Municipal Securities Primary Financing

The corporate underwriting process you just studied follows federal Securities and Exchange Commission (SEC) registration rules. Municipal securities follow a different path: they are exempt from SEC registration under the Securities Act of 1933 but are subject to Municipal Securities Rulemaking Board (MSRB) rules instead.

What Are the Methods of Sale for Municipal Securities?

What Are the Details of a Competitive Sale?

The notice of sale specifies:

• Maturity dates
• Call provisions
• Denominations
• Dated date and delivery date
• Bid submission requirements

What Are the Details of a Negotiated Sale?

• The underwriter is selected in advance and works directly with the issuer to structure and price the issue (the same firm cannot be both the issuer's financial advisor and the underwriter on one issue)
• Terms, pricing, and timing are all negotiated between the issuer and the underwriter

What Is Advance Refunding?

• Issuing new bonds to refund (pay off) outstanding bonds before their call date
• Proceeds from the new issue are placed in escrow (typically in government securities) until the call date of the old bonds
• Allows the issuer to lock in lower interest rates
• The 90-day line: if the old bonds stay outstanding more than 90 days after the new bonds are issued, it is an advance refunding. If the old bonds are redeemed within 90 days, it is a current refunding
• Since the Tax Cuts and Jobs Act of 2017, advance refunding bonds can no longer be issued on a tax-exempt basis; issuers now use current refundings (redeeming the old bonds within 90 days) or taxable advance refundings
• Putting it together: an issuer whose old bonds are not callable for years cannot do a current refunding now. To lock in a lower rate today, it must issue taxable bonds for an advance refunding. The new issue is taxable even though the old bonds were tax-exempt

What Practices Govern Primary Municipal Offerings?

• Governs syndicate practices for municipal new issues
• Establishes priority provisions for allocating bonds to different categories of orders
• The four order types are:
  1. Presale orders: placed before the syndicate wins (or prices) the issue
  2. Group net orders: credited to the entire syndicate, so all members benefit
  3. Designated orders: large institutional orders on which the customer designates which members receive credit
  4. Member orders: a syndicate member's orders for its own account
• Only one ranking is fixed by rule: customer orders (presale, group net, and designated) receive priority over a member's orders for its own account. The ranking among the three customer categories is whatever the syndicate's own written priority provisions say
• A retail order period is an order period in which orders from customers who meet the issuer's eligibility criteria, and who are already conditionally committed, are either the only orders solicited or are given priority over other orders. Outside a retail order period, the rule itself gives a retail order no rank over other customer orders
• Each syndicate must establish written priority provisions. Leaving the ranking to the manager's discretion does not satisfy the rule
• The manager may depart from the provisions case by case only if the syndicate disclosed in writing, before the first offer, that it may. The manager then bears the burden of justifying that the departure served the syndicate's best interests. Disclosure alone does not justify a departure, and the rule sets no issuer approval or member vote for it
• Syndicate members' designations and order allocation must be handled fairly

What Must the Senior Manager Disclose Before the First Offer?

Before the first offer of any securities, the senior syndicate manager must furnish the following in writing to the other syndicate members and to selling-group members, not only the syndicate:

1. All terms and conditions required by the issuer
2. The issuer's retail-order-period requirements, if any
3. The priority provisions
4. The procedure, if any, for changing the priority provisions
5. Whether the manager may depart from the priority provisions case by case
6. Whether orders may be confirmed before the end of the order period
7. All pricing information

Any later change to the priority provisions or to pricing information must be furnished promptly in writing to the same group.

What Happens After the Syndicate Wins the Bonds?

Once the issuer awards the bonds (competitive sale) or signs the purchase contract (negotiated sale), the senior manager sends a commitment wire to syndicate members confirming the deal. Two separate deadlines follow, and the exam tests the difference:

• Allocation deadline (within 24 hours of the commitment wire): The senior manager must complete the allocation of securities within 24 hours of sending the commitment wire
• Conditional allocation exception: If the purchase contract is not yet signed (negotiated sale) or the award not yet made (competitive sale) when allocations happen, the allocation is made subject to that signing or award, and the purchaser must be told so
• Free-to-trade notice (same 24-hour window): At the same time as the allocation, the senior manager must notify all syndicate and selling-group members simultaneously, through an industry-accepted electronic method, that the issue is free to trade
• Priority-allocation summary (within two business days of the sale date): The senior manager must give syndicate members and the issuer a written summary of allocations that received priority over members' own take-down orders, broken out by priority category. This is a reporting deadline, not the deadline for completing allocations

Exam Tip: Gotchas

Do not confuse the two deadlines. The 24-hour clock covers completing allocations and giving free-to-trade notice. The two-business-day clock covers only the written priority-allocation summary sent to the syndicate and the issuer.

Memory Aid: "Please Get Dessert Made" = Pre-sale, Group, Designated, Member. This is the ladder most syndicates adopt, and the mnemonic is a good default. The part that is law is the last step: the customer eats before the member does.

Exam Tip: Gotchas

If a question says the written priority provisions rank customer orders above member orders but do not rank the customer categories, do not fall back on the presale-group-designated ladder. The rule fixes only one point: fill the customer orders before the member order. It sets no order among presale, group net, and designated orders, so a correct answer never depends on an assumed ladder. Retail orders are not an exception: without an issuer's retail order period or a syndicate provision that says otherwise, a retail order has no rank over a presale order. In that case the one certain position is that the member order comes last.

What Are Official Statements and Disclosure Documents?

What Are the Key MSRB Disclosure Rules?

• Official statement delivery rule: Requires dealers to deliver the official statement to customers no later than settlement and to submit it to EMMA (Electronic Municipal Market Access)
• CUSIP-application rule: Requires application for a CUSIP number for new municipal issues

Exam Tip: Gotchas

• Municipal securities are exempt from SEC registration under the Securities Act of 1933. There is no SEC registration statement or prospectus for munis.
• The official statement is NOT an SEC document. It is the primary disclosure document for municipal bonds, but it is governed by MSRB rules, not SEC registration requirements.