MSRB NOTICE 2010-41 (SEPTEMBER 30, 2010)

MSRB FILES PROPOSAL TO INCREASE TRANSACTION ASSESSMENTS AND TO INSTITUTE A NEW TECHNOLOGY FEE ON REPORTED SALES TRANSACTIONS UNDER RULE A-13

On September 30, 2010, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) a proposed rule change that consists of amendments to Rule A-13 to increase transaction assessments for certain municipal securities transactions reported to the Board and to institute a new technology fee on reported sales transactions.[1]  The purpose of the proposed rule change is to assess reasonable fees necessary to defray the costs and expenses of operating and administering the MSRB.  The proposed rule change would amend Rule A-13 to (a) increase the existing transaction assessments for inter-dealer and customer sales from .0005% to .001% of the total par value of inter-dealer sales and sales to customers that are reported by dealers to the MSRB (the “transaction fee”), and (b) impose a technology fee of $1.00 per transaction for inter-dealer and customer sales reported to the Board (the “technology fee”). The technology fee would be transitional in nature and would be reviewed by the Board periodically to determine whether it should continue to be assessed.  The MSRB proposes an effective date for this proposed rule change of January 1, 2011.

Current Sources of Revenue

The MSRB currently levies four types of fees that are generally applicable to dealers.  Rule A-12 provides for a $100 initial fee paid once by a dealer when it first begins to engage in municipal securities activities.  Rule A-13 provides for an underwriting fee of $.03 per $1000 par value of municipal securities purchased in a primary offering (with specified exceptions), and a transaction fee of $.005 per $1000 par value of sale transactions of municipal securities (with specified exceptions).  Finally, Rule A-14 provides for an annual fee of $500 from each dealer who conducts municipal securities activities.

At present, approximately 90% of the Board’s revenue is generated through underwriting fees and transaction fees. In fiscal year 2009, approximately 55% of the Board’s revenue was generated by underwriting fees and approximately 36% of its revenue was generated by transaction fees.  The underwriting and transaction fees assessed pursuant to Rule A-13 are generally proportionate to a dealer’s activity within the industry, as based on the par value amount of underwriting and customer and inter-dealer transactions during the year.  Underwriting fees are based on a dealer’s participation in the underwriting of municipal securities, and transaction fees are based on a dealer’s participation in the municipal securities market in terms of par value sold.

The transaction assessment was last modified in 2000 when the Board commenced assessments on customer sale transactions reported by dealers.  The transaction fee has not been increased since that date, despite the additional activities undertaken by the MSRB over the last ten years.  The amount of the underwriting assessment has not been increased since 1992, although in December 2009 the MSRB eliminated certain exemptions from the underwriting assessment.

Rationale for Proposed Rule Change

The Board is proposing to increase the transaction fee and establish a new technology fee for three reasons.  First, the expenses of the MSRB are increasing and additional revenue is necessary in order to meet projected expenses associated with ongoing operations. Second, the MSRB needs additional revenue to cover anticipated expenses associated with its new regulatory responsibilities mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).  Third, the MSRB needs additional revenue to replace aging and outdated information technology software and hardware. In particular, funding is needed to ensure the operational integrity of the MSRB’s information systems, retire and update computer hardware and software, and conduct ongoing risk management including business continuity activities and system maintenance.  The new technology fee would be used to establish a new technology renewal fund, which would be segregated for accounting purposes.  The technology renewal fund is intended to fund replacement of aging and outdated technology systems and to fund new technology initiatives. 

As reflected in the 2009 audited financial statement, revenue decreased from fiscal year 2008 to 2009 from approximately $22.2 million to approximately $19.6 million, while expenses increased from approximately $18.6 million to approximately $21.3 million.  Although revenue has increased in fiscal year 2010, primarily due to the elimination of certain exemptions from underwriting fees, expenses have also continued to increase.  Moreover, the MSRB has not set aside separate reserves for major technology systems that will need replacement or upgrades in the near future. 

Several factors have contributed to the recent, large increase in operating expenses.  First, over the last two years, the MSRB has significantly improved transparency in the municipal securities market by developing and implementing market information transparency systems for the (a) collection and dissemination of electronic official statements and other primary market documents and information, allowing dealers, in most instances, to discontinue sending paper copies of official statements to new issue customers; (b) collection and dissemination of electronic continuing disclosure documents and related information from issuers and their agents; (c) collection and dissemination of current interest rates and other information on auction rate securities and variable rate demand obligations (the “SHORT” system); (d) production and publication of statistical information on the municipal securities market; and (e) display on a publicly available, user-friendly website of the documents and information described above, as well as real-time trade information, which are made continuously available to the general public (the Electronic Municipal Market Access System or “EMMA” website).

The EMMA and SHORT systems were initially developed and launched using general revenue and cash reserves.  Since inception, significant demand from users of these systems and regulatory requirements established by the SEC have resulted in the development of new functionality, with an attendant rise in development and operating costs.  Additionally, the rapid adoption by the marketplace of these systems as key sources for market disclosures, trade prices and interest rate information has resulted in an accelerated investment in resources to support the technology systems. 

In addition, Congress recently passed, and the President signed into law, comprehensive financial reform legislation, the Dodd-Frank Act.  Effective October 1, 2010, the Dodd-Frank Act expands the MSRB’s mission in a number of ways that will require a more substantial commitment of staff and technical resources.  The expansion of the MSRB’s jurisdiction to include regulation of municipal advisors will require additional rulemaking capabilities.  The MSRB will also need to focus additional resources on establishing regulatory protections for municipal entities.  The MSRB has also been given additional responsibilities in connection with providing enforcement and examination support to the Commission, the Financial Industry Regulatory Authority (“FINRA”) and the federal bank regulators, and the MSRB has been authorized to develop information systems with other federal regulators in furtherance of their missions.

Given the significant resource commitments needed to further develop its information systems, and the additional statutory obligations imposed on the MSRB by the Dodd-Frank Act, the MSRB must generate sufficient revenue to ensure that these systems operate in a continuous, reliable manner while at the same time devoting substantial staff resources to developing an extensive new body of regulatory requirements. 

Description of Proposed Rule Change

In order to address the projected revenue shortfall, the MSRB proposes to increase revenue in two ways.  First, the MSRB proposes to increase the amount of the transaction fee assessed on the par value of inter-dealer and customer sale transactions reported to the MSRB by dealers under MSRB Rule G-14(b), except for transactions currently exempted from the transaction fee as provided in MSRB Rule A-13(c)(iii), from $.005 per $1000 par value to $.01 per $1000 par value of such sale transactions. Transactions exempted from the transaction fee consist of sale transactions in municipal securities that have a final stated maturity of nine months or less or that, at the time of trade, may be tendered at the option of the holder to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent.  This increase in the transaction fee is expected to generate an estimated $7 million in revenue annually.

The second fee proposed by the MSRB would consist of a technology fee assessed at $1.00 per transaction for each sale transaction reported to the MSRB by dealers under MSRB Rule G-14(b).  The exemptions from the transaction fee, as described above, would not apply to the technology fee.  The technology fee is expected to generate an estimated $10 million in revenue annually, and would be transitional in nature, in that it would be reviewed periodically by the MSRB in relation to the level of funding needed for capital expenditures and to maintain the technology renewal fund.  The funds accumulated in the technology renewal fund would be solely dedicated to funding capital expenses for technology investments.

As noted above, the bulk of the MSRB’s revenue is derived from the underwriting and transaction fees, which are generally proportionate to a dealer’s activity within the industry, as based on the par value amount of underwriting and customer and inter-dealer transactions during the year.  The proposed new technology fee would help to establish a more balanced assessment of overall fees paid by dealers since it would be based on a dealer’s participation in the market as measured by the total number of inter-dealer and customer sale transactions reported to the MSRB, rather than par value, and therefore would help to more evenly distribute the burden of dealer assessments.  The MSRB believes these fees are fair and balanced, based on the activities of regulated market participants.

Finally, with regard to the expansion of the MSRB’s regulatory mandate to include regulation of municipal advisors and the protection of municipal entities, the MSRB will continue to review its assessments on the market participants it regulates to ensure that costs of rulemaking are appropriately allocated among the entities it regulates.  Although the MSRB recognizes that an appropriate allocation of such regulatory costs may not be feasible during the transition of the MSRB to its broader mission, it expects to revisit the manner in which its activities are funded in the coming years, as appropriate.  The MSRB is committed to ensuring that its assessments are balanced based in large measure on the level of activity of all of its regulated entities.

Questions about the amendments should be directed to Lawrence P. Sandor, Senior Associate General Counsel at (703) 797-6600. 

September 30, 2010

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TEXT OF AMENDMENTS [2]

Rule A-13:  Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers

(a) – (b) No change

(c) Transaction and Technology Assessments. 

(i) Transaction Fee on Inter-Dealer Sales.  Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to [.0005% ($.005 per $1,000)] .001% ($.01 per $1,000) of the total par value of inter-dealer municipal securities sales that it reports to the Board under rule G-14(b), except as provided in subsection (iii) of this section [paragraph] (c).  For those inter-dealer transactions reported to the Board by a broker, dealer or municipal securities dealer on behalf of another broker, dealer or municipal securities dealer, the inter-dealer transaction fee shall be paid by the broker, dealer or municipal securities dealer that reported the transaction to the Board.  Such broker, dealer or municipal securities dealer may then collect the inter-dealer transaction fee from the broker, dealer or municipal securities dealer on whose behalf the transaction was reported. 

(ii) Transaction Fee on Customer Sales.  Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to [.0005% ($.005 per $1,000)] .001% ($.01 per $1,000) of the total par value of sales to customers that it reports to the Board under rule G-14(b), except as provided in subsection (iii) of this section [paragraph] (c).  The customer transaction fee shall be paid by the broker, dealer or municipal securities dealer that effected the sale to the customer.

(iii) Transactions Not Subject to Transaction Fee. Transaction fees assessed pursuant to subsection (i) or (ii) of this section (c) are not assessed on transactions in municipal securities that: 

(a) have a final stated maturity of nine months or less; or

(b) at the time of trade, may be tendered at the option of the holder to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent.

(iv)  Technology Fee.

(a) Technology Fee on Inter-Dealer Sales.  Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to $1.00 per transaction for each inter-dealer municipal securities sale that it reports to the Board under rule G-14(b).  For those inter-dealer transactions reported to the Board by a broker, dealer or municipal securities dealer on behalf of another broker, dealer or municipal securities dealer, the technology fee shall be paid by the broker, dealer or municipal securities dealer that reported the transaction to the Board.  Such broker, dealer or municipal securities dealer may then collect the technology fee from the broker, dealer or municipal securities dealer on whose behalf the transaction was reported. 

(b) Technology Fee on Customer Sales.  Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to $1.00 per transaction for sales to customers that it reports to the Board under rule G-14(b).  The technology fee shall be paid by the broker, dealer or municipal securities dealer that effected the sale to the customer.

(d)(f) No change


[1]  File No. SR-MSRB-2010-10.  Comments on the proposed amendments should be submitted to the SEC and should reference this file number.  

[2]  New language is underlined, and deletions are in brackets.