Amendment Filed to Previously Filed Amendment to Rule G-11(g)(i), on Sales of New Issue Municipal Securities During the Underwriting Period

            On August 18, 1998, the Board filed with the Securities and Exchange Commission Amendment No. 1 to its File No. SR-MSRB-97-15 relating to a proposed rule change consisting of amendments 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 to be made by brokers, dealers and municipal securities dealers. 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. The amendment 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.

            On December 23, 1997, the Board filed with the SEC 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 ¹. The Commission received three comment letters in response to the notice. One of the commentators was the City of New York². 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 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.

            The City of New York does not want the amendment to rule G-11(g)(i) 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: Awithin 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 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."³  Rule G-12(c), on uniform practice, requires that, for transactions effected on a Awhen, as and if issued" basis, initial confirmations be sent within two business days following the "trade date.^"4 In a published interpretive letter on rule G-12,⁵ 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 Awhen, as and if issued" confirmations reflecting the allocation of new issue securities to Apre-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 Apre-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 purchasers= 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.

August 18, 1998

AMENDMENT TO PROPOSED RULE CHANGE⁶

(a) - (f) No additional change.

(g) [Disclosure of] Designations and Allocations of Securities. The senior syndicate manager shall:

            (i) within 24 hours of the sending of the commitment wire, complete the allocation of securities; provided, however, that, if at the time allocations are made the purchase contract in a negotiated sale is not yet signed or the award in a competitive sale is not yet made, such allocations shall be made subject to the signing of the purchase contract or the awarding of the securities, as appropriate, and the purchaser must be informed of this fact;

(ii) - (iv) No additional change.

(h) No change.

ENDNOTES

¹    See Securities Exchange Act Rel. No. 39873 (April 14, 1998), 63 FR 19775.

²    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, Staff Attorney, from Ronald W. Smith, Senior Legal Associate.

³    Rule G-15(a)(iii) further states that a dealer may send a confirmation for a Awhen, 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.

⁴   Pursuant to rule G-12(a), any inter-dealer transaction that is submitted to NSCC for comparison is exempt from rule G-12(c).

⁵   See MSRB interpretation of April 30, 1982, MSRB Manual, &3556.55.

⁶  Underlining indicates additions; brackets denote deletions.