WASHINGTON — The Municipal Securities Rulemaking Board’s expenses over the next two years will increase “at significantly higher rates” as the MSRB continues to expand its information systems and begins to regulate municipal advisers, the board is cautioning.
Its warnings come in a 10-page response to industry groups’ and other market participants’ criticisms of its proposal to nearly double the fees it collects from dealer firms. The MSRB filed its response with the Securities and Exchange Commission on Nov. 19.
MSRB expenses increased 14.5% to $21.3 million during the fiscal year ending Sept. 30, 2009, from $18.6 million, and were projected to rise 8.5% during the fiscal year that ended about two months ago. But the board now anticipates sharply higher increases for fiscal 2011 and 2012, primarily as a result of several “technology initiatives.”
“A significant portion of these expected increases in expenses relates to the continued operation and further enhancements of the MSRB’s new information systems, including ongoing establishment of sophisticated new functionality,” wrote MSRB senior associate general counsel Lawrence Sandor.
The initiatives include free public access to credit ratings through the Electronic Municipal Market Access, or EMMA, website; increased transparency for short-term debt; and additional continuing disclosures as a result of amendments to the SEC’s Rule 15c2-12 on disclosure or voluntary actions by issuers.
Sandor added that the MSRB has not previously set aside reserves for replacement of the board’s various information systems. Instead, it’s relying on “general operating reserves” to fund all development and any systems upgrades and replacements.
He said certain existing information systems, including its Real-time Transaction Reporting System and the public access systems for dealer forms to report political contributions “now rely on dated technology and can be expected to need comprehensive re-engineering in the coming years.”
Specifically, the MSRB is seeking SEC permission to impose a new $1 “technology fee” on each inter-dealer transaction as well as dealer sales to customers. The fee would generate $10 million annually, though it is designed to be “transitional,” according to the board’s October filing with the SEC.
The MSRB also is seeking permission, for the first time in 10 years, to increase to 1 cent the half-cent transaction fee per $1,000 par value of bonds. It expects the increase to generate $7 million annually. Short-term debt would be exempt from the fee increase.
The additional $17 million would boost by nearly 84% the transaction fees the MSRB collects from dealers.
Though the MSRB’s dealer-led board approved the proposal in late September, just before the board was reconstituted as a majority-public self-regulator, industry groups, dealer firms, and the Government Finance Officers Association criticized it in comment letters filed earlier this month.
“We would like the MSRB to explain why it believes these new and increased fees are necessary and what impact they could have on market participants, especially those in the issuer community,” wrote Susan Gaffney, director of the GFOA’s federal liaison center here. “The proposed fee changes are significant, making more information and ongoing transparency on the MSRB’s use of funds essential.”
“Unfortunately, some of our members continue to see MSRB fees as line items on their transactions,” Gaffney wrote. “Moreover, even when MSRB fees are not itemized, we are concerned that state and local governments ultimately pay the fees indirectly.”
In response, Sandor said that a portion of the MSRB’s Rule A-13 prevents dealers from charging or passing through its fees to issuers. While this most logically applies to an underwriting assessment imposed under the rule, which is not the subject of the current fee proposal, issuers that suspect a dealer is violating this provision should contract “the appropriate enforcement agency,” Sandor wrote.
Though industry trade associations recommended that the MSRB consider an entirely new revenue model, where firms are assessed based on their gross income from municipal securities activities, Sandor said that is unlikely to happen.
“Without taking a position with regard to whether, in the long term, a shift to a revenue-based assessment system should be adopted by the MSRB, 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,” he wrote.
