The MSRB protects and strengthens the municipal bond market, enabling access to capital, economic growth, and societal progress in tens of thousands of communities across the country. To fulfill its congressional mandate to protect investors, issuers and the public interest by promoting a fair and efficient market, the MSRB establishes a multi-year Strategic Plan that outlines the organization’s goals, actions and outcomes. The principles for funding these activities are described below.
As a self-regulatory organization (SRO) under the Securities Exchange Act of 1934 (“Exchange Act”), the MSRB is authorized to fund its activities through mandatory assessments on regulated entities.1 The MSRB also charges fees for certain of its market transparency services. Subject to a rule filing with the Securities and Exchange Commission (SEC), rates for regulated entity assessments and subscription service fees can be revised in accordance with MSRB funding needs.
The Board strives to diversify funding sources among regulated entities and other entities that fund MSRB services in a manner that ensures long-term sustainability, seeking to achieve an equitable balance among regulated entities and a fair allocation of the costs of systems and services among other users and regulated entities to the extent allowed by law.
1. Regulated Entity Assessments
Funding for MSRB programs and services is derived primarily from assessments on brokers, dealers and municipal securities dealers (collectively “dealers”) and municipal advisors. The goal is to allocate burdens on different classes of regulated entities fairly, taking into consideration the benefits received from operating in a fair and efficient market. Rates for certain Regulated Entity Assessments are established via an Annual Rate Card Process described in the Procedures section.2
2. Data Access Fees
The MSRB collects, stores and provides access to information pertaining to the municipal securities market. When data and documents from the MSRB information systems are made available to users via automated subscriptions-based feeds or customized upon request, data fees may be assessed so long as they are consistent with the MSRB Data Access Fee Policy. Data fees must be commercially reasonable.
3. Fine Revenue
Fines collected by the SEC or FINRA for violations of the rules of the MSRB are shared with the MSRB as set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Parameters around the use of fine revenue are set forth in the MSRB Fine-Sharing Policy.
4. Other Revenue
The MSRB may also receive funding from other sources. These additional revenue sources individually are not expected to be material sources of funding but may supplement other primary funding sources. Other revenue may be derived from professional qualifications examination fees, investment income, late fees on regulated entity assessments or other miscellaneous sources of revenue.
Certain funding priorities exist based on the MSRB’s Strategic Plan, in support of its responsibilities as an SRO, consistent with its congressional mandate as outlined in the Exchange Act.3 These priorities are:
- funding to maintain modern and informed regulation of dealers and municipal advisors that reflects current market practices and protects investors, issuers and the public interest, including by conducting economic analysis, establishing and maintaining a professional qualifications program, and providing coordination and support to the regulatory authorities that examine compliance with and enforce MSRB rules;
- funding to establish, maintain, and enhance information systems for the municipal securities market4 and provide market transparency for issuers, institutions, and the investing public, including transaction-related data and documents and data related to bond issuances;
- funding to provide high quality market data to enable comprehensive analysis of the municipal securities market, including developing data products and services that provide value for investors, issuers and all market participants to strengthen market efficiency and fairness;
- funding to ensure the MSRB fulfills its obligation to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products, and, in general, to protect investors, municipal entities, obligated persons, and the public interest,5 including by fostering dialog and working collaboratively with all market participants and the broader community we serve;
- funding for stakeholder engagement activities and education, including receiving information from municipal market participants and other stakeholders to provide input that informs the rulemaking process, as well as ensuring that these stakeholders are aware of regulatory developments that may affect them and are educated on the MSRB rules;
- funding to support the internal administrative functions of the MSRB and to administer the activities of the Board and its committees; and
- funding sufficient to maintain a prudent level of liquid reserves, taking into consideration a range of reasonably foreseeable market conditions and expected expenditures over a three-year time horizon.
In its funding decisions for programs and services in support of the Strategic Plan, the Board considers:
- expected benefits to stakeholders, including investors, issuers and the public interest in promoting a fair and efficient municipal securities market;
- the level of regulated entity assessments necessary to fund the program or service, the value provided and the resulting burden on regulated entities;
- that regulated entity assessments are necessary and appropriate to fund the operation and administration of the Board in a manner consistent with requirements of the Exchange Act;
- that fees for data services and products are based on a commercially reasonable standard for pricing for information products, the MSRB Data Access Fee Policy, and requirements of the Exchange Act with respect to fees charged for market information services; and
- other revenue sources that may be available for funding a program or service.
Organizational reserves are maintained to ensure the MSRB has appropriate financial resources to support mission objectives, respond to regulatory requirements and pursue opportunities, to enable the organization to be fiscally prepared regardless of economic conditions, to provide the MSRB with the requisite level of liquidity to fund ongoing operations, and to ensure the long-term financial sustainability of the organization. The MSRB determines the target for organizational reserves by conducting a detailed and comprehensive analysis of the liquidity needs in four categories: Working Capital, Risk Reserves, Strategic Investment Reserves and Regulatory Reserves. The target is refreshed each year in conjunction with the annual budget development process, with a more detailed and comprehensive analysis completed in conjunction with the strategic planning process.
Though the Board intends to utilize the Annual Rate Card to set fee rates to maintain reserves at or near target levels, if organizational reserves exceed the target at the fiscal year-end by more than 15% for two consecutive fiscal years, then the Finance Committee shall evaluate the excess in light of foreseeable market conditions and organizational demands and make a recommendation to the Board as to how the excess should be addressed. If organizational reserves fall below the target at fiscal year-end by more than 10% for two consecutive fiscal years, then the Finance Committee, in the absence of extraordinary events, will recommend an operational budget that includes a projected surplus sufficient to rebuild organizational reserves to the targeted reserve level over a reasonable period of time.
Aligning Strategic, Operating and Financial Planning
The Board reviews its Strategic Plan and its long-term objectives for MSRB programs and services and approves an annual Operating Plan to advance the objectives. The Board also reviews and approves an annual Budget and ensures that sufficient resources are allocated to advance the annual Operating Plan.
Strategic, operational and financial planning is conducted with the expectation that unforeseen events will occur in the market and/or in the regulatory environment that will require MSRB response. In some cases, unforeseen events or circumstances may require revisions in operating plans and budgets during mid-cycle.
Review and Establish Annual Rate Card
The Board uses adjustments to the Annual Rate Card to set and revise the Rate Card Fees6 to levels that the MSRB anticipates will be sufficient to: (i) cover anticipated expenses for the related fiscal year, (ii) maintain target contribution balances between fees on regulated entities, (iii) address any prior-year variance between the amounts of each of the Rate Card Fees actually collected versus budget (i.e., “Rate Card Fee Variances”), and (iv) address any variance between the amount of the Board’s organizational reserves versus the Board’s reserves target (i.e., “Reserves Variances”).
The Annual Rate Card Process is intended to establish a fee framework that is transparent and predictable for regulated entities while also retaining the Board’s ability to react to changing circumstances when establishing reasonable fees on regulated entities. The Annual Rate Card Process consists of the following activities, which are executed by the Finance Committee and presented to the Board for review and approval:
1. Development of the Fiscal Year Expense Budget.
- Consistent with Section 8.1 of the Board’s Policies and Procedures, the Board approves the annual Expense Budget and, thereby, establishes the baseline revenue that the organization needs to fund operations for the fiscal year.
- Once the Board sets the Expense Budget, any Reserves Variance may further adjust the amount of the Expense Budget that needs to be funded, as discussed below.
2. Reconciliation of Reserves Variance.
- If there is a Reserves Variance, either positive or negative, at the end of the prior fiscal year, the amount of such Reserves Variance will be considered and may be subtracted from or added to the Expense Budget to develop a final “Budgeted Revenue Target” for a given fiscal year.
- The Board may determine whether to resolve the entire Reserves Variance within one Annual Rate Card cycle or over the course of multiple Annual Rate Card cycles.
3. Incorporation of Other Anticipated Revenue.
- Revenue from sources other than the Rate Card Fees is forecasted, and that estimate is credited against the Budgeted Revenue Target.
- The amount remaining after these revenue estimates are incorporated determines the total amount of funding that needs to be generated from the Rate Card Fees (the “Rate Card Funding Amount”).
4. Validation of Contribution Targets and Reconciliation of Any Rate Card Fee Variances from the Prior Fiscal Year .
- Allocation of the Rate Card Funding Amount across the Rate Card Fees is determined by applying percentage Contribution Targets for each of the respective Rate Card Fees.
- The initial Contribution Targets were established by the Board using recent historical precedents. To maintain fairness and equity in fees, Contribution Targets are intended to be stable over time, unless there is a durable, material shift in market structure or circumstances.
- Each year during the Annual Rate Card Process, the Board considers whether there have been any such shifts and evaluates whether adjustments to Contribution Targets are necessary as supported by market activity trends and data.
- Once the Contribution Targets are confirmed, the Rate Card Funding Amount is allocated across the Rate Card Fees.
- Any Rate Card Fee Variances between the budget and actual results of the Rate Card Fees for the prior fiscal year are then added to or subtracted from the allocated Rate Card Funding Amount for the specific applicable Rate Card Fee to determine the final funding expectation from each Rate Card Fee (“Final Contribution Amount”).
5. Forecast of Expected Activity and Setting the Annual Rate Card .
- The Board uses the best available information to set expected volumes of activity for the coming fiscal year.
- Based on the anticipated volumes of activity, the Board calculates the rates of assessment for each of the Rate Card Fees (by dividing the Final Contribution Amount by the respective underlying volume or level of activity associated with each fee) to generate their respective Final Contribution Amounts.
Limitations on Rate Changes . The Board has established certain limitations on Rate Card Fee increases from year-to-year to promote greater predictability and stability. If the full amount of a negative Rate Card Fee Variance cannot be recaptured in a single year due to these limitations, the remaining amount of the variance will carry over into the calculation of the Annual Rate Card in the following fiscal year(s).
1. 10% Maximum Cap on Targeted Revenue.
- The first limitation is a 10% cap on the maximum increase in the targeted revenue for a Rate Card Fee based on the highest amount of such targeted revenue in the previous two annual rate cards.
- This maximum cap is intended to limit large increases in the rate of assessment for the Rate Card Fees to ensure that fee increases remain incremental and, accordingly, regulated entities have time to operationalize such increases into their business models.
2. 25% Maximum Cap on Assessment Rate Increases.
- The second limitation is a 25% cap on the maximum increase in the assessment rate for a Rate Card Fee based on the highest assessment rate in the previous two annual rate cards.
- The secondary cap is intended to limit large increases in rates of assessment for the Rate Card Fees in instances where expected volume decreases significantly from the prior year.
Fee rates may increase year-to-year, subject to limitations discussed above, or decrease from year-to-year, as needed to meet the outlined objectives. The Board reviews and establishes the Annual Rate Card that will be effective for the upcoming calendar year during the fourth quarter of the prior calendar year. The amended Annual Rate Card resulting from the Annual Rate Card Process will be filed with the SEC consistent with the Exchange Act.
- Annual Rate Card: Rates of assessment for the Rate Card Fees established on an annual basis through the Annual Rate Card Process. Beginning in 2024, each annual rate card is expected to be operative for the calendar year, January 1 through December 31.
- Annual Rate Card Process: Annual, multi-step process used to determine the rates of assessment for each of the rate card fees required to appropriately fund the activities of the MSRB. This process is executed by the Finance Committee and presented to the full Board for review and approval.
- Budget: The planned fiscal year sources of revenue, operating expenses and capital expenditures.
- Budgeted Revenue Target: The amount of revenue the MSRB needs to assess in a given fiscal year to fund the Expense Budget along with adjustments for any Reserves Variances that may increase or decrease the amount of funding needed.
- Contribution Targets: The percentage of the total Rate Card Funding Amount that each Rate Card Fee is responsible for funding. The initial Contribution Targets were established by the Board using recent historical precedents. To maintain fairness and equity in fees, Contribution Targets are intended to be stable over time, unless there is a durable, material shift in market structure or circumstances.
- Final Contribution Amount: The amount of target revenue to be generated from each Rate Card Fee. The Final Contribution Amount is determined by allocating the Rate Card Funding Amount across the Rate Card Fees based on the Contribution Targets and then adjusting the allocated Rate Card Funding Amount for each Rate Card Fee by any Rate Card Fee Variances.
- Operating Plan: Tactical plan that clearly articulates short-term priorities for the fiscal year, as well as the time frames and the measures of performance. It focuses on implementation versus the direction set in the Strategic Plan.
- Rate Card Fees: Underwriting Fee, Transaction Fee, Trade Count Fee and Municipal Advisor Professional Fee.
- Rate Card Fee Variances: The difference between the amount of revenue budgeted for each rate card fee and the amount of revenue assessed in a given year. During the Annual Rate Card Process, any Rate Card Fee Variances between the budget and actual results of the Rate Card Fees for the prior fiscal year are added to or subtracted from the allocated Rate Card Funding Amount for the specific applicable Rate Card Fee to determine the final funding expectation from each Rate Card Fee.
- Rate Card Funding Amount: The amount of funding that needs to be generated from the Rate Cards Fees. The Rate Card Funding Amount is determined by subtracting the expected amount of revenue from other revenue sources (non-Rate Card Fees) from the Budgeted Revenue Target.
- Regulated Entities: Entities regulated by the MSRB under the Exchange Act, which are brokers, dealers, municipal securities dealers and municipal advisors that engage in municipal securities or municipal advisory activities and are registered with (or are required to be registered with) the MSRB.
- Reserves Variance: The difference between the amount of the Board’s organizational reserves versus the Board’s reserves target, excluding the impact of any Rate Card Fee Variances. A positive Reserves Variance may reduce the Budgeted Revenue Target for a given fiscal year. A negative Reserves Variance may increase the Budgeted Revenue Target for a given fiscal year.
- Strategic Plan: Mission statement, vision statement, guiding principles, and strategic goals that define the organization’s direction for the future. The Strategic Plan provides broad statements of direction that establish parameters for decision-making.
1See Section 15B(b)(2)(J) of the Exchange Act.
2See also MSRB Rules A-11, Assessments for Municipal Advisor Professionals, A-12, Registration, and A-13, Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers.
3See Section 15B of the Exchange Act.
4See Section 15B(b)(3) of the Exchange Act.
5See Section 15B(b)(2)(C) of the Exchange Act.
6Underwriting Fee, Transaction Fee, Trade Count Fee, and Municipal Advisor Professional Fee.