Switching Roles from FA to Underwriter Prohibited
Weekly Market Brief
For the seven-day period ended December 6, the Bond Buyer's 20-Bond
Index decreased by 10 basis points from 4.22% to 4.12%. For the same period,
the yield on 10-year Treasury Bonds decreased to 3.87%.
This week's economic releases included the ISM Non-Manufacturing Index
which increased to 60.7 in November from 60.3 in October and the ISM
Manufacturing Index increased to 59.3 in November from 57.7 in October.
(An ISM reading above 50 signals expansion.) Also released was the
Employment Situation Report which indicated that 155,000 jobs were
Rate Graphs. [12/09/2018]
MSRB Releases Results of MA Testing (Series 50)
To help insure that Municipal Advisors are qualified to provide
services, the Municipal Securities Rulemaking Board implemented rule
that all Municipal Advisor must pass the Series 50 Test on and after
October 13, 2017. As of October 13, 505 firms were registered as
municipal advisor with one or more individuals that has passed that
test. 184 firms are sole practitioners. 50 firms had no qualified
Series 50 representatives. 40 firms have elected not to continue
engaging in Municipal Advisor Activities.
BAB Subsidy Cut for Fiscal Year 2019
For the United State's fiscal year beginning October 1, 2018 and ending September 30,
2019, the subsidy payments to issuers of Build America Bonds will be cut
by 6.2% The cut is under the federal government's sequestration
cuts that began in March 2013. The BAB subsidy in the 2018 fiscal
year was reduced by 6.6%, for the 2017 fiscal
year was reduced by 6.9%, for the 2016 fiscal
year was reduced by 6.8%, for the 2015 fiscal
year was reduced by 7.3% and for the 2014 fiscal year was reduced by 7.2%.
Moody's Is Now On EMMA
As of June 1, 2015 Moody's Investors Service began making
its municipal ratings available on the Municipal Securities Rulemaking
Board's Electronic Municipal Market Access (EMMA) website. Prior
to June 1, Standard & Poor's, Fitch and Kroll already made their
municipal ratings available to EMMA. With this change, it is now
easier for issuers as well as investors to monitor rating changes.
Bond Insurers Receive Rating Upgrades
March 18, 2014 Standard & Poor's raised the ratings of certain bond
insurers as follows: MBIA's rating to A- from BBB, National Public
Finance Guarantee Corp. to AA- from A (MBIA's main unit for insuring
municipal bonds), Assured Guaranty to AA from AA- and Municipal
Assurance Corp. (a unit of Assured Guaranty) to AA from AA-. As a result
of the change Assured will now have the same rating as Build American
Mutual, the highest rated insurer. According to "The Bond Buyer" in 2013
only 3.6% of all new municipal bonds were insured.
May 21, 2014 Moody's raised the rating of National Public
Finance Guarantee Corp. to A3 from Baa (MBIA's main unit for insuring
Missouri State Auditor Finds Negotiated Sales Costly
The Missouri State Auditor, Thomas A. Schweich, released a study titled
"General Obligation Bond Sales Practices." The study was an
analysis of 538 general obligation bonds
issued by Missouri local governments during a 4 year period ending
December 31. 2011.
The study found that competitive
sales result in 23.5 to 24.2 lower basis points than negotiated sales.
The issuers included in the study will pay approximately $43 million in
added interest as a result of selling their bonds with a negotiated
rather than competitive sale. The Auditor's office also found that
"based on interviews with local government finance officials, there is a
clear lack of understanding of the bond issuance process." In
addition to recommending the use of competitive bidding for most General
Obligation bonds, the Auditor also recommended that local governments
"obtain the services of a financial advisor who is independent from the
underwriting function, regardless of the method of sale used."
See the Full Report.
SEC Adopts Municipal
In July 2010, Congress
passed the Dodd-Frank Act, which requires the Securities and Exchange
Commission (the "SEC") to adopt a rule requiring municipal advisors to
register with the SEC. A temporary rule was adopted pending the SEC's establishment of the registration process and
defining who is a "municipal advisor." On September 18,
2013, the SEC adopted the final rule which will become effective on July
1, 2014. The complete text of the rule is 777
pages and is available at
three page summary is available. The
Government Finance Officers Association has prepared a very good summary
Issue Brief: SEC Municipal Advisor Rule"
Howard to Speak at
Missouri GFOA's Spring Conference
On May 1, 2014, Joy A.
Howard will be speaking and moderating a session on the new Municipal
Advisor Rule and how it affects municipal entities at the Government
Finance Officers Association of Missouri's Spring Conference. The
conference will be held in Lake Ozark and additional details regarding
the conference are available at
SEC Charges School District and Underwriter
with Disclosure Related Fraud
On July 29, 2013, the
Securities and Exchange Commission charged a school district in Indiana
and its municipal bond underwriter with falsely stating to bond
investors that the school district had been properly providing annual
financial information and notices required as part of its prior bond
offerings. An SEC investigation revealed that in an official statement
prepared in 2007, the school district stated that it was in compliance
with its disclosure obligations related to prior bond offerings.
However, the district had not submitted any of the required annual
reports or notices for a 2005 bond offering, and the underwriter did not
conduct adequate due diligence to detect the false statement in the
course of the 2007 offering. In its Press release the SEC noted that
"this is the first time the SEC has charged a municipal issuer with
falsely claiming in a bond offering’s official statement that it was
fully compliant with the annual disclosure obligations it agreed to in
prior offerings, and an underwriter and its principal for not doing the
necessary research to attest to the truthfulness of that claim."
See the entire
Underwriters' Role to Be Disclosed
Under MSRB Rule G-17
Effective August 2, 2012 underwriters must make significant
disclosures regarding their role and certain other matters. Among
the disclosures, that must be made in writing, are the following:
the underwriter must deal fairly at all times with both municipal issuers
the underwriter’s primary
role is to purchase securities with a view to
distribution in an arm’s-length commercial transaction with
the issuer and
it has financial and other interests that differ from those
of the issuer;
unlike a municipal
advisor, the underwriter does not have a fiduciary
duty to the issuer under the federal securities laws and is
by federal law to act in the best interest of the issuer
without regard to
the underwriter’s own financial or other interests; and,
the underwriter has a duty
to purchase securities from the issuer at a fair and
reasonable price, but must balance that duty with its duty to
securities to investors at prices that are fair and
In addition, the amendment states that an underwriter must
not recommend that the issuer not retain a municipal advisor.
include numerous other disclosures relating to (i) conflicts of
interest, (ii) compensation arrangements, and (iii) material
aspects of a transaction including known risks to the issuer.
GAO's Study on Municipal Bond Disclosure Released
On July 19, 2012, the United
States Government Accountability Office released its study "Options for
Improving Continuing Disclosure." The study was mandated by the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
The report addresses (1) the extent to which information currently
provided on municipal securities is useful for investors and the extent
to which existing regulations reflect principles for effective
disclosure, and (2) options for improving the information issuers
disclose to investors of municipal securities. To conduct this work, GAO
reviewed disclosure rules and compared them with principles for
effective disclosure cited by SEC and the International Organization of
Securities Commissions, surveyed selected experts and market
participants, and interviewed issuers. The study is available at
SEC's Study on Municipal Bonds Released
On July 31, 2012 the
Securities and Exchange Commission (SEC's) released its study on the municipal
securities market. The report includes the SEC's analysis of disclosure and
price transparency and discusses possible legislative changes to improve
disclosure. The report recommends that Congress
consider authorizing the SEC to set baseline disclosure standards and
require municipal issuers to have audited financial statements.
The report also outlined other potential legislative changes
that the SEC may recommend to Congress to help improve disclosures and practices in the municipal
securities market including:
- Eliminating the availability of
Securities Act and Exchange Act exemptions for conduit borrowers who
are not municipal entities.
- Authorizing the Commission to
establish the form and content of financial statements for municipal
issuers who issue municipal securities, and to recognize a
designated private-sector body as the standard setter for generally
accepted for federal securities law purposes.
- Providing a safe harbor from private
liability for forward-looking statements of repeat municipal issuers
that satisfy certain conditions.
- Permitting the Internal Revenue
Service to share information with the SEC that it obtains from
returns, audits, and examinations related to municipal securities
offerings, particularly in instances of suspected securities fraud.
- Providing a mechanism, through
trustees or other entities, to enforce compliance with continuing
disclosure agreements and other obligations of municipal issuers to
protect municipal securities bondholders.
The study is available at
BAM - New Municipal Bond
Build America Mutual
Assurance Company ("BAM") was launched on July 23, 2012. The
company was assigned a AA/Stable rating by Standard& Poor's Rating
Services. BAM will insure only essential public purpose issues and
will be the industry's first mutual bond insurer. To obtain insurance,
BAM will allocate an amount equal to 1% of the par amount insured as a
Member Surplus Contribution, giving the issuer the right to vote as a
member of BAM and to receive dividends. An additional 10-year upfront
risk premium will be changed and annual installment premiums if the
bonds extend beyond 10 years.
On January 17, 2013,
Moody's downgraded Assured Guaranty Municipal Corp. to A2 from Aa3 and
Assured Guaranty Corp. to A3 from Aa3. Following the downgrade, Assured
Guaranty announced that is will establish a new insurer this year that will
not be rated by Moody's.
MAC - New Municipal Bond
As promised in January,
and as noted above, Assured Guaranty established a new municipal bond insurer.
The launch of the new company known as Municipal Assurance Corp. (MAC), was
announced today. MAC will insure only select categories of U.S.
municipal bonds and opens for business with $1.5 billion of claims-paying
resources, financial strength ratings of AA+ (stable outlook) from Kroll
Bond Rating Agency and AA- (stable outlook) from Standard & Poor’s Rating
Services, and insurance licenses in 37 states and the District of
Columbia. MAC has been capitalized to approximately $800 million through
cash and securities contributed by Assured Guaranty Municipal Corp. (AGM)
and Assured Guaranty Corp. (AGC), which own MAC jointly via a holding
company. Additional information is available and
Auditor Reprimands School District for Failure to Engage Independent
Financial Advisor and for Absence of Competitive Bidding
On March 2, the Missouri
State Auditor released its finding of an audit of the School District of
Springfield, R-XII. The Auditor's report notes that the District
sold bonds and certificates through a negotiated sale, rather than a
competitive sale and has used the same underwriter since 1991. In
addition, the District's bond underwriter acts in the dual capacity of
financial advisor and underwriter which creates a conflict of interest.
"Additionally, the lack of independent financial advice could result in
the School Board not always being adequately informed of bond issuance
options or being able to adequately evaluate bond proposals." The
audit also indicated that while Missouri law does not require
competitive sales, competitive sales may result in lower interest costs.
The audit was undertaken by the Missouri
State Auditor in response to a petition signed by more than 5,000
residents of the District.
Switching Roles from Financial Advisor to
Effective November 27, 2011 broker-dealers
are prohibited from serving
as a financial advisor and then switching to an underwriter. In
addition, underwriters are required to disclose in writing that they
serve solely in an arms length commercial transaction rather than in a
fiduciary capacity (a requirement for financial advisors under the Act).
Rule G-23 of the Municipal
Securities Rulemaking Board ("MSRB") was adopted in 1977 and prohibited
broker-dealers (underwriters) from serving as both underwriter and
financial advisor for the same transaction. However, Rule G-23 permitted
a broker-dealer serving as a financial advisor to subsequently serve as
underwriter with issuer's consent.
Additional information regarding the current Rule G-23 and its
background is available on this site at
Advisors Serve in the Issuers' Best Interest; Underwriters Don't
In its newly released report for issuers "Six Things to Know When
Issuing Municipal Bonds," the Municipal Securities Rulemaking Board
("MSRB") states that "municipal advisors are required by federal law to
act in the best interests of their state and local government clients
without regard to their own financial or other interests. This is called
a “fiduciary duty.” Municipal advisors must not let any financial
relationships or interests they have prevent them from acting in the
best interests of state or local government issuers that want to raise
money at the lowest possible cost. Underwriters do not have a fiduciary
duty to their state or local government issuer clients, but they must
act fairly and not deceive state or local government issuers." The
report is one of several reports released by the MSRB as part of it new
State and Local Government Toolkit.
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Phone (314) 423-2122
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