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, 604-609 [2010-33269]
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Federal Register / Vol. 76, No. 3 / Wednesday, January 5, 2011 / Notices
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove
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
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Electronic comments may be
submitted by using the Commission’s
Internet comment form (https://
www.sec.gov/rules/sro.shtml), or send
an e-mail to rule-comment@sec.gov.
Please include File No. SR–OCC–2010–
19 on the subject line.
• Paper comments should be sent in
triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington DC 20549–1090.
All submissions should refer to File No.
SR–OCC–2010–19. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at OCC’s principal office and
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OCC’s Web site (https://
www.theocc.com/about/publications/
bylaws.jsp). All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
All submission should refer to File No.
SR–OCC–2010–19 and should be
submitted within January 26, 2011 days
after the date of publication.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.9
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–33304 Filed 1–4–11; 8:45 am]
BILLING CODE 8011–01–P
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
9 17
CFR 200.30–3(a)(12).
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’’).
1 15
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MSRB’s response, and a supplemental
response to the MSRB’s response.4
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.
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
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’’).
5 15 U.S.C. 78o-4(b)(2)(J).
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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
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.
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.
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
7 See
6 See
Securities Exchange Act Release No. 63313
(File No. SR–MSRB–2010–14) (November 12, 2010).
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Supplemental MSRB Response Letter.
Commission’s Notice, supra note 3.
9 Public Law 111–203, 124 Stat. 1376 (2010).
8 See
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605
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
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.
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.12In 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
10 See
supra note 3.
supra note 4.
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.
11 See
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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
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
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
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14 Id.
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.
18 See MSRB Response Letter.
19 Id. See also, Supplemental MSRB Response
Letter confirming that fiscal year 2010 expenses
were approximately $23.1 million.
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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
In addition, in discussing the need for
the technology fee, the MSRB asserted
that ‘‘[m]aintaining the EMMA and
SHORT systems, together with the RealTime 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
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.
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.
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
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
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
26 See,
e.g., BDA Letter I.
GFOA Letter and SIFMA Letter I.
28 See MSRB Response Letter.
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.
32 See MSRB Response Letter.
27 See
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time.’’ 33 The MSRB further noted that it
‘‘expects to continuously review its fee
structure to ensure that, over the longrun, 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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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,
33 Id.
34 Id.
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.
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therefore, it is appropriate that at least
a portion of the MSRB’s revenues reflect
this universal usage of such
resources.’’ 39
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 affiliateto-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
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
39 Id.
40 See
HTD Letter.
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.
45 See, e.g., BDA Letter I, Coastal Securities Letter,
Edward Jones Letter I, SIFMA Letter I, Southwest
Securities Letter and TD Ameritrade Letter.
41 See
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607
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
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
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
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
46 See
supra note 44, and accompanying text.
GFOA Letter.
48 See MSRB Response Letter.
49 Id.
50 See HTD Letter, RW Smith Letter, SIFMA Letter
I and Southwest Securities Letter.
51 See RW Smith Letter and SIFMA Letter I.
52 See MSRB Response Letter. Specifically, the
MSRB noted that the National Futures Association,
47 See
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05JAN1
608
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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
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
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
jlentini on DSKJ8SOYB1PROD with NOTICES
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
IV. Discussion and Commission
Findings
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.
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.
56 See MSRB Response Letter.
57 Id.
58 Id.
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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
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
59 Id.
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.
63 See supra note 9, and accompanying text.
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Frm 00072
Fmt 4703
Sfmt 4703
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.
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.
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
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–
64 See
supra note 20, and accompanying text.
supra note 6, and accompanying text.
66 See MSRB Response Letter.
67 Id.
68 Id.
69 15 U.S.C. 78s(b)(2).
65 See
E:\FR\FM\05JAN1.SGM
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Federal Register / Vol. 76, No. 3 / Wednesday, January 5, 2011 / Notices
MSRB–2010–10), be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.70
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–33269 Filed 1–4–11; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63613; File No. SR–
NYSEAmex–2010–121]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Making Permanent NYSE
Amex Equities Rule 123C(9)(a)(1) and
Amending Rule 123C(9)(a)(1)(iii)
December 29, 2010.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on December
20, 2010, NYSE Amex LLC (the
‘‘Exchange’’ or ‘‘NYSE Amex’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
jlentini on DSKJ8SOYB1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to make
permanent NYSE Amex Equities Rule
123C(9)(a)(1), which currently operates
on a pilot basis. The Exchange also
proposes to amend Rule
123C(9)(a)(1)(iii) to eliminate the
requirement that only Floor brokers can
represent interest after 4 p.m. The text
of the proposed rule change is available
at the Exchange, the Commission’s
Public Reference Room, www.sec.gov,
and https://www.nyse.com.
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
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
70 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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16:26 Jan 04, 2011
Jkt 223001
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
1. Purpose
The Exchange proposes to make
permanent NYSE Amex Equities Rule
123C(9)(a)(1),4 which has operated on a
pilot basis and allows the Exchange to
temporarily suspend certain rule
requirements at the close when extreme
order imbalances may cause significant
dislocation to the closing price
(‘‘Extreme Order Imbalances Pilot’’ or
‘‘Pilot’’).5 The Pilot has recently been
extended to June 1, 2011. In addition, in
connection with proposing to make the
rule permanent, the Exchange proposes
to amend Rule 123C(9)(a)(1)(iii) to
eliminate the requirement that only
Floor brokers can represent interest after
4:00 p.m. and to make technical
amendments related to the obligations
of member firms entering interest
pursuant to Rule 123C(9)(a)(1).6
Background
Pursuant to NYSE Amex Equities Rule
123C(9)(a)(1), the Exchange may
suspend NYSE Amex Equities Rule 52
(Hours of Operation) to resolve an
extreme order imbalance that may result
in a price dislocation at the close as a
result of an order entered into Exchange
systems, or represented to a Designated
Market Maker (‘‘DMM’’) orally at or near
the close. NYSE Amex Equities Rule
123C(9)(a)(1) was intended to be and
has been invoked to attract offsetting
4 The Exchange notes that parallel changes are
proposed to be made to the rules of New York Stock
Exchange LLC. See SR–NYSE–2010–84.
5 See Securities Exchange Act Release Nos. 59755
(April 13, 2009), 74 FR 18009 (April 20, 2009) (SR–
NYSEAltr–2009–15) (order granting approval of the
Pilot); 60808 (October 9, 2009), 74 FR 53539
(October 19, 2009) (SR–NYSEAmex–2009–70)
(extending the operation of the Pilot to December
31, 2009); 61265 (December 31, 2009), 75 FR 1094
(January 8, 2010) (SR–NYSEAmex–2009–96)
(extending the operation of the Pilot from December
31, 2009 to March 1, 2010); 61611 (March 1, 2010),
75 FR 10530 (March 8, 2010) (SR–NYSEAmex–
2010–15) (extending the operation of the Pilot from
March 1, 2010 to June 1, 2010); 62293 (June 15,
2010), 75 FR 35862 (June 23, 2010) (SR–
NYSEAmex–2010–50) (extending the operation of
the Pilot from June 1, 2010 to December 1, 2010);
and SR–NYSEAmex–2010–113 (filed November 30,
2010) (extending the operation of the Pilot from
December 1, 2010 to June 1, 2011).
6 In addition, the Exchange proposes to make a
technical change to the text of Rule 123C(9)(a)(1)(v).
PO 00000
Frm 00073
Fmt 4703
Sfmt 4703
609
interest in rare circumstances where
there exists an extreme imbalance at the
close such that a DMM is unable to
close the security without significantly
dislocating the price.
As a condition of the approval to
operate the Pilot, the Exchange
committed to provide the Commission
with information regarding: (i) How
often an NYSE Amex Equities Rule 52
temporary suspension pursuant to the
Pilot was invoked during the six months
following its approval; and (ii) the
Exchange’s determination as to how to
proceed with technical modifications to
reconfigure Exchange systems to accept
orders electronically after 4 p.m. As the
Exchange has previously noted in filings
with the Commission, the Pilot has been
invoked only twice in NYSE Amexlisted securities.7
Proposal To Make Permanent the
Operation of the Extreme Order
Imbalance Rule
The Exchange has completed and
tested the system modifications
necessary to accept orders electronically
after 4 p.m. The Exchange therefore
proposes to make Rule 123C(9)(a)(1), as
amended, permanent beginning on
January 3, 2011.
Because the Exchange can now accept
orders electronically after 4 p.m., the
Exchange proposes to amend Rule
123C(9)(a)(iii) to eliminate the
restriction that only Floor brokers can
represent offsetting interest in response
to a solicitation of interest pursuant to
the Rule. The Exchange further proposes
to make technical changes to Rule
123C(9)(a)(1)(iii) to identify what
interest may be entered in response to
a solicitation, i.e., it must be offsetting
interest, a limit order priced no worse
than the last sale, and irrevocable.
Market participants sending in interest
electronically in response to a
solicitation after 4 p.m. are responsible
for assuring compliance with all
provisions of subsection (iii), including
that such interest must be on the
opposite side of the imbalance, must be
limit priced no worse than the last sale,
and must be irrevocable. Failure to
abide by these requirements could
subject a market participant to
regulatory review and possible
disciplinary action.8
The Exchange also proposes to amend
Rule 123C(9)(a)(iv) to make clear that all
7 See SR–NYSEAmex–2010–113 (filed November
30, 2010) (extending the operation of the Pilot from
December 1, 2010 to June 1, 2011).
8 Prior to implementation of this rule change, the
Exchange will issue guidance in the form of an
Information Memo that member organizations
entering interest will be responsible for complying
with Rule 123C(9)(a)(1)(iii).
E:\FR\FM\05JAN1.SGM
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]]>Agencies
[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]
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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'').
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78o-4(b)(2)(J).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 63313 (File No. SR-
MSRB-2010-14) (November 12, 2010).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\7\ See Supplemental MSRB Response Letter.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ See Commission's Notice, supra note 3.
\9\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\10\ See supra note 3.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\11\ See supra note 4.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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
