The Municipal Securities Rulemaking Board has drafted rule changes to address an issue that surfaced when Lehman Brothers filed for bankruptcy last year and profits were withheld from syndicate members in municipal bond transactions senior managed by that firm.

The draft changes, which the board released yesterday, would speed up the timetables for syndicate managers to disburse profits to the other syndicate members as well as for settlements of secondary market trading accounts.

The draft changes, the board said, would reduce the exposure of syndicate and secondary market trading account members to the risk of potential "deterioration in the credit of the syndicate or account manager during the pendency of account settlements."

The board is asking that public comments be submitted on the draft rule changes by June 26.

In a primary market transaction, the syndicate purchases the bonds at a discount from the issuer, then sells them to their customers. The spread between the price paid to the issuer and the amount received from the customer is the profit that is divided up between the syndicate members, minus costs of the syndicate such as underwriters counsel or Cusip numbers.

Syndicate profits, which are initially held by the senior manager, are distributed over time to the syndicate members, and customers have the option of designating that credits for their purchases go to a specific member of the syndicate, which in turn boosts that member's share of the syndicate profits.

While the senior manager is responsible for distributing the profits when a deal is completed, problems arise if the senior manager goes bankrupt or experiences financial trouble before the profits are distributed, largely because the money is not being held in a trust for syndicate members. Rather, it's held in the senior manager's general funds. In the event of a bankruptcy, the syndicate members become unsecured creditors.

To limit syndicate members' exposure to these situations, the board drafted changes to its Rule G-11 on new-issue syndicate practices that would require syndicate managers to disburse payments credited to a specific syndicate member within 10 calendar days after settlement, from the current 30 days.

In addition, the board proposed trimming to 30 calendar days from 60 the timeframe for syndicate managers to disburse general group order profits to syndicate members.

The board also drafted changes to its Rule G-12 on uniform 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.

"If the senior manager does not have enough money to make the payments, members of the syndicate just become general unsecured creditors of the senior manager," said MSRB associate general counsel Margaret "Peg" Henry.

Henry said the board decided it is "advisable" to shorten these disbursement periods in light of the financial difficulties a lot of dealers have experienced in the past year, not just Lehman.

Henry also noted that these deadlines have not been updated since they were implemented in the 1970s, prior to the advent of electronic billing and that many fees are agreed upon in advance and can be estimated soon after settlement.

"The board concluded that it was reasonable to shorten the period of time," she said.

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