The Securities Industry and Financial Markets Association has upped the ante in its dispute with the Municipal Securities Rulemaking Board over the self-regulator’s proposal to nearly double the fees it collects from dealers, warning that the MSRB must do a better job of explaining the need for the increase.
In a three-page comment letter filed Thursday with the Securities and Exchange Commission, the industry group said an explanation of the fee hikes the board submitted to the SEC on Nov. 19 is insufficient.
“The board should — but has not — provide a detailed budget for its current fiscal year to justify such an inordinate increase,” wrote Michael Decker, managing director and co-head of SIFMA’s municipal securities division. “Other than the generalizations contained in the Nov. 19 letter, the MSRB’s plans and the related costs remain hidden.”
The board argued that its expenses for the fiscal year that ended Sept. 30 increased by 8.5% and that its expenses will continue to rise “at significantly higher rates” in the coming two years as it continues to develop its Electronic Municipal Market Access system and begins to regulate municipal advisers.
As a result, the MSRB is seeking SEC permission to impose a new $1 “technology fee” on each interdealer 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 the transaction fee it charges on most munis to 1 cent from one-half cent per $1,000 par value of bonds. It expects that increase to generate $7 million annually. Short-term debt would be exempt from the fee increase.
In all, the additional $17 million would boost by nearly 84% the transaction fees the board collects from dealers.
The fee hikes, which would go into effect in January, would come on top of provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the MSRB to obtain half of any enforcement penalties collected by the SEC and one-third or another portion of any Financial Industry Regulatory Authority enforcement-related collections. The board also is authorized to impose fines on dealers and advisers that fail to submit timely information.
In his letter last week, Decker warns that the MSRB “provides no real information about its anticipated expenses that would justify a near doubling of its revenues.”
For example, the board said in its Nov. 19 letter that the technology underlying its Real-time Transaction Reporting System and public access portal for political contribution filings “can be expected to need comprehensive re-engineering in the coming years.”
“However, the MSRB does not answer some key questions such as when specifically will the re-engineering be undertaken, what is the projected cost of that re-engineering, and why does the MSRB need to raise funds now for initiatives that will be undertaken 'in the coming years,’ ” Decker wrote.
The board said it has not previously set aside reserves for replacement of technology systems, suggesting that at least a portion of the revenue derived from the proposed new and increased fees is not needed now but will be held in reserve for further expenses. At the same time, the MSRB said that it would periodically review its fee structure over time to ensure fairness.
“Before it begins establishing substantial new reserves for future projects and initiatives, the MSRB should establish a fee structure that fairly allocates costs across all regulated constituencies,” Decker wrote.
“Moreover, while the MSRB has stated in its letter that it will 'periodically’ review its fee structure, nothing in its proposal would obligate it to do so or sunset any of the proposed new or increased fees in the future.”
Decker argued that the board has the ability to adjust its fees to closely match its budgeted expenses each year. Thus, he said, “there is no reason for the MSRB to assess the dealer community more than is necessary to cover annual expenses simply to hold those funds in reserve for future initiatives without at least a more comprehensive discussion with the dealer community about how much those initiatives will cost, when they will be started and what are the projected benefits for the wider community.”
