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

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