MSRB concept proposal touches on pricing, disclosure

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PHOENIX – The Municipal Securities Rulemaking Board is asking market participants whether syndicate members should be required to make a “bona fide public offering” of municipal securities, underwriters should have to report details about advance refundings more quickly, and issue price rules have affected primary offerings.

Several proposals and numerous questions populate the 14-page concept proposal on primary market practices that the MSRB released oThursday. The board had announced following its July meeting that it would be issuing a wide-ranging concept release on primary offering proposals. The MSRB typically deploys concept proposals as a prelude to amending its rules, giving market participants a chance to provide input at an early stage of the process. This release touches on rules G-11 on primary offering practices and G-32 on disclosures in connection with primary offerings.

“Issuing a concept proposal is an important way for the MSRB to collect information that helps us understand the varied perspectives of municipal market participants and determine whether there are in fact issues to be addressed, either by advancing a rule proposal or considering alternative approaches such as providing guidance,” said MSRB executive director Lynnette Kelly.

The comments are due no later than Nov. 13.

The first question the MSRB’s release asks is whether it should amend G-11 to require members of syndicates to make a bona fide public offering of the bonds allocated to them at the public offering price. Syndicate members sometimes agree to this in documents signed before the sale, but the MSRB said it is aware that they do not always do so and often face little consequence for violating that contractual agreement.

The board has considered this question in the past, but declined to act on it and is now asking whether changing market conditions warrant it.

MSRB\ also seeks input on details, such as how to define a bona fide public offering and how underwriters could document compliance.

Other possible G-11 amendments discussed in the release include requiring the senior syndicate manager to inform all other syndicate members simultaneously when a bond purchase agreement is executed, and explicitly stating that, in negotiated sales, retail or institutional priority orders must be allocated up to the amount of priority set by the issuer before allocating to lower priority orders.

On the disclosure side, the board is seeking feedback on the possibility of codifying that underwriters in an advance refunding deal must disclose, within a shorter timeframe and to all market participants at the same time, the CUSIPs refunded and the percentages. Currently, the rule requires that underwriters submit information no later than five business days after closing.

“Accordingly, the market is sometimes unaware of the particular CUSIPs refunded until after the five-day period, and market participants may have unequal access to this information during the five-day period,” the MSRB noted.

The MSRB further asked whether to require the submission of preliminary official statements to EMMA, which some issuers due voluntarily but are not required to do so. Another possible G-32 change could require non-dealer municipal advisors who prepare an official statement on behalf of an issuer to make the OS available to the managing underwriter when the issuer approves it. This is currently required only of MAs who are also dealers.

The MSRB release ends with some general questions, including one about the impact of issue price on the primary offering market. Under rules that had been in place for years, the issue price of each publicly offered maturity of bonds was generally the first price at which 10% of the bonds was reasonably expected to be sold to the public.

Under the new rule, which became effective in June, the issue price is the price at which the first 10% of a maturity of bonds is actually sold to the public. If 10% of a maturity is not sold, a special rule can be used under which the issue price is the initial offering price (IOP) as long as the underwriters hold the IOP for five business days after the sale date.

The rules contain an exemption for competitive sales under which an issuer may treat the reasonably expected IOP of the bonds to be the issue price if the issuer obtains at least three bids for its bonds and a certification from the winning underwriter bidder as to the reasonably expected IOP upon which it based its bid. The issuer must also award the bonds to the bidder who offers the highest price or lowest interest cost.

“Has the IRS’s issue price rule impacted any primary offering practices in the municipal securities market, and in what ways?” the MSRB asked. “If any MSRB rules are affected, what, if any, amendments should be considered?”

Following the comment period, the MSRB could either take no new action, or could formally propose rule changes.

Leslie Norwood, the Securities Industry and FInancial Markets Association managing director, associate general counsel, and co-head of the muni division, said that SIFMA is reviewing the concept proposal.

"We appreciate that the MSRB’s approach is to solicit information from the industry before proposing any rule changes. SIFMA will be focusing on areas where the MSRB can be helpful to the efficiency of the market, such as auto-populating fields in the Form-32 with information it already receives through the [New Issue Information Dissemination Service] from the DTCC," she said..

“SIFMA feels strongly that where market participants can have the flexibility to handle matters and ensure orderly markets contractually, that they should be permitted to continue to do so," Norwood added. "SIFMA has long maintained a model agreement among underwriters [MAAU], which contractually sets forth the legal relationships between syndicate members in competitive and negotiated offerings. As the MSRB is currently reviewing its rules regarding primary offering practices, so too is SIFMA reviewing its MAAU to ensure it reflects current market practices. SIFMA will be submitting a response letter to the MSRB.”

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