Wednesday, September 29, 2010
Ms. Leslie Carey, Associate General Counsel
Mr. Ronald W. Smith, Senior Legal Associate
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Dear Ms. Carey and Mr. Smith:
The following remarks, regarding the Request for Comment on Rule G-23 on the Underwriting Activities
of Financial Advisors, are the comments and observations of Columbia Capital Management, LLC
(Columbia), an independent, full-service financial and investment advisory firm. Since its
founding in 1996 Columbia has advised bond issuers throughout the country on more than $17.5
billion in debt issuance.
We appreciate and respect the proposed changes to Rule G-23 intended to limit the ability of
dealers to resign as financial advisor on a transaction in order to serve as underwriter. We have
observed this practice a number of times in communities in our region and believe that in many
cases it deprives an issuer of the unbiased, independent advice it sought when originally retaining
a financial advisor. We believe our comments and suggestions support the amendments to the
rule and the underlying policies.
Respectfully submitted,
Columbia Capital Management, LLC
Dennis Lloyd
President
6330 Lamar Avenue • Suite 200 • Overland Park, Kansas • 66202 • 913.248.8500
Responses to Request for Comment on Rule G-23 on the Underwriting Activities of Financial
Advisors
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?
We believe that a dealer should be precluded 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 for
one year. A one year cooling off period prevents a dealer from setting up a transaction or identifying
a potential transaction while serving as financial advisor but either resigning prior to beginning work
on that transaction or not initiating the transaction until after expiration of the current term of
service. Without a cooling off period the same situation that the amendments to Rule G-23 are
meant to prevent could be circumvented by the “timing” of a transaction.
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?
No, there should not be an exception to amended Rule G-23 to prohibit dealers from serving as
underwriter on transactions for which they have served as financial advisor to the issuer for
competitive bid transactions. Any time a financial advisor provides the winning bid on a competitive
sale transaction the potential for an appearance of impropriety exists. The financial advisor that
provides a wining competitive bid may be accused of having asymmetric information offering it a
competitive advantage in its bidding, that it manipulated the bidding terms to its advantage or that it
rejected or otherwise disqualified other bids to its advantage. In an era when public trust in financial
transactions and governmental decision-making is diminished, any practice that creates even an
appearance of impropriety should be avoided.
Key to all competitive bid transactions is the terms of the bidding established in the Notice of Sale.
In a typical competitive sale the financial advisor has sole or substantial input on those terms. If the
financial advisor is permitted to bid on a competitive sale an incentive exists for that firm to establish
bidding terms and parameters that favor it over other dealers. Unfortunately, even if all the bidding
terms are fair and reasonable, but the financial advisor then provides the winning competitive bid,
the potential for an appearance of impropriety still exists.
Most notices of sale are already published at least five business days before a competitive bid
transaction, so a rule mandating such a period would not provide meaningful relief. The reality of
the competitive bid marketplace is that many bidders typically begin preparing for potential bids the
afternoon before or the morning the bids are due. The due diligence is generally limited to a cursory
review of the Notice of Sale and the Preliminary Official Statement. Mandating more time for due
diligence as a remedy to potential abuse will not change the reality of the marketplace and those
bidders will not be independently analyzing most issuers or issues. Further, as noted above, the real
concern is not due diligence or time for alternative bids, but the risk that the terms of the Notice of
Sale favor one firm over another, or are perceived to favor one firm.
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In our years of serving as financial advisor for numerous competitive bids, we have never
experienced a failed bid. Even during the depths of financial dislocation in 2008, when so many
market participants were standing on the sidelines, we did not experience a failed bid. While failed
bids may occur from time to time, we believe most would be due to (i) severe market disruptions, (ii)
transactions not suited to competitive bid or (iii) poorly designed bidding rules under the
circumstances. Rules should not be based on this very, very uncommon occurrence.
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?
No, small and infrequent issuers are the most likely to be manipulated by dealers who serve as
financial advisor and then resign to serve as underwriter. These are the issuers that lack the
sophistication to know if the terms of the underwriting engagement are reasonable.
The alternatives are to (i) retain an independent financial advisor, (ii) retain a dealer serving as
financial advisor subject to the fiduciary standard with no interest in serving as underwriter for the
bonds or (iii) retaining a firm to serve as underwriter without the benefit of a financial advisor. The
costs are dependent on all the facts and circumstances and will vary from issuer to issuer. While
some commentators may assert that the addition of a financial advisor to a transaction may increase
issuance costs, in most cases an interest rate reduction of even a few basis points will more than
offset the fee of a financial advisor, regardless of the impact of that fee on the aggregate costs of
issuance. In the third alternative the costs should be no higher, and may be lower, than in the case of
a financial advisor resigning to serve as underwriter without the benefit of independent advice.
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?
No it is not 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. A financial advisor enjoys a special
position of trust with most issuers. A firm serving as underwriter on one transaction while serving as
financial advisor on another may exploit that position of trust to either obtain unjust fees on the
underwriting or to minimize the size or type of transaction for which it serves as financial advisor
while maximizing its advantage and compensation on the underwriting. This conflict can be
resolved only by requiring that a financial advisor not serve as underwriter for any issues of its
financial advisor client and, as described in answer 1 above, for a period of at least one year
following its engagement as financial advisor.
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?
As explained in answer 2 above, both potential abuse and perceptions of abuse can occur in the
terms of the Notice of Sale. That type of manipulation cannot be remedied by a third-party receiving
the bids or an electronic platform. Issuers that rely on financial advisors generally do not change
their practices because the bid will be offered via electronic platform. In our experience, it is
relatively uncommon for the issuer to coordinate the sale on its own behalf.
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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?
We believe the exception found in Rule G-23(d)(iii) should be limited to transactions for which
multiple bids were received and that the rule should be further restricted to the indirect purchase of
not more than 10% of the issue by the financial advisor. If the financial advisor is purchasing more
than 10% of the issue then the same potential for manipulation that can occur directly could occur
indirectly. We do not believe the limitation “except to the extent that such purchase is made to
contravene the purpose of this rule” can be meaningfully enforced. A limitation on the amount of
bonds purchased indirectly can prevent such contravention of the rule.
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?
No, for the same reasons described in answers 2 and 4 above, an issuer should not 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. We
have not seen a valid business reason for such a practice in our experience.
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