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Mixed Reactions to Draft Syndicate Proposals

WASHINGTON - The Securities Industry and Financial Markets Association is concerned that rule changes drafted by the Municipal Securities Rulemaking Board that would speed up deadlines for syndicate managers to disburse profits to other syndicate members would be too burdensome.

But First Southwest Co. is urging the MSRB to adopt the changes as drafted to the board's Rule G-11 on uniform practices and to then conduct a study of how the industry should better structure syndicates to protect participating underwriters from the effects of a bankruptcy or similar proceeding of another syndicate member.

SIFMA's and First Southwest's reactions came in separate comment letters filed to the MSRB late last month in response to the draft rule changes the board released in May to address an issue that surfaced when Lehman Brothers filed for bankruptcy last year. Profits were withheld from syndicate members in municipal bond transactions senior managed by tLehman.

In a brief interview on Thursday, First Southwest chairman and chief executive officer Hill Feinberg said his firm has still not recovered some of its profits from a transaction senior managed by Lehman just before its collapse. Members of that syndicate have become unsecured creditors of the firm, because the money was not held aside in a trust for syndicate members.

On Thursday, the MSRB declined to comment on the letters, saying the 15-member board was still reviewing them. Before they can be implemented, the board must submit them for approval to the Securities and Exchange Commission.

In its letter, First Southwest welcomed the rule changes to limit liability, but urged the board to go even further and consider "complex credit and legal issues" tied to how syndicates can be better structured.

"We believe that syndicates should be structured in such a manner that any money held in the syndicate is for the benefit of the participating underwriters from the moment of inception and then paid out according to the proposed G-11 amendment deadline," Feinberg wrote.

"There should be a provision that underwriters in bankruptcy, or similar proceeding, may have a deferred liability to the syndicate that should be factored into any such proceeding. A firm in bankruptcy, or similar proceeding, should not be able to use other syndicate members' profits, while at the same time increasing its future liability owed the syndicate."

In its letter, SIFMA said it is supportive of related draft changes to Rule G-12 on new syndicate practices that would require the settlement of secondary market trading accounts within 30 calendar days, rather than 60 days. These accounts are sometimes used if an investor is trying to sell a large position and several dealers agree to buy a substantial block of it to sell to other investors.

But the industry group warned that the draft changes to Rule G-11 - which would accelerate the rule's requirement for settlement of syndicate accounts to 30 calendar days after the issuer delivers the securities to the syndicate - "will be unduly burdensome to the industry, and will not [be] flexible enough to account for current market conditions and developments."

Currently, final settlement of syndicate accounts must occur within 60 calendar days after all securities have been delivered by the syndicate or account manager to the syndicate members.

SIFMA pointed out that for competitive deals, it is not uncommon for syndicate accounts to have unsold bonds 30 calendar days after the issuer delivers the securities to the syndicate, since dealers do not start selling bonds until they win the competitive bid.

"The current market conditions and volatility create additional problems with clearing bonds out of a competitive syndicate," SIFMA said in its letter, which was written by Leslie Norwood, the group's managing director and associate general counsel.

For negotiated deals, particularly in transactions involving new credits, structures, or products, the 30-day limit may be hard to meet because the syndicate's expenses, particularly for underwriters' counsel, may not be final within 30 calendar days after the issuer delivers the securities to the syndicate, SIFMA said.

"Specifically, it is not uncommon for underwriters' counsel fees to increase to cover unexpected work outside the original fee estimate in transactions involving new credits, structures, and products," SIFMA wrote. "Final bills from underwriters' counsel may take many weeks to arrive, and the receipt of such bills are out of the direct control of the senior manager."

SIFMA noted that this situation has occurred numerous times recently as Build America Bonds and other newly authorized tax-credit bonds hit they market. It also said that taking into account holidays and weekends, 30 calendar days may mean as little as 20 business days, "which many members feel is an insufficient amount of time to finalize the expenses of the syndicate account."

SIFMA took issue with a separate two-pronged portion of the draft changes to G-11 that would require syndicate managers to disburse profits credited to a specific syndicate member within 10 calendar days after settlement, from the current 30, and that would facilitate the reduced time period by creating a new requirement that all members submit their designations to the syndicate manager within two business days after settlement.

SIFMA warned that the two-day limit is "unwarranted and puts the co-managers under significantly tighter deadlines than the senior manager," and that the 10-day limit "would greatly increase the administrative demands on the ... senior managers, with a minimal reduction in risk to the syndicate members."

The industry group stressed that the time frames for settlement of the syndicate account and the payment of designations should be the same, which would lead to "a reduction in administrative costs for syndicate managers and compliance simplification."

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