ALEXANDRIA, Va. — Non-dealer municipal advisors contend some muni bond underwriters are engaging in financial advisory activities with an issuer, despite a Municipal Securities Rulemaking Board rule prohibiting them from serving in both roles in the same transaction.

The MAs cited, as an example, a copy of a 2012 investment banking contract in which a dealer agreed to underwrite an issuer’s bonds and to provide services that are similar to those traditionally provided by an MA. The advisors would not identify the parties involved, but provided The Bond Buyer with a redacted copy of the contract, called an “Investment Banking Services Engagement Agreement.”

Larry Kidwell, president of Brentwood, Tenn.-based MA firm Kidwell & Co., said in an interview Friday that even though the MSRB amended its Rule G-23 in 2011 to prohibit dealers acting as financial advisors and underwriters on the same deal, this kind of role-sharing continues.

Before the rule change, G-23 allowed a dealer acting as an FA to resign and switch roles if it disclosed potential conflicts of interest to the issuer and obtained the issuer’s consent.

“We continue to see instances where banks and broker dealers seem to disregard G-23 and G-17 [on fair dealing] by seeking to serve in multiple transaction capacities by engaging in actions Dodd-Frank specifically intended to eliminate,” said Kidwell, a board member of the National Association of Independent Public Finance Advisors. He was in Alexandria for NAIPFA’s annual meeting but was not speaking on behalf of the group.

But Michael Nicholas, chief executive officer of Bond Dealers of America, said if any firm is violating G-23, it is an isolated incident and stressed that the Securities and Exchange Commission needs to finalize its definition of an municipal advisor, so it is clear when firms are MAs.

The redacted agreement stated a city would “retain the professional services of [a firm] in the capacity of investment banker related to underwriting services.” The size of the bond transaction and its purpose were blacked out.

The document also said the investment banker would provide the city with a host of “consulting services,” and that the city would retain the firm as an “investment banker in matters relating to capital improvement requirements.”

They included reviewing the city’s financial operations and economic trends related to capital requirements, developing financial strategies and attending meetings with the City Council and project team.

Nathan Howard, an attorney with Kodner Watkins & Kloecker LLC, who works with NAIPFA, said some dealers appear to be avoiding using the term “municipal advisor” in contracts, and instead call themselves “consultants,” to avoid the G-23 prohibition.

The non-dealer MAs said some banks that are not registered as MAs are providing advisory-type services to muni issuers. They said, for instance, that some issuers have received phone calls from staff at regional banks asking to them to discuss their finances. These banks have then recommended complex muni products involving derivatives based on those discussions, they said.

“The problem is that even with [the] Dodd-Frank Act and subsequent changes to MSRB rules, we continue to witness disturbing and ongoing instances where banking and broker-dealer institutions present themselves to issuers as something more than just underwriters or bankers,” Kidwell said.

“The SEC is very familiar with the problems associated with role-switching by municipal market participants,” he said.

Nicholas said role-switching is clearly prohibited by G-23 and that any firm providing both advisory and underwriting services on the same deal would violate the rule. But a single example of this “is not indicative of the marketplace,” he said.

Nicholas noted that bond dealers are heavily regulated, while non-dealer-affiliated MAs are not.

“It’s ironic that a completely unregulated sect of the marketplace is claiming that a regulated sect of the marketplace is violating rules,” he said.

Also, there remains lack of clarity from the SEC about when a firm is an municipal advisor, Nicholas said. That kind of controversy further illustrates the need for the SEC to define MAs and bring oversight to non-dealer-affiliated MAs, he said.

The SEC proposed an initial definition of an MA in interim registration rules in October 2010 and in final registration rules in December 2010, but hundreds of market participants criticized the definition as too broad. The SEC recently extended the proposed rules another year, until September 2013, and was criticized for the delay.

The SEC included the Dodd-Frank definition of MA in interim registration rules in September 2010 and tweaked it in December 2010, but market participants criticized it as too broad. The SEC recently extended the proposed rules until September 2013 and was criticized for the delay.

BDA and NAIPFA sparred in recent weeks over a House-passed bill that would narrow the muni advisor definition, to those who are “engaged for compensation” to provide municipal advice and exempt underwriters, bankers and swap dealers, and those who provide advice related to those activities, from being MAs.

Dealers generally support the bill, but non-dealer municipal advisors and public advocacy groups claim it has too many loopholes.

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