Muni advisors' method-of-sale advice in SEC spotlight

While the Securities and Exchange Commission has continued to signal its concern over whether municipal advisors are fulfilling their fiduciary dutyin the area of competitive or negotiated sale advice, some attorneys see the likelihood of that concern alone spurring enforcement action against MAs as slim.

In November, the SEC's Division of Examinations released its Fiscal Year 2026 Examination Priorities . A section on municipal advisors says the division will continue to look at whether MAs have met their fiduciary duty to municipal entity clients when engaging in municipal advisory activities and specifically mentions the provision of advice regarding the method of sale of municipal securities.

In addition, Dave Sanchez, director of the SEC's Office of Municipal Securities, in speeches in recent years has expressed concern about the number of municipal entities opting for negotiated sales despite research suggesting that competitive sales are more efficient for the issuer in the majority of transactions. A possible reason for negotiated sales' dominance "is that municipal advisors are failing to even raise with issuers the possibility of a competitive sale," Sanchez said in a September 2024 speech.

"I don't think this topic is necessarily gaining traction as an enforcement matter," said Andrew Kintzinger, counsel at Hunton Andrews Kurth LLP. "I think instead, the Office of Municipal Securities has given a renewed focus to several studies that evaluate pricing between competitive and negotiated, and OMS has been speaking to issuer groups about the importance of evaluating what is most cost-effective to an issuer."

Whether to do a competitive or negotiated sale "is inherently an issuer decision," Kintzinger said. He believes that what Sanchez is trying to communicate to the issuer community, broker-dealers and municipal advisors in his speeches is that the SEC thinks it's important that issuers know that they can take a competitive path or a negotiated path "butthere are pros and cons to either" and the SEC believes that's "an important conversation to have with an issuer."

"I think this is a helpful dialogue rather than a warning that an enforcement action is going to follow," Kintzinger said. "I just don't sense that that's where the market participants or the regulators are."

The attorney pointed to a "theory of liability" that the SEC could pursue, though he described the chances of it doing so as "remote."

"They could say that, 'Look, Section 15B of the Exchange Act and Rule G-42 from the MSRB create a fiduciary duty for municipal advisors and a significant part of that fiduciary duty is the duty of care,'" Kintzinger said.

If the SEC wanted to create a theory of liability, it could allege that a municipal advisor in advising an issuer failed in its duty of care by not adequately disclosing to its issuer client that there was the opportunity to do either a competitive or negotiated sale and the pros and cons of either option, the attorney said.

"I think that would be a very difficult case to make because in my experience municipal advisors are almost uniformly in good communications with their issuers about should the sale be done on the competitive basis or should the offer be made pursuant to a negotiated underwriting," Kintzinger said.

Brian Garzione, a partner at Hawkins Delafield & Wood LLP, said Sanchez's remarks relating to competitive versus negotiated sales have been "an interesting theme" in his speeches on MAs.

"It highlights another area where practitioners might not fully understand their duties," Garzione said.

If a competitive sale isn't presented to an issuer as a financing option, "then perhaps there is a technical deficiency in the MA's advice," he said. Though there could be a variety of reasons why a competitive sale might not work for a given issuer, the SEC likely would prefer to see evidence that the working group had discussed the option and why a negotiated sale was recommended by the MA, the attorney said.

"I would be surprised if this issue alone was the basis of an SEC enforcement action against an MA," Garzione said. "However, I can imagine a scenario where this issue is raised as part of a broader action where several other MA regulatory concerns are also present."

Kintzinger said "there's much anecdotal evidence" now that municipal advisors are starting to "keep more detailed memoranda or written documentation regarding the decision by an issuer to do competitive or negotiated."

Ed Fierro, a partner at Bracewell LLP, said that given that the SEC's Division of Examinations has included the issue among its examination priorities, municipal advisors should, at a minimum, expect questions about it during examinations.

"I think more detailed memoranda or written documentation could be helpful," Fierro said.

David Erdman has worn both the issuer and municipal advisor "hats" during his long public finance career. Currently a managing director at Baker Tilly Municipal Advisors, LLC, Erdman worked for the State of Wisconsin's Capital Finance Office from 1994 until his retirement in 2022 after having served as Capital Finance Director since 2015.

While noting the fiduciary duty MAs have to their municipal entity clients, Erdman said there could be a question about whether that fiduciary responsibility is "for now or is it ongoing fiduciary responsibilities."

By way of example, he provided some perspective gleaned from his issuer days.

"As an issuer, I could do a competitive sale and I can probably get a better bid than a negotiated sale, but there are some other factors, there are some other considerations that are more longer-term in nature that sometimes support a negotiated sale over a competitive sale," Erdman said, adding that the adage 'it's a marathon, not a sprint' is one that "applies here."

"As an issuer, I would go and do a negotiated sale if I really wanted to focus on expanding the investor base, the investors that were interested in my bonds," he said, adding that going the negotiated sale route gave him the opportunity to work with underwriters "to reach out and make sure more investors were aware of the State of Wisconsin credit."

"In a competitive sale you award based on a true interest cost rate, which could just include one or two investors," Erdman said. "Whereas in a negotiated sale, as an issuer you may work with a syndicate to say 'Schedule me for one-on-one investor calls' and complete and post an investor presentation."

As an issuer, Erdman wanted more than just two orders for his bonds.

"I wanted 20 orders for my bonds," he said, adding that when more people hold the paper, more people are getting continuing disclosure and other information about the credit. "And for the next competitive sale, rather than having just two accounts interested in the bond, you may have more investors interested, which as an issuer you hope that more investor demand returns better sale results."

Switching back to his current municipal advisor hat, Erdman said if a Baker Tilly Municipal Advisors client interested in expanding the investor base for its credit told him it had already decided on a negotiated sale, the conversation about competitive versus negotiated sales wouldn't end there.

"We still need to have that conversation, with [the] understanding there likely isn't a one-size-fits-all answer," he said.