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Series 53 > Unit 4-Origination and Syndication > Flashcards

Unit 4-Origination and Syndication Flashcards

1
Q

Securities Act of 1933

A
  • All nonexempt interstate issues must be registered
  • Issuers must provide full, fair disclosure about itself and the offering
  • Issuers must disseminate all information needed for making a reasonable judgement
  • Regulates the underwriting and distribution of new issues
  • Creates provisions of criminal repercussions for fraud surrounding new issues

NOTE: Remember, munis are exempt from the Act with the exception of the anti-fraud provision

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2
Q

Availability of OS (SEC 15c2-12)

A
  • An underwriter of an issue is making an implied recommendation
  • As such, underwriters are required to review a muni issuer’s OS for offerings of $1 million or more before bidding, buying, or selling that issue
  • The underwriter must have assurances from the issuer that there is a process in place by which to disseminate event notices to bondholders
  • Event notices for bonds with a CUSIP must be submitted to EMMA in a timely manner
  • There are very few exceptions

NOTE: While the MSRB cannot force an issuer to write an OS, the issuer will have trouble finding an underwriter for their issue without one-as underwriters need an OS as part of their due diligence mandate by the SEC. The underwriter must then submit the OS to the MSRB Gateway in electronic form

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3
Q

Continuing Disclosure Agreement (CDA)

A

A subset of 15c2-12 that specifies an issuers have agreed to provide regular information to EMMA, such as the date in which financial disclosures are made

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4
Q

Event Notices (examples)

A
  • Payment Delinquencies
  • Ratings change
  • Bond Calls
  • Withdrawal from debt service funds

NOTE: Issuers with $10 million or less in aggregate debt are exempt from filing event notices

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5
Q

For How Long Must Underwriters Distribute OS?

A

Upon customer request:

  • For 90 days after secondary trading begins OR once info is publicly available on NRMSIR
  • In all events, minimum is 25 days from the end of underwriting period
  • All requests must be honored within one business day
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6
Q

Exemptions to 15c2-12

A

Applies to muni bonds in denominations of 100K that:

  • Are sold to no more than 35 sophisticated investors
  • Mature in 9 months or less, OR
  • May be tendered or put at least every 9 months until maturity
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7
Q

Underwriter Considerations for New Issues

A
  • How much did the underwriter rely on information from issuer executives or employees?
  • The familiarity between the BD and issuer
  • Are there any credit enhancements?
  • Is the bid competitive or negotiated?
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8
Q

EMMA

A

Electronic database for event filings, real time prices, OS for new issues, 529 plan info

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9
Q

Negotiated Offering

A

The issuer submits a Request for Proposal (RFP), followed by a series of meeting to select an IB for underwriting. The winning underwriter will then help the issue prepare the OS, price, and yield of the issue

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10
Q

Competitive Bidding

A
  • Very common for GOs

- Also known as sealed bid sales or advertised sales

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11
Q

Official Notice of Sale

A

The method by which an issuer invited bidders for a new issue:

  • Date, time, place of sale
  • Name and description of issuer
  • Type of bond
  • Any restrictions on bidding process
  • Dated Date and first coupon date
  • Maturity structure
  • Call provisions (if any)
  • Denomination and registration provisions
  • A breakdown of expenses to be shared by issuer and underwriter
  • Amount of good faith deposits
  • Paying agent, trustee, or both
  • Name of firm providing legal opinion
  • Details of delivery
  • Award criteria

NOTE: Usually places by issuer in Bond Buyer

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12
Q

Bond Buyer

A

Published every business day regarding new and secondary issues

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13
Q

30 Day Visible Supply

A

The dollar volume amount of new issues expected to hit the market in the next 30 days

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14
Q

Placement Ratio

A

The percent of bonds sold each week compared to bonds offered

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15
Q

New Issue (bid) Worksheet

A

Published by Bond Buyer for underwriters to place bids, compare issues, or gather new issue data

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16
Q

Thomson Reuters

A

A more data driven portal showing yield curves, historical price performance, new issue pricing, and ratings

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17
Q

When is the syndicate created?

A

When a notice of sale is published in the Bond Buyer and the participating banks wish to make a bid

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18
Q

Considerations for IBs Joining a Syndicate

A
  • Potential demand for new issue
  • Amount of potential liability the IB faces
  • Potential profit
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19
Q

Agreement of Underwriters

A

A document detailing each syndicate members responsibilities, level of participation, and manager’s duties and responsibilities

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20
Q 
Syndicate Agreement/Letter (competitive)
Syndicate Contract (negotiated)
A
  • Level of each member’s participation
  • Order allocation priority
  • Duration of syndicate account
  • Lead account manager
  • Total takedown, manager fee, and selling group concessions
  • Other obligations (good faith deposits, general expenses, and liability for unsold bonds)
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21
Q

When are fees paid to syndicate manager and discretionary fees need to be disclosed to other members?

A

Before Date of Sale

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22
Q

Feasibility Study

A

Used by underwriters (in conjunction with a POS) when debating whether or not to bid on a pending revenue bond

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23
Q

Western Account (divided)

A

You are only responsible for your allocation

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24
Q

Eastern Accounts (Undivided)

A

Remainder of unsold bonds are redistributed based on your level of syndicate participation
-Most common

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25
Q

Establishing the Syndicate Bid (Competitive)

A

-Provides lowest Net Interest Cost to issuer and max profit for the underwriter

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26
Q

When is syndicate bid established?

A

Typically at a meeting before bid is due:

  • Price, yield, and underwriting spread is established
  • Not all members have to agree, so long as dissenters agree with majority
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27
Q

Writing the Scale

A

When determining the syndicate bid, it is the process by which maturities are assigned a yield or price
-Designed to maximize profit for syndicate

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28
Q

Firm Commitment

A

The syndicate agrees to buy the entire issue for resale. As such, the financial responsibility falls on the syndicate

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29
Q

When are good faith deposits made to the issuer?

A

At the time the syndicate submits its bid for consideration

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30
Q

Cover Bid

A

The second place bid in a competitive offering. If the first syndicate is somehow disqualified, the issue goes to the cover bid

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31
Q

Net Interest Cost (NIC)

A

The combined premium (or discount) at which a bond is issued along with the total coupon it will pay

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32
Q

True Interest Cost (TIC)

A

The same as NIC but factoring in TVM

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33
Q

Split-Rate Bid

A

Bonds with more than one interest rate

  • Bid is awarded to syndicate with the lowest average interest cost to issuer
  • If each bid call for one rate for the whole issue, it goes to the syndicate with the highest bid
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34
Q

Commitment Wire

A

A communication sent by the syndicate manager informing other members that the bid has been awarded

  • Competitive: Date of the award
  • Negotiated: Date the contract is signed
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35
Q

What is a syndicate account? When is it created?

A

The primary account in which all proceeds are deposited and from which all expenses are paid
-Also known as the joint account

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36
Q

Reoffering Bid/Reoffering Yield

A

The price at which bonds are resold to the public

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37
Q

Spread

A

Difference between price syndicate pays the issuer and the reoffering price

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38
Q

Syndicate Manager’s Fee

A

A per bond fee paid to manager for brining the issue to market

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39
Q

Underwriting Fee

A

Money (from the spread) paid by each member to cover underwriting expenses.
-Any surplus is redistributed proportionately

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40
Q

Total Takedown

A

The portion of the spread that remains after subtracting manager’s fee and underwriting fee
-It is the price at which a syndicate member buys its portion of bonds from the syndicate (not the issuer)

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41
Q

Selling Concession

A

The discount a member firm receives if a syndicate manager choses to employ them to offload bonds

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42
Q

Additional Takedown

A

What is left to the syndicate manager after giving a discount to a selling group member (if one is used)

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43
Q

All or None

A

All bonds must be sold or offer is cancelled

  • Cannot be advertised unless it is actually part of the terms of the offering
  • Does not apply to firm commitments as the syndicate has already purchased the issue
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44
Q

At the Market

A

Occasionally, the syndicate account can be used for secondary market distribution. When this is done, it cannot advertise bonds as at the market unless it believes there exists another market outside of the one the syndicate itself has created.
-Essentially, it cannot imply there is more than one market for the same security

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45
Q

Date of Sale

A

Date bid is awarded (or contract is signed)

-Also the date the commitment wire is sent

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46
Q

Presale Period

A

Time before date of sale (before bid is awarded)

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47
Q

Order Period

A

The time in which the syndicate solicits orders and allocates them regardless of the time in which they were received
-Typically only lasts a few hours

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48
Q

Underwriting Period

A
  • Begins with the earlier of the bid submission to buy the securities from the issuer OR the outright purchase from the issuer
  • End at the later of the issuer delivering securities to the syndicate OR the syndicate no longer retains an unsold balance of bonds
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49
Q

Order Allocation

A

Sent by the syndicate manager in writing to all member prior to the first offering of the syndicate to sell the issue to the public
-If the syndicate is going to accept presale orders, the allocation priority must be disclosed BEFORE the presale period begins
-All members must agree in writing to the allocation process. Any changes must be promptly disclosed in writing by the manager to the members
-The allocation method must be formal and cannot be simply up to the manager’s discretion.
NOTE: The manager may occasionally deviate from the order allocation method iff the action is for the best interest of the syndicate as a whole. Burden of proof lies with the syndicate manager

50
Q

Presale Order (First Priority)

A

An order communicated to a syndicate before submitting an official bid to the issuer. If the syndicate wins the bid, these orders take priority
-Entire takedown (minus manager fee) is deposited into the syndicate account and split amongst members

51
Q

Group Net Order (2nd Priority)

A

An order in the order period which credits the entire syndicate

  • Often used to guarantee an order is filled
  • Entire takedown (minus manager fee) is deposited into the syndicate account and split amongst members
  • Entity of the entity making GNO must be disclosed to manager
52
Q

Designated Order (3rd Priority)

A

A customer order in which credit is attributed to one or more syndicate members

53
Q

Member at the Takedown Orders (Lowest Priority)

A

An order in which a specified syndicate member receives the takedown

54
Q

When must manager disclose which orders were filled and at what priority?

A

Within 24 hours of commitment wire being sent

Remember: Date of sale and commitment wire are same day

55
Q

When does manager disclose to members what orders were given preferential priority?

A

Within 2 business days of the date of sale

56
Q

When does manager have to disclose details regarding designated orders?

A

Within 10 business days of date of sale

  • Dollar amount of credit and receiving member must be disclosed
  • Client name is not disclosed
57
Q

When does the manager have to disclose designated credits made by the issuer itself?

A

Within 15 business days of date of sale OR within 3 business days of the manager receiving the designated instructions from the issuer

58
Q

When does the syndicate manager have to pay out designated credits to the appropriate member?

A

Within 10 calendar days after the issuer delivers the securities to the syndicate

59
Q

Transmission of Payments by the Public

A

A muni BD can only accept new issuer payments iff:

1) the offering is a firm commitment
2) the money is promptly transmitted to appropriate party OR
3) It is an AON offering and the money is held in a designated escrow account until the offering is complete

60
Q

When must a syndicate account be settled?

A

No later than 30 days from the date the manager delivered securities to members. Also disclosed at this time:

  • Accounting of the syndicate account
  • Discretionary and clearing fees
  • The identity of those placing Group Net Orders
  • Identity of any related accounts that received an allocation (along with aggregate par and maturity)
  • Any other de minimis expenses

NOTE: Discretionary fees for clearing costs and management fees must also have been disclosed prior to the date of sale

61
Q

When are good faith deposits returned?

A

Within 2 business days following settlement

-If the syndicate loses the bid the manager must return deposits to members within 2 business days of the issuer returning the money to the manager

NOTE: Good faiths are typically 1-2% of overall offering

62
Q

Municipal Financial Advisors

A

Advise issuers on the structure or terms of a new issue for a fee
-Agreement must be in writing before, upon, or promptly after inception

63
Q

Municipal Financial Advisors as Underwriters

A

Typically prohibited in any capacity (direct or indirect)

  • Cannot acquire new issue bonds for its own account, or that of any BD with whom the advisory firm has a control relationship
  • The BD can act as a placement agent for the new issue, so long as it does not receive any compensation outside of what is established in the advisory contract
64
Q

Municipal Financial Advisors and Remarketing

A

Remarketing is when an issuer moves from variable rate to fixed rate, often when the project has been completed or the issuer is comfortable locking down current interest rates

  • An advisory BD can only act as a remarketing agent if it discloses to the issuer in writing:
    • A conflict of interest may exist
    • The source and basis of remuneration the BD may receive if acting as remarketing agent

NOTE: These disclosures can be made in the remarketing agreement or in a separate document
NOTE 2: The issuer must acknowledge receipt of the disclosure and agree to the remuneration

65
Q

Muni Financial Advisors Disclosure to Clients

A

If a muni BD receives bonds from an issuer it advises, all customers buying must be notified of this relationship by settlement

66
Q

State/Local Law Priority (muni financial advisors)

A

No MSRB rule supersedes any more restrictive law made by the state or local govt. regarding the activities of muni financial advisors

67
Q

Bond Contract

A

A general collection of docs spelling out agreement between issuer and underwriters/investors of a new issue. Includes:

  • Bond Resolution
  • Trust Indenture
  • Legal documents pertaining to state/local law
  • Covenants
68
Q

Bond Resolution

A

Document that authorizes a issuer to sell securities

  • Description of issuers obligations and responsibilities to bondholders
  • Revenue Statement (for revenue bonds)
  • Priority of Payments

May be split into two docs:
Authorizing Resolution-Authorizes issue of bonds
Award Resolution-Authorizes Sale of bonds

69
Q

Trust Indenture (Bond Indenture)

A

Spells out agreement between issuer and trustee appointed to act on bondholder’s behalf (covenants)
-Individual covenants are spelled out in OS
NOTE: Most common with Revenue Bonds. While technically not required, most revenue bonds are issued with an indenture
NOTE 2: The indenture is too long to be submitted to all bondholders. But must be delivered if requested

70
Q

Rate Covenant

A

Issuer must charge a rate that can substantially cover general maintenance, replacement expenses, and debt service

71
Q

Maintenance Covenant

A

Issuer promises to keep facility in good order

72
Q

Insurance Covenant

A

Issuer promises to insure the facility and/or equipment

73
Q

Non-Discrimination Covenant

A

Issuer must charge a rate to all users of the facility/equipment without bias

74
Q

Additional Bonds (open end)

A

The issuer can issue new bonds on the facility with an equal claim to previous bonds.
-Typically, new bonds must be covered by the total earnings must not fall below 125% of debt service

75
Q

Additional Bonds (closed end)

A

Any new bonds are subordinate to older bonds

-This makes newer bonds harder to market

76
Q

Sinking Fund

A

Certain bonds-especially lower credit rating-may have a sinking fund covenant

77
Q

Catastrophe/Calamity Clause

A

Issuer must redeem bonds in the event of major damage or destruction

78
Q

Outside Audit

A

The issuer must keep a separate record of all projects and submit books and records for review to an outside auditor

79
Q

Call Features

A

If applicable, will spell out call features, schedule, and methods by which a call may be issued

80
Q

Flow of Funds

A

Net Revenue Pledge-Maintenance first, debt 2nd

Gross Revenue Pledge-Debt first, maintenance 2nd

81
Q

Muni Bond Counsel (bond attorney)

A

An independent law firm reviewing the legality of the issue:

  • Issue is authorized to issue bonds
  • Bonds have been properly announced
  • Bond certs are properly printed
  • Interest is federally tax exempt
  • Issue is exempt from Act of ‘33
82
Q

Legal Opinion

A

Issued by the bond counsel:
Unqualified-states the bond is legally issued and exempt from fed taxes
Qualified-Expresses certain reservations about the issue

-Must be printed or attached to the back of each bond certificate

83
Q

Ex-legal

A

Usually comes into play with smaller issuers who cannot afford a legal opinion.
-Ex-Legal allows bond to meet good delivery without a legal opinion.

84
Q

Underwriter’s Counsel

A

A lawyer representing the underwriters interests when issuing new muni securities
-At the close of the underwriting period, the underwriter’s counsel will issue a 10b-5 certificate, attesting that material was omitted subject to the anti-fraud provisions of the Act of ‘34

85
Q

Common OS Statements

A
  • Offering Terms
  • Purpose of Issue
  • Financial stability of issuer
  • Security of bonds
  • Description of bonds
  • Project Feasibility study
  • Legal proceedings
  • Tax status
  • Other provisions: investment of funds, additional bonds, insurance, order or procedure in case of default)

NOTE: These are examples. There is no set required list of disclosures

86
Q

If a muni advisor helps prepare the OS, when must it be delivered to a syndicate manager?

A

Promptly after the award is given and at least 2 days before manager delivers securities to syndicate members

87
Q

POS

A
  • Similar to Red Herring
  • Contains similar info as OS without interest rate and offering price

NOTE: The POS does not constitute an offer to sell

88
Q

Forwarding Official Communications

A

Any doc pertaining to a specific issue:

  • Is addressed to bondholders by the issuer
  • From a trustee from an issue pertaining to the issue
  • State or federal tax authority
  • Custody agent for stripped coupon muni
  • Other info regarding the issue: monetary issues, defaults, material events, tax status updates
89
Q

BD’s responsibility to forward Official Communication

A

-If the BD holds the bonds for a customer, it may use reasonable methods by which to promptly forward the material
-If there is no CUSIP, the BD may use a description to identify the issue in question
NOTE: the BD is not in violation if it can prove it used reasonable efforts to forward the communication
NOTE 2: If an unsubstantial amount of copies of official comms are not provided, the BD may request a correction from the sender. But the BD is not expected to make copies on behalf of the sender

90
Q

BD compensation for forwarding communication

A

-A BD does not need to retransmit without compensation
-If the request to retransmit comes with compensation, transmittal may be made at the same time
-If retransmission would cost $500+, the BD may hold off on transmittal, contact the issuer of the communication, and wait for proper compensation before transmitting
NOTE: The BD can use “Suggested Rates of Reimbursement” for expenses incurred and any other reference material made available by FINRA

91
Q

Non-Objecting Beneficial Owners

A

So long as bondholders have indicated in writing that they are ok with their names and securities being discloses, the BD does not need to transmit

92
Q

Forwarding comms to Intl clients

A

The BD is not required to forward comms to intl. clients–though they may do so voluntarily

93
Q

Forwarding Comms to IARs

A

If the client authorizes in writing, official comms may be forwarded to the client’s IAR

94
Q

Negotiated Underwriting Disclosures

A
  • Spread
  • Any compensation the BD receives for acting on behalf of issuer
  • Initial offering price for each maturity

NOTE: In a competitive bid, the spread is not disclosed

95
Q

Delivery of OS

A
  • No BD may sell munis to a customer without delivering an OS (provided there is one) by settlement
  • If no OS, a statement to that effect (along with any POS) must be delivered

NOTE: This requirement is waived if the syndicate has already electronically filed the OS with EMMA prior to first execution
NOTE 2: Muni Bond Funds are exempt

96
Q

When must a manager submit an OS to EMMA?

A
  • Within one business day of receipt from the issuer and no later than the closing date
  • Must be in word-search PDF format
97
Q

What is included in OS submission to EMMA?

A
  • Issuer name and description
  • CUSIP issuer name, description, and state
  • Par
  • Dated Date
  • Expected closing Date (bond closing date)
  • Formal award date and time
  • Fist execution date and time
  • Any advance refund provisions
98
Q

Disclosures for VRDOs

A

CUSIP and other info must be disclosed for any instrument that has its interest reset as frequently as every 9 months.
-Submitted electronically to SHORT system by 6PM EST

99
Q

New Information Dissemination System (NIIDS)

A

A system by which new issue information is collected and disseminated to vendors in real time
-Maintained by DTCC

100
Q

Who acquires the CUSIP

A

Typically the syndicate manager. But it may the muni advisor (if one is used)

101
Q

When must a manager apply for a CUSIP?

A
  • Immediately after receiving notice of award
  • Manager must make sure CUSIP is assigned by time of first execution

NOTE: If muni advisor is involved, must obtain CUSIP no later than 1 business day after dissemination of Notice of Sale and make sure CUSIP is acquired by time award is made to underwriter

102
Q

What accompanies a CUSIP application?

A
  • Copy of OS or POS

- Legal opinion (if applicable)

103
Q

Time of first execution

A

The time the underwriter plans to make first trade execution in a new issue

104
Q

When must an application be made to DTCC for deposit?

A

Within 1 business day of award date

NOTE: Requirement is waived if security matures in 60 days or less or is (for whatever reason) depository ineligible. In either case, CUSIP must still be disclosed along with a description of the issue

105
Q

Credit Enhancements (CUSIP Update)

A

If an existing issue receives some form of credit enhancement such as:
-Letter of Credit
-Insurance on debt service
-Put Option
-Prerefunding
If the credit enhancement does not apply to the whole issue, a separate CUSIP is needed to distinguish the credit enhanced bonds

106
Q

Advertising New Issues

A

A syndicate member can place an ad for a new issue with reoffering price or yield (even if these have changed) provided that the ad contains the date of sale and the price/yield was effective at the time of publication
-Must also state that issue may have been sold or may be available at different price/yield listed in the ad
NOTE: As always, a member cannot publish an ad for an issue that it knows is already presold in entirety

107
Q

Municipal Financial Professional (MFPs)

A 
Any AP engaged in:
-Muni Rep activities
-Underwriting
-Trading
-Sales
-Advisory capacity
-Research and Investment Advice
-Activities that involve communication with public
NOTE: Does not apply to sales to natural persons and those activities that are purely clerical
108
Q

For how long do APs continue to be considered an MFP?

A

A year following their reclassification to another position

109
Q

Political Contributions (Negotiated Underwritings and Muni Advisory)

A

BDs are barred from any muni business for 2 years following a contribution to a candidate of an issuer made by:

  • The firm itself
  • Any MFP associated with the firm (6 mo. lookback)
  • Non MFP executives and officers
  • Any PAC controlled by the for or MFPs

NOTE: Competitive bids are based on NIC and not subject to these rules

110
Q

What contributions do not result in a ban?

A

$250 to a candidate the MFP is eligible to vote for

NOTE: This does not apply to contributions made by the firm itself
NOTE 2: If an MFP triggers an ban and then leaves to join another firm, both firms are banned for the remainder of the 2 year period

111
Q

Contribution Definition

A

Any gift, donation, loan, designed to influence an election
-This also applies to donations made to help pay off campaign debt and contributions to transition teams for successful candidates

112
Q

Federal and State Officials

A

G-37 applies to current officers of an issue running for a federal office (House, Senate, Presidency).

EX. DeSantis running for President

However, donations to a current president running for re-election would only be subject to FEC rules

113
Q

Political Contributions made by MFP Spouse

A
  • If issued from a joint account with the MFP, the MFP is considered to have donated 50%
  • If the spouse donates alone (or anyone else in household), do not trigger the rule

NOTE: An MFP cannot use a non-MFP to circumvent the rule

114
Q

Reporting Political Contributions

A

Must be filed quarterly with MSRB by month end following quarter end (e.g., April 30th for end of Q1)
-Must be sent by physical mail (no fax or email)q

115
Q

Automatic Exemptions and Clawbacks

A

A BD may avoid 2 year ban if:

  • The BD discovers the prohibited contribution within 4 months of contribution date
  • The contributions does not exceed $250 AND
  • The contributor clawsback the contribution within 60 calendar days of discovery

NOTE: The BD may only use this exemption twice in a rolling 12 month period. However, only one exemption can be made if the contributions came from the same MFP–no matter the time frame

116
Q

Form G-37X

A

Used by BDs to declare their exemption to rule G-37

-Must not have engaged in muni business for 8 consecutive calendar quarters

117
Q

How long must Form G-37s be kept?

A

6 years

118
Q

Solicitation of Muni Business by Consultants (G-38)

A

Designed to reign in aggressive solicitation tactics by consultants outside of the muni BD
-Soliciting consultants must be affiliated with the BD
in some way

119
Q

Affiliated Person

A
  • Any partner, director, executive, employee of the BD

- An affiliated company of the BD

120
Q

Affiliated Company

A

Any entity directly or indirectly controlled by the BD

Series 53 (5 decks)

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