Series 54: Restrictions On Financial Advisors

Restrictions on Financial Advisors

The MSRB prohibits a financial advisor for a bond from acting as an underwriter or placement agent on the same issue. This is to prevent a conflict of interest. A financial advisor generally seeks the lowest possible interest cost for an issuer, while an underwriter seeks the highest yield that makes the securities attractive to investors. Moreover, an underwriter may be inclined to advocate for a larger issue than the issuer requires if it sees a broad market for the new securities, or a smaller one if it senses a weaker market.

While financial advisors may not purchase securities directly from the issuer, they are permitted to buy them from the underwriters, either for their own accounts or for the accounts of their customers. However, they must disclose the conflict of interest to their customers at or before confirmation of the sale.

However, there is one exception to the rule that financial advisors may not operate as underwriters. Financial advisors are allowed to assist issuers in placing an entire issue with a government entity. This exception only applies to private placements, and not public offerings. A private placement is an offering of sec