A municipal advisor’s role is to provide services relating to the structure and sale of securities and to ultimately assist issuers in trying to obtain the lowest financing cost.
In 2014, the relationships among the underwriter, the municipal advisor and the issuer were codified by the Securities and Exchange Commission (“SEC”) as part of the rulemaking required by the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Act”) passed in 2010 in the wake of the Financial Crisis. In particular, the SEC and the Municipal Securities Rulemaking Board (“MSRB”) regulated when and what advice can given by an underwriter. Further, the MSRB also put in place the Series 50 and 54 licenses that specified the responsibilities of the Municipal Advisor.
The various rules and regulations governing Municipal Advisors are designed to help ensure that the advice issuers are receiving is being given by a firm with a fiduciary duty. An underwriter does not have a fiduciary duty to issuers and is not required to act in the issuer’s best interest without regard to its own financial or other interests. The MSRB requires underwriters to disclose that they are not required to act in an issuer’s best interest. Telling issuers that they do not need a municipal advisor is a violation of MSRB regulations.
In only limited circumstances can the underwriter provide advice on municipal securities. There is an allowance for an underwriter to provide advice in connection with a request for proposals for a particular financing. This allowance cannot be expanded into overall advice for such work as an overall rating strategy. An underwriter may only provide advice relating to a specific transaction for which it is hired. An underwriter may provide more expansive advice if there is a Municipal Advisor. While the underwriter has limited roles regarding providing advice, it has a central role in providing information about the market, interest rates and most importantly identifying specific investors.
Without a properly registered and licensed municipal advisor being engaged, it is also against SEC regulations for “market participants” – including informal advisors, consultants or other professionals – to provide advice about a municipal securities issue; once a municipal advisor is engaged to advise the issuer or borrower, any market participant is free to provide advice.
Commercial banks that provide direct loans or purchase securities directly are not acting as fiduciaries to issuers of municipal bonds. There is no requirement that they act in the interest of the issuer, and it is not incumbent on them to offer the best possible rate, price or terms.