I. Introduction
On February 7, 2000, the Municipal Securities Rulemkaing Board (“MSRB” or “Board”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, submitted to the Securities and Exchange Commission (“Commission”) a proposed rule change revising Rule A-13, Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers. The proposed rule change was published for comment in the Federal Register on March 10, 2000. No comments were received on the proposal. This order aproves the proposal.
17 CFR 240.19b-4.
II. Description of the Proposal
A. Current Fee Structure
Rule A-13(c) currently provides for a fee levied by the MSRB based on the total par value of a dealer's inter-dealer sales in municipal securities. Dealers report these transactions by submitting transaction information to the automated comparison system operated by the National Securities Clearing Corporation. The inter-dealer transaction fee assessment has been set at $.005 per $1,000 par value of sales since it was instituted in 1996.
The total par value of sales transactions will be referred to hereafter as “transaction activity.”
The MSRB levies three other types of fees that generally apply to dealers. Rule A-12 requires each dealer to pay a $100 initial fee when it enters the municipal securities business. Rule A-14 requires each dealer that conducts municipal securities business during the year to pay an annual fee of $200. Rule A-13 requires each dealer to pay an assessment on underwriting activity based on the par value of the dealer's purchases from the issuer of primary offerings of municipal securities.
B. Proposed Fee Structure
The MSRB is proposing to expand the transaction-based fee to take into account the dealer's sales to customers in addition to sales to dealers. The MSRB proposes to use a rate of $.005 per $1,000 par value to calculate assessments for both inter-dealer and customer transactions. The MSRB would exclude from the calculation of both inter-dealer and customer transaction-based fees certain transactions in very short-term instruments (i.e., securities that have a final stated maturity of nine months or less and securities that may be put to the issuer at least as frequently as every nine months). Transactions on these instruments are not excluded from the inter-dealer transaction-based fee, but would be excluded from that fee under the MSRB's proposal.
The excluded categories of short-term issues are referred to hereafter as “municipal commercial paper,” “short-term notes,” and ”variable rate demand obligations.”
Under the proposed rule change, the MSRB would assess transaction fees on a monthly basis, based on transactions that dealers report to the MSRB's Transaction Reporting System, which supports market surveillance and price transparency functions for the municipal securities market. Dealer sales to customers (not purchases by the dealer from customers) would be used as the measure of transaction activity to avoid double counting when a dealer buys and sells a block of securities in the customer market.
Similarly, the current inter-dealer transaction fee is assessed to the dealer on the “sell side” of each trade.
The proposed is intended to increase revenue to the MSRB to cover budgetary expenditures. The MSRB contends that it is facing a projected shortfall in revenue caused by declining underwriting assessments and increases in projected expenses. According to the MSRB, during the past five years, increased regulatory activities and expanded operation of the Municipal Securities Information Library (“MSIL”) system have increased its expenses from $6,716,681 in FY 1994 to $9,849,701 in FY 1999. The MSRB reported that much of the expenses during this time resulted from development and operation of its Transaction Reporting System. In addition, according to the MSRB, its long-range plans call for increased involvement in activities to improve disclosure, which may entail substantial modification or enhancement of the Board's computer systems, thus requiring increased revenue.
The MRSB reported that MSIL expenditures during the past five fiscal year totaled $16.5 million, more than half of which is for its Transaction Reporting System development and operations. The MSRB has enhanced the Transaction Reporting System to disseminate more information in the transparency reports and to increase the information provided in a surveillance database to support enforcement of Board rules. Annual subscriptions to the transparency reports are available for a fee of $15,000, which the MSRB stated has resulted in revenue that less than offsets the marginal cost of production. In January 2000, the MSRB began making available detailed transaction reports and determined that, in order to foster the broadest possible dissemination of price information, the new reports will be made available free of charge. See Exchange Act Release No. 41916 (Sept. 27, 1999) 64 FR 53759 (Oct. 4, 1999).
III. Discussion
The Commission must approve a proposed MSRB rule change if it finds that the proposal is consistent with the requirements of the Act and the rules and regulations thereunder that govern the MSRB. The Commission finds that the proposal meets the above standard. In particular, the Commission finds that the proposed rule is consistent with the requirements of Section 15B(b)(2)(J) of the Act, which requires, in pertinent part, that the MSRB's rules shall “provide that each municipal securities broker and each municipal securities dealer shall 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.”
15 U.S.C. 78s(b). The Commission's statutory role is limited to evaluating rules as proposed against the statutory standards. See S. Rep. No. 75, 94th Cong., 1st Sess., at 13 (1975).
15 U.S.C. 78 o-4(b)(2)(J).
The Commission believes that the proposal will help to provide sufficient revenues to fund Board operations and to allocate fees among brokers, dealer, and municipal securities dealers in a manner that more accurately reflects each dealer's participation in the municipal securities market. The Commission believes that the MSRB's fees should be based, to the extent possible, on a comprehensive measurement of participation in the municipal market. The Commission further believes that it is appropriate for the MSRB to change the scope of the rules governing fees based on changes in dealer participation in the market. The Commission also believes that the increased revenue will help to ensure that the MSRB continues to provide increased disclosure in the municipal securities market.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder applicable to the MSRB and, in particular, Sections 15B(b)(2)(J).
In approving this rule proposal, the Commission notes that it has also considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR-MSRB-00-03) be, and hereby is, approved.
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. 00-9326 Filed 4-13-00; 8:45 am]
BILLING CODE 8010-01-M