Municipal Advisor Representative Exam

Under the Dodd-Frank Act and SEC rules, municipal advisors owe a fiduciary duty to their municipal entity clients. This is a higher standard than the arm's-length relationship between an underwriter and an issuer. The fiduciary duty includes a duty of loyalty (placing the client's interests ahead of the advisor's own) and a duty of care (exercising reasonable professional judgment and diligence).

The duty of loyalty requires municipal advisors to disclose all material conflicts of interest, refrain from engaging in activities that are adverse to the client without informed consent, and not receive compensation from third parties in connection with the advisory relationship without disclosure and consent. The duty of care requires the advisor to possess the requisite expertise, conduct thorough analysis, and make recommendations that are suitable for the client's specific circumstances.

A municipal advisor provides advice to municipal entities on bond issuances and financial products, owes a fiduciary duty, and represents the interests of the municipal entity. The advisor does not purchase or resell the securities.

An underwriter purchases municipal securities from the issuer and resells them to investors. The underwriter has an arm's-length commercial relationship with the issuer, not a fiduciary one. Under MSRB Rule G-17, the underwriter must disclose this arm's-length nature. A firm cannot simultaneously serve as both municipal advisor and underwriter on the same transaction -- this is a critical regulatory prohibition designed to prevent conflicts of interest.

A refunding is the issuance of new bonds to retire or redeem outstanding bonds, typically to achieve interest rate savings. In a current refunding, the outstanding bonds are called or redeemed within 90 days of the new bond issuance. In an advance refunding, the new bonds are issued more than 90 days before the outstanding bonds are called -- the proceeds are placed in an escrow account invested in government securities until the call date.

The Tax Cuts and Jobs Act of 2017 eliminated the tax-exempt status for advance refunding bonds, meaning issuers can no longer issue tax-exempt bonds to advance refund outstanding tax-exempt bonds. This has increased the importance of alternative strategies such as taxable advance refundings and forward delivery bonds. Municipal advisors must analyze whether refunding savings justify the transaction costs and comply with IRS arbitrage regulations.

Debt capacity analysis evaluates how much additional debt a municipality can prudently issue. Key metrics include debt per capita, debt as a percentage of assessed valuation, debt service as a percentage of the operating budget, and coverage ratios comparing available revenues to debt service requirements.

Municipal advisors help clients develop debt policies that establish guidelines for when and how to issue debt, target debt ratios, and procedures for ongoing debt management. A comprehensive capital improvement plan (CIP) identifies infrastructure needs, prioritizes projects, and outlines funding sources over a multi-year period. The advisor's role is to ensure the client's financing plan is sustainable and aligned with its long-term financial health.

MSRB Rule G-42 codifies the fiduciary and other duties of municipal advisors. It requires advisors to meet their fiduciary duty, make specified disclosures, document the advisory relationship, and provide advice that has a reasonable basis. The rule establishes that the fiduciary duty cannot be waived by the client.

Key requirements include providing the client with a written disclosure of all material conflicts of interest, the basis for compensation, any legal or disciplinary events, and a description of the scope of the engagement. Municipal advisors must also provide a duty of care -- making a reasonable inquiry into the facts relevant to the advisory activity, exercising due diligence in performing the analysis, and having a reasonable basis for any advice or recommendation provided.

Municipal advisors must register with both the SEC (using Form MA for the firm and Form MA-I for individuals) and the MSRB. The Dodd-Frank Act created the regulatory framework requiring municipal advisors to register, a significant change from the previously unregulated nature of municipal advisory activities.

Certain entities are exempt from municipal advisor registration, including underwriters acting in their underwriting capacity, attorneys providing legal advice, engineers providing engineering advice, accountants providing accounting services, and elected or appointed members of governing bodies. However, these exemptions are narrowly construed -- if the activity goes beyond the scope of the exemption, registration may be required.

Municipal advisors must identify, disclose, and manage conflicts of interest that could impair their ability to fulfill their fiduciary duty. Common conflicts include receiving compensation from parties other than the client (such as referral fees), having affiliates that provide services to the same issuer, or advising multiple clients with competing interests.

Under MSRB Rule G-42, advisors must provide written disclosure of all material conflicts of interest at the start of the engagement and update disclosures as new conflicts arise. Some conflicts may be managed through disclosure and informed consent, while others may be so severe that they require the advisor to decline the engagement. The key principle is that the advisor's duty of loyalty to the client must never be compromised by competing interests.

MSRB Rule G-37 applies to municipal advisors just as it applies to municipal securities dealers. The rule prohibits a municipal advisor from engaging in municipal advisory business with an issuer for two years after any covered political contribution to an official of that issuer who can influence the award of advisory business.

The rule extends to contributions made by the firm, its municipal advisory professionals (MAPs), and their supervisors. The de minimis exemption of $250 per election applies only when the contributor is entitled to vote for the official. Municipal advisors must file quarterly reports (Form G-37) with the MSRB disclosing all political contributions. The rule also prohibits soliciting contributions from others (bundling) to circumvent the restrictions.