MSRB releases guidance for MAs on duties in conduit financings
WASHINGTON – The Municipal Securities Rulemaking Board has released guidance for municipal advisors on how they should approach complying with the board’s rule on core duties when working on conduit financings.
The guidance related to MSRB Rule G-42 uses various scenarios to discuss how a municipal advisor’s relationship with the issuer, obligated person, or both in a conduit financing may affect the duties that are owed to the issuer during the course of the financing.
Under the rule’s core standards of conduct, MAs owe a fiduciary “duty of loyalty” to their municipal issuer clients and are required “without limitation … to deal honestly and with the upmost good faith with a municipal entity and act in the client’s best interests without regard to the financial or other interests of the municipal advisor.”
The rule also contains a “duty of care” for all clients, including obligated persons, that requires MAs to: exercise due care in their work; be qualified to provide advisor services; make a “reasonable inquiry” into the facts relevant to a client’s request before deciding whether to proceed; and undertake a “reasonable investigation” to determine their advice is not based on bad information.
The first scenario the MSRB considers in the guidance is one where an issuer, in connection with a specific issuance of munis, hires an MA to provide advice directly to a conduit borrower and not to the issuer itself. In that instance, the MA’s duty of care obligations to the obligated person apply in all respects.
However, the MSRB notes that there is a “threshold question” about whether such an arrangement could legally mean that the MA is also engaged in municipal advisory activities to, or on behalf of, the issuer. That question requires Securities and Exchange Commission input and MAs seeking an answer would have to contact the SEC’s Office of Municipal Securities.
Even if the MA in the scenario turns out not to be engaged in activities to, or on behalf of, the issuer, the fact that the issuer is compensating the MA may mean it would have to disclose that compensation to the obligated person as a material conflict of interest under G-42, according to the MSRB.
“In the MSRB’s view, the payments from the issuer to the municipal advisor may create a relationship between the municipal advisor and the issuer, that even if not a municipal advisor-client relationship, generally would give rise to a potential material conflict of interest that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice to, or on behalf of, the conduit borrower in accordance with the [rule],” the MSRB said.
The board also wants MAs to be aware that if the issuer gives an instruction or direction that an MA follows and if that instruction ultimately inhibits or limits the MA’s ability to fulfill its duties and obligations, the MA would be in violation of G-42.
The other four scenarios included in the guidance all involve instances where an MA would owe duties to both an issuer and an obligated person during a financing. The MSRB warns MAs attempting such a setup to carefully think through the different steps they would have to take to comply with the rule.
“Although dual representation is possible, for every action take during an issuance, it is incumbent upon a municipal advisor to assess and determine, as to each client, if such actions comply with the standards of conduct and other requirements under Rule G-42,” the MSRB said.
The MSRB also included guidance covering when the conduit borrower is also a municipal entity. That type of setup “should be carefully considered at the beginning of the dual representation and thoughtfully reconsidered periodically during the course of the dual engagement,” according to the MSRB.
“In the MSRB’s view, the facts and circumstances wherein a municipal advisor would be able to fully comply with Rule G-42, including all obligations as a fiduciary to each municipal entity, are not likely to occur frequently,” the MSRB said.