The Municipal Securities Rulemaking board has released guidance for issuers to use in deciding when to hire, and how to compensate, municipal advisors.
State and local governments often hire municipal advisors to help them with a range of financial issues, including providing advice on muni bond issuances. Muni advisors owe their issuer clients a fiduciary duty to put their best interests ahead of their own, a duty that underwriters do not have, the MSRB pointed out.
The guidance, which was added to the MSRB’s state and local government toolkit, covers assessing what services an issuer needs and understanding the scope of those services as well as possible compensation structures. But it does not appear to be as detailed as the Government Finance Officers Association’s best practice on Selecting Financial Advisors, which was issued in 2008.
When assessing the services needed from a muni advisor, issuers should consider their own resources, such as the skills of existing staff and any knowledge gaps the expertise of an advisor might fill.
Issuers should also consider the size and type of bond transactions they expect to undertake, as some parameters could affect what the advisor will need to do, the MSRB said.
“For example,” the guidance states, “if an issuer engages a municipal advisor in connection with a specific issuance and has already determined that the bonds will not be rated, municipal advisor services related to rating agency presentations will not be required.”
Issuers should also ensure they understand the services offered by the muni advisor to ensure those services meet their needs, the MSRB said.
Advisors frequently can offer help both on specific bond transactions and more general financial advice, including assisting in: the development of a financing plan; the underwriter evaluation and selection process; preparing rating agency presentations; the preparation of offering documents and; evaluating market conditions and pricing performance.
Issuers may be able to choose from several common payment structures with their muni advisors, including fixed fees for the entirety of the work or hourly fees, according to the guidance. A contingent fee structure can be used for specific transactions, in which the advisor is paid only if the deal closes. This structure can be combined with fixed or hourly fees, the MSRB said.
The guidance warns, however, that certain expenses may be due to the advisor if the transaction fails to closes.
Two other common structures are retainer agreements, in which the advisor is paid on a certain schedule regardless of the work done, or fees based on the size of a given bond deal. Whatever structure the issuer and advisor agree on, it should be documented in writing, according to the guidance.
“To avoid any confusion about the compensation arrangement, both parties should specify in detail the scope of services to be provided by the municipal advisor,” the MSRB said. “In some circumstances, it may also be appropriate to specify the services that will not be provided by the municipal advisor. Maximum compensation and any other additional agreed-upon conditions should also be documented, as should costs that are to be borne by the municipal issuer and the municipal advisor.”