A broker-dealer who acted as financial advisor to a municipality wishes to act as underwriter in a negotiated offering. Which statement is TRUE?

• A. The broker-dealer must inform the issuer in writing that a potential conflict of interest exists
• B. The financial advisor is prohibited from acting as the underwriter
• C. This is only permitted in competitive bid underwritings
• D. The broker-dealer must disclose to the issuer in writing all compensation received from the issuer

Answer: (B)

A key protection here is independence: a broker-dealer that has acted as the issuer’s financial advisor must not also serve as the underwriter for the same issue. When one firm provides advisory services aimed at securing the issuer’s best terms and then also takes on the underwriting role, its incentives can conflict, risking biased advice or arrangements that aren’t in the issuer’s best interests. The MSRB’s rules are designed to prevent that conflict by prohibiting this dual role in the same transaction, whether the sale is negotiated or competitive. Therefore, the statement that the financial advisor is prohibited from acting as the underwriter is true. If the issuer wants to proceed with an underwriting, the firm would need to step back from the advisory role or the issuer would need to hire independent parties to handle underwriting to preserve fairness and impartiality.