Volume 16, Number 1 JANUARY 1996
NOTICE OF FILING Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
AMENDMENTS FILED
The Board has filed an amendment to the proposed fee schedule revisions that currently are pending at the Securities and Exchange Commission. As amended, the fee schedule would: (i) raise the $100 annual fee to $200, effective for the fiscal year that began on October 1, 1995; (ii) leave the underwriting assessment on primary offerings of long-term issues at its current level of $.03 per $1,000 par value; (iii) implement a new transaction fee, of $.005 per $1,000 par value, on inter-dealer sales transactions, effective on January 1, 1996.
Questions about the proposed amendment may be directed to Christopher A. Taylor, Executive Director.
The Board is statutorily authorized to levy fees on dealers to fund Board operations. On August 11, 1995, the Board filed with the Commission certain changes in the fees that are assessed on dealers (the "August 1995 filing").1 The August 1995 filing proposed three changes in Board fees: (i) the annual fee of $100 assessed under rule A-14 would be raised to $200; (ii) the underwriting assessment of $.03 per $1,000 par value, assessed on primary offerings of most long-term municipal securities under rule A-13, would be decreased to $.02 per $1,000 par value; and (iii) rule A-13 would include a new transaction fee of $.01 per $1,000 par value of inter-dealer sales transactions. The background and rationale of the fee revisions were included in a notice released in August and later published in the October 1995 edition of MSRB Reports.2
On November 13, 1995, the Board filed an amendment to the August 1995 filing.3 Under the amended version of the fee schedule: (i) the annual fee would be $200 -- the same as proposed in the August 1995 filing; (ii) the underwriting assessment of $.03 per $1,000 par value would remain at its current level; and (iii) the proposed transaction fee would be assessed at $.005 per $1,000 par value -- one-half the rate originally proposed in the August 1995 filing.4
The Board has requested that the Commission make the proposed $200 annual fee effective for the Board's 1996 fiscal year, which began on October 1, 1995. The Board already has billed dealers $100 in annual fees for this fiscal year. If the amendment is approved by the Commission, the Board would bill dealers an additional $100 in fees later in the fiscal year. The Board has requested that the Commission approve the proposed transaction fee to become effective for transactions executed after January 1, 1996.
The Board is revising its fee schedule to generate additional revenue that is necessary for Board operations. As amended, the proposed transaction fee is expected to generate approximately $2 million per year if transaction volumes continue at current levels. While this is only half of the amount originally proposed in the August 1995 filing, the reduction in revenues would be partially offset because the current underwriting fee of $.03 per $1,000 would be left at that level, rather than being reduced, as initially proposed. However, the January 1, 1996, effective date for the proposed transaction fee further reduces anticipated revenues for the 1996 fiscal year because the first three months of the fiscal year will pass without transaction fee revenue. Taking this into account, the entire fee schedule, as amended, is expected to provide approximately $1.2 million less in revenue than the fee schedule proposed in August.
Even though the revenues will be lower under the proposed amended fee schedule, the Board anticipates that the amended fee schedule would provide sufficient revenues for the Board's 1996 fiscal year. In part, this is because of changes in the Board's planned transaction reporting program. At its November 1995 meeting, the Board decided to combine Phase II of the program (the reporting of institutional customer transactions for transparency and market surveillance purposes) and Phase III (the reporting of retail transactions) into one "customer transaction" phase, which is planned to become operational in January 1998. The new plan for the transaction reporting program will result in substantial cost savings for the 1996 fiscal year.
The Board noted in the August 1995 filing that, although inter-dealer transaction volume is an acceptable measure of dealer participation in the market for purposes of fee assessment, the Board intends, in future years, to review the possible use of customer transaction data for this purpose. The data provided by the customer transaction phase of the reporting program can be used as an additional measure of dealer participation in the market and thus may allow the Board to broaden the base for fee collection in the future. Because of the revised schedule for the customer transaction phase, however, it will not be possible to use customer transactions as a basis for fee assessment until some time in the second half of the Board's 1998 fiscal year. This new implementation date is somewhat later than the Board anticipated when the initial fee filing was made in August 1995.
The Board has reviewed comment letters on the August 1995 filing that were submitted to the Commission. A number of the comments expressed concern over the impact of the proposed fee revisions on broker's brokers. The Board understands that the proposed transaction fee would have a substantial impact on market participants whose transaction activity is primarily or exclusively in the inter-dealer market. In recognition of this fact and the delay in the customer transaction phase of the transaction reporting program, the Board decided to keep the $.03 per $1,000 underwriting assessment in rule A-13 at its current level and to reduce the proposed transaction fee by 50 percent, to $.005 per $1,000 par value. The Board wishes to point out, however, that, it may be necessary to raise the transaction fee in fiscal year 1997, perhaps to $.0075 per $1,000 par value, as expenditures for the transaction reporting program rise to meet the January 1998 implementation date for the customer transaction phase. The Board reviews its fee schedules, along with other budgetary matters, each year.
In its discussion of the fee revisions, the Board considered a number of alternative proposals for fee assessment proposed by various parties.
Revenue-Based Proposals One suggestion considered by the Board is that fees be linked in some way to the "municipal securities revenues" of dealers. The Board, however, has been unable to locate any source of information that could be used for this purpose. The level of "municipal securities revenue" generated by a dealer could not be used for fee assessment unless the term is clearly defined, uniformly computed by dealers and such computations are independently audited prior to being reported to the Board. Thus, even if the Board were, by rule, to define "municipal securities revenue" and establish accounting rules for its computation, it still would be necessary for each dealer to obtain an independent audit of this calculation before the figures could be used to generate fee assessments. The Board believes that the high costs to the dealer community of obtaining compliance with these requirements would make this method of fee assessment impractical. Moreover, there is a question whether, without these safeguards, the Board would subject its own financial reports to possible qualification if it based fees on "municipal securities revenue."
Proposals for Increased Annual Fees The Board currently receives $100 annual fees from approximately 2,700 dealers. Under the proposed fee revisions, the Board expects to receive $200 annual fees from roughly this number of dealers. The Board has considered the suggestion that the annual fee could be increased to a level of $1,000 to increase total annual fee revenue from $540,000 to $2.7 million.
Of the approximately 2,700 dealers currently paying the Board annual fees, only approximately 850 have reported any inter-dealer transactions to the Board since January 1995.5 Given that the remaining dealers have not reported any inter-dealer transactions, the Board believes that the remaining entities either: (i) are merely executing occasional municipal securities transactions as an accommodation to customers requesting them to do so; or (ii) are not active at all, but wish to remain capable of executing municipal securities transactions in the future. Raising the annual fee to $1,000 likely would result in the list of dealers eligible to execute transactions in municipal securities dropping in number from 2700 to under 1,000. This would drop the revenue expectations of a $1,000 annual fee to $1 million -- only $460,000 more than the $200 annual fee is expected to yield.
In adopting the proposed rule change, the Board carefully considered whether it should increase the $100 annual fee at all, since a large annual fee may constitute a barrier to low-volume dealers participating in the market. The Board has concluded that the proposed $200 annual fee is not a significant barrier for dealer participation in the market; however, the Board is concerned that a much more substantial barrier would be created by a $1,000 fee and accordingly believes that $200 is an appropriate amount for an annual fee at this time.
Proposals for Flat Fees for Categories of Dealers The Board also has considered suggestions that various categories of dealers be created by the Board, based upon market indicators such as the dealers' underwriting volume and transaction volume, and that all dealers in a specific category be annually assessed the same flat fee. These proposals are similar to the proposals to raise annual fees to $1,000 in that each depends heavily upon obtaining a higher percentage of Board revenue from dealers having a relatively low percentage of market activity. As noted above, however, dramatically raising fees for dealers with little or no market activity is unlikely to have the desired revenue effect because lower-volume dealers simply will drop out of the market when faced with high annual fees. In addition, the Board is concerned that relatively high annual fees for low-volume dealers may constitute an inappropriate barrier to participation in the market by these dealers.
In effect, the amended fee schedule "categorizes" dealers based upon their market activity by assessing separate fees based on underwriting activity and transaction volume, and assessing a flat $200 annual fee for all dealers. Each dealer pays a specific fee amount based on its own underwriting and transaction volume. The Board does not believe that it would be appropriate to re-adjust the allocation of the fees by creating categories specifically for the purpose of shifting fee burdens to lower volume dealers.
General Concern Over Using Dealer Participation in the Market for Measuring Fee Assessment In proposing alternative fee structures, several commentators criticized the general concept of levying fees based heavily upon measures of dealer participation in the municipal securities market such as underwriting volume and transaction activity. The Board has carefully considered suggestions for a totally different approach in its fee assessment structure, but has concluded that assessments based upon objective measures of participation in the market still represent the best method for funding Board operations. After closely examining the various alternative measures of dealer participation in the market, the Board has concluded that underwriting activity and inter-dealer transaction volume currently are the best available and auditable means upon which to base fees. These measures of dealer activity are admittedly imperfect because they do not track every important activity in the market, such as customer transactions. As noted above, the Board currently is working to expand the transaction reporting system to obtain customer transaction data. The Board believes that, until customer transaction data can be obtained, the proposed fee schedule presents a reasonable, practical and fair fee structure for funding Board operations.
November 15, 1995
Rule A-13. Underwriting *and Transaction* Assessment*s* 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 paragraph (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 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; (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; or (iv) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more then one account, with a view toward distributing the securities. If a syndicate or similar account has been formed for the purchase of the securities, the *underwriting* fee shall be paid by the managing underwriter on behalf of each participant in the syndicate or similar account. (b)*Underwriting Assessments-Amount.* For those primary offerings subject to assessment under section (a) above, the amount of the underwriting fee is: (i) through (iii) No change. (c)*Transaction Assessments. Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to .0005% ($.005 per $1,000) of the total par value of municipal securities sales that it reports to the Board under rule G-14(b). For those transactions reported to the Board by a broker, dealer or municipal securities dealer on behalf of another broker, dealer or municipal securities dealer, the 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 transaction fee from the broker, dealer or municipal securities dealer on whose behalf the transaction was reported.* *(d) Billing Procedure.* The Board periodically will invoice brokers, dealers and municipal securities dealers for payment of underwriting *and transaction* fees. The underwriting *and transaction* fee*s* must be paid within 30 days of the sending of the invoice by the Board. {(d) 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.} (e) Prohibition on Charging Fees Required Under this Rule To Issuers. No broker, dealer or municipal securities dealer shall charge or otherwise pass through the fee required under this rule to an issuer of municipal securities. *(f) Definitions.* *(i) 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.*
Rule A-14. Annual Fee In addition to any other fees prescribed by the rules of the Board, each broker, dealer and municipal securities dealer shall pay an annual fee to the Board of *$200,* {$100} with respect to each fiscal year of the Board in which the broker, dealer or municipal securities dealer conducts a municipal securities business. Such fee must be received at the office of the Board in {Washington, D.C.} *Alexandria, Virginia* no later than October 31 of the fiscal year for which the fee is paid, accompanied by the invoice sent to the broker, dealer or municipal securities dealer by the Board, or a written statement setting forth the name, address and Commission registration number of the broker, dealer or municipal securities dealer on whose behalf the fee is paid.
Rule G-14. Reports of Sales or Purchases (a) No change. (b) Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities with other brokers, dealers or municipal securities dealers using the formats and within the time frames specified in Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices *and to assess transaction fees. The transaction information* {and} will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules.
[1] SEC File No. SR-MSRB-95-13.
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