[Federal Register Volume 59, Number 169 (Thursday, September 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21571]


[[Page Unknown]]

[Federal Register: September 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34601; File No. SR-MSRB-94-12]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Underwriting Assessment for Brokers, Dealers, and Municipal Securities 
Dealers

August 25, 1994.
    On August 15, 1994, the Municipal Securities Rulemaking (``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''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder. 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 a proposed amendment to rule A-13 on 
Underwriting Assessment for Brokers, Dealers and Municipal Securities 
Dealers. Board rule A-13 requires dealers to pay fees to the Board 
based upon the dealer's individual participation in primary offerings 
of municipal securities (``rule A-13 fees'') and the proposed amendment 
would preclude brokers, dealers and municipal securities dealers 
(``dealers'') from charging or otherwise passing through rule A-13 fees 
to issuers. The Board requests that the Commission delay effectiveness 
of the proposed rule change until 30 days after approval by the 
Commission is published in the Federal Register to ensure their 
underwriting practices are in compliance.

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 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(a) Purpose
    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.\1\ 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.\2\ 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.\3\
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    \1\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.'' 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 matter with data collected under rule 
G-36.
    \2\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.
    \3\``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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    Rule A-13 states that, 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. The Board 
invoices managing underwriters monthly for rule A-13 fees, based upon 
information filed with the Board under rule G-36 on delivery of 
official statements to the Board.
    Rule A-13 is intended to provide a dealer assessment that roughly 
reflects each dealer's involvement in the municipal securities market. 
In adopting rule A-13 in 1976, the Board recognized that participation 
in new issue offerings was not a perfect means to measure a dealer's 
involvement in the market because the assessment would not, among other 
things, reflect secondary market transactions and activity. However, 
after looking at alternative assessment mechanisms and methods of 
establishing accounts receivable available at that time, the Board 
concluded that a fee based on underwriting participation was the best 
available means to create verifiable assessments generally reflecting a 
dealer's involvement in the market.
    The Board is aware 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. The Board believes 
that it is misleading for underwriters to characterize rule A-13 fees 
in this fashion. Since rule A-13 fees are assessments on dealers for 
the operation of the Board, the Board believes that 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. 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.
(b) Statutory Basis
    As set forth in Section 15B(b)(2)(J) of the Act, the Board has 
authority to adopt rules to:

    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.

The Board believes that 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will equally apply to all dealers. 
Therefore, the Board does not believe that the proposed rule change 
will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Board has not solicited comments on the proposed rule change.

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 requests that the Commission delay effectiveness of the 
proposed rule change until 30 days after approval by the Commission is 
published in the Federal Register to ensure that their underwriting 
practices are in compliance.

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 Commissions, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, 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 provisions 
of 5 U.S.C. 522, 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-94-12 and should be 
submitted by September 22, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21571 Filed 8-31-94; 8:45 am]
BILLING CODE 8010-01-M