WASHINGTON--U.S. regulators are probing whether securities firms
are circumventing rules implemented in the wake of the financial
crisis to protect municipalities against potentially biased
investment advice, according to people familiar with the
matter.
At issue is whether banks are attempting to skirt post-crisis
rules, including those restricting firms that provide financial
advice to municipalities from underwriting certain municipal bond
transactions. Lawmakers and regulators implemented the changes to
avoid the kind of questionable behavior leading up to the crisis,
in which municipalities were steered into risky and complex deals
they didn't fully understand.
The 2010 Dodd-Frank law stipulates that banks hired as financial
advisers act as fiduciaries, or in their client's best interests.
Regulators have also restricted banks from underwriting a municipal
bond transaction if they were initially hired to advise on the
deal. Yet the Securities and Exchange Commission is concerned that
banks may be mischaracterizing their role in order to preserve
their ability to underwrite bonds.
The SEC is investigating several municipal contracts entered
into by banks, including Goldman Sachs Group Inc. (GS), Piper
Jaffray Cos. (PJC), Robert W. Baird & Co. and Stifel Financial
Corp. (SF). Spokesmen for Piper and Stifel declined to comment. A
spokeswoman for Baird didn't respond to requests for comment.
The SEC is scrutinizing a February contract between Goldman and
a St. Louis stadium authority, two people familiar with the matter
said. Worried about losing the St. Louis Rams, the city's National
Football League franchise, local officials hired Goldman to analyze
a range of financing options to upgrade the aging Edward Jones Dome
and keep the team in the 18-year-old stadium. The options include a
bond deal to finance contractually-required upgrades.
Goldman's $20,000-per-month contract as "financial advisor" to
the St. Louis Regional Convention and Sports Complex Authority says
the bank is not providing "advice"--just information to senior
officials at the authority. The bank says it may seek to underwrite
the authority's bonds, should the agency issue debt in the
future.
James Shrewsbury, chairman of the stadium authority, said the
agency hired Goldman at the request of Missouri Gov. Jay Nixon, who
can appoint five of the authority's 11 members, including its
chairman. Mr. Shrewsbury said the stadium authority is trying to
get the best possible advice on how to keep the Rams in the dome.
The team's contract to play in the stadium expires in 2015. "Right
now they are not underwriting any bonds," he said of Goldman.
A person familiar with Goldman's thinking said the firm was
hired on a broad assignment that's still in its early stages, and
that there's currently no plan to sell municipal bonds for the
stadium. Still, regulators are concerned the firm is calling itself
an adviser and then disclaiming responsibility to act as a
fiduciary, according to the two people familiar with the probe.
They're also concerned the firm would have a say in how to
structure a bond deal while setting itself up to underwrite the
bonds--the very role-switching regulators have tried to quash.
Previously, banks serving as financial advisers could switch
roles provided they obtained their client's consent and after
disclosing that conflicts may exist. Regulators began to crack down
on "role switching" in the $4 trillion municipal bond market in
2010, at the behest of former SEC Chairman Mary Schapiro, who
described the practice as a "classic example of a conflict of
interest." Unlike financial advisors, who act in the best interests
of their clients, underwriters enter into an "arm's length"
relationship when they underwrite municipal debt. Supporters of the
ban warn many municipal borrowers aren't sophisticated enough to
understand the distinction. Ms. Schapiro pushed the Municipal
Securities Rulemaking Board, which sets the role-switching rule, to
tighten the measure.
John Cross, director of the SEC's municipal securities office,
said in a statement that the agency is generally concerned about
investment banks' compliance with role-switching restrictions and
that municipalities receive conflict-free advice. He declined to
comment on a specific company or its services.
Regulators also are scrutinizing "general consulting services"
agreements, in which brokerage firms seek to sidestep the
role-switching restrictions by providing "general" financial advice
that isn't tied to a specific bond transaction. In one such
agreement between Monroe County, Wis., and regional bank Robert W.
Baird & Co., the firm said it will provide advice based on the
county's financing needs but warns it isn't working in the capacity
of a financial adviser nor underwriter. Still, the firm leaves the
door open to being hired in those roles in the future.
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