[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