In September the Securities and Exchange Commission finalized the long awaited municipal advisor definition. The Government Finance Officers Association supports regulating those professionals who provide “advice” to state and local governments and believes that the Dodd Frank Act and this rule will help to ensure that those who provide advice have a fiduciary duty to their government clients. The SEC’s final Rule aims to set a clear line between advice and the underwriting of bonds. Differentiating these two practices is key to the implementation of the municipal advisor rule and will encourage best practices by issuers and other professionals, resulting in a stronger municipal market.
There is no doubt that for decades, investment bankers acting as underwriters have contributed to essential infrastructure financings. They have brokered hundreds of thousands of deals that provide everything from a new public safety facility in Sedgwick County, Kansas, to a Resource Recovery Facility here in Montgomery County, Maryland. However, it is equally undeniable that the financial interests of investment banks and issuers are not aligned and that issuers need to look out for their own interests, either directly or with the assistance of qualified advisors who have to put the interests of their clients first.
I know that many governments are overwhelmed with a wide variety of financial responsibilities that limit their ability to fully engage in the day to day events of the municipal securities market. This is why GFOA’s Best Practices, Selecting Financial Advisors, Selecting Underwriters in a Negotiated Sale, and Selecting and Managing the Method of Sale for State and Local Government Bonds, recommend that governments hire a financial advisor for their transactions, unless they have sufficient in house expertise to understand all facets of the bond transaction.
Unfortunately, for many governments, critical financial advice about bond transactions has come from parties subject to varying and unclear contractual or regulatory duties (or none at all) and not all that advice has been in the best interest of or suitable for those governments.
The final Rule addresses and will help to rectify some of the market practices that however well intentioned, caused a blurring of the lines between underwriting and the fiduciary role of a professional advisor. It continues down an important path set in 2011 when the MSRB changed rule G-23 to stop the practice of role-switching that allowed a professional to serve as both the FA and underwriter on the same transaction.
The changes to Rule G-23 also set the stage for ensuring that the issuer knows up front whether the professional coming to the office seeks to be hired as an FA or an underwriter. The MSRB continued this theme in Rule G-17 by developing disclosure standards that the underwriter must provide to an issuer about its role in a transaction, its conflicts of interest, and that it does not have a fiduciary duty to the issuer.
The SEC MA Rule further advances the market down this path by defining this line and clarifying the separate roles of a financial advisor and underwriter.
There has been vocal opposition, primarily from the broker/dealer community that this Rule will stifle the ability to have important conversations and a flow of ideas between underwriters and issuers. I believe these concerns are exaggerated, and are unhelpful to having the market move forward with finding appropriate ways to adapt to the new Rule.
Unlike some of the rhetoric I’ve heard, conversations between underwriters and issuers may still occur after Jan. 13. It is the advice component of these conversations that will have to change, unless an issuer follows the GFOA’s Best Practices, and has a financial advisor on a transaction, an RFP out for underwriters, and/or has secured a professional as an underwriter.
While the goal and intent of the Rule are set, there are areas where interpretations from the SEC would be helpful. These include the need to give additional guidance about how the term “RFP” may be interpreted; how underwriters, issuers and other market participants can better understand the difference between advice and general information; how an issuer should disclose that it has a financial advisor; and when an underwriter may qualify as engaged with an issuer to trigger the underwriter exemption of the Rule.
There’s no doubt about it -— the MA Rule is an important step forward for ensuring that municipal capital markets truly serve the public interest. Many of the discussions currently being held in the market seem to blur the lines of the Rule, and what it does for this sector and issuers. We find the spirit and letter of the rule in line with the GFOA’s Best Practices that will help to ensure that our citizens receive the best deal possible for the financing of essential infrastructure that our taxpayers depend on and deserve.
Tim Firestine is chief administrative office of Montgomery County, Md., and president of the Government Finance Officers Association.