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 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
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
Primary Offering Practices
- Governs syndicate practices for municipal new issues
- Establishes priority provisions for allocating bonds to different categories of orders
- The standard priority of orders, from highest to lowest, is:
- 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
- Customer orders (presale, group net, and designated) receive priority over a member's orders for its own account
- Syndicate managers must disclose 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 (highest to lowest priority). Customer orders come before a member's own account: the customer eats first.
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
- 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.