Bond Proceeds, a 45-Day Payment, and a $500 Contribution
The treasurer of the Town of Fairview wants to invest $12 million of proceeds from a wastewater revenue bond issued five months ago. Of that, $3 million is earmarked for a debt service payment due in 45 days. Fairview's written investment policy permits obligations maturing in 397 days or less and limits the town to pools authorized under state statute. The pool the representative is pitching has a current weighted average maturity of 58 days against a 60-day limit, and offers a daily series plus a 12-month term series paying roughly 40 basis points more. The representative also learns that the treasurer, who approves the investment, received a $500 campaign contribution six weeks ago from the representative's sales assistant, who answers phones and does not solicit municipal business. The firm has no underwriting relationship with Fairview, but an affiliated entity provides municipal advisory services to the town.
1. How should the representative allocate the $12 million between the daily series and the 12-month term series?
Read the worked answer
Liquidity drives the answer, not yield.
- The $3 million due in 45 days belongs in the daily series. The term series typically locks the investor in until maturity, and a 12-month tranche cannot be redeemed to meet a 45-day obligation. The pool's 58-day weighted average maturity describes the portfolio, not the investor's redemption rights; do not let the treasurer conflate the two.
- The remaining $9 million can be considered for the term series only if the town's investment policy and state statute permit it, the maturity matches a known outflow, and the treasurer understands the liquidity trade-off.
There is a second, less obvious constraint: these are tax-exempt bond proceeds. The temporary period for spending is generally limited, and the bonds are already five months old. Placing proceeds beyond the temporary period into a higher-yielding investment can generate positive arbitrage that must be rebated, and yield-restriction rules may bite. The extra 40 basis points can be a net loss once rebate is computed.
The representative should not size the allocation alone - flag the arbitrage question to bond counsel and put the recommendation in writing.
2. Does the $500 contribution to the treasurer create a pay-to-play problem?
Read the worked answer
Work through MSRB Rule G-37 in order, because the intuitive answer is wrong.
- Is the contributor an MFP? A sales assistant who answers phones and does not solicit municipal securities business is presumptively a non-MFP. Non-MFP contributions are not covered by the ban, so the $500 does not, standing alone, trigger it.
- Is selling LGIP interests "municipal securities business" under G-37? Ordinarily the sale of municipal fund securities is not one of the covered categories (underwriting, financial advisory/consultant, remarketing). But the affiliated municipal advisor is covered, and its business with Fairview counts at the firm level.
- Recheck her status. If the assistant ever solicits, is held out as part of the municipal group, or is in a supervisory role over that business, she becomes an MFP and the $500 is barred. The $250 de minimis exception would not save it.
- If she is an MFP and the firm has covered business with Fairview, the firm must stop doing business with the town, seek an MSRB exemption under G-37(i), and obtain a return of the contribution.
Either way: report the contribution on Form G-37 for the quarter if made by an MFP, document the MFP determination contemporaneously, and escalate. The appearance problem alone warrants a principal's review.
3. Before the town invests, what must the representative verify and disclose about the pool itself?
Read the worked answer
The representative is recommending a security the town may not fully understand, so verification comes first:
- Authorization: confirm the pool is one the town may legally use under state statute and under Fairview's own written investment policy. Many states restrict local governments to the state-sponsored pool.
- Disclosure: read the current information statement. Confirm fees, the WAM and maximum maturity limits, eligible investments, redemption terms, and who holds custody.
- Status, plainly stated: an LGIP is not registered under the Investment Company Act and is not FDIC insured. A stable $1.00 net asset value is an objective, not a guarantee, and can be broken.
- Suitability of the description: never describe the pool as a money market fund or as "risk-free." That is a G-17 fair-dealing problem regardless of the pool's quality.
The representative should also put the recommendation and the treasurer's approval in writing, since the treasurer is the decision-maker and the town bears the investment risk.