WASHINGTON — The Financial Industry Regulatory Authority has asked the Securities and Exchange Commission to allow it to assess its muni members quarterly fees based on the par value of their reported transactions to help fund the Governmental Accounting Standards Board, despite protests from issuers and dealers.
The rule changes, which FINRA filed with the SEC on Tuesday, are virtually the same as FINRA proposed in June that drew ire from both issuer and dealer groups.
The only substantive change is that the June version said the fees would be based on muni sales, while the proposal FINRA filed with the SEC makes clear the fees would be based on dealer muni purchases as well as sales, sources said.
The SEC is expecting to file the FINRA fee plan in the Federal Register this week and has asked that public comments be submitted within 21 days after it is published.
FINRA wants the new fee system to take effect upon SEC approval, so that if the commission were to approve the rules changes on Feb. 1, the self-regulator would bill fees based on trading activity for the first quarter of 2012 to cover one quarter of the 2012 budget of GASB.
GASB establishes financial reporting and accounting standards for state and local governments.
The standards are nonbinding but governments must use them to get clean opinions from auditors on their financial statements.
Representatives of issuer and dealer groups said Thursday they still have the same concerns about FINRA's proposal for a new "GASB accounting support fee."
"We're disappointed that [FINRA] didn't make any changes and in our view they are not in compliance with Section 978 of the Dodd-Frank Act, where the language specifically says that fees should be collected from members" of a national securities association, Jeff Esser, executive director and chief executive officer of the Government Finance Officers Association, said Thursday.
Esser is worried that FINRA's dealer members will pass the fees onto municipal bond issuers.
In the release it filed with the SEC, FINRA said it "declines to give a blanket exemption for issuers of municipal securities."
David Cohen, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said the group is also disappointed that FINRA did not amend its proposal.
"We believe it is an unfair tax on dealers and municipal bond investors," he said.
SIFMA had complained in comments that state and local governments — the end-users of GASB standards — would get a "free ride" under FINRA's proposal since the fees would be imposed on dealers.
But FINRA told the SEC that it "has no authority to collect the fee from non-FINRA members."
The self-regulator said it "has long recognized that members pass fees through to the customers" and that it does not address the allocation of fees to customers provided the fees "are fair, reasonable and accurately disclosed."
"Although FINRA is not encouraging members to pass all or part of the GASB Accounting Support Fee to their customers, that decision is ultimately one for each member, subject to the conditions and requirements noted," the self-regulator told the SEC.
Cohen said Thursday that the rule changes should state that dealers can pass the fees onto issuers.
FINRA's fee proposal stems from the Dodd-Frank Act, which was enacted on July 21, 2010.
The act authorized the SEC to require a national securities association to establish a reasonable annual accounting support fee to adequately fund GASB's annual budget.
GASB had suffered budget shortfalls in recent years and some regulators were concerned conflicts of interest arose when state and local governments — which were providing funds to the standards-setter — threatened to halt the funding if GASB pursued projects they did not like.
In May 2011, the SEC issued an order to implement the Dodd-Frank mandate and required FINRA to establish a fee to help fund GASB.
In June, FINRA released its proposal to assess its muni firm members' quarterly fees based on the par value of the muni securities transactions they report to the Municipal Securities Rulemaking Board. FINRA said quarterly fees are necessary because it is statutorily prohibited from collecting more money than GASB's recoverable annual budgeted expenses and also because municipal trade volume varies during the year.
FINRA said that if GASB's recoverable annual budgeted expenses were $10 million for a year, it would collect $2.5 million from its members for each quarter.
If a member firm accounted for 10% of the total par value amount of all the muni transactions reported for the quarter to the MSRB, under its Rule G-14 on purchases and sales, the member's assessment would be 10% of one quarter of GASB's annual budget. That would amount to 10% of $2.5 million, or $250,000.
Any members whose quarterly assessment would be less than $25.00 would not have to pay GASB support fees for that quarter, according to FINRA.
The authority told the SEC that it received 11 comment letters on the proposed rule changes — five generally in favor of them and six generally against.
Dodd-Frank required FINRA to consult with state and local officials and groups. But the GFOA claimed in comments submitted on the proposal released in June that FINRA failed to meet the consultation requirement.
The self-regulator disagreed in its filing to the SEC and told the commission: "To provide a further opportunity for all interested parties ... to raise concerns and express their views, FINRA has elected to file the proposed rule change for full notice and comment."
