[Federal Register Volume 59, Number 202 (Thursday, October 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25963]
[[Page Unknown]]
[Federal Register: October 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34840; File No. SR-MSRB-94-12]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Underwriting Assessment for Brokers, Dealers, and Municipal Securities
Dealers
October 13, 1994.
On August 15, 1994, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-94-12), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'')1, and Rule 19b-4 thereunder. The MSRB filed
the proposed rule change to preclude brokers, dealers and municipal
dealers from passing through rule A-13 fees to issuers. The Commission
published notice of the proposal in the Federal Register on September
1, 1994.2 The Commission has reviewed the comments it received in
response to the notice.3 For the reasons discussed below, the
Commission is approving the proposed rule change.
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\1\15 U.S.C. 78s(b)(1).
\2\Securities Exchange Act Release No. 34601 (August 25, 1994),
59 FR 45318.
\3\Letter from Robert E. Aherne, First Vice President and
General Counsel, Merrill Lynch, to Jonathan Katz, Secretary, SEC
(September 29, 1994); Letter from Catherine L. Spain, Director,
Federal Liaison Center, Government Finance Officers Association, to
Jonathan Katz, Secretary, SEC (September 21, 1994).
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I. Description
The proposal amends MSRB rule A-13 on Underwriting Assessments for
Brokers, Dealers and Municipal Securities Dealers. The proposal will
preclude brokers, dealers and municipal securities dealers
(``dealers'') from charging or otherwise passing through rule A-13 fees
to issuers. The proposal will become effective 30 days after
publication of the approval order in the Federal Register.
Rule A-13 requires each dealer to pay to the Board a fee based upon
the dealer's participation in ``primary offerings'' of municipal
securities (``rule A-13 fees'').4 In addition to rule A-13 fees,
the Board charges an initial fee of $100 and an annual fee of $100
under rules A-12 and A-14, respectively, but rule A-13 fees provide the
bulk of Board revenues. The amount of rule A-13 fees owed is based upon
the par value of the dealer's participation in primary offerings.5
No obligation to pay a rule A-13 fee is generated by participation in
the following types of primary offerings: (i) those composed
exclusively of securities less than nine months in maturity; (ii)
offerings under $1 million in par value; and (iii) ``limited
placement'' offerings, as described in subsection (c)(1) of Exchange
Act Rule 15c2-12.6
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\4\As used in rule A-13, ``primary offering'' is defined as in
Exchange Act Rule 15c2-12 on municipal securities disclosure. Thus,
a dealer's obligation under rule A-13 is triggered by its
participation in the offering of municipal securities by or on
behalf of an issuer, whether the dealer is purchasing the securities
directly (i.e., is acting as underwriter) or is acting as an agent
in placing the securities with investors. The obligation of a dealer
to deliver an official statement to the Board under Board rule G-36
also is based upon the dealer's participation in a ``primary
offering.'' The MSRB believes that consistent use of the concept of
``primary offering'' in rules A-13 and G-36 has created substantial
administrative efficiencies for the Board by allowing A-13 fee
invoicing to be accomplished in an automated manner with data
collected under rule G-36.
\5\Currently, the assessment under rule A-13 is $.03 per $1,000
par value for offerings containing securities two years or more in
maturity. If the longest maturity in an offering is over nine months
but less than two years, the assessment is $.01 per $1,000 par value
of the issue. For purposes of calculating the assessment, a put
option date is treated the same as a maturity date, e.g., a primary
offering of a security with a put option of one year would generate
an assessment at the $.01 rate.
\6\``Limited placement'' offerings are those that are sold to no
more than 35 persons each of whom the underwriter reasonably
believes (i) has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of the prospective investment and (ii) is not purchasing for
more than one account or with a view to distributing the securities.
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Under the current requirements of rule A-13, if a syndicate or
similar account is formed for the purpose of purchasing securities from
an issuer, the managing underwriter is responsible to pay the
assessment fee on behalf of each participant in the syndicate. Payment
by the managing underwriter, rather than by individual syndicate
members, is solely an administrative convenience for underwriters and
the Board.
Rule A-13 is intended to provide a dealer assessment that roughly
reflects each dealer's underwriting activity in the municipal
securities market.\7\ Since rule A-13 fees are assessments on dealers
for the operation of the Board, a dealer's obligation under rule A-13
should not be charged or otherwise passed through to an issuer as an
expense to the issuer of bringing a new issue to market. As such, the
proposal would add paragraph (e) to rule A-13 which states:
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\7\In opposing the adoption of the proposed amendment, a
commenter argued that the proposal would cause a disproportionate
allocation of the MSRB costs to be born by a relatively small number
of dealers that underwrite new issues, instead of being borne by all
dealers (including dealers in the secondary market). Letter from
Robert E. Aherne, supra note 3. Participation in new issue offerings
may not be a perfect means to measure a dealer's involvement in the
market because the assessment does not, among other things, reflect
secondary market transactions and activity. In the Commission's
view, however, a fee based on underwriting participation is the best
available means to create verifiable assessments generally
reflecting a dealer's involvement in the market.
* * * (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
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an issuer of municipal securities.
A commenter supported the Board's perception that, in negotiated
underwritings, the subject of rule A-13 fees sometimes is raised in the
context of discussions of expenses to be paid by the issuer of the
securities.\8\ The Commission supports the Board's view that it is
misleading for underwriters to characterize rule A-13 fees in this
fashion.\9\ In this respect, the fees paid to the Board by dealers
under rule A-13 should be characterized by dealers to issuers no
differently than the annual fees paid to the Board under rule A-14 and
any other ``overhead'' expenses that are incurred by virtue of the
dealer engaging in municipal securities business.
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\8\Letter from Robert A. Aherne, supra note 3, at 3, stating
that the rule A-13 fee ``has generally been viewed by the industry *
* * as allocable to the Issuer's expenses in bringing the issue to
market.''
\9\This position is further supported by a commenter that states
``[t]he underwriting fee is more appropriately categorized as part
of the dealer's overhead cost of operation.'' Letter from Catherine
L. Spain, supra note 3.
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II. Discussion
The proposed rule change is consistent with the requirements of the
Act, and, specifically, with Section 15B(b)(2)(J) of the Act.\10\
Section 15B(b)(2)(J) authorized the MSRB to adopt rules to provide that
each municipal securities broker and each municipal securities dealer
pay to the Board such reasonable fees and charges as may be necessary
or appropriate to defray the costs and expenses of operating and
administering the Board. The proposed rule change is consistent with
its authority to charge dealers reasonable fees to defray the costs of
operating and administering the Board. The proposed rule change makes
clear that the fees levied under rule A-13 are to be paid by dealers
and not issuers.
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\10\Section 15B(b)(2)(J); [15 U.S.C. Sec. 70o-4(b)(2)(J)].
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III. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the MSRB and, in particular, Section
15B(b)(2)(J).
It is therefore ordered, Pursuant to Section 19(b)(2) of the Act,
that the proposed rule change as described above be, and hereby is,
approved, and shall be effective November 21, 1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25963 Filed 10-19-94; 8:45 am]
BILLING CODE 8010-01-M
