MSRB proposal would bar dealers from adviser-to-underwriter switch for municipal issues

By Angela McDaniels

Tacoma, Wash., Aug. 17 - The Municipal Securities Rulemaking Board is requesting comments on a rule change that would prohibit any broker, dealer or municipal securities dealer acting as financial adviser to an issuer in connection with its new issue of municipal securities from also acting as the underwriter for that issue.

The Securities and Exchange Commission requested the change, according to an MSRB notice.

MSRB Rule G-23 in its current form allows the financial adviser for an issue to become an underwriter subject to certain requirements. For example, the dealer must disclose in writing to the issuer that there may be a conflict of interest in changing from financial adviser to underwriter or agent for the securities, and the issuer must expressly acknowledge in writing that it has received this disclosure.

The draft rule change would prohibit a dealer that acts as financial adviser to an issuer for a particular issue sold on either a negotiated or competitive bid basis from switching roles and underwriting the same issue. As a result, the provisions of Rule G-23 regarding disclosures, terminations and consents in connection with such a change in roles would be rendered unnecessary and eliminated.

The draft rule change provides a narrow exception for financings in which a dealer acting as financial adviser to an issuer places the entire issue with another governmental entity as part of a plan of financing by that entity for or on behalf of the issuer, such as in the case of a state bond bank financing or other governmental financing in which an issuer may issue a bond to such entity to evidence its debt under a loan program, but only so long as the dealer does not receive compensation for that placement and is not compensated as an underwriter in connection with any related transaction undertaken by the governmental entity.

The draft rule change preserves the ability of dealer financial advisers to purchase the new issue from the underwriters of the issue so long as this is not done to circumvent the prohibition on role switching.

In addition, the draft rule change would prohibit a financial adviser from acting as remarketing agent for the issue on which it advised. However, the dealer could later become the successor remarketing agent for that issue if the financial advisery relationship with the issuer has been terminated for at least one year.

Comments should be directed to Leslie Carey, associate general counsel, or Ronald W. Smith, senior legal associate, no later than Sept. 30.

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