Glossary of Municipal Securities Terms
Second Edition (January 2004)
SECONDARY MARKET DISCLOSURE – Disclosure of information relating to outstanding municipal securities made following the end of the underwriting period by or on behalf of the issuer of or other obligor with respect to the securities. Certain secondary market disclosure obligations are set forth in Rule 15c2-12. Broker-dealers also have an obligation to disclose certain material information regarding any security sold to a customer pursuant to MSRB Rule G-17. See: CONTINUING DISCLOSURE; RULE 15c2-12.
SECTION 20 SUBSIDIARY – A separate legal entity affiliated with a bank holding company that is registered as a broker-dealer and conducts underwriting and other securities business. Under Section 20 of the Glass-Steagall Act, subsequently repealed by the Gramm-Leach-Bliley Act, such a subsidiary could underwrite or deal in certain types of securities, including tax-exempt revenue bonds, in which the bank holding company could not. Bank holding companies that have not elected to be treated as financial holding companies for purposes of the Gramm-Leach-Bliley Act must continue to undertake such securities activities through these so-called section 20 subsidiaries. Financial holding companies are permitted to engage in such activities directly. See: GLASS-STEAGALL ACT; GRAMM-LEACH-BLILEY ACT.
SECURITIES ACT OF 1933 – Federal securities legislation originally enacted in 1933 that provides for, among other things, the registration of securities with the SEC and the preparation and distribution of prospectuses. Issuers of municipal securities are generally exempt from these requirements, although certain anti-fraud provisions under the Act apply to such issuers. See: EXEMPT SECURITIES.
SECURITIES AND EXCHANGE COMMISSION (SEC) – The federal agency responsible for supervising and regulating the securities industry. Generally, municipal securities are exempt from the SEC’s registration and reporting requirements. Broker-dealers in municipal securities, however, are subject to SEC regulation and oversight. The SEC also has responsibility for the approval of MSRB rules and has jurisdiction, pursuant to SEC Rule 10b-5, over fraud in the sale of municipal securities.
SECURITIES EXCHANGE ACT OF 1934 – Federal securities legislation originally enacted in 1934 that provides for, among other things, the regulation of the marketplace for securities. Regulation of broker-dealer activities in the municipal securities market is primarily effected through the rules of the MSRB, which was created under Section 15B of the Act. In addition, certain SEC rules, including but not limited to Rule 10b-5 and Rule 15c2-12, apply to broker-dealer transactions in municipal securities.
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) – A non-profit corporation created by the Securities Investor Protection Act of 1970 under which investors are partially insured against the possibility of loss resulting from the insolvency of a broker-dealer. In the event of a firm’s insolvency, SIPC appoints a trustee to conclude the affairs of the firm. The trustee typically would return identifiable property (e.g., securities registered in a particular customer’s name) to customers and handle customer claims for other securities or funds due them. SIPC maintains a trust fund for the protection of customers into which broker-dealers make contributions, and SIPC may pay customer claims out of this fund, up to certain specified limits.
SECURITY – Generally, an instrument evidencing debt of or equity in a common enterprise in which an investment is made on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable equities or evidences of indebtedness or ownership.
SECURITY FOR THE BONDS or SECURITY – The specific revenue sources or assets of an issuer that are pledged for payment of debt service on a series of bonds, as well as the covenants or other legal provisions protecting the bondholders. Credit enhancement is considered additional security for bonds. See: CREDIT ENHANCEMENT; PLEDGED REVENUES.
SELF-LIQUIDITY – A term used in connection with tender option bonds whereby the issuer or conduit borrower agrees to repurchase bonds that have been tendered but not yet remarketed without procuring a third-party liquidity facility. Compare: LIQUIDITY FACILITY.
SELLING AGREEMENT – An agreement between a selling dealer and a primary distributor providing for the sale to customers by the selling dealer of municipal fund securities. See: PRIMARY DISTRIBUTOR; SELLING DEALER.
SELLING DEALER – A broker-dealer, other than a primary distributor, that sells municipal fund securities to customers pursuant to a selling agreement. Selling dealers are most commonly used in connection with 529 college savings plans. Compare: PRIMARY DISTRIBUTOR; WHOLESALER. See: 529 COLLEGE SAVINGS PLAN; MUNICIPAL FUND SECURITY; SELLING AGREEMENT.
SELLING GROUP – A group of broker-dealers that assists in the distribution of a new issue of municipal securities. Selling group members are able to acquire new issue securities from the underwriting syndicate at a concession or dealer’s allowance (i.e., at a discount from the public offering price, which discount may be less than or equal to the total takedown) but do not participate in residual syndicate profits nor share any liability for any unsold balance. Compare: SYNDICATE. See: CONCESSION; SPREAD.
SELLING GROUP AGREEMENT – Agreement whereby broker-dealers may participate in the distribution of a new issue of municipal securities as members of a selling group without being members of the underwriting syndicate. Compare: AGREEMENT AMONG UNDERWRITERS. See: SELLING GROUP.
SERIES OF BONDS – Bonds of an issue sharing the same lien on revenues and other basic characteristics. A series of bonds may consist of serial bonds, term bonds or both. An issue of bonds can consist of one or more series of bonds. Typically, where a single issue consists of more than one series of bonds, the series are distinguished from one another based on one or more key characteristics. For example, one series may be senior lien bonds and the other may be junior lien bonds; two series may have liens on different revenue sources; one series may consist of capital appreciation bonds and the other may consist of current interest paying bonds; one series may be tax-exempt bonds and the other may be taxable municipal securities; one series may bear interest at a fixed rate and the other may bear interest at a variable rate. Compare: ISSUE OF BONDS.
SERIES RESOLUTION – A resolution adopted by an issuer in connection with the issuance of one or more series of additional bonds under a master resolution. The series resolution often will constitute the award resolution for such bonds. Compare: MASTER RESOLUTION; SUPPLEMENTAL INDENTURE. See: AWARD RESOLUTION; ORDINANCE; RESOLUTION.
SET ASIDE – Typically, a requirement by an issuer that a certain percentage of a new issue offering be handled by one or more specified underwriting firms, often a local, minority-owned or woman-owned firm. The term also may refer to a requirement by an issuer that a certain percentage of a new issue offering be offered in a retail order period.
SHORT SALE – A sale of securities that the selling party does not own. A selling broker-dealer is obliged to go into the market and subsequently purchase the securities from a third party in order to make delivery on this transaction. See: SHORT POSITION.
SHORT TERM or SHORT TERM RANGE – A designation given to maturities of a serial issue typically having maturities of shorter than three years from issuance. However, depending upon the context, a shorter period to maturity may be intended (e.g., nine or thirteen months). Compare: INTERMEDIATE RANGE; LONG TERM.
SIGNATURE GUARANTEE – A written representation placed by an authorized person on the assignment or bond power attached to a registered certificated security. The guarantee affirms that the person who signed the assignment or bond power is the person in whose name the securities are registered or is authorized to act on behalf of such person and that the signature is genuine. The signature guarantee provides assurance to the transfer agent that the transfer is proper and can be completed. See: ASSIGNMENT.
SLGS – An acronym (pronounced “slugs”) for “State and Local Government Series.” SLGS are special Treasury securities sold by the United States Treasury Department to states, municipalities and other local government bodies. The interest rates and maturities of SLGS can be subscribed for by an issuer of municipal securities in such a manner as to comply with arbitrage restrictions imposed under the Internal Revenue Code. SLGS are most commonly used for deposit in an escrow account in connection with the issuance of refunding bonds. See: ADVANCE REFUNDING; REFUNDING; TREASURY SECURITIES.
AGENT (Continuing Disclosure) – Acts on behalf of issuer or obligated person on municipal security issue.
SOLICITED ORDER – Colloquial term for an order from a customer resulting from a direct communication initiated by the broker-dealer. The resulting transaction generally is considered to have been recommended for purposes of MSRB Rule G-19. Compare: UNSOLICITED ORDER. See: RECOMMENDATION.
SOPHISTICATED INVESTOR – Typically, an investor viewed by an issuer or underwriter as having sufficient resources, market knowledge and experience to understand and bear the risks involved in a particular investment. Compare: ACCREDITED INVESTOR; QUALIFIED INSTITUTIONAL BUYER; SOPHISTICATED MUNICIPAL MARKET PROFESSIONAL. See: INVESTOR LETTER.
SOPHISTICATED MUNICIPAL MARKET PROFESSIONAL (SMMP) – An entity with respect to which a broker-dealer has reasonable grounds to conclude (i) has timely access to the publicly available material facts concerning a municipal securities transaction; (ii) is capable of independently evaluating the investment risk and market value of the municipal securities at issue; and (iii) is making independent decisions about its investments in municipal securities, and other known facts do not contradict such a conclusion. An SMMP may not be a natural person and must have total assets of at least $100 million invested in municipal securities in its portfolio and/or under management. Certain disclosure, suitability and fair pricing obligations of a broker-dealer under MSRB rules may be deemed fulfilled in connection with a transaction between the broker-dealer and an investor that constitutes an SMMP with respect to such transaction. Compare: ACCREDITED INVESTOR; QUALIFIED INSTITUTIONAL BUYER; SOPHISTICATED INVESTOR.
SOURCES AND USES – Generally, a table set forth in an official statement identifying the source from which funds are derived (generally including, but not always limited to, bond proceeds) and the application of funds in connection with a new issue of municipal securities.
SPECIAL ASSESSMENT – A charge imposed against a property in a particular locality because that property receives a special benefit by virtue of some public improvement, separate and apart from the general benefit accruing to the public at large. Special assessments may be apportioned according to the value of the benefit received, rather than the cost of the improvement. Compare: TAX. See: BENEFITED PROPERTIES.
SPECIAL DISTRICTS – Single-purpose or limited-purpose units of government formed under state enabling legislation to meet certain local needs not satisfied by existing general purpose governments in a given geographical area. In some states, special districts (such as school, fire and hospital districts) may be granted taxing powers.
(2) Historically, that portion of a full cash refunding bond issue that is secured by the interest earnings on Treasury securities purchased with the proceeds of the refunding bonds. See: ADVANCE REFUNDING.
SPECIAL TAX BOND – A bond secured by one or more designated taxes other than ad valorem taxes. For example, bonds for a particular purpose might be supported by sales, cigarette, fuel or business license taxes; however, the designated tax does not have to be directly related to the project purpose. Compare: GENERAL OBLIGATION BOND.
SPECIAL TAX COUNSEL – A lawyer or law firm employed to give an opinion that the interest on tax-exempt bonds qualifies for exclusion from gross income of the holders thereof for federal income tax purposes. Special tax counsel customarily does not give an opinion as to the validity of the tax-exempt bonds but relies on the opinion of bond counsel as to such matters. Special tax counsel is often utilized when bond counsel is unable or unwilling to give an opinion as to the tax-exempt status of the bonds. Compare: BOND COUNSEL; LEGAL OPINION.
SPEED –The rate of principal repayments (also known as “prepayment speed”) of home mortgages funded from mortgage revenue bonds. The rate of repayments is affected by a number of factors, depending upon the type of mortgage loan, the existence of certain types of guarantees or insurance on the loans, the interest rate environment and other economic factors. Various indices have been developed to estimate the likely speed of repayments depending upon certain of these factors. See: PLANNED AMORTIZATION CLASS BOND.
SPREAD – (1) With respect to a new issue of municipal securities, the differential between the price paid to the issuer for the new issue and the prices at which the securities are initially offered to the investing public; this is also termed the “gross spread,” “gross underwriting spread” or “production.” To the extent that the initial offering prices are subsequently lowered by the syndicate, the full amount of the spread may not be realized by the syndicate. The spread is usually expressed in dollars or points per bond. Historically, the spread has consisted of four components, although one or more components may not be present in any particular offering:
Takedown – Normally the largest component of the spread, similar to a commission, which represents the income derived from the sale of the securities. If bonds are sold by a member of the syndicate, the seller is entitled to the full takedown (also called the “total takedown”). If bonds are sold by a broker-dealer that is not a member of the syndicate, such seller receives only that portion of the takedown known as the concession or dealer's allowance, with the balance (often termed the “additional takedown”) retained by the syndicate.
Risk or Residual – The amount of profit or spread left in a syndicate account after meeting all other expenses or deductions. A portion of the residual is paid to each underwriter within a syndicate on a pro rata basis according to the number of bonds each broker-dealer has committed to sell without regard to the actual sales by each member.
(2) With respect to securities trading in the secondary market, the differential between the bid price and the offering price in a two-sided market quotation. This is often referred to as a “bid-offer spread” or “bid-ask spread.” See: BID; OFFER; TWO-SIDED MARKET.
STABILIZATION – A practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price, or purchases such securities in the secondary market if the offering price declines below a certain level. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Generally, this is a practice seen in the equity market.
STANDARD & POOR’S (S&P) – A nationally recognized statistical rating organization that provides ratings for municipal securities and other financial information to market participants. See: NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION; RATING AGENCY; RATINGS.
STANDBY BOND PURCHASE AGREEMENT – An agreement with a third party, typically a bank, in which the third party agrees to purchase tender option bonds (typically variable rate demand obligations) tendered for purchase in the event that they cannot be remarketed. Unlike a letter of credit, a standby bond purchase agreement does not guarantee the payment of principal and interest by the issuer and is not an unconditional obligation to purchase the tender option bonds. Compare: CREDIT ENHANCEMENT; LETTER OF CREDIT. See: LIQUIDITY FACILITY; STANDBY LETTER OF CREDIT; TENDER OPTION BOND; VARIABLE RATE DEMAND OBLIGATION.
STATE INFORMATION DEPOSITORY (SID) – An entity to which an issuer or obligated person that has entered into a continuing disclosure agreement under Rule 15c2-12 is required to send annual financial information and material event disclosures, if such an entity has been established within the state of the issuer. Compare: NATIONALLY RECOGNIZED MUNICIPAL SECURITIES INFORMATION REPOSITORY. See: RULE 15c2-12.
STEPPED COUPON BONDS – Bonds on which the interest rate periodically changes (generally by increasing) over their life on specified dates and at specified interest rates. Redemption premiums may be higher than on conventional bonds, in order to assure the bondholder that the yield to call would not be less than the expected yield to maturity.
STICKERING – The act of amending or supplementing the information provided in an official statement on a new issue during its underwriting period. The amendment typically provides current information regarding new developments affecting the issuer or the issue and/or updated or corrected information regarding matters already discussed in the official statement. The term refers to the practice of printing new information on paper with adhesive backing, so that it can be glued to the appropriate pages of the official statement, although the amendment or supplement can be delivered in various other formats. See: OFFICIAL STATEMENT; UNDERWRITING PERIOD.
“STREET” NAME – The name of a broker-dealer or nominee. Securities registered in the name of a broker-dealer or nominee are described as being “registered in ‘street’ name.” These securities generally can be transferred more easily than securities with other forms of registration and are considered to be in “good delivery” form for purposes of inter-dealer transactions. Compare: NOMINEE.
STRIPPED COUPON SECURITIES – Securities consisting of interest payments on municipal securities that have been “stripped” from the underlying security and sold separately to investors. Compare: STRIPS.
STRIPS – Acronym for “Separate Trading of Registered Interest and Principal Securities.” STRIPS consist of an ownership interest in a specified principal amount of a Treasury security that has been stripped at issuance of the right to receive any interest payments thereon, or an ownership interest in a specified amount of any such stripped interest payment coming due on a specific interest payment date. In either case, the owner of the STRIPS will receive a single payment upon “maturation” of the STRIPS. STRIPS have the economic characteristics of a zero coupon bond. See: TREASURY SECURITIES; ZERO COUPON BOND.
SUITABILITY – The appropriateness of a particular security as an investment for a particular investor, taking into account the specific features of the security and the investor's financial capabilities and sophistication, tax status, investment objectives and other relevant considerations. A security that seems appropriate for the investor in light of these factors is said to be “suitable,” whereas one that does not seem appropriate may be “unsuitable.” Broker-dealers are required under MSRB rules to make suitability determinations before recommending particular investments or investment strategies to customers. See: RECOMMENDATION.
SUPER SINKER – A colloquial term for a term maturity, usually from a single family mortgage revenue issue with several term maturities, that will be the first to be called from a sinking fund into which all proceeds from prepayments of mortgages financed by the issue are deposited. The maturity’s priority status under the call provisions means that it is likely to be redeemed in its entirety well before the stated maturity date. Therefore, the super sinker maturity may be considered attractive to investors because it offers long-term interest rates on what is effectively a short-term security. Compare: PLANNED AMORTIZATION CLASS SECURITIES; SINKER. See: REDEMPTION PROVISIONS.
SUPPLEMENTAL INDENTURE – An agreement entered into by an issuer that supplements the issuer’s master indenture or trust indenture. Often, a supplemental indenture is executed in connection with the issuance of one or more series of additional bonds under the master or trust indenture. In some cases, a supplemental indenture merely amends terms of the master or trust indenture without providing for the issuance of additional bonds. See: MASTER INDENTURE; TRUST INDENTURE. Compare: SERIES RESOLUTION.
SWAP – A sale of a security and the simultaneous purchase of another security for purposes of enhancing the investor’s holdings. The swap may be used to achieve desired tax results, to gain income or principal, or to alter various features of a bond portfolio, including call protection, diversification or consolidation, and marketability of holdings. Compare: INTEREST RATE SWAP CONTRACT; TAX SWAP.
SWAPTION or SWAP OPTION – An option held by one party that provides that party the right to require that a counter-party enter into a swap contract on certain specified terms. See: INTEREST RATE SWAP CONTRACT.
SWING COUPON – In the pricing of a negotiated sale of a new issue of municipal securities, the coupon rate on a selected maturity of the new issue that is adjusted (or “swings”) in order to more precisely achieve or maximize the final production for the issue. An underwriter preparing to bid on a competitive sale of a new issue also may adjust a swing coupon to more precisely achieve or maximize the final production on its bid. See: PRODUCTION.
SYNDICATE – A group of underwriters formed to purchase a new issue of municipal securities from the issuer and offer it for resale to the general public. The syndicate is organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient capital to purchase an issue and broadening the distribution channels of the issue to the investing public. One of the underwriting firms will be designated as the syndicate manager or lead manager to administer the operations of the syndicate. There are two major types of syndication agreements:
Undivided or Eastern Account – A method for determining liability stated in the agreement among underwriters in which each member of the underwriting syndicate is liable for any unsold portion of the issue according to each member’s percentage participation in the syndicate. Syndicates most frequently are structured as undivided accounts.
Divided or Western Account – A method for determining liability stated in the agreement among underwriters in which each member of an underwriting syndicate is liable only for the amount of its participation in the issue, and not for any unsold portion of the participation amounts allocated to the other underwriters.
SYNDICATE ACCOUNT LETTER – A document, also known as an agreement among underwriters, sent by the syndicate manager on a competitive new issue to the syndicate members that defines the terms of operation of the syndicate. This document designates the syndicate manager and identifies the account, the priority of allocating securities and the members’ participations, among other matters. See: AGREEMENT AMONG UNDERWRITERS.