WASHINGTON – The Securities Industry and Financial Markets Association has issued final model documents for issue price rules that contain four instead of three alternative Notices of Sale for competitive transactions.

“We’re trying to make a clearer set of options that will work for almost all fact patterns for competitive sales,” said Leslie Norwood, SIFMA managing director, associate general counsel and co-head of the municipal securities division.

The MSRB's proposal would expand Rule G-34 beyond its intent, SIFMA's Leslie Norwood told the SEC.
Leslie Norwood, SIFMA managing director, associate general counsel and co-head of the municipal securities division.
The revised bond documents for issue price are intended to promote transparency and increase legal certainty for all market participants, said SIFMA's Leslie Norwood.

She said the documents should help with “understanding the expectations of market participants while promoting transparency of sales terms for both issuers and underwriters.” They should also “help reduce regulatory costs and regulatory risk while increasing legal certainty for the benefit of all market participants,” she added.

The documents also refine the definition of a “related party” and clarify the obligations of the syndicate and selling group to the lead manager in a transaction, among other things.

SIFMA made the revisions to the documents, which besides the Notice of Sale, also include the Master Agreement Among Underwriters, the Master Selling Group Agreement, the Retail Distribution Agreement and the Model Bond Purchase Agreement, after seeking input from municipal market groups. The group proposed the model documents on March 29.

The Treasury Department’s issue price rules take effect on June 7. Issue price is important because it determines the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements. It also determines whether the subsidy payments for direct-pay bonds such as Build America Bonds are appropriate.

Generally the rules say that 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, the issue price is the initial offering price as long as underwriters hold the IOP for five business days after the sale date or until 10% of the maturity is sold, if sooner.

The rules contain an exemption for competitive sales under which an issuer can treat the reasonably expected IOP of the bonds to be the issue price if the issuer obtains a certification from the winning underwriter as to the reasonably expected IOP upon which it based its bid. But this exemption is conditioned on, among other things, the issuer receiving at least three bids from separate underwriters and awarding the bonds to the bidder who offers the highest price or lowest interest cost.

In its draft documents, SIFMA introduced to the market for the first time the concept of revocable and non-revocable bids and drafted several Notices of Sale accordingly. The final documents replace no longer use that terminology and instead refer to just confirming or cancelling bids, There are four alternatives, three of which would not necessarily subject the underwriter to the hold-the-offering-price requirement.

Under the first alternative Notice of Sale, the issuer agrees to refrain from requiring underwriters to “hold the offering price” for five days. In this case, if the issuer doesn’t meet the requirements for a competitive sale, the underwriter will base the issue price on the prices for 10% of each maturity of bonds sold.

This alternative would most likely be used if the issuer does not need to determine the issue price of the munis on the sale date. It would probably not be used for advance refundings where the issuer needs to know the issue price in order to determine the rate at which to invest the proceeds and hold them under an escrow agreement until the bonds are called or mature and can be refunded.

In the second alternative, the issuer may invoke the “hold-the-offering-price” requirement for underwriters if the competitive sale requirements are not met. This is the one option likely to involve increased cost for issuers because underwriters will likely price in their concerns that they may be asked to hold the offering price for up to five business days. This replaces the earlier proposed non-revocable bid concept. The issuer could use this alternative if it must determine the issue price of the securities on the sale date.

Under a third alternative, underwriters bidding on the bonds expect that the competitive sale requirements will be met. If they are not, the winning underwriter can either cancel its bid or, within 90 minutes after notification from the issuer that it is invoking the hold-the-offering price rule, confirm its bid.

A fourth alternative is where underwriters expect the competitive sale requirements will be met and the sale will be cancelled if they are not.

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