Notice To Members 87-88

Request for Comments on Proposed Amendments to Section 66 of the NASD Uniform Practice Code Regarding Syndicate Expense Statements and Prompt Settlement of Commissions

Published Date:

TO: All NASD Members and Other Interested Persons

ATTN: Syndicate Department

LAST DATE FOR COMMENT: JANUARY 30, 1988.

EXECUTIVE SUMMARY

The NASD requests comments on two proposed amendments to Section 66 of the NASD Uniform Practice Code. The first amendment would require syndicate managers of public offerings to provide members of underwriting syndicates with itemized statements of the expenses incurred by the syndicate. The second amendment would require that all sales commissions or concessions be paid or settled on the syndicate settlement date.

The text of the proposed amendments is attached.

BACKGROUND AND EXPLANATION OF PROPOSED AMENDMENTS

Syndicate Expense Statements

Section 66 of the NASD Uniform Practice Code requires final settlement of syndicate accounts by the syndicate manager within 90 days following the syndicate settlement date. Syndicate accounts are ordinarily established by underwriting groups to process the income and expenses of the syndicate in distributions of corporate securities.

As a result of concerns about the lack of detail provided by syndicate managers in syndicate settlement statements, the NASD Corporate Financing Committee considered the need to require syndicate managers to provide to members of underwriting syndicates itemized statements of the expenses incurred by the syndicate. The Committee noted that Municipal Securities Rulemaking Board Rule G-ll(h) requires an itemized statement in municipal underwritings. The Committee reviewed examples of syndicate settlement statements issued under Rule G-ll(h) and syndicate settlement statements used in non-municipal underwritings and noted that the non-municipal statements were diverse in format and provided little or no detail about the nature of expenses incurred by the syndicate.

The NASD Corporate Financing and Uniform Practice Committees determined that a requirement for a standardized and detailed syndicate settlement statement is appropriate. Therefore, the Committees recommended to the Board of Governors and the Board approved an amendment to Section (56 of the Uniform Practice Code to require syndicate managers to provide to members of the syndicate an itemized settlement statement including the following expense categories: legal fees, advertising, travel and entertainment, closing expenses, loss on oversales, telephone/postage/communications, co-manager's expenses, computer/data processing charges, interest expense, and miscellaneous. The miscellaneous category would include only minor items that cannot be easily categorized elsewhere in the statement and the amount under miscellaneous would not be disproportionately large in relation to other items. Any other major expenses not included in the above categories would be itemized separately.

Under the proposed amendment, the itemized settlement statement would be provided to syndicate members by the syndicate manager no later than the date of final settlement of the syndicate account, which Section 66 requires to be within 90 days of the syndicate settlement date.

Prompt Settlement of Commissions

The Corporate Financing Committee also reviewed the practice of including commissions on "designated" sales and "manager bill and deliver" sales as an item on syndicate settlement statements. In a designated sale or manager bill and deliver sale, payment for the sale is made by the customer — usually an institution — directly to the manager of the offering and a member is designated to receive the selling commission. The Committee discussed whether commissions on such sales should be paid or settled on the syndicate settlement date — usually one week after the effective date of the offering — or later, as part of the final syndicate settlement, which occurs up to 90 days after the syndicate settlement date. Currently, syndicate managers settle commissions on regular sales on the syndicate settlement date and settle selling commissions on designated sales and manager bill and deliver sales as part of the final syndicate settlement 90 days later.

It is the general practice of NASD members participating in a public offering to pay sales commissions to registered representatives shortly after a sale. A delay in the payment of commissions by a syndicate manager can have a negative impact on the net capital of a syndicate member. Therefore, the Corporate Financing and Uniform Practice Committees determined that syndicate managers should not delay the payment of such sales commissions. They recommended to the Board of Governors and the Board approved an amendment to Section 66 of the Uniform Practice Code to require all commissions or sales concessions to be paid or settled on the syndicate settlement date. This requirement would ensure that all commissions, including commissions on designated sales and manager bill and deliver sales, would be settled on the settlement date rather than be included on the final syndicate settlement statement.

REQUEST FOR COMMENTS

TheNASD encourages all members and other interested persons to comment on the proposed amendments.Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

Comments must be received no later than January 30, 1988. Comments received by this date will be considered by the NASD Corporate Financing and Uniform Practice Committees and the NASD Board of Governors. If approved by the Board, the proposed amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions regarding the proposed amendments can be directed to Richard J. Fortwengler, NASD Corporate Financing Department, at (202) 728-8258.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

AMENDMENTS TO SECTION 66 OF THE NASD UNIFORM PRACTICE CODE*

Sec. 66

Settlement of Syndicate Accounts

(a) Definitions:

(1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
(2) "syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
(3) "syndicate manager"means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
(4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
(b) Final settlement of syndicate accounts shall be effected by the syndicate manager within 90 days following the syndicate settlement date.
(c) No later than the date of final settlement of the syndicate account, the syndicate manager shall provide to each member of the selling syndicate an itemized statement of syndicate expenses that shall include, where applicable, the following categories of expenses;legal fees, advertising, travel and entertainment," closing expenses, loss on oversales, telephone/postage/communications, co-manager's expenses, computer/data processing charges, interest expense and miscellaneous. The amount under miscellaneous should not be disproportionately large in relation to other items and should include only minor items that cannot be easily categorized elsewhere in the statement.Any other major items not included in the above categories must be itemized separately.
(d) The syndicate manager shall settle all commissions for sales made by the selling syndicate, including designated sales and/or manager bill and deliver sales, on the syndicate settlement date.

* New language is underlined.