WASHINGTON – The Government Finance Officers Association has released a five-page primer on municipal advisor rules that should be entitled, "Everything you need to know about these rules and how they affect issuers."
In the primer, GFOA recommends that, unless a government has sufficient internal expertise, it use a municipal advisor when considering and developing a bond transaction.
The Dodd-Frank Act subjected nondealer MAs to federal registration and oversight for the first time. The MSRB has been writing rules for MAs and, where appropriate, extending rules for dealer-MAs, such as Rule G-37 on political contributions and pay-to-play practices, to nondealer MAs.
"While the [Securities and Exchange Commission's] MA Rule and subsequent [Municipal Securities Rulemaking Board] rulemaking do not regulate issuers directly, there are numerous indirect implications, especially related to MSRB Rule G-42, Duties of Municipal Advisors, that goes into effect on June 23, 2016," GFOA said in the primer.
The rules not only apply to MAs working for governments on bond and financing transactions, but also to all kinds of advisory activities they provide on, among other things, swaps, the defeasance of securities and rating agency presentations, the group said.
"This is important to note as, in the past, others on the financing team may have provided this type of advice to governments," GFOA said.
Under the MA rules, non-MA professionals can freely respond to requests for proposals (RFPs) or talk to issuers in general terms about market information, but they cannot provide specific advice unless certain exemptions have been met.
Dealer-MAs and nondealer-MAs are subject to the same rules. But when a broker-dealer is serving as an MA on a transaction it may not engage in other activities related to the same transaction such as underwriting.
Issuers can check with the SEC and the MSRB to ensure an MA is registered, the primer said. They will be able to check the MSRB's website later this summer to see if an MA passed its exam. MAs have until Sept. 12, 2017 to take and pass the exam.
Dodd-Frank imposes a fiduciary duty on MAs to put their issuer clients' interests first when they advise the issuers on transactions or financial products. Rule G-42 details the meaning of fiduciary duty and requires an MA to have a duty of care and a duty of loyalty to its issuer clients. The primer describes those duties.
Rule G-42 is likely to spur more formal contracts between issuers and MAs because the rule requires written documentation of an MA's relationship with an issuer when the relationship is established, GFOA said. This information should include: the scope of, and limits on, services to be performed; disclosures of conflicts of interest; details on any legal disciplinary events; and events that would trigger the termination of the relationship.
Rule G-42 also requires that an MA have a reasonable basis for making a recommendation to a client and the primer describes what the MA must take into account in making such a determination.
In addition, G-42 prohibits MAs from engaging in certain activities that relate to the transaction on which it is advising. These activities include underwriting, providing derivatives or guaranteed investment contracts, and facilitating bank loans over $1 million or similar financial products, according to the primer.
In the past underwriters often advised issuers on transactions or financial products, but an underwriter does not have a fiduciary duty to put the issuer client's interest first, GFOA reminded issuers. Under G-42 only professionals with a fiduciary duty can provide detailed advice to an issuer unless an exemption is in place.
The primer gives detailed descriptions of the exemptions and model language that can be used to document them.
For example, an issuer can obtain advice from an underwriter if the issuer has retained an independent registered MA (IRMA) that has not been associated with the underwriter within the past two years. The issuer must represent in writing to the underwriter that it has retained and will rely on an IRMA for advice for maximum disclosure. GFOA recommended the issuer post this information on its website.
Underwriters responding to an RFP or a request for qualifications (RFQ) can include recommendations to the issuer without violating the MA rule. For the exemption to apply, the RFP or RFQ must not be outstanding for more than six months and the issuer must distribute it to at least three reasonably competitive firms or post it on its website. GFOA also recommended that an RFP of RFQ be posted on the issuer's website to ensure wide distribution.
GFOA also recommended an issuer select an underwriter through a competitive RFP process and then issue a "letter of intent" that will allow the underwriter to more freely trust the transaction being developed.
The primer tells issuers that if they believe an MA is not acting in their best interest or is violating federal rules or laws, they should submit complaints to
