Market participants slammed a proposal to assess a fee on broker-dealers to help finance the Governmental Accounting Standards Board, differing about whether regulations on dealers should be permitted to pass the fee along to other market participants, including issuers.
The Financial Industry Regulatory Authority’s GASB fee proposal highlighted divisions in the municipal market on funding the accounting standard-setter, with an industry group saying broker-dealers should be permitted to pass the assessments along to parties who use or benefit from GASB’s rules, including issuers. State and local government groups, meanwhile, urged the Securities and Exchange Commission to bar dealers from passing the fees through to them.
“To ensure compliance with the act, we call on the SEC to direct FINRA to adhere to the language of the Dodd-Frank Act and make certain that the fee is paid by members of the association and not passed on to customers,” wrote the Government Finance Officers Association, the International City-County Management Association, the National Association of Counties, the National League of Cities and the United States Conference of Mayors.
“Without this additional language, there will be nothing to ensure that the law is correctly implemented, and that state and local governments — and ultimately taxpayers — will not be unnecessarily burdened with additional fees.”
The remarks, made in comment letters filed with the SEC Monday, come as FINRA has asked the commission for authority to assess muni members quarterly fees based on the par value of their reported muni transactions to fund GASB, which establishes financial reporting and accounting standards for state and local governments.
FINRA’s proposal stems from Dodd-Frank, which authorized the SEC to direct a self-regulatory organization to collect a GASB accounting support fee from its members. Last year, the SEC directed FINRA, which oversees broker-dealers, to establish a GASB fee to help fund the board’s budget and provide the accounting standard-setter with an independent and more reliable funding mechanism.
Previously, GASB relied on voluntary donations from state and local governments, as well as revenue from sales of its publications, but contributions plunged after the 2008 financial crisis.
Still, GFOA said Dodd-Frank does not permit dealers to pass the fee through to them.
“We’re simply asking the SEC to follow the law,” Jeffrey Esser, GFOA’s executive director and chief executive officer, said in an interview.
Specifically, Esser said, Dodd-Frank requires FINRA, as the SEC’s designee, to collect the fee from its members. If broker-dealers passed the assessments on to issuers, such a practice would create an unfunded mandate for state and local governments and violate congressional intent, he said.
“It’s not a policy choice,” Esser said. “It’s a legal question.”
In a separate letter, the National Association of State Auditors, Comptrollers and Treasurers said FINRA’s proposal is a reasonable, fair and equitable way to secure independent funding for GASB, but it remained concerned that broker-dealers would pass the fee along to muni issuers.
“We believe the SEC should direct FINRA to make certain the fee is paid by its members,” wrote Ronald Jones, NASACT’s president.
The SEC’s Jan. 3 notice requesting comments said firms that passed the GASB fee on to muni customers would need to use proper, non-misleading disclosure and follow FINRA and MSRB rules, including FINRA requirements on just and equitable trade principles.
Dealer and industry groups said they should be able to pass the fee along to market participants.
“Principles of fundamental fairness would dictate dealers be allowed to pass through any GASB support fee to municipal bond issuers instead of, or in addition, to investors,” wrote David Cohen, managing director and associate general counsel of the Securities Industry and Financial Markets Association.
SIFMA also said the proposed fee would be an “unfair tax” on broker-dealers, who should not be required to subsidize GASB. Rather, SIFMA said, broker-dealers should be permitted to pass the fee through to parties that use or benefit from GASB’s rules, including issuers, banks, FAs, rating agencies, insurance companies, mutual funds, legislative and governmental staff, and taxpayer organizations.
Bond Dealers of America, a dealer group, also objected to “saddling” broker-dealers with costs that should be shouldered by a range of muni market participants, including issuers, FAs and investors.
Because of that belief, wrote BDA chief executive officer Michael Nicholas, “we strongly support the provision of the proposal that allows broker-dealers to share that burden and pass the fee through.”
