WASHINGTON — The Municipal Securities Rulemaking Board could bring in roughly $2 million in additional revenue from a rule change proposed this week that would eliminate the exemptions on underwriting fees for most short-term municipal securities, the board’s spokesperson said yesterday.
But that revenue estimate is based on the current volume of short-term debt and is very rough, board officials stressed.
“Fee revenue depends entirely on issuance volume and we don’t want to speculate on what that volume might be,” MSRB executive director Lynnette Hotchkiss said yesterday in a statement.
The change to the board’s Rule A-13, which was submitted to the Securities and Exchange Commission on Wednesday and was effective upon filing, is mostly meant to offset a decrease in revenue coupled with increased costs associated with operating market information services and regulating the muni market. The costs stem primarily from the development and operation of the MSRB’s Electronic Municipal Market Access, or EMMA system, which collects and posts muni disclosure, trade data and other information, board staff have said.
The elimination of the short-term exemption was choreographed in August when the board announced it was increasing its annual fee for municipal securities firms to $500 from $300 beginning Oct. 1 to generate an additional $280,000 for fiscal year 2010.
The elimination of the fee exemptions will apply generally to short-term debt, such as variable-rate demand obligations, though commercial paper will remain exempt from fee assessments.
Under the current rule, the board charges underwriting fees of three cents per $1,000 par value of bonds and one cent per $1,000 par value of notes.
As part of the proposed changes, the MSRB wants to harmonize the underwriting fees of notes and bonds by changing the underwriting fee on primary offerings in which all securities offered have a final stated maturity of less than two years to three cents per $1,000 par value of debt.
Specifically, the board is proposing to eliminate exemptions for primary offerings that have an aggregate par value less than $1.0 million; have a final stated maturity of nine months or less; may be tendered to the issuer or its designated agent at par value or more, at least as frequently as every nine months until maturity or early redemption; and have authorized denominations of $100,000 or more and are sold to no more than 34 individuals the dealer reasonably believes to be a sophisticated investors.
The rule change defines “primary offerings” the same as under the SEC’s Rule 15c2-12 on disclosure. However, it would exclude from these fees subsequent remarketings after the initial issuance of the bonds or notes.
In addition, the board’s Rule G-32 on disclosures for primary offerings also has been amended to include a new definition of commercial paper. It now means “municipal securities having a maturity of nine months or less issued pursuant to a commercial paper program permitting such municipal securities to be rolled over upon maturity into new commercial paper.”
The MSRB said in its notice that it believes the existing exemptions have become increasingly inequitable as the volume of primary offerings of short-term debt has grown, and the board’s resources have been devoted to supporting both notes and bonds.
In June, separate changes made to G-32 made it possible for the board to track data related to short-term securities and bill underwriters based on their participation in this market “consistent with other offerings,” Hotchkiss said.
Separately, the SEC announced Tuesday that it has approved rule changes that would shorten the time periods for settlement of syndicate accounts, so-called secondary market trading accounts and the payment of designations.
Specifically, it approved amendments to the MSRB’s Rule G-11 on new-issue syndicate practices that will require final settlement of underwriting syndicate or similar accounts in 30 calendar days, from 60, after the issuer delivers the securities to the syndicate.
The rule changes also would reduce the deadline for the payment of designations from 30 to 10 calendar days after the bond closing and require co-managers to provide syndicate managers with their designations within two business days after the bond closing.
Finally, the SEC approved related changes to its Rule G-12 on uniform practices that requires the settlement of secondary market trading accounts in 30 instead if 60 calendar days from the date the securities have been delivered to the account members.
The changes to G-11 are effective for new issues of municipal securities for which the “time of formal award” occurs after Oct. 28. The G-12 changes are effective for secondary market trading accounts formed after Oct. 28.
The changes to G-11 and G-12 were drafted in May to address an issue that surfaced when Lehman Brothers filed for bankruptcy last year and profits were withheld from syndicate members in muni transactions that had been senior managed by the firm.
