Underwriters' Counsel Should Be More Proactive With Dealer Clients

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CHICAGO – Underwriters' counsel should be more proactive in keeping up to date with regulators' concerns and then communicating those to their underwriter clients, a dealer official said here.

Guy Yandel, executive vice president and co-manager of the municipal finance division at George K. Baum, made his comments during a panel on underwriter counsel activities at the National Association of Bond Lawyers Bond Attorneys Workshop here.

"[Lawyers] are not plugged into the same channels that we are, and [they] can't be, but [they] can talk to us," Yandel said.

Yandel pointed to the Securities and Exchange Commission Office of Compliance, Inspections and Examinations 2012 risk alert on strengthening practices for underwriting municipal securities. The risk alert, among other things, emphasized an underwriter's due diligence responsibilities when reviewing issuers' disclosure documents.

During that time, he said, it seemed like "the people who were at the back of the line in terms of comprehending the seriousness and direction of regulatory initiatives were certain bond and underwriters' counsel."

"We were getting feedback continuously from the regulators, but when we would go to certain underwriter's counsel and bond counsel and say 'We think this is something we need to take seriously,' the primary feedback we got was 'Just ignore it, don't take this seriously, this is not as a big a deal as you are getting in the message from … the regulators,'" Yandel said.

The SEC eventually launched its Municipalities Continuing Disclosure Cooperation initiative, which promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.

MCDC led to settlements with 72 underwriters who paid a total of $18 million as well as 71 issuers.

"We learned that we had to emphasize internally the legal analyses that are important because the legal industry isn't going to keep up," Yandel said. "We get signals through the examination process from [the Financial Industry Regulatory Authority] and the SEC that the legal community doesn't receive directly."

Yandel also said that the legal community generally only gets signals about regulators' intentions from enforcement actions, which he said are "way at the end of the process."

"It's a lagging indicator as opposed to a leading indicator," he said. "We need help interpreting the leading indicators to try to be on top of this stuff, and we learned we can't always rely on underwriter's counsel to do that."

However, if underwriters' counsels are talking with underwriters regularly, they will be much more plugged in to what their clients are seeing and hearing from regulators, according to Yandel.

He used an example from his own experience to illustrate the point, saying that in the approximately three years since the new regulatory emphasis on underwriter due diligence responsibilities became clear, only three law firms have come to his dealer firm and asked how they can help and what they can focus on to be more valuable.

"Why everybody that we hire as underwriters' counsel isn't having some form of that conversation with us is a bit of a mystery," he said. "Underwriters' counsel needs to … find a way to get further upstream of what is going on so [they] are not just waiting for enforcement actions to inform [them] of what's going on."

Yandel said George K. Baum generally now tells its bankers to rely on the firm's general counsel instead of outside counsel because the general counsel has a higher level of understanding of the issues facing the firm. However, if underwriters' counsel had more conversations with underwriters, they too might have the deeper understanding of what dealer firms like George K. Baum are looking for in their counsel.

Carol McCoog, a partner with Hawkins Delafield & Wood who was on the panel, did not disagree with Yandel about the need for underwriters' counsel to understand the issues, but cautioned that underwriters need to be aware that counsel is sometimes brought in at a late stage in a transaction, which can make things more difficult.

"As much as you want underwriters' counsel to be proactive and get in front of things, sometimes we are trying to jump on the moving train that has already gone pretty far," she said.

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