The Municipal Securities Rulemaking Board earlier this month issued a request for comment on two draft compliance resources — one for dealers and the other for municipal advisors — concerning new-issue pricing.
The stated goal for the compliance resources is “to enhance understanding regarding the existing regulatory standards applicable to regulated entities’ supervision of conduct when pricing a new issuance of municipal securities.” Emphasis supplied.
In a Bond Buyer article, Gail Marshall, chief regulatory officer at MSRB, said “[t]he examining authorities were speaking of it and firms are getting examined on it. We thought we could put out a compliance resource that firms could use to assist them in evaluating or developing the policies and the procedures.” Marshall also said, “… we're not saying that there are issues with pricing, we just wanted to remind our regulated entities that the supervisory procedures and controls and compliance policies should be speaking to pricing and in what instances that should happen.”
The draft compliance resource for “Underwriter Considerations for Assessing Supervision of New Issue Pricing” provides a summary of relevant rule requirements citing MSRB Rule G-17’s Fair Dealing obligations and “General Fair Pricing” and MSRB Rule G-27 (as well as MSRB Rules G-8 and G-9 regarding books and records).
The draft compliance resource for “Municipal Advisor Considerations for Assessing Written Supervisory Procedures Regarding New Issue Pricing” provides a summary of the relevant rules and application to MAs citing MSRB Rule G-42 (highlighting the duty of care and documentation of the relationship) and MSRB Rules G-17 and G-44.
The draft compliance resources also provide a series of FAQs and invites feedback on the entirety of the draft compliance resources. Interestingly, the RFC also asks whether the MSRB should amend the relevant rules or adopt/amend formal interpretive guidance that expressly defines a regulated entity’s obligations with respect to new-issue pricing.
Given “examining authorities were speaking of it [new-issue pricing] and firms are getting examined on it,” the importance of understanding the application of existing rules and requirements and the opportunity to provide feedback to the MSRB is critical.
Further, the MSRB’s draft compliance resources, in the rule summary and FAQs, highlight several key factors that are — at least in the draft — important to meeting regulatory obligations. For the underwriter-focused draft, these include:
FAQ 1: Credit quality and size of the issue, time spent structuring the issue and who is paying underwriter’s counsel fee, along with other factors that may be considered when evaluating if an underwriter’s compensation is consistent with their fair dealing obligation.
FAQ 2: “Fair and reasonable” does not mean the best price recognizing that underwriters have interests that differ from issuers.
FAQ 3: The final purchase price is not solely determinative of the fair dealing obligation. Another factor may be the best judgment of the underwriter as to the FMV at the time the issue is priced. The “rules make clear that the pricing process inherently involves a degree of subjectivity, and an underwriter’s best judgment can only be informed with the limited market information reasonably available up to and at the time a new issuance is priced” and the "process by which an underwriter arrives at and documents its best judgment of the fair market value of a new issuance can be helpful affirming compliance with Rule G-17.” Emphasis supplied.
FAQ 4: Other facts and circumstances that might be relevant (beyond the final purchase price) in determining whether the dealer has met its fair pricing obligation: market dynamics (including comparable transactions), movements of benchmark curves, underwriter status (sole/syndicate), structure, unique or uncommon features, instructions from the issuer regarding pricing, new or unknown credit, investor demand or change in status of the order book.
FAQ 5: Market dynamics beyond the underwriter’s control can impact final pricing.
FAQs 6 and 7: Focuses on MSRB Rule G-27 and makes clear the importance of a level of deference to underwriting personnel and recognizes that not every aspect of the pricing process can be documented (but see FAQ 3). Nevertheless, WSPs should have sufficient detail to support the nature and scope of the firm’s pricing activities.
For the MA-focused draft, the FAQs include discussion points around the scope of services, documentation of the same and the prospect of an implied undertaking of service provided for in a document other than the engagement letter. The FAQs make clear that the MA can exclude services (e.g. advice related to new-issue pricing) but also points out that engagement in behavior that is inconsistent with a limitation may negate that limitation. FAQs 4 and 5 attempt to address silence or ambiguity with regard to pricing in the relationship documentation providing a “maybe” in response to the two FAQs.
Worth a detailed read and we hope there is further clarity in the final compliance resource. Like the Underwriter-focused FAQs, the last three focus on WSPs and MSRB Rule G-44.
The RFC and the statements by the MSRB cited in The Bond Buyer point to the need for firms to ensure compliance with these obligations. Lumesis’ New Issue Pricing and Scales platform addresses many of the key obligations, requirements and factors cited in the rule summaries and FAQs. The platform, built to provide efficiencies and transparency to public finance teams, underwriters, municipal advisors and issuers for indicative and final scales, allows users to easily build new-issue structures or launch a pricing analysis from the Ipreo calendar.
The platform, using the structural and credit characteristics of the target deal, identifies comparable issues, bonds and trades generating a scale for the new issue and each unique structure contemplated. The platform allows users to refine results — allowing for deference to the expertise of the underwriter — by toggling the Comp Search Parameters (bond parameters addressing the factors highlighted in the FAQs and more) and trade parameters (side of market, size of issuance and size of trades). Users can include notes, explore and compare alternative structures and compare their target deal to specific deals. All results can be stored for review and for compliance purposes.
As market participants digest the RFC from the MSRB and respond to the same, they can also take steps beyond existing practices to address “existing regulatory standards applicable to regulated entities’ supervision of conduct when pricing a new issuance of municipal securities” and provide the business tools to generate efficiencies as well.
