September 29, 2010
VIA ELECTRONIC MAIL
Leslie Carey
Associate General Counsel
Ronald W. Smith
Senior Legal Associate
Municipal Securities Rule Making Board
1900 Duke Street, Suite 600
Washington, DC 22314
Re: Comments in Response to MSRB Notice 2010-27
Dear MSRB Board Members:
George K. Baum and Company is a Broker/Dealer registered with FINRA, the SEC and the MSRB.
We have been in business for more than 80 years. Our primary business since our inception has
been municipal finance. With offices in 15 states, we provide both underwriting and financial
advisory services to municipalities and not-for -profit entities throughout the country. Our
concern is with the thousands of “Main Street” issuers of municipal bonds. George K. Baum’s first
Guiding Principal is “Client First” and we believe that in small communities across the country, we
always act in our clients’ best interests whether we are acting in the role of financial advisor or in the
role of an underwriter. We have found that this approach to business is the best way to obtain and
retain long term clients. As a result, the implementation of a “one size fits all” rule is inconsistent
with the reality for thousands of small issuers across the country.
Comments on the proposed rule change:
A. Implementation concerns:
1. Your questions 1 and 6 in MSRB notice 2010-27 inquire about the appropriateness
of certain financial advisory/underwriting engagements.
Question 1. -Should a dealer be precluded for a specific time frame from entering
into a financial advisory relationship with an issuer after serving as an underwriter on
one of the issuer’s prior offerings of securities?
Question 6. - Is it appropriate for a dealer to serve as financial advisor to an issuer at
the same time that it serves as underwriter on a separate issue for the same issuer?
This answer to both questions is similar. Many issuers maximize the diversity of
advice and assistance they receive from public finance professionals by rotating
assignments among different firms, often for different financing entities of the same
issuer. Access to such diversity significantly outweighs whatever purpose is sought
by restricting who an issuer may select of their own choosing and using their own
1400 Wewatta Street Suite 800 Denver, Colorado 80202 303.292.1600
September 29, 2010
Leslie Carey
Ronald W. Smith
Page 2
internal processes. It is not at all unusual for a sophisticated issuer to know different
firms’ strengths and to employ them in the manner best serving the issuer’s interests.
If the final form of the rule is written too broadly it would mandate exclusion of
experienced professionals which an issuer wishes to engage to best accomplish a
financing.
2. Further, there are a number of different services which broker dealers provide to
their issuer clients. Any new or amended rule should be drafted so that it does not
restrict the services available to municipal entities. We group our services into
three broad categories:
a. Underwriting - culminating in debt issuance
b. Financial Advisory - culminating in debt issuance
c. Consulting - Consulting services might include mill levy analysis and
management, rate maintenance analysis, election services (including
polling services, copywriting, graphic design and facilities planning),
swap advisory services and even providing valuations for business units
and financial securities. These consulting services do not necessarily
result in the issuance of a series of bonds. Rather, they are part of the
full spectrum of services which our clients require from time to time.
The currently proposed rule changes speak to a regulated firm’s inability to switch
from the role of financial advisor to the role of underwriter on each specific
transaction. We applaud this approach because it will allow a regulated firm to
continue to engage in non-transaction specific consulting while allowing an issuer
to have certainty in the relationship that they have with a firm for each specific
debt transaction.
3. Finally, issuers throughout the country are party to a variety of financial advisory,
investment banking and underwriting agreements. With the proposed change to
G-23, they will each have to decide, in conjunction with those counterparties and
counsel, how their existing relationships fit under the amended rule and make
changes as appropriate. For those in rural areas, it might mean converting a
financial advisory agreement to an underwriting agreement, so as to retain the
services of a trusted advisor in an anticipated debt issuance. For a large
sophisticated issuer with a menu of debt issues on the horizon, it might include a
series of specific assignments for a variety of firms; now all conformed to the new
rule.
B. Small issuer concerns – Question number 3 in MSRB Notice 2010-27 is as follows:
Question 3. - Are there small and/or infrequent issuers that will be negatively
affected by the proposed prohibition? What are the alternatives and costs for such
issuers should the MSRB adopt the proposed draft rule amendment?
The proposed rule would likely increase Issuance Costs - If a financial advisor
switches to the role of underwriter, then only an underwriting fee is incurred by the
September 29, 2010
Leslie Carey
Ronald W. Smith
Page 3
issuer. No financial advisory fee is charged. If the FA is not allowed to serve as
underwriter, then the issuer will incur both an FA fee and an underwriting fee. For
many smaller transactions, this will significantly increase issuance costs. Given the
high fees that independent FAs charge and the recent underwriting spreads we have
seen on competitive sales, we could easily see the combination of FA and
underwriting fees on smaller transaction being twice as high if the proposed change
to G-23 in enacted.
C. Additional Concerns:
We believe that the intent of the proposed rule change is to maintain the integrity of
the relationships an issuer has with its financial advisor so that an issuer understands
that on a given transaction their financial advisor does not even have the appearance
of any conflict of interests. In the same spirit we believe that the current practice of
allowing a financial advisor to retain their role while involved with a private
placement, which the financial advisory firm or a related bank portfolio purchases,
should be eliminated.
Recommendations:
1. The amended rule should be applied on a transaction by transaction basis. That is, it should
be analyzed as to each unique debt issuance.
2. The amended rule should provide for a transition period, allowing municipalities to analyze
their relationships and conform them to the rule.
3. The amended rule should have an exemption for bond issues or issuers of a smaller size.
For example, any issue of $30,000,000 or less should be subject to rule G-23 as it exists
today.
4. The amended rule should be written to prohibit those activities of financial advisors, dealer
banks and affiliated bank portfolios, from doing indirectly what they are prohibited from
doing directly.
Thank you for the opportunity to comment.
Very truly yours,
GEORGE K. BAUM & COMPANY
Robert K. Dalton
Vice Chairman