[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24990-24993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12384]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37197; File No. SR-MSRB-95-13]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes 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

May 10, 1996.

I. Introduction

    On August 11, 1995 the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB) submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to change the fees assessed under 
Rules A-13 and A-14, as well as to change the reporting requirements 
under Rule G-14. The proposed rule change was published for comment in 
the Federal Register (``Original Proposal'').\3\ In November 1995, the 
MSRB submitted Amendment No. 1 to the proposed rule change which was 
also published for comment (``Amended Proposal'').\4\ The Commission 
received twenty-three comment letters in all. For the reasons discussed 
below, the Commission is approving the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 36150 (August 23, 1995), 
60 FR 45197 (August 30, 1995).
    \4\ Securities Exchange Act Release No. 36492 (November 20, 
1995), 60 FR 58422 (November 27, 1995).
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II. Description and Scope of the Proposed Rule Change

    The proposal changes the MSRB's existing fee structure to impose, 
effective March 1, 1996, transaction-based fees on inter-dealer 
transactions. The proposal establishes a transaction fee of $.005 per 
$1,000 par value of bonds on all inter-dealer sales transactions, and 
effective October 1, 1995, increases the annual fee, applicable to each 
broker, dealer, and municipal securities dealer who conducts municipal 
securities business, from $100 to $200. Effective March 1, 1996, the 
proposal permits the MSRB to use reported transaction information for 
the purpose of assessing transaction fees.
    Rule G-14 requires each inter-dealer transaction that is eligible 
for automated comparison to be reported to the MSRB through National 
Securities Clearing Corporation, the central facility provider for the 
automated comparison process. The corollary change to Rule G-14 under 
the proposal authorizes the MSRB to use the reported transaction 
information to assess inter-dealer transaction fees. The MSRB will send 
monthly invoices to dealers that report inter-dealer sales transactions 
on their own behalf, and/or on behalf of another dealer.\5\ The dealer 
will be responsible for the timely payment of the entire fee amount to 
the MSRB, but the MSRB expects that clearing dealers will pass through 
the fees to executing dealers based upon their transaction volume. To 
assist the clearing dealer, the invoice will separate out the fees due 
on the transactions submitted by the clearing dealer on behalf of 
identified executing dealers.\6\ As improvements are made in the timely 
and accurate reporting of transactions under Rule G-14, including the 
correct identification of executing brokers, the MSRB will consider 
revisions in the billing procedure to accommodate direct billing of 
executing brokers.
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    \5\ Under the proposal, the MSRB will bill only for those trades 
for which the buy and sell sides ultimately have agreed on trade 
details such as price, transaction amount, and value.
    \6\ Rule G-14 requires that in each inter-dealer transaction the 
clearing dealer identify the executing dealer on whose half the 
transaction is reported. Nevertheless, trades are reported lacking 
the executing broker's identifier. The fees due on those trades will 
appear on the clearing dealer's invoice assigned to ``blank''.
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    As explained in its filing, the proposal is intended to increase 
revenue to the MSRB to cover budgetary expenditures. The MSRB 
anticipates its technology expenditures to rise over the next few years 
as it implements transparency

[[Page 24991]]

improvements with its institutional and retail transaction reporting 
system.
    The MSRB's rationale for implementing inter-dealer transaction fees 
is that dealers should be assessed fees based upon their level of 
participation in the market. The MSRB understands that the transaction 
fee will have a substantial effect on participants whose transaction 
activity is primarily or exclusively in the inter-dealer market.\7\
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    \7\ In recognition of this fact, and in response to concerns of 
commenters and the Commission, the MSRB amended the filing to reduce 
the originally proposed transaction fee by 50% from $.01 to $.005 
per $1,000 par value. The amendment left intact the $.03 per $1,000 
underwriting assessment.
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III. Summary of Comments

    The Commission received thirteen comment letters on the rule change 
as originally proposed \8\ and an additional ten comment letters on the 
amended proposal.\9\ Of the twenty-three comment letters received, 
twenty-one were from municipal securities broker's brokers who opposed 
the aspect of the proposal which would establish an inter-dealer 
transaction fee.\10\
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    \8\ See letters from Peter C. Byram, Senior Vice President, J.J. 
Kenny Drake, to Secretary, SEC, dated September 7 1995 (``J.J. Kenny 
letter 1''); from Richard G. McDermott, Jr., President, Chapdelaine 
& Co., to Secretary, SEC, dated September 11, 1995 (``Chapdelaine 
letter''); from John J. Lynch, Jr., Executive Vice President, J.F. 
Hartfield & Co., Inc., to Secretary, SEC, dated September 12, 1995 
(``Hartfield letter''); from Richard W. Smith, President, RW Smith & 
Associates, Inc., to Jonathan G. Katz, Secretary, SEC, dated 
September 13, 1995 (``RW Smith letter 1''); from Thomas G. Caffrey, 
President, Titus and Donnelly, Inc., to Secretary, SEC, dated 
September 14, 1995 (``Titus letter''); from Patricia MacGeorge, 
Treasurer, EMR Securities, Inc., to Jonathan G. Katz, Secretary, 
SEC, dated September 15, 1995 (``EMR letter''); from Robert J. 
Ellwood, President, R.W., Ellwood & Co., Inc., to Secretary, SEC, 
dated September 18, 1995 (``R.W. Ellwood letter 1''); from James J. 
Smith, President, Smith Peters & Stark, to Jonathan G. Katz, 
Secretary, SEC. dated September 18, 1995 (``Smith Peters letter''); 
from Brian Kelly, President, Municipal Partners, Inc., to Secretary, 
SEC, dated September 19, 1995 (``Municipal Partners letter''); from 
John V. Kick, Treasurer, Barr Brothers & Co., Inc., to Secretary, 
SEC, dated September 19, 1995 (``Barr letter''); from James Avena, 
President, Tullett and Tokyo Securities, Inc., to Jonathan G. Katz, 
Secretary, SEC, dated September 19, 1995 (``Tullett letter 1''); 
from Glenn Grossman, Senior Managing Director Cantor Fitzgerald, to 
Jonathan G. Katz, Secretary, SEC, dated September 19, 1995 (``Cantor 
letter''); and from George Brakatselos, Vice President, Public 
Securities Association, to Secretary, SEC, dated September 20, 1995 
(``PSA letter 1''). Letters were also submitted to the MSRB and 
forwarded to the Commission. See letters from John B. Licata, Chief 
Executive Officer, Sonoma Securities Corp., dated October 10, 1995 
(``Sonoma Letter''), from George Brakatselos, Vice President, Public 
Securities Association, to Mr. Christopher Taylor, Executive 
Director, MSRB dated November 1, 1995 (``PSA letter 2''), and from 
Peter C. Byram, Senior Vice President, J.J. Kenny Drake, Inc., to 
Board of Directors, MSRB, dated September 19, 1995 (``J.J. Kenny 
Drake letter 2'').
    \9\ See letter from Richard W. Smith, President, RW Smith & 
Associates, Inc. to Jonathan G. Katz, Secretary, SEC. dated November 
8, 1995 (``RW Smith letter 2''); from Dominick F. Antonelli, Chief 
Operating Officer, Roosevelt & Cross, Inc., to Robert Colby, Deputy 
Director, SEC, dated November 9, 1995 (``Roosevelt letter''); from 
the employees of RW Smith & Associates, Inc., to Jonathan G. Katz, 
Secretary, SEC, dated December 5, 1995 (``Smith employees' 
letter''); from Richard W. Smith, President, RW Smith & 
Associations, Inc., to Jonathan G. Katz, Secretary, SEC, dated 
December 6, 1995 (``RW Smith letter 3''); from George Brakatselos, 
Vice President, Public Securities Association, to Secretary, SEC, 
dated December 8, 1995 (``PSA letter 3''); from Peter C. Byram, 
Senior Vice President, J.J. Kenny Drake, to Jonathan G. Katz, 
Secretary, SEC, dated December 6, 1995 (``J.J. Kenny letter 3''); 
from O. Gene Hurst, President, Wolfe & Hurst Bond Brokers, Inc., to 
Jonathan Katz, Secretary, SEC, dated December 8, 1995 (``Wolfe 
letter''); from Robert J. Ellwood, President, R.W. Ellwood & Co., 
Inc., to Secretary, SEC, dated December 12, 1995 (``R.W. Ellwood 
letter 2''); from John J. Lynch, Jr., Executive Vice President, J.F. 
Hartfield & Co., Inc., to Secretary, SEC, dated December 15, 1995 
(``Hartfield letter 2''); and from James Avena, President, Tullett 
and Tokyo Securities, Inc., to Jonathan G. Katz, Secretary, SEC. 
dated December 15, 1995 (``Tullett letter 2'').
    \10\ These firms transact exclusively with other dealers and not 
with issuers or public investors. The two nonbroker's broker comment 
letters received by the Commission were from the Public Securities 
Association (``PSA''). The PSA also sent a comment letter to the 
MSRB recommending an alternative fee structure. All three PSA 
letters focused on the proposals' impact on the brokers' broker.
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A. Comments on the Original Proposal

    The comments focused almost exclusively on the new transaction fee. 
All but one of the broker's brokers commented that the proposed fee 
generated an inequitable burden on the broker's broker and in effect 
amounted to a double assessment on transactions involving a broker's 
broker.\11\
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    \11\ The Sonoma letter opposed the increase in the annual fee, 
arguing that the increase was not fair to a small firm with little 
municipal securities business.
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    Two commenters suggested the MSRB consider different fee structures 
that might achieve the MSRB's goals. The PSA suggested that the MSRB 
eliminate both the existing annual fee and underwriting assessment and 
establish a new annual fee.\12\ The PSA proposed an annual fee based on 
a municipal securities firm's underwriting ranking. Depending on the 
firm's ranking, a firm would pay between $1,000 and $100,000 per year. 
The PSA believes this proposal distributes the financial burden more 
evenly and would simplify the billing process.
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    \12\ See letter from George Brakatselos, Vice President, Public 
Securities Association, to Mr. Christopher Taylor, Executive 
Director, MSRB, dated November 1, 1995 (``PSA letter 2'').
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    Another commenter, a broker's broker, offered three alternatives to 
the MSRB's proposal to initiate an inter-dealer transaction 
assessment.\13\ This brokers' broker suggested moving to a flat fee 
structure based on a firm's aggregate market activity. The suggestion 
is similar to the PSA's, but would use both transaction data and 
underwriting data to determine a firm's level of market participation. 
The annual fee would range from $1,000 for the smallest 1,700 firms to 
$20,000 for the top 50 firms. As a second alternative, Kenny suggested 
the MSRB meet its funding needs by maintaining the underwriting 
assessment at $.03 per $1,000 par value and increasing the annual fee 
for all members to $1,000. Lastly, Kenny suggested that a logical 
alternative would be for the MSRB to initiate a revenue-based 
assessment, thus capturing the true participation of each firm in the 
municipal securities market.\14\
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    \13\ See letter from Peter C. Byram, Senior Vice President, J.J. 
Kenny Drake, Inc. to Board of Directors, MSRB, dated September 19, 
1995 (``J.J. Kenny letter 2'').
    \14\ Many commenters echoed the opinion that an assessment based 
on revenues, similar to that used by the National Association of 
Securities Dealers and the New York Stock Exchange, would be a more 
equitable method of determining a firm's participation in the 
municipal securities market. See Hartfield letter, Titus letter, 
Municipal Partners letter, Cantor letter, Barr letter, PSA letter 1, 
RW Smith letter 2, and Hartfield letter 2.
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    In response to these comments, the MSRB reduced the proposed 
transaction fee by 50%, but determined to retain its proposed 
structural changes.\15\ The MSRB defended its decision to include sales 
transactions reported by brokers' brokers in the inter-dealer 
assessment, noting that broker's brokers represent the sell side on 35% 
of the par value of reported inter-dealer transactions. In comparison, 
broker's brokers do not participate in underwriting and consequently 
would pay no percentage of the underwriting assessment. The MSRB does 
not find the transaction fee to be disproportionate or unduly 
burdensome because the broker's brokers comprise a very significant 
portion of the inter-dealer market. The MSRB asserts that, for the 
purposes of the transaction fee, transactions involving a broker's 
broker, although executed at the direction of other dealers, are to be 
viewed as separate offsetting purchase and sale transactions. 
Accordingly, the fee does not amount to a double assessment for the 
``same'' transaction but amounts to a fee assessed on any participant 
on the sell side of any inter-dealer transaction.
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    \15\ Securities Exchange Act Release No. 36492 (November 20, 
1995), 60 FR 58422 (November 27, 1995).
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    The MSRB also believes its proposed transaction fee is likely to be 
more easily administered than the alternatives offered by the PSA and 
other commenters. The MSRB stated that it

[[Page 24992]]

considered whether its fees could be derived from the total municipal 
securities revenues of dealers, and based on the advice of their 
outside auditors, concluded to not adopt such an assessment. The MSRB 
stated that the term ``municipal securities revenue'' is neither 
clearly defined nor uniformly computed by dealers. In addition, the 
MSRB believes it could receive a qualified opinion on its audited 
financial statements unless each dealer had its own ``municipal 
securities revenue'' computations independently audited prior to 
reporting them to the MSRB. The MSRB noted that even if it were, by 
rule, to define ``municipal securities revenue'', establish accounting 
rules for its computation, and require each dealer to use the 
accounting rules to compute ``municipal securities revenue''. it would 
still be necessary for each dealer to have the computation 
independently audited. The MSRB determined that the high cost to the 
dealer community of computing the ``municipal securities revenue'' 
would make this method of fee assessment impractical. The MSRB also 
considered the suggestions for raising the annual fee to $1,000 or 
implementing a staggered schedule based on the dealer's underwriting 
and/or transaction volume. The MSRB asserted that a $1,000 or more 
annual fee would constitute an inappropriate barrier to participation 
in the municipal securities market. The MSRB noted that in 1995, only 
850 of the approximately 2,700 municipal securities dealers reported 
any inter-dealer transactions. Therefore, the MSRB surmised that 
approximately 1,850 dealers are merely executing an occasional 
municipal securities transaction as an accommodation for a customer, or 
are not active at all, but wish to remain capable of executing 
municipal securities transactions in the future. The MSRB concluded 
that raising the annual fee to $1,000 or more would likely result in 
only 850 or so firms continuing to pay the annual fee and participate 
in the municipal securities market. If this were to happen, the revenue 
projected would not be sufficient to meet the administrative needs of 
the MSRB.

B. Comments on the Amended Proposal

    The Commission received ten comment letters on the MSRB's amended 
proposal that reduced the transaction fee from $.01 to $.005 per $1,000 
par value of inter-dealer sales transactions. The commenters reiterated 
their concerns that a fee on inter-dealer transactions was an 
inappropriate method of measuring a firm's participation in the 
municipal securities market. The broker's brokers continued to opine 
that the MSRB did not fully understand the role of a broker's broker. 
The broker's brokers argued that any fee assessed on their sale 
transactions was in effect a double assessment on the dealer's sale 
transaction and thus inequitable.

IV. Discussion

    The Commission must approve a proposed MSRB rule change if it finds 
that the proposal is consistent with the requirements of the Act and 
the rules and regulations thereunder that govern the MSRB.\16\ The 
Commission believes that the approval of the proposal meets the above 
standard. Specifically, Section 15B(b)(2)(J) of the Act provides 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.\17\
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    \16\ 15 U.S.C. 78s(b). The Commission's statutory role is 
limited to evaluating rules as proposed against the statutory 
standards. See S. Rep. No. 75, 94th Cong., 1st Sess., at 13 (1975.)
    \17\ 15 U.S.C. 78o-4.
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    The MSRB and the broker's brokers both recognize broker's brokers 
as significant contributors to the municipal securities market. The 
MSRB contends that broker's brokers should be subject to the inter-
dealer transaction fees in the same proportion as they participate in 
the inter-dealer transaction volume. In contrast, the broker's brokers 
believe that their sale transactions should be excluded from the inter-
dealer assessment because they are in effect a part of the dealer's 
sale transactions which are already assessed a fee.
    The Commission believes that as participants in the municipal 
marketplace, broker's brokers, like other dealers, should contribute to 
defraying the administrative costs of the MSRB, particularly as the 
MSRB undertakes initiatives to improve transparency in the municipal 
securities market. Historically, broker's brokers have paid only the 
minimal $100 annual fee despite their volume of transactions. The 
Commission believes that inter-dealer transaction volume is a 
reasonable indicator of a firm's participation in the municipal 
market.\18\ This measure will be improved with the addition of 
institutional and retail transaction volume as the MSRB's transparency 
program expands in the coming years.
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    \18\ The MSRB is projecting inter-dealer sales volume of $400 
million in fiscal year 1996, with broker's brokers accounting for 
$140 million of it. Accordingly, broker's brokers will pay 
approximately $700,000 in inter-dealer transaction fees while 
dealers will pay approximately $1.3 million in inter-dealer 
transaction fees. In addition, many dealers may also incur an 
underwriting assessment.
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    The Commission recognizes that inter-dealer transactions involving 
broker's brokers also involve a sell transaction by another dealer that 
is itself subject to the transaction fee. This is true however, not 
just for transactions involving broker's brokers, but for any riskless 
principal trade between dealers. Excluding broker's brokers' sales from 
transaction fees would largely insulate broker's brokers from payment 
of fees, not withstanding their significant role in municipal 
securities markets. Although the inter-dealer transaction fee adds a 
new cost to inter-dealer transactions, for the principal seller as well 
as the broker's broker, the Commission does not believe that such fees 
will significantly interfere with inter-dealer transactions involving 
broker's brokers, given the fee's relative small size and the 
usefulness of broker's brokers in conducting inter-dealer transactions 
efficiently and anonymously. While assessing fees based on municipal 
revenues might lead to fees that provide a more accurate assessment of 
a firm's participation in the municipal market, the Commission believes 
that such an approach currently raises definitional and reliability 
issues as discussed above.
    Many of the commenters were troubled that a small community of the 
municipal market would contribute a large portion of the MSRB's 
funding.\19\ Accordingly, the MSRB reduced the inter-dealer transaction 
fee 50% to $.005 per $1000 par value.
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    \19\ See J.J. Kenny letter 1, Hartfield letter, Titus letter, 
EMR letter, Ellwood letter 1, and PSA letter 1.
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    The Commission does not view the proposed fees as inconsistent with 
the purposes of the Act. The Commission believes the MSRB's fees should 
be based, to the extent possible, on comprehensive measures of 
participation in the municipal market. To this end, the Commission 
encourages the MSRB to continue to consider the feasibility of a 
revenue-based fee structure, based on the municipal revenues of 
brokers, dealer, and municipal securities dealers. The Commission 
recognizes that such an approach involves definitional and reliability 
issues that would have to be resolved before a revenue-based fee could 
be adopted and therefore this fee structure is not a viable option in 
light of the MSRB's immediate revenue needs. The Commission urges the 
MSRB to revisit the feasibility of a revenue-

[[Page 24993]]

based fee structure and work with market participants to address the 
issues raised by this concept. In developing its fees the Commission 
encourages the MSRB to continue to build a consensus among market 
participants on how best to allocate the burden of funding the MSRB 
operations.

V. Conclusion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the Municipal Securities Rulemaking Board and, 
in particular, with the requirements of Section 15B of the Act.\20\ 
Specifically, the Commission believes the proposal is consistent with 
the requirements of Section 15B(b)(2)(J) that the MSRB's rules be 
designed, among other things, to provide that each municipal securities 
broker and each municipal securities dealer shall pay to the MSRB such 
reasonable fees and charges as may be necessary or appropriate to 
defray the costs and expenses of operating and administrating the 
Board.
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    \20\ 15 U.S.C. Sec. 78o-4.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-MSRB-95-13) is approved.

    By the Commission.

    Dated: May 10, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12384 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M