Financial Advisors Acting as Remarketing Agents: Rule G-23

Financial Advisors Acting as Remarketing Agents: Rule G-23

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Manager, Muni Department
Underwriting
Public Finance
Compliance

Amendments Approved

The Securities and Exchange Commission has approved amendments concerning financial advisors who wish to act as remarketing agents for issues on which they advised the issuer.

Questions about the amendments may be directed to Ronald W. Smith, Senior Legal Associate.

On March 26, 1999, the Securities and Exchange Commission ("SEC") approved amendments to rule G-23, on activities of financial advisors.¹ The amendments concern financial advisors who wish to act as remarketing agents for issues on which they advised the issuer. The amendments became effective upon SEC approval.

Rule G-23, on activities of financial advisors, establishes disclosure and other requirements for dealers that act as financial advisors to issuers of municipal securities. The rule is designed principally to minimize the prima facie conflict of interest that exists when a dealer acts as both financial advisor and underwriter with respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert the issuer to the potential conflict of interest that might lead the dealer to act in its own best interest as underwriter rather than the issuer's best interest.²

The amendments require a dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities to disclose in writing to the issuer, prior to acting as a remarketing agent for such issue, that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists and the source and basis of the remuneration the dealer could earn as remarketing agent on such issue. This written disclosure to the issuer can be in a separate writing provided to the issuer prior to the execution of the remarketing agreement or the disclosure can be in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration. If the disclosure is made prior to the execution of the remarketing agreement, the amount of the specific fee paid by the issuer to the remarketing agent still can be negotiated in the remarketing agreement. If the disclosure is made in the remarketing agreement, the dealer will have negotiated the amount of its fee with the issuer.

(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer:

~~(f)~~ (g) Each broker, dealer, and municipal securities dealer subject to the provisions of sections (d), or (e) or (f) of this rule shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9.

1. See Securities Exchange Act Release No. 41217 (April 1, 1999), 64 FR 15855 (1999).

2. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor's acquisition or participation.