SIFMA model documents learn from new issue price rule

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ST. LOUIS – The Securities Industry and Financial Markets Association unveiled new model issue price documents just shy of a year after the effectiveness of a new issue price rule, which most issuers seem to think is working smoothly.

The new SIFMA documents, dubbed “Version 2.0,” make a variety of changes to the model documentation that the group first released on May 2, 2017. The Treasury’s issue price rules for municipal securities have been effective since June 7, 2017, and issuers in the Government Finance Officers Association’s Committee on Governmental Debt Management meeting at the beginning of the GFOA’s annual conference indicated that they haven’t run into serious problems with the new regulations. SIFMA told the committee that the new model documents were largely the result of feedback from both SIFMA members and other groups like the GFOA after several months of experience with the new issue price rule.

Issue price regulations are critical for issuers because issue price determines the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements, among other things. Under the previous regulations, 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 rules that took effect last year, 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 at the sale date, issuers and dealers can use the initial offering price (IOP) as the issue price as long as the underwriters hold it for five business days after the sale date.

For competitive sales, issuers and underwriters can treat the reasonably expected IOP of the bonds as the issue price as long as the issuer receives at least three bids for the bonds and meets certain other conditions. If three bids are not received, underwriters can still opt to hold the price for five days or wait until 10% of each maturity is sold. In some cases they can opt out of the transaction.

“We appreciate the industry’s valuable input on the updates to the model documents”, said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s Municipal Securities Division. “They are designed to make it easier for our members to assist their issuer clients in complying with the issue price rules, in understanding the expectations of market participants while promoting transparency of sales terms for both issuers and underwriters, and to help reduce legal costs and regulatory risk while increasing legal certainty, for the benefit of all market participants. We felt it important to update the existing documents to maximize their usefulness to the industry.”

Among the changes included are expansions and clarifications to the sections of the documents that assign liability to firms for their failures to comply with the rules, requiring the firm at fault to indemnify the others on the transaction. Norwood said this change was made to be certain that liability for errors is placed where it belongs. The new documents also require that the syndicate manager be notified of any issue price compliance failure and allow the manager to otherwise assume that each underwriter has complied with its obligations for establishing issue price.

The changes between the first and second generations of the SIFMA documents highlighted on SIFMA’s website where the original “Version 1.0” documents are also still available. Norwood said that no particular market practice led to the creation of “Version 2.0,” but that they arose out of experience after a few months of working with the new rules.

A year ago, issuers on the debt committee were anxious about the soon-to-be effective rule, particularly for smaller issuers who use competitive sales and might not get three bids. But the reality a year later is that most market participants believe the issue price rules are working fairly smoothly. Offered the chance to voice continuing concerns or problems with the issue price regulations, no member of the committee chose to do so. One member noted that they had done a competitive deal shortly after the effective date, but received far more than three bids and so were at no risk of failing to meet the requirements for establishing issue price. Another member noted that many underwriters are simply assuming that they will be holding the price, something that some issuers believe is costing them money although they do not yet have sufficient data to show that.

“I don’t know too many underwriters who don’t want to be compensated for risk,” one committee member said, adding that in at least some cases he is fine simply waiting for 10% of the bonds to sell.

Norwood told the committee that SIFMA model documents are intended as a template, and they can be tailored to meet the preferences of the participants in a given transaction. The National Association of Bond Lawyers is reviewing the new SIFMA documents already.

The GFOA’s conference concludes May 9.

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