A broker-dealer who acted as financial advisor to a municipality in structuring a new issue now wishes to act as underwriter in a negotiated offering.

Which statement is TRUE?

A. This is only permitted in competitive bid underwritings

B. The financial advisor is prohibited from acting as the underwriter

C. The broker-dealer must disclose to the issuer in writing all compensation received from the issuer

D. The broker-dealer must inform the issuer in writing that a potential conflict of interest exists

The true statement is B. The financial advisor is prohibited from acting as the underwriter

Explanation:

This because a financial advisor to a municipality is paid an advisory fee for assisting a municipality structure a new bond issue, with the aim of obtaining the lowest interest cost for the issuer. An underwriter for a new municipal issue wants to obtain the highest interest rates possible on the bonds, because it is easier to sell. Consequently, there is a conflict of interest between the financial advisor and the underwriter. Also, the Municipal Securities Rulemaking Board rule is that the financial advisor cannot be the underwriter.

Answer: B. The financial advisor is prohibited from acting as the underwriter

Explanation: The Municipal Securities Rulemaking Board prohibits a financial advisor that was involved in the issue of a municipal security to underwrite offerings. Acting in both capacities produces a conflict of interest. This rule applies to underwriting both competitive and negotiated bids.

The only time a broker can be an underwriter in such a case is when he/she does not get any compensation for offering this service as an underwriter.