In recent discussions at The Bond Buyer California Public Finance conference, Dave Sanchez, the director of the Securities and Exchange Commission’s (SEC) Office of Municipal Securities, highlighted a critical area of oversight: new-issue pricing. This topic is part of the SEC’s 2025 exam priorities, reflecting a significant shift in regulatory focus impacting municipal advisors and broker-dealers alike. Municipal advisors have explicit responsibilities related to pricing opinions and the structuring of municipal securities. Sanchez emphasized that advisors must either actively engage in evaluating pricing or publicly disclose their decision not to assess this crucial aspect, thus ensuring transparency for clients. This level of scrutiny reinforces the critical role these advisors play in the financial equilibrium of municipal markets.
Sanchez’s remarks were not merely theoretical; they referenced existing guidelines from the Municipal Securities Rulemaking Board (MSRB), specifically Rules G-17 and G-42, which outline fair dealing and fiduciary duties. His observations about the historical nature of these rules suggested a preemptive stance by the SEC, akin to preparing a home for an expected visitor. Drawing attention to compliance and fair pricing practices, Sanchez indicated that an average underpricing of 25-35 basis points could detrimentally affect both issuers and market integrity. This unjustifiable spread underscores the need for both heightened awareness and action amongst market participants.
Comparative Analysis and Market Dynamics
An essential element of new-issue pricing involves benchmarking against comparable deals. Sanchez urged attendees to diligently analyze pricing in relation to recent trades of similar securities, rather than merely relying on past issuance scales. Utilizing tools such as Solve’s DIVER Scale Viewer and Scale Writer can significantly enhance this analysis. Notably, the importance of assessing bond performance in the secondary market within a week or two post-pricing was emphasized as a crucial step in forming accurate pricing expectations. The SEC encourages the adoption of resources like the MSRB’s EMMA platform, complementing powerful analytical tools to ensure that pricing is objectively substantiated.
The conversation took an interesting turn when Sanchez addressed the method of sale, noting observations from a CDFA presentation earlier in 2023. The ongoing debate between competitive and negotiated sales became a focal point, with Sanchez pointing out that negotiated sales often yield less favorable pricing outcomes. This assertion generated considerable discussion among conference attendees, indicating a growing recognition of how sales methods can influence market dynamics and pricing efficacy. The implications of this debate are profound, suggesting that market participants need to critically evaluate their sale strategies in light of pricing effectiveness.
As the SEC tightens its focus on new-issue pricing for municipal securities, market participants must be proactive in adjusting their practices. Transparency, due diligence in pricing evaluations, and informed sales strategies will be the keys to navigating this evolving regulatory landscape. With the potential risks posed by mispricing highlighted by Sanchez, now is the time for municipal advisors and broker-dealers to ensure that responsible pricing practices are woven into the fabric of their operational routines. The stakes are high, and the path forward must be marked by integrity, diligence, and an unwavering commitment to market fairness.