Bond Counsel Corner: Municipal Advisors and the IRMA Exemption

Cities, townships and other issuers of municipal bonds typically hire a financial advisor for expert advice on the financing structure and financial terms for each bond issue they undertake.  For decades these consultants have been called a “Financial Advisor” or “FA.”  Now they are also known by another name – “Municipal Advisor” or “MA” – and   they are required to register as an MA with the U.S. Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB).

The federal Dodd-Frank Act of 2010 created the term “Municipal Advisor” and for the first time subjected municipal FAs to federal regulation.  Under the Act and SEC and MSRB rules, an MA owes a statutory fiduciary duty to its municipal client, including a duty of care and a duty of loyalty.  In short, an MA must not do anything inconsistent with its municipal client’s interests.

There are many investment bankers whose firms can serve as underwriters of municipal bonds.  Although they may wish to offer bond-related advice to a municipality with the objective of being selected as the underwriter of a resulting bond issue, they do not want to be deemed an MA having the MA fiduciary duty that would prevent their serving as such underwriter.  That is because an underwriter ultimately purchases bonds from the issuer, for resale to investors, after negotiating the purchase price, interest rates and other bond terms with the issuer – in which respects its interests are inconsistent with the issuer’s interests.

This has been addressed in the SEC’s MA registration rule by certain exemptions for underwriters and others from being deemed an MA with its inherent fiduciary duty that would bar them from underwriting the municipal issuer’s bonds. 

The “IRMA exemption” enables an underwriter firm to give bond-related advice to a municipality without having to register as an MA if (1) the municipality hires an independent registered Municipal Advisor (IRMA) as its own MA and certifies in writing that it will rely on the IRMA’s advice, and (2) the underwriter discloses in writing to the municipality (with a copy to the IRMA) that, by receiving such written statement from the municipality, the underwriter is not an MA.

The “independent” attribute means that the IRMA has no relationship to the underwriter and is defined in detail in the SEC rule.

John Kamins leads Foster Swift’s bond counsel and public finance practice.