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More active use of passive underwriter titles in equity filings

Active and passive underwriter titles have been prevalent for years in SEC documents on debt issuances, but the distinctions have also recently popped up in a few equity issuance filings.

One example came in a March filing from Cadence Bancorp LLC that lists Sandler O'Neill & Partners LP and Keefe Bruyette & Woods Inc. as joint passive book-runners and Goldman Sachs & Co. and J.P. Morgan Securities LLC as lead book-running managers. In a November 2016 filing, biopharmaceutical company Clearside Biomedical Inc. listed active and passive book-running managers for a follow-on offering, and New York Community Bancorp Inc. did the same with a March 2017 filing for a preferred equity deal.

Passive and active roles on equity issuances are not new, but historically the titles have been informal, said Philippe Espinasse, a former investment banker and author of "IPO: A Global Guide."

"It is not something that will generally be found in an offering circular or underwriting agreement," he told S&P Global Market Intelligence in an email.

It is not unprecedented for the industry to take new approaches with underwriter titles. A 2009 blog post from The Wall Street Journal noted that active and passive titles were first used in 2004, but they did not gain traction on debt deals until a few years later.

On equity deals, issuers still sometimes use the passive or active designations in press releases, but not always in their registration statements. In a June 2016 news release, Planet Fitness Inc. listed J.P. Morgan, BofA Merrill Lynch, Jefferies LLC and Guggenheim Securities LLC as active book-running managers on a secondary offering, but the issuer did not mention the titles in a related Form S-1.

Whether the titles are identified or not, issuers do regularly have active book runners lead equity deals and passive book runners take part in the same transaction. An active book runner is typically listed first on the prospectus cover in the coveted "lead left" position, which is an indication of the i-bank that is heading the deal process.

Active book runners help with setting up investor meetings, allocating shares, timing of issuance and pricing of stock. Passive book runners play a smaller role in the deal, but do issue shares.

Jones Day Partner Chip MacDonald said an issuer often gives passive book runner roles to investment banks that have established relationships with the company. "It's a way of rewarding bankers who have been providing services over the long term," MacDonald said in an interview.

Issuers want good relationships with several underwriters because that can lead to more coverage from equity research teams at investment banks. Also, different investment banks can provide distribution to different types of investors.

While the issuers have final say, the i-banks are often the ones suggesting the active or passive designation. Issuers are sometimes perplexed by investment banks' infatuation over the titles.

Putting the titles in public documents is not additional expense for issuers, but their use can appease either active or passive book runners. Active book runners like the recognition because it shows they have a leading spot on the deal. And while all investment banks prefer the active role, a passive title is better than co-manager, in part because databases that compile league table rankings often only give deal credit to book runners. League table rankings are an important marketing tool for investment banks because they serve as a third-party verification of their market share.

If issuers more regularly identify active book managers in SEC filings, the league table services can give less credit to passive underwriters and more to active underwriters. But simply giving credit to active book managers is not without its shortcomings because that title does not always mean the underwriter is leading the deals.

For instance, an IPO news release for software company MuleSoft Inc. lists BofA Merrill Lynch as the active book-running manager. However, BofA Merrill was third in the prospectus cover behind Goldman Sachs and J.P. Morgan, the joint lead book-running managers.

If the active distinction moves further down the underwriter ranks, it could become the new passive.