WASHINGTON — State and local governments should not allow underwriters to pass through any fees they pay to finance the Governmental Accounting Standards Board, the Government Finance Officers Association warned members Thursday.
The guidance appears in a best-practices document approved by the GFOA executive committee. It comes 10 days after the Financial Industry Regulatory Authority asked the Securities and Exchange Commission to allow it to assess its muni firm members quarterly fees based on the par value of their reported muni trades to help fund the annual budget of GASB.
FINRA’s proposal has drawn protests from both dealers, who do not think they should be paying the fees, and issuers, who worry dealers will try to pass the fees onto them as a cost of bond issuance.
Comments on the proposal, which FINRA is seeking to become effective upon approval by the SEC, are due Jan. 30.
Previously, GASB relied on voluntary contributions from state and local governments, as well as revenues from the sale of publications, but has faced repeated budget shortfalls.
GFOA members, who convened for their winter meeting here this week, are concerned FINRA’s proposal does not prohibit dealers from passing the GASB fees along to muni issuers. Their guidance is designed to alert members about the fees now, even before the SEC finalizes the FINRA proposal.
“All we’re doing is anticipating that, if prior experience is any guide to future behavior, there is at least the possibility that dealers will say we’ll pass that fee along to issuers,” said Ben Watkins, Florida’s director of bond finance and a member of the debt committee. “So we’re just making a preemptive move to say that’s not right.”
The concern about GASB fees emerged at a GFOA debt committee panel discussion Tuesday. It sparked last-minute revisions to a best-practices document, which had already been submitted to the executive committee for approval, on expenses charged by underwriters in negotiated sales.
The revisions say issuers “should not allow the underwriter to pass through to the issuer any fees that are assessed on the underwriter’s firm as part of” the GASB fee.
“We’re not going to pay GASB fees,” Frank Hoadley, Wisconsin’s capital finance director, said during the meeting. “I don’t think it has to be nuanced at all.”
The executive committee approved the underwriting expense best practices, including the GASB-fee revisions, by voice vote on Thursday, according to Susan Gaffney, director of GFOA’s federal liaison center. The group will clarify its guidance, “if and when the fee is in place, in order to correctly reflect the SEC’s final action,” she wrote in an email.
A dealer group declined to comment generally on GFOA’s move.
But Michael Decker, managing director and co-head of the muni division of the Securities Industry and Financial Markets Association, wrote in another email: “We oppose the fee as proposed by FINRA, but if it is adopted, we expect our members will comply with all provisions of the rule.”
FINRA’s fee proposal stems from the Dodd-Frank Act, which authorized the SEC to direct FINRA to collect a GASB accounting support fee from dealers. Last year, the SEC told FINRA to establish a reasonable annual fee to fund the board’s annual budget and provide an independent funding mechanism.
FINRA floated the GASB fee proposal in June and the final version it sent to the SEC for approval is virtually the same.
Separately, GFOA’s best practices for underwriting expenses bolster earlier advice about travel costs associated with an issuance.
Previously, the guidance said underwriters’ expenses generally include travel to and from the issuer’s officers, and issuers “may want to specify” that airfare will be paid based on coach fare, in accordance with state or local policies. The new guidance says underwriter’s expenses include “reasonable travel costs incurred as part of the transaction.” It also suggests issuers “may want to establish guidelines regarding travel reimbursement practices including but not limited to mode of travel, airfare, hotels and meals.”
GFOA’s executive committee also approved minor revisions to a best-practices document on managing Build America Bonds and other direct-subsidy bonds, according to Gaffney.