurement efforts to select new financial advisors.

Jack Addams, vice chairman of public finance at Texas-based First Southwest, said his firm's policy is to work with issuers as their financial advisor or underwriter. First Southwest has provided financial advisory services to Broward County in the past.

Though Addams believes that the number of issuers instituting the more restrictive policy to seek only independent FAs is currently low, he said instances in Florida and California have prompted the investment bank to change its policy.

"We intend to challenge it at every place we see it," Addams said. "We think that whenever there's a process to pick an FA that it should be open to all FAs. It should not matter if you are a broker-dealer FA, which we are, or a non-broker-dealer FA. "We just want a level playing field."

First Southwest ranked second by volume as a financial advisor nationally in the first quarter of 2013, according to Thomson Reuters data.

Earlier this year, the county and the school district began separate searches for new, independent financial advisors.

It is believed to be the first time that both the county and the school district intended to impose the restrictive policy, which specifically prohibited dealer-FAs from applying.

The Broward County School District removed the restriction on March 26, and declined to comment about the change because it is still searching for FAs.

On Tuesday, Broward County officials revised their solicitation, which now appears to open the door for dealer-FAs to apply and it adds new conditions that firms must follow.

Prospective applicants seeking to become the county's FA must sign a statement that their work will not result in a conflict of interest, according to a revised request for letters of interest.

Additionally, the county is prohibiting FAs from participating, directly or indirectly, in underwriting any bonds it issues while under contract, and precluding firms from underwriting any bonds for one year after their contract expires, unless permitted in writing by the Broward County Commission.

"I will tell you that from my perspective I'm delighted that the county changed the language, and it is language that we would fully support," Addams said Wednesday.

First Southwest will apply for a financial advisory position with Broward County under the new guidelines, he said.

Neither the MSRB nor the Government Finance Officers Association's best practices for selecting a financial advisor suggest that municipal bond issuers should prohibit dealers from becoming their financial advisor.

GFOA does recommend that issuers — due to inherent conflicts of interest — have a policy in writing that will not allow a financial advisor to resign in order to serve as underwriter for a transaction.

Issuers should require firms to disclosure any affiliation or relationship with a broker-dealer, and issuers should have a policy about whether, and under what circumstances, they would permit a firm to serve as an underwriter on one transaction and a financial advisor on another transaction, according to the GFOA.

The organization also recommends that issuers with financial advisors that are also broker-dealers institute a "lockout period from the time that the financial advisor contract ends to the time when the broker-dealer can serve as a negotiated underwriter for the issuer."

Ben Watkins, director of the Florida Division of Bond Finance and a member of the GFOA's debt committee, said that he is aware of the fact that some issuers have hardened their own policies on whether FAs can also be broker-dealers.

"I think there's probably a growing awareness in the issuer community about the perceived conflict in that regard, and that the only way to avoid a conflict is to entertain people who do only FA work," he said. "I don't necessarily take that point of view but others may."

Watkins said the more restrictive position is not unique but he did not know how prevalent it could be among issuers.

For well over 30 years, Los Angeles County, Calif., has hired only independent financial advisors, which are paid on a full-time basis as opposed to the traditional method of payment as bonds are sold, according to Assistant County Treasurer Glenn Byers.

"We pay them no matter what," Byers said. "We want independent financial advisors not affiliated with a broker-dealer, and pay them so we know that we get an independent view."

There is an inherent conflict if firms are "working both sides of the fence," he said. "In our model, we have FAs and pay them no matter what, that way they will tell you the truth and not worry about doing a transaction to get paid."

The county began using a pool of independent financial advisors in the mid-1990s following a financial meltdown, which led to a collapse of the real estate market.

"At the time we were using strictly underwriters, and we weren't using financial advisors," Byers said. "We entered a recession, just swept everything aside and said how can we do it better? Having independent FAs turned out to be a great idea."

Other counties have borrowed the model, which also calls for competitively seeking advisors every five years. The current FA pool is in the second year of a five-year contract.

In addition to Los Angeles County, a few other issuers in California also prevent dealer-FAs from applying, and First Southwest will challenge those policies when new financial advisors are sought, Addams said.

In Florida, Broward County is the second-most populous county in the state with more than 1.7 million residents.

Addams said challenging Broward's change in policy was important because the county is a major issuer with a large population center, and excluding dealer-FAs would prevent them from seeing the full range of FAs that are available.

"Broward County or the Broward County School District, you name the entity, they can hand pick whoever they want" for a financial advisor, Addams said. "We just want to compete for the business."

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