An independent financial adviser has informed the Securities and Exchange Commission that an underwriter recently told a prospective bond issuer that it provided services similar to a financial adviser.

The notice comes as the Municipal Securities Rulemaking Board and the SEC are seeking to finalize changes to the MSRB’s existing Rule G-23 that allows underwriters to act as FAs provided they disclose conflicts of interest.

The changes would prohibit dealer FAs from switching roles and acting as underwriter on the same muni issue. The SEC’s comment period on the MSRB’s proposal ended Monday.

In a comment letter dated March 21, Steven Apfelbacher, president of Ehlers & Associates Inc. in Roseville, Minn., told the SEC that underwriters should not be able to provide the same advice as FAs.

His letter cited an underwriter’s recent presentation to a state school association, educating officials about the bond market and its various players.

The PowerPoint presentation said an FA helps the issuer implement a finance plan and determine the structure and terms of an issue while an underwriter purchases bond issues from issuers with the intent of reselling them to bondholders.

The presentation also said underwriters employ public finance professionals to “'work directly with bond issuers providing similar services to those offered by financial advisers.’”

In an interview, Apfelbacher declined to identify the underwriter who authored the presentation, saying he simply sought to give the SEC an example of actual ­conduct.

“I tried to be objective and say this is what’s going on,” he said. In his comment letter, he offered to provide the SEC with a copy of the presentation.

Groups representing issuers and independent FAs also urged the SEC to tighten the proposed Rule G-23 amendments, saying they fail to recognize distinct roles played by FAs and underwriters and their differing obligations to issuers.

In a comment letter dated March 21, the Government Finance Officers Association said it supported the proposed changes to Rule G-23, calling them “long overdue.” Still, the group said the rule should require underwriters in negotiated transactions to disclose they are not serving as the issuer’s financial adviser and have no duty to act in its best interests.

“Issuers need to clearly understand that their underwriter is not their financial adviser and that they are not discouraged from hiring a financial adviser because of a loophole in the proposed guidance that suggests the underwriter can perform both roles,” said Susan Gaffney, director of the GFOA’s federal liaison center.

Specifically, Gaffney’s letter said, when an issuer in a negotiated transaction is not represented by an FA, an underwriter can emerge as an issuer’s only source of financial advice and “de facto” FA, even though the underwriter has no obligation to put the issuer’s interests first.

“That’s what we’re very, very uncomfortable with,” said Eric Johansen, city treasurer of Portland, Ore. and chairman of the GFOA’s governmental debt management committee.

But when an issuer in a negotiated transaction is represented by a financial adviser, the GFOA does not harbor the same concerns.

In that scenario, an underwriter should be allowed to provide the issuer advice about the structure, timing and terms of the issue, Gaffney said.

Similarly, in competitive transactions, regardless of whether an issuer has hired an FA, Gaffney said broker-dealers should be allowed to discuss the structure, timing, terms and other similar matters about the issue without creating an FA relationship between the underwriter and the issuer.

The GFOA’s concerns stem from guidance issued by the MSRB for the first time in February, when the board released a second version of proposed Rule G-23 amendments and filed them with the SEC for approval.

In the guidance, which had not been subjected to the MSRB’s earlier round of public comments, the board said a dealer would not be considered an FA for purposes of the role-switching ban if it clearly identified itself as an underwriter from “the earliest stages of its relationship with the issuer.”

In its March 21 comment letter, the National Association of Independent Public Finance Advisers said the board’s proposed rule violates the intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“This MSRB proposal is at variance with the purpose of the act because the one party with potentially the most significant conflicts of interest — the underwriter — would still be permitted to give issuers advice with respect to the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such issues without a corresponding fiduciary duty,” said NAIPFA president Colette Irwin-Knott.

Dodd-Frank treats FAs as municipal advisers who are subject to the SEC’s proposed registration scheme, including the obligation to put clients’ interests ahead of their own. It exempts broker-dealers serving as underwriters from the muni-adviser definition and registration requirements.

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