FirstSouthwest vice chairman and manager of public finance Jack Addams said the restrictions are "unusual, unduly restrictive, and outdated in light of current regulations."

WASHINGTON — FirstSouthwest is protesting against "restrictive" conditions included in a request for qualifications issued by the Greater Texoma Utility Authority in Texas, which said it will only consider proposals from a financial advisor that is independent from a broker-dealer.

The authority sought bids for various services related to a planned offering to fund water system improvements. The authority's board decided to require an FA that is independent from a broker-dealer firm because it thought it would be advantageous to do so and it was in line with one of the Government Finance Officers Association's best practice documents, said Jerry Chapman, consulting general manager at GTUA.

"They felt they were within their rights," Chapman said.

Responses to the RFQ were due Dec. 5.  Chapman said the board has since decided to award the FA contract to Austin-based Specialized Public Finance, Inc., a firm that has several employees that used to work at FirstSouthwest.

But Dallas-based FirstSouthwest, which offers both financial advisory and underwriting services, took umbrage at the requirement. In a two-page Dec. 3 letter to GTUA general manager Drew Satterwhite, FirstSouthwest vice chairman and manager of public finance Jack Addams said the restrictions are "unusual, unduly restrictive, and outdated in light of current regulations."

Addams added that his firm does not think the GTUA's RFQ is in keeping with the spirit of the Environmental Protection Agency's "fair share" policy, which requires entities awarding contracts to make a good-faith effort to award a fair number of them to women and minority-owned businesses.

"There have been extensive regulatory changes regarding regulation of FAs," Addams said in the letter, describing the changes codified by both the Dodd-Frank Act and the Securities and Exchange Commission's municipal advisor registration rule that was adopted in September.

"The Dodd-Frank Act and Municipal Securities Rulemaking Board rules specifically require financial advisors to municipalities to be fiduciaries of their advisory clients, regardless of whether they are underwriters for other clients, and contain prohibitions regarding switching roles from financial advisor to underwriter."

Addams also sent Satterwhite a copy of the FA rankings for the past five years in the Lone Star State.

"As you will note, with the restrictions you have put in place for selection of FA you omit 8 out of the top 10 FA firms in Texas, including minority firms," Addams wrote.

GFOA's best practices are silent on whether an issuer is advantaged by choosing a non-dealer vs. a dealer-affiliated advisor, but state that "no firm should be given an unfair advantage in the [Request for Proposals] process." The GFOA guidelines also state that issuers should decide whether to allow firms to serve as underwriter on one transaction and FA on another and adopt a policy, They also say that "when an issuer has a financial advisor contract with a firm that also is a broker-dealer, there should be 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."

The dispute is similar to one that FirstSouthwest had with a pair of Los Angeles RFPs last month. In those cases, the city was seeking both a general financial advisor and one specifically to work on bond issuance related to the city's wastewater department, and refused to consider dealer-affiliated FAs.

FirstSouthwest sent the city a seven-page letter protesting that fact, but although the city reissued the RFPs as a result of a glitch it declined to alter the requirements in response to FirstSouthwest's complaint. Los Angeles' debt management policy, adopted in 2005, deems it a conflict of interest for firms to do business with the city as both an underwriter and a financial advisor in general.

FirstSouthwest has served as underwriter to the GTUA once before in 2012. Chapman did not say that the authority has ruled out allowing firms to underwrite some transactions and advise on others, as Los Angeles has done and as the GFOA best practices suggest issuers might do.

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