A major adjustment to a federal rule aims to ensure bond issuers have access to the most competitive bond structure. Until now, financial advisors could serve double duty as underwriters on the same bonding issue. The Municipal Securities Rulemaking Board (MSRB) Rule G-23 went into effect in late November. The change prohibits municipal securities dealers from acting as financial advisors on a new bond issue, and then turning around and making an agreement to underwrite the bonds.
The revised rule also prohibits a dealer who serves as an advisor for a bond issue from serving as the initial remarketing agent. However, a dealer is allowed to serve as a successor remarketing agent if the dealer’s financial advisory relationship with the issuer has been terminated for at least one year. In a news release, MSRB Executive Director Lynnette Kelly Hotchkiss says, “We have carefully considered the distinct roles involved in bringing a new municipal securities issue to market and this rule change preserves the integrity of the new issue market for the benefit of all market participants.”
Previously under Rule G-23, a financial advisor could resign from a project and then act as an underwriter for that same bond issue if the previous relationship was disclosed and appropriate consent requirements were met. A city that hires an independent financial advisor will be able to choose the most cost-effective option for its unique situation, as typically multiple bids will be solicited from underwriters for the new issue.