Potential Conflicts of Interest For Municipal Bond Underwriters

There are many potential conflicts of interest that may come into play when engaging in the underwriting of municipal securities. Some of these require only that they be disclosed. Other more potentially serious types of conflicts require that the underwriter take certain actions to ensure that purchasers of the securities are not adversely affected.

Acting As a Financial Advisor to the Issuer

Broker dealers will often provide advice to state and local municipalities for a fee.  Broker dealers who act as a financial advisor to issuers of municipal securities will provide guidance as to the timing and structure of potential offerings and other financial matters.  Any investor, who purchases a new municipal issue from a broker dealer with a financial advisory relationship with the issuer, must be informed of the relationship in writing prior to the completion of the transaction. While underwriters will advise issuers on the timing and structure of issues, as well as other financial matters, this does not create a financial advisory relationship. A financial advisory relationship is contractual in nature and must be in writing. The contract will include:

  • The terms under which fees will be paid
  • Services to be provided by the broker dealer
  • Use of broker dealer’s services
  • Use of services offered by a control party or by a party controlled by the broker dealer

Information Obtained While Acting As a Fiduciary 

A broker dealer acting in a fiduciary capacity may not use the information obtained in the furtherance of their duties for their own benefit. A municipal securities dealer, acting as a financial advisor to the issuer of municipal securities, may not use the information it obtains regarding current bondholders to solicit business from them. Examples of fiduciary capacities are:

  • Financial Advisor
  • Transfer Agent
  • Paying Agent
  • Indenture Trustee
  • Clearing Agent
  • Correspondent for Another Dealer
  • Registrar
  • Safekeeping Agent

Acting as a Financial Advisor and Underwriter

When a firm acts as both the financial advisor and underwriter to an issuer, potential conflicts of interest arise. The Municipal Securities Rule Making Board or MSRB has set strict rules regarding these situations. The MSRB requires:

  • The nature of the financial advisory relationship to be disclosed.
  • The amount of the compensation received by the member to be disclosed.
  • That prior to entering into a negotiated underwriting, the firm must receive the issuer’s consent and must inform the issuer of the potential conflicts and must terminate the advisory relationship.
  • The issuer must acknowledge the receipt of the information relating to the conflicts, in writing.
  • That prior to submitting a bid for a competitive underwriting the broker dealer must receive the issuer’s approval.
  • That in the event the broker dealer acts as an underwriter, that all purchasers be informed of the financial advisory relationship.



Related Articles
  1. Investing

    What Is A “Broker-Dealer” And Why Should You Care?

    For many investors, the financial services industry is a strange and mysterious place filled with a language all in its own.
  2. Managing Wealth

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  3. Insurance

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  4. Insights

    What's a Dealer Market?

    In a dealer market, market participants buy and sell through dealers who are designated as market makers.
  5. Personal Finance

    How to Distinguish Advisors From Salespeople

    What's in a financial professional's title? Often a great deal of confusion and potential for conflict. So be sure you're working with a fiduciary.
  6. Investing

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace the municipal bonds portion of the Series 7 Exam.
  7. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  8. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  9. Small Business

    How Effective Is The Chinese Wall?

    Because underwriters work on one side of the Chinese wall and analysts work on the other side, information gathered by the underwriters is not supposed to be shared with analysts.
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
Trading Center