Questions about the amendments may be directed to Ronald W. Smith, Senior Legal Associate.      

        On November 27, 1998, the Securities and Exchange Commission ("SEC") approved 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 amendments became effective upon approval by the SEC. The amendments are summarized below. Following the summary, additional information is provided regarding the amendment on allocation of securities because this amendment was revised after the original filing with the SEC.

SUMMARY

        The requirements of the amendments are as follows:

Issuer Syndicate Requirements (Rules G-8(a)(viii) and G-11(f))

• The managing underwriter is required 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 issuer 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.
• The managing underwriter must provide the issuer with a copy of any such statement for its review.

Allocation of Securities (Rule G-11(g)(i))

• The managing underwriter is required to complete the allocation of securities within 24 hours of the sending of the commitment wire.
• 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 purchasers must be informed of this fact.

Disclosure of Designation Information (Rule G-11(g)(iii))

• The managing underwriter must 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 amendment does not require that the identity of the investors providing the designations be disclosed; the only disclosure required is the total amount of the designations for each dealer.

Disclosure of the Take-Down (Rule G-11(g)(iv))

• The managing underwriter is required 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.

Payment of Designations (Rule G-12(k))

• Designations must be paid within 30 calendar days following the date the issuer delivers the securities to the syndicate.

ALLOCATION OF SECURITIES (Rule G-11(g)(i))

        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.

        To ensure a timely allocation process in the industry, the Board originally filed with the SEC an amendment 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. The Board believed that, in order to ensure compliance with the proposed amendments, underwriters would include a provision in the bond purchase agreement, or otherwise reach agreement with issuers, that allocations must be completed within the 24-hour time frame. If issuers or financial advisors wish to review orders and proposed allocations, they would have to do so within this 24-hour period.

        One issuer commentator to the SEC on the proposed amendment noted that it is a mistake to assume that the bond purchase agreement will be signed prior to the completion of the allocation. The commentator's practice is 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 its 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 commentator notes that it 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 commentator states that underwriters have advised it that this is a fairly common practice.

        The commentator 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. The Board agreed with the commentator that the proposed amendment did 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 commentator's example of refunding delays and when the issuing authority is unable to schedule a meeting to approve the final pricing until two or more days after the sending of the commitment wire). The Board also agreed 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.

        The Board determined 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.⁽²⁾ 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.⁽³⁾ In a published interpretive letter on rule G-12,⁽⁴⁾ 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 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.

December 1, 1998

TEXT OF AMENDMENTS⁽⁵⁾

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; 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) 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.

ENDNOTES

1. Sec. Exch. Act Rel. No. 40717 (November 27, 1998).

2. 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.

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

4. See MSRB interpretation of April 30, 1982, MSRB Manual, ¶ 3556.55.

5. Underlining indicates additions; strikethrough denotes deletions.

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