Issuer's Role in Selection of Underwriter's Counsel
GFOA recommends that Issuers minimize their involvement in the selection of underwriter’s counsel. However, it is appropriate for the issuer to ensure that underwriter’s counsel is competent, has no conflicts of interest, and that costs are reasonable.
Underwriter’s counsel is employed to represent the underwriter in the offering of bonds. The duties of such counsel include drafting bond purchase agreements and may include drafting or reviewing official statements, preparing due diligence questions, and coordinating required disclosure documents. Such counsel also assists the underwriter in meeting its legal responsibilities generally in the issuance and sale of the bonds (including due diligence, assessing the adequacy of issuer disclosure and issuing an opinion letter on which the underwriter can rely).
While underwriter’s counsel represents the underwriter, in some cases issuers have assumed a direct role in selecting or approving underwriter’s counsel. Among the reasons cited by issuers for being involved in the selection or approval of underwriter’s counsel are the issuer’s (1) need for assurance that underwriter’s counsel is qualified and competent and will give the highest priority to the bond offering, (2) need for assurance that underwriter’s counsel understands the issuer’s finances and operations, disclosure practices, and other pertinent information, and will help promote full and complete disclosure, (3) desire to control the costs of the underwriter’s counsel, which are typically paid directly or indirectly by the issuer, (4) desire to avoid the use of firms where conflicts of interest or pending regulatory enforcement may exist, and (5) compliance with state and local legal or policy requirements (i.e. diversity, equity and inclusion).
The GFOA believes that issuers should have limited input in the engagement of underwriter’s counsel. GFOA recognizes that (1) the underwriter has a reasonable need to rely on such counsel’s competence and confidential advice and (2) the potential for conflicts of interest exists if an issuer designates a firm to serve as underwriter’s counsel. The issuer, to protect its interests, should have policies and procedures that will facilitate limited involvement, including any or all of the following:
- The issuer may draw up a list of general criteria and qualifications to be used by the underwriter and other professionals in the selection of counsel.
- Working with the underwriter, the issuer can prepare a list of acceptable firms and leave the final selection to the underwriter.
- The issuer may ask to review the qualifications of a firm proposed by the underwriter and provide feedback on the selection including retaining the ability to exercise a veto due to concerns relating to cost, competence, or conflicts of interest.
Firms should be evaluated based on:
- their general knowledge and experience with disclosure requirements,
- their understanding of and, if applicable, past performance with the issuer, expertise with the securities being offered,
- their ability to complete the transaction in an orderly manner, and
- the absence of any conflicts of interest that might jeopardize the ability of the firm to carry out its responsibilities.
Governmental issuers should also have a role in negotiating with the underwriter the cost of services performed by underwriter’s counsel obtaining a fixed, not-to-exceed, hourly rate, or other appropriate fee arrangement that takes into account the complexity of the transaction and the scope of counsel’s work as well as whether fees are contingent upon the issuance of the bonds.
The underwriter bears the ultimate responsibility for the adequacy of its own counsel. Any undue influence by an issuer, that calls into question the qualifications or independence of underwriter's counsel, may create risk to the issuer and to the underwriter because of the increased potential of inadequate disclosure in the offering of the issuer’s bonds and a reduced ability of the issuer to claim reliance on the expertise of its financing team.
 In 2014, the Securities and Exchange Commission’s (SEC) Municipalities Continuing Disclosure Cooperation (MCDC) Initiative emphasized the importance the SEC placed on issuer disclosure and resulted in 72 underwriter settlements for violations of federal securities laws.
- GFOA Best Practice, Selecting Bond Counsel, 2008.
- GFOA Best Practice, Selecting and Managing Underwriters for Negotiated Sale, 2014.
- GFOA Best Practice, Selecting and managing Municipal Advisors, 2014.
- SIFMA Best Practice Recommendation on Disclosures Regarding Choice of Underwriters’ Counsel in Municipal Securities Transactions, 2013
- MSRB Regulatory Notice 2017-14, Market Advisory on Issuer’s Designation of Underwriter’s Counsel, July 27, 2017
- Board approval date: Saturday, October 31, 2009