Municipal advisors want more answers as to why their professional fees are doubling.
Last week, the Municipal Securities Rulemaking Board filed a proposed rule change with the Securities and Exchange Commission to increase the professional fee for MAs to $1,000 from $500 . The amendments, which will be immediately effective, are set to phase in over a two-year period.
“The MSRB believes the proposed rule change is necessary and appropriate because it will help defray the costs of the board’s rulemaking, compliance support, professional qualifications programs, and other activities relating to municipal advisors,” the MSRB said.
The change would create more equity in fees between MAs and broker-dealers, the MSRB said.
The National Association of Municipal Advisors wants the MSRB to provide more detailed information about fees and expenses related to municipal advisory regulation.
“We believe that the MSRB has a responsibility to provide this information,” wrote Susan Gaffney, NAMA executive director.
The change would alleviate the MSRB’s dependency on dealer-paid revenue sources, the MSRB said.. In fiscal year 2019, dealer fees accounted for more than 80% of the MSRB’s revenue.
“We’ve been reducing the percent contributed by dealers over time,” said Nanette Lawson, MSRB chief financial officer. “It used to be around 86% and now it’s around 80% so we’re continually striving to do that. This is just a continued step on this long road to fairness and equity.”
The board determined that the increased professional MA fee would result in “a fairer and more equitable fee structure.”
“Although the organization does offset some portion of its costs and expenses through its fees on municipal advisors, the board believes that its present fee structure does not appropriately allocate the costs of operating the MSRB between dealers and municipal advisors,” the MSRB wrote.
The MSRB said the increased fees will help defray the cost of operating the MSRB including its regulatory activities for MAs. The board said it will advance the MSRB’s goal of developing a “sustainable financial model that fairly assesses fees across regulated entities.”
Lawson said the increased fees will be a way for the MSRB to fund operations and noted that there were temporary
Increasing the MA fees would generate about $760,000 in additional revenue for fiscal year 2020 and $1.5 million in additional revenue for fiscal year 2021, the board estimated. MAs will pay $750 a year in fiscal year 2020, increasing to $1000 in fiscal year 2021.
With MAs paying $1000, their fees will account for about 7% of the MSRB’s fiscal 2021 budget revenue, an increase from 3.6%.
Dealers currently pay underwriting, transaction and technology fees, and there isn’t an equivalent for MAs. Gail Marshal, MSRB chief compliance officer, said the MSRB could have come up with a transaction-based fee. But since MA’s don’t already report their transactions, it would create a burden in reporting for MAs, she said.
NAMA supported the MSRB’s decision to not implement new fees such as a transaction-based levy.
“We support that decision, and believe that it is imperative for the MSRB to engage in conversation with MAs about such concepts – as well as solicit comments about any new fees - as the manner in which MAs are paid and the services that they provide are far different and varied than what exists for broker-dealers,” Gaffney wrote.
The MSRB did not solicit comments on the rule change.
An independent MA views the increased fee as the cost of doing business.
“We view it as part of the costs of operations so we will add that to the budgeting as we move forward with the fee increase,” said Robert Zondag, CFO and managing partner at American Deposit Management Co., an independent MA firm.
Zondag doesn’t believe the proposed change will greatly affect his firm consisting of five MAs.
“If someone has a lot of registered individuals that change may be significant, but it also may depend on the revenue a large firm has in comparison to that fee change as well,” Zondag said.
Though the rule change is immediately effective, the first payments at the changed rates aren’t due until April 30, 2020.
