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.
Methods of Sale
| 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) |
Competitive Sale Details
The notice of sale specifies:
- Maturity dates
- Call provisions
- Denominations
- Dated date and delivery date
- Bid submission requirements
Negotiated Sale Details
- The underwriter often acts as the financial advisor to the issuer and helps structure the issue
- Terms, pricing, and timing are all negotiated between the issuer and the underwriter
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
MSRB Rule G-11 (Primary Offering Practices)
- Governs syndicate practices for municipal new issues
- Establishes priority provisions for allocating bonds to different categories of orders
- Customer orders typically receive priority over member/dealer orders
- Syndicate managers must disclose priority provisions to syndicate members before the first offer
- Syndicate members' designations and order allocation must be handled fairly
Official Statements and Disclosure
| 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 |
Key MSRB Disclosure Rules
- MSRB Rule G-32: Requires dealers to deliver the official statement to customers no later than settlement and to submit it to EMMA (Electronic Municipal Market Access)
- MSRB Rule G-34: 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.