(Volume 15, Number 3) October 1995
Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
Amendments Filed The Board has filed amendments concerning certain changes in Board fees. The fees apply to all brokers, dealers and municipal securities dealers that conduct municipal securities activities regulated by the Board.
Questions about the proposed amendments may be directed to Christopher A. Taylor, Executive Director.
On August 11, 1995, the Board filed with the Securities and Exchange Commission (Commission or SEC) certain changes in Board fees, which have not been approved by the Commission as of the date of this Notice.[1] The fees apply to all brokers, dealers and municipal securities dealers that conduct municipal securities activities regulated by the Board (dealers). The changes are:
- An increase in the annual fee levied under rule A-14 from $100 to $200. - A decrease in the underwriting assessment fee, levied under rule A-13(b)(iii), from three cents per $1,000 par value to two cents per $1,000 par value. - Institution of a new fee, under rule A-13, on each inter-dealer transaction in municipal securities, levied on the seller, at a rate of one cent per $1,000 par value.
The new fee structure will help to allocate assessments on dealers based as closely as possible on dealer participation in the municipal securities market, and will increase Board revenues to remedy a projected budget shortfall that has resulted from declines in new issue volume. The Board requested the Commission to approve the changes effective October 1, 1995, to coincide with the beginning of the Board's fiscal year. Bills sent to dealers in October are based upon the fee structure and rates that have been in effect for the past four years. The fee changes, when approved by the SEC, may incorporate the originally proposed effective date or may incorporate another effective date. After final SEC action, dealers will receive a subsequent notice informing them of the status of the fee changes, and any additional amounts owed.
Until recently, there has been no reliable information to measure municipal securities transaction activity of individual dealers, and therefore the only objective way to measure dealer participation has been the underwriting assessment of rule A-13. Phase I of the Board's Transaction Reporting Program, which began operation in January 1995, now includes data on essentially all inter-dealer trades in its surveillance database.[2] Accordingly, the Board intends to use this transaction data to better allocate assessments on dealers. The Board plans to implement additional phases of the Transaction Reporting Program in the next two years, during which the Program's scope will expand to include information on institutional customer trades and retail customer trades. The Board intends to review mechanisms for using the additional customer transaction data to adjust dealer fees even more equitably.
Current Fee Structure The Board 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-14 provides for an annual fee of $100 from each dealer that conducts municipal securities business during the year. Rule A-13 provides for an underwriting assessment, based on the par value of a dealer's participation in primary offerings of municipal securities.
Rule A-12 and A-14 fees have been the same since their adoption in 1975 and 1977, respectively. The rule A-13 underwriting assessment fee historically has varied, based on new issue volume in the market and the Board's revenue needs. The underwriting assessment has ranged from a high of $.05 per $1,000 in 1976 to a low of $.01 per $1,000 in 1988. Since 1991, it has been set at $.03 per $1,000 par value for primary offerings of most long-term securities.[3] In 1992, a lower rate of $.01 per $1,000 was instituted for primary offerings of certain short-term securities.[4] The Board now bills dealers monthly for A-13 fees, based upon official statements sent to the Board under rule G-36.[5]
The rule A-13 underwriting assessment fee provides over ninety percent of Board revenues. The Board originally adopted the underwriting assessment so that the fee would best reflect each dealer's involvement in the municipal securities market, based on then-available data. Although there are exceptions, it is generally true that the activity of individual dealers in the underwriting business provides a rough gauge of their general transaction activity and overall participation in the market. However, even when originally adopting rule A-13 in 1976, the Board recognized that basing the rule A-13 fees exclusively on dealer participation in new issue offerings was an imperfect means to measure a dealer's participation in the market because, among other things, it does not reflect market activity occurring after the purchase of a new issue from an issuer. Notwithstanding this fact, a fee based on underwriting participation has, until now, been the best available means to create verifiable assessments that generally reflect a dealer's participation in the market.
The Transaction Reporting Program Now Provides a New Mechanism to Measure a Dealer's Participation in the Market In January 1995, the Board launched Phase I of its Transaction Reporting Program. Under an amendment to rule G-14, on reporting of transactions, which became effective November 9, 1994,[6] dealers are required to report their inter-dealer transactions to the Board for use in the Transaction Reporting Program. This data is used for daily, public price and volume reporting and for the maintenance of a surveillance database of inter-dealer transactions which supports enforcement of Board and Commission rules. Phases II and III of the Transaction Reporting Program, now scheduled for implementation over the next two years, will address the reporting of institutional customer and retail customer transactions.[7]
The surveillance database component of the Transaction Reporting Program now provides the Board, for the first time, with information on essentially all inter-dealer transactions executed in the municipal securities market. The Board accordingly believes that this data should be used to adjust the fees levied under rule A-13 so that those fees more accurately reflect each dealer's participation in the market.
In addition to the Board's desire to allocate assessments more accurately based on dealer participation in the market, the proposed rule change also is necessary to address a projected shortfall in Board revenues. The Board's current reliance on underwriting fees for the bulk of its revenues, combined with the sharp decline in new issue volume,[8] require Board action to bring projected revenues and expenses into balance. Because of declines in new issue volume, the Board's revenues from rule A-13 underwriting assessments have declined from about eight million dollars in fiscal year (FY) 1993 to approximately six million dollars in FY94,[9] and are projected to be approximately four million dollars in FY95. Since, as noted, the rule A-13 fees provide approximately ninety percent of Board revenues, this situation requires the Board action to adjust revenues to meet necessary expenditures.
The Board's expenses over the next several years will include costs of the Board's traditional rulemaking activities, and in addition will be affected by the development and continued operation of programs that support the Board's rules and the statutory purposes set forth in section 15B of the Securities Exchange Act. Several of these programs operate within the Board's Municipal Securities Information Library(TM) (MSIL)(TM) System, including the Transaction Reporting Program, the Continuing Disclosure Information System, and the Official Statement/Advance Refunding Document System.[10] These programs, along with the Board's rulemaking activities, professional qualification program and arbitration program, are expected to result in total expenses of approximately six-and-one-half million dollars in FY95 and approximately eight million dollars in FY96.
Revenue Effect of Proposed Rule Change Based on the Board's projection that FY96 inter-dealer transaction volume will be about $400 billion, the proposed transaction fee would add about $4 million per year to the Board's revenues in FY96. The lowering of the underwriting assessment fee by $.01 per $1,000, based on a projected new issue volume of $130 billion in FY96, would reduce expected revenue by approximately $1.3 million. The increase in the annual fee from $100 to $200 would result in approximately $275,000 in additional revenue. Accordingly, the Board estimates that the proposed rule change would create a net revenue increase from these sources of approximately $3 million for FY96. Together with fees assessed for users of the Municipal Securities Information Library and other miscellaneous revenue sources, the total revenues under the proposed rule change are estimated to closely match expected expenses in FY96.
The volatility of new issue volume from year to year prevents an accurate prediction of the potential need for additional fee adjustments in FY97 and beyond. The Board has and will continue to examine new issue volume projections each year as part of its annual budget process. The Board intends, in future years, to review possible uses of additional transaction data that will be provided by Phases II and III of the Transaction Reporting System as mechanisms to adjust dealer fees even more equitably, based upon dealer participation in the market.
Rule G-14 requires that each inter-dealer transaction that is eligible for automated comparison be reported to the Board through National Securities Clearing Corporation (NSCC), the central facility provider for the automated comparison process. The proposed amendments would avoid levying an additional burden upon dealers to submit transactions for billing by broadening the purpose of rule G-14 to include fee assessment among the purposes of this rule.
The Transaction Reporting Procedures under rule G-14 place primary responsibility for trade reporting on each dealer that executes an inter-dealer transaction ("executing dealers"). However, the Rule G-14 Transaction Reporting Procedures allow executing dealers who are not direct members of NSCC to use other mechanisms to report transactions. Some executing dealers report transactions to NSCC through other firms that are members of NSCC ("clearing dealers"). This is typically the case in an introducing/clearing broker arrangement.[11]
Rule G-14 generally requires both the "buy" and "sell side" of an inter-dealer transaction to report their transaction to the Board. Under the proposed rule change, the Board will bill the "sell side" of each transaction. The Board will bill only for those trades for which the buy and sell sides ultimately agree on trade details such as price, transaction amount and par value. Dealers will receive bills monthly.
The Board recently amended the rule G-14 Transaction Reporting Procedures to require each dealer reporting a transaction to include the identity of both executing dealers in the transaction (as well as both clearing dealers).[12] Compliance with this rule change, however, has not yet reached a level at which the executing dealers can always be reliably identified from the information reported to the Board. Therefore, the Board will bill clearing dealers directly, providing with each bill information on the transaction volume associated with each executing dealer that can be reliably identified based on the information submitted by the clearing dealer, as well as information about any residual transaction volume that cannot be reliably associated with any executing dealer.[13] The clearing dealer will be responsible for timely payment of the entire fee to the Board on behalf of the executing dealers for which it reports transactions. The Board expects that clearing dealers may pass through these fees to executing dealers based upon transaction volume and this is provided for in the proposed change to rule A-13. As improvements are made in the timely and correct reporting of transactions under rule G-14, including correct identification of executing dealers, the Board will consider revisions in this procedure to accommodate direct billing of executing dealers.
Planned Date of Effectiveness The Board requested the Commission to approve the changes effective October 1, 1995, to coincide with the beginning of the Board's fiscal year. The SEC has not approved the changes as of the date of this Notice. Bills sent to dealers in October are based upon the fee structure and rates that have been in effect for the past four years. The fee changes, when approved by the SEC, may incorporate the originally proposed effective date or may incorporate another effective date. After final SEC action, dealers will receive a subsequent notice informing them of the status of the fee changes, and any additional amounts owed.
September 26, 1995
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 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) - (iv) No change. 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) - (ii) No change. (iii) for all other primary offerings subject to this rule, {.003%} *.002%* ({$.03} *$.02* per $1,000) of the par value. (c)*Transaction Assessments. Each broker, dealer and municipal securities dealer shall pay to the Board a fee equal to .001% ($.01 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{$100} *$200,* 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] File No. SR-MSRB-95-13. [2] See "Reporting Inter-Dealer Transactions to the Board: Rule G-14, "MSRB Reports, Vol. 14, No. 3 (December, 1994), at 3-6 for a description of Phase I of the Transaction Reporting Program. [3] As used in rule A-13, "primary offering" is defined as in Exchange Act Rule 15c2-12 on municipal securities disclosure. Primary offerings that have been assessed at $.03 per $1,000 under rule A-13 since 1991 are those municipal securities with a final stated maturity of two years or more and an aggregate par value of $1,000,000 or more. Since 1992, rule A-13 has, in addition, exempted from fee assessments those primary offerings which have a final stated maturity of nine months or less or which are "puttable" to an issuer at least as frequently as every nine months until maturity. [4] Since 1992, the A-13 assessment has been $0.1 per $1,000 for primary offerings with a final stated maturity of nine months or more, but less than two years, and $.01 per $1,000 for primary offerings which are puttable every two years or less. (The exemptions stated in the previous footnote have remained effective.) The present proposed rule change does not affect the assessment fee for such offerings. [5] Rule G-36 requires the underwriters of primary offerings to deliver the official statement, if one is produced for the primary offering, to the Board within 10 days of the date of sale. [6] See Securities and Exchange Act Release No. 34-34955 (November 9,1994). [7] See "Transaction Reporting Program for Municipal Securities: Phase II," MSRB Reports, Vol. 15, No. 1 (April 1995), at 11-15. [8] New issues of long-term totaled $292 billion in 1993 and $165 billion in 1994. Based on new issue volumn to date, the Board projects that the 1995 total is not likely to exceed $130 billion. See "A Decade of Municipal Finance," The Bond Buyer, August 7, 1995, at 39. [9] See "Financial Statements - Fiscal Years Ended September 30, 1994 and 1993," MSRB Reports, Vol. 15, No.1 (April 1995), at 57. [10] For descriptions of MSIL components, see, e.g., "Transaction Reporting Program for Municipal Securities: Phase II," MSRB Reports, Vol. 15, No.1 (April 1995), at 11-15, and "Changes Proposed to the CDI System," MSRB Reports, Vol. 15, No. 2 (July 1995), at 9-11. [11] Some dealers also report transactions indirectly to NSCC through other clearing agencies registered with the Commission (i.e., Midwest Clearing Corporation and Stock Clearing Corporation of Philadelpia). [12] See Securities and Exchange Act Release 34-35988 (July 18, 1995) and "Reporting Executing Dealer Identities in Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 15, No. 3 (October 1995), at page 35. [13] Two specific compliance problems sometimes result in trade reports that, although accurate with respect to price and par value, are unreliable with regard to identifying the executing dealers. First, a clearing dealer may agree with, or "stamp," the data submitted by its contra-party to NSCC, to indicate it agrees with certain details of the trade (par value, price, etc.) However, currently the dealer who "stamps" the trade data does not necessarily agree with the executing dealers identified by the contra-party. Second, a clearing may simply fail to identify correctly its own executing dealer not necessarily agree with the executing dealer in its submission. These practices will become less common as the industry complies more fully with the dealer identification requirement.
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