Municipal Securities Issuance and Underwriting
What the underwriter owes
In a primary offering the underwriter's duties run three ways: to the issuer (due diligence and a reasonable basis for the offering price), to the market (SEC Rule 15c2-12), and to customers (MSRB disclosure rules). Under 15c2-12, before bidding for or purchasing a primary offering of $1,000,000 or more, the underwriter must reasonably determine that the issuer has agreed in writing to provide annual financial information and event notices; the final official statement must reach the underwriter no later than seven business days after the date of the final agreement to purchase or sell. The underwriter then files the official statement with EMMA under MSRB Rule G-32 and delivers it to customers; if no official statement is prepared, a notice of that fact is filed and disclosed instead.
Know the spread mechanics: gross spread = management fee + underwriting fee + takedown, out of which the selling concession and reallowance are paid. The public offering price must rest on a bona fide public offering, not on price support for the syndicate.
Traps
- Assuming the underwriter certifies the official statement; the standard is reasonable investigation.
- Mixing the seven-business-day official statement deadline with the separate EMMA filing obligation.
- Forgetting that 15c2-12 reaches bids as well as purchases.
- Treating a continuing-disclosure failure as the issuer's problem alone; the underwriter must have the written undertaking before bidding.
Worked example
A $20,000,000 negotiated issue carries a gross spread of 1.20% ($12 per $1,000 bond): management fee $3, underwriting fee $2, takedown $7. If the selling concession is $5 and the reallowance $1.50, a non-syndicate dealer buying at reallowance earns $1.50 per bond, a syndicate member selling to the public keeps the concession, and the manager retains the balance of the takedown.