What MSRB compliance resources mean for underwriters, MAs in new-issue pricing

The Municipal Securities Rulemaking Board earlier in November issued two long-awaited compliance assets for municipal underwriters and municipal advisors. They had been in response to the MSRB’s October 2021 request for touch upon draft compliance assets for sellers and municipal advisors on new-issue pricing.

The assets every present a abstract of guidelines relevant to the pricing of new-issue municipal securities and giving advise re the identical. For underwriters, these embody MSRB Rule G-17 (primary honest dealing, basic honest pricing with commentary round aggressive and negotiated underwritings), MSRB Rule G-27 (supervision) and MSRB Guidelines G-8 and 9 (books and data). 

For municipal advisors these embody MSRB Rule G-42 (duties of non-solicitor municipal advisors), MSRB Rule G-17 (conduct of municipal securities and municipal advisory actions), MSRB Rule G-44 (supervisory and compliance obligations of municipal advisors) and MSRB Guidelines G-8 and 9 (books and data).

Importantly the MSRB made clear that the compliance “assets don’t create new authorized or regulatory necessities or new interpretations of current necessities however could also be helpful instruments for municipal advisors and underwriters in supporting their persevering with compliance efforts and in assessments of their relevant insurance policies and procedures.” 

As many people know, current Securities and Alternate Fee exams have included questions round new-issue pricing and assist for a similar in line with the principles. Whereas the MSRB’s compliance assets usually are not a rule and it has not been filed with the SEC, one can infer that following the identical can be useful ought to the SEC inquire.  

UW Useful resource
The underwriter useful resource gives for these performing as an underwriter, a useful resource to reinforce their understanding of their honest dealing obligations, on conduct of municipal securities and municipal advisory actions and sure of supervisory obligations.

To begin, MSRB Rule G-17 contains an “implied illustration that the worth an underwriter pays to an issuer is honest and cheap, making an allowance for all related components, together with the most effective judgment of the underwriter as to the honest market worth of the issuance on the time it’s priced.” 

In negotiated offers (the main target right here — please see the UW useful resource for extra on aggressive offers), the underwriter has an obligation to barter in good religion with the issuer and contains the duty to make sure the accuracy of representations made together with these concerning the worth negotiated and investor demand. On this regard, there are a selection of things that may be at play and are essential as one navigates the panorama. 

ALSO READ  What to Anticipate from Tesla’s Q2 Earnings This Week?

Let’s begin with the acquisition worth paid by the underwriter — it have to be “honest and cheap” underneath Rule G-17. This needn’t be the “greatest” worth. The MSRB guidelines acknowledge that underwriting engagements are “arm’s size” and that the pursuits of the events can and do differ and that the underwriter can place its personal pursuits forward of the issuers to make sure the underwriting agency is sufficiently compensated for its companies and by limiting its threat.

Components related when figuring out “honest and cheap embody the most effective judgment of the underwriter as to the honest market worth of the brand new issuance when it’s priced. Whereas subjective the underwriter’s “greatest judgment” is knowledgeable with market data “fairly out there as much as and on the time a brand new issuance is priced.” 

This may and may embody the ultimate buy worth, comparable problems with the current previous in addition to the place these points are buying and selling within the secondary market and as applicable, the aspect of the market and measurement of trades. Importantly, “the method by which an underwriter arrives at and paperwork its greatest judgment of the honest market worth of a brand new issuance will be useful to affirming compliance with Rule G-17.” In different phrases, course of and documentation matter. 

“Info and circumstances” may also be related to figuring out if the underwriter has met its honest pricing obligation and, per the UW Useful resource, could embody a number of of the next:  

  • Market dynamics main as much as and on the time of pricing;
  • Actions of benchmark curves v. preliminary pricing scales; 
  • Whether or not the underwriting is solely managed or managed by a syndicate; 
  • Complexity of the construction and/or distinctive or unusual options; 
  • Directions associated to pricing from the issuer or the issuer’s municipal advisor; 
  • Whether or not the underwriting is for a brand new and/or unknown credit score; or
  • The kind and nature of investor demand for the issuance. 
ALSO READ  Munis weaker amid lively main market

The UW Useful resource makes clear that the WSP requirement shouldn’t be one measurement suits all and the identical can and needs to be tailor-made to a agency’s underwriting actions.  Additional, “whereas companies don’t must doc each facet of the pricing course of, there may be an expectation … {that a} vendor will keep and protect materials data associated to major choices” that can assist “facilitate inspections and examinations … and help the analyzing authorities in evaluating a vendor’s compliance with Part 15B of the Alternate Act, the principles and rules thereunder, and MSRB guidelines.” (Emphasis added).

DIVER’s New Problem Pricing and Scales platform will be extremely efficient in supporting these obligations and “information and circumstances” referenced within the UW Useful resource and the referenced MSRB Guidelines. Utilizing the structural and credit score traits of the transaction, one can determine all comparable points and trades to kind an goal baseline round a brand new problem. Furthermore, related secondary commerce exercise will be included to permit for consideration of extra market knowledge. Moreover, the entire supporting proof to justify a pricing yield curve will be saved for retrieval to assist correct documentation. 

MA Useful resource
The MA Useful resource can help municipal advisors of their assessments of their insurance policies and WSPs when offering recommendation to their purchasers with respect to recommendation on the pricing of a brand new problem municipal safety.

MSRB Rule G-42, which establishes the core requirements of conduct and duties of municipal advisors. obligates a municipal advisor to “[a]ct in a way in line with its obligation of care to its shopper.” The obligation of care is defined in Supplementary Materials .01 of Rule G-42 and requires a municipal advisor to, amongst different issues: 

1. Possess the diploma of information and experience essential to offer the shopper with knowledgeable recommendation; 

2. Make an inexpensive inquiry as to the information related to a shopper’s willpower as as to whether to proceed with a plan of action or that kind the premise for any recommendation supplied to the shopper; 

ALSO READ  Tennessee legislature passes P3 package deal permitting toll categorical lanes

3. Undertake an inexpensive investigation to find out that it isn’t basing any advice on materially inaccurate or incomplete data; and, 

4. Have an inexpensive foundation for any recommendation supplied to or on behalf of the shopper.

Because it pertains to new problem pricing (if “pricing-related companies” usually are not throughout the scope of the connection the identical have to be documented and conduct should not embody such companies), the municipal advisor should take affirmative steps to make sure it’s conferences its G-42 obligations. The municipal advisor ought to have instruments and assets to make sure they’ve a way of the marketplace for comparable transactions (market section, credit score, construction and extra) and the place these transactions are buying and selling put up issuance ought to the market have moved because the time of problem. This permits the municipal advisor to interact in a constructive dialogue on behalf of and with their shopper to deal with its G-42 obligations. DIVER’s New Problem Pricing and Scales platform is one device to assist entry complete data to assist new problem pricing obligations.  

Moreover, if a municipal advisor is offering new problem pricing recommendation, it’s anticipated to have WSPs.  The MA Useful resource makes clear that the requirement shouldn’t be one measurement suits all and may and needs to be tailor-made a agency’s actions. It additionally gives that “…there may be an expectation … {that a} municipal advisor will keep and protect paperwork materials to a advice or that memorialize the premise for the advice.” As many have heard, there was some focus by examiners on new problem pricing and “[m]aintaining and preserving books and data facilitate inspections and examinations of municipal advisors and help the analyzing authorities in evaluating a municipal advisor’s compliance with Part 15B of the Alternate Act, the principles and rules thereunder, and MSRB guidelines.”

MSRB Compliance Assets are essential and significant instruments for these working within the municipal market and, whereas not creating new necessities or having been filed with the SEC, needs to be a reminder that there are established authorized necessities underneath current MSRB guidelines that municipal advisors are anticipated to meet.  

origin hyperlink

By admin