Self-Regulatory Organizations; Notice of Filing of Amendment No. 1 to 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

SECURITIIES AND EXCHANGE COMMISSION

[Release No. 34-40456; File No. SR-MSRB-97-15, Amdt. No. 1]

Self-Regulatory Organizations; Notice of Filing of Amendment No.

1 to 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

September 22, 1998.

On August 18, 1998, the Municipal Securities Rulemaking Board

(``Board'' or ``MSRB'') filed with the Securities and Exchange

Commission (``Commission'' or ``SEC'') Amendment No. 1 to its File No.

SR-MSRB-97-15 (hereafter referred to as ``Amendment No. 1''), pursuant

to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ and Rule 19b-4 thereunder.\2\ Amendment No. 1 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 Amendment No. 1 from interested persons.

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\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The Board is filing herewith Amendment No. 1 to its previously

proposed amendment to Rule G-11(g)(i), on sales of new issue municipal

securities during the underwriting period. Amendment No. 1 retains the

requirement of the previously proposed amendment to Rule G-11(g)(i) to

complete the allocation of securities within 24 hours of the sending of

the commitment wire. Amendment No. 1 further provides that, if the bond

purchase agreement is not yet signed or if the award is not yet made at

the time allocations are made, such allocations are subject to the

signing of the bond purchase agreement or the award of bonds and the

purchaser must be informed of this fact.

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 Amendment No. 1 and discussed

any comments it received on Amendment No. 1. 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

On December 23, 1997, the Board filed with the Commission proposed

amendments to Rules G-11, G-12 and G-8 to strengthen further the

integrity of the syndicate practices process. One of the amendments to

Rule G-11(g) would require the managing underwriter to complete the

allocation of securities within 24 hours of the sending of the

commitment wire. The Board adopted this amendment to ensure a timely

allocation process in the industry.

Notice of the proposed rule change appeared in the Federal Register

on April 21, 1998.\3\ The Commission received three comment letters in

response to the notice. One of the commenters was the City of New

York.\4\ The City of New York states that it is a mistake to assume

that the bond purchase agreement will be signed prior to the completion

of the allocation. It notes that it is the City's practice to sign a

bond purchase agreement on the

[[Page 51977]]

second day following the verbal award of its refunding bonds and that,

due to the complexity of the City's refundings, it would be virtually

impossible to complete the work necessary to permit a bond purchase

agreement to be signed within 24 hours of the verbal award. The letter

notes that the City of New York has been advised that allocations may

be completed (and investors can be given notice of the allocations)

prior to the signing of the bond purchase agreement. In such cases, the

allocations are made subject to execution of a bond purchase agreement

and investors are so notified. The letter states that underwriters have

advised the City of New York that this is a fairly common practice.

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\3\ See Securities Exchange Act Rel. No. 39873 (April 14, 1998),

63 FR 19775.

\4\ The Board responded to issues raised in comment letters to

the Commission from The Bond Market Association and Salomon Smith

Barney by letter dated June 10, 1998, to Mignon McLemore, Attorney,

from Ronald W. Smith, Senior Legal Associate.

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The City of New York does not want the amendment to Rule G-11(g) to

be interpreted as requiring that a bond purchase agreement be signed

within 24 hours of the sending of the commitment wire. It suggests that

the rule language be amended to state: ``Within 24 hours of the sending

of the commitment wire, complete the allocation of securities (which

may be made subject to execution of a bond purchase agreement).'' As an

alternative, the City of New York states that the Board could provide

an exemption to the proposed requirement by allowing a 48-hour period

for allocations of refunding bonds.

The Board agrees with the City of New York that the proposed

amendment does not require that the bond purchase agreement be signed

within 24 hours of the sending of the commitment wire. In many

instances, the bond purchase agreement is signed within 24 hours of the

sending of the commitment wire, but there are circumstances in which

this is not done (e.g., the City of New York example of refunding

delays and when the issuing authority is unable to schedule a meeting

to approve the final pricing until two to three days after the sending

of the commitment wire). The Board also agrees that, prior to the

signing of the bond purchase agreement in a negotiated offering or the

official award of bonds in a competitive sale, any allocations made

must be subject to the execution of the bond purchase agreement or the

award, as appropriate. Moreover, the Board believes it is important

that investors be made aware of this fact. Although the signing of the

bond purchase agreement or the adoption of the award resolution is

often viewed as a technicality, if the market moves dramatically before

the signing or adoption, prices may change or the deal may not be

finalized.

Therefore, the Board determined to adopt Amendment No. 1 to the

proposed rule change to revise the language of the proposed amendment

to Rule G-11(g)(i). The revised amendment retains the requirement to

complete the allocation of securities within 24 hours of the sending of

the commitment wire. It further provides that, if the bond purchase

agreement is not yet signed or if the award is not yet made at the time

allocations are made, such allocations are subject to the signing of

the bond purchase agreement or the award of bonds and the purchaser

must be informed of this fact.

In addition, the Board wishes to remind dealers about a prior Board

interpretation regarding the sending of confirmations prior to the

signing of the bond purchase agreement or date of award. Rule G-15, on

confirmation, clearance and settlement of transactions with customers,

requires that a confirmation be sent in all transactions, whether the

transaction is done ``when, as and if issued'' or ``regular-way.'' \5\

Rule G-12(c), on uniform practice, requires that, for transactions

effected on a ``when, as and if issued'' basis, initial confirmations

be sent within two business days following the ``trade date.'' \6\ In a

published interpretive letter on Rule G-12,\7\ the Board stated that,

for purposes of this requirement, ``trade date'' should be understood

to refer to, in the case of a competitive new issue, a date no earlier

than the date of award of the new issue of municipal securities, and,

in the case of a negotiated new issue, a date no earlier than the date

of signing of the bond purchase agreement. Therefore, Board rules do

not allow ``when, as and if issued'' confirmations reflecting the

allocation of new issue securities to ``pre-sale'' orders to be sent to

customers before the date of award or of signing of the bond purchase

agreement. The Board stated that, in reaching this conclusion, it does

not intend to call into question the validity of a ``pre-sale'' order

received for a syndicate's securities or the practice of soliciting

such orders. The Board recognizes that such orders are expressions of

the purchaser's firm intent to buy the new issue securities in

accordance with the stated terms, and that such orders may be filled

and confirmed immediately upon the award of the issue or the execution

of a bond purchase agreement. The Board is of the view, however, that

such orders cannot be deemed to be executed until the time of the award

of the new issue or the execution of a bond purchase agreement on the

new issue. Mailing of confirmations on such orders prior to this time,

therefore, is a representation that the orders have been filled before

this actually occurs, and, as such, may be deceptive or misleading to

the purchasers.

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\5\ Rule G-15(a)(iii) further states that a dealer may send a

confirmation for a ``when, as and if issued'' transaction executed

prior to determination of settlement date. If such a confirmation is

sent, it must include all the information required by Rule G-15(a)

with the exception of settlement date, dollar price for transactions

executed on a yield basis, yield for transactions executed on a

dollar price, total monies, accrued interest, extended principal and

delivery instructions.

\6\ Pursuant to Rule G-12(a), any inter-dealer transaction that

is submitted to NSCC for comparison is exempt from Rule G-12(c).

\7\ MSRB Manual, General Rules, MSRB Interpretation (CCH) para.

3556.55.

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The Board believes Amendment No. 1 is consistent with Section

15B(b)(2)(C) of the Act.\8\

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\8\ Section 15B(b)(2)(C) states that the Board's rules shall be

designed to prevent fraudulent and manipulative acts and practices,

to promote just and equitable principles for 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.

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

The Board does not believe that Amendment No. 1 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

Written comments relating to Amendment No. 1 were neither solicited

nor received.

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

[[Page 51978]]

arguments concerning the foregoing, including whether Amendment No. 1

is consistent with 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, Amendment No. 1 and

should be submitted by October 20, 1998.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Jonathan G. Katz,

Secretary.

[FR Doc. 98-25920 Filed 9-28-98; 8:45 am]

BILLING CODE 8010-01-M