Document ID: SEC-2011-0020-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2011-01-05T05:00Z

[Federal Register Volume 76, Number 3 (Wednesday, January 5, 2011)]
[Notices]
[Pages 604-609]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-33269]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63621; File No. SR-MSRB-2010-10]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Consisting of 
Amendments to Rule A-13 To Increase Transaction Assessments for Certain 
Municipal Securities Transactions Reported to the Board and to 
Institute a New Technology Fee on Reported Sales Transactions

December 29, 2010.

I. Introduction

    On September 30, 2010, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change which consists of amendments to 
Rule A-13 to increase transaction assessments for certain municipal 
securities transactions reported to the Board and to institute a new 
technology fee on reported sales transactions. The proposed rule change 
was published for comment in the Federal Register on October 19, 
2010.\3\ The Commission received fifteen comment letters regarding the 
proposed rule change, the MSRB's response, and a supplemental response 
to the MSRB's response.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 34-63095 (October 
13, 2010), 75 FR 64372 (the ``Commission's Notice'').
    \4\ See e-mail from Coastal Securities, Inc., dated November 8, 
2010 (``Coastal Securities Letter''); letter from Bond Dealers of 
America, dated November 9, 2010 (``BDA Letter I''); letter from 
Hartfield Titus & Donnelly, LLC, dated November 9, 2010 (``HTD 
Letter''); letter from the Securities Industry and Financial Markets 
Association, dated November 9, 2010 (``SIFMA Letter I''); e-mail 
from RW Smith Associates, Inc., dated November 9, 2010 (``RW Smith 
Letter''); letter from Southwest Securities, Inc., dated November 9, 
2010 (``Southwest Securities Letter''); letter from the Government 
Finance Officers Association, dated November 9, 2010 (``GFOA 
Letter''); letter from TD Ameritrade Holding Corporation, dated 
November 9, 2010 (``TD Ameritrade Letter''); letter from Edward 
Jones, dated November 9, 2010 (``Edward Jones Letter I''); letter 
from BMO Capital Markets, dated November 9, 2010 (``BMO Letter''); 
letter from Morgan Stanley Smith Barney LLC, dated November 10, 2010 
(``Morgan Stanley Letter''); letter from Lawrence P. Sandor, Senior 
Associate General Counsel, MSRB, dated November 19, 2010 (``MSRB 
Response Letter''); letter from Jeffries & Company, Inc., dated 
November 29, 2010 (``Jeffries Letter''); letter from the Securities 
Industry and Financial Markets Association, dated December 2, 2010 
(``SIFMA Letter II''), letter from Bond Dealers of America, dated 
December 14, 2010 (``BDA Letter II''); letter from Edward Jones, 
dated December 14, 2010 (``Edward Jones Letter II''); and letter 
from Lawrence P. Sandor, Senior Associate General Counsel, MSRB, 
dated December 28, 2010 (``Supplemental MSRB Response Letter'').
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    This order approves the proposed rule change.

II. Background and Description of Proposal

A. Current Sources of MSRB Revenue

    Section 15B(b)(2)(J) of the Exchange Act states that the MSRB's 
rules should ``provide that each municipal securities broker, municipal 
securities dealer, and municipal advisor 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.'' \5\ The MSRB currently levies four types of fees that are 
generally applicable to dealers pursuant to three separate rules.
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    \5\ 15 U.S.C. 78o-4(b)(2)(J).
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    MSRB Rule A-12 provides for a $100 fee paid once by a dealer when 
it first begins to engage in municipal securities activities. MSRB Rule 
A-13 provides for a) an underwriting fee of $.03 per $1000 par value of 
municipal securities purchased in a primary offering (with specified 
exceptions), and b) a transaction fee (the ``transaction fee'') of 
$.005 per $1000 par value of sale transactions of municipal securities 
(with specified exceptions). Finally, MSRB Rule A-14 provides for an 
annual fee of $500 from each dealer who conducts municipal securities 
activities. In addition, since this proposed rule was filed, the MSRB 
has amended Rule A-12 to establish an initial fee of $100

[[Page 605]]

payable by municipal advisors prior to engaging in municipal advisory 
activities and amended Rule A-14 to establish an annual fee of $500 for 
municipal advisors.\6\
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    \6\ See Securities Exchange Act Release No. 63313 (File No. SR-
MSRB-2010-14) (November 12, 2010).
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    According to the MSRB, the transaction fee was last modified in 
2000 when the Board commenced assessments on customer sale transactions 
reported by dealers. The transaction fee has not been increased since 
that date. The MSRB stated in its proposal that approximately 90% of 
its revenue is generated through its underwriting and transaction fees. 
According to the MSRB, in fiscal year 2009, approximately 55% of its 
revenue was generated by underwriting fees and approximately 36% of its 
revenue was generated by transaction fees. The MSRB also stated that 
the underwriting and transaction fees assessed pursuant to Rule A-13 
are generally proportionate to a dealer's activity within the industry, 
as based on the par value amount of underwriting and customer and 
inter-dealer transactions during the year.

B. Proposal

    The MSRB proposes to increase the amount of the transaction fee 
assessed on the par value of inter-dealer and customer sale 
transactions reported to the MSRB by dealers under MSRB Rule G-14(b), 
except for transactions currently exempted from the transaction fee as 
provided in MSRB Rule A-13(c)(iii), from $.005 per $1000 par value to 
$.01 per $1000 par value of such sale transactions. Transactions 
exempted from the transaction fee consist of sale transactions in 
municipal securities that have a final stated maturity of nine months 
or less or that, at the time of trade, may be tendered at the option of 
the holder to an issuer of such securities or its designated agent for 
redemption or purchase at par value or more at least as frequently as 
every nine months until maturity, earlier redemption, or purchase by an 
issuer or its designated agent. The MSRB expects that its proposed 
increase in the transaction fee would generate an estimated $7 million 
in revenue annually.
    In addition, the MSRB proposes to impose a technology fee, assessed 
at $1.00 per transaction for each sale transaction reported to the MSRB 
by dealers, under MSRB Rule G-14(b) (the ``technology fee''). The 
exemptions from the transaction fee, as described above, would not 
apply to the technology fee. The MSRB expects that the new technology 
fee would generate an estimated $10 million in revenue annually. The 
technology fee would be transitional in nature and would be reviewed by 
the MSRB annually to determine whether it should continue to be 
assessed.\7\ The MSRB proposes to use the technology fee to establish a 
technology renewal fund, which would be segregated for accounting 
purposes.
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    \7\ See Supplemental MSRB Response Letter.
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C. Purpose of the Proposed Rule

1. Transaction Fee
    In the proposal, the MSRB stated that the purpose of the proposed 
increase in the transaction fee is to assess reasonable fees necessary 
to defray the costs and expenses of operating and administering the 
MSRB.\8\ Specifically, the MSRB stated that the expenses of the MSRB 
are increasing and additional revenue is necessary to meet projected 
expenses associated with ongoing operations. The MSRB indicated that 
several factors have contributed to the recent, large increase in 
operating expenses. First, over the last two years, the MSRB has 
significantly improved transparency in the municipal securities market 
by developing and implementing market information transparency systems 
including the Short-Term Obligation Rate Transparency (``SHORT'') 
system for interest rate resets and the Electronic Municipal Market 
Access (``EMMA'') system for display of disclosures and trade data. 
Second, effective October 1, 2010, amendments to Section 15B of the 
Exchange Act contained in the Dodd-Frank Wall Street Reform and 
Consumer Protection Act \9\ (the ``Dodd-Frank Act') expanded the MSRB's 
mission to include regulation of municipal advisors and the protection 
of municipal entities. Third, pursuant to the Dodd-Frank Act, the MSRB 
has also been given additional responsibilities in connection with 
providing enforcement and examination support to the Commission, the 
Financial Industry Regulatory Authority (``FINRA''), and the Federal 
bank regulators.
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    \8\ See Commission's Notice, supra note 3.
    \9\ Public Law 111-203, 124 Stat. 1376 (2010).
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2. Technology Fee
    In its proposal, the MSRB stated that it intends to use the 
technology renewal fund to fund replacement of aging and outdated 
technology systems and to fund new technology initiatives. In 
particular, the MSRB stated that funding is needed to ensure the 
operational integrity of the MSRB's information systems, retire and 
update computer hardware and software, and conduct ongoing risk 
management including business continuity activities and system 
maintenance.
    In the proposal, the MSRB stated that it will continue to review 
its assessments on the market participants it regulates to ensure that 
costs of rulemaking are appropriately allocated among the entities it 
regulates. Although the MSRB recognizes that an appropriate allocation 
of such regulatory costs may not be feasible during the transition of 
the MSRB to its broader mission, it stated that it expects to revisit 
the manner in which its activities are funded in the coming years, as 
appropriate. The MSRB also restated its commitment to ensure that its 
assessments are balanced based in large measure on the level of 
activity of all of its regulated entities.
    A more complete description of the proposal is contained in the 
Commission's Notice.\10\
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    \10\ See supra note 3.
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    The MSRB has requested an effective date for the proposed rule 
change of January 1, 2011.

 III. Discussion of Comments and MSRB's Response

    The Commission received fifteen comment letters and two responses 
from the MSRB to the comment letters.\11\ The comment letters and the 
MSRB's responses are discussed in greater detail below.
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    \11\ See supra note 4.
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A. Comments Requesting More Transparency in the Budget Process and 
Additional Justification for the Size and Timing of Revenue Increase.

    Several commenters asked for more transparency in the MSRB's budget 
process and noted that the fee increases were sought without industry 
input prior to the filing of the proposed rule change and that 
additional dialogue with industry participants should have been 
undertaken before determining the appropriate funding levels and manner 
of assessing fees.\12\In the MSRB Response Letter, the MSRB noted that 
``a number'' of the technology systems creating the need for additional 
operating revenue and the technology fee ``are well known to the 
municipal securities industry through the MSRB's prior notice and 
comment process and its filings with the Commission.''\13\ The MSRB 
further explained in the MSRB Response Letter that ``externally facing 
technology initiatives normally must be undertaken through the normal 
MSRB rulemaking process, which includes

[[Page 606]]

extensive opportunity for public comment. The MSRB believes that this 
is the appropriate process for receiving input from industry 
participants with regard to its regulatory and information system 
initiatives, rather than through a process whereby industry 
participants could seek to influence which initiatives the MSRB pursues 
by attempting to limit the resources available to it.''\14\
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    \12\ See GFOA Letter, HTD Letter, Morgan Stanley Letter, RW 
Smith Letter, SIFMA Letter I, Jeffries Letter and Southwest 
Securities Letter.
    \13\ See MSRB Response Letter.
    \14\ Id.
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    Commenters also stated that the MSRB did not provide sufficient 
justification for the size of the proposed transaction fee increase and 
the imposition of the technology fee,\15\ with several commenters 
stating that the MSRB should have provided details on matters such as 
projections of operational costs, plans for demonstrating controlling 
such costs, expected revenue in future years, projected budgets, 
financial forecasts, and planned technology initiatives in requesting 
the increased transaction fee and the new technology fee.\16\ Several 
commenters stated that the MSRB should be required to give more detail 
on the magnitude of its planned technology upgrade.\17\
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    \15\ See BDA Letter I, Coastal Securities Letter, GFOA Letter, 
HTD Letter, Morgan Stanley Letter, RW Smith Letter, SIFMA Letter I, 
Southwest Securities Letter and TD Ameritrade Letter. Some 
commenters calculated the size of the increase in MSRB revenues over 
the previous year to be approximately 80% without distinguishing 
between the proposed uses of the separate fees. See BDA Letter I, 
HTD Letter, RW Smith Letter, SIFMA Letter I and TD Ameritrade 
Letter.
    \16\ See BDA Letter I, Coastal Securities Letter, GFOA Letter, 
HTD Letter, RW Smith Letter, SIFMA Letter I and TD Ameritrade 
Letter.
    \17\ See, e.g., HTD Letter and BDA Letter I.
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    Although the MSRB did not provide detailed revenue or budget 
projections, the MSRB noted in the proposal and in the MSRB Response 
Letter that, ``the MSRB's 2009 audited financial statement reflected an 
increase in expenses from $18.6 million for the fiscal year ended 
September 30, 2008 to $21.3 million for the fiscal year ended September 
30, 2009, representing an increase of 14.5%.'' \18\ The MSRB further 
noted that it ``expects that expenses for [fiscal year 2010] to be 
approximately $23.1 million, representing an additional increase of 
8.5% over the previous year, including an increase in market 
information transparency program expenses of 13%.'' \19\ From fiscal 
year 2008 to fiscal year 2010 the operating expenses of the MSRB have 
increased approximately 25%.\20\ Furthermore, the MSRB ``forecasts 
total operating expenses to increase to approximately $29.2 million in 
fiscal year 2011, which would be a 26% increase in expenses over 2010, 
and approximately $31.8 million in fiscal year 2012, which would be a 
38% increase in expenses over fiscal year 2010.'' \21\ According to the 
MSRB, this increase in expenses ``reflects the many recent MSRB 
initiatives in support of the MSRB's investor protection mandate, 
including the development and launch of the primary market disclosure 
electronic library, the collection of secondary market disclosures, 
establishment of our [SHORT] system for interest rate resets, the 
[EMMA] system for display of disclosures and trade data, and other 
enhancements to our information systems.'' \22\ The MSRB also stated 
that it needs additional funding ``to satisfy its obligations under the 
[Dodd-Frank Act], which requires the MSRB to draft rules regarding the 
activities of municipal advisors as well as rules for the protection of 
municipal entities and obligated persons.'' \23\
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    \18\ See MSRB Response Letter.
    \19\ Id. See also, Supplemental MSRB Response Letter confirming 
that fiscal year 2010 expenses were approximately $23.1 million.
    \20\ See Supplemental MSRB Response Letter. Expenses for market 
information transparency programs (EMMA, SHORT and RTRS) and 
operations alone increased approximately 57% from fiscal year 2008 
to fiscal year 2010. Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
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    In addition, in discussing the need for the technology fee, the 
MSRB asserted that ``[m]aintaining the EMMA and SHORT systems, together 
with the Real-Time Transaction Reporting System (``RTRS''), ensuring 
their operational stability, and employing sound risk management 
practices, including adequate redundancies, must be a priority.'' \24\ 
The MSRB further noted that the technology fee is needed because ``[i]n 
undertaking its various information systems, the MSRB has not 
previously set aside reserves for replacement of these systems, instead 
relying on its general operating reserves to fund all development and 
any systems upgrades and replacements. Certain of the existing public 
information systems operated by the MSRB, including RTRS and the public 
access system for Forms G-37 under Rule G-37, on political 
contributions and prohibitions on municipal securities business, now 
rely on dated technology and can be expected to need comprehensive re-
engineering in the coming years.'' \25\
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    \24\ Id.
    \25\ Id.
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    Commenters \26\ also noted that the MSRB has not fully explained 
why the proposed fees must become effective on January 1, 2011, given 
the lack of justification for the fee increases and the size of the 
MSRB surplus.
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    \26\ See, e.g., BDA Letter I.
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    Two commenters stated that the MSRB should include consideration of 
revenues from fine sharing with FINRA in determining whether to 
increase the transaction fee and impose a technology fee.\27\ In 
response, the MSRB stated that ``any revenues derived from such 
provision [of the Dodd-Frank Act] would, of course, be taken into 
account as the MSRB prepares future budgets and reviews its sources of 
revenue and the appropriate levels of assessments in future years, 
although the Board would establish appropriate budgeting safeguards 
against allowing the prospects of realizing fine revenue from 
influencing its rulemaking activities.'' \28\
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    \27\ See GFOA Letter and SIFMA Letter I.
    \28\ See MSRB Response Letter.
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B. Comments Regarding Municipal Advisors' Share of the Cost of 
Regulation

    Several commenters raised concerns about what they referred to as 
the disproportionate and inequitable cost of regulation borne by 
dealers, noting that the MSRB recently obtained jurisdiction over 
municipal advisors and that those advisors should bear not only the 
entire cost of their own regulation, but also part of the cost of 
maintaining the MSRB's information systems.\29\ One commenter suggested 
that the MSRB should first assess fees on municipal advisors, beyond 
the establishment of an initial and annual fee,\30\ and only afterwards 
consider dealer fees.\31\
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    \29\ See BDA Letter I, Coastal Securities Letter, HTD Letter, 
Morgan Stanley Letter, RW Smith Letter, Jeffries Letter and SIFMA 
Letter I.
    \30\ See supra note 6, and accompanying text.
    \31\ See RW Smith Letter.
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    In response, the MSRB stated that the ``fairness of assessments on 
all classes of regulated entities is to be viewed on a long-term basis 
and not within a narrow window of time or on a per-rule basis.'' \32\ 
The MSRB noted that it ``firmly believes that it must be adequately 
funded to undertake all necessary rulemaking in the service of 
protecting investors, municipal entities, obligated persons and the 
public interest with rules applicable to dealers, municipal advisors or 
both without the constraint of determining whether such rulemaking 
bears a close relationship to the level of funding obtained from each 
constituency at a particular point in

[[Page 607]]

time.'' \33\ The MSRB further noted that it ``expects to continuously 
review its fee structure to ensure that, over the long-run, there is a 
reasonable relationship between the amounts assessed to a specific 
constituency and the level of rulemaking, system development and 
operational activities undertaken by the MSRB in connection with such 
constituency, to the extent consistent with the Dodd-Frank Act.'' \34\
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    \32\ See MSRB Response Letter.
    \33\ Id.
    \34\ Id.
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C. Comments Regarding the Effect on Retail Dealers, Retail Clients, 
Brokers' Brokers and Issuers

    Several of the commenters expressed concern that the burden of the 
proposed rule change and, in particular, the technology fee, will be 
borne disproportionately by retail firms and their customers since the 
technology fee of $1 applies to all sales transactions, regardless of 
size.\35\ One commenter estimated that the combination of the proposed 
transaction fee and proposed technology fee assessed on retail trades 
of $25,000 would represent an increase of 900% over the current 
transaction fee,\36\ while another commenter stated that its total MSRB 
fees for orders it processes for its clients would increase by over 
11,000% per month.\37\ The MSRB responded that ``the combination of 
increasing the existing transaction fee based on par value of trades 
and imposing the new technology fee on individual transactions, 
regardless of trade size, provides for a mix of assessment measurements 
that in general further reduces the MSRB's reliance on a circumscribed 
group of regulated entities for the bulk of its revenues.'' \38\ The 
MSRB further noted with respect to the technology fee that ``[w]hile 
the proposed technology fee would, as a percentage of the entire 
transaction, be larger for retail-size transactions, the MSRB observes 
that the large percentage increases for small transactions noted by 
some commenters, if assumed to be accurate, fail to take into account 
that, under the current formula based solely on trade size, the actual 
amount of the assessment is extremely small and will continue to be 
small and likely would have only a negligible effect on overall 
transaction costs for retail investors even after such increases. 
Further, every transaction, regardless of size, draws equally on MSRB 
information systems and, therefore, it is appropriate that at least a 
portion of the MSRB's revenues reflect this universal usage of such 
resources.'' \39\
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    \35\ See BDA Letter I, Coastal Securities Letter, Morgan Stanley 
Letter, SIFMA Letter I, Southwest Securities Letter and TD 
Ameritrade Letter.
    \36\ See SIFMA Letter I.
    \37\ See TD Ameritrade Letter.
    \38\ Id.
    \39\ Id.
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    One commenter noted that the proposed rule change, if approved, 
would mean a fundamental shift in the cost of operating the MSRB from 
being largely borne by primary market participants to secondary market 
participants.\40\ Two commenters stated that broker's brokers would be 
disproportionately affected because their activities typically involve 
a large number of retail-sized transactions.\41\ Another commenter 
stated that affiliate-to-affiliate transfers used to fill some customer 
orders would result in duplicative assessments.\42\ One commenter 
suggested further raising the existing transaction fee or basing the 
technology fee on par value as potential alternatives to the $1.00 per 
transaction technology fee included in the proposed rule change.\43\ In 
its response, the MSRB stated that it ``specifically intended that the 
proposed rule change would shift the source of its dealer-based 
revenues toward market participants engaged in sales and trading of 
municipal securities. As among dealers, the MSRB views this shift as 
broadening the universe of dealers that share the burden of funding 
MSRB activities since the underwriting fee is assessed against a 
significantly narrower group of dealers--that is, those that act as 
underwriters of new issues--than the group of dealers that engage in 
sales and trading of municipal securities, which includes firms active 
in both the secondary and primary market.'' \44\
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    \40\ See HTD Letter.
    \41\ See HTD Letter and RW Smith Letter. These commenters also 
suggest that transactions routed through broker's brokers tend to 
involve a chain of two or more sales transactions that would result 
in multiple assessments on the various professionals involved in 
moving bonds from one investor to another.
    \42\ See Morgan Stanley Letter.
    \43\ See Edward Jones Letter I.
    \44\ See MSRB Response Letter.
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    Several commenters \45\ expressed concern regarding the imposition 
of transaction-based assessments on situations where multiple separate 
transactions may occur to effect a movement of a position in a 
security. In its response, the MSRB noted that such situations are 
reflective of the existing structure of the transaction fee and do not 
arise anew as a result of the proposed rule change. The MSRB further 
stated that the ``rule proposal is more equitable to market 
participants in that the transaction fee exemptions that apply to 
short-term securities would not apply to the technology fee, thereby 
broadening the base on which such fee is assessed.'' In addition, the 
MSRB acknowledged that the proposed rules shift the cost burden more 
towards the broader sales and trading market, and that firms engaging 
solely or primarily in sales and trading activities, and not in 
underwriting activities, may view this shift as having a greater affect 
on such firms. As noted above, however, the MSRB stated that it 
specifically intended such a shift and believes that any such shift is 
appropriate as it would broaden the universe of market participants 
that share the burden of funding MSRB activities.\46\
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    \45\ See, e.g., BDA Letter I, Coastal Securities Letter, Edward 
Jones Letter I, SIFMA Letter I, Southwest Securities Letter and TD 
Ameritrade Letter.
    \46\ See supra note 44, and accompanying text.
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    Another commenter urged the MSRB to ensure that fees assessed on 
dealers are not passed, directly or indirectly, to issuers, stating 
that some issuers see MSRB fees as line items on their 
transactions.\47\ In its response, the MSRB noted that MSRB Rule A-
13(e) provides that no dealer shall charge or otherwise pass through 
the fee required under the rule to an issuer of municipal securities, 
but also that Rule A-13(e) would most logically apply to the 
underwriting assessment imposed under such rule, which is not the 
subject of the current rule filing.\48\ The MSRB urged any issuer of 
municipal securities that believes a dealer is violating this rule 
provision to contact the appropriate enforcement agency with any 
relevant information regarding such potential rule violation.\49\
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    \47\ See GFOA Letter.
    \48\ See MSRB Response Letter.
    \49\ Id.
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D. Comments Regarding use of MSRB's Existing Surplus

    Some commenters stated that they believe the MSRB has an 
excessively large surplus that should be utilized to fund projects, 
regulation, and technology renewal prior to implementation of any fee 
increases or new fees.\50\ Two commenters suggested that non-profit 
organizations only need 25% or three months of reserve to cover 
expenses.\51\
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    \50\ See HTD Letter, RW Smith Letter, SIFMA Letter I and 
Southwest Securities Letter.
    \51\ See RW Smith Letter and SIFMA Letter I.
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    In its response, the MSRB noted that other ``non-profit 
organizations active in the municipal securities market as well as 
other self-regulatory organizations have reserves of comparable 
relative size.'' \52\ The MSRB also responded that

[[Page 608]]

its ``cash and liquid reserves are projected to decrease significantly 
over the next three years, if additional funding is not approved and 
underwriting and transaction activity remains level.'' \53\
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    \52\ See MSRB Response Letter. Specifically, the MSRB noted that 
the National Futures Association, a ``self-regulatory organization 
similar in size and structure to the MSRB * * * [also] maintains 
cash and liquid reserves equivalent to approximately one year's 
expenses.'' See Supplemental MSRB Response Letter.
    \53\ Id.
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E. Comments Regarding Alternative Revenue Models

    Two commenters suggested that the MSRB consider an entirely new 
revenue model, where firms are assessed based on their gross income 
from municipal securities activities, including underwriting, trading, 
sales, and advisory services.\54\ Another commenter noted, however, 
that there is not industry consensus for this approach and further 
analysis would be needed.\55\
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    \54\ See HTD Letter and SIFMA Letter I. SIFMA Letter I also 
included a suggestion that the Commission consider imposing a fee on 
mutual funds and Commission registered investment advisers with 
municipal market clients and remit the revenue from such fees to the 
MSRB.
    \55\ See Morgan Stanley Letter.
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    In response, the MSRB stated that ``any such change could not 
realistically be effected in a sufficiently timely manner to ensure 
that the MSRB could continue to operate effectively given its current 
resource base and operational commitments, as well as its statutory 
mandate.'' \56\ The MSRB further noted that ``[u]nlike FINRA, which has 
jurisdiction over its members that encompasses (with limited 
exceptions) their entire scope of activities, the MSRB's regulatory 
jurisdiction is limited to the [activities] specified in Section 15B of 
the Exchange Act. Thus, in imposing its revenue-based assessment, FINRA 
does not face some of the same constraints and need for clearly 
defining the extent of activities subject to such an assessment as 
would the MSRB.'' \57\ The MSRB explained that ``[f]or dealers, sales 
and trading transactions and underwriting activities are the key types 
of activities from which they derive revenues that are clearly tied to 
the MSRB's statutory mandate. The other type of activity * * * that is 
clearly tied to the MSRB's statutory mandate is * * * municipal 
advisory activities.'' \58\ The MSRB asserted that ``assessments based 
on the MSRB's current model [of assessing sales and trading activities 
and underwriting activities], together with an appropriate assessment 
to be developed on municipal advisory activities, serve as a reasonable 
approximation of the type of assessments that would ultimately be 
imposed under a revenue-based system.'' \59\
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    \56\ See MSRB Response Letter.
    \57\ Id.
    \58\ Id.
    \59\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's responses to the comment 
letters and finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB \60\ and, in particular, the 
requirements of Section 15B(b)(2)(J) of the Exchange Act \61\ and the 
rules and regulations thereunder. Section 15B(b)(2)(J) of the Exchange 
Act requires, among other things, that the MSRB's rules be designed to 
provide that each municipal securities broker, municipal securities 
dealer, and municipal advisor 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.\62\
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    \60\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \61\ 15 U.S.C. 78o-4(b)(2)(J).
    \62\ Effective October 1, 2010, pursuant to the Dodd-Frank Act, 
the applicability of Section 15B(b)(2)(J) of the Exchange Act was 
extended to municipal advisors.
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    The Commission believes that the proposed rule change is consistent 
with the Exchange Act because the proposed increase in the transaction 
fee and the imposition of the new technology fee will help defray the 
costs and expenses of administering the Board. In particular, the 
increase in the transaction fee will help offset the MSRB's expected 
increase in expenses due to, among other things, the additional 
regulatory requirements imposed on it by the Dodd-Frank Act.\63\ 
Similarly, the new technology fee will help offset expenses the MSRB 
expects to incur due to the MSRB's expanding technology requirements 
and the need to replace and update existing technology, including the 
MSRB's EMMA and SHORT systems, the RTRS, as well as other enhancements 
to its disclosure and information systems. The need for an increase of 
the transaction fee and imposition of the technology fee is further 
supported by the substantial increases in the costs incurred by the 
Board in fiscal years 2009 and 2010--aggregating approximately 25% over 
a two year period \64\--and the MSRB's expectation that its costs will 
continue to increase due to its amplified responsibilities and need to 
fund the replacement of aging and outdated technology systems and new 
technology initiatives.
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    \63\ See supra note 9, and accompanying text.
    \64\ See supra note 20, and accompanying text.
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    The Commission recognizes the concerns raised by some commenters 
that the increase in transaction fees and the new technology fee will 
be used to subsidize municipal advisor regulation. As noted above, 
however, the MSRB has already taken a first step to assess fees on 
municipal advisors to account for a portion of the costs of needed 
regulatory activity.\65\ The MSRB also stated that it expects to assess 
other fees on municipal advisors as is appropriate.\66\ Furthermore, 
the MSRB has proposed to account for technology fee collections in a 
separate technology renewal fund, which should help to ensure that such 
funds are used only for the replacement and renewal of outdated 
technology systems and to fund new technology initiatives.
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    \65\ See supra note 6, and accompanying text.
    \66\ See MSRB Response Letter.
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    The Commission also notes that all fees assessed by the MSRB are 
reviewed by the Board on an on-going basis to help ensure that they 
continue to be appropriately assessed, meet the resource needs of the 
MSRB, and are appropriate from the standpoint of the fair allocation of 
burdens for supporting MSRB activities.\67\ In addition, with respect 
to the new technology fee in particular, the MSRB stated that it will 
annually review whether this fee should continue to be assessed and, if 
so, at what level and indicated that ``[s]uch review will take into 
consideration, among other things * * *, issues of equity among 
regulated entities.'' \68\
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    \67\ Id.
    \68\ Id.
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    Further, the Commission believes that the broadening of the MSRB's 
proposed fees to all types of dealers--in order to more equitably 
assess all entities regulated by the MSRB--is consistent with the 
MSRB's pledge to continue to review all of its fees to ensure that 
their impact is reasonable and appropriate among its different types of 
regulated entities.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\69\ that the proposed rule change (SR-

[[Page 609]]

MSRB-2010-10), be, and it hereby is, approved.
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    \69\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-33269 Filed 1-4-11; 8:45 am]
BILLING CODE 8011-01-P