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Series 52 > Unit 5-Syndication of Municipal Issues > Flashcards

Unit 5-Syndication of Municipal Issues Flashcards

1
Q

SEC Rule 15c2-12

A

-Assumes underwriting is an implied recommendation
-Underwriters must review an issuer’s OS before making any bid for issues exceeding $1 million (very few exceptions)
-Before an underwriter purchases a new issue, it must have done due diligence to make sure the issue can provide timely event notices to EMMA (ratings change, delinquencies, calls, draws on debt services)
NOTE: Remember, the MSRB cannot require an OS (although almost all of them have them) as the issuer makes the OS and the MSRB cannot regulate issuers

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2
Q

Rules for Distributing OS to Customers

A

Underwriters must distribute a final OS to any potential customer for 90 days after secondary trading begins or until the OS is publicly available on NRMSIR
-The period for delivering an OS on request must be no longer than 25 days from the end of the underwriting period

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3
Q

Exception to OS Distribution

A

Bonds in denomination of 100K that:
-Are sold to more than 35 people who have sophistication
-Mature in 9 months or less
-Can be put or tendered at least every 9 months until maturity
NOTE: Event notices do not need to be made to EMMA if the issuer has less than $10 million in aggregate bonds (including the issue in question)

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4
Q

Types of Issuing

A
  • Negotiated
  • Private Placement (also negotiated)
  • Competitive
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5
Q

Negotiated Underwriting

A

The issuer contracts an IB directly to assist with preparation of the OS, interest rate and price, along with financial feasibility studies

  • IBs are usually drafted after looking over Requests for Proposal (RFP)
  • IBs are more concerned with demonstrating their services and expertise as opposed to making a bid that may or may not be accepted
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6
Q

Competitive Underwriting

A
  • Very common with GOs (may even be required)
  • A municipality has already done all the necessary studies for the issue, and is now opening the window rot accept underwriting bids from various IBs
  • Interested IBs will reach out to the issuer’s lawyer, advisor, etc. do request documents regarding the pending issue
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7
Q

Official Notice of Sale

A
  • Usually placed by the issuer in the Bond Buyer to advertise new issues up for bid. Usually includes:
  • Date, time, place of sales
  • Name of issuer
  • Type of Bond
  • Bidding restrictions
  • Dated date and first coupon date
  • Interest payment date
  • Maturity structure
  • Any call provisions
  • Denominations
  • Expenses to be split between issuer and IB
  • Amount of good faith deposits
  • Paying agent, trustee, or both
  • Name of law firm providing legal opinion
  • Delivery details
  • Criteria for awarding the issue
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8
Q

The Bond Buyer and Thomson Reuters

A
  • Published online every business day detailing info about new and secondary municipal bonds
  • Each week, will publish 30-day visible supply, the total dollar volume of new issues expected to hit the market in the next 30 days
  • Publishes placement ratio
  • Thomson publishes more in depth info like yield curves, data feeds, historical data, new issue pricing, and ratings
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9
Q

What is a syndicate?

A

A group of IBs working together on the same issue in order to spread risk and assure distribution

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10
Q

What do firms consider before joining a syndicate?

A
  • Demand for the issue
  • Level of potential financial liability
  • Potential profit to be made
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11
Q

Syndicate Letter or Agreement (contract for negotiated)

A

The formal agreement between syndicate members including:
-Level of participation
-Order allocation priority
-Duration of syndicate account
-Appointment of syndicate manager for syndicate acct
-Total takedown, fees, and concessions
-Other items like good faith deposits, general expenses, and liability for unsold bonds
NOTE: All fees paid to the syndicate manager and discretionary fees must be disclosed to all members before date of sale
NOTE 2: Syndicate letters are not binding until the syndicate manager submits the bid. Members may pull out any time before

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12
Q

Divided/Western Accounts

A

Each member is only responsible for their allocation

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13
Q

Undivided/Eastern Accounts

A

Think Communism
-Each underwriter is responsible for allocating any remaining bonds in proportion to their original allocation
NOTE: Eastern accounts are most common

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14
Q

Syndicate Bid

A

Designed to provide issuer with lowest net interest cost and syndicate most profit upon resale

  • Before bids are due, the manager will summon all members to agree on price and/yield as well as the underwriting spread
  • If a consensus is not reached, bid can still take place as long as all members agree to abide by majority opinion
  • Bids are then submitted with the requisite good faith deposit
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15
Q

Writing the Scale

A

The process by which a syndicate established the reordering price or yield

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16
Q

Firm Commitment

A

In a competitive bid, syndicate members bear financial risk. Hence why proposals are so diligently arrived at

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17
Q

Awarding a Bid

A

The issuer will award the bid to the syndicate that provides lowest net interest cost or true interest cost
-Losing syndicates will have their good faith deposits returned. The losing manager must return the funds to other members within 2 business days

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18
Q

Net Interest Cost (NIC)

A

Combines premium or discount at which bonds will be offered with the total coupon interest it will pay

Calculation:
NIC=Total interest payment +discount (-premium) ÷ Bond Year Dollars

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19
Q

True Interest Cost (TIC)

A

Same as NIC but factors in TVM.

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20
Q

Split-Rate Bid

A

Bids with more than one interest rate (usually do to several maturities).

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21
Q

Commitment Wire

A

The message sent by a syndicate manager to let members know it has been awarded issue

  • For competitive bids, it is sent when bid is awarded
  • For negotiated bid, it is sent when contract is signed
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22
Q

Bond Year

A

The number of $1000 bonds of a maturity x the number of years a bond is outstanding

EX. A $1000 bond with 6 year to maturity has a bond year dollar value of $6000

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23
Q

Syndicate Account

A

Established once an issue is awarded. It is the account for which all proceeds and expenses of the syndicate will be made to/from

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24
Q

The Spread (syndicate compensation)

A

The difference between the price the syndicate pays the issuer and the reordering price (yield)

  • The total spread is also called gross spread, the underwriter’s discount, or underwriter’s fee
  • In competitive offerings, spread does not need to be disclosed
  • In negotiated underwriting, spread and all other agent fees must be disclosed
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25
Q

Syndicate Manager’s Fee

A

A per bond fee the syndicate manager receives for bringing the issue to market

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26
Q

Underwriting Fee

A

Each syndicate member contributes a portion of their spread to cover syndicate expenses. Any remaining funds are later distributed to members in accordance with their level or participation

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27
Q

Takedown

A

The portion of the spread after the manager’s fee and underwriting fee are deducted

  • It is the discount at which syndicate members buy bonds from the issuer
  • Largest portion of total spread
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28
Q

Selling Concession

A
  • The discount offered by syndicate members when employ a selling group (think Goldman and Schwab)
  • It is part of the total takedown
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29
Q

Additional Takedown

A

The amount the syndicate member keeps of the original total takedown after providing a discount to selling group member

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30
Q

All or None

A

States the entire issue must be sold or cancelled

  • A issuer soliciting bids cannot deem AON unless that is actually codified in the terms of the offering
  • Not applicable when there is a firm commitment, as the syndicate already agreed to buy the bonds directly from the issuer
31
Q

At the Market Offers

A
  • A syndicate is the most common method by which to distribute new issues (an often secondary issues)
  • A municipal dealer participating in a syndicate cannot claim securities are being sold At the Market unless is has a reasonable basis to believe a market exists outside the one created by the syndicate itself
32
Q

Date of Sale

A

Competitive: Date bid is awarded
Negotiated: Day contract is signed

33
Q

Presale Period

A

Period preceding the date of sale

34
Q

Order Period

A

The period set by the syndicate manager in which syndicate members solicit customers for the new issue. and all orders are allocated regardless in the order in which they were received

  • Period usually lasts a few hours after bid is awarded
  • There are often order periods reserved exclusively for retail customers
35
Q

Underwriting Period

A

Is triggered by the first submission of an order to the syndicate to buy the securities or the purchase of securities from the issuer, whichever comes first
-The period ends when the issuer delivers securities to the syndicate or the syndicate no longer has any unsold bonds, whichever is last

36
Q

Order Allocation

A
  • The MSRB mandates syndicates have a formal allocation process
  • This is usually spelled out in syndicate agreement
  • Priority process must be disclosed to any customer who makes a request in writing
  • There are usually provisions in which the manager can deviate from the scheduled priority if it is in the syndicate’s best interest. However, these are on a case by case basis and must be justifiable by the syndicate manager
37
Q

Presale Orders

A
  • Highest priority
  • Takes place before date of sale
  • Syndicate members do not get a takedown. The total spread (minus manager fee) is deposited into syndicate account
38
Q

Group Net Orders

A
  • 2nd highest priority
  • Syndicate member credits sale to the entire syndicate (as opposed to itself) to help ensure order will be filled
  • Takedown is deposited into the account and then split based on participation
  • Only order in which person making order must be disclosed to manager
39
Q

Designated Order

A
  • 3rd Priority
  • An order filled for a customer by a syndicate member but with instructions that other members should also receive credit for the sale (part of the takedown)
  • Must be disclosed to all members within 10 business days of date of sale
  • Designated credits must be distributed to applicable syndicate members within 10 calendar days after the date the issue delivers securities to syndicate
40
Q

Member at the Takedown

A
  • Lowest Priority
  • Syndicate member placing order receives takedown
  • All order a syndicate member places for itself (or for an account it controls) must be disclosed and coded as member orders
41
Q

When must allocation be completed?

A

Within 24 hours of sending commitment wire
-Within 2 business days of the date of sale, the manager must disclose to all members orders that were given priority over member takedown orders

42
Q

Transmission of Payments

A

A muni dealer can accept payment from public customers for an issue it is participating in iff:

  • Its a firm commitment underwriting
  • The money is promptly transmitted to the correct party
  • The distribution is AON and money is held in a proper escrow account until the completion of the offering
43
Q

Other Syndicate Rules

A
  • Manager must furnish a detailed accounting of the syndicate account before or at time of syndicate settlement
  • All fees and expenses
  • Summary of allocation
  • Identity of each individual submitting a group order
44
Q

When is syndicate settlement?

A

No later than 30 calendar days after date syndicate manager delivers securities to syndicate members

45
Q

Good Faith Deposits

A
  • Usually less than 5% of total issue for sale
  • May also be secured with a surety bond
  • Returned to syndicate members within 2 business days of syndicate settlement
46
Q

Municipal Advisors as Underwriters

A
  • Generally prohibited (even as a selling group member)
  • Ok if BD helps allocate new issue so long as it does not receive any compensation in addition to its contractual advisory fee
47
Q

Remarketing

A
  • Used by issuers to go from variable rates to fixed
  • Often when project has been completed and issuer feels comfortable locking in rates long term
  • Advisory BDs cannot act as remarketing agent, but can be listed as a successor remarketing agent if the advisory relationship has been terminated for at least one year
48
Q

Applicable State and Local Laws

A

MSRB rules are subordinate to any more stringent state and local laws regulating the activities of financial advisors (muni advisors)

49
Q

Municipal Bond Counsel (bond attorney)

A

A disinterested party (law firm) that advises the municipality during the preparation of a new issue: Some roles:

  • The issuer is authorized to issue debt
  • Bonds have been properly announced
  • Bond certificates have been properly printed
  • Interest is federally tax exempt
  • Issue is exempt from Act of ‘33
50
Q

Legal Opinion

A

Used to determine tax exempt status of an issue as well as to disclose any call provisions, tax status of issuer, and general description of bond
NOTE: For smaller issuers that do not hire a bond counsel, all issues must clearly be marked “ex-legal”

51
Q

Bond Bank

A

A pool of small municipal offerings to attract investors.

-Compiled from a state’s bond bank, whose credit rating backs the issues

52
Q

Underwriter Counsel

A
  • Law firm hired to represent the underwriter
  • Prepares 10b-5 certificate at the closing of a syndicate attesting that no material information has been omitted
  • Has no role in the legal opinion of the offering
53
Q

Availability of OS

A

If a muni advisor helps prepare an OS for an issuer, it must provide the final OS promptly to the syndicate manager after an award is made and at least 2 days before the syndicate manager distributes securities to syndicate members

54
Q

Official Communication

A

Any written material:

  • Addressed to a municipal investor from the issuer
  • From a trustee of a muni on behalf of the muni
  • State/Local Tax Authority
  • Custody agent for stripped coupon muni
  • Contains other relevant information regarding the issue
55
Q

Rules for Forwarding Official Communication

A
  • If a BD receives communication from an issuer/agent of an issuer for a muni it holds on behalf of a customer, it must use reasonable resources to promptly forward the communication
  • CUSIP may be used to identify issue and owner
  • If no CUSIP, the BD must investigate to what issue the communication applies
  • The BD is not in violation if it does not forward if it can prove it used reasonable effort
  • BD’s may (but are not required) to forward info to investors residing overseas
  • BDs may forward communications to an IAR if the client has indicated in writing this is acceptable
56
Q

Compensating BDs for forwarding communication

A
  • A BD may forward communication and charge the issuer a service fee at the same time
  • If the amount is to exceed $500, the BD may wait for compensation before forwarding
  • BD’s should look to FINRA’s suggested rates of reimbursement
57
Q

What do BDs do if there is no OS to give client?

A
  • It must inform clients that there is no OS and provide a copy of the POS (if available)
  • Requirement is waived if issuer has already filed with EMMA
58
Q

New Issue Information Dissemination System (NIIDS)

A

-Operated by DTCC and integrated with EMMA, it serves as the central databank in which official documents relating to new issues are collected and disseminated real-time to vendors

59
Q

Committee on Uniform Securities Identification Procedure (CUSIP)

A
  • Used in U.S. and Canada
  • Not assigned to those notes or bonds maturing in 9 months of less
  • -System is owned by American Bankers Association and maintained by S&P
  • Formalizes clearing and settlement
60
Q

When do CUSIPS need to be obtained? Who does it?

A

The underwriter must secure CUSIP no later than the time of final pricing for negotiated offers.
-In a competitive bid, the issuer’s municipal advisor must have a CUSIP no later than one business day after dissemination of notice of sale

61
Q

Depository Eligibility

A
  • Underwriter must apply with DTCC to register new issues no later than one day after award of bid, or signing of contract
  • Not required if the issue matures in 60 days or less OR, is ineligible for deposit for some other reason
62
Q

Secondary Credit Enhancement

A

If, after trading begins on the secondary, an issuer is able to secure a credit enhancement on a portion of, but not all, maturities in the issue, it must apply for a new CUSIP in order that they may be distinguished

63
Q

Political Contributions G-37

A

Focuses on:
-Negotiated Underwritings
-Private Placements with a remarketing agent
-Municipal Advisors assisting on new issue(s)
NOTE: Rule does not apply to competitive bids as those are awarded based on lowest NIC to issuer

64
Q

Municipal Financial Professional (MFP)

A

Anyone AP who assists in underwriting, private placement, trading, research, investment advice, or any other communication with the public

  • Not applicable if task is purely ministerial or only involves sales to natural persons
  • A person is subject to MFP rules for up to open year after leaving their role
65
Q

Prohibitions Against Muni Firms when political contributions are made

A

A muni firm cannot be contracted as a negotiated underwriter or financial advisor of a muni issue for 2 years after a political contribution is made to any officer of that issuer by:

  • The muni firm itself
  • Any MFP of the firm (with a 6 month look-back)
  • Any non-MFP executive officer of the muni firm
  • Any PAC controlled by the firm or MFPs (backdoor)
66
Q

Contribution Limits

A

-$250 by an MFP who is eligible to vote for the candidate
-Any contribution by an MFP to a candidate they are not eligible to vote for triggers the 2 year prohibition and look-back
-The $250 de minimus rule does not apply to contributions made by the muni firm itself
NOTE: The $250 rule is per election. So an MFP could donate to the primary campaign and then again for the general without triggering anything
NOTE: If an MFP triggers the 2 year window and one firm and then leaves to join another firm, both firms are subject to whatever remaining time is on the 2 year balance

67
Q

Contribution Definition

A

Any monetary donation, gift, loan for the purpose of influencing an election
-Also includes offer to pay off debt expenses incurred by a campaign or transition committee

68
Q

Federal Contributions

A

The $250 rule applies only if the person running to national office (U.S. House, Senate, President) is already a current officer of an issuer (e.g., governor running for senate)
-A current president running for reelection would only be subject to FEC rules

69
Q

Contributions from (or including a spouse)

A

A contribution made from an MFP and his spouse on a joint check will be deemed to have been made 50% of the amount
-Additionally, the spouse could make a contribution on their own. The rule only applies to MFPs who directly make contributions
NOTE: The rule will be triggered if it is discovered the MFP funneled money to a non-MFP to make a contribution

70
Q

Contribution Reporting

A

Firms must submit contribution info to EMMA on the last day of the month following a quarter end (e.g., April 30th)

71
Q

Contributions Exemptions (avoiding 2 year rule)

A

-BD discovers contribution within 4 months of donation
-Contribution does not exceed $250
-The contributor is repaid the money within 60 days of discovery
NOTE: A BD is entitled to 2 exemptions per rolling 12 month period

72
Q

Form G-37X

A

Allows BD to be exempt from G-37 political contribution rules if it has not engaged in muni business for 8 consecutive quarters
-Form must be retained for 6 years

73
Q

Rules Concerning Business Solicitation from Consultants

A

In order to curtail aggressive consultant behavior, the MSRB implemented Rule G-38

  • A BD cannot pay a person to solicit municipal securities business unless that person is affiliated with the firm
  • Affiliated means: partner, director, officer or employee of the main firm OR and affiliated company of the BD (a company that the primary BD directly or indirectly controls)

Series 52 (10 decks)

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