While Securities and Exchange Commission Chairman Paul Atkins has said municipal issuer protection "is, in essence, taxpayer protection," the realities some smaller, infrequent issuers face can make regulators' job of protecting them challenging.
Atkins' comment, made during the 2026 Joint Compliance Outreach Program in January, was referenced by Dave Sanchez, director of the SEC's Office of Municipal Securities, during a JCOP session on pricing. Sanchez during his remarks also noted that the SEC's Division of Examinations has continued to identify pricing and method of sale as examination priorities in relation to MAs.
However, many smaller, less frequent issuers don't use a municipal advisor when accessing the new issue market. Often, such issuers, staffed by professionals with many other responsibilities besides a bond deal, have relied on the same underwriter and bond counsel for years. Small, infrequent issuers may decide – perhaps after being told so – that a municipal advisor is an unnecessary expense.
But that decision, some MAs say, often has the potential to cost such issuers more in the end.
"These folks all have plenty to do," Michael Sudsina, president and CEO of Ohio-based municipal advisory firm Sudsina & Associates, LLC, said of such issuers. "And when you throw a bond issue at them, that's just one more thing they have to do."
Unlike some larger issuers, small, infrequent issuers lack the staff expertise that can help them do well in a bond sale, Sudsina said. Smaller issuers "need somebody on their side of the table protecting their interests no matter how friendly the banker is," he said, noting that, unlike municipal advisors, underwriters don't have a fiduciary duty to their issuer clients.
"They're totally more vulnerable," Sudsina said of smaller issuers, adding that a bond issue "is something one of those professionals, one of those people in that seat, may do once in their career."
Underwriters aren't allowed to discourage issuers from using a municipal advisor, he noted, referencing information contained in a Municipal Securities Rulemaking Board
"Bottom line is you know the banker or others will say an MA is a cost you don't need to incur, especially with these infrequent issuers," he said.
For a banker, not having an MA on a deal means "nobody's looking over their shoulder," Sudsina said.
However, once a financing team that includes bond counsel, a banker and an MA is assembled, "we all typically do work well together to ensure the best possible financing result for the issuer," Sudsina said.
Leslie Norwood, a managing director, associate general counsel and head of municipal securities at the Securities Industry and Financial Markets Association, cited
Robert Lewis, a managing director at PMA Securities, LLC, a broker-dealer and municipal advisor headquartered in Naperville, Illinois, said while MAs can explain the value they bring to a financing, some small issuers may see the advisory fee as an additional cost and be skeptical of such an explanation when it comes directly from an MA, even if the explanation is supported by quantitative analysis.
"Independent analysis and reporting could help these issuers better understand the role and value of municipal advisory services, particularly in market segments that have not historically been served by MAs," Lewis said.
A 2024 PMA Securities
Though the article didn't identify the district, details in the case study – including a screenshot of an Electronic Municipal Market Access website image – make it clear the deal being described was the $9.5 million of general obligation school bonds, Series 2020, issued by Community Unit School District Number 185, McDonough County, Illinois.
The principal amount of the maturity PMA Securities analyzed was $1.64 million. The EMMA screenshot showed that the underwriter first sold the entire maturity to another broker-dealer at the list price. Just 25 minutes later, the second broker-dealer flipped the full amount of those bonds to an investor for a higher price.
"The impact to the school district is that the use of the second broker-dealer to find the end investor for this maturity may have cost the school district 1.706% of the par amount, or $27,978," the PMA Securities article said.
The underwriter used the same approach for all the other maturities of the bond issue, which, according to PMA Securities' analysis, cost the school district more than $106,000 in aggregate. That cost was on top of the "excessively high," underwriter's compensation of nearly $238,000 paid to the original underwriter, the article said.
While a 2024 article about a 2020 deal might seem like old news, it wasn't to Patrick M. Twomey, superintendent of the school district, also known as Macomb Community Unit School District #185, who only learned about the article last month.
Also last month, Twomey learned for the first time that the underwriter the district used on its deal, First Midstate Inc., had settled an SEC administrative proceeding concerning alleged activity said to have occurred prior to his district's January 2020 deal.
The matter involved "unfair conduct" by FMI "in connection with underwriting municipal bonds for municipal issuers," a December 2020 SEC order said. FMI and its owner consented to the entry of the order without admitting or denying the SEC's findings.
"You trust these people so much," Twomey said of FMI, "and to now know that … they were charged with this kind of practice and settled … is really disturbing."
The SEC found that between June 1, 2014 and Oct. 1, 2018, FMI and Paul D. Brown, its owner and president, represented on FMI's website and in other communications "that FMI had an extensive customer list that would allow it to sell the bonds to investors at competitive interest rates," according to the order.
"In fact, FMI had a very limited customer base and its regular practice was to sell many of the offerings it underwrote to other broker-dealers, not to investors," the SEC alleged in the order.
According to a Financial Industry Regulatory Authority BrokerCheck Report, FMI "is no longer registered with FINRA" and the brokerage firm ceased doing business on June 21, 2023.
"Why wouldn't the SEC contact somebody like us so we were aware … of what happened?" Twomey said.
While he knew FMI was no longer operating, "we had no closure with them," Twomey said of the firm, adding that the district and the firm had a "long-term positive relationship – or at least we thought it was a positive relationship."
Twomey's district, where he has served as superintendent for about 14 years, didn't use an MA on its 2020 deal.
"Quite frankly, it's hard for someone who's not in a rural area to get their head wrapped around this, but it's because A) you don't know you [need] one," he said.
Twomey, who was a superintendent for another school district previously, said that in his roughly 20 years as a school superintendent, he doesn't recall a municipal advisor ever contacting him or his district to offer municipal advisory services.
For rural district superintendents, a bond deal might be something that happens only a few times during their careers, Twomey said, adding that such superintendents already have a lot on their plates, including being in charge of the curriculum, the budget, day-to-day operations and transportation.
"And so particularly when it comes to the selling of bonds, you know there's … no superintendent who can honestly call themselves a bond expert or even a finance expert," he said.
For an MA, convincing a small government that it's worth, for example, paying $25,000 to hire a municipal advisor can be difficult,
"The reaction from these small governments is 'Oh my goodness, that's a lot of money,'" Erdman said.
However, while $25,000 might seem like a big number, if an MA can save an issuer a basis point or two on a medium-sized transaction that's going to be paid off over ten years, "that $25,000 could be offset, depending on the size and structure of the transaction," he said.
A municipal advisor can also provide issuers with recommendations regarding potential finance plans, according to Erdman.
"Rates were really low a few years ago and some investment bankers were recommending 'You should maybe do a one-, two- or three-year interim financing and then take that out later,'" he said, adding that such a plan could result in two transactions for a government rather than one and expose the government to refinancing and interest-rate risk."
He added that in "certain circumstances, interim financing may be an appropriate strategy."
Erdman noted the SEC's focus on pricing and the responsibility MAs have to ensure their issuer clients are protected when it comes to new issue pricing. However, he said that if an issuer "doesn't have a municipal advisor or sufficient in-house market expertise, it may lack an independent party focused on evaluating whether the bonds were fairly priced."
As for what can be done to protect smaller, less frequent issuers, Erdman said protecting them "requires a shared commitment to education from local officials, market participants, and industry organizations, particularly given the limited staff and market exposure of many infrequent issuers."
Erdman, who earlier in his career served as Wisconsin's capital finance director, said the Government Finance Officers Association offers best practices that less frequent issuers can use to educate themselves regarding the bond issuance process.
"Infrequent issuers may have limited familiarity with the distinct roles of underwriters, bond counsel, and municipal advisors, underscoring the value of education and established best practices," he said.
Asked whether there perhaps could be a regulatory solution that might help protect smaller, less frequent issuers, Erdman said regulatory fixes can have unintended consequences.
"I would hope this is something that we could work together and solve as an industry rather than …looking toward regulators," he said.
Emily Brock, director of the GFOA's Federal Liaison Center, highlighted some resources GFOA offers including its
"GFOA's number one priority is to make sure issuers of all sizes and frequencies understand their protections and their authorities throughout bond issuance,"
