One Ferry Building, San Francisco, California 94111 (415) 445-2300
Via Email
September 28, 2010
Ms. Leslie Carey, Associate General Counsel
Mr. Ronald W. Smith, Senior Legal Associate
MSRB
1900 Duke Street, Suite 600
Alexandria, VA 22314
lcarey@msrb.org
rsmith@msrb.org
Regarding: Comments on Proposed Amendments to Rule G-23
Dear Ms. Carey and Mr. Smith:
Stone & Youngberg appreciates the opportunity to comment on the proposed
amendments to Rule G-23.
Founded in San Francisco in 1931, Stone & Youngberg has consistently worked as an
underwriter and financial advisor to California local government and schools. Stone &
Youngberg in the post-World War II era worked closely with professional government
managers to develop responsible new tools for building the public infrastructure
necessary to accommodate California's rapid growth. More recently we have expanded
beyond California, but the same basic principles that have guided our firm since 1931
have been applied elsewhere.
The proposed amendments would have a dramatic affect on our approach to working
with local government and schools by removing or reducing our ability to provide a bid
on bonds we may have assisted in structuring. This notion is especially important
because we are committed to providing capital to small, often non-rated, infrastructure
development projects. Futhermore, the proposed amendments would unnecessarily
reduce a public agency’s choices in selecting an otherwise qualified trusted dealer to
serve variously as bond underwriter or financial advisor.
More particularly, the following comments address the specific questions raised by the
questions posed in MSRB Notice 2010-27 (August 17, 2010).
1.
Should a dealer be precluded for a specific timeframe 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?
No. In our case, we have relationships with issuers that often begin with the financing of
a road or water project. We may then finance a local school. As the community grows,
we may finance an expansion of the water or sewer system, provide economic
development capital to a redevelopment agency, or finance the city hall, fire station, or
police station. Frequently during periods of growth we may work with the same issuer on
three or four separate financings during a two or three year period. Depending on the
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September 28, 2010
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public agency’s particular needs and the type of bond issues involved, the public agency
may engage us to underwrite the first issue, to act as its financial advisor on the second
issue, and to again underwrite a third issue. Given current conflict of interest notice
requirements in G-23 we do not see a value to making the proposed amendment to insert
an arbitrary time period between financings.
2.
If the MSRB were to amend Rule G-23 to prohibit dealers from serving as underwriter on transactions for
which they have served as financial advisor to the issuer, should there be an exception for competitively bid
transactions? Would it matter if the notice of sale was made available 5-7 business days before a competitively bid
transaction to allow additional time for other competing firms to conduct due diligence? Should a financial advisor be
allowed to bid in a competitively bid transaction in which a failed bid had occurred? How would the situation be
handled in which there is a failed bid and the financial advisor cannot step in to buy the bonds because of the
prohibition? Is this a common occurrence?
In a competitively bid transaction where we are permitted to bid according to existing
Rule G-23, we remind the issuer that if we are the only bid, that such a bid could be
rejected or there would need to be a sound explanation for why we were the only bid!
Our banking staff and underwriters can not recall a situation in California where we were
the financial advisor on a competitively sold bond issue and we were the only bid. We
have been the only bid on a non-rated issue in a state where competitive bidding is
compulsory.
Best practices suggest that a notice of sale should be circulated 5 to 15 days before a
competitive sale. As a financial advisor we want to see as many bids as possible.
Bidding or underwriting after a failed bid is complicated. Facts and circumstances of
each situation can make it difficult to impose a comprehensive rule that covers so many
possible situations; especially for small issues. At the same time, our experience suggests
that a failed bid does not open up an opportunity for the financial advisor to switch roles
to underwrite. We have seen such issues re-bid after market conditions have stabilized or
the issue has been restructured.
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?
We can imagine some small issuers might be affected in some jurisdictions, but we are
more accustomed to acting as an underwriter on small issues from infrequent issuers.
Generally speaking, limiting the ability of a public agency to work with a dealer in a
manner determined by local officials and/or reducing the number of underwriters who
may bid on the local agency’s bonds are likely to increase the cost of capital to the issuer.
4.
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?
Stone & Youngberg is frequently engaged as an underwriter on one issue and as a
financial advisor on another issue from the same issuer. Our business is providing capital
to states, local government, and schools. Facts and circumstances will dictate whether
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September 28, 2010
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one issue is going to be prepared for a competitive sale with us as the financial advisor or
prepared for a negotiated sale with us as the underwriter. For instance, Stone &
Youngberg has served the City of San Francisco as a financial advisor for competitively
sold bonds secured by the City's general fund while acting as an underwriter on non-rated
land secured infrastructure bonds.
5.
As it relates to current practices, are there instances in competitively bid transactions in which a financial
advisor should resign in order to “officially” bid on a competitive new issue transaction as an underwriter? Is there ever
a time when the financial advisor does not conduct the bid process for the issuer, such as the use of electronic bidding
platforms where the process of collecting bids is done by a third party on behalf of the issuer? Is it an uncommon
practice for the bid process to be handled internally by the issuer?
Stone & Youngberg cannot recall a situation given the current rule where we should have
resigned to bid on bonds. Stone & Youngberg's financial advisory experience over the
past decade has almost exclusively been conducted on electronic platforms. Some issuers
will still request the additional option of a bidder submitting through a facsimile bid, but
such instances are rarer each year. Yes, it is uncommon for an issuer to handle bidding
internally.
Stone & Youngberg bids on approximately 150 issues sold at competitive sale each year
and underwrites approximately 165 separate issues each year as an underwriter of
negotiated sales.
6.
In the context of a primary offering, should the exception found in Rule G-23(d)(iii) be limited to situations
in which a financial advisor purchases bonds from underwriters who won a competitive bid for the bonds in which
multiple bids were received?
Stone & Youngberg does not see situations where additional market protections would be
provided by amending Rule G-23(d)(iii).
7.
In competitively bid transactions, are there situations where the issuer may hire a financial advisor to serve on
a specific issue and then, at some point, hire a second financial advisor to oversee the competitive bid process in order
to allow the original financial advisor to bid on the issue?
Stone & Youngberg has not experienced this situation.
We look forward to your consideration of our comments and invite any additional
questions you might have.
Thank you.
Sincerely,
Stone & Youngberg