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?
| Method | How It Works | Price Determination |
|---|---|---|
| Competitive sale | Issuer publishes a notice of sale; underwriters submit sealed bids; lowest net interest cost (NIC) or true interest cost (TIC) wins | Determined by competitive bidding |
| Negotiated sale | Issuer selects the underwriter in advance; terms and price are negotiated directly | Determined by negotiation |
| Private placement | Securities sold directly to a limited number of sophisticated or institutional investors; no public offering | Negotiated with buyer(s) |
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
- 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
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:
- Presale orders: placed before the syndicate wins (or prices) the issue
- Group net orders: credited to the entire syndicate, so all members benefit
- Designated orders: large institutional orders on which the customer designates which members receive credit
- 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
- 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 that it may, and the manager can justify that the departure served the syndicate's best interest
- Syndicate managers must disclose the priority provisions to syndicate members before the first offer
- Syndicate members' designations and order allocation must be handled fairly
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. Fill the customer orders first, then the member order, and allocate among the customer orders on a defensible, disclosed basis.
What Are Official Statements and Disclosure Documents?
| Document | Purpose | Equivalent To |
|---|---|---|
| Official statement (OS) | Primary disclosure document for municipal securities | Corporate prospectus |
| Preliminary official statement (POS) | Distributed during marketing period before pricing | Red herring |
| Notice of sale | Published by issuer in competitive sales to invite bids | No corporate equivalent |
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.