WASHINGTON — The Depository Trust Co. has more than doubled some of the fees it collects from municipal issuers for new bond transactions, drawing anger from issuers who are vowing to fight the increases.
The Government Finance Officers Association is urging the Securities and Exchange Commission to reverse the little-noticed fee increases, which were proposed Dec. 21 and automatically took effect on Monday without SEC input.
“The increases … are unfairly assessed on municipal securities issuers, and take advantage of the unique nature of municipal securities — serial maturities,” Susan Gaffney, director the GFOA’s federal liaison center here, said in a letter sent to the SEC Monday evening. “This places a much greater cost burden on municipal securities, which in effect would be a 130-150% increase, an amount that far exceeds the increase proposed for corporate bond issuers (40%).”
“The timing of the filing is an attempt to take advantage of holiday distractions in the hope that it will slip through without notice by the affected parties,” she said. “This, unfortunately, is an all-too-familiar pattern by DTC of 'last-minute’ end-of-year fee increases.”
Specifically, the DTC raised the fees it charges for new “book-entry” securities. Fees increased to $500 from $200 for new transactions with multiple CUSIPs and to $350 from $250 for single-CUSIP transactions. Fees for transactions that are “complex,” which DTC does not define in its filing to the SEC, jumped to $750 from $325.
Unlike corporate debt, which often consists of a bullet-maturity and single CUSIP, muni deals can be complex with several maturities and CUSIPs.
GFOA officials are upset they learned of the hikes only this week.
Frank Hoadley, the former chair of the GFOA debt committee and Wisconsin’s capital finance director, said the filing DTC made to the SEC in December, which was not even available on the commission’s website Tuesday, appeared designed “to slide through without notice.”
“That’s something that raises suspicion,” he said. “It’s something we need to take a look at and understand what’s happened.”
SEC spokesman John Nester declined to comment on the fee hikes. Stuart Goldstein, managing director of corporate communications for DTC’s parent company, the Depository Trust & Clearing Corp., said he is concerned about “inaccuracies” in the GFOA letter but declined to comment further until staff had a chance to review it. He stressed that DTCC is a nonprofit utility.
Some market participants said they are alarmed at the fee hikes, when DTC routinely provides rebates to its members, who are predominately banks and brokerage firms.
DTC rebated $3.545 million for the first three quarters of 2010, compared to $27.372 million for the same period in 2009. However, DTC reported an increase in retained earnings to $114.373 million in 2010 from $35.566 million in 2009.
Even when the holding company reported a nearly $20 million loss in 2008, it rebated $380 million to its members, according to its financial statements.
To obtain immediate effectiveness of the fee increases, DTC said that they would have no impact on entities other than DTC “participants” — meaning its member firms.
But in light of the fact that these increases will be passed on to issuers, that statement should be reconsidered, said Robert Apfel, president of Bondholder Communications Group, which assists issuers in communicating with their investors.
Asked about the DTC fee increases, Michael Decker, co-head of the municipal securities division at the Securities Industry and Financial Markets Association, said in a statement: “Due to the prevalence of serial bonds in the municipal market and the way the fee is structured, the DTCC’s [fee hikes] would disproportionately affect the municipal issuers relative to other sectors. Also, we are concerned about rushing consideration of a proposal with such potentially significant implications. We hope the SEC will consider the proposal thoughtfully and deliberately before taking action.”