Municipal Securities Rulemaking Board

Syndicate Settlement Practice Violations Noted

July 1981

The Board continues to be concerned about industry compliance with certain of the requirements of Board rules G-11, "Sales of New Issue Municipal Securities During the Underwriting Period," and G-12, "Uniform Practice," with respect to the settlement of syndicate accounts. Board rule G-11(g) requires, among other matters, that syndicate managers provide to members at the time of settlement of a syndicate account a detailed statement of the expenses incurred by the syndicate.¹ Rule G-12(j) requires that settlement of a syndicate account and distribution of any profit due to members be made within 60 days of delivery of the syndicate's securities. In addition, rule G-12(i) requires that good faith deposits be returned within two business days of settlement with an issuer, and rule G-12(k) requires that sales credits designated by a customer be distributed within 30 days following delivery of the securities to the customer.

The Board has from time to time received complaints from industry members concerning certain managers' non-compliance with these requirements. These persons allege that certain managers unduly delay the sending of syndicate settlement checks and other disbursements, and furnish settlement statements that provide little or no detail about the nature of the expenses incurred by the syndicate. These persons have also, on occasion, furnished to the Board copies of syndicate statements which illustrate clearly these managers' failure to provide the requisite information and to meet the time requirement for these disbursements. The Board has referred each of these complaints to the appropriate regulatory agency for investigation and appropriate action.

The Board wishes to emphasize strongly the need for compliance with these provisions. The Board continues to be of the view that the time periods and other requirements of the rules, which were arrived at after considerable deliberation, are fair and reasonable. The Board believes that failure to comply with these provisions is inexcusable. The Board does not accept the rationale offered by some, that the difficulties in obtaining bills for syndicate expenses justify these undue delays; the Board believes that it is incumbent upon managers to assure that such bills are received and processed in timely fashion, to permit compliance with the rule. The Board strongly urges syndicate managers who have failed to comply with these requirements to bring their practices into compliance with the requirements of the rules.

The Board also is communicating these views to the enforcement organizations and stressing its concern with respect to compliance with these provisions. It strongly urges all syndicate members to notify the appropriate enforcement organization of any violations by managers of these provisions. If the manager is a member of the NASD, notification should be directed to Surveillance Department, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006, telephone (202) 728-8221. If the manager is a national bank, notification should be sent to Investment Securities Division, Office of the Comptroller of the Currency, 490 L'Enfant Plaza, S.W., Washington, D.C. 20219, telephone (202) 447-1901. If the manager is a State member bank of the Federal Reserve System, notification should be directed to the Division of Banking Supervision and Regulation, Federal Reserve Board, 20th and C Streets, N.W., Washington, D.C. 20551, telephone (202) 452-2781. If the manager is a bank insured by the Federal Deposit Insurance Corporation (other than a member of the Federal Reserve System), notification should be directed to Division of Bank Supervision, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429, telephone (202) 898-6863.

Footnotes

¹ The rule contemplates that the statement will set forth a detailed breakdown of expenses into specified categories, such as advertising, printing, legal, computer services, packaging and handling, etc. The statement may include an item for miscellaneous expenses, provided that the amount shown under such an item is not disproportionately large in relation to other items of expense shown and includes only items of expense which cannot be easily categorized elsewhere in the statement.

Notice Concerning Disclosure of Syndicate Expenses

January 12, 1984

Board rule G-11, concerning syndicate practices, among other things, requires syndicates to establish priorities for different categories of orders and requires certain disclosures to syndicate members which are intended to assure that allocations are made in accordance with those priorities. In addition, the rule requires that the manager provide certain accounting information to syndicate members. In particular, subsection (h)(i) of the rule requires that senior syndicate managers, at or before the final settlement of a syndicate account, furnish to the other members of the syndicate "an itemized statement setting forth the nature and amounts of all actual expenses incurred on behalf of the syndicate." This provision is designed to assure that managers provide a detailed breakdown of syndicate expenses. The Board has received complaints from industry members concerning managers' non-compliance with this requirement that expense items listed are not described sufficiently to explain the true nature of the expenses.

The Board wishes to emphasize that, since one of the purposes of rule G-11(h)(i) is to assure the accountability of managers for syndicate funds, expense items must be described so as to make the expenditures readily understandable by syndicate members. Generalized categories of expenses will be deemed to be not in compliance with the rule if they do not adequately portray the nature of the expense.

Notice Concerning Syndicate Expenses that Appear Excessive

March 3, 1987

Rule G-11(h)(i) requires that a senior syndicate manager, at or before final settlement of a syndicate account, furnish to the syndicate members "an itemized statement setting forth the nature and amount of all actual expenses incurred on behalf of the syndicate." A major goal of rule G-11(h)(i) is to ensure the accountability of managers for their handling of syndicate funds. In a January 1984 notice concerning this provision, the Board stated that expense items must be described so as to make the expenditures readily understandable by syndicate members and generalized categories of expenses will be deemed to be not in compliance with the rule if they do not portray adequately the nature of the expense.¹ Subsequently, in response to claims that certain managers may have been charging excessive fees for designated sales, the Board specifically warned managers to take care in determining actual syndicate expenses. The Board stated that manager may violate rule G-17, on fair dealing, if the expenses charged to syndicate members bear no relation to or otherwise overstate the actual expenses incurred on behalf of the syndicate.²

The Board has received a number of complaints concerning the amount of syndicate expenses charged by managers for many new issue municipal securities. It appears that in some instances syndicate managers may be charging syndicate members expenses that are overstated or excessive, particularly with respect to computer charges and clearance fees.

The Board wishes to reiterate that its rules prohibit managers from overstating actual syndicate expenses. The Board has asked the NASD and the bank regulatory agencies in their examinations of municipal securities dealers to emphasize enforcement of rules G-11(h)(i) and G-17 as they pertain to syndicate expenses by seeking substantiation of syndicate expenses that appear unreasonable or excessive. As the enforcement agencies review accounting practices in this area, the Board will discuss with them whether more precise accounting information should be required of managers under rule G-11.

Footnotes

¹ Notice Concerning Disclosure of Syndicate Expenses (January 12, 1984) MSRB Manual

² Notice Concerning Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985) MSRB Manual

Notice Concerning Syndicate Expenses

November 14, 1991

Over the years, the Board, pursuant to rule G-11 and rule G-17, on fair dealing, has urged syndicate managers to provide members with a clear and accurate itemized statement of all actual expenses incurred in the underwriting of each issue. In a 1984 notice, the Board stated that expense items must be sufficiently described to make the expenditures readily understandable by syndicate members, and that generalized categories of expenses are not sufficient if they do not portray the specific nature of the expenses.¹ In 1985, the Board issued a notice specifically warning managers to take care in determining actual syndicate expenses, and noting that managers may violate rule G-17 if the expenses charged to syndicate members bear no relation to, or otherwise overstate, the actual expenses incurred.² And in 1987, in response to industry complaints concerning the amount of syndicate expenses charged by managers, the Board issued another notice reiterating that Board rules prohibit managers from overstating actual syndicate expenses.³

The Board wishes to reiterate its interpretation of rules G-11 and G-17 that syndicate expenses charged to members must be clearly identified and must be the actual expenses incurred on behalf of the syndicate.⁴ The Board continues to be concerned over the number of complaints about syndicate managers who may be charging expenses that are overstated or excessive, particularly with respect to clearance fees for designated sales and computer expenses. Board rules specifically prohibit managers from overstating actual syndicate expenses.

The Board urges syndicate members to report possible overstatements of syndicate expenses and other problems in compliance with rule G-11(h)(i). The Board will continue to monitor this situation, and will refer any complaints it receives in this area to the appropriate enforcement agencies. In addition, the NASD has alerted the Board that it will accept telephone complaints or information from syndicate members who do not wish to reveal their identities.

Footnotes

¹ Notice Concerning Disclosure of Syndicate Expenses (January 12, 1984) MSRB Manual

² Notice Concerning Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985) MSRB Manual

³ Notice Concerning Syndicate Expenses that Appear Excessive (March 3, 1987) MSRB Manual

⁴ See MSRB Reports, vol. 5, no. 6 (November 1985), and vol. 5, no. 5 (August 1985).

Syndicate Expenses: Per Bond Fee for Bookrunning Expenses

June 14, 1995

Board rule G-11, concerning syndicate practices, among other things, requires syndicates to establish priorities for different categories of orders and requires certain disclosures to syndicate members which are intended to assure that allocations are made in accordance with those priorities. In addition, the rule requires that the manager provide certain accounting information to syndicate members. In particular, rule G-11(h)(i) provides that: "Discretionary fees for clearance costs to be imposed by a syndicate manager and management fees shall be disclosed to syndicate members prior to the submission of a bid, in the case of a competitive sale, or prior to the execution of a purchase contract with the issuer, in the case of a negotiated sale."¹ The purpose of this provision is to provide information useful to syndicate members in determining whether to participate in a syndicate account. The rule also requires that the senior syndicate manager, at or before final settlement of a syndicate account, furnish to the syndicate members "an itemized statement setting for the nature and amount of all actual expenses incurred on behalf of the syndicate." One of the purposes of this section is to render managers accountable for their handling of syndicate funds.

The Board has received inquiries regarding the appropriateness of a per-bond fee for the bookrunning expenses or management fees of the senior syndicate manager. Discretionary fees for clearance costs and management fees may be expressed as a per-bond charge. These expenses, however, must be disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract with the issuer; for example, in the Agreement Among Underwriters. The itemized statement setting forth a detailed breakdown of actual expenses incurred on behalf of the syndicate, such as advertising, printing, legal, computer services, etc., must be disclosed to syndicate members at or before final settlement of the syndicate account. With respect to these fees, the Board has previously noted that managers who assess a per-bond charge for designated sales may be acting in violation of rule G-17 if the expenses charged to members bear no relation to or otherwise overstate the actual expenses incurred on behalf of the syndicate.² The Board believes a per-bond fee creates the appearance that it is not an actual expense related to and incurred on behalf of the syndicate.

The Board is concerned about the charging of syndicate expenses and compliance with rule G-11. Managers should exercise care in accounting for syndicate funds, and any charge that has not been disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract may be charged to syndicate members only if it is an actual expense incurred on behalf of the syndicate. The Board will continue to monitor syndicate practices and will notify the appropriate enforcement agency of any complaints it receives in this area. Syndicate members are encouraged to notify directly the appropriate enforcement agency of any violations of these provisions.

Footnotes

¹ The rule defines management fees to include, "in addition to amounts categorized as management fees by the syndicate manager, any amount to be realized by a syndicate manager, and not shared with the other members of the syndicate, which is attributable to the difference in price to be paid to an issuer for the purchase of a new issue of municipal securities and the price at which such securities are to be delivered by the syndicate manager to the members of the syndicate."

² Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985) MSRB Manual.

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