[Federal Register Volume 63, Number 76 (Tuesday, April 21, 1998)]
[Notices]
[Pages 19775-19778]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10506]
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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.
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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 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\
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\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.
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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\
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\4\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16,
``Board Review of Underwriting Process.''
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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.
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\5\ Smith Barney.
\6\ Prudential.
\7\ BMA and Lehman Brothers.
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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\
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\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.
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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\
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\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.
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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\
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\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.''
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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\
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\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.
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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\
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\26\ Artemis and Goldman Sachs.
\27\ Artemis.
\28\ Goldman Sachs.
\29\ Goldman Sachs.
\30\ Artemis.
\31\ Artemis.
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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.''
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\32\ Smith Barney.
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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\
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\33\ BMA, GFOA, Newman, Rauscher Pierce, Smith Barney and
Wachovia.
\34\ BMA.
\35\ Goldman Sachs.
\36\ Artemis.
\37\ Newman and Wachovia.
\38\ BMA.
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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\
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\39\ Artemis, BMA, Edward Jones, Goldman Sachs, Newman, Rauscher
Pierce, Smith Barney and Wachovia.
\40\ BMA.
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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\
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\41\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10506 Filed 4-20-98; 8:45 am]
BILLING CODE 8010-01-M
