MSRB Assets Rise to $36M as New Fees Kick In

WASHINGTON — The Municipal Securities Rulemaking Board’s net assets spiked to $36.65 million for the fiscal year ending Sept. 30, 2011, soaring by $6.89 million from the previous year as new technology and transaction fees offset a dip in underwriting assessment fees, according to audited financial statements and an annual report expected to be released Friday.

The annual report says the board diversified its revenue sources in 2011 “to ensure more balanced and equitable funding” aligned with the costs of fulfilling its mission and expanded regulatory mandate, under the Dodd-Frank Act, to protect investors, issuers and public pension plans.

“FY 2011 reflects growth in total revenue as a result of targeted efforts to adequately fund operations, coupled with new revenues,” the report says.

Issuance of long-term debt plunged in 2011, to the lowest levels seen in a decade. The board’s underwriting assessment fees also dipped, dropping to $11.37 million in 2011 from $13.98 million in 2010.

Generally, the MSRB charges underwriting fees of three cents per $1,000 par value of bonds and notes.

But new revenue more than offsets the reduced underwriting fees, including $6.28 million in technology fees, imposed on muni securities trades effective Jan. 1, 2011.

The technology fee requires dealers to pay a $1.00 assessment on all muni transactions, including interdealer transactions and dealer sales to customers.

Separately, the MSRB also saw increased revenue from transaction fees, which rose to $11.35 million in 2011 from $6.9 million in 2010.

Effective Jan. 1, 2011, the board raised the transaction fees it charged on most munis to one cent from one-half cent per $1,000 par value of bonds.

The board has said the fee hike and new technology fees, which sparked opposition from a dealer group and an industry group, were needed to defray the technology costs for its EMMA website, as well as expenses tied to the regulation of municipal advisors under Dodd-Frank.

The report reveals the MSRB’s employment agreement with its executive director, Lynnette Kelly, calls for the board to make deferred compensation contributions of $10,000 on Sept. 30, 2010, $50,000 on Sept. 30, 2011, and $55,000 on Sept. 30, 2012. The total of that amount, plus interest and accrued earnings, is to be paid to Kelly on Sept. 30, 2012.

During fiscal 2011, Kelly — formerly known as Lynnette Hotchkiss — received a previously vested deferred compensation payment of $126,312, according to the report.

In addition, the report reveals the MSRB entered into separation agreements with former employees and in 2010 and 2011 recorded a total liability related to those agreements of about $209,000.

Kelly declined to provide details about the employees or the payments, citing privacy concerns.

Among the board’s assets, the value of its investments rose to $19.32 million from $16.228 million during the previous fiscal year. Accounts receivable surged to $6.248 million from $3.93 million, while cash increased to $2.9 million from $1.74 million.

The spike in assets came as the MSRB’s liabilities dipped to $3.3 million from $3.83 million, partly due to decreased obligations stemming from accrued vacation payments and deferred rent.

While overall revenue increased to $33.48 million from $22.68 million, total expenses also jumped to $26 million from $23.1 million, led by costs related to “market information transparency programs and operations,” which surged to $13.9 million in 2011 from $11.9 million in 2010.

Such expenses include the cost of operating and maintaining the board’s EMMA website, according to the board’s chief financial officer, Beth Wolfe.

But technology and transaction fees were not the only contributors to the board’s revenue spike.

In 2011, the MSRB for the first time also reported $1.98 million in revenue from fines stemming from violations of the board’s rules, which are enforced by the Financial Industry Regulatory Authority.

Under Dodd-Frank, the MSRB, as of Oct. 1, 2010, became entitled to one-third of the fines collected by FINRA for MSRB rule violations.

The board also is entitled to half of any fines collected by the Securities and Exchange Commission for similar violations, but as of Sept. 30, “no SEC fine revenue has accrued to the benefit of the MSRB,” the report says.

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