Some Issuers Already Forbid Fee Shuffle

WASHINGTON — California is not the first municipal issuer to prohibit underwriters from passing along industry trade-group fees to taxpayers through bond transactions.

Officials in Florida, Wisconsin, New York City, and other large issuers have long refused to allow underwriters to pass on the Securities Industry and Financial Markets Association’s muni assessment, a mandatory fee on the roughly 50 SIFMA members that underwrite munis. It is the equivalent of two cents per $1,000 par value of most long-term bonds.

Sources said the fee historically has generated around $10 million. SIFMA officials said that estimate is too high but declined to provide the exact amount. For the fiscal year ­ending Oct. 31, 2009, the group reported its membership dues and assessments were $66.87 million and its revenues totaled $82.03 million.

The issue came to the fore Tuesday when California Treasurer Bill Lockyer announced he will no longer allow investment bankers to pass along the assessments they pay to SIFMA or to the California Public Securities Association, which has a separate assessment of two cents per $1,000 par value of bonds. Lockyer also said he plans to recoup fees the state paid underwriters since 2005, which may amount to about $1.5 million.

The policy change comes in the wake of a recently disclosed Financial Industry Regulatory Authority inquiry into the activities of CalPSA.

“Making taxpayers, in effect, foot the bill for banks’ lobbying or campaign activities is not justified under any circumstances,” Lockyer said.

SIFMA’s fee initially was imposed in the 1970s by the Public Securities Association, a predecessor group to SIFMA. The fee was lowered to two cents from three cents last January.

To be sure, several issuers still pay the fee. Tom DeBacker, the interim chief financial officer of the Los Angeles-based Metropolitan Water District, said his agency has been paying such pass-through assessment fees. “I’m not aware of any plans to change that,” he said. “Obviously, we’ll be watching the state of California on this and see what falls out from that.”

But many issuers contend there is little perceived benefit from having taxpayers foot the bill for the trade group.

An issuer official in New York, who declined to be identified, said: “Everyone is trying to get their hand in the till every time we issue debt and the question is, what does the taxpayer get out of that?”

Last year, the Government Finance Officers Association updated guidance on “payment of the expense component of underwriters’ discount” to recommend issuers not pay underwriter fees or dues owed to either SIFMA or the Municipal Securities Rulemaking Board.

“Since 1994, the MSRB has been clear that our underwriting assessment on dealers should not be charged or otherwise passed through to an issuer as an expense of bringing a new issue to market,” MSRB executive director Lynnette Hotchkiss. “When the MSRB adopted this prohibition, it viewed the underwriting assessment as part of the underwriter’s overhead expenses incurred by virtue of engaging in the municipal securities business.”

SIFMA officials maintain that states and localities benefit from the trade group, which is working with GFOA and other market groups on a variety of issues, including ensuring that issuer liquidity is not hampered by new bank capital standards set to go into effect in 2015.

“Issuer clients and underwriters negotiate the fees and expenses issuers pay to bring bonds to the markets prior to every transaction, such is the case in most industries in which businesses and clients contract to do business,” said Leslie Norwood, SIFMA’s managing director and associate general counsel. “These fees are fully disclosed and transparent in advance of the closing of a transaction.”

But some issuers said that in competitive transactions they may not know if the fees are passed on to them, because they do not typically see an itemized list of underwriters’ expenses.

For reprint and licensing requests for this article, click here.
Washington
MORE FROM BOND BUYER