The Board has filed an amendment to rule G-23, on activities of financial advisors.

 

On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") an amendment to rule G-23, on activities of financial advisors.⁽¹⁾ The amendment requires a financial advisor, prior to entering into a remarketing agreement for an issue on which it advised, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent. The proposed amendment will become effective upon approval by the SEC.

DISCUSSION

Rule G-23, on activities of financial advisors, establishes disclosure and other requirements for dealers that act as financial advisors to issuers of municipal securities. The rule is designed principally to minimize the prima facie conflict of interest that exists when a dealer acts as both financial advisor and underwriter with respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert the issuer to the potential conflict of interest that might lead the dealer to act in its own best interest as underwriter rather than the issuer's best interest.⁽²⁾

The Board recently was made aware that, in certain instances, some financial advisors also have acted as remarketing agents for issues on which they advised the issuer. In May 1997, the Board published a notice (the "Notice") that, among other things, proposed for comment draft amendments to rule G-23 concerning this issue.⁽³⁾ The draft amendment to rule G-23 would have required a dealer acting as both financial advisor and remarketing agent for an issue to meet the same disclosure and other requirements as a dealer acting as financial advisor and later negotiating the underwriting or acting as placement agent for the issue (which includes terminating the financial advisory relationship with regard to the issue and making certain disclosures regarding the potential conflict of interest). The concern was that there may be a potential conflict of interest for the financial advisor because its advice regarding the type of issue (i.e., variable rate) and the issue's timing and terms may be colored by the fees it expects to receive as remarketing agent.

Many of the commentators were opposed to the draft amendment. Some of the commentators felt that issuers should not be precluded from selecting a financial advisor to also serve as a remarketing agent and that the decision should be left to the issuer as to whether there is a conflict of interest involved in this situation. Based upon the comments received, the Board determined not to adopt the draft amendment to rule G-23.

Instead of requiring a broker, dealer or municipal securities dealer to resign as financial advisor for an issue prior to acting as remarketing agent for that issue, the proposed amendment requires the financial advisor, prior to entering into a remarketing agreement, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists. The proposed amendment ensures that an issuer is made aware that there may be a conflict of interest for the financial advisor for an issue to change its capacity to that of remarketing agent for such issue and the issuer is made aware of the terms of the remuneration the dealer could earn as remarketing agent on such issue. The issuer can then decide whether to allow the financial advisor for an issue to act as remarketing agent for such issue.

The proposed amendment also requires that the financial advisor receive the issuer's acknowledgment in writing of receipt of such disclosures. The issuer's written acknowledgment of receipt can be accomplished by a variety of methods, including a signed statement from the issuer prepared by the dealer or issuer, or by the issuer signing or initialing the dealer's disclosure letter.

When the requirements contained in the proposed amendment are met, a dealer acting as financial advisor for an issue may also serve as remarketing agent for such issue.

December 23, 1997

---

Text of Proposed Amendment⁽⁴⁾

Rule G-23. Activities of Financial Advisors

(a) - (d) No change.

(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless, prior to entering into a remarketing agreement, the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists and the terms of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure.

[(e)] (f) No change.

[(f)] (g) Each broker, dealer, and municipal securities dealer subject to the provisions of sections (d), [or] (e) or (f) of this rule shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9.

[(g)] (h) No change.

[(h)] (i) No change.

---

ENDNOTES

1. File No. SR-MSRB-97-16. Comments sent to the SEC should refer to the file number.

2. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor's acquisition or participation.

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

4. Underlining indicates new language; brackets denote deletions.

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.