Debt Management

GFOA Primer: Municipal Advisor Rulemaking and Issuers

The Implications of the SEC Rule and MSRB Rule G-42 on Hiring and Using Municipal Advisors and Underwriters


KEY DATE: Governmental debt issuers that work with municipal advisors should be aware that by September 12, 2017, any individuals providing municipal advisory services must have passed the “Series 50” exam, a professional qualification exam developed by the Municipal Securities Rulemaking Board (MSRB). After September 12, 2017, any individual who does not hold the Series 50 registration cannot perform municipal advisory activities.


The information contained in this document was developed to educate members about the SEC MCDC Initiative and should not be construed as legal advice.

The Securities and Exchange Commission’s municipal advisor rule took effect on July 1, 2014. The Rule defines the term “municipal advisor” (MA), and creates the broad framework for the regulations that the MSRB is charged with developing regarding the duties and responsibilities of MAs. The MA Rule itself stems from the new regulatory framework over municipal advisors created by the Dodd-Frank Act to protect issuers from unfair and deceptive practices by outside professionals and clearly states that municipal advisors have a federal fiduciary duty to their issuer clients, must meet professional qualification standards and may serve no other role than to advise their clients in a transaction.

While the MA Rule and subsequent MSRB rulemaking do not regulate issuers directly, there are numerous indirect implications, especially related to MSRB Rule G-42, Duties of municipal advisors, that goes into effect June 23, 2016. These include: formal standards that must be met by the MA, and between MAs and their clients, including written documentation of municipal advisory engagements; disclosures to client of MA conflicts of interest; and the recommendations that MAs provide issuers must meet a suitability standard, which may in turn result in additional discussions between MAs and their clients.

If an issuer is engaged with a MA on June 23, 2016 (and thereafter), regardless of the timing of the project, the MA must adhere to new rulemaking. The MA will send issuers disclosure of conflicts of interest, at the very least.

These rules not only apply to municipal advisors to governments on bond and financing transactions, but also all types of advisory activities, including swaps and advice provided after the deal is closed (e.g., defeasance of the securities, rating agency presentations). This is important to note as in the past, others on the financing team may have provided this type of advice to governments. Under the MA Rule, while non-MA professionals will be able to freely respond to an issuer’s RFP, talk in general terms with issuers about general market information, and pitch products within certain limits, any specific advice from them is prohibited unless certain exemptions apply. (See The MA Rule and Underwriters section at the end of this brief.) Additionally, MAs working for broker/dealer firms have the same obligations as non-broker/dealer firm MAs. Further, while a broker/dealer MA serving as MA on a transaction may not engage in other activities related to that specific bond transaction, the firm may participate in other transactions and as other parties (e.g., underwriter, placement agent) on a separate transaction.

While nothing in the federal law or rules force issuers to hire a municipal advisor, GFOA recommends that, unless a government has sufficient internal expertise, it use a municipal advisor when considering and developing a bond transaction. GFOA urges municipal entities to assure themselves that the selected municipal advisor has the necessary expertise to assist the issuer in determining the best type of financing for the government, selecting other finance professionals, planning the bond sale and successfully selling and closing the bond sale.

Municipal Advisor Registration and Professional Qualification Requirements
Municipal sdvisors must be registered with the SEC and the MSRB. Issuers should consult both the MSRB’s Municipal Advisor Registration page and the SEC’s EDGAR system to confirm that their MA or potential MA is registered. Additionally, federal testing of municipal advisors will take place over the next year. MAs will have until September 2017 to take and pass the exam. Issuers will be able to confirm that a MA has passed the exam by viewing a web page the MSRB will establish later this summer.

MAs' Fiduciary Duty to Issuers
The Dodd-Frank Act imposes a fiduciary duty on those professionals that advise governments when they sell bonds or enter into a financial product. MSRB Rule G-42 further details the meaning of fiduciary duty and places a standard of both duty of care and duty of loyalty on MAs to their municipal entity clients (MAs advising obligated persons only have a duty of care standard). The duty of care includes the MA having the knowledge and expertise needed to provide particular advice to a client; inquiring with the client about information that is relevant to making a recommendation of a financing or any advice for a certain course of action; and having a basis for which to provide the advice to the client. The duty of loyalty, applicable to municipal entities, requires that the MA deal honestly and with the utmost good faith to the entity; puts the client’s interests ahead of all other interests, including the MA’s own; and not engage with a client if the MA cannot manage or mitigate their conflicts of interest in a manner that allows them to work in the best interests of the client.

Only the municipal advisor has these fiduciary duties to their clients. While MAs and other parties have acted in the spirit of many of these concepts over the years, SEC and MSRB rulemaking makes clear the responsibilities MAs have to their clients, which are non-negotiable.

MA Contract with Issuer Client
Issuers will be seeing more formal contracts from municipal advisors, as MSRB Rule G-42 requires documentation of the municipal advisor relationship with issuers. This must be done in writing, dated and delivered to the client upon or promptly after the relationship is established. Information in the documentation includes – scope of services to be performed; disclosures of conflicts of interest and any detailed legal disciplinary events; limitations to the scope of engagement; and events that would trigger the termination of the relationship.

Rule G-42 does not technically require that the issuer sign or acknowledge this written documentation; however, issuers should expect that they may be asked to sign a contract with their MAs.

MA Disclosures to Issuers
The MA is required to disclose, in writing, all material conflicts of interest and the manner in which the MA plans to manage or mitigate these conflicts. This includes, fee-splitting arrangements and payments to third parties; and any conflict that would impair the MA’s ability to provide advice under the Rule’s standard of conduct. If an MA has no conflicts of interest, it must state that in writing to the client.

The MA must also provide information on any legal and disciplinary events that are material to the client’s review of the municipal advisor. The MA must give the client the information or link to the information in the SEC’s EDGAR system related to these events. The issuer does not have to acknowledge receipt and does not have any responsibilities for the information provided to them by the MA.

MA Recommendations to Client
The MA must have a reasonable basis for making a recommendation to a client. This includes:

  • Making a determination that the recommendation is suitable for a particular government by knowing the client's facts and circumstances, abiding by the client's rules, and understanding the authority of each person acting on the client’s behalf.
  • Knowing the client’s experience with municipal securities and financial products, and the client's understanding of the type and complexity of the instruments being discussed and recommended.
  • Being aware of the client’s tax status, risk tolerance, and liquidity needs.
  • Evaluating the risks, benefits, structure, and characteristics of the securities or financial product.
  • Tell the client whether or not the advisor investigated or considered other reasonably feasible alternatives.

The MA may also be asked, upon request from the issuer, to review a recommendation from another party and determine if the recommendation is suitable for the client.

Finally, the MA may share with the client documentation of the tasks it performed to determine its recommendation. The issuer does NOT need to acknowledge receipt of this information

Prohibitions on Principal Transactions

The SEC and MSRB have developed rules that prohibit municipal advisors from engaging in certain activities with municipal entities when the transaction relates directly to the same municipal securities or financial product from for the MA provides advice. This includes, sale or purchase of any security; a derivative contract; guaranteed investment contract (GIC); bank loans over $1,000,000 when it is “economically equivalent to a security; and other similar financial products. The rulemaking does not prohibit a MA serving as MA on one transaction from serving in a different capacity on a separate transaction (e.g., underwriter).

The MA Rule and Underwriters
The role of the underwriter is to sell bonds for the issuer. They do not have a fiduciary duty to the issuer. However, many investment banking firms have previously provided other services to their clients, including financing recommendations and advice on bond sales. The MA Rule and subsequent MSRB rulemaking states that only professionals with a fiduciary duty to the state or local government may provide advice, unless an exemption is in place. While investment bankers may continue to respond to RFPs, talk in general terms with issuers about general market information, and pitch products within certain limits, specific advice from investment bankers is prohibited unless certain exemptions apply. Under these conditions, and those met through an exemption, the underwriter may speak freely with the issuer, without the MA being present. Additionally, if an underwriter provides an idea or recommendation, it is up to the issuer to determine whether or not it is serious enough to be evaluated by the MA.

Below is a discussion of the exemptions along with model language that issuers may wish to use themselves, or may be sent to them from underwriters or other professionals.

The Independent Registered Municipal Advisor Exemption
An issuer may obtain advice from an underwriter when the issuer has retained an independent registered municipal advisor. The independent registered municipal advisor must not have been associated with the underwriter within the past two years. The issuer must represent in writing to the underwriter that it has retained and will rely on a municipal advisor for advice (preferably through the use of a contract with the MA). The underwriter must have a reasonable basis for relying on the issuer’s representation. The municipal advisor may be hired for a specific deal for which the underwriter may be providing advice, or if a government hires a municipal advisor on a retainer basis, an underwriter may approach the issuer on any type of financing, as long as the issuer states in writing that it will rely on advice of its municipal advisor. Upon request, the issuer may send the representation to the underwriter directly, or post it on its web site. GFOA recommends posting this language on the government’s website for efficient distribution and access by underwriters. It is important to note that the issuer remains in control of the scope of work it wishes to receive from its municipal advisor. GFOA discourages an underwriter from speaking with or sending materials directly to the issuer’s municipal advisor unless specifically authorized by the issuer . Additionally, for those entities that use multiple municipal advisors, suggested language is noted below for those circumstances.

Independent Municipal Advisor Exemption Language
[State or local government] has retained an independent registered municipal advisor. [State or local government] is represented by and will rely on its municipal advisor [Include name of firm here] [If desired, include name of advisor at the firm here] to provide advice on proposals from financial services firms concerning the issuance of municipal securities and municipal financial products (including investments of bond proceeds and escrow investments, if applicable). This certificate may be relied upon until (insert date). Proposals may be addressed to [State or local government] at ______________. If the proposal received will be seriously considered by [State of local government] the entity will share the document with its municipal advisor. Please note that aside from regulatorily mandated correspondence between an underwriter and municipal advisor, the underwriter should not speak directly with or send documents directly to the municipal advisor unless specifically directed to by the issuer.
Draft language for 2nd sentence to be used by larger entities - The [State or local government] uses several municipal advisors in its debt management program. To know which firm is being used for a particular credit, please contact the issuer at _______________, [or see below for the appropriate listing].
[If posted on the issuer’s website, add the following language at the beginning: By publicly posting the following written disclosure, [State or local government] intends that market participants receive and use it for purposes of the independent registered municipal advisor exemption to the SEC Municipal Advisor Rule.]

Issuer Uses RFP/RFQ Process/RFP Exemption
Underwriters responding to an RFP may include recommendations without violating the MA Rule. For this exemption to apply, the RFP may not be outstanding for more than six months and the issuer must widely distribute the RFP to at least three reasonably competitive firms or post it on their web site. GFOA recommends that the RFP be posted on a government’s web site to ensure wide distribution. If an issuer uses a pool of underwriters from which it chooses underwriters for a particular transaction, the issuer may have to issue a mini-RFP to receive advice from members of its underwriting pool. Issuers may be asked to provide – or may provide on their own - a disclaimer that they their RFP process is in line with the MA Rule, as noted here:

Issuer Uses RFP/RFQ Process/RFP Exemption Language
[State or local government] is aware of the “Municipal Advisor Rule” of the Securities and Exchange Commission (effective July 1, 2014) and the RFP/RFQ exemption from the definition of “municipal advisor” for a person providing “advice”. In response to an RFP/RFQ, [State or local government] hereby notifies [all] [certain designated] investment banking firms that it wishes them to provide advice and recommendations on [insert description of particular objectives concerning the issuance of municipal securities and/or municipal financial products (as such terms are defined in the municipal advisor rule)]. [State or local government] intends for such advice and recommendations to qualify for the RFP/RFQ exemption. The advice and recommendations may be made orally or in writing. [State or local government] reserves the right to accept or reject any proposals submitted to it and to conduct a formal procurement process, in each case if deemed by [State or local government] to be in its best interests and to comply with applicable laws or procurement policies. This RFP/RFQ is open from _________ to [insert date no later than six months after the first date or, in the case of mini RFPs, a date that is no later than 3 months after the first date]. [State or local government] understands that by responding to this RFP/RFQ, respondents are not municipal advisors to [State or local government]. [If not posting publicly, add the following language: This RFP/RFQ is being sent to [a least three investment banking firms] [the entire pool of firms].

Underwriter is Selected for a Transaction/Letter of Intent
Upon selection of an underwriter for a specific transaction (GFOA recommends selecting underwriters through a competitive RFP process), GFOA recommends issuing a “letter of intent”, which will allow the underwriter to more freely discuss the transaction as its being developed. Model language for this exemption is suggested as followed:
Underwriter is Selected for a Transaction/Letter of Intent Language
[State or local government] is aware of the municipal advisor rule of the Securities and Exchange Commission (effective July 1, 2014) and the underwriter exclusion from the definition of “municipal advisor” for a firm serving as an underwriter for a particular issuance of municipal securities.

[State or local government] hereby designates [Underwriter] as an underwriter for [brief description of the Bonds] (the “Bonds”) that [State or local government/Conduit Issuer/Obligated Person] currently anticipates issuing. [State or local government] expects that [Underwriter] will provide advice to [State or local government] on the structure, timing, terms, and other matters concerning the Bonds.
It is [State or local government’s] intent that [Underwriter] serve as an underwriter for the Bonds, subject to satisfying applicable procurement laws or policies, formal approval by [governing body/issuer], finalizing the structure of the Bonds and executing a bond purchase agreement. While [State or local government] presently engages [Underwriter] as the underwriter for the Bonds, this engagement letter is preliminary, nonbinding and may be terminated at any time by [State or local government] without penalty or liability for any costs incurred by the underwriter, or [Underwriter]. Furthermore, this engagement letter does not restrict [State or local government] from entering into the proposed municipal securities transaction with any other underwriters or selecting an underwriting syndicate that does not include [Underwriter].
[[State or local government] duly authorized official responsible for public finance]

Issuer Concerns with a Municipal Advisor
If an issuer believes that a MA is not acting in their best interest, is violating federal law and rulemaking, or other professionals are acting in a manner that is not compliant with the SEC MA Rule and MSRB Rulemaking, the issuer should submit those concerns to the SEC -