"Proposed rule G-23 addresses certain aspects of the conduct of a
municipal securities professional acting as a financial advisor or
consultant to a state or local governmental unit. As a financial advisor,
the municipal securities professional acts in a fiduciary capacity as
agent for the governmental unit, assisting it in determining its debt
structure, determining when and under what circumstances to market its
securities, and preparing or assisting in the preparation of documents to
be used in connection with the sale of its securities......
The role and interests of a securities professional acting as financial
advisor to a governmental unit are significantly different from the role
and interests of a securities professional acting as an underwriter or as
a purchaser in a private placement. For example, as agent for the issuer,
a financial advisor would normally seek to achieve the lowest possible
interest cost for the issuer, while an underwriter, acting as principal
for its own account, would normally want to establish yields which make
the securities attractive for resale to others. Other marketing features,
important from an underwriting perspective, may conflict with an
independent determination of the same matters from the perspective of the
issuer. If the underwriter has customers for large amounts of the
securities to be issued, the underwriter may be influenced to advocate a
larger issue than might otherwise be in the best interests of the issuer;
conversely, an underwriter might advocate a smaller issue if its own
customers' interest is not strong. Maturities, redemption provisions and
remedy covenants are other facets of an issue with respect to which a
municipal securities professional may be influenced to give different
advice, depending on whether the securities professional is acting as an
underwriter or private placement purchaser of the securities, or solely as
the issuer's agent. The size of the underwriting spread may also be
affected by the arm's-length character of the relationship between the
issuer and its agents, on the one hand, and the underwriter, on the other.
The Board believes that this prima facie conflict is
mitigated in competitive bid situations, where the existence of
competition among underwriters for award of the securities tends to
introduce an arm's-length element into the establishment of the terms of
the issue and the underwriting. In these situations, the Board believes
that ordinary principles of agency law should apply. Thus, in the Board's
view it is appropriate to require disclosure of the financial advisor's
intent to bid on the securities in a competitive sale, and to require the
prospective underwriter to obtain the consent of the issuer to the dual
role.
In contrast, in a negotiated sale situation, the element of competition
among prospective purchasers is absent, and the financial advisor who also
acts as underwriter or purchaser in a private placement does so with a
substantial conflict of interest. The Board believes that the existence of
this conflict is contrary to the fiduciary obligations of the municipal
securities professional as a financial advisor to the issuer and is not
consistent with the public interest."
For the complete text of rule, as
currently in effect, see
Rule G-23
at the Municipal
Securities Rule Making Board's web site.
