by Steve Apfelbacher, Senior Financial Advisor/President
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Bond underwriter firms buy and sell municipal bonds. Some bond underwriter firms also act as financial advisors to municipal issuers. While serving as the municipality's trusted advisor for a debt issue, the bond underwriter firm can, currently, resign in the middle of the debt issue process, to buy the municipality's bonds. This role switching, first being hired by the municipality as their financial advisor and then switching roles to buy the bonds on the same debt issuance, has been allowed under Rule G-23 by the Municipal Securities Rulemaking Board (MSRB) and Securities Exchange Commission (SEC). The ability of bond underwriters to switch roles has been subject to much debate for a number of years.
Organizations like the Government Finance Officers Association (GFOA) have recommended that due to inherent conflicts of interest (Municipalities want the lowest interest rate and the bond purchaser wants the highest interest rate), the bond underwriter firm acting as a financial advisor for an issuer should not to be allowed to resign and serve as underwriter for the debt offering being considered. The financial advisor, once hired, should work on the municipality's behalf until the financing is complete. Resigning leaves the municipality without skilled help to get the best interest rate and terms for the debt offering.
Effective November 27, 2011, bond underwriter firms will no longer be allowed to resign and serve as underwriter for the debt offering being undertaken. Ehlers applauds the MSRB and the SEC for changing Rule G-23. When his rule goes into effect, municipalities will be able to rely on the advice of their financial advisor without fear that their advisor will resign to buy their bonds. Municipalities, however, will need to decide upfront if their interests are best served using a financial advisor or underwriter to meet their debt needs.
Ehlers is an independent financial advisor to governmental debt issuers. One of our advisor services is to help governmental entities issue their debt. When hired to advise on debt issuance, we advocate the municipality's best interests throughout the entire debt process and have never switched roles.
To read more about G-23, click here.