Amendments Filed regarding Syndicate Practices: Rules G-11, G-12 and G-8

The Board has filed proposed 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, in regard to syndicate practices.

On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") 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, in regard to syndicate practices.⁽¹⁾ The proposed amendments will become effective upon approval by the SEC.

DISCUSSION

As part of its review of the underwriting process, 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 designations: and (3) timing of settlement of syndicate accounts.⁽²⁾

The proposed amendments adopted by the Board are summarized below.

Issuer syndicate requirements

The proposed amendments revise rules G-8(a)(viii) and G-11(f) to require the managing underwriter to maintain a record of all 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. 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.

Most commentators agreed that recording and disclosing issuer policies and requirements would be beneficial, but some of the commentators were opposed to requiring the managing underwriter to create a written detailed statement of issuer syndicate requirements if they are not in published form. 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 determined to adopt the proposed amendments.

Allocation of securities

The proposed amendments to 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 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.

While some commentators noted their support for the prompt completion of allocations, they also noted that a dealer's compliance with the amendment is dependent upon the timely actions of others (i.e., issuers and financial advisors) and thus recommended that the amendment not be adopted. The Board adopted the proposed amendments to ensure a timely allocation process in the industry. The Board believes that, in order to ensure compliance with the proposed amendments, underwriters will include a provision in the bond purchase agreement that allocations must be completed within the 24-hour time frame. If issuers or financial advisors wish to review orders and proposed allocations, they will have to do so within this 24-hour period.

Disclosure of designation information

There currently is no Board rule requiring the disclosure to syndicate members of all designations to members. The proposed amendments revise rule G-11(g) to require the managing underwriter to 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.

The draft amendments contained in the Notice required disclosure to syndicate members of all designations to members within five business days following the date of sale. Some of the commentators recommended a longer time frame to provide more time for the process to be completed. The Board determined to change the time frame 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 pursuant to rule G-12(k). The Board believes almost all of the information will be available by 10 business days, but the additional time is provided in order to receive any late information.

Disclosure of take-down

A small number of issuers are setting aside, or holding back, a portion of the take-down to direct to syndicate members at their discretion. Because this issuer "set-aside" is part of the take-down, the Board believes this should be disclosed to syndicate members in the same manner as customer designations. Accordingly, the proposed amendments revise 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.

The draft amendments contained in the Notice required disclosure to members of the syndicate within 10 business days following the date of sale. Based upon comments received suggesting that the proposed time frame was too short, the Board extended the time frame in the proposed amendments 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.

Payment of designations

The proposed amendments to 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. The Board adopted this amendment in order to provide for more efficient operation of syndicate accounts.

December 23, 1997

Text of Proposed Amendments⁽³⁾

Rule G-11. Sales of New Issue Municipal Securities During the Underwriting Period

(a) - (e) No change.

(f) Communications Relating to Issuer Syndicate Requirements, Priority Provisions and Order Period. Prior to the first offer of any securities by a syndicate, the senior syndicate manager shall furnish in writing to the other members of the syndicate (i) a written statement of all terms and conditions required by the issuer, (ii) the priority provisions, (iii) [(ii)] the procedure, if any, by which such priority provisions may be changed, (iv) [(iii)] if the senior syndicate manager or managers are to be permitted on a case-by-case basis to allocate securities in a manner other than in accordance with the priority provisions, the fact that they are to be permitted to do so, and (v) [(iv)] if there is to be an order period, whether orders may be confirmed prior to the end of the order period. Any change in the priority provisions shall be promptly furnished in writing by the senior syndicate manager to the other members of the syndicate. Syndicate members shall promptly furnish in writing the information described in this section to others, upon request. If the senior syndicate manager, rather than the issuer, prepares the written statement of all terms and conditions required by the issuer, such statement shall be provided to the issuer.

(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;

(ii) within two business days following the date of sale, disclose to the other members of the syndicate, in writing, a summary, by priority category, of all allocations of securities which are accorded priority over members' take-down orders, indicating the aggregate par value, maturity date and price of each maturity so allocated, including any allocation to an order confirmed at a price other than the original list price. The summary shall include allocations of securities to orders submitted through the end of the order period or, if the syndicate does not have an order period, through the first business day following the date of sale; [.]

(iii) disclose to the members of the syndicate, in writing, all available designation information to members within 10 business days following the date of sale and all information with the sending of the designation checks pursuant to rule G-12(k); and

(iv) disclose to the members of the syndicate, in writing, the amount of any portion of the take-down directed to each member by the issuer. Such disclosure is to be made by the later of 15 business days following the date of sale or three business days following receipt by the senior syndicate manager of notification of such set asides of the take- down.

(h) No change.

 

Rule G-12. Uniform Practice

(a) - (j) No change.

(k) Any credit designated by a customer in connection with the purchase of securities as due to a member of a syndicate or similar account shall be distributed to such member by the [municipal securities] broker, dealer or municipal securities dealer handling such order within 30 calendar [business] days following the date the issuer delivers the securities to the syndicate [delivery of the securities to the customer].

(l) No change.

 

Rule G-8. Books and Records to be Made By Brokers, Dealers, and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

(i) - (vii) No change.

(viii) Records of Syndicate Transactions. With respect to each syndicate or similar account formed for the purchase of municipal securities, records shall be maintained by a managing underwriter designated by the syndicate or account to maintain the books and records of the syndicate or account, showing the description and aggregate par value of the securities, the name and percentage of participation of each member of the syndicate or account, the terms and conditions governing the formation and operation of the syndicate or account (including a separate statement of all terms and conditions required by the issuer) all orders received for the purchase of the securities from the syndicate or account (except bids at other than syndicate price), all allotments of securities and the price at which sold, the date and amount of any good faith deposit made to the issuer, the date of settlement with the issuer, the date of closing of the account, and a reconciliation of profits and expenses of the account.

(ix) - (xix) No change.

(b) - (f) No change.

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ENDNOTES

1. File No. SR-MSRB-97-15. Comments sent to the SEC should refer to the file number.

2. "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

3. Underlining indicates new language; brackets denote deletions.

 

 

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