Amendments to Rule A-13 on Underwriting Assessments

On September 30, 2009, the Municipal Securities Rulemaking Board (“Board” or “MSRB”) filed with the Securities and Exchange Commission (“SEC”) amendments to Rule A-13 on underwriting assessments, and Rule G-32, on disclosures in connection with primary offerings, which became effective upon filing.[1]  The rule change will apply to primary offerings of municipal securities for which submission of Form G-32 under MSRB Rule G-32(b)(i)(A) is initiated on or after December 1, 2009.  The purpose of the rule change is to assess reasonable fees necessary to defray the costs and expenses of operating and administering the MSRB.  The rule change will partially accomplish this purpose by amending Rule A-13 to eliminate exemptions in Rule A-13 pertaining to underwriting assessments for primary offerings of municipal securities that: (i) have an aggregate par value less than $1,000,000; (ii) have a final stated maturity of nine months or less, except commercial paper; (iii) at the option of the holder thereof, may be tendered 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; and (iv) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer (“dealer”) reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more than one account, with a view toward distributing the securities (“limited offering”).  The underwriting fee for primary offerings of these securities will be $.03 per $1000 par value, which is the current underwriting fee for primary offerings of municipal bonds.  Additionally, the rule change will further harmonize the underwriting fees of notes and bonds by changing the underwriting fee on primary offerings in which all securities offered have a final stated maturity less than two years to the rate of $.03 per $1000 par value.  For purposes of the underwriting assessment under Rule A-13, a primary offering will be defined to mean a primary offering under Exchange Act Rule 15c2-12, but excludes subsequent remarketings after the initial issuance of the bonds or notes.  Rule G-32 has also been amended to include a new definition of commercial paper.

The MSRB currently levies three 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 enters the municipal securities business.  Rule A-13 provides for an underwriting fee of $.03 per $1000 par value of bonds and $.01 per $1000 par value of notes (with specified exceptions), and a transaction fee of $.005 per $1000 par value of sale transactions of specified securities.  Rule A-14 provides for an annual fee of $500 from each dealer who conducts municipal securities activities. 

The underwriting and transaction fees in Rule A-13 assess fees that are generally proportionate to a dealer’s activity within the industry.  Historically, municipal notes were either exempt from underwriting fees or were subject to reduced underwriting fees ($.01 per $1000), and variable rate demand obligations, small issues, and limited offerings also were exempt from underwriting fees.  The MSRB believes that such a fee structure has become increasingly inequitable as the volume of primary offerings in these categories (including in particular note issues) has grown, and the MSRB’s resources have been devoted to supporting both notes and bonds.  The elimination of exemptions for these categories of primary offerings will result in fees that are more fairly, reasonably and equitably allocated to reflect dealer participation in the overall municipal debt market.

During the past five years, the Board’s ongoing expenses have increased significantly due to increased regulatory activities and expanded market information products and services, including the new Electronic Municipal Market Access system (“EMMA”) to implement the new “access equals delivery” primary market disclosure service under MSRB Rule G-32 and the new continuing disclosure service to implement the Commission’s amendments to Exchange Act Rule 15c2-12 as well as the Short-term Obligation Rate Transparency system (“SHORT”) for interest rate transparency for variable rate demand obligations and auction rate securities.  These new systems and their associated rules greatly enhance the efficiency of the municipal securities market and provide critical information to dealers and investors.  The rule change is designed to better match the MSRB’s revenues with the operating costs associated with these important new systems and the costs of regulating the municipal securities market.         

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

September 30, 2009

*                  *                    *

TEXT OF AMENDMENTS [2]

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

(a) Underwriting Assessments-Scope. Each broker, dealer and municipal securities dealer shall pay to the Board an underwriting fee as set forth in section (b) for all municipal securities purchased from an issuer by or through such broker, dealer or municipal securities dealer, whether acting as principal or agent, as part of a primary offering, provided that section (b) of this rule shall not apply to a primary offering of securities if all such securities in the primary offering:

[(i) have an aggregate par value less than $1,000,000;]

[(ii) have a final stated maturity of nine months or less] (i) are commercial paper as defined in MSRB Rule G-32(d); or

[(iii) at the option of the holder thereof, may be tendered 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) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more than one account, with a view toward distributing the securities; or]

[(v)] (ii) constitute municipal fund securities.

If a syndicate or similar account has been formed for the purchase of the securities, the underwriting fee shall be paid by the managing underwriter on behalf of each participant in the syndicate or similar account.

(b) Underwriting Assessments-Amount. For those primary offerings subject to assessment under section (a) above, the amount of the underwriting fee is[:]

[(i) for primary offerings in which all securities offered have a final stated maturity less than two years, .001% ($.01 per $1,000) of the par value;]

[(ii) for primary offerings in which all securities offered, at the option of the holder thereof, may be tendered 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 two years until maturity earlier redemption, or purchase by an issuer or its designated agent, .001% ($.01 per $1,000) of the par value; and]

[(iii) for all other primary offerings subject to this rule,] .003% ($.03 per $1,000) of the par value.

(c)  - (e) No change

(f)  Definition. [For purposes of this rule, the term "primary offering" shall mean an offering of municipal securities directly or indirectly by or on behalf of the issuer of such securities, including any remarketing of such securities directly by or on behalf of the issuer of such securities.] The term “primary offering” shall have the meaning set forth in Rule G-32(d)(viii), provided that, for purposes of Rule A-13, the term “primary offering” shall not include any remarketing of municipal securities.

Rule G-32: Disclosures in Connection with Primary Offerings

(a) – (c) No change

(d) Definitions. For purposes of this rule, the following terms have the following meanings:

(i) – (xii) No change

(xiii) The term “commercial paper” shall mean municipal securities having a maturity of nine months or lessissued pursuant to a commercial paper program permitting such municipal securities to be rolled over upon maturity into new commercial paper.

(e) No change