[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