WASHINGTON - The Municipal Securities Rulemaking Board this week will discuss how to proceed with draft rule changes it proposed in May to address an issue that surfaced when Lehman Brothers filed for bankruptcy last year and profits were withheld from syndicate members in muni transactions senior managed by the firm.
At its three-day meeting that begins today in San Francisco, the board will consider comments it received on the draft changes, said MSRB executive director Lynnette Hotchkiss. The draft changes to its Rule G-11 on uniform practices and G-12 on new syndicate practices would speed up the timetables for syndicate managers to disburse profits to the other syndicate members as well as for settlements of so-called secondary market trading accounts.
In addition, the 15-member board must select a new chairman and vice chairman as well as elect individuals to fill five seats - two bank dealer officials, two securities dealer officials, and one "public" official - to replace five members whose terms are expiring. The new officers and members will assume their posts at the beginning of the board's next fiscal year on Oct. 1.
The board is made up of five securities firm representatives, five bank-dealer officials, and five members of the public, including a representative of the issuer community and a representative of investors, who serve three-year staggered terms. Each year it elects a new chairman and vice chairman, as well as five new members.
In response to its proposal to speed up the timetables for syndicate managers to disburse profits, the board received two comment letters. One, from First Southwest & Co., urged the MSRB to adopt the changes as drafted to the board's Rule G-11 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.
In a brief interview, Hill Feinberg, First Southwest chairman and chief executive officer, noted that his firm was one of several syndicate members on a North Texas Tollway Authority transaction senior managed by Lehman just before it went bankrupt and has yet to receive any of its underwriting fees from the transaction, along with other syndicate members.
As a result, the firms have been forced to make claims to a bankruptcy court handling the Lehman case, he said. He declined to say precisely how much First Southwest is owed.
Feinberg said he hopes the MSRB works to create standardized procedures under which syndicate member fees would be placed in escrow. His remarks mirrored his letter, which argued that a syndicate should be structured so that any money held in it should be for the benefit of the participating underwriters from the moment of inception and paid out under the deadlines in Rule G-11.
In a separate letter, the Securities Industry and Financial Markets Association said it is supportive of the proposed changes to G-12 that are tied to secondary market trading account settlements.
But the group but warned that the draft changes to Rule G-11, which would accelerate the requirement for settlement of syndicate accounts to 30 calendar days after the issuer delivers the securities to the syndicate, would be "unduly burdensome to the industry and will not [be] flexible enough to account for current market conditions and developments."
Currently, final settlements of syndicate accounts must occur within 60 calendar days after all securities have been delivered by the syndicate manager to the syndicate members.
SIFMA pointed out that this new deadline presents problems for both competitive and negotiated deals.
Meanwhile, the board will have to elect a successor to Ron Stack, whose term as chairman expires Sept. 30. Stack, whose bank dealer term on the board also expires this fall, has resigned from Barclays Capital to head the northeast group in Wells Fargo & Co.'s public finance department.
Peter Clarke, managing director at JPMorgan in New York, who is currently serving as vice chairman and has one year left on his term on the board, is expected to replace Stack. The board also must select a successor to Clarke.
Meanwhile, the four other members leaving the board at the end of September are: Maud Smith Daudon, president and CEO of Seattle-Northwest Securities Corp.; Michael Imhoff, managing director at Stifel Nicolaus & Co. in Denver; James Posthauer, director of municipal trading and underwriting at SunTrust Robinson Humphrey in Atlanta; and Robert Zubak, senior portfolio manager at Allstate Investments LLC in Northbrook, Ill.
The board may also elect a replacement for Stephen Wool, who resigned his bank dealer seat late last month when he left Keybanc Capital Markets in Chicago for Janney Montgomery Scott LLC.