Recent congressional hearings and their aftermath have led to increased and evolved discussion of financial reform and the regulation of practitioners in the field of municipal securities. The current focal point, and long-time elephant in the room, is fiduciary duty and how it should or should not apply to various participants in the municipal securities process.

Vigorous discussion on this important topic is healthy and has tended to be thoughtful and issue-oriented. With the Senate debating the appropriateness and degree of fiduciary duty of various muni market participants, the National Association of Independent Public Financial Advisors wishes to provide its perspective on several limited yet critical points.

Recent descriptions of the relationships in municipal securities transactions have confirmed that a natural business conflict exists between the underwriter of a municipal security and the issuer of the same security. Transactions between an issuer and the underwriter are being described as arm’s length, thus resulting in a standard of care substantially different than fiduciary duty.

Underwriters owe fiduciary duty not to the issuers of munis but to investors who purchase the securities and whose interests obviously differ significantly from those of issuers. The growing practice of underwriters representing more than one party in complex financial structures has blurred the boundaries of conflict and calls to mind an observation by Wall Street analyst Jack Grubman: “What used to be conflict is now a synergy.”

Municipalities and their constituent tax- and rate-payers have been harmed by this limited-duty perspective. Within this framework, the underwriter’s obligation to other participants has superseded the interests of issuers. The transaction obligation to investors has usurped public trust. NAIPFA believes that the highest standard of care is due municipal issuers.

NAIPFA also believes that any and all parties acting in a role traditionally known as financial adviser should have a fiduciary duty to their issuer clients. This is critical for the protection of tax- and rate-payers, issuers and, in the long run, investors.

The financial adviser, whether an independent or a representative of a broker-dealer, must be conflict-free and demonstrate undivided loyalty to its issuer client. The growing complexity of municipal finance requires accessibility of all issuers to appropriate and unconflicted advice.

Without prescription of fiduciary duty to all municipal financial advisers to their issuer clients, current regulatory efforts are hollow and would likely achieve no positive outcome. Muni FAs working for, controlled by or affiliated with a banking firm/broker-dealer should be barred from being initially hired by an issuer as an FA and subsequently be allowed to resign and underwrite and purchase the bonds without an extended cooling-off period.

It is critical that Congress pass legislation that prescribes a fiduciary duty in municipal securities transactions for financial advisers, whether an independent or a representative of a broker-dealer. Issuers must know that they can always trust the advice of their financial adviser. This straight, common-sense approach must be part of regulatory reform.


Steve Apfelbacher, CIPFA, is a financial adviser at Ehlers & Associates Inc. and president of the National Association of Independent Public Finance Advisors