The Affiliated Bidder in a Competitive GO Sale
Your firm is the municipal advisor to the City of Riverton, which plans to sell $85 million of general obligation bonds in a competitive sale next quarter. The city's finance director, Ms. Alvarez, has asked your firm to help draft the official statement, set the sale date, and evaluate the bids alongside city staff. During the engagement, you learn that your firm's affiliated broker-dealer, Riverton Securities LLC, intends to submit a bid for the bonds. Ms. Alvarez also asks you privately which underwriter 'deserves' the business. Your firm's written engagement letter does not mention the affiliate relationship. The city charter requires the lowest bidder be awarded the bonds.
1. What must your firm do about the affiliate relationship before continuing the engagement?
Read the worked answer
MSRB Rule G-42 requires a municipal advisor to disclose in writing, before or at the time of engaging, all actual and potential conflicts of interest, including any affiliate relationship with a potential underwriter. The fiduciary duty under G-42(c) is owed to the City, not to the affiliate. The firm should amend the engagement letter to identify Riverton Securities, describe the affiliate's intent to bid, explain how the firm will wall off confidential information, and obtain the City's informed written consent to continue. If consent cannot be obtained, the firm should decline the engagement or resign. A verbal assurance is not enough because the conflict is material: the affiliate could benefit from the firm's advice on structuring, timing, or sale terms.
2. May Riverton Securities bid, and may your firm evaluate the bids?
Read the worked answer
In a competitive sale, the affiliate may bid if it receives no confidential information and the process is arm's-length. But the firm should not evaluate or score its affiliate's bid; city staff and bond counsel should handle that, or an independent third party should. The firm can help design the bid form and the objective award formula before bids are opened. If the firm participates in evaluating bids, it must disclose the conflict and recuse from the affiliate's bid. It should not share the City's reserve price, competing bids, or model outputs with the affiliate. Under G-42, the advisor must act in the City's best interest and cannot tilt the process toward an affiliate.
3. How should you respond to the request to identify which underwriter 'deserves' the business?
Read the worked answer
Decline. A municipal advisor owes a fiduciary duty to the municipal entity and cannot recommend an underwriter based on personal preference or private relationships. If the City asks for a recommendation in a negotiated sale, the firm should use objective, disclosed criteria such as capital, distribution capability, and prior performance, and document the analysis. The request to say which underwriter 'deserves' the business is a red flag; the firm should explain that it can help the City evaluate proposals but cannot advocate for a particular firm without a reasonable basis and disclosure.