Questions are being asked about the bond allocation process, but a top regulator says underwriters are under no obligation to give the answers.
There are no regulations on what underwriters must tell municipal issuers, about allocation or anything else, said Christopher A. Taylor, executive director of the Municipal Securities Rulemaking Board.
"If it is specified at all, it is specified solely by the issuer," he said. And though the board could require disclosure, it feels that leaving the matter to issuers is more efficient, Taylor said.
The allocation process is in the spotlight because of charges that senior managers may have angled for business by using allocations to reward politically connected firms. The reluctance of some senior managers to answer issuers' questions has added to the controversy.
The New Jersey Turnpike Authority, for example, had to wait several months and send several requests before Merrill Lynch & Co. would disclose how the firm had allocated its $1.6 billion portion of the turnpike's 1991 refunding issue, which is now a focus of a federal investigation.
And New Jersey officials said Lazard Freres & Co., the senior manager on the state's $1.8 billion refunding issue last year, did not respond for several months to a request for a detailing of the allocation on that deal.
The state's director of public finance, Robert Lurie, said recently he was interested in seeing the allocation, but that pestering Lazard was "not a high priority."
After reports about the situation surfaced recently, Lazard turned the information over to the state. A state Treasury official said the data is being compiled and will be made available to the public within the next several days.
A spokeswoman for Lazard said they believe they have complied all along with every request from the state for information.
Regulations such as the MSRB's Rule G-11 deal with the responsibilities of dealers to syndicate members in an underwriting, and Rule G-23 governs dealers' actions as financial advisers. But regarding relations with issuers, "there's no requirement, not in that general form," Taylor said.
In addition, the federal Securities and Exchange commission does not have any regulations concerning the relationship between underwriters and issuers. an SEC spokesman said.
Taylor said that before a deal it is up to the issuer to ask the "obvious questions" about what fees it is paying and why a senior manager wants a specific underwriter as part of the bond syndicate.
After a deal, an issuer has little power to obtain additional information from an underwriter, Taylor said.
In any case, the underwriter does not have to give any information that the contract does not specifically call for, Taylor said. The issuer has a contractual right if it's specified in its contract," he said.
The MSRB is the primary agency responsible for establishing the standards and practices governing the municipal securities industry. The board's rules must be approved by the SEC, and federal antifraud provisions enforced by the SEC apply to all municipal market participants, but otherwise municipal bond industry practices are not subject to many of the federal regulations affecting other security transactions.
The National Association of Securities Dealers enforces brokerdealer rules and administers qualifying examinations for municipal securities professionals.
The so-called Tower amendment, passed by Congress in 1975, prohibits the MSRB from requiring disclosure information from municipal bond issuers, Taylor said. The MSRB does have the authority to require underwriters to supply bond issuers with certain types of information, but it has never done so, Taylor said.
I can do a lot of things vis a vis the underwriter as long as it doesn't infringe on the [issuer's] rights," he said.
While the MSRB could require that underwriters provide specific types of information to a bond issuer, the issuer itself could specify the same thing in its contract with the underwriter, Taylor said.
In New Jersey, Gov. Jim Florio recently. signed an executive order that includes a provision requiring senior managers to automatically provide allocation information on deals by the state. A spokesman for Treasurer Samuel Crane said that the provision is not retroactive, so it cannot be used to force Lazard to provide allocations on the 1992 refunding deal.
Rules governing the conduct of syndicate members were established by the MSRB to ensure "fair play amongst the wolves," Taylor said.
Some issuers believe underwriters should provide information on bond allocations and other transaction fees and processes upon request.
The Massachusetts Water Resources Authority, for example, obtains information from underwriters such as which firms placed orders for specific bonds, which firms received designations and how many bonds each underwriter sold. The authority spends a fair amount of time tracking the performance of its underwriters to ensure they are providing good service, said Philip N. Shapiro, chief financial officer and director of finance and development for the authority.
Shapiro made his comments during a media seminar sponsored last week by the Public Securities Association in New York.
"Woe be to the underwriter who wouldn't provide that information if I asked for it," said Max Bohnstedt, finance director for Richmond, Va. Bohnstedt also was a speaker at the PSA seminar.
Bohnstedt said that he would consider penalizing an underwriter by not adding the firm to an upcoming syndicate if it balked at providing information on a previous underwriting.