WASHINGTON — Broker-dealers are objecting to the Financial Industry Regulatory Authority’s proposal that they pay a quarterly fee, based on their municipal bond sales, to help fund the board that sets accounting standards for state and local governments.
In comment letters filed Monday with FINRA, the Bond Dealers of America and the Securities Industry and Financial Markets Association criticized the self-regulator’s proposed quarterly “accounting support fee,” which would fund the annual budget of the Governmental Accounting Standards Board.
GASB previously relied on voluntary donations from state and local governments, as well as revenue from sales of its publications, but the contributions plunged after the 2008 financial crisis.
In their comment letters, SIFMA and the BDA objected to the proposed fee, saying GASB, a private entity, is not subject to public oversight and accountability. SIFMA also complained that broker-dealers, unlike financial advisers, banks, and rating agencies, would be required to shoulder the burden of funding GASB.
“These diverse entities that use GASB generally accepted accounting principles for a variety of purposes get a 'free ride’ without paying the fare to financially support GASB under the proposed methodology,” wrote David Cohen, SIFMA’s managing director and associate general counsel. “Financial support of GASB should come from the entire universe of users, not just broker-dealers.”
In a two-page letter, BDA chief executive officer Michael Nicholas said the proposed fee would disproportionately burden middle-market broker-dealers.
In addition, Nicholas said, FINRA’s collection of fees for GASB would lack transparency.
“These fees would be collected under governmental compulsion and there will be no public accountability,” wrote Nicholas. “Separating the authority to spend money from the responsibility for collecting it — and accountability to those who pay it — it is extremely bad public policy.”
An issuer group also objected to FINRA’s proposal, saying the proposed funding mechanism does not prevent broker-dealers from passing the GASB fee on to issuers of municipal securities.
In a two-page comment letter, Jeffrey Esser, the executive director and CEO of the Government Finance Officers Association, also criticized FINRA for failing to consult with state and local governments before issuing its proposal.
In an interview, Esser said state and local governments are concerned that GASB will have greater resources to generate and impose potentially burdensome accounting and financial reporting requirements.
“I think the problem with an unlimited source of funding is that GASB will have more money to issue more standards, which are very costly to state and local governments,” he said.
The remarks come just one year after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the Government Accountability Office to study the role and importance of GASB in the municipal securities market, as well as the manner and level of GASB’s historic funding. Dodd-Frank also authorized the Securities and Exchange Commission to direct FINRA to collect a GASB accounting support fee from dealers.
Earlier this spring, a few months after the GAO released its GASB report, the SEC directed FINRA to establish a “reasonable annual accounting support fee” to fund board’s annual budget and provide “an independent and more reliable funding mechanism.”
In June, FINRA released for public comment a proposal to require member firms to pay a quarterly assessment based on each firm’s portion of the total par value of municipal securities sales reported to the Municipal Securities Rulemaking Board during the previous quarter.
For example, if GASB budgeted $10 million in annual expenses, FINRA would collect $2.5 million from member firms each quarter, with each firm’s assessment pegged to its share of the par value of muni transactions reported to the MSRB the previous quarter, FINRA noted in its proposal. Firms with a quarterly assessment of less than $25 would not be charged a fee that quarter.The comment period on FINRA’s proposal ended Monday.
GASB spokesman Neil McGarity declined to comment on FINRA’s proposal.
A FINRA spokeswoman, Nancy Condon, said the authority is in the process of reviewing the comment letters.
GASB’s parent organization, the Financial Accounting Foundation, is a tax-exempt entity under section 501(c)(3) of the Internal Revenue Code. FAF funds itself through subscription and publication revenues, voluntary GASB contributions, and accounting support fees for the Financial Accounting Standards Board, or FASB, GASB’s counterpart group for corporations.
According to the 2011 budget posted on GASB’s website, GASB received $1.2 million in voluntary contributions in 2010, after budgeting for $1.325 million in such donations. In its 2011 budget, GASB projects revenue of $550,000 from voluntary contributions and $3.87 million from “accounting support fees,” with expenses of $7.69 million. FAF’s 2011 budget estimates $2.06 million in net revenues from GASB publications and subscriptions.
A footnote in the budget says the FAF estimated that FINRA would start collecting GASB fees on July 1, 2011.
