CHICAGO - Chicago named one of its financial consultants to serve as its independent registered municipal advisor to evaluate financing proposals from underwriters, as it seeks to comply with new regulations without stemming the flow of creative financing suggestions.
The role Chicago picked Martin J. Luby to fill stems from the Securities and Exchange Commission's Municipal Advisor Rule that took effect July 1. It requires individuals and firms providing advice to state and local governments about the issuance of muni bonds to register as MAs. That creates a fiduciary duty and prevents the firm from acting as an underwriter on financings it might have suggested.
The IRMA provision allows a dealer or other professional to provide advice to a municipality without registering and facing the rule restrictions as long as that government has retained and is relying on the advice of its own independent registered municipal advisor. Under the exemption a municipal entity seeks and considers the advice, analysis, and perspective of the independent registered municipal advisor, but is not required to follow it.
The IRMA exemption has helped ease the concerns of some industry participants over the rule's potential to impede financing suggestions from broker-dealers. Chicago's chief financial officers have long held the belief that the city's use of negotiated sales provides incentives for bankers to submit creative ideas and to provide up- to-date market data for the city to review.
The city in a formal notice in late June announced Luby's selection as its municipal advisor to evaluate all financing proposals and recommendations. Luby will not advise on the investment of city funds managed by the city treasurer.
"After much discussion with securities lawyers, industry participants and staff, the city of Chicago named an initial MA to help the city to develop the protocols required by the new law and to provide a consistent approach to the many different types of debt it issues," a finance department spokeswoman said.
The city said it may add additional MA's in the future as it gains experience in complying with the new regulations and will continue to use a separate advisor for individual transactions to preserve its practice of hiring separate financial advisors, including women and minority-owned firms, with expertise in specific credits.
The city said Luby meets all IRMA requirements and has told the city he had no ties with any individual investment banking firm over the last two years.
The city said its sister agencies such as the Chicago Public Schools are taking a slightly different approach, naming pools of municipal advisors under the exemption with plans to use them in rotation without naming separate advisors for individual bond deals.
The city said it settled on Luby as its initial MA due to his specific experience. His "extensive work in publishing academic research - 16 articles and one book on municipal finance in the last three years, including academic research and numerous technical reports on the use of financial advisors - made him uniquely qualified for this new role, especially versus financial advisors that get paid almost exclusively from the issuance of bonds," the spokeswoman said.
Luby is an assistant professor in the School of Public Service at DePaul University and a visiting senior fellow at the University of Illinois' Institute for Government and Public Affairs.
Luby also has worked as an investment banker and advisor and has close ties to the city's chief financial officer, Lois Scott. He worked at her independent advisory firm Scott Balice Strategies, which she sold to take the Chicago CFO position.
Luby has been engaged to perform arbitrage rebate work for the city since 1996 and has been tapped to do work verifying the tax levy for bonds and comparing debt policies but he does not advise the city directly on specific bond transactions.
"Unlike most financial advisors, Dr. Luby is not intimately involved with the underwriting firms on a daily basis," the spokeswoman said. "As such, he is able to maintain a level of independence on idea review that few, if any, other firms offered."
