The MSRB advised municipal securities issuers against designating or influencing the selection of an underwriter’s counsel in the process of offering bonds.
In a Regulatory Notice (“notice”), the MSRB explained that conflicts of interest can arise from an issuer playing a role in the selection of an underwriter’s counsel. According to the MSRB, underwriters must maintain their independence in order to effectively perform due diligence responsibilities and make fair assessments. A key resource for an underwriter is the presence of an experienced, unbiased, expert counsel. The MSRB warned that “conflicted loyalties” could arise if an issuer-designated counsel is used, which could call into question the “integrity and thoroughness of the due diligence process as well as the quality of representation provided by such counsel.”
While the MSRB acknowledged that an issuer may want to ensure that a sufficiently qualified counsel is selected, the MSRB also noted the significance of protecting the integrity of the underwriting process. The MSRB advised that an underwriter is subjected to financial risk and legal liability by representing an issuer; as such, it is in the best interest of the underwriter to choose a suitable counsel.
The MSRB reiterated that issuers should “refrain from [involvement] in selection of counsel,” or limit involvement to “concerns regarding competency, conflicts of interest and the avoidance of excessive costs.”
Lofchie Comment: Without a means of enforcement, will this notice change conduct? Although the MSRB cautions underwriters that they may be at greater risk of missing required disclosure if they rely on an issuer-selected counsel, it is not clear that this risk is urgent enough to discourage the practice (if it were, the notice would likely not be necessary).