[Federal Register Volume 60, Number 227 (Monday, November 27, 1995)]
[Notices]
[Pages 58422-58427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28868]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36492; File No. SR-MSRB-95-13]


Self-Regulatory Organizations; Notice of Amendment to 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

November 20, 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 November 
13, 1995, the Municipal Securities Rulemaking Board (``Board'' or 
``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') Amendment No. 1 to a proposed rule change 
(File No. SR-MSRB-95-13). Notice of the filing had previously been 
provided in Securities Exchange Act Release No. 36150 (Aug. 23, 1995), 
60 FR 45197 (Aug. 30, 1995). The Commission received 13 comment letters 
in response to publication of the original notice. The comments are 
discussed subsequently in this document. The amendment to 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 amendment from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board is filing an amendment to its proposed rule change SR-
MSRB-95-13, relating to certain changes in the fees assessed to 
brokers, dealers and municipal securities dealers (``dealers''). The 
proposed rule change, as amended, comprises an amendment to rule A-13 
on Underwriting Assessments, a corollary amendment to rule G-14 on 
Reports of Sales and Purchases, and an amendment to rule A-14 on the 
Annual Fee. The Board requests that the amendment to rule A-14 be 
effective for the Board's fiscal year 1996 (October 1, 1995-September 
30, 1996, referred to herein as ``FY96''). Since $100 already has been 
collected from each dealer for FY96, upon approval of the proposed rule 
change, the Board would bill each dealer an additional $100 for FY96.
    Because of the Board's immediate need for the additional revenue 
that would be raised by the proposed fee on transactions included in 
the amendment to rule A-13, the Board requests that the A-13 amendment 
and the corollary amendment to rule G-14 become effective on January 1, 
1996. The Board requests that the Commission approve the proposed rule 
change prior to that date, so that needed revenues can be collected in 
a timely manner.

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 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

    The initial filing of the proposed rule change on August 11, 1995 
(File No. SR-MSRB-95-13 as filed, referred to herein as the ``August 
1995 filing'') proposed three changes in the fees assessed by the Board 
on dealers: (i) The annual fee of $100 assessed under rule A-14 would 
be raised to $200; (ii) the underwriting assessment of $.03 per $1,000 
par value, assessed on primary offerings of most long-term municipal 

[[Page 58423]]
securities under rule A-13, would be decreased to $0.2 per $1,000 par 
value; and (iii) rule A-13 would include a new transaction fee of $.01 
per $1,000 par value of inter-dealer sales transactions.
    As amended, the proposed rule change would result in the following 
fees: (i) The annual fee would be increased to $200, as proposed in the 
August 1995 filing; (ii) the underwriting assessment of $.03 per $1,000 
par value would remain at its current level of $.03 and thus would no 
longer be included as part of the proposed rule change; and (iii) the 
proposed transaction fee would be assessed at $.005 per $1,000 par 
value--one half the rate originally proposed.
    In the August 1995 filing, the Board discussed the reasons for the 
proposed rule change, the Board's philosophy that fees should be 
assessed upon dealers based upon the level of the dealers' 
participation in the market, and the Board's need for additional 
revenues. These stated purposes of the proposed rule change also apply 
to the proposed rule change, as amended.
    Because the proposed transaction fee has been halved by the 
amendment, the estimated revenue from the proposed transaction fee also 
is halved, from approximately $4 million per year to approximately $2 
million per year. However, the underwriting fee will remain at $.03 per 
$1,000 par value of primary offerings, so that revenues from this 
source are projected to be approximately $3.9 million. This 
approximately $1.3 million more than was projected under the August 
1995 filing, which contemplated an underwriting fee of $.02 per $1,000. 
The proposed rule change, as amended, will provide the Board with 
approximately $700,000 per year less in revenue than the proposed rule 
change as initially filed. In addition, the Board is requesting a 
January 1, 1996 effective date for the transaction fee, which means 
that the first three months of FY96 will pass without any revenue from 
the proposed transaction fee.
    The Board believes that the reduced revenues from the proposed rule 
change, as amended, will be sufficient to meet the Board's requirements 
because, among other reasons, the Board now anticipates that a lower 
level of expenditure will be required for the Board's transaction 
reporting program during FY96. The lower level of expenditures is now 
expected because the Board recently decided to combine Phase II of the 
program (the reporting of institutional customer transactions for 
transparency and audit trail purposes) and Phase III of the program 
(reporting of retail transactions) into one phase. This combined 
``customer transaction reporting phase'' is expected to become 
operational in January 1998. Previously, Phase II was scheduled to 
become operational during FY96, which would have required greater FY96 
expenditures on the program than are now required.\1\

    \1\ A description of the revised plan for the transaction 
reporting system is included in SR-MSRB-95-17, filed with the 
Commission on November 13, 1995.
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    The Board noted in the August 1995 filing that, although inter-
dealer transaction volume is an acceptable measure of dealer 
participation in the market for purposes of fee assessment, the Board 
intends, in future years, to review the possible use of customer 
transaction data, provided by the Board's transaction reporting 
program, as an additional way to measure dealer participation in the 
market. The Board continues to view customer transaction volume as an 
appropriate measure of dealer participation in the market and will 
review the use of customer transaction information for fee assessment 
purposes once it becomes available. Due to revisions in the schedule 
for the customer transaction phase, it will not be possible to use 
customer transactions as a basis for fee assessment until sometime in 
the second half of the Board's 1998 fiscal year. This date is somewhat 
later than the Board anticipated when the August 1995 filing was made.
    The Board understands that the proposed transaction fee would have 
a substantial impact on participants whose transaction activity is 
primarily or exclusively in the interdealer market. In recognition of 
this fact, the Board concluded to leave the $.03 per $1,000 
underwriting assessment in rule A-13 at its current level and to reduce 
the proposed transaction fee by 50 percent to $.005 per $1,000 par 
value in the proposed rule change, as amended.
    In its August 1995 filing of the proposed rule change the Board 
noted that it was proposed pursuant to the Section 15B(b)(2)(J) of the 
Act, which requires, in pertinent part, that the Board's rules shall:

provide that each municipal securities broker and 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. Such rules shall 
specify the amount of such fees and charges.

    The same statutory basis applies to the proposed rule change, as 
amended. It would provide reasonable fees, based upon dealer 
involvement in the municipal securities market, that are necessary to 
defray Board expenses.

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

    In the August 1995 filing, the Board discussed why it believes that 
the proposed rule change does not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. The 
board believes that the same rationale applies to the proposed rule 
change, as amended.
    In the August 1995 filing, the Board noted that, for dealers that 
previously have not engaged in underwriting activities, the proposed 
transaction fee may constitute a substantial net increase in fees paid 
to the Board. The Board noted at that time its belief that the proposed 
transaction fee, at a level of $.01 per $1,000 par value, did not 
represent an undue burden on those dealers since the fee would directly 
reflect the dealers' participation in the inter-dealer market. At the 
revised level of $.005 per $1,000 par value, the proposed transaction 
fee would require these dealers to pay only half the amount of fees to 
the Board that was originally proposed and so any burden on these 
dealers would be commensurately reduced. The Board, therefore, believes 
that the proposed rule change, as amended, does not place any undue 
burden on dealers.

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

    The Board did not request comment on the August 1995 filing or on 
the proposed rule change, as amended. The board understands, however, 
that the Commission received 13 comment letters on the August 1995 
filing, from the following:

Barr Brothers & Co. Inc. (``Barr Brothers'')
Cantor Fitzgerald Partners (``Cantor Fitzgerald'')
Chapdelaine & Co. (``Chapdelaine'')
R.W. Ellwood & Co. (``Ellwood'')
EMR Securities Inc. (``EMR'')
J.F. Hartfield & Co., Inc. (``Hartfield'')
J.J. Kenny Drake Co., Inc. (``Kenny'')
Municipal Partners Inc. (``MPI'')
The Public Securities Association (the ``PSA'')
R.W. Smith & Associates, Inc (``R.W. Smith'')
Smith Peters & Stark (``Smith Peters'')
Sonoma Securities Corporation (``Sonoma'') (sent via the Board)
Tullett and Tokyo Securities, Inc. (``Tullett'')

    In addition to these comment letters regarding the August 1995 
filing, the Board also has received two letters 

[[Page 58424]]
proposing alternative fee structures.\2\ The comments received by the 
Commission on the August 1995 filing and the two alternative proposals 
are discussed below.

    \2\ These are a September 19, 1995 letter from Kenny (``Kenny 
II'') and a November 1, 1995 letter from the PSA (``PSA II'').
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Broker's Brokers

    All commentators on the August 1995 filing except three \3\ 
identified themselves as municipal securities broker's brokers 
(``broker's brokers''). All broker's brokers commenting on the August 
1995 filing specifically criticized the transaction fee and opposed its 
application to broker's brokers, as did one other commentator.\4\

    \3\ The exceptions are Barr Brothers, the PSA and Sonoma.
    \4\ The PSA was the non-broker's broker that opposed the 
transaction fee and its application to broker's brokers. In 
addition, Barr Brothers commented to suggest a revenue-based fee 
system and Sonoma opposed the increase in the annual fee. These 
issues are discussed below.
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    A broker's broker is a dealer that deals exclusively with other 
dealers and not with public investors or issuers. Broker's brokers are 
heavily involved in the inter-dealer market for municipal securities, 
working with other dealers who wish to buy or sell specific municipal 
securities issues. A broker's broker avoids taking inventory positions 
in municipal securities and does not execute an order for a purchase or 
sale unless an offsetting order or orders can be executed at the same 
time. Broker's brokers are subject to Board rules, as are all other 
dealers, based upon the municipal securities activities which they 
undertake.
    The exact number of broker's brokers operating in the municipal 
securities market is unknown. The commentators give estimates ranging 
from 15 \5\ to 21.\6\ The Board has identified 19 dealers who are known 
to have advertised themselves as broker's brokers.\7\

    \5\ EMR.
    \6\ Hartfield.
    \7\ They are Associated Bond Brokers, Butler Larsen Pierce & 
Co., Cantor Fitzgerald, Chapdelaine, Cowen & Co., EMR, Ellwood, 
Hammond & Botzum, Hartfield, Kenny, O'Brien & Shepard, MPI, Murphy & 
Durieu, Schmidt Securities, R.W. Smith, Smith Peters, Titus & 
Donnelly, Tullett, and Wolfe & Hurst Bond Brokers.
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    Broker's brokers execute offsetting purchase and sale 
transactions and would be assessed transaction fees based upon their 
sale transactions.

    Some commentators suggest that the proposed rule change results in 
an inappropriate double assessment of transactions because it assesses 
the sale transactions of broker's brokers and also assesses the 
transactions of those dealers that sell securities through the use of 
broker's brokers.\8\ These commentators state that a sale transaction 
executed by a broker's broker should not be viewed as a separate 
transaction, but rather as part of one trade between two other dealers, 
with the broker's broker ``in the middle.''

    \8\ Cantor, Chapdelaine, Kenny and PSA.
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    Transactions executed by a broker's broker may be executed either 
at the direction of a dealer that wishes to sell a quantity of 
securities or a dealer that wishes to purchase a quantity of 
securities. Broker's brokers work at the direction of the selling 
dealer most of the time. In such cases, the selling dealer agrees that 
the broker's broker will buy a quantity of securities from the selling 
dealer at a specific price and simultaneously sell the securities to 
one or more purchasing dealers at a price (or prices) that allow the 
broker's broker to make an agreed-upon sum on the transaction(s). The 
offsetting purchase and sale transactions by broker's brokers are 
confirmed and submitted for clearing as separate purchase and sale 
transactions. The difference between the purchase and sale prices 
represents the compensation to the broker's broker.\9\ When the 
broker's broker works for the purchasing dealer, the situation 
generally is the same except that the agreement on prices and 
compensation is reached with the purchasing dealer. In all cases, the 
broker's broker maintains strict anonymity between the selling and 
purchasing dealers. Even the dealer directing the broker's broker to 
execute a transaction cannot learn the identity of the broker's 
broker's contra-party.

    \9\ For example, the broker's broker might confirm to the 
selling dealer at a dollar price of $99.90 and confirm to the 
purchasing dealer at a price of par. The difference between the two 
prices is the compensation to the broker's broker. In some cases, 
the broker's broker purchases one block of securities from the 
selling dealer and sells the securities to two or more other 
dealers, in smaller blocks, at different prices. In these cases, the 
transaction with the selling dealer is confirmed and cleared as one 
transaction at a specific price, while the offsetting sale 
transactions are confirmed separately at the prices agreed upon.
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    Accordingly, even though the transactions of broker's brokers are 
executed at the direction of other dealers, the transactions reasonably 
can be viewed as separate, offsetting purchase and sale transactions. 
For purposes of the proposed transaction fee, the Board believes that 
this is the correct analysis. A broker's broker with a high transaction 
volume should be assessed proportionately more in transaction fees than 
a broker's broker with a low transaction volume. Were the transactions 
of broker's brokers found not to be separate transactions, broker's 
brokers would not be subject to the proposed transaction fee at all.

    The total transaction fees levied against all broker's brokers 
would be exactly proportionate to the total inter-dealer transaction 
volume of all broker's brokers.

    A number of commentators stated opposition to the proposed 
transaction fee because the total fees that would be generated by 
broker's brokers transactions would be disproportionate to the 
percentage of broker's brokers in the overall dealer population.\10\ 
The Board estimates that approximately 35% of the par value of inter-
dealer transactions reported to it under rule G-14 have a broker's 
broker on the sale side of the transaction and therefore 35% of the 
transaction fee would be derived from broker's brokers. That this 
percentage would be disproportionate to the percentage of dealers who 
are broker's brokers is not surprising since broker's brokers execute 
comparatively high numbers of inter-dealer municipal securities 
transactions, i.e., they participate very heavily in this portion of 
the market. In contract, broker's brokers do no underwriting and 
consequently would pay zero percent of the underwriting assessment.

    \10\ Cantor, Chapdelaine, Ellwood, EMR, Hartfield, Kenny, PSA, 
and Tullett. One commentator, for example, notes that ``[i]t is . . 
. inequitable for twenty brokers' brokers who compose less than 1% 
of the over 2700 broker-dealers registered with the MSRB to pay 
twenty-five to thirty-three percent of the new transaction fee'' 
(PSA).
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    Under the proposed rule change, as amended, broker's brokers would 
contribute less than 11 percent of Board revenues.\11\ This latter 
percentage shows the effect of blending the heavy participation of 
broker's brokers in the inter-dealer market, the nil participation in 
the underwriting market and the payment of $200 per broker in annual 
fees. As discussed more fully below, given the available options for 
allocating fees among dealers based upon their participation in the 
market, the Board does not believe this result to be unreasonable.

    \11\ The 11 percentage figure is based upon the following 
assumptions: $400 billion in interdealer sales transactions during 
the year, generating $2 million in transaction fees for the year; 
the transaction fee effective for the entire year; broker's brokers 
paying an estimated 35 percent of transaction fees; $130 billion in 
new issuance, generating $3.9 million in underwriting fees; and 
2,700 dealers generating $540,000 in annual fees. In FY96, the 
transaction fee would be in effect only for the last nine months, 
reducing the total amount of revenue to the Board and the portion of 
revenue obtained through the transaction fee. Accordingly, in FY96, 
the percentage of fees paid by broker's brokers is estimated to be 
less than 9 percent of total Board revenues.
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    The proposed rule change is not tied to the profitability of 
specific categories of dealers, 

[[Page 58425]]
but rather applies in an identical manner to all inter-dealer 
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transactions.

    Several commentators opposing the proposed rule change noted that 
broker's brokers' profit margins on inter-dealer transactions are 
smaller than those of other dealers and that broker's brokers generally 
do not provide municipal securities services other than the execution 
of inter-dealer transactions.\12\ These commentators accordingly 
believe that the proposed transaction fee would reduce the profits of 
broker's brokers more than those of other dealers. Some commentators 
further suggested that, as a result, the proposed transaction fee would 
cause some broker's brokers to exit the business, reducing liquidity in 
the municipal securities market.\13\

    \12\ Cantor, Kenny, MPI, and R.W. Smith.
    \13\ Kenny and PSA.
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    Although the proposed transaction fee would represent a new cost of 
doing business for broker's brokers, the Board does not believe that, 
at a rate of $.005 per $1,000 par value, it would be a major factor in 
the ongoing viability of broker's brokers. The transaction fee would be 
imposed on all dealers at the same rate. It would apply to all broker's 
brokers in exactly the same way and thus would have no impact on 
broker's brokers competing with each other. Moreover, given that 
certain broker's brokers state that they will be unable to pass the 
transaction fee on to purchasing or selling dealers,\14\ the Board does 
not believe the proposed fee would provide any disincentive to the use 
of broker's brokers.

    \14\ Chapdelaine and Kenny.
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    As a matter of policy, the Board does not believe that it would be 
advisable to exempt or to set lower rates for transactions executed by 
a specific category of dealers such as broker's brokers. The Board 
nevertheless is sensitive to the profitability concerns of broker's 
brokers and acknowledges that, on average, the profits earned by 
borker's brokers in proportion to their inter-dealer transactions may 
be lower than for other dealers. Broker's brokers execute all of their 
transactions on a ``riskless'' basis, i.e., they only execute orders 
when there already exists an offsetting order. The compensation to 
dealers for executing such ``riskless'' transactions normally is lower 
than the compensation received for transactions sold from inventory, 
where market risk has been undertaken. Any dealer may execute riskless 
transactions. The Board did not and could not propose a lower 
transaction fee for ``riskless'' transactions because there is no 
mechanism for reliably identifying an inter-dealer transaction as 
``riskless.'' It should be noted, however, that if such a mechanism 
were to become available, and a lower fee were established for 
``riskless'' transactions, it would be necessary to raise Board fees in 
other areas to compensate for the reduction in revenue.

Need for Additional Revenue

    Some commentators suggested that the Board does not need the 
additional revenue that would be raised by the proposed rule 
change,\15\ that the Board should consider scaling back operations and 
expenses in a period of industry contraction,\16\ or that the Board has 
not considered how changes in underwriting volume or other factors may 
affect Board revenues in the future.\17\

    \15\ Hartfield. In addition, one commentator suggested that the 
Board would raise more from the transaction fee than the Board has 
projected. The Board has estimated $400 billion in annual 
transaction volume based upon nine months of actual sell-side trade 
data submitted to the Board under rule G-14, from January 1995 
through September 1995. This commentator estimates the annual level 
at closer to $700 billion, based in part upon reports of $48 billion 
in ``compared municipal transactions'' for July 1995. This July 
figure apparently was provided to the commentator by National 
Securities Clearing Corporation. Since the July figure given is 
approximately double the sales transactions tracked by the Board for 
July, it appears that the numbers being used by the commentator 
represent the par value of each buy-side and sell-side added 
together. The fee under the proposed rule change, however, would be 
assessed for only the sell-side of transactions. (The commentator 
was Kenny.)
    \16\ Kenny.
    \17\ R.W. Smith.
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    The Board has budgeted approximately $7.5 million in operating 
expenditures and $200,000 in capital expenditures in FY96 and expects 
its FY97 operating budget to be approximately $8.4 to $8.7 million, 
with capital expenditures of about $1 million. While these projections 
do represent substantial increases over actual operating expenditures 
in FY95 (which were approximately $6.6 million, unaudited), the Board 
does not agree with the commentators' suggestion that the Board should 
scale back its regulatory functions and projects during cyclical 
periods of market contraction. In fact, there may be a need for 
increased regulatory vigilance during these periods. In addition, many 
ongoing Board projects affecting the budget--such as completion of the 
Board's Transaction Reporting System, the continued operation of the 
Official Statement/Advance Refunding System, and the planned Job 
Delineation Survey for professional qualification examinations--are 
long-range projects which are critical to regulation of the market and 
are not logically related to cyclical market activity.
    The Board's policy is to maintain cash and liquid assets equal to 
six months' to one year's operating expense. This reserve amount at the 
end of the Board's 1995 fiscal year (September 30, 1995) was 
approximately $6.3 million (unaudited). Without the proposed rule 
change, the Board would start FY97 below the minimum level of reserves 
required by Board policy and would be expected to exhaust almost all 
reserves by the end of FY97. With the proposed rule change, cash and 
liquid assets at the end of FY96 are projected to be within the range 
established by the Board's policy. The Board reviews projected new-
issue volume regularly, along with other budgetary matters, and in 
doing so, reviews and sets fee levels to meet the Board's policy. Under 
the proposed rule change, the Board would regularly review transaction 
volume as well.

Proposed Alternative Fee Structures

    A number of commentators suggested that Board fees should be 
imposed based upon the revenues earned by dealers, rather than 
transaction volume.\18\ There also have been suggestions that the Board 
raise its annual fee or impose flat fees for dealer categories to 
obtain needed revenue.\19\ The Board has considered these and a number 
of other suggestions, but continues to believe that the combination of 
annual fees, underwriting assessments and transaction fees included in 
the proposed rule change represents the best available, auditable, fee 
structure.

    \18\ Barr Brothers, Cantor Fitzgerald, Hartfield, MPI, and the 
PSA.
    \19\ E.g., PSA and PSA II.
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    There is no source of ``municipal securities revenue'' that 
could be used to produce an auditable fee structure for the Board.

    The Board has considered carefully whether Board fees should be 
linked in some way to the ``municipal securities revenues'' of dealers. 
Based on the advice of its outside auditors, the Board has concluded 
that it could not adopt a fee based on the ``municipal securities 
revenue'' unless this term is clearly defined and uniformly and 
computed by dealers and unless such computations are independently 
audited prior to being reported to the Board. Without these 
requirements being met, the Board would be in danger of having its own 
audited financial statements qualified if it were to assess fees linked 
to ``municipal securities revenue.''
    The Board has been unable to locate any source of audited 
information that 

[[Page 58426]]
uniformly calculates and identifies ``municipal securities revenue'' 
earned by securities firms and dealer banks. Even if he Board were, by 
rule, to define ``municipal securities revenue,'' establish accounting 
rules for its computation, and require each dealer to use these rules 
to perform these calculations, it also would be necessary for each 
dealer to obtain an independent audit of the calculation before the 
figures could be used to generate fee assessments. The Board believes 
that the high cost to the dealer community of achieving compliance with 
these requirements would make this method of fee assessment 
impractical.

    Increasing annual fees above the proposed $200 level, or the 
creation of ``dealer categories'' with relatively large assessments 
for low-volume dealers, would create barriers to participation in 
the municipal securities market by low-volume dealers.

    The Board also has considered the suggestion of a commentator \20\ 
that the annual fee could be increased to $1,000. The Board currently 
receives annual fees from approximately 2,700 dealers. The commentator 
therefore estimates that a $1,000 fee would raise $2.7 million and 
could be implemented in lieu of the proposed transaction fee.

    \20\ PSA II.
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    Of the approximately 2,700 dealers currently paying the Board 
annual fees, only approximately 850 have reported any inter-dealer 
transactions to the Board since January 1995.\21\ Given that the 
remaining dealers have not reported any inter-dealer transactions, the 
Board believes that the remaining entities either: (1) Are merely 
executing occasional municipal securities transactions as an 
accommodation to customers requesting them to do so; or (ii) are not 
active at all in the inter-dealer market, but wish to remain capable of 
executing municipal securities transactions in the future. Raising the 
annual fee to $1,000 likely would result in the list of dealers 
eligible to execute transactions in municipal securities dropping in 
size from 2,700 to substantially under 1,000. This would decrease the 
revenue expectations for a $1,000 annual fee to $1 million--only 
$460,000 more than is expected from the proposed $200 annual fee.

    \21\ This figure, which is obtained from the Board's Transaction 
Reporting System, is approximate because reporting of executing 
dealer identities (as contrasted with clearing dealer identities) 
became mandatory only in July 1995. The figure nevertheless fits 
well with other estimates of the number dealers that execute inter-
dealer transactions.
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    In amending the proposed rule change, the Board carefully 
considered whether it should increase the $100 annual fee at all, since 
a larger annual fee might constitute a barrier to low-volume dealers 
participating in the market. In fact, a low-volume dealer has commented 
in opposition to the proposed $100 increase in annual fee.\22\ The 
Board has concluded that the proposed $200 annual fee is not a 
significant barrier for dealer participation in the market; however, 
the Board is concerned that a much more substantial barrier would be 
created by a $1,000 fee and accordingly believes that a $200 annual fee 
should be the maximum at this time.

    \22\ Sonoma.
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    The Board also has considered suggestions that categories of 
dealers be created based upon market indicators such as underwriting 
volume and transaction volume, and that all dealers in a specific 
category be annually assessed the same flat fee (``flat fee 
proposals'').\23\ The flat fee proposals reviewed by the Board are 
similar to the proposals to raise annual fees to $1,000 in that each 
depends heavily upon obtaining a higher percentage of board revenue 
from dealers having a relatively low percentage of market activity. As 
noted above, however, dramatically raising fees for dealers with little 
or no market activity is unlikely to have the desired revenue effect 
because lower-volume dealers simply will drop out of the market when 
faced with high annual fees. In addition, the Board is concerned that 
relatively high annual fees for low-volume dealers may constitute an 
inappropriate barrier to participation in the market by these dealers.

    \23\ Kenny II and PSA II.
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    In effect, the proposed rule change does ``categorize'' dealers 
based on their market activity by assessing separate fees based on 
underwriting activity and transaction volume, and assessing a flat $200 
annual fee for all dealers. Each dealer pays a particular fee amount 
based on its own underwriting and transaction volume. The Board does 
not believe that it would be appropriate to re-adjust the allocation of 
fees by creating other categories, merely to shift fee burdens to lower 
volume dealers.

Using Dealer Participation in the Market for Measuring Fee Assessment

    In proposing alternative fee structures, several commentators 
criticized the general concept of levying fees based heavily upon 
measures of dealer participation in the municipal securities market 
such as underwriting volume and transaction activity. In addition to 
the suggestions that much higher annual fees be assessed, or that 
``municipal securities revenues'' be used for fee assessment, another 
criticism was made that assessing dealers based on their transaction 
activity does not fit within `'value-added tax methodologies'' that 
look to the value added to a product to determine a tax to be paid, 
rather than the activity of market participants.\24\

    \24\ R.W. Smith.
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    The Board has carefully considered suggestions for a totally 
different approach in its fee assessment structure, but has concluded 
that assessments based upon objective measures of participation in the 
market still represent the best method for funding Board operations. 
After closely examining the various alternative measures of dealer 
participation in the market--including the suggestions for using 
``municipal securities revenue''--the Board has concluded that 
underwriting activity and inter-dealer transaction volume are the best 
available and auditable means upon which to base fees. These measures 
of dealer activity are admittedly imperfect because they do not track 
every important activity in the market, e.g., customer transactions. 
There is, however, currently no available source of customer 
transaction data. The Board is working on expanding the transaction 
reporting system to obtain customer transaction data and this component 
of the program is now expected to be in place in early 1998. The Board 
will review the use of customer transaction activity as a means of 
assessing fees when additional reliable information becomes available. 
The Board believes that, until that time, the proposed rule change 
presents a reasonable, practical and fair fee structure for funding 
Board operations.

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 is requesting the Commission to make the proposed change 
to rule A-14 on the Annual Fee 

[[Page 58427]]
effective for Board fiscal year 1996, i.e., that it become effective as 
of October 1, 1995, for reasons discussed above. The Board is 
requesting that the proposed change to rule A-13 on fee assessments, 
and the corollary change to rule G-14 on reports of sales and 
purchases, be made effective on January 1, 1996, also for reasons 
discussed above.

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 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 December 18, 1995.

    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. 95-28868 Filed 11-24-95; 8:45 am]
BILLING CODE 8010-01-M