[Federal Register Volume 60, Number 168 (Wednesday, August 30, 1995)]
[Notices]
[Pages 45197-45200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21498]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36150; File No. SR-MSRB-95-13]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to Fee
Assessments and Reporting of Sales or Purchases, Pursuant to Rules A-
13, A-14, and G-14
August 23, 1995.
Pursuant to Section 19(b)(2) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(2), notice is hereby given that on August
11, 1995, 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-
95-13). The proposed rule change is described in Items I, II, and III
below, which Items have been prepared by the Board. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Board is filing amendments to three of its rules to make
certain changes in the fees assessed to brokers, dealers and municipal
securities dealers (``dealers'') that engage in municipal securities
activities regulated by the Board. The proposed amendments relate to
the following rules: rule A-13, which currently provides for fee
assessments based on underwriting activity; rule A-14, which provides
for an annual fee paid by dealers to the Board; and rule G-14, which
currently requires reporting of certain transactions in municipal
securities to the Board for purposes of public price reporting and
market surveillance. The proposed amendments are collectively referred
to hereafter as ``the proposed rule change.'' The Board has planned
that the proposed rule change will become effective October 1, 1995, to
coincide with the beginning of the Board's 1996 fiscal year. The Board
accordingly requests the Commission to approve the proposed rule change
in such time as to allow it to become effective on that date.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
texts of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Section
(A), (B), and (C) below, of the most significant aspects of such
statements.
The purpose of the proposed rule change is to help provide
sufficient revenues to fund Board operations and to allocate fees among
dealers in a manner that, compared to the current fee structure, more
accurately reflects each dealer's involvement in the municipal
securities market. The proposed rule change would accomplish these
purposes by: amending rules A-13 and G-14 to institute a new assessment
of $.01 per $1,000 par value on all interdealer transactions that are
required to be reported to the Board under rule G-14; amending rule A-
13 to lower the current underwriting assessment from $.03 per $1,000 to
$.02 per $1,000; and amending rule A-14 to increase the annual fee
assessed to dealers from $100 to $200 per dealer.
The 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 who 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
[[Page 45198]]
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.\1\ In 1992, a lower rate of
$.01 per $1,000 was instituted for primary offerings of certain short-
term securities.\2\ The Board now bills dealers monthly for A-13 fees,
based upon official statements sent to the Board under rule G-36.\3\
\1\ 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.
\2\ Since 1992, the A-13 assessment has been $.01 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 in effect.)
The present proposed rule change does not affect the assessment fee
for such offerings.
\3\ 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.
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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 that
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,\4\ 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 the Board and Commission rules. Phases II and III of the
Transaction Reporting Program, now scheduled for implementation in 1996
and 1997 respectively, will address the reporting of institutional
customer and retail customer transactions.\5\
\4\ See Securities Exchange Act Release No. 34955 (November 9,
1994).
\5\ See ``Transaction Reporting Program for Municipal
Securities: Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995),
at 11-15.
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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
will more accurately reflect each dealer's participation in the market.
Need for Revenue Increases
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,\6\ 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,\7\ 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.
\6\ New issues of long-term municipal securities totalled $292
billion in 1993 and $165 billion in 1994. Based on new issue volume
to date, the Board projects a total in 1995 of about $130 billion.
See ``A Decade of Municipal Finance,'' The Bond Buyer, August 7,
1995, at 39.
\7\ See ``Financial Statements--Fiscal Years Ended September 30,
1994 and 1993,'' MSRB Reports, Vol. 15, No. 1 (April 1995), at 57.
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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
System. These include the Transaction Reporting Program, which provides
transparency reports and maintains the market surveillance database,
the Continuing Disclosure Information System for the collection and
dissemination to the market of material event notices, and the Official
Statement/Advance Refunding Document System, which maintains a
comprehensive collection of official statements and escrow agreements,
and provides electronic dissemination and archiving of such documents.
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 the 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 an increase of
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
[[Page 45199]]
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 to review in future years the
possible uses of additional transaction data that will be provided by
Phases II (institutional customer trades) and III (retail customer
trades) of the Transaction Reporting System as mechanisms to adjust
dealer fees even more equitably, based upon dealer participation in the
market.
Billing Procedures for the Transaction Fee
Rule G-14 requires each inter-dealer transaction that is eligible
for automated comparison to be reported to the Board through the
National Securities Clearing Corporation (``NSCC''), the central
facility provider for the automated comparison process. The Transaction
Reporting Procedures under rule G-14 place primary responsibility for
trade reporting on each dealer that executes an inter-dealer
transaction (the ``executing dealer''). 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 directly to NSCC through
other dealers that are members of NSCC (``clearing dealers''). This is
typically the case in an introducing/clearing broker arrangement.\8\
\8\ Some dealers also report transactions indirectly to NSCC
through other clearing agencies registered with the Commission
(e.g., Midwest Clearing Corporation and Stock Clearing Corporation
of Philadelphia).
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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 only the seller in
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.\9\ 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 broker that can be reliably identified based on the
information submitted by the clearing broker, as well as information
about any residual transaction volume that cannot be reliably
associated with any executing broker.\10\ 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 clearing dealers to 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 brokers, the Board will consider
revisions in this procedure to accommodate direct billing of executing
brokers.
\9\ See ``Reporting Inter-Dealer Transactions to the Board: Rule
G-14,'' MSRB Reports, Vol. 15, No. 2 (July 1995), at 15-17 (File No.
SR-MSRB-95-22).
\10\ Two specific compliance problems may result in trade
reports that, although accurate with respect to price and par value,
are unreliable with regard to identifying the executing brokers.
First, a clearing dealer may agree with, or ``stamp,'' the data
submitted to NSCC by its contra-party, 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 brokers identified by the
contra-party. Second, a clearing dealer may simply fail to identify
correctly its own executing broker in its submission. These
practices will become less common as the industry complies more
fully with the dealer identification requirement.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change affects all dealers equally and according
to the same terms. Therefore, the Board does not believe that the
proposed rule change places any burden on competition that is not
necessary or appropriate, given the purposes of the Act.
The transaction fee on inter-dealer transactions will affect
dealers in general proportion to their volume of inter-dealer
transactions, and in particular, in proportion to the number and par
value of transactions in which the dealer is the seller, rather than
the buyer, of municipal securities in the inter-dealer market. The
reduction in the underwriting assessment will offset, or partially
offset, the transaction fee for dealers with underwriting businesses.
However, for those dealers that previously did no underwriting
business, the transaction fee may constitute a substantial net increase
in fees paid to the Board. For example, for brokers' brokers the
transaction fee will constitute a new fee based on the brokers'
broker's activity in the market. However, the Board believes that the
$.01 per $1,000 level of the fee is not unduly burdensome in light of
the prominence of brokers' brokers in the municipal securities market.
The Board also notes that this fee will affect all brokers' brokers
equally.
C. Self-Regulatory Organization's Statement of Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
The Board has requested that the proposed rule change be effective
October 1, 1995, to coincide with the beginning of the Board's 1996
fiscal year.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the
[[Page 45200]]
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of the filing
will also be available for inspection and copying at the Board's
principal offices. All submissions should refer to File No. SR-MSRB-95-
13 and should be submitted by September 20, 1995.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21498 Filed 8-29-95; 8:45 am]
BILLING CODE 8010-01-M
