WASHINGTON — Industry groups are urging the Securities and Exchange Commission to reject a proposal from the Municipal Securities Rulemaking Board to provide it with an additional $17 million in revenue annually by nearly doubling the amount of transaction fees it collects from dealers.
The board has said sharp fee hikes are necessary to defray the technology costs for its EMMA site as well as expenses tied to the regulation of municipal advisers under the Dodd-Frank Act. However, the Bond Dealers of America and the Securities Industry and Financial Markets Association said it is hard to tell if the proposal is truly justified.
Both industry groups argued that the MSRB has provided few details explaining why it needs such a significant surge in its fees — which would result in an 84% increase in revenues — in separate comment letters filed Tuesday with the SEC.
“We are not aware of any fee proposal by any other financial regulator in recent memory that would increase revenue to the regulator by a factor approaching this amount,” wrote Michael Decker, SIFMA’s managing director and co-head of municipal securities. “The MSRB has provided little justification for such a sizable increase in its revenue, and has certainly not provided any detail as to how its expenses are expected to rise by 84%.”
BDA and SIFMA also warned that the proposed fee hikes would disproportionately and negatively affect the retail segment of the municipal market.
Specifically, the board is seeking SEC permission to impose a new $1 “technology fee” on dealers for each transaction involving long-term debt. The fee would generate $10 million annually, according to the board’s September filing with the SEC.
The MSRB also is seeking permission, for the first time in 10 years, to increase to one cent the half-cent transaction fee per $1,000 par value of bonds. It expects the increase to generate $7 million annually.
MSRB executive director Lynnette Hotchkiss said the board does not comment publicly on pending filings. Asked about EMMA costs, she said the MSRB used a “significant” amount of its reserves to pay for its development and launch, but said it is difficult to give a precise figure.
The fee hikes, which would go into effect in January, would come on top of provisions in the Dodd-Frank Act that permit the MSRB to obtain half of any enforcement penalties collected by the SEC and one-third or another portion of any Financial Industry Regulatory Authority enforcement-related collections. The MSRB also is authorized to impose fines on dealers and advisers that fail to submit timely information.
Though a dealer-led board approved the fee hikes before the MSRB transformed into a majority-public self-regulator Oct. 1, Decker said in an interview that the proposal had “touched a nerve” among dealers and there is “virtually universal opposition” to it.
However, he said there might be more support among dealers if the MSRB were more transparent about its funding needs.
“There might be more friendliness toward the notion of providing the MSRB with more revenue if we knew more details about the initiatives that the MSRB thought they needed money for,” he said.
Michael Nicholas, chief executive officer of BDA, warned that the fees would have adverse consequences on mid-size and regional firms, which operate with smaller margins than larger firms.
“We are … concerned that the flat $1-per-transaction technology fee will disproportionately and unfairly affect broker-dealers engaged in a retail business, since the fee is the same regardless of the size of the transaction,” Nicholas wrote.
While both groups were sympathetic to the MSRB’s need for stable funding sources, they criticized the proposal for not requiring muni advisers to shoulder additional fees. The MSRB began to oversee advisers Oct. 1 and it will take time for it to develop a comprehensive set of fees and assessments for advisers.
Nicholas wrote that if the SEC decides the MSRB must have an immediate increase in its revenue, the fee hikes should sunset after three months, after which the board could propose “a fairer structure to support its activities.”
SIFMA warned that because of the over-the-counter nature of the muni bond market, certain elements of the proposed new and increased fees would be levied multiple times on a single transfer of bonds from one investor to another.
SIFMA also said that the MSRB has a significant accumulated surplus that should be “spent down” before collecting additional revenue. Further, it suggested the board consider a movement away from assessments based on market activity and towards fees based on firms’ overall sizes.
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