MSRB NOTICE 2011-34 (JULY 26, 2011)

MSRB FILES PROPOSAL TO ESTABLISH INTERIM MUNICIPAL ADVISOR ASSESSMENT AND SEEKS COMMENT ON DRAFT MUNICIPAL ADVISOR SURVEY

The Municipal Securities Rulemaking Board (the “MSRB”) has filed a proposed rule change with the Securities and Exchange Commission (the “SEC”) to establish a new interim municipal advisor assessment under new Rule A-11, on municipal advisor assessments, and a new Form A-11-Interim to be used in connection with such interim municipal advisor assessment (the “proposed interim assessment”).[1]  In addition, the MSRB is seeking comment on a draft survey seeking information from municipal advisors on the nature of the municipal advisory activities they undertake as well as the manner and level of compensation received by municipal advisors for such municipal advisory activities (the “draft survey”).

Comments on the draft survey should be submitted to the MSRB by no later than September 12, 2011[*] and may be submitted in electronic or paper form.  Electronic comments may be submitted to the MSRB via email to CommentLetters@msrb.org.  Please indicate the notice number in the subject line of the email and if possible, send comments in PDF format.  Written comments should be sent to Ronald W. Smith, Corporate Secretary, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s web site.[2]

Questions about this notice should be directed to Ernesto A. Lanza, Deputy Executive Director and General Counsel, at 703-797-6600.

BACKGROUND

The MSRB currently levies five types of fees payable by market participants regulated by the MSRB,[3] consisting of:

   ●  a one-time initial fee of $100 assessed under Rule A-12 and payable by brokers, dealers, municipal securities dealers and municipal advisors[4]

   ●  an annual fee of $500 assessed under Rule A-14 and payable by brokers, dealers, municipal securities dealers and municipal advisors[5]

   ●  an underwriting fee of $.03 per $1000 par value of municipal securities purchased in a primary offering (with certain exceptions) assessed under Rule A-13 and payable by brokers, dealers and municipal securities dealers[6]

   ●  a transaction fee of $.01 per $1000 par value of sale transactions of municipal securities (with certain exceptions) assessed under Rule A-13 and payable by brokers, dealers and municipal securities dealers[7]

   ●  a technology fee of $1 for each sale transaction of municipal securities assessed under Rule A-13 and payable by brokers, dealers and municipal securities dealers[8]

Based on historical collections and collections so far this fiscal year, the MSRB expects that the share paid by municipal advisors of the total revenues generated from these five fees for the current fiscal year will be less than 3 percent.  The MSRB expects that, together with the initial fee and annual fee, the proposed interim assessment payable by municipal advisors would generate well under 10 percent of the MSRB’s total annual revenue in the fiscal year beginning October 1, 2011.[9]

In the 2010 Dealer Fee Order, in which the SEC approved a previous increase in the transaction fee and the establishment of the technology fee payable by brokers, dealers and municipal securities dealers under Rule A-13, the SEC recognized “the concerns raised by some commenters that the increase in transaction fees and the new technology fee will be used to subsidize municipal advisor regulation, ”noting that the MSRB had taken certain initial steps to assess municipal advisor fees by extending the initial fee under Rule A-12 and the annual fee under Rule A-14 to municipal advisors and expected to assess other fees on municipal advisors as is appropriate.[10]  The proposed interim municipal advisor assessment and the draft municipal advisor survey represent the next steps toward achieving the MSRB’s goal – recognized in the 2010 Dealer Fee Order – of an overall fee structure that equitably assesses all entities regulated by the MSRB.

PROPOSED INTERIM MUNICIPAL ADVISOR ASSESSMENT

Description of the Proposed Interim Assessment

The proposed interim assessment is designed to defray a portion of the increased costs and expenses associated with the operation and administration of the MSRB attributable to the MSRB’s regulation of municipal advisors.  The proposed interim assessment would consist of an annual assessment equal to $300 for each assessable professional reported or required to be reported by a municipal advisor to the MSRB on new Form A-11-Interim for each fiscal year pursuant to new Rule A-11.  Completed Form A-11-Interim and payment of the interim assessment would be due by November 30 of each fiscal year.  Form A-11-Interim would be completed and submitted, and the interim assessment would be paid, in the manner set forth in the Instructions for Interim Municipal Advisor Assessment and Form A-11-Interim.[11]

For purposes of the interim assessment, an assessable professional of a municipal advisor would, pursuant to proposed Rule A-11(b)(i), consist of any natural person who is an associated person of the municipal advisor who has received compensation or other payments from the municipal advisor (excluding reimbursement for out-of-pocket expenses) includable in such person’s gross income for federal income tax purposes in the amount of $10,000 or more during the fiscal year of the MSRB for which the municipal advisor is submitting Form A-11-Interim and who provides services in connection with the municipal advisor’s municipal advisory activities as defined in Rule D-13.  Such services include, but are not limited to:

(A)  engaging in municipal advisory business[12] with a municipal entity or obligated person;

(B)  soliciting[13] municipal advisory business with a municipal entity or obligated person on its own behalf or soliciting third-party business;[14]

(C)  providing research or analytical services to other personnel of the municipal advisor engaged in the services described in paragraph (A) or (B) above or to clients of the municipal advisor, where such research or analytic services are related to the services described in paragraph (A) or (B) above;

(D)  acting as supervisor of any person described in paragraph (A), (B) or (C) above with respect to such person’s services as described in paragraph (A), (B) or (C) above;

(E)  acting as supervisor of any person described in paragraph (D) above up through and including the Chief Executive Officer or similarly situated official; or

(F)  serving as a member of the municipal advisor’s executive or management committee or similarly situated officials, if any.

Notwithstanding the foregoing, a municipal advisor would not be required to include on Form A-11-Interim as an assessable professional any associated person (i) who otherwise qualifies as an assessable professional if such associated person is included on Form A-11-Interim for such fiscal year as an assessable professional of another municipal advisor that is controlling, controlled by, or under common control with such municipal advisor, or (ii) whose functions are solely clerical or ministerial.

Proposed Form A-11-Interim would require that municipal advisors provide information about the number of assessable professionals who, during the fiscal year for which the assessment is calculated, were principal/supervisory personnel or other advisory personnel.  Principal/supervisory personnel would consist of any assessable professional who is either described in paragraph (D), (E) or (F) of the definition of assessable professional or who is a partner or other equity owner of the municipal advisor firm having a cumulative ownership interest representing at least 2.5% of the firm.  All other assessable professionals would be reported as other advisory personnel.  The interim assessment would be calculated based on the sum of principal/supervisory personnel and other advisory personnel.[15]  Because of the gross income threshold in the definition of assessable professional, municipal advisors that generate revenues of less than $10,000 in connection with their municipal advisory activities during the fiscal year typically would not have any assessable professionals to report for such fiscal year and therefore would not be required to pay the interim assessment.[16]

Interim Nature of Assessment

The MSRB expects the interim assessment to remain in effect for a limited period of time during which the MSRB, by means of the draft survey described below, would examine the nature of the municipal advisory activities undertaken by municipal advisors as well as the manner and level of compensation received by municipal advisors for such municipal advisory activities.  Based on the MSRB’s findings, the MSRB would then consider whether to replace the interim assessment with a permanent form of assessment on municipal advisors that would, together with other MSRB assessments payable by municipal advisors, brokers, dealers and municipal securities dealers, provide for reasonable assessments that are fairly and equitably apportioned among all market participants subject to MSRB regulation and that do not impose an undue burden on small municipal advisors.

Effective Date of Proposed Interim Assessment and Period Covered By Form A-11-Interim

The MSRB has requested that the SEC approve the proposed interim assessment for effectiveness on October 1, 2011, which is the first day of the MSRB’s fiscal year.  Municipal advisors would be required to submit completed Form A-11-Interim and to make payment of the interim assessment by November 30, 2011 based on information for the period from October 1, 2010 through September 30, 2011.  If in any subsequent fiscal year the MSRB has not yet replaced the interim assessment with a permanent form of assessment as described above, municipal advisors would be required to submit completed Form A-11-Interim and to make payment of the interim assessment by November 30 of such fiscal year based on information for the prior fiscal year.

DRAFT MUNICIPAL ADVISOR SURVEY

Description of the Draft Survey

As noted above, the MSRB is seeking comment on the draft survey to collect information from municipal advisors on the nature of the municipal advisory activities they undertook as well as the manner and level of compensation received by municipal advisors for such municipal advisory activities during calendar year 2011.  The MSRB intends to use the findings from the draft survey to determine whether to replace the interim assessment with a permanent form of assessment on municipal advisors and, if so, the nature of such permanent assessment.  Such permanent assessment would be designed so that, together with other MSRB assessments payable by municipal advisors, brokers, dealers and municipal securities dealers, it would provide for reasonable assessments that are fairly and equitably apportioned among all market participants subject to MSRB regulation and that do not impose an undue burden on small municipal advisors.

The information collected on Form A-11-Survey would be used solely to assist the MSRB in establishing fair and equitable assessments on regulated entities to support the MSRB’s regulatory work.  Municipal advisors would not be assessed any fees based on the information provided on Form A-11-Survey.

Draft Form A-11-Survey is divided into six items, as follows:

●  Item 1 – Municipal Advisor Firm, in which the municipal advisor firm would be identified by name and MSRB registration number

●  Item 2 – Municipal Advisory Income, in which gross income derived from various categories of municipal advisor activities during calendar year 2011 would be provided, as well as the types of activities other than municipal advisory activities engaged in by the firm and the amount of gross income derived from such non-municipal advisory activities[17] – with minor modifications, the categories listed in this item would be the same as the categories of registration used in connection with the registration of municipal advisors with the MSRB as set forth in Rule G-40(b)(i)(F)

●  Item 3 – Manner of Compensation, in which compensation received for municipal advisory activities during calendar year 2011 would be provided in categories based on the manner of fee calculation, including fixed fee, hourly fee, retainer, transaction-size based fee, and other fee basis – municipal advisors would provide the total amount received during calendar year 2011 within each category as well as the portion of such total amount for which receipt of payment was contingent upon completion of a transaction

●  Item 4 – Compensation for Municipal Advisory Activities Based on Transaction Size, in which the total amount of transaction-size based fees reported in Item 3 would be apportioned among various categories of transactions for which such fees were based – municipal advisors would provide the number of transactions, the average size of transaction and the average size of fee for each category

●  Item 5 – Affiliates, in which the municipal advisor would indicate whether it has any affiliates,[18] whether it has received any payments during calendar year 2011 in connection with related activities[19] and a description of any such related activities

●  Item 6– Submitter, in which the person making the submission of Form A-11-Survey would be identified by name, title, phone number, and e-mail address.

As noted in the December 2010 SEC Order, some industry participants have suggested that the MSRB consider a revenue-based model for assessments.  The MSRB noted that such a model would require further study and that the model that the MSRB has historically used for assessing brokers, dealers and municipal securities dealers, relying primarily on transaction and underwriting assessments, has been a reasonable approximation of the type of assessments that would ultimately be imposed under a revenue-based system.  This is true because such a large proportion of the activities undertaken by brokers, dealers and municipal securities dealers subject to MSRB regulation are transactional in nature.

The MSRB recognizes, however, that the activities of municipal advisors may often constitute a mix of transactional work and on-going non-transaction-based advisory activities, and the balance of such types of activities can vary considerably from firm to firm.  Thus, before establishing a permanent assessment on municipal advisors, and consistent with the statements and findings in the December 2010 SEC Order, the MSRB is seeking through the draft municipal advisor survey the data necessary to make an informed decision as to whether transaction-based assessments, revenue-based assessments or assessments established pursuant to other parameters, or a mix of these types of assessments, would be the appropriate approach to establishing a fair and reasonable assessment model for municipal advisors that does not impose an undue burden on small municipal advisors and that results in an overall fee structure that equitably assesses all entities regulated by the MSRB.

Request for Comments, Expected Effective Date of Draft Survey and Period Covered By Form A-11-Survey

The MSRB requests comments on all aspects of the draft municipal advisor survey and the forms of assessments that may be appropriate in connection with the activities of municipal advisors.  If the MSRB determines to file the draft survey with the SEC for approval, the MSRB would expect to request that the draft survey and draft amendment to Rule A-11 be made effective January 1, 2012.  Municipal advisors would be required to submit completed Form A-11-Survey to the MSRB by February 29, 2012 based on information for the period from January 1, 2011 through December 31, 2011.  The MSRB does not currently expect to require completion of the survey in subsequent fiscal years.

July 26, 2011

* * * * *

PROPOSED INTERIM ASSESSMENT – TEXT OF PROPOSED RULE A-11 AND FORM A-11-INTERIM [20]
[Filed with the SEC – comments should be submitted to the SEC]

Rule A-11 – Municipal Advisor Assessments

(a) Interim Assessment and Form A-11-Interim. Each municipal advisor shall, by no later than November 30 of each fiscal year of the Board:

(i) submit to the Board a completed Form A-11-Interim, setting forth the number of assessable professionals of the municipal advisor for the fiscal year of the Board ending on the immediately preceding September 30 and such other information about the municipal advisor as shall be required by Form A-11-Interim, in such format and manner specified in the current Instructions for Interim Municipal Advisor Assessment and Form A-11-Interim; and

(ii) shall pay to the Board an interim assessment equal to $300 for each of its assessable professionals reported or required to be reported by such municipal advisor on Form A-11-Interim for such fiscal year.

(b) Definitions. Solely for purposes of this rule and any forms hereunder, the following terms shall have the following meanings:

(i) “assessable professional” of a municipal advisor means a natural person who is an associated person of the municipal advisor who has received compensation or other payments from the municipal advisor (excluding reimbursement for out-of-pocket expenses) includable in such person’s gross income for federal income tax purposes in the amount of $10,000 or more during the fiscal year of the Board for which the municipal advisor is submitting Form A-11-Interim and who provides services in connection with the municipal advisor’s municipal advisory activities as defined in Rule D-13.  Such services include, but are not limited to:

(A) engaging in municipal advisory business with a municipal entity or obligated person;

(B) soliciting municipal advisory business with a municipal entity or obligated person on its own behalf or soliciting third-party business;

(C) providing research or analytical services to other personnel of the municipal advisor engaged in the services described in paragraph (A) or (B) above or to clients of the municipal advisor, where such research or analytic services are related to the services described in paragraph (A) or (B) above;

(D) acting as supervisor of any persons described in paragraph (A), (B) or (C) above with respect to such person’s services as described in paragraph (A), (B) or (C) above;

(E) acting as supervisor of any person described in paragraph (D) above up through and including the Chief Executive Officer or similarly situated official; or

(F) serving as a member of the municipal advisor’s executive or management committee or similarly situated officials, if any .

Notwithstanding the foregoing, a municipal advisor shall not be required to include on Form A-11-Interim as an assessable professional any associated person (i) who otherwise qualifies as an assessable professional if such associated person is included on Form A-11-Interim for such fiscal year as an assessable professional of another municipal advisor that is controlling, controlled by, or under common control with such municipal advisor, or (ii) whose functions are solely clerical or ministerial.

(ii)  “municipal advisory business” means the provision of advice to or on behalf of a municipal entity or an obligated person with respect to municipal financial products or the issuance of municipal securities.

(iii) “soliciting,” as it applies to an associated person of a municipal advisor, means the undertaking of any direct or indirect communication by such associated person with a municipal entity or obligated person for the purpose of obtaining or retaining:

(A) municipal advisory business for such municipal advisor with a municipal entity or obligated person; or

(B) third-party business.

(iv) “third-party business” means an engagement by a municipal entity of another person that does not control, is not controlled by, or is not under common control with the person soliciting such engagement, where such other person is:

(A) a broker, dealer, municipal securities dealer, or municipal advisor engaging or seeking an engagement with such municipal entity in connection with municipal financial products or the issuance of municipal securities; or

(B) an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) providing or seeking to provide investment advisory services to or on behalf of such  municipal entity.

(v) Terms defined in any form or the instructions thereto shall have the meaning set forth therein for purposes of such form.

* * * * *

Click here to view Proposed Form A-11-Interim

Click here to view Instructions for Interim Municipal Advisor Assessment and Form A-11-Interim

* * * * *

DRAFT SURVEY FOR COMMENT – TEXT OF DRAFT AMENDMENT TO RULE A-11 AND FORM A-11-SURVEY [21]
[Comments should be submitted to the MSRB]

Rule A-11 – Municipal Advisor Assessments

(a)-(b) No change.

(c) Form A-11-Survey.  Each municipal advisor shall submit to the Board completed Form A-11-Survey on or prior to February 29, 2012, setting forth information for the calendar year ending December 31, 2011 regarding the municipal advisor’s gross income derived from municipal advisory activities and manner of compensation for such municipal advisory activities, by category, and such other information about the municipal advisor as shall be required by Form A-11-Survey , in such format and manner specified in the Instructions for Form A-11-Survey.  Information provided by municipal advisors on Form A-11-Survey shall not be made available to the public other than on an aggregate basis and without identifying information.  No municipal advisor shall be assessed any fee by the Board based on information provided on Form A-11-Survey.

* * * * *

Click here to view Draft Form A-11-Survey


[*] The date by which comments on the draft survey are due was corrected from August 12, 2011 to September 12, 2011.

[1]  File No. SR-MSRB-2011-08.  Comments on the proposed interim assessment should be submitted to the SEC and should reference this file number.

[2]  Comments are posted on the MSRB web site without change and personal identifying information, such as name, address, telephone number or e-mail address, will not be edited from submissions.  Therefore, commentators should submit only information that they wish to make available publicly.

[3]  These five fees generate more than 95% of the MSRB’s total revenue.

[4]  For the MSRB fiscal year ended September 30, 2010, the initial fee generated $8,500 and was payable solely by brokers, dealers and municipal securities dealers.  The payment of the initial fee became obligatory for municipal advisors on January 1, 2011.  As of July 22, 2011, approximately 495 firms not previously registered with the MSRB have paid the initial fee in connection with registering with the MSRB as non-dealer municipal advisors, generating approximately $49,500 from these new municipal advisor registrants.  The amount generated from the initial fee is expected to be significantly lower in future years since such fee is payable by each firm only once upon initial registration with the MSRB.

[5]  For the MSRB fiscal year ended September 30, 2010, the annual fee generated $1,010,321 and was payable solely by brokers, dealers and municipal securities dealers.  The payment of the annual fee became obligatory for municipal advisors on January 1, 2011.  As stated in note 4 above, approximately 495 firms not previously registered with the MSRB have become new municipal advisor registrants as of June 15, 2011 and have paid the annual fee in connection with their first year as a registered firm, generating approximately $247,500 from these new municipal advisor registrants.

[6]  For the MSRB fiscal year ended September 30, 2010, the underwriting fee generated $13,984,780 and was payable solely by brokers, dealers and municipal securities dealers.  Municipal advisors do not pay this fee.

[7]  For the MSRB fiscal year ended September 30, 2010, the transaction fee generated $6,940,551 and was payable solely by brokers, dealers and municipal securities dealers.  The amount of this fee was increased from $.005 per $1000 par value of sale transactions to .01 per $1000 par value of sale transactions beginning January 1, 2011.  Municipal advisors do not pay this fee.  The MSRB previously estimated that this increase in the transaction fee would generate an estimated $7 million of additional revenue annually.  See Exchange Act Release No. 63621 (File No. SR-MSRB-2010-10) (December 29, 2010) (the “2010 Dealer Fee Order”).

[8]  The technology fee became effective on January 1, 2011 and therefore the MSRB did not generate any revenue from this fee for the MSRB fiscal year ended September 30, 2010.  The technology fee is payable solely by brokers, dealers and municipal securities dealers.  Municipal advisors do not pay this fee.  The MSRB previously estimated that the new technology fee would generate an estimated $10 million of revenue annually.  See 2010 Dealer Fee Order, supra note 7.

[9]  Approximately 185 brokers, dealers and municipal securities dealers previously registered with the MSRB as such have also registered with the MSRB as municipal advisors as of July 22, 2011 and such firms also would be subject to the proposed interim assessment.

[10]  See 2010 Dealer Fee Order, supra note 7.

[11]  Municipal advisors would be able to submit Form A-11-Interim in either paper or electronic format and to pay the interim assessment by check, credit card or electronic funds transfer as described in the Instructions for Interim Municipal Advisor Assessment and Form A-11-Interim.

[12]  Proposed Rule A-11(b)(ii) would define municipal advisory business as the provision of advice to or on behalf of a municipal entity or an obligated person with respect to municipal financial products or the issuance of municipal securities.

[13]  Under proposed Rule A-11(b)(iii), an associated person of a municipal advisor would be viewed as soliciting municipal advisory business if the associated person undertakes any direct or indirect communication with a municipal entity or obligated person for the purpose of obtaining or retaining:  (A) municipal advisory business for such municipal advisor with a municipal entity or obligated person; or (B) third-party business.

[14]  Proposed Rule A-11(b)(iv) would define third-party business as an engagement by a municipal entity of another person that does not control, is not controlled by, or is not under common control with the person soliciting such engagement, where such other person is: (A) a broker, dealer, municipal securities dealer, or municipal advisor engaging or seeking an engagement with such municipal entity in connection with municipal financial products or the issuance of municipal securities; or (B) an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) providing or seeking to provide investment advisory services to or on behalf of such municipal entity.

[15]  Proposed Form A-11-Interim also would require that municipal advisors provide information about the number of personnel at the firm that are engaged solely in non-municipal advisory activities.  This information would be used to better understand the extent to which municipal advisory activities represent only a portion of firms’ overall activities but would not be used to calculate the interim assessment.

[16]  All municipal advisors would be required to submit completed Form A-11-Interim, even if such municipal advisors have no assessable professionals to report.

[17]  Information regarding any non-municipal advisory activities or income derived therefrom would be used to better understand the nature of the various types of municipal advisor firms.  The MSRB does not intend on assessing any fees based on such non-municipal advisory activities or income.  See Note 14 above.

[18]  Affiliate would mean any company, partnership, sole proprietorship or other firm that controls, is controlled by, or is under common control with the municipal advisor, within the meaning of the Securities Exchange Act of 1934, as amended, or, in the case of an investment adviser, within the meaning of the Investment Advisers Act of 1940, as amended.

[19]  Related activities would be defined as any of the following activities undertaken by a municipal advisor or its affiliate: (i) municipal advisory activities; (ii) activities of any kind relating to municipal financial products or municipal securities; or (iii) activities of any kind relating to the provision by any person of investment advisory services to or on behalf of a municipal entity.

[20]  Underlining indicates additions.

[21]  Underlining indicates additions made by draft amendments to Proposed Rule A-11.