The Massachusetts Water Resources Authority has asked underwriters who want to work on the agency's next bond deal to assume responsibilities that some leading candidates have called "virtually impossible" to meet.
At issue is the authority's new request for qualifications and proposals, which requires firms to sign a "statement of fiduciary responsibility standards."
The purpose is "to assure that the firm will be in a position to act at all times with undivided loyalty to the MWRA and its ratepayers and will seek to gain no financial benefit from acting as financial adviser or underwriter, other than as provided by the MWRA for financial advisory or underwriting services," the statement says.
The move directly follows a recent scandal involving apparently divided loyalties between the MWRA's previous financial adviser, Lazard Freres & Co., and one of its senior underwriters, Merrill Lynch & Co.
The authority's chief financial officer, Philip N. Shapiro, said the move is intended to protect the MWRA's reputation in the wake of the scandal. But diversified firms that do municipal underwriting may be unable or unwilling to comply with this new level of fiduciary responsibility, market sources said.
"How is the municipal underwriting department of a large firm supposed to know and disclose what is going on in every other branch of that firm?" one senior municipal executive said. "Underwriters are not now, nor were they ever supposed to be, fiduciaries."
Another municipal executive said that if a firm decided to limit its answer to only the actions of its municipal department, it may be opening itself up to future legal problems.
"This document represents a new level of risk for underwriters," the source said. "A firm could honestly think it was acting in the best interest of the issuer and get itself sued."
Another municipal participant said it is unreasonable for the authority to expect compliance with this request.
"I think we may be seeing a somewhat hysterical response to a bad situation in Massachusetts," said John L. Kraft, a partner at the bond attorney firm of Lowenstein, Sandler, Kohl, Fisher & Boylan. "Whereas a financial adviser has a clear, fiduciary responsibility, underwriters are different."
Kraft said that attempting to saddle an "arms-length relationship," with fiduciary responsibility is improper.
Some market participants said, however, that it is not unreasonable to expect a senior manager to act as a fiduciary for the authority. And authority officials said firms will have to accept their requirements.
"We are not looking to make life hard for underwriters," Shapiro said. "But we are very concerned with the reputation of the authority now."
Several executives complained that it is unreasonable to expect a diversified firm from revealing all parts of its business, especially since their responses will be open to public scrutiny under the Massachusetts Freedom of Information Act.
"Those are viable concerns," Shapiro said. "But our request could be amended to answer such concerns."
Shapiro encouraged all municipal participants to tell his office what they think about the authority's proposal.
The scandal that prompted the MWRA's new emphasis on loyalty involved Mark S. Ferber, the authority's financial adviser for the past 10 years. Last month, the authority fired Ferber and dissolved its entire bond syndicate after it was revealed that Ferber and MWRA senior manager Merrill Lynch split fees on several swap transactions and were involved in an undisclosed $1 million per year retainer agreement.
Ferber served as financial adviser through stints with Kidder, Peabody & Co.; First Boston Corp., Lazard Freres & Co.; and finally with First Albany Corp.
Ferber was subsequently fired from First Albany late last month in reaction to the events at the MWRA.
Shapiro said the amount of money the authority has paid in underwriting fees and the amount of money they will spend over the next 10 years justifies their concerns about the fidelity of underwriters.
The MWRA is responsible for the court-ordered clean up of the Boston Harbor, the construction of the Deer Island Sewage Treatment plant, and several other water and sewer projects throughout the state.
The authority has issued over $3 billion in municipal bonds and, according to Shapiro, will sell another $3 billion before these projects are completed. The pending request for proposals applies to an upcoming $200 million bond sale planned for later this fall.
Shapiro said that a separate request will be sent out soon for financial advisers, and final selections will be made in the middle of September.
