Notice regarding issuer selection of underwriters’ counsel

        In connection with the Board’s review of the underwriting process in 1997,1 the Board expressed concern, and sought comment from the municipal securities community, regarding the practice of certain issuers in selecting the counsel to be used by underwriters in the offering of the issuer’s bonds. The Board emphasized that underwriters must be free to select counsel in whom they have confidence and who do not have conflicting allegiances that may compromise, or appear to compromise, their capacity to carry out their responsibilities. This is especially true in light of the special role of underwriters’ counsel in assisting underwriters with their due diligence responsibilities and in reviewing with a critical eye the disclosure information provided by issuers.2

        Comments and information received by the Board suggest that problems do exist in this area, but rulemaking does not appear to be an appropriate solution at this time.3 The Board recognizes, for example, that issuers often have a legitimate interest in the selection of underwriters’ counsel.4 An issuer may fairly object to the use of counsel where the issuer’s own experience has called into question the counsel’s conduct or competence. The issuer also may wish to promote the efficiencies gained by using counsel whose knowledge, location or prior experience will facilitate prompt and proper completion of the financing. It may encourage underwriters to consider the use of local firms or firms in which minorities and women undertake significant responsibilities. The fees of such counsel also are important since they are paid, directly or indirectly, by the issuer.5

        Ultimately, however, underwriters must be free to select their own counsel and to reject the imposition of counsel in circumstances where they lack the basis for placing their complete confidence in such counsel. In particular, underwriters should have a basis for concluding that counsel has the requisite experience and expertise in securities law matters, the resources to assist the underwriters in meeting their due diligence responsibilities and the independence to perform the critical role of such counsel in the disclosure process.6

        It is also important to remember the "counseling" role to be played by underwriters’ counsel. Underwriters often need to take their counsel into their confidence on difficult and sensitive questions. Underwriters and therefore their counsel are "adverse" to issuers on a variety of matters, including many related to investor protection. These include decisions regarding bond structure, security provisions, operating and reporting covenants and, above all, disclosure, especially in matters involving negative facts and circumstances. The potential for conflict of interest is inherent in the issuer’s selection of the counsel whose particular responsibilities may include advocating decisions that the issuer may oppose or may perceive as not in its best interest.

        The Board is aware of situations in which underwriters have retained counsel designated by an issuer where the underwriters lacked an adequate basis for placing their confidence in such counsel. The Board recognizes that pressure by issuers may be subtle and indirect and difficult to resist. It is also aware of situations where underwriters have had so little confidence in the designated underwriters’ counsel that they have privately consulted other lawyers regarding disclosure and other issues. While there may be circumstances where underwriters may wish to consult counsel other than their designated counsel for a transaction, such conduct suggests that the practices of some issuers have resulted in the selection of underwriters’ counsel who are not in fact fulfilling all of the obligations inherent in such role.

        In its March 1994 interpretive release on municipal disclosure,7 the Securities and Exchange Commission indicated that information "concerning financial and business relationships and arrangements among the parties involved in the issuance of municipal securities may be critical to an evaluation of an offering." Such information, the Commission pointed out, could indicate the "existence of actual or potential conflicts of interest" and "may reflect upon the qualifications, level of diligence and disinterestedness of financial advisors, underwriters, experts and other participants in an offering." The Commission listed selection of counsel as one of the issues to be considered and noted that investors reasonably expect participants in municipal securities offerings to follow appropriate standards and procedures. Any circumstances that might suggest that underwriters’ counsel – or any other party – might not perform its role in the expected and appropriate manner could be material.

        The Board reminds both issuers and underwriters that investors may be harmed in a variety of ways in any offering process that does not properly utilize the review, guidance and counseling of an independent, competent and appropriately critical underwriters’ counsel. The results may compromise the integrity of the securities market and undermine the ability of both issuers and underwriters to rely on the expertise and guidance of underwriters’ counsel.

        The Board urges both issuers and underwriters to ensure that underwriters select and utilize counsel in a manner that promotes investor protection.

September 3, 1998


1. See "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

2.See National Association of Bond Lawyers and Section of Urban, State and Local Government Law, American Bar Association, Disclosure Roles of Counsel in State and Local Government Securities Offerings (2d ed. 1994) ("Disclosure Roles of Counsel") at 17-18.

3.Rulemaking in this area would be problematic because of the difficulty of determining what influence was brought to bear, whether it was improper and whether the underwriters in fact had the appropriate basis for accepting the suggested counsel and placing their confidence in such counsel’s advice and service.

4.See Government Finance Officers Association’s ("GFOA") draft Recommended Practice – Issuer’s Role in Selection of Underwriter’s Counsel (1998) ("Draft GFOA Recommended Practice"). The Draft GFOA Recommended Practice is subject to final approval by the GFOA’s board. See also Disclosure Roles of Counsel at 18-20.

5. Fees are a legitimate concern for both issuers and underwriters and may be subject to controls, caps and other agreements. The Board, however, is concerned that in some circumstances limits imposed directly by an issuer may either prevent the selection of appropriate underwriters’ counsel or pressure such counsel to limit their role. Underwriters, issuers and those who advise them (including financial advisors and in some cases bond counsel) should recognize the potential risks of fee arrangements that may undermine investor protection.

6. The Draft GFOA Recommended Practice recognizes that the underwriter has a reasonable need to rely on the competence and confidential advice of its counsel and that the potential for conflicts of interest exists if an issuer designates a firm to serve as underwriters’ counsel. See also Disclosure Roles of Counsel at 19.

7.Securities Act Release No. 7049, Exchange Act Release No. 33741, Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others (March 9, 1994), 59 FR 12748 (March 17, 1994).



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