Chapter 2.4 Flashcards
(45 cards)
Duties of Underwriters to issuers
-Underwriters must deal fairly with issuers
- All statements and representations made in writing or orally to the issuer must be truthful and accurate including responses to requests for proposal, issue price certificates and materials used in official statements. Also:
- Underwriters must honor an issuer’s retail order period and
- Underwriters must not recommend that an issuer not retain an advisor.
- Required disclosures to the issuer:
- That the underwriter’s primary role is to buy the securities from the issuer and then to distribute them to investors, all in an arm’s length commercial transaction. Unlike municipal advisors, and underwriter does not have a fiduciary duty to issuers
- That underwriters must review official statements as part of their duty to investors under federal securities laws.
- That underwriters must disclose all actual and potential conflicts of interest, including any 3rd party payments and incentives.
- That the specific characteristics and risk of complex financing, such as variable rate demand notes and derivatives, will be explained so that the personnel of the issuer are capable of independently evaluating them.
- Financial Aspects of Underwriting Transactions:
- An underwriter’s compensation for a new issue must not be so disproportionate as to constitute an unfair practice. Compensation includes both direct compensation paid by the issuer and 3rd party payments.
- Pricing of a new issue is one, but not the only, factor in determining whether an underwriter has treated an issuer “fairly”
-Underwriters of municipal debt are either commercial banks or broker/dealer members of FINRA or the MSRB, the municipal securities rulemaking board.
- Duties of municipal securities underwriters with respect to disclosures from issuers in both the primary and secondary markets.
- Municipal securities underwriters are prohibited from underwriting a new issue of municipal securities unless the underwriter has reasonably determined that the issuer has agreed in writing to provide certain annual information and event notices to various information repositories.
- Municipal securities dealers are prohibited from recommending a municipal security unless it has procedures in place that provide reasonable assurance that it will receive promptly any event notices from the issuer.
Two types of Underwriting
Negotiated deals and Competitive bidding
Negotiated Deals
Where the municipality approaches a particular underwriter for help in bringing out the new issue. Terms and interest costs are negotiated directly between the municipality and the underwriter for a Revenue Bond issue. A bond purchase agreement is used in negotiated transactions.
- Disclosures on negotiated issues: At or prior to receiving confirmation of a new issue done on a negotiated basis, customers must receive a copy of the following information:
- Underwriting spread(not on competitive)
- B/D fees
- Initial offering yield for each maturity in the issue(Scale)
- The following information is not included:
- Pre-sale orders: There are no pre-sale orders on negotiated deals.
- Identity of all syndicate members
Competitive Bidding
When the municipality requests sealed bids from underwriters or underwriting syndicates. It will award the bonds to the group which offers the municipality the lowest net interest cost. The net interest cost is the amount of interest that the municipality will end up paying on the bond issue. In determining the Net interest cost, any premium over par that is received when the bond is sold is subtracted from the interest cost on the issue. Most General Obligation bonds are awarded on the basis of competitive bidding.
The official notice of sale
Used with competitive bids. Municipalities invite bids to be made on proposed new issues by publishing a notice of sale in the newspapers. It include the bidding details and states that the municipality will accept sealed bids at a certain time and place from underwriting syndicates. An official notice of sale is normally available from either the issuer, financial consultant, or the approving attorney, but NOT THE SEC!
The official notice of sale Includes
- Date and time bids are to be received
- The details of the bond issue
- Redemption features
- Interest rate and bidding details
- Paying agent
- Purpose of the new bonds
- Listing of the bond attorneys who will give the legal opinion
- Where the bonds are to be delivered
- Maturity dates and call features
- Amount of good faith deposit required from bidders
- The right to reject any or all bids and may waive irregularities in a bid.
The official notice of sale would not include:
- The bond’s rating
- Any statements of guarantee of debt service
- Offering yields
- Bond years- used to calculate net interest cost
- Record of tax collections
- The legal opinion
Bid Form
A document included with the notice of sale that is sent to bidders. When executed, the bid form becomes the contract between the issuer and the underwriting syndicate in a competitive underwriting.
Agreement among underwriters or syndicate letter
For most competitive new issues, the underwriters will consist of a syndicate put together and arranged by a managing underwriter. The manager is best described as the dealer that directs all of the underwriting groups activities. It is up to the manager to determine the size of each member’s participation in the underwriting. In a competitive bid, the manager, before submitting a bid, will send out to each member a syndicate letter, in which the underwriting agreement between the manager and each member of the syndicate is described.
A syndicate letter contains what?
- The duration of the underwriting
- The member’s participation or commitment
- A statement to the effect that the syndicate does not constitute a legal partnership
- A vote of a majority of the syndicate members will determine the bid and offering prices
- A carte blanche given to the manager to act “with customary authority and discretion”
- Priority or allocation schedule
- A syndicate manager may violate the terms of a syndicate letter if it is for the benefit of the syndicate account
- The amount of the management fee
Disclosure Capacity
Every B/D which is a member of the syndicate that submits an order for the purchase of municipal securities shall disclose at the time of the order if the securities are being purchased for its:
- Dealer account
- A related portfolio
- Investment trust sponsored by the B/D
- Accumulation account for an investment trust
- Group order - and if a group order, the identity of the person for whom the order is submitted.
**Members do not have to disclose purchases for public orders or designated orders. All orders are assumed to be for public customers unless indicated otherwise.
Depository Trust Company(DTC)
A registered clearing agency that compares, confirms, clears, and settles securities transactions.
Application deadlines for DTC
- Competitive Sale: Not later than 1 business day after award from the issuer.
- Negotiated Sale: Not later than 1 business day after execution of the contract to purchase the securities from the issuer.
Eastern Agreement
“Help your neighbors”. Each member of the syndicate is severally and jointly responsible for the underwriting according to his fixed participation percentage. If there remains any unsold bonds, a member who has a 10% participation will be held responsible for 10% of the unsold amount, even though he has sold all of the bonds originally allocated. This is called an undivided account.
Western Agreement
Each member is responsible for his own bonds, and not for anyone else’s.
Determining the price
After the syndicate studies the terms of the bond issue given in the official notice of sale, it will decide on how much to bid on the bonds, based upon what it think is a competitive price. The price is determined on bond buyer worksheets by the underwriter.
Allocation Procedures
- The rules adopted by an underwriting syndicate specify the priority to be given different types of orders received by the syndicate.
- MSRB rules require syndicates to adopt priority provisions in writing and to make them available to interested parties.
- MSRB Rule G-11 requires underwriters to give priority to customer orders over orders for their own account or orders for related accounts to the extent feasible and consistent with the orderly distribution of securities in the offering or unless otherwise agreed to by the issuer.
- Once the bonds have been awarded in a competitive underwriting to a particular syndicate group, bonds are allocated in the following order:
- Pre-Sale orders: Bonds first go to those who put in orders prior to the issuance of the bonds.
- Syndicate group account or group net account: Orders made for a net price for the benefit of the syndicate as a group, according to each member’s pro rata participation. Syndicate members must disclose the identity of all persons for whom an order is submitted.
- Designated orders: Orders made for a net price from customers who designate 2 or more members of the syndicate from whom they wish to buy the bonds. The take down is shared by the designated members.
- Members orders at the take-down: Orders which have been placed by a syndicate member.
- *Allocations must be disclosed to customers upon request.
- *Remember “Pretty girls demand more”
What must the syndicate manager disclose in writing to each syndicate member?
- All allocations which were higher in priority than members “take down” orders within 2 business days after the date of sale. This includes “filled orders” but not submitted orders.
- All available information on designations paid to syndicate and non-syndicate members in total dollars within 10 business days following the date of sale.
Take down and concesions
- Each member of the syndicate will buy bonds from the syndicate manager at the offering price less a “take down”.
- If a bona fide dealer in municipals is not a member of the syndicate, he will buy the bonds from the syndicate at the offering price less a “concession”.
- Anything left over by way of profit above the take down will be split among the syndicate members, after the manager’s expenses have been met.
Communications relating to issuer syndicate requirements, priority provisions, and order period
- Prior to the first offer of any securities by a syndicate manager, the manager shall furnish in writing to other members of the syndicate:
- Terms and conditions required by the issuer
- The priority provisions
- Procedures by which priority provisions can be changed
- If there is an order period whether orders may be confirmed prior to the end of the order period.
**Expenses or projected expenses of the syndicate are not included.
After the syndicate has been chosen by the issuer, it will offer the bonds on a ….
“When, as, and if issued” basis. The bonds still have to be printed by the printer, so it might be several weeks before actual delivery takes place to buyers and syndicate members.
The official Statement
Is like a prospectus and contains the most detailed financial information on a new issue of municipal bonds. If an official statement is provided by the issuer, it must be provided to all customers that purchase the new issue not later than the settlement date of the transaction. Upon request, other B/D’s must be provided with an official statement. The official statement is provided by the issuer - some issuers do not provide them, thus B/D’s would not be required to provide it.
- B/D’s cannot prepare their own internal credit reports for the public.
- The managing underwriter must provide a copy of the final official statement to all B/D’s that purchase the new issue either with a written copy or electronic version.
- If a preliminary official statement is available, it must be sent to the customer with a notice that an official statement is not being prepared.
- If a customer requests an official statement within 90 days after the underwriting period ends it must be provided to the customer within 1 business day or until the time that copies are available from the MSIL(Municipal securities information library)
Rule 15c2-12
A municipal underwriter must obtain and review the Official statement that the issuer deems final and complete prior to making a purchase or sale of municipal securities except for the offering term details
-The offering term details would not be reviewed since the offering terms have not yet been set at this time.
Official Statement Information
- When an underwriter receives the official statement from the issuer, it must submit it to EMMA within 1 business day.
- If an official statement is amended after it has been filed with the EMMA, the amendment must be filed with the EMMA no later than 1 business day after receipt.
- If an official statement has been delivered to the MSRB for an underwriting and the issue is later cancelled, the dealer must notify the EMMA promptly and in writing.
