The Verbal Swap Termination Engagement
On March 3, the finance director of a regional transit authority calls your firm and asks it to 'take a quick look' at a proposed $150 million swap termination and to 'help us negotiate' the termination payment with the counterparty. No written agreement is signed. Over the next three weeks, your analysts spend 42 hours reviewing the swap documents, build a termination-payment model, and join two calls with the counterparty. On March 24, the finance director says the authority's counsel thinks a written agreement is unnecessary because the work is 'just advisory' and the authority may not proceed. Your firm has not yet invoiced. The authority is a municipal entity under MSRB rules.
1. When was a written agreement required, and what activities triggered it?
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Municipal advisory activities include providing advice on municipal financial products, such as a swap termination, and advice on the structure or negotiation of a municipal financial product. Reviewing the termination documents, modeling the termination payment, and negotiating with the counterparty are core advisory activities. Under MSRB Rule G-42(b), the firm was required to have a written agreement with the Authority before commencing those activities, meaning before the March 3 call, not after 42 hours of work. The 'quick look' label does not change the substance. A limited exception exists for solicitation activities, but this was not a solicitation; it was advice and negotiation.
2. What must the written agreement contain?
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The written agreement must describe the scope of services, such as reviewing the termination, modeling the payment, and negotiating with the counterparty; the fees or fee formula; the identity of the municipal entity; the date; the terms of termination; and required disclosures of conflicts and other information. It should also state whether the firm will serve as fiduciary and any limitations on the engagement. G-42(b) requires the agreement be in writing and agreed to by both parties before services begin, not after the fact.
3. What should the firm do now if the authority refuses to sign?
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The firm should stop work, send a written engagement letter for signature, and explain that G-42 requires it before further services. If the Authority refuses, the firm cannot continue advisory work. It may invoice for services already performed only if it can do so consistently with the rules and any agreement; better practice is to document the conversations and seek compliance or counsel guidance. It should not backdate the agreement. It should also consider whether the Authority's refusal signals that the engagement should be declined altogether.