Syndicate Preselling and Missing Continuing Disclosure Undertaking
You are the syndicate manager and municipal securities principal for a firm serving as senior manager on a $45 million negotiated revenue bond issue for a water utility. The issuer wants to market the bonds next week. The preliminary official statement is dated, but the issuer has not signed a continuing disclosure undertaking. A syndicate member asks to presell $8 million to retail customers using the preliminary official statement and to redact the section on continuing disclosure because the issuer will sign later. Another syndicate member is also paid as the issuer’s municipal advisor on the same financing. The issuer wants the bonds priced on a negotiated basis with a 10-year call.
1. Can the firm permit the preselling and the redaction? Explain.
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No. Two independent problems make the proposal unacceptable:
- Rule 15c2-12: An underwriter must obtain a continuing disclosure undertaking from the issuer before bidding for or purchasing the bonds. Preselling before the undertaking is signed is not permitted for the underwriter’s participation.
- G-32 disclosure: The underwriter must ensure the official statement is provided to customers and submitted to EMMA. A redacted official statement omitting the continuing disclosure section would be materially misleading and would violate G-17 fair dealing.
Preselling with a preliminary official statement can be permissible only when the document is complete except for pricing and the continuing disclosure undertaking is in place. The principal should refuse the redaction request and halt preselling until the undertaking is executed.
2. What must be completed before the firm commits as underwriter?
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Before committing, the principal should confirm:
- Executed continuing disclosure undertaking satisfying Rule 15c2-12, including annual filings and event notices.
- Due diligence on the issuer and the official statement, including the water utility’s financials and the security pledge.
- Final official statement review and G-32 submission to EMMA.
- Syndicate agreement and allocation procedures, including the 10-year call terms.
- Conflict review for the syndicate member that also serves as municipal advisor.
The principal’s sign-off should be documented. If any item is missing, the firm should not commit, because the underwriting obligation attaches before the bonds are priced and sold.
3. How should the firm address the syndicate member that is also the issuer’s municipal advisor?
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The dual role is a conflict that must be disclosed and managed. The principal should:
- Require the member to disclose the municipal advisory relationship to the issuer and the syndicate.
- Obtain the issuer’s informed consent to the member’s participation in the underwriting.
- Establish information barriers so the member does not use confidential issuer information in syndicate decisions.
- Document the conflict review and any conditions imposed.
If the conflict cannot be managed, the member should be removed from the syndicate. The analysis should be under G-17 fair dealing and the firm’s supervisory procedures, not merely a verbal assurance.