Municipal advisors maintain a fiduciary duty to issuers

Municipal advisors to governmental issuers are required by law to serve as a fiduciary to their clients: the MA must put the client's interests above any other, including its own. A fiduciary duty is the highest standard of care under the law. MAs have a duty of loyalty and a duty of care. The duty of loyalty includes requiring the municipal advisor to deal honestly and in good faith with the municipal entity and to act in the municipal entity’s best interests without regard to financial or other interests of the municipal advisor. It requires a municipal advisor to make clear, written disclosure of all material conflicts of interest. The duty of care requires that a municipal advisor act competently and provide advice to the municipal entity after inquiry into reasonably feasible alternatives to the financings or products proposed.


profle2issuers without an ma are alone at the table

Municipal entities and their employees are excluded from the MA rule. Underwriters cannot provide both municipal advisory and underwriting services on the same same transaction and the underwriting exception only runs for the life of a specific transaction. Lawyers, accountants and consultants not registered as municipal advisors may not provide advice to the issuer on the structure, timing and terms of municipal securities or municipal financial products. Without a municipal advisor, an issuer is alone at the bargaining table.

Issuers using municipal advisors benefit from having an experienced advocate representing their needs in the structuring of transactions and the management of their debt. Municipal advisors are the only transaction professionals that can assist an issuer in the planning of a transaction from conceptual plan of finance to transaction execution to management of bond proceeds to the management of on-going post-issuance requirements.



Dealers operating under the underwriting exemption do not have a fiduciary duty to issuers

A broker-dealer firm operating under the underwriting exemption may provide advice to the issuer, but does not have a fiduciary duty. Working within the underwriting exemption, the broker-dealer is subject only to a fair-dealing standard: they may not engage in deceptive, dishonest or unfair practices. But the advice they provide does not have to be best interest of the issuer. The underwriter's primary job is to marry bonds for sale with investors willing to buy them. Unfortunately, the underwriter's two “masters” have diametrically opposing demands: the issuer wants to sell its bonds at the highest possible price, while the investor desires to purchase them at the lowest possible price.



Many underwriting firms (broker-dealers) are registered as municipal advisors. Broker-dealers may forego the opportunity to provide underwriting services and serve issuers as their municipal advisor. In that capacity, the broker-dealer firm is subject to the fiduciary duty and the host of other regulatory duties imposed on MAs.

But, the underwriting firm is never truly independent. Because the firm relies on income from its underwriting activities, as well as its MA work, its ability to provide truly independent advice is tainted by its need to protect its underwriting business. In a negotiated underwriting, MAs use comparable sales in the market as a basis for negotiation of the issuer's coupons, yields and call provisions with the underwriter. If the issuer's MA firm is also providing underwriting services on one or more of those comparable sales, it is impossible to know whether the underwriter's advice on structuring considerations will be influenced but its underwriting activities.

Only a firm focused solely providing advice to its clients is truly independent.



One frequent complaint about the MA rules from issuers that have not historically used financial advisors is that adding an MA simply adds to the costs of issuance for a transaction. While MAs are often compensated from bond proceeds, not using an MA is not free. In most transactions of any size, the quality of execution (the coupons and yields on the bonds) is a much more important factor for the issuer's effective cost of borrowing than the MA's fee.

In a 2010 paper referenced in the SEC final rule, researchers Arthur Allen and Donna Dudney described their review of more than 58,000 new municipal bond issues over an 18 year period. They found that higher-quality financial advisors were associated with a statistically significant reduction (improvement) in new issue yields. They found further that the effect was most pronounced on negotiated issues and on revenue bond credits. A reduction in yields of only 0.05% from a $10 million (par) issue with a true interest cost of 5% structured to produce level debt would save the issuer nearly $73,000 over the life of the bonds.

An independent MA can add additional value to a transaction in ways that are more difficult to measure:

• an MA often has access to tools and resources for use in structuring transactions and negotiations with bond underwriters that issuers typically do not because of the tools' cost and complexity

• an MA often has significant experience working with rating agencies

• an MA typically reviews legal and bond documents on a regular basis and works with counsel to ensure transactions are documented accurately and consistent with the issuer's expectations

• an MA often advises on dozens of transactions each year, a significantly broader exposure to municipal market conditions than even the largest issuer

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