Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Rules G-11, on Sales of New Issue Municipal Securities During the Underwriting Period, G-12, on Uniform Practice, and G-8, on Books and Records

[Federal Register Volume 63, Number 76 (Tuesday, April 21, 1998)]
[Notices]
[Pages 19775-19778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10506]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39873; File No. SR-MSRB-97-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Rules 
G-11, on Sales of New Issue Municipal Securities During the 
Underwriting Period, G-12, on Uniform Practice, and G-8, on Books and 
Records

April 14, 1998.
    On December 23, 1997, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change (File No. 
SR-MSRB-97-15), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\, and Rule 19b-4 thereunder.\2\ The proposed 
rule change is described in Items I, II, and III below, which Items 
have been prepared by the Board. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board is filing herewith an amendment to Rule G-11, on sales of 
new issue municipal securities during the underwriting period, G-12, on 
uniform practice, and G-8, on books and records (hereinafter referred 
to as the ``proposed rule change''). The proposed rule change, among 
other things, requires the managing underwriter of a syndicate to 
maintain a record of all issuer syndicate requirements; requires the 
managing underwriter to complete the allocation of securities within 24 
hours of the sending of the commitment wire; requires the managing 
underwriter to disclose to syndicate members all available designation 
information; requires the managing underwriter to disclose to members 
of the syndicate, in writing, the amount of any portion of the take-
down that is directed to each member of the syndicate by the issuer; 
and shortens the deadline for payment of designations to 30 calendar 
days after the issuer delivers the securities to the syndicate.

II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Board included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
texts of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    As part of the Board's review of the underwriting process, the 
Board has determined to adopt the proposed rule change to further 
strengthen the integrity of the syndicate practices process.

Issuer Syndicate Requirements

    Issuer requirements involving syndicate formation, order review, 
designation policies and bond allocations have become much more 
prevalent in the municipal securities market. Such requirements are 
significant because they help to determine which dealers, and 
ultimately which investors, obtain the bonds. As issuer syndicate 
requirements can affect the functioning of the syndicate, and at times 
the final costs to the issuer of the new issue, the Board believes that 
records of such requirements should be maintained so that any problems 
or concerns regarding the functioning of the syndicate arising from 
these requirements can be identified and addressed and the information 
should be provided to syndicate members and others, upon request.
    The proposed rule change amends Rules G-8(a)(viii) and G-11(f) to 
require the managing underwriter to maintain a record of all issuer 
syndicate requirements. If the requirements are in a published 
guideline, such guidelines should be maintained by the dealer and 
supplemented by a statement of any additional requirements that arise 
prior to settlement. If the requirements are not in published form, the 
managing underwriter must create a written detailed statement of such 
requirements and maintain such statement in its records. The managing 
underwriter must provide a copy of the published guidelines or 
underwriter prepared statement of issuer syndicate requirements to 
syndicate members prior to the first offer of any securities by the 
syndicate. Syndicate members must furnish this summary promptly to 
others, upon request. In addition, the managing underwriter must 
provide the issuer with a copy of any such statement for its review.

Allocation of Securities

    The proposed rule change amends Rule G-11(g) to require the 
managing underwriter to complete the allocation of securities within 24 
hours of the sending of the commitment wire. Delays in allocations seem 
to be a growing problem in the municipal securities market. Many delays 
in allocations appear to be the result of issuers and financial 
advisors failing to review orders and proposed allocations in a timely 
fashion. Investors complain that they have difficulty finalizing their 
portfolio positions when their orders

[[Page 19776]]

remain unfilled for as long as two or more days after the end of the 
order period. During volatile market conditions, delays in allocations 
hurt the prospect for a successful underwriting. The Board adopted the 
proposed rule change to ensure a timely allocation process in the 
industry.

Disclosure of Designation Information

    There currently is no Board rule requiring the disclosure to 
syndicate members of all designations to members. The proposed rule 
change amends Rule G-11(g) to require that the managing underwriter 
disclose to syndicate members all available designation information 
within 10 business days following the date of sale and all information 
with the sending of the designation checks.

Disclosure of Take-Down

    A small number of issuers are setting aside, or holding back, at 
their discretion, a portion of the take-down to direct to syndicate 
members. The Board believes that because this issuer ``set-aside'' is 
part of the take-down, it should be disclosed to syndicate members in 
the same manner as customer designations. The proposed rule change 
amends Rule G-11(g) to require the managing underwriter to disclose to 
members of the syndicate, in writing, the amount of any portion of the 
take-down that is directed to each member of the syndicate by the 
issuer. Such disclosure must be made by the later of 15 business days 
following the date of sale or three business days following receipt by 
the managing underwriter of notification of such set-asides by the 
issuer.

Payment of Designations

    The proposed rule change amends Rule G-12(k) to move the deadline 
for payment of designations from 30 business days following delivery of 
the securities to the customer to 30 calendar days after the issuer 
delivers the securities to the syndicate. The Board adopted this 
amendment to provide for more efficient operation of syndicate 
accounts.
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\3\
---------------------------------------------------------------------------

    \3\ Section 15B(b)(2)(C) states that the rules of the Board 
shall be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
the public interest.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, because it would apply equally 
to all brokers, dealers and municipal securities dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In May 1997, the Board published a notice (the ``Notice'') that, 
among other things, proposed for comment draft amendments to Rules G-
11, G-12 and G-8 in three areas: (1) Recordkeeping and disclosure of 
issuer syndicate requirements; (2) timing and disclosure of allocations 
and designation; and (3) timing of settlement of syndicate accounts.\4\
---------------------------------------------------------------------------

    \4\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16, 
``Board Review of Underwriting Process.''
---------------------------------------------------------------------------

    In response to its request for comments, the Board received comment 
letters addressing the draft amendments from the following 13 
commentators:
    •  Artemis Capital Group (``Artemis'')
    •  City of Chicago (``City of Chicago'')
    •  Edward Jones (``Edward Jones'')
    •  Franklin Templeton Group (``Franklin Templeton'')
    •  Goldman, Sachs & Co. (``Goldman Sachs'')
    •  Government Finance Officers Association (``GFOA'')
    •  Lehman Brothers Inc. (``Lehman Brothers'')
    •  Newman & Associates, Inc. (``Newman'')
    •  Prudential Securities (``Prudential'')
    •  Rauscher Pierce Refsnes, Inc. (``Rauscher Pierce'')
    •  Smith Barney Inc. (``Smith Barney'')
    •  The Bond Market Association (``BMA'')
    •  Wachovia Bank, N.A. (``Wachovia'')
    Some commentators had general comments opposing any amendments to 
rules concerning syndicate practices. One commentator questioned the 
``necessity for regulatory intervention in this area'' because the 
amendments will offer no benefit to issuers or investors but 
``[r]ather, it is syndicate members who would be the economic 
beneficiaries of these changes and senior managers who would bear the 
cost.'' \5\ Another commentator stated that ``dealers should be granted 
some discretion in conducting their business'' and that ``the dealer 
community is capable of and should remain responsible for developing 
mutually acceptable standards and practices in their dealings with one 
another through the negotiation of contractual obligations.'' \6\ This 
commentator also believes that ``the business relationship of dealers, 
which does not serve the interest of investor protection * * * is not 
an area which should be subject to rulemaking by the MSRB.'' Two 
commentators \7\ noted general concern about the Board proposing rules 
requiring dealers to ``police'' other market participants when dealer 
compliance with certain of the draft amendments is dependent upon the 
actions of others (e.g., issuers and financial advisors) to complete 
certain actions within specified timeframes.
---------------------------------------------------------------------------

    \5\ Smith Barney.
    \6\ Prudential.
    \7\ BMA and Lehman Brothers.
---------------------------------------------------------------------------

    The Board has determined, however, to adopt most of the proposed 
amendments because the proposed rule change would improve the syndicate 
process and thus, be a benefit both to investors and syndicate members. 
Specific comments on the draft amendments are summarized below.

    Rule G-8(a)(viii): Managing underwriter must maintain a record 
of all issuer syndicate requirements. If the requirements are in a 
published guideline, such guidelines should be maintained by the 
dealer and supplemented by a statement of any additional 
requirements that arise prior to settlement. If the requirements are 
not in published form, the managing underwriter must create a 
written detailed statement of such requirements and maintain such 
statement in its records.
    Rule G-11(f): Managing underwriter must provide a copy of the 
published guidelines or underwriter prepared statement of issuer 
syndicate requirements to syndicate members prior to the first offer 
of any securities by the syndicate. Syndicate members must furnish 
this summary promptly to others, upon request. Managing underwriter 
must provide the issuer with a copy of any such statement for its 
review.

    Five commentators indicated general support for these amendments 
without commenting on the specific components.\8\ GFOA noted that 
``[t]he regulatory system should facilitate, not hinder, activism on 
the part of issuers and GFOA believes that the proposed changes help to 
improve communications about issuer directions and are consistent with 
its recommendations to issuers'' and that it ``believes it is 
particularly important that issuers be provided with a copy of any 
underwriter-prepared statement of issuer requirements in advance of 
distribution for approval. It urges issuers, however, to take 
responsibility themselves to provide clear directions

[[Page 19777]]

about allocation designations in writing to underwriters.'' \9\ One 
commentator noted support for maintaining a record of issuer syndicate 
requirements and for requiring the managing underwriter to provide a 
copy of the issuer requirements to syndicate members prior to the first 
offer of any securities by the syndicate.\10\
---------------------------------------------------------------------------

    \8\ Artemis, City of Chicago, GFOA, Rauscher Pierce and 
Wachovia.
    \9\ GFOA also noted that in its 1996 recommended practice on 
``Pricing Bonds in a Negotiated Transaction,'' it urged ``issuers to 
communicate to underwriters specific goals to be achieved in the 
pricing of bonds and expectations regarding the roles of each member 
of the financing team * * * [and] to give clear directions to 
underwriters on how bonds should be allocated and to review the 
Agreement Among Underwriters prior to the sale to ensure that it 
incorporated the issuer's goals.'' In addition, GFOA suggested that 
issuers ``approve all information that will be sent out by the 
underwriter on the preliminary pricing wire, including the 
allocation of the bonds and the take-down.''
    \10\ Goldman Sachs.
---------------------------------------------------------------------------

    Five commentators expressed general support for disclosure of 
issuer policies and requirements, but they noted concerns on how the 
information would be disclosed (e.g., by using the Agreement Among 
Underwriters or a dealer-prepared statement).\11\ Four commentators are 
opposed to requiring the managing underwriter to create a written 
detailed statement of issuer syndicate requirements if they are not in 
published form.\12\ Two commentators noted the time and cost that would 
be involved in requiring the managing underwriter to prepare such a 
statement.\13\ One commentator stated that the managing underwriter 
should be allowed to use the Agreement Among Underwriters instead of 
being required to create a written statement.\14\ Two commentators \15\ 
are not opposed to requiring syndicate managers to provide copies of 
issuer policies to syndicate members once the issuer has prepared these 
policies in written form and made them available.\16\ One commentator 
noted that, for liability purposes, issuers often do not provide their 
allocation requirements in writing.\17\
---------------------------------------------------------------------------

    \11\ BMA, Edward Jones, Lehman Brothers, Newman and Smith 
Barney. Lehman Brothers believed that issuer policies and 
requirements are more appropriately addressed in the Agreement Among 
Underwriters. Lehman Brothers noted that BMA recently revised its 
standard form of Agreement Among Underwriters with comments 
solicited from the industry and that none of the areas being 
reviewed by the Board concerning syndicate practices were identified 
as areas of concern to be addressed in the revised Agreement Among 
Underwriters; therefore, the amendments concerning syndicate 
practices are not needed. The Board notes, however, that BMA's 
notice requesting comment on its draft of a standard Agreement Among 
Underwriters stated that the ``Agreement does not attempt to address 
the syndicate proposals included in the recent MSRB Review of the 
Underwriting Process, since at this time it is impossible to predict 
whether, or in what form, those proposals might eventually be 
adopted.''
    \12\ BMA, Edward Jones, Lehman Brothers and Smith Barney.
    \13\ BMA and Smith Barney.
    \14\ Edward Jones.
    \15\ BMA and Lehman Brothers.
    \16\ BMA believed that ``[i]ssuers seeking to impose their 
requirements on syndicates must take the initiative to enunciate 
such requirements, in writing, and publish them so they are 
available to all who are involved, or considering becoming involved, 
in a syndicate for that issuer.'' Lehman Brothers believed that 
``[t]o the extent that an issuer has specific designation policies, 
the issuer should be responsible for providing copies of such 
policies to the syndicate manager who could make copies available to 
syndicate members upon request.''
    \17\ Newman.
---------------------------------------------------------------------------

    Most commentators agree that recording and disclosing issuer 
policies and requirements would be beneficial. Managing underwriters 
currently take issuer direction on syndicate matters and relate such 
information to the members. The Board believes the formalization of 
this process should not be a burden; therefore, the Board has 
determined to propose the draft amendment.

    Rule G-11(g): Senior syndicate managers to complete the 
allocation of securities within 24 hours of the sending of the 
commitment wire.

    Six commentators support this draft amendment.\18\ One commentator 
noted that ``all investors, both retail and institutional, benefit from 
a more timely allocation process.'' \19\ While five commentators noted 
that support for the prompt completion of allocations, they also noted 
that a dealer's compliance with the draft amendment is dependent upon 
the timely actions of others (i.e., issuers and financial advisors) and 
thus recommended that the amendment not be adopted.\20\
---------------------------------------------------------------------------

    \18\ Artemis, Edward Jones, Franklin Templeton, Goldman Sachs, 
GFOA and Rauscher Pierce. Franklin Templeton believed ``[b]onds 
should be confirmed no later than 24 hours after the order period 
has closed.''
    \19\ Edward Jones.
    \20\ BMA, Lehman Brothers, Newman, Smith Barney and Wachovia. 
Smith Barney also noted that 24 hours may not always provide 
sufficient time for issuers to review the allocations and that 
``[i]ssuers have an interest in conducting such review to assure 
themselves that the book runner is acting fairly.''
---------------------------------------------------------------------------

    The Board has determined to submit the proposed rule change because 
it should greatly facilitate the allocation process. The Board believes 
that, to ensure compliance with the proposed rule change, underwriters 
will include a provision in the bond purchase agreement that 
allocations must be completed within the 24 hour timeframe. If issuers 
or financial advisors wish to review orders and proposed allocations, 
they will have to do so within this 24 hour time period.

    Rule G-11(g): Require disclosure to syndicate members of all 
designations to members within five business days following the date 
of sale.

    Six commentators \21\ support this draft amendment, with five of 
these recommending changes to the proposed timeframe.\22\ Three 
commentators recommended disclosure within 10 business days following 
the date of sale to provide more time for the process to be 
completed.\23\ One commentator suggested that the ``timeframe be 
extended to the later of ten business days after the date of sale, or 
three business days following receipt by the senior manager of the 
information.'' \24\ One commentator recommended 10 to 15 business days 
as more feasible.\25\
---------------------------------------------------------------------------

    \21\ BMA, Edward Jones, GFOA, Lehman Brothers, Newman and 
Wachovia.
    \22\ GFOA had no comment about the timeframe.
    \23\ Edward Jones, Lehman Brothers and Newman.
    \24\ BMA.
    \25\ Wachovia.
---------------------------------------------------------------------------

    Two commentators are opposed to syndicate members receiving a 
statement of designations made to all syndicate members.\26\ One of 
these commentators stated that the draft amendment ``would discourage 
competition, essentially forcing accounts to go through the manager'' 
and that ``[s]mall accounts, in particular, would be even more 
vulnerable to intimidation by the manager and there would be little 
incentive for any account to work with any member other than the senior 
manager.'' \27\ This commentator also stated that ``decreased 
competition would hurt issuers by raising the cost of issuance.'' The 
other commentator stated that ``[s]yndicate members view capital 
formation from the perspective of their own competitive advantage and 
would use allocation and designation information to challenge the 
fairness of decisions made by the senior manager.'' \28\ These two 
commentators are in favor of an amendment to require the senior 
syndicate manager to disclose to individual syndicate members the 
amount of their respective designations, with one commentator \29\ 
suggesting it be made within five business days following the date of 
sale and the other commentator \30\ suggesting that it be made within 
seven business days following the date of sale. One of these 
commentators also stated that ``[o]ften, syndicate members fail to 
receive their full designation payments, to the benefit of the senior 
managers, as a direct result of delays in communicating this 
information'' and that ``implementation of this amendment is critical 
as it will

[[Page 19778]]

considerably reduce the prevalence of this problem and help to ensure 
that syndicate members receive the full designation credit they have 
earned.'' \31\
---------------------------------------------------------------------------

    \26\ Artemis and Goldman Sachs.
    \27\ Artemis.
    \28\ Goldman Sachs.
    \29\ Goldman Sachs.
    \30\ Artemis.
    \31\ Artemis.
---------------------------------------------------------------------------

    Another commentator opposes the draft amendment in its 
entirety.\32\ It believes that the designation information ``would 
potentially be used to promote further fixed economics in the municipal 
bond industry, through the use of set-asides or similar methods of 
allocation * * * the industry must allow the market system to allocate 
the economics if dealers are to efficiently allocate their resources.'' 
It further stated that ``those firms that provide services to 
investors, such as research, liquidity and analysis, profit by being 
compensated by those investors in the form of designations'' and fixed 
economics would provide a deterrent to ``firms from providing services 
to investors and the market at large.'' It also noted that it opposes 
the draft amendment because, for senior managers to be in compliance 
with any timeframe contained within the rule, they would have to rely 
on buyers making their designations within that timeframe. This 
commentator stated that, if the Board determines to go forward with the 
draft amendment, it would support BMA's comment to disclose 
designations ``upon the later of three days after notice from the buyer 
or ten days after the date of sale.''
---------------------------------------------------------------------------

    \32\ Smith Barney.
---------------------------------------------------------------------------

    The Board has determined to propose the draft amendment because it 
believes all syndicate members have the right to the disclosure of all 
designation information. The Board does not believe the proposed rule 
change will be used to promote ``fixed economics'' in the municipal 
securities industry. The Board did decide, however, to change the 
timeframe to require disclosure to syndicate members of all available 
designation information within 10 business days following the date of 
sale and all information with the sending of the designation checks. 
The Board believes almost all of the information will be available 
within 10 business days, but the additional time is provided to receive 
any late information.

    Rule G-11(g): Require the senior manager to disclose to members 
of the syndicate, in writing, within 10 business days following the 
date of sale, the amount of any portion of the take-down that is 
directed to each member of the syndicate by the issuer.

    Six commentators\33\ support this draft amendment with one 
commentator noting ``this part of the take-down should be disclosed to 
syndicate members in the same manner as customer designations.'' \34\ 
One commentator is opposed to the amendment noting that it would 
provide a means for syndicate members to challenge senior managers 
about their decisions.\35\ Another commentator believes that the 
disclosure of a dealer's take-down should be made only to that 
dealer.\36\ Two commentators suggested that the timeframe be changed to 
15 days following the date of sale.\37\ One commentator suggested that 
the timeframe be changed to the later of 15 business days following the 
date of sale, or three business days following receipt by the senior 
manager of notification of such set-asides.\38\
---------------------------------------------------------------------------

    \33\ BMA, GFOA, Newman, Rauscher Pierce, Smith Barney and 
Wachovia.
    \34\ BMA.
    \35\ Goldman Sachs.
    \36\ Artemis.
    \37\ Newman and Wachovia.
    \38\ BMA.
---------------------------------------------------------------------------

    The Board has determined to propose the draft amendment because it 
believes all syndicate members have the right to the disclosure of all 
take-down information. The Board did decide, however, to change the 
timeframe to the later of 15 business days following the date of sale 
or three business days following receipt by the managing underwriter of 
notification of such set asides.

    Rule G-12(k): Move the deadline for payment of designations from 
30 business days following delivery of the securities to the 
customer to 30 calendar days after the issuer delivers the 
securities to the syndicate.

    Eight commentators support this draft amendment.\39\ One 
commentator stated that the amendment ``will greatly streamline the 
underwriting process.'' \40\
---------------------------------------------------------------------------

    \39\ Artemis, BMA, Edward Jones, Goldman Sachs, Newman, Rauscher 
Pierce, Smith Barney and Wachovia.
    \40\ BMA.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the Board's principal offices. 
All submissions should refer to File No. SR-MSRB-97-15 and should be 
submitted by May 12, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\41\
---------------------------------------------------------------------------

    \41\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10506 Filed 4-20-98; 8:45 am]
BILLING CODE 8010-01-M