[Federal Register Volume 65, Number 48 (Friday, March 10, 2000)]
[Notices]
[Pages 13067-13069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5917]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42492; File No. SR-MSRB-00-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Underwriting and Transaction Assessments, Pursuant to Rule A-13

March 2, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 7, 2000, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change. 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.
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
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I. Self-Regulatory Organizations Statement of the Terms of 
Substance of the Proposed Rule Change

    The MSRB is filing a proposed amendment to its rule A-13 on 
underwriting and transaction assessments for brokers, dealers and 
municipal securities dealers. Rule A-13 currently provides for fee 
assessments based on transaction activity, as measured by the par value 
of inter-dealer sales, and on under writing activity. The proposed rule 
change would change the fee assessment based on transaction activity to 
include the par value of sales to customers. This would provide for 
necessary increases in revenue sufficient to offset declines in 
underwriting assessments and increases in Board expenses. In review of 
the present need to bring Board revenues into better balance with 
necessary expenditures, the Board is requesting Commission approval of 
the proposed rule change by April 1, 2000.

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 Section 
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

1. Purpose
    The purpose of the proposed rule change is to help provide 
sufficient revenues to fund Board operations and to allocate fees among 
broker, dealers and municipal securities dealers (collectively 
``dealers'') in a manner that more accurately reflects each dealer's 
involvement in the municipal securities market. The proposed rule 
change would accomplish these purposes by revising the current fee 
based on transaction activity to include, as a basis for measuring 
involvement in the market, sales of municipal securities by dealers to 
customers. The proposed rule change would also exclude certain short-
term securities from the new customer transaction-based fee assessment 
and from the existing fee assessment based on inter-dealer 
transactions.\3\
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    \3\Securities for which transaction fees are not assessed are 
those with 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. The rationale for excluding these securities 
is discussed below.
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Current Fee Structure
    Rule A-13 currently provides for an assessment based on the total 
par value of a dealer's inter-dealer sales transactions in municipal 
securities.\4\ Dealers report these transactions by submitting 
transaction information to the automated comparison system operated by 
National Securities Clearing Corporation (``NSCC''). The Rule A-13 
inter-dealer transaction assessment has been set at $.005 per $1,000 
par value of sales since it was instituted in 1996.
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    \4\The total par value of sales transactions will be referred to 
hereafter as ``transaction activity.''
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    In addition to the assessment based on inter-dealer transaction 
activity, the Board currently levies three other 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 $200 paid by each 
dealer that conducts municipal securities business during the year. In 
addition to the Rule A-13 inter-dealer transaction assessment, Rule A-
13 also provides for an assessment on underwriting activity, based on 
the par value of the dealer's purchases from the issuer of primary 
offerings of municipal securities.\5\
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    \5\The Rule A-13 underwriting assessment fee historically has 
varied, based on new issue volume in the market and the Board's 
revenue needs. Since 1991, Rule A-13 has provided for an assessment 
of $.03 per $1,000 on primary offerings (as defined in Exchange Act 
Rule 15c2-12) of municipal securities that have an aggregate par 
value of at least $1,000,000, that are not ``puttable'' to an issuer 
every two years or less, and that have a final stated maturity of 
two years or more. Since 1992, the Rule A-13 underwriting 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'' to an issuer 
every two years or less. Rule A-13 exempts from underwriting 
assessments those primary offerings which have a final stated 
maturity of nine months or less or which are puttable at least as 
frequently as every nine months until maturity.
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Proposed Fee Structure
    Under the proposed rule change, the transaction-based fee, which 
currently takes into consideration only the amount of a dealer's inter-
dealer sales activity, would be expanded to take into account the 
dealer's sales transactions to customers as well. A rate of $.005 per 
$1,000 par value would be used to calculate assessments for both inter-
dealer and customer transactions.
    The proposed rule change would exclude from the calculation of both 
inter-dealer and customer transaction-based fees certain transactions 
in very short-term instruments: 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. These excluded 
categories of short-term issues are referred to hereafter as 
``municipal commercial paper,'' ``short-term notes,'' and ``variable 
rate demand obligations.'' These instruments are not currently excluded 
from the inter-dealer transaction-based fee, but would be excluded form 
that fee once the proposed rule change becomes effective.
Need for the Proposed Rule Change
Static or Declining Revenues
    The proposed rule change is needed to help bring the Board's 
revenues more closely into balance with expenditures. During the past 
three fiscal years, the greatest part of the Board's revenues--

[[Page 13068]]

69 percent--has come from the underwriting fee. Underwriting fee 
revenue, however, decreased by 16 percent in the last fiscal year 
(``FY'')--from $8,162,250 in FY 1998 to $6,819,726 in FY 1999--as total 
underwriting in the industry declined.\6\ The Board projects a further 
ten percent decrease in underwriting fee revenue in FY 2000,\7\ and 
little or no increase in underwriting volume in the years after 2000. 
In addition, the Board's annual revenue from inter-dealer transaction 
activities has been virtually unchanged over the past three years. 
Thus, the two major current sources of Board revenue are either static 
or declining. If there is no alteration in the fee structure, overall 
revenues are projected to decline six percent between FY 1999 and 2000.
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    \6\Underwriting of long-term municipal securities was $286 
billion in calendar year 1998 but declined in 1999 by more than 20 
percent to $226 billion. See ``A Decade of Municipal Bond Finance,'' 
The Bond Buyer, January 7, 2000, at 30.
    \7\New issues of municipal securities in January 2000 were about 
seven billion dollars, a decline of 35% from the level of January 
1999. Refunding volume decreased more than 90%. See ``January's Deep 
Freeze: New-Issue Volume Lowest Since at Least '95,'' The Bond 
Buyer, February 1, 2000, at 1.
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Increase in Expenses
    During the past five years, due to increased regulatory activities 
and expanded operation of the Municipal Securities Information Library 
(``MSIL'') system,\8\ the Board's expenses have increased from 
$6,716,681 in FY 1994 to $9,849,701 in FY 1999. Much of the Board's 
expenses during this time have derived from development and operation 
of its Transaction Reporting System, which supports market surveillance 
and price transparency functions for the municipal securities 
market.\9\
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    \8\The MSIL is composed of computer systems that store and 
disseminate, to the public and municipal securities enforcement 
agencies, the following information: official statements, advance 
refunding documents, and continuing disclosure of material events; 
political contributions by municipal securities professionals; and 
municipal securities transactions.
    \9\MSIL expenditures during the past five fiscal years totaled 
$16.5 million, more than half of which is for Transaction Reporting 
System development and operations. Since inception, the Transaction 
Reporting System has been enhanced 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 has resulted in revenue that less than offsets 
the marginal cost of production. In January 2000, the Board began 
making available detailed transaction reports. The Board has 
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).
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    In 1999, the Board began to look into possible ways to provide a 
``real-time'' transaction reporting system in the municipal securities 
market to make price and volume information public on a more 
contemporaneous basis than is currently the case. This will continue to 
require budgetary allocations consistent with, or higher than, that 
experienced thus far. In addition, the Board's long-range plans call 
for increased involvement in activities to improve disclosure, which 
may entail substantial modification or enhancement of the Board's 
computer sytems.
Projected Shortfall and Request for Commission Approval
    The proposed amendment, therefore, is necessary to address a 
projected shortfall in Board revenues caused by declining underwriting 
assessments and increases in projected expenses. The Board estimates 
that sales activity for long-term bonds in FY 2000 will be 
approximately $350 billion in inter-dealer trades and $480 billion in 
customer sales.\10\ Assuming the customer transaction fee is effective 
for six months in FY 2000, Board revenues from transaction activity-
based fees during FY 2000 would be about three million dollars.
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    \10\Additional FY 2000 inter-dealer activity in short=term notes 
and short puts (securities excluded from the proposed fee) is 
estimated by the Board as $3.4 billion. Customer sales in the same 
securities are estimated to be $720 billion.
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    The proposed change in the fee structure would bring the Board's 
revenues into better balance with its expenditures. Fiscal year 2000 
expenditures are projected to be $11.98 million. Total revenues, 
including the transaction fees estimated above, are projected to be 
$10.39 million. If the proposed rule change is effective for half the 
current fiscal year, the projected shortfall will be $1.59 million. 
Without any assessment based upon customer trade activity, the 
projected shortfall would be an additional $1.2 million, i.e., the 
total shortfall would be $2.79 million. For this reason, the Board is 
requesting that the Commission approve the proposed rule change prior 
to April 1, 2000, for effectiveness on the same date. In the years 
after 2000, without the proposed fee, there would be an even larger 
shortfall, which would be of serious concern to the Board.
Proposed Fee Structure Better Reflects Dealer's Market Participation
    The Board's goal in determining the underwriting and transaction 
assessments has been to make the fees paid by each dealer reflect the 
dealer's involvement in the municipal securities market. When it 
originally adopted the rule A-13 underwriting fee in 1976, the Board 
stated its intention to broaden the scope of the rule, when possible, 
to reflect market activity occurring after the purchase of a new issue 
from an issuer. Reliable information to measure inter-dealer 
transaction activity first become available in 1995 as part of the 
Board's Transaction Reporting Program. This information, reported by 
dealers to the Board under Rule G-14, is the basis of the inter-dealer 
transaction fee that went into effect in 1996. In adopting the inter-
dealer transaction fee, the Board noted that, together, the 
underwriting and inter-dealer transaction fees would more accurately 
reflect each dealer's participation in the market than the underwriting 
fee alone. At the same time, the Board stated its intention to examine 
customer transaction data when it became available, in order to adjust 
dealer fees even more equitably.\11\
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    \11\See ``Revisions to Board Fee Assessments: Rules A-13, A-14 
and G-14,'' MSRB Reports, Vol. 16, No. 2 (June 1996), at 13-15.
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    Dealers began reporting customer transactions to the Board under 
rule G-14 in March 1998. Combined sales data (i.e., inter-dealer plus 
customer sales) is a better measure of dealer participation in the 
market than is inter-dealer sales data alone, because there is 
substantial activity by dealers that buy securities on the inter-dealer 
market for resale to customers. The Board believes the combination of 
underwriting, inter-dealer and customer transaction fees to be the best 
currently available means for comprehensive measurement of dealer 
participation in the municipal securities market.\12\
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    \12\As an alternative to the proposed transaction-based fee 
structure, the Board considered a revenue-based approach to fees. 
The Board concluded that it may not be feasible to conduct the 
objective audits necessitated by revenue-based fee assessment and, 
therefore, that the transaction-based approach is preferable.
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    Under the proposed rule change, the board would assess transaction 
fees on a monthly basis, based on transactions that dealers report to 
the Transaction Reporting System. Dealer sales to customers (not 
purchases by the dealer from customers) will be used as the measure of 
transaction activity. This avoids double counting when a dealer buys 
and sells a block of securities in the customer market.\13\
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    \13\Similarly, the current inter-dealer transaction fee is 
assessed to the dealer on the ``sell side'' of each trade.
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Exclusions
    After reviewing trade data from the Transaction Reporting System, 
the Board determined to exclude certain

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very short-term municipal issues (e.g., commercial paper, variable rate 
demand obligations and short-term notes) from both the inter-dealer and 
customer transaction assessments.\14\ There are relatively few 
transactions in these issues compared to the market as a whole (less 
than 7 percent of all transactions). However, transactions in these 
extremely short-term issues, which constitute about 51 percent of the 
par value traded, typically have very high par values. To assess a 
transaction activity fee on such issues would result in 
disproportionate fees for the small number of dealers that trade them, 
especially since those dealers also generally will have the highest 
levels of transaction and underwriting activity in issues that are 
subject to fee assessments.\15\
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    \14\Currently, all inter-dealer transactions required to be 
reported to the Board are considered for purposes of the fee 
calculation.
    \15\In connection with the Board's proposal in 1995 to institute 
the inter-dealer transaction fee assessment, several municipal 
``broker's brokers'' expressed a concern that they would be assessed 
a disproportionate share of Board fee revenue. The presently 
proposed rule change would address this concern. Since broker's 
brokers do not effect transactions with customers, the percentage of 
total Board revenue paid by these brokers would decrease when 
customer transactions are included in the fee base.
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2. Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(J) of the Act,\16\ which requires, in pertinent part, 
that the Board's rules shall:

    \16\15 U.S.C. 78o-4(b)(2)(J).
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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 * * *.

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

    The Board does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act in that it 
applies equally to all dealers in municipal securities.

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

    Written comments 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 MSRB 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 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. 
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-00-03 and should be submitted by March 31, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\17 CFR 200.30-3(a)(12).

Jonathan G. Katz,
Secretary.
[FR Doc. 00-5917 Filed 3-9-00; 8:45 am]
BILLING CODE 8010-01-M