Notice2022-12839
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Amend Certain Rates of Assessment for Rate Card Fees Under MSRB Rules A-11 and A-13, Institute an Annual Rate Card Process for Future Rate Amendments, and Provide for Certain Technical Amendments to MSRB Rules A-11, A-12, and A-13
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 15, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 115 (Wednesday, June 15, 2022)</title>
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[Federal Register Volume 87, Number 115 (Wednesday, June 15, 2022)]
[Notices]
[Pages 36164-36179]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12839]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95075; File No. SR-MSRB-2022-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change To Amend Certain
Rates of Assessment for Rate Card Fees Under MSRB Rules A-11 and A-13,
Institute an Annual Rate Card Process for Future Rate Amendments, and
Provide for Certain Technical Amendments to MSRB Rules A-11, A-12, and
A-13
June 9, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on June 2, 2022 the Municipal Securities
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the MSRB. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB filed with the Commission a proposed rule change to amend:
(i) Rule A-11, on assessments for municipal advisor professionals,
to modify the rate of assessment for the annual professional fee for
each person associated with a municipal advisory firm who is qualified
as a municipal advisor representative in accordance with Rule G-3, on
professional qualification requirements, and for whom the municipal
advisory firm has an active Form MA-I on file with the Commission as of
January 31st of each year (each individual being a ``covered
professional'' and such fee amount on each covered professional the
``Municipal Advisor Professional Fee''); \3\
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\3\ ``Form MA-I: Information Regarding Natural Persons Who
Engage in Municipal Advisory Activities,'' is an SEC form that must
be completed and filed by a municipal advisory firm with respect to
each natural person associated with the firm and engaged in
municipal advisory activities on the firm's behalf, including
employees of the firm. Independent contractors are included in the
definition of ``employee'' for these purposes. A natural person
doing business as a sole proprietor must complete and file Form MA-I
in addition to Form MA. Form MA-I is also used to amend a previously
submitted form, including in such cases where an individual is no
longer an associated person of the municipal advisory firm or no
longer engages in municipal advisory activities on the firm's
behalf. See ``Instructions for the Form MA Series,'' available at
<a href="https://www.sec.gov/about/forms/formmadata.pdf">https://www.sec.gov/about/forms/formmadata.pdf</a>. For purposes of Rule
A-11 and the calculation of the Municipal Advisor Professional Fee,
if a firm has filed an amendment to indicate that an individual is
no longer an associated person of the municipal advisory firm or no
longer engages in municipal advisory activities on its behalf, then
that individual's Form MA-I would not be deemed as active for
purposes of the Municipal Advisor Professional Fee and would not be
counted in the January 31st calculation regarding the assessment of
the Municipal Advisor Professional Fee.
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(ii) Rule A-13, on underwriting and transaction assessments for
brokers, dealers, and municipal securities dealers (collectively,
``dealers''), to modify the rate of assessments on
[[Page 36165]]
dealers for certain underwriting, transaction, and trade count fees \4\
(collectively, the ``Market Activity Fees'' and, such Market Activity
Fees together with the Municipal Advisor Professional Fee, the ``Rate
Card Fees''); \5\ and
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\4\ As further described herein, the proposed rule change would
provide a technical amendment to Rule A-13 to change the terminology
for this fee from ``technology fee'' to ``trade count fee.'' To
avoid confusion, the proposed rule change utilizes the amended name
except as context requires for clarity, such as describing this
specific technical amendment and providing certain historical
revenue data in Exhibit 3. See discussion infra entitled ``Technical
Amendments to Rule A-13 and Related Cross-References.''
\5\ Underwriting assessments charged pursuant to Rule A-
13(c)(ii) to certain dealers acting as underwriters of municipal
fund securities are not included in the Market Activity Fees that
would be amended by this proposed rule change.
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(iii) Rule A-11, Rule A-12, on registration, and Rule A-13 to
provide greater regulatory clarity for the assessment of fees on
municipal securities brokers, municipal securities dealers, and
municipal advisors (collectively, ``MSRB regulated entities'') under
these rules.
The proposed amendments to the rates of assessment of the Rate Card
Fees are referred to as the ``Rate Card Amendments.'' The Rate Card
Amendments would effectuate the Rate Card Fees in accordance with the
following table.
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Basis Proposed rate
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Underwriting Fee............... Per $1,000 Par $0.0297
Underwritten.
Transaction Fee................ Per $1,000 Par 0.0107
Transacted.
Trade Count Fee................ Per Trade............. 1.10
Municipal Advisor Professional Per Covered 1,060
Fee. Professional.
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The proposed technical amendments to Rule A-11, Rule A-12, and Rule A-
13 are referred to as the ``Technical Amendments.'' The Rate Card
Amendments and the Technical Amendments together are referred to as the
``proposed rule change.''
The MSRB has designated the proposed rule change for immediate
effectiveness.\6\ The Rate Card Amendments and the Technical Amendments
are designated to have an operative date of October 1, 2022. The Board
currently anticipates the amended Rate Card Fees proposed by the Rate
Card Amendments to be operative for a period of fifteen months from
October 1, 2022 to December 31, 2023 and an amended set of Rate Card
Fees to become operative on January 1, 2024 in accordance with a
subsequent proposed rule change and the internal rate setting process
described herein.\7\
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\6\ The MSRB has designated the Rate Card Amendments as
establishing or changing a due, fee, or other change under Section
19(b)(3)(A)(ii) of the Act (15 U.S.C. 78s(b)(3)(A)(ii)) and Rule
19b-4(f)(2) (17 CFR 240.19b-4(f)(2)) thereunder. The MSRB has
designated the Technical Amendments as being immediately effective
upon filing pursuant to Section 19(b)(3)(A)(iii) of the Exchange Act
(15 U.S.C. 78s(b)(3)(A)(iii)) and Rule 19b-(f)(6) (17 CFR 240.19b-
4(f)(6)) thereunder.
\7\ See discussion infra under ``Proposed Annual Rate Card
Approach.'' As further described therein, the Board presently
anticipates filing proposed rule changes with the Commission to
amend the rates of assessment of the Rate Card Fees on an annual
basis going forward, as applicable, with the first set of such
amendments filed with the Commission prior to or in the last quarter
of calendar year 2023 to become operative on January 1, 2024.
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The text of the proposed rule change is available on the MSRB's
website at <a href="http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2022-Filings.aspx">www.msrb.org/Rules-and-Interpretations/SEC-Filings/2022-Filings.aspx</a>, at the MSRB's principal office, and at the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the Rate Card Amendments is to amend the rate of
assessment for the Board's Rate Card Fees effective on October 1, 2022.
The description of the Rate Card Amendments also provides transparency
regarding the internal process for how the Board intends to amend such
fees on an annual basis going forward. Specifically, subsequent to this
proposed rule change, and commencing with the filing of a proposed rule
change prior to or in the last quarter of calendar year 2023, the Board
anticipates filing a proposed rule change with the Commission each year
to effectuate an ``Annual Rate Card'' that would revise the Rate Card
Fees as necessary or appropriate to defray the costs and expenses of
operating and administering the Board.\8\ The MSRB anticipates filing
such proposed rule changes to be effective as of January 1 each
calendar year and operative until December 31 for that year.\9\ In
addition to the proposed Rate Card Amendments, the proposed rule change
also proposes the Technical Amendments to Rule A-11, Rule A-12, and
Rule A-13 to provide greater regulatory clarity for the assessment of
fees on MSRB regulated entities under these rules.
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\8\ See Section 15B(b)(2)(J) of the Act (15 U.S.C. 78o-
4(b)(2)(J)).
\9\ Unlike these anticipated future amendments, the Rate Card
Amendments for Fiscal Year 2023 are expected to be effective for a
15-month period from October 1, 2022 to December 31, 2023.
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Purpose and Description of the Rate Card Amendments
As a self-regulatory organization, the Board discharges its
statutory mandate under the Exchange Act by establishing rules for
regulated entities, enhancing the transparency of the municipal
securities market through technology systems, and publicly
disseminating data about the municipal securities market. The Board
funds its activities primarily through the assessment of fees and
charges on regulated entities as is necessary or appropriate to defray
the costs and expenses of operating and administering the Board.\10\
The Board independently manages and monitors its financial position on
an ongoing basis to ensure that the organization has sufficient revenue
and organizational reserves to maintain its operations in accordance
with the Act,\11\ without interruption, even in economic downturns and
other unforeseen circumstances.
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\10\ See Section 15B(b)(2)(J) of the Act (15 U.S.C. 78o-
4(b)(2)(J)).
\11\ Id.
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Current Fee Structure
The Board has previously established, and currently applies, the
following fee
[[Page 36166]]
assessments on regulated entities to ensure the MSRB's ongoing
operations (the ``current fee structure''): \12\
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\12\ The Market Activity Fees listed do not indicate the current
temporary fee reductions that expire on September 30, 2022. See Rule
A-13(h) (specifying a temporary underwriting assessment of .00165%
($0.0165 per $1,000) of the par value; a temporary transaction
assessment of .0006% ($0.006 per $1,000) of the par value; and a
temporary technology assessment of $0.60 per transaction); see also
Exchange Act Release No. 91247 (Mar. 3, 2021), 86 FR 13593 (Mar. 9,
2021) File No. SR-MSRB-2021-02 (hereinafter, ``2021 Temporary Fee
Reduction''). Consistent with the language of the 2021 Temporary Fee
Reduction, these reduced fee rates will expire on September 30,
2022; and the related rule text would be deleted effective as of
October 1, 2022 by operation of the Technical Amendments proposed
herein.
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(i) Municipal Advisor Professional Fee: A fee of $1,000 for each
covered professional as of January 31 of each year; \13\
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\13\ Current Rule A-11(a)(i).
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(ii) Initial Registration Fee: A $1,000 one-time registration fee
to be paid by each dealer to register with the MSRB before engaging in
municipal securities activities and by each municipal advisor to
register with the MSRB before engaging in municipal advisory
activities; \14\
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\14\ Rule A-12(b). Initial registration assessments charged
pursuant to Rule A-12(b) are not included in the Rate Card Fees that
would be amended by this proposed rule change. Given that the amount
of the initial registration fee historically has been set with the
intention of defraying a significant portion of the administrative
and operational costs associated with the processing of a regulated
entity's initial registration, the Board determined that, at this
time, it was not beneficial or necessary to incrementally adjust
such fees each year through an annual rate setting process. See
Exchange Act Release No. 75751 (Aug. 24, 2015), 80 FR 52352 (Aug.
28, 2015) File No. SR-MSRB-2015-08 (stating the initial registration
fee is to help defray a significant portion of the administrative
and operational costs associated with processing an initial
registration). See also discussion infra under ``Board Review of the
Current Fee Structure'' and ``Proposed Annual Rate Card Approach.''
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(iii) Annual Registration Fee: A $1,000 annual fee to be paid by
each dealer and municipal advisor registered with the MSRB; \15\
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\15\ Rule A-12(c). Annual registration assessments charged
pursuant to Rule A-12(c) are not included in the Rate Card Fees that
would be amended by this proposed rule change. Given that the rate
of assessment for the annual registration fee is intended to serve
as a fixed, baseline contribution from all registered regulated
entities, irrespective of a regulated entity's actual total market
activities, the Board determined that, at this time, it was not
beneficial or appropriate to incrementally adjust such fees each
year through an annual rate setting process. See also discussion
infra under ``Board Review of the Current Fee Structure'' and
``Proposed Annual Rate Card Approach.''
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(iv) Late Fee: A $25 monthly late fee and a late fee on the overdue
balance (computed according to the prime rate) until paid on balances
not paid within 30 days of the invoice date by the dealer or municipal
advisor; \16\
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\16\ Rule A-11(b) and Rule A-12(d). As discussed herein, the
Technical Amendments would remove the current reference in Rule A-
12(d) to late fees for payments due pursuant to Rule A-13 and
incorporate this concept into Rule A-13. See Rule A-12(d) (``Any
broker, dealer, municipal securities dealer or municipal advisor
that fails to pay any fee assessed under this rule or Rule A-13
within 30 days of the invoice date shall pay a monthly late fee of
$25 and a late fee on the overdue balance, computed according to the
Prime Rate, as provided for in the MSRB Registration Manual, until
paid.'' (emphasis added)).
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(v) Underwriting Fee: A fee amount of $.0275 per $1,000 of the par
value paid by a dealer on all municipal securities purchased from an
issuer by or through such dealer, whether acting as principal or agent
as part of a primary offering (the ``Underwriting Fee''); \17\
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\17\ Current Rule A-13(c)(i).
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(vi) Municipal Funds Underwriting Fee: A fee amount of $.005 per
$1,000 of the total aggregate assets for the reporting period (i.e.,
the 529 savings plan fee on underwriters), in the case of an
underwriter (as defined in Rule G-45) of a primary offering of certain
municipal fund securities; \18\
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\18\ Current Rule A-13(c)(ii). Assessments charged pursuant to
Rule A-13(c)(ii) related to certain municipal fund securities are
not included in the Rate Card Fees that would be amended by this
proposed rule change. The basis upon which the municipal funds
underwriting fee is assessed (i.e., the total aggregate assets for
the reporting period) is not subject to the same type of volatility
as the Market Activity Fees, but instead is expected to generally
continue to grow over time. For example, municipal funds
underwriting fee revenue amounted to approximately $1,332,000 in
Fiscal Year 2021, approximately $1,167,000 in Fiscal Year 2020, and
approximately $991,000 in Fiscal Year 2019. See MSRB 2021 Annual
Report, available at <a href="https://www.msrb.org/-/media/Files/Resources/MSRB-2021-Annual-Report.ashx">https://www.msrb.org/-/media/Files/Resources/MSRB-2021-Annual-Report.ashx</a>?. As a result, the Board determined
that, at this time, it was not beneficial or necessary to
incrementally adjust the rate of assessment each year through an
annual rate setting process. See discussion infra under ``Board
Review of the Current Fee Structure'' and ``Proposed Annual Rate
Card Approach.''
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(vii) Transaction Fee: A fee amount of .001% ($.01 per $1,000) of
the total par value to be paid by a dealer, except in limited
circumstances, for inter-dealer sales and customer sales reported to
the MSRB pursuant to Rule G-14(b), on transaction reporting
requirements (the ``Transaction Fee''); \19\
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\19\ Rule A-13(d)(i) (transaction fee on inter-dealer sales) and
Rule A-13(d)(ii) (transaction fee on customer sales).
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(viii) Technology Fee: \20\ A fee of $1.00 paid per transaction by
a dealer for each inter-dealer sale and for each sale to customers
reported to the MSRB pursuant to Rule G-14(b) (the ``Trade Count
Fee''); \21\ and
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\20\ As further described herein, the proposed rule change would
provide a technical amendment to this provision of Rule A-13 to
rename this fee to the ``trade count fee.''
\21\ Rule A-13(d)(vi).
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(ix) Examination Fee: A $150 test development fee assessed per
candidate for each MSRB examination.\22\
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\22\ Rule A-16. Assessments charged pursuant to Rule A-16
related to such examination fees are not included in the Rate Card
Fees that would be amended by this proposed rule change. Given that
the rate of assessment for the examination fee historically has been
set with the intention of defraying a portion of the overall costs
of the MSRB's professional qualification and testing program, the
Board determined that, at this time, it was not beneficial or
necessary to incrementally adjust the rate of assessment of such fee
each year through an annual rate setting process. See Exchange Act
Release No. 85135 (Feb. 14, 2019), 84 FR 5513 (Feb. 21, 2019) File
No. SR-MSRB-2019-02 (stating the examination fee is intended to
partially offset the overall program costs to the MSRB of its
professional qualification and testing program). See also discussion
infra under ``Board Review of the Current Fee Structure'' and
``Proposed Annual Rate Card Approach.''
In addition to these fees assessed on regulated entities, the Board
also receives revenues from certain other sources, such as investment
income, regulatory fine sharing,\23\ and MSRB data subscription
fees.\24\ These revenue sources contribute a much smaller portion to
the overall MSRB funding.\25\
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\23\ Fine revenue became a revenue source as first provided in
2010 under the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the ``Dodd-Frank Act''). See 15 U.S.C. 78o-4(c)(9).
\24\ The MSRB charges data subscription service fees for
subscribers, including regulated entities and non-regulated
entities, seeking direct electronic delivery of municipal trade data
and disclosure documents associated with municipal bond issues. This
information is also available without direct electronic delivery on
the EMMA website without charge.
\25\ For example, fine-sharing revenue amounted to approximately
0.9% of the MSRB's overall revenue in Fiscal Year 2021 (or
approximately $322,000), 3.3% in Fiscal Year 2020 (or approximately
$1.5 million), and 0.4% (or approximately $151,000) in Fiscal Year
2019. See MSRB 2021 Annual Report, available at <a href="https://www.msrb.org/-/media/Files/Resources/MSRB-2021-Annual-Report.ashx">https://www.msrb.org/-/media/Files/Resources/MSRB-2021-Annual-Report.ashx</a>?.
Given that this revenue is collected by FINRA and the SEC for
violations of MSRB rules and the fact that the Board does not set
the rates of assessment for the collection of such fines, the Board
does not believe that it is appropriate to separately consider fine-
sharing revenue for potential rebates to regulated entities by
operation of the proposed Annual Rate Cards and the annual rate
setting process.
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Board Review of the Current Fee Structure
Early in Fiscal Year 2021, the Board determined that it should
review the current fee structure in relation to the MSRB's long term
financial position and near-term anticipated funding needs (the ``Fee
Review''). Through its Fee Review, the Board sought to identify
potential improvements to the MSRB's current fee structure that would:
(i) maintain a fair and equitable balance of reasonable fees and
charges among regulated entities; \26\ (ii) mitigate the
[[Page 36167]]
impact of market volatility on the amount of fee revenue actually paid
each year \27\ and, correspondingly, facilitate the Board's ability to
manage the amount held by the MSRB in organizational reserves year-to-
year; \28\ and (iii) prudently fund the MSRB's anticipated near-term
operating expenses.\29\
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\26\ While engaging in the Fee Review, and consistent with the
MSRB Funding Policy, the Board considered how potential
modifications to the current fee structure would impact the
diversity of the MSRB's funding sources. See MSRB Funding Policy,
available at <a href="https://www.msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Funding-Policy">https://www.msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Funding-Policy</a> (hereinafter, the
``MSRB Funding Policy'') (stating that the ``MSRB strives to
diversify funding sources among regulated entities and other
entities that fund MSRB services in a manner that ensures long-term
sustainability, seeking to achieve an equitable balance among
regulated entities and a fair allocation of the costs of systems and
services among other users and regulated entities to the extent
allowed by law.'')
\27\ Market Activity Fees are driven by market dynamics and are
inherently unpredictable. Because of this unpredictability, the
amount of Market Activity Fees collected by the MSRB has often
exceeded the amount budgeted in recent fiscal years. The MSRB's
Financial Statements for recent fiscal years are available at <a href="http://msrb.org/About-MSRB/Financial-and-Other-Information/Annual-Reports.aspx">http://msrb.org/About-MSRB/Financial-and-Other-Information/Annual-Reports.aspx</a>. See ``Chart 2--Historical Budget vs. Actual Revenue
for the Rate Card Fees'' and ``Chart 4--Rate Card Fees: Historical
Activity Volume Variance Budget to Actual.''
\28\ The Board established a reserves target to ensure that the
organization maintains a prudent level of financial resources to
fund operations and ensure the long-term financial sustainability of
the organization, taking into consideration a range of reasonably
foreseeable market conditions and expected expenditures over a
three-year time horizon. The reserves target is determined after
conducting a detailed and comprehensive analysis of the liquidity
needs in four categories: (1) working capital, (2) risk reserves,
(3) strategic investment reserves, and (4) regulatory reserves. See
MSRB Funding Policy (link at note 26 supra) (these four categories
are identified in the discussion under ``Reserve Considerations'').
The Board reviews and adjusts the reserves target on an annual basis
to ensure that it remains appropriately aligned with the
organization's needs. See MSRB Fiscal Year 2022 Budget for a further
discussion of the MSRB's budget and reserves, available at <a href="https://www.msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx">https://www.msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx</a>?.
\29\ See, e.g., Exhibit 3, ``Chart 8--Historical Actual
Expenses,'' ``Chart 10--Historical and Projected Revenue without
Rate Card Model Compared to Historical and Pro Forma Expenses,''
``Chart 11--Historical and Projected Revenue with Rate Card Model
Compared to Historical and Pro Forma Expenses.''
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Maintaining a Fair and Equitable Balance of Fees. As part of its
Fee Review, the Board evaluated the MSRB's current fee structure to
determine whether the fees and charges assessed upon regulated entities
remain reasonable, fair, and equitable. Among other factors considered
during the Fee Review, the Board: (i) analyzed publicly available data
on the revenue models of dealers and municipal advisors across
geographic areas; \30\ (ii) examined MSRB expense allocations to inform
its understanding of how much of the MSRB's expense budget relates to
various activities; \31\ (iii) evaluated historical budgeted revenue
versus actual revenues generated for the existing fee categories; \32\
(iv) gauged the MSRB's fee distribution across varying business models
of dealer and municipal advisory firms; \33\ and (v) deliberated upon
feedback from stakeholder discussions and prior written comments on the
topic of the MSRB's fees and expenses.\34\
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\30\ The Board considered market data from various external and
internal sources, such as the Texas Bond Review Board State and
Local Annual Reports (<a href="http://www.brb.state.tx.us/publications.aspx">http://www.brb.state.tx.us/publications.aspx</a>),
the California State Treasurer's Office--California Debt and
Investment Advisory Commission (CDIAC) (<a href="https://data.debtwatch.treasurer.ca.gov/Government/CDA-All-Data/yng6-vaxy">https://data.debtwatch.treasurer.ca.gov/Government/CDA-All-Data/yng6-vaxy</a>),
primary market data included in official statements and other
offering documents, and trading and other secondary market data. See
also, e.g., the MSRB's published Fact Books, which provide various
historical data sets related to market activities, such as the
distribution of municipal trades by dealers, available at <a href="https://www.msrb.org/Market-Transparency/Market-Data-Publications/MSRB-Fact-Book.aspx">https://www.msrb.org/Market-Transparency/Market-Data-Publications/MSRB-Fact-Book.aspx</a>.
\31\ See, e.g., Exhibit 3, ``Chart 9--Historical Budgeted
Expense by Function.''
\32\ See Exhibit 3, ``Chart 1--Historical Revenue Variances:
Budget vs. Actual'' and ``Chart 2--Historical Budget vs. Actual
Revenue for the Rate Card Fees.''
\33\ As non-exhaustive examples, the Board considered fee
distribution across the business models of: (i) small, medium, and
large firms, (ii) dually registered firms versus firms registered
only as dealers or municipal advisors, and (iii) firms that engage
in underwriting activities versus secondary market activities. See
also Exhibit 3, ``Chart 14--Distribution of Registrants by Range of
Total Fees Assessed Under Current Fee Structure Compared to
Projected Distribution Under the Rate Card Model (Exclusive of Late
Fees and Examination Fees).''
\34\ See, e.g., MSRB Notice 2020-19: ``MSRB Requests Input on
Strategic Goals and Priorities'' (Dec. 7, 2020), available at
<a href="https://msrb.org/-/media/Files/Regulatory-Notices/RFCs/2020-19.ashx??n=1">https://msrb.org/-/media/Files/Regulatory-Notices/RFCs/2020-19.ashx??n=1</a>, and related stakeholder comments (hereinafter, the
``Stakeholder Comments to the MSRB's Strategic Priorities''),
available at <a href="https://msrb.org/Rules-and-Interpretations/Regulatory-Notices/2020/2020-19?c=1">https://msrb.org/Rules-and-Interpretations/Regulatory-Notices/2020/2020-19?c=1</a>. See also, e.g., comments provided on
Exchange Act Release No. 87075 (Sep. 24, 2019), 84 FR 51698 (Sep.
30, 2019) File No. SR-MSRB-2019-11, available at <a href="https://www.sec.gov/comments/sr-msrb-2019-11/srmsrb201911.htm">https://www.sec.gov/comments/sr-msrb-2019-11/srmsrb201911.htm</a>, and comments
provided on Exchange Act Release No. 81264 (July 31, 2017), 82 FR
36472 (Aug. 4, 2017) File No. SR-MSRB-2017-05, available at <a href="https://www.sec.gov/comments/sr-msrb-2017-05/msrb201705.htm">https://www.sec.gov/comments/sr-msrb-2017-05/msrb201705.htm</a>.
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Based on these factors considered, the Board found that the current
fee structure--including the basis on which fees are assessed and the
relative contribution of revenue from each of the current fees assessed
on regulated entities--overall remains reasonable, fair, and equitable.
However, as further discussed below, the Board also determined that the
current fee structure could be improved with certain process changes
and targeted rule amendments to address the challenges associated with
(i) the revenue impact of market volatility and (ii) the MSRB's
anticipated near-term funding needs.
Mitigating the Impact of Market Volatility. As part of the Fee
Review, the Board analyzed the historical revenue generated under the
MSRB's current fee structure as compared to the historical amounts
budgeted over the same fiscal years.\35\ While the various fees
actually paid by regulated entities have, in some recent fiscal years,
marginally exceeded or underperformed their budgeted amounts, the Board
found that the amount of the three Market Activity Fees actually
collected have often exceeded their annual budget targets by more than
marginal amounts.\36\ The Board also found that the recurring variances
between budgeted amounts and actual amounts of Market Activity Fees
collected directly contributed to the periodic build-up of excess
reserves and, consequently, precipitated the need for the MSRB to use
rebates or temporary fee reductions as a mechanism to rightsize
organizational reserve positions back to the Board's target.\37\ Based
on these causal links between fluctuations in market activity year-to-
year, variances in the amount of Market Activity Fees actually
collected versus budgeted amounts, and the need for rebates or
temporary fee reductions to rightsize organizational reserves, the
Board prioritized the identification of alternative fee approaches that
would better mitigate the impact of the inevitable, year-to-year
fluctuations in activity in the municipal securities market.
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\35\ See, e.g., Exhibit 3, ``Chart 1--Historical Revenue
Variances: Budget vs. Actual'' and ``Chart 2--Historical Budget vs.
Actual Revenue for the Rate Card Fees.''
\36\ See Exhibit 3, ``Chart 1--Historical Revenue Variances:
Budget vs. Actual,'' ``Chart 2--Historical Budget vs. Actual Revenue
for the Rate Card Fees,'' and ``Chart 4--Rate Card Fees: Historical
Activity Volume Variance Budget to Actual.'' Relatedly, the Board
determined that such recurring variances could not be fully
addressed with further refinements to the MSRB's budgeting process;
rather, the variances were inherent to the imprecision associated
with budgeting future market volumes related to underwriting and
trading activity that exists within the overall dynamic of the
municipal securities market.
\37\ Compare, e.g., Exhibit 3, ``Chart 2--Historical Budget vs.
Actual Revenue for the Rate Card Fees,'' Chart 5--Historical
Effective Fee Rate Changes'' and ``Chart 12--Total Reserves vs.
Target: Historical and Projected without Rate Card Model.''
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After considering alternatives, the Board first determined that the
Municipal Advisor Professional Fee and the current set of Market
Activity Fees--i.e., Underwriting Fees, Transaction Fees, and Trade
Count Fees--remain the most reasonable and practical mechanisms for
assessing fees on regulated entities and so should not be replaced with
alternative fee
[[Page 36168]]
mechanisms. The Board came to this determination primarily because it
continues to believe that the respective mechanisms for assessing the
Municipal Advisor Professional Fee and the Market Activity Fees remain
superior to potential alternatives--some of which may require
significantly more burdensome firm reporting to achieve comparatively
greater precision in the alignment of the total amount of the fees
assessed on a given firm with such firm's total regulated activities;
\38\ and, therefore, these fee mechanisms remain the best option among
alternatives to ensure that the amount of the Municipal Advisor
Professional Fees and Market Activity Fees paid by a given firm is both
(i) appropriately balanced to the burdens and benefits of the MSRB's
regulatory and transparency activities, and also (ii) generally
proportional to the differing resources devoted to the regulation of
firms with different business models and differing degrees of
complexity.\39\ These existing fee methods also have the advantage of
being established mechanisms for assessing fees on regulated entities;
and, in this regard, the Board believes that maintaining this current
set of fee methods is more advantageous than other alternatives because
firms already understand and have embedded such assessments into their
business operations.
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\38\ See also related discussion infra under ``Self-Regulatory
Organization's Statement on Burden on Competition--Baseline and
Reasonable Alternative Approaches.''
\39\ The Board considers the distribution of its fees among
regulated entities of differing sizes, complexities, and business
models and strives for proportionality in the distribution of fees
as much as feasible within the broader set of considerations
described in the MSRB Funding Policy. See, e.g., related discussion
supra under ``Board Review of the Current Fee Structure--Maintaining
a Fair and Equitable Balance of Fees'' and Exhibit 3, ``Chart 14--
Distribution of Registrants by Range of Total Fees Assessed Under
Current Fee Structure Compared to Projected Distribution Under the
Rate Card Model (Exclusive of Late Fees and Examination Fees).'' See
also Release No. 34-87075 (Sep. 24, 2019), 84 FR 51698 (Sep. 30,
2019) File No. SR-MSRB-2019-11 (providing for increases to the
Municipal Advisor Professional Fee and discussing the superiority of
maintaining the Municipal Advisor Professional Fee in light of
possible alternatives that would require creating a novel and,
therefore, likely more burdensome reporting requirement).
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While the Board determined that the mechanisms for assessing the
Municipal Advisor Professional Fee and the Market Activity Fees should
not be replaced, the Board also determined it would be beneficial to
refine its approach to review and amend these fee rates for each
calendar year on an annual basis going forward. Specifically, to avoid
the MSRB accumulating excess reserves through the collection of fee
revenue above budgeted amounts over multiple fiscal years and then
utilizing short-term fee reductions to return the excess revenues to
the regulated entities who paid the fees, the Board is proposing to
review and incrementally refine the rates of assessment for each of
these fees each year. This revised approach would more closely align
the rates of assessment for the Municipal Advisor Professional Fee and
the Market Activity Fees to the MSRB's annual revenue requirements,
including by factoring revenue surpluses and shortfalls against
budgeted amounts for each of these fees from the prior year directly
into the annual rate calculation process. As further described in the
section below entitled ``Proposed Annual Rate Card Approach,'' the
Board's proposed approach would (i) better mitigate the impact of
market volatility on the MSRB's revenue structure (and, consequently,
also better mitigate the impact of market volatility on the MSRB's
organizational reserves), and (ii) maintain rates within a reasonably
predictable range that, while subject to more incremental changes each
year, would be comparably more stable over the long term than the
MSRB's current fee structure.\40\
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\40\ See related discussion infra under ``Proposed Annual Rate
Card Approach--Limitations on Rate Changes to Promote Predictability
and Stability'' (discussing various limitations on future increases
of the Rate Card Fees). See also Exhibit 3, ``Chart 5--Historical
Effective Fee Rate Changes.''
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Funding the MSRB's Anticipated Near-Term Operating Expenses. In
addition to analyzing the impact of variable market activity as part of
its Fee Review, the Board also analyzed the MSRB's current budget
projections for Fiscal Year 2023 and the anticipated funding needs in
the near term beyond Fiscal Year 2023.\41\ Specific to the projections
for Fiscal Year 2023, the MSRB's pro forma estimate currently
anticipates an operating deficit for the twelve-month period, based on
preliminary projected expenses and projected revenue under the current
fee structure (and without the Rate Card Amendments). Beyond Fiscal
Year 2023, the Board assumed at least modest expense growth in the
near-term fiscal years in line with the MSRB's ten-year compound annual
growth rate,\42\ particularly in consideration of the current impacts
of inflation and other key expenses associated with modernizing and
operating the MSRB's technology systems. Based on these budgetary
expectations, the Board analyzed options for how expense control and
additional revenue generation could address both the projected
operating deficit for Fiscal Year 2023 and the likelihood of expense
growth in future near-term fiscal years.
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\41\ Specific to the scope of the Board's near-term funding
analysis, the Board considered various funding scenarios for Fiscal
Year 2023 through Fiscal Year 2025. See, e.g., Exhibit 3, ``Chart
8--Historical Actual Expenses'' (showing a ten-year historical
compound annual growth rate of 4.2%), ``Chart 10--Historical and
Projected Revenue without Rate Card Model Compared to Historical and
Pro Forma Expenses,'' ``Chart 11--Historical and Projected Revenue
with Rate Card Model Compared to Historical and Pro Forma
Expenses.''
\42\ See Exhibit 3, ``Chart 8--Historical Actual Expenses.''
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In terms of expense control, the MSRB remains committed to
responsibly managing expenses and aligning its resources to the
fulfillment of the Board's statutory mandate.\43\ Accordingly, the
Board reviewed anticipated expenses against various factors, including
(i) the MSRB's ``Strategic Plan--Fiscal Years 2022-2025;'' \44\ (ii)
actual historical expenses versus budgeted expenses for certain
activities; \45\ and (iii) stakeholder feedback and comments.\46\ Based
on these and other aspects of its Fee Review, the Board determined that
the MSRB's Strategic Plan should serve as the main budgetary guidepost
for how the MSRB allocates its limited resources and resolves competing
fiscal priorities, particularly because various stakeholders provided
significant written input regarding the Strategic Plan.\47\
Consequently, the Board determined that the MSRB's expenditures in
Fiscal Year 2023 and future near-term fiscal years generally should
align with the expenses necessary to discharge its statutory mandate in
accordance with the Strategic Plan.\48\ As a result, at least modest
expense growth, in line with the MSRB's ten-year compound annual growth
rate,\49\ is assumed given various
[[Page 36169]]
considerations, including the current Strategic Plan's emphasis on the
modernization of the MSRB's technology systems and the MSRB's ongoing
efforts to advance the quality, accessibility, security, and value of
the MSRB's market data for all participants in the municipal securities
market. The Board will continue to actively monitor and manage its
financial position to ensure prudent expense alignment to the MSRB's
statutory mandate and the corresponding objectives of the MSRB's
Strategic Plan.
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\43\ See, e.g., ``Controlling Expenses'' in MSRB Fiscal Year
2022 Budget at page 12 and related discussion, available at <a href="https://msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx">https://msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx</a>?.
See also Exhibit 3, ``Chart 6--Historical Expense Variances: Budget
vs. Actual.''
\44\ The MSRB's Strategic Plan--Fiscal Years 2022-25 is
available at <a href="https://msrb.org/-/media/Files/Resources/MSRB-Strategic-Plan-2022-2025.ashx">https://msrb.org/-/media/Files/Resources/MSRB-Strategic-Plan-2022-2025.ashx</a>? (the ``Strategic Plan'').
\45\ See Exhibit 3, ``Chart 6--Historical Expense Variances:
Budget vs. Actual'' and ``Chart 9--Historical Budgeted Expense by
Function.''
\46\ See, e.g., Stakeholder Comments to the MSRB's Strategic
Priorities (link at note 34 supra).
\47\ Id.
\48\ The MSRB notes that its anticipated expenditures for the
near-term fiscal years beyond Fiscal Year 2023 are subject to
greater uncertainty caused by the higher potential for changing
circumstances and, correspondingly, its budgetary assumptions for
these years are also less certain.
\49\ See Exhibit 3, ``Chart 8--Historical Actual Expenses.''
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In terms of revenue, the Board determined that the current fee
structure should be amended to increase total revenue and, thereby,
reduce the likelihood of a near-term operating deficit for Fiscal Year
2023.\50\ The Board is proposing to raise this additional revenue in
accordance with a new rate setting approach as described in the
following section entitled ``Proposed Annual Rate Card Approach.'' The
Board considered comments from regulated entities about the
consequences associated with the MSRB collecting more fee revenue than
needed and with the MSRB maintaining organizational reserves in excess
of what is required.\51\ In response to such concerns, the Board has
undertaken significant efforts to determine the level of organizational
reserves needed and, correspondingly, refined and reduced its
organizational reserves target.\52\ To bring the MSRB's excess
organizational reserves in-line with this refined target, the Board has
intentionally budgeted operating deficits in recent fiscal years,
primarily by temporarily reducing certain fees on regulated entities
and, thereby, collecting less revenue as a result of those fee
reductions.\53\ At the same time, the Board has designated funds from
the MSRB's organizational reserves for necessary multiyear systems
modernization initiatives, which has further aligned organizational
reserves to target.\54\ As a result of these efforts, the MSRB's
organizational reserves presently are on track to be aligned with the
Board's reserves target for Fiscal Year 2023.\55\ In this way, while
the Board determined that additional funding is needed for Fiscal Year
2023, the Board also determined that such funding would be best
obtained through an increase in fees as opposed to the further drawing
down of organizational reserves below target.\56\
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\50\ See Exhibit 3, ``Chart 10--Historical and Projected Revenue
without Rate Card Model Compared to Historical and Pro Forma
Expenses'' and ``Chart 11--Historical and Projected Revenue with
Rate Card Model Compared to Historical and Pro Forma Expenses.''
\51\ See, e.g., letter from Mike Nicholas, Chief Executive
Officer, Bond Dealers of America (``BDA''), (Jan. 11, 2021)
(hereinafter, the ``BDA Comment Letter'') (responding to the MSRB's
Request for Input on Strategic Goals and Priorities and stating
``[w]e strongly urge the Board to take a comprehensive look at its
finances with the goal of once and for all establishing a funding
mechanism that fairly allocates the MSRB's expenses among regulated
entities and does not assess the industry for more money than the
MSRB needs''), available at <a href="https://www.msrb.org/rfc/2020-19/Dbamerica.pdf">https://www.msrb.org/rfc/2020-19/Dbamerica.pdf</a>.
\52\ See Exhibit 3, ``Chart 12--Total Reserves vs. Target:
Historical and Projected without Rate Card Model'' and ``Chart 13--
Total Reserves vs. Target: Historical and Projected with Rate Card
Model.''
\53\ See the 2021 Temporary Fee Reduction (citation and link at
note 12 supra); Release No. 34-85400 (Mar. 22, 2019), 84 FR 11841
(Mar. 28, 2019) File No. SR-MSRB-2019-06 (providing for a temporary
fee reduction); and Release No. 34-83713 (July 26, 2018), 83 FR
37538 (Aug. 1, 2018) File No. SR-MSRB-2018-06 (providing for a
temporary fee reduction). See also Exhibit 3, ``Chart 1--Historical
Revenue Variances: Budget vs. Actual,'' ``Chart 2--Historical Budget
vs. Actual Revenue for the Rate Card Fees,'' ``Chart 5--Historical
Effective Fee Rate Changes,'' and ``Chart 7--Historical Budgeted
Revenue and Budgeted Expense.''
\54\ See the MSRB's Fiscal Year 2022 Budget, at page 13
(discussing the MSRB's system modernizations investments), available
at <a href="https://msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx">https://msrb.org/-/media/Files/Resources/MSRB-FY-2022-Budget-Summary.ashx</a>?. See also, e.g., the MSRB's 2021 Annual Report, at
page 2 (link at note 25 supra); the MSRB's 2020 Annual Report, at
page 35 (discussing certain modernization investment efforts),
available at <a href="https://msrb.org/-/media/Files/Resources/MSRB-2020-Annual-Report.ashx">https://msrb.org/-/media/Files/Resources/MSRB-2020-Annual-Report.ashx</a>?; and the MSRB's 2019 Annual Report, at page 11
(discussing the MSRB's cloud investments), available at <a href="https://msrb.org/-/media/Files/Resources/MSRB-2019-Annual-Report.ashx">https://msrb.org/-/media/Files/Resources/MSRB-2019-Annual-Report.ashx</a>?.
\55\ See Exhibit 3, ``Chart 13--Total Reserves vs. Target:
Historical and Projected with Rate Card Model.''
\56\ See Exhibit 3, ``Chart 10--Historical and Projected Revenue
without Rate Card Model Compared to Historical and Pro Forma
Expenses,'' ``Chart 11--Historical and Projected Revenue with Rate
Card Model Compared to Historical and Pro Forma Expenses,'' and
``Chart 12--Total Reserves vs. Target: Historical and Projected
without Rate Card Model,'' and ``Chart 13--Total Reserves vs.
Target: Historical and Projected with Rate Card Model.''
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Proposed Annual Rate Card Approach
Consistent with the Board's analysis and conclusions discussed
above, the Board proposes to amend the Municipal Advisor Professional
Fee assessed pursuant to Rule A-11 and the Market Activity Fees
assessed pursuant to Rule A-13 (i.e., the Rate Card Fees). Underlying
the proposed textual amendments to Rule A-11 and Rule A-13 is a revised
fee approach, whereby the Board anticipates reviewing the Rate Card
Fees each year and modifying them through the filing of a proposed rule
change with the Commission. In this way, the MSRB's Annual Rate Cards
will propose amended rates of assessment for each of the four fees on
regulated entities that make up the Rate Card Fees (i.e., Underwriting
Fees, Transaction Fees, Trade Count Fees, and Municipal Advisor
Professional Fees). Subsequent to the Annual Rate Card described in
this proposed rule change,\57\ the Board anticipates filing such
proposed rule changes enumerating the Annual Rate Cards to be effective
as of January 1st of each calendar year beginning with January 1,
2024.\58\
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\57\ Because of the expiration of the 2021 Temporary Fee
Reduction on September 30, 2022, the proposed rule change's Annual
Rate Card for Fiscal Year 2023 and the first quarter of Fiscal Year
2024 will become effective on October 1, 2022, and, in this way, is
intended to be operative for a fifteen-month period running from
October 1, 2022, to December 31, 2023.
\58\ As the proposed rule change is structured, a given Annual
Rate Card would remain effective and operative until a subsequent
proposed rule change amending such rates is filed, effective, and
operative. As stated, the MSRB anticipates that subsequent Annual
Rate Cards for future years will be filed with the Commission
through a proposed rule change and the MSRB would seek to have such
rates operative for twelve months running from January 1 to December
31 (i.e., a calendar-year basis). In order to execute the Annual
Rate Card Process, the MSRB determined to establish the Annual Rate
Card on a calendar-year basis. This allows the MSRB to determine any
prior fiscal year variances and return excess revenue or assess
revenue shortfalls through the new Rate Card Fees. Nevertheless, as
changing fiscal circumstances may warrant, the MSRB will retain the
flexibility to amend the rates of assessment specified by a given
Annual Rate Card under this modified approach in accordance with
applicable statutory requirements governing any such proposed rule
change.
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The Annual Rate Card approach is expected to ensure the MSRB's
financial model remains sustainable, while (i) adequately funding
future MSRB expenses and also (ii) providing a greater degree of
flexibility than the MSRB's current fee structure to mitigate the
impact of market volatility (and effectively manage organizational
reserve levels). The Annual Rate Card approach differs from the MSRB's
current approach by instituting a framework of more frequent, but also
more incremental adjustments, to the four fees that generate the vast
majority of the MSRB's annual revenue. The increased frequency of the
MSRB's amendments to the Rate Card Fees is meant to avoid the
accumulation of excess reserves resulting from additional revenue
collected due to market volatility as compared to budget expectations
and, thereby, the need for rate amendments in the form of more
significant, ad hoc temporary fee reductions or rebates.\59\ To ensure
that
[[Page 36170]]
the Board's adjustments to the Annual Rate Card will remain
incremental, the Board is proposing certain maximum caps on the amount
of such year-to-year increases, as discussed below under the section
entitled ``Limitations on Rate Changes to Promote Predictability and
Stability.'' \60\
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\59\ The proposed rule change would not amend the underlying
activities that are the subject of such assessments. In other words,
the respective volumes of underwriting and transaction activities of
a dealer firm would continue to serve as the basis upon which Market
Activity Fees are assessed under Rule A-13; and the number of
covered professionals associated with a municipal advisory firm
would continue to serve as the basis upon which the rate of the
Municipal Advisor Professional Fee is assessed under Rule A-11.
Other fees assessed on regulated entities--specifically, the initial
registration fee, annual registration fee, late fee, municipal funds
underwriting fee, and examination fees--will be unchanged.
\60\ If the proposed rule change becomes operative, the MSRB
Funding Policy will be updated as of such operative date to reflect
this Annual Rate Card approach, including with respect to certain
maximum caps incorporated into the Annual Rate Card Process (as
defined infra) regarding (i) a maximum cap on targeted revenue,
which would generally cap a year-over-year increase in the total
targeted revenue for a Rate Card Fee at 10% when applicable, and
(ii) a maximum cap on assessment rate increases, which would
generally cap the maximum year-over-year increase in the assessment
rate for a Rate Card Fee at 25% when applicable. See related
discussion infra under ``Limitations on Rate Changes to Promote
Predictability and Stability.'' The current MSRB Funding Policy is
publicly available, presently at <a href="https://www.msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Funding-Policy">https://www.msrb.org/About-MSRB/Financial-and-Other-Information/Financial-Policies/Funding-Policy</a>.
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Objectives of the Annual Rate Card. Adjustments to the Annual Rate
Card will be used to revise the Rate Card Fees to annual levels that
the MSRB anticipates will be sufficient to: (i) cover anticipated
expenses for the related fiscal year; \61\ (ii) maintain target
contribution balances between fees on regulated entities in line with
recent historical precedents; \62\ (iii) address any prior-year
variance between the amounts of each of the Rate Card Fees actually
collected versus budget (i.e., ``Rate Card Fee Variances''); \63\ and
(iv) address any variance between the amount of the Board's
organizational reserves versus the Board's target (i.e., ``Reserves
Variances'').\64\ Fee rates may increase year-to-year, subject to
certain limitations discussed in additional detail below, or decrease
from year-to-year, as needed to meet these objectives.
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\61\ As noted, the MSRB anticipates that, subsequent to the
Annual Rate Card proposed herein and currently anticipated to be
operative for the fifteen months from October 1, 2022 to December
31, 2023, future Annual Rate Cards would become effective on January
1, while the MSRB fiscal year would start on the prior October 1.
See also Exhibit 3, ``Chart 11--Historical and Projected Revenue
with Rate Card Model Compared to Historical and Pro Forma
Expenses.''
\62\ That is, this factor is intended to maintain a
proportionate percentage amount of the MSRB's anticipated expenses
for the fiscal year among each of the Market Activity Fees and the
Municipal Advisor Professional Fee. See, e.g., Exhibit 3, ``Chart
3--Historical Actual Revenue for the Rate Card Fees as a Percentage
of the Total Rate Card Fee Revenue'' and ``Chart 14--Distribution of
Registrants by Range of Total Fees Assessed Under Current Fee
Structure Compared to Projected Distribution Under the Rate Card
Model (Exclusive of Late Fees and Examination Fees)'' (reflecting
that the distribution of registrants by range of total fees assessed
under the current fee structure are currently anticipated to be
relatively stable if the proposed Rate Card Amendments are
implemented).
\63\ A positive variance may occur, for example, when the actual
revenue from Rate Card Fees collected for a fiscal year exceeds
budgeted amounts (a ``Positive Rate Card Fee Variance''). See, e.g.,
Exhibit 3, ``Chart 2--Historical Budget vs. Actual Revenue for the
Rate Card Fees,'' at Fiscal Year 2020 (reflecting the actual revenue
generated from the Underwriting Fee and Transaction Fee exceeding
budget). A negative variance may occur, for example, when the actual
revenue from Rate Card Fees collected for a fiscal year is below
budgeted amounts (a ``Negative Rate Card Fee Variance''). See, e.g.,
Exhibit 3, ``Chart 2--Historical Budget vs. Actual Revenue for the
Rate Card Fees,'' at Fiscal Year 2020 (reflecting the actual revenue
generated from the Technology Fee below budget).
\64\ A positive variance above the reserves target may occur,
for example, due to actual expense savings, actual revenue above
budget from sources other than Rate Card Fees, or the Board's
determination to decrease the reserves target in light of revised
organizational needs (a ``Positive Reserves Variance''). See, e.g.,
Exhibit 3, ``Chart 12--Total Reserves vs. Target: Historical and
Projected without Rate Card Model,'' at Fiscal Year 2021 (reflecting
actual reserves exceeding target). A negative variance below the
reserves target may occur, for example, due to an increase in actual
expenses, shortfall in revenue from sources other than Rate Card
Fees, or the Board's determination to increase the reserves target
in light of revised organizational needs (a ``Negative Reserves
Variance''). See, e.g., Exhibit 3, ``Chart 12--Total Reserves vs.
Target: Historical and Projected without Rate Card Model,'' at
Fiscal Year 2011 (reflecting actual reserves below target).
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Process for Setting the Annual Rate Card. The Board will develop an
Annual Rate Card for future fiscal years through a uniform process
consistent with the objectives discussed above (the ``Annual Rate Card
Process'').\65\ The Annual Rate Card Process is intended to establish a
fee framework that is more transparent and predictable for the MSRB's
stakeholders while also retaining the Board's ability to flexibly react
to changing circumstances when establishing reasonable fees on
regulated entities. The Annual Rate Card Process will consist of the
activities below.
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\65\ The amended Annual Rate Cards resulting from the Annual
Rate Card Process will be filed with the Commission as proposed rule
changes consistent with the Act.
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Development of the Fiscal Year Operational Funding Level.
Consistent with its existing budgeting process, the Board will approve
the annual expense budget and, thereby, establish the baseline revenue
that the organization will need to operate for that fiscal year (i.e.,
the ``Operational Funding Level''). As previously discussed, the MSRB
anticipates the Operational Funding Level in the near-term fiscal years
to align with the discharge of the Board's statutory mandate and
corresponding initiatives outlined in the MSRB's current Strategic
Plan. Once the Board sets the Operational Funding Level, any Reserves
Variances may further adjust the amount of the Operational Funding
Level, as discussed below.
Reconciliation of Any Material Reserves Variances. While the Board
currently projects that the MSRB's reserves will be at their target
level at the end of Fiscal Year 2022, based on current circumstances,
if there are material Reserves Variances in future fiscal years, the
amount of such Reserves Variances will be added to or subtracted from
the Operational Funding Level to develop a final ``Budgeted Revenue
Target'' for a given fiscal year. For example, if there is a Negative
Reserves Variance, the Board may determine, in accordance with the MSRB
Funding Policy, that some or all of the reserves shortfall will be
incorporated into the total revenue that needs to be collected for that
fiscal year.\66\ Conversely, if there is a material Positive Reserves
Variance, the Board may determine, in accordance with the MSRB Funding
Policy, that some or all of the excess will offset an amount of the
total revenue that needs to be collected for that fiscal year.\67\
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\66\ Stated differently, the Board may decide that some or all
of such a Negative Reserves Variance amount will be added to that
fiscal year's Operational Funding Level when determining the
cumulative Budgeted Revenue Target for that fiscal year. Notably,
the Board would have the flexibility to close the Negative Reserves
Variance (i.e., increase reserves funding to reach the target) over
a period of multiple fiscal years, rather than all in one fiscal
year, and so could determine to only address some of the Negative
Reserves Variance in a given fiscal year. For example, if the
Operational Funding Level was determined to be $45 million and there
was a Negative Reserves Variance of $1 million (i.e., actual
reserves were under target by $1 million), then the Board could seek
to resolve that difference by increasing the target amount of
revenue to be generated from the applicable Annual Rate Card by $1
million and set a final Budgeted Revenue Target of $46 million.
Alternatively, the Board may determine to seek to resolve the $1
million difference over the course of two Annual Rate Cards and set
the final Budgeted Revenue Target for the first of those two Annual
Rate Cards at, for example, $45.5 million.
\67\ Stated differently, the Board may decide that some or all
of such a Positive Reserves Variance amount will be subtracted from
that fiscal year's Operational Funding Level to determine the
Budgeted Revenue Target for that fiscal year. As discussed in the
immediately prior footnote, the Board would have the flexibility to
close the Positive Reserves Variance (i.e., decrease reserves
funding to target) over a period of multiple fiscal years, rather
than all in one fiscal year, and so could determine to only address
some of the Positive Reserves Variance in a given fiscal year. For
example, if the Operational Funding Level was determined to be $45
million and there was a Positive Reserves Variance of $1 million
(i.e., actual reserves were over target by $1 million), then the
Board could seek to resolve that variance by decreasing the target
amount of revenue to be generated from the applicable Annual Rate
Card by $1 million and set a final Budgeted Revenue Target of $44
million. Alternatively, the Board may determine to seek to resolve
the $1 million variance over the course of two Annual Rate Cards and
set the final Budgeted Revenue Target for the first of those two
Annual Rate Cards at, for example $44.5 million.
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[[Page 36171]]
Incorporation of Other Anticipated Revenue. Revenue from sources
other than the Rate Card Fees will be forecasted, and that estimate
will be credited against the Budgeted Revenue Target. The amount
remaining after these revenue estimates are incorporated will be the
remaining revenue amount that will determine the total amount of
funding needed to be generated from the Rate Card Fees (the ``Rate Card
Funding Amount'').
Reconciliation of Any Rate Card Fee Variances from the Prior Fiscal
Year. Each of the four Rate Card Fees will be responsible for a
proportionate amount of the overall Rate Card Funding Amount (each a
``Proportional Contribution Amount''). The MSRB will maintain a fair
and equitable balance of the Proportional Contribution Amounts in line
with recent historical precedents.\68\ Beginning with the Annual Rate
Card for Fiscal Year 2024, any Rate Card Fee Variances between the
budget and actual results of the Rate Card Fees for the prior fiscal
year will be added to (or subtracted from) the Proportional
Contribution Amount (``Final Contribution Amount'').\69\ For example,
if new issuance underwriting volume were to exceed the budgeted amount
in Fiscal Year 2023, resulting in a Positive Rate Card Fee Variance for
that fee, the Proportional Contribution Amount for the Underwriting Fee
would be adjusted downward sufficient to offset the excess Underwriting
Fee revenue collected (and vice versa). In this way, Rate Card Fee
Variances related to a specific Rate Card Fee will only impact the
Proportional Contribution Amount for that specific fee.
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\68\ The Board will consider whether contribution targets should
be revisited when setting rates each year. However, to maintain
fairness and equity in fees, the Board intends contribution targets
to be relatively stable over time, unless there is a durable,
material shift in market structure or circumstances that would
indicate that the expectations for the relative contributions from
one or more fees are no longer reasonable or appropriate. See
Exhibit 3, ``Chart 3--Historical Actual Revenue for the Rate Card
Fees as a Percentage of the Total Rate Card Fee Revenue'' and also
``Chart 14--Distribution of Registrants by Range of Total Fees
Assessed Under Current Fee Structure Compared to Projected
Distribution Under the Rate Card Model.''
\69\ More specifically, a Negative Rate Card Fee Variance will
increase the rate of assessment for a Rate Card Fee by increasing
its Final Contribution Amount. A Positive Rate Card Fee Variance
will reduce the rate of assessment for a Rate Card Fee by reducing
its Final Contribution Amount. See note 63 supra and related
discussion regarding Rate Card Fee Variances.
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Forecast of Expected Activity and Setting the Annual Rate Card. The
MSRB will use the best available information to set expected volume of
activity for the coming fiscal year. Based on the anticipated volume of
activity, the MSRB will calculate rates of assessment for each of the
Rate Card Fees to generate their respective Final Contribution Amounts.
Limitations on Rate Changes to Promote Predictability and
Stability. To alleviate the potential for greater uncertainty among
regulated entities regarding the variability of the Rate Card Fees
under this revised approach, the Board has also established certain
limitations on fee increases from year-to-year to promote greater
predictability and stability.\70\
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\70\ If the full amount of a Negative Rate Card Fee Variance
cannot be recaptured in a single year due to these limitations, the
remaining amount of such variance will carry over into the
calculation of the Rate Card Funding Amount for the following fiscal
year(s) and, all else being equal, increase the rate of assessment
for such Rate Card Fee as described above. Conversely, there are no
limits on potential decreases to the rates of assessment for the
Rate Card Fees that may result from Positive Rate Card Fee Variances
and, if warranted, Positive Reserves Variances.
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10% Maximum Cap on Targeted Revenue. The first limitation is a 10%
cap on the maximum year-over-year increase in the targeted revenue for
a Rate Card Fee.\71\ This maximum cap is intended to limit large
increases in the rate of assessment for the Rate Card Fees to ensure
that fee increases remain incremental and, accordingly, regulated
entities have the time to operationalize such increases into their
business models.
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\71\ Note that the 10% revenue cap is based on targeted revenue
dollars. The underlying market activity volume will likely vary
based on projected market conditions for the respective fiscal year.
For illustrative purposes only, if the target revenue for one of the
Rate Card Fees in Year 1 is $13,000,000, the maximum target revenue
in Year 2 would be $14,300,000. In addition, if target revenue
decreased in Year 2--such as to return excess revenue collected in
Year 1--then the cap for Year 3 would be calculated based on the
higher revenue target in the year prior to the decrease (i.e., the
higher prior revenue level in Year 1, which is $13,000,000 in this
example).
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25% Maximum Cap on Assessment Rate Increases. The second limitation
is a 25% cap on the maximum year-over-year increase in the assessment
rate for a Rate Card Fee.\72\ The secondary cap is intended to limit
large increases in rates of assessment for the Rate Card Fees in
instances where expected volume decreases significantly from the prior
year.
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\72\ For illustrative purposes only, if the Trade Count Fee is
set at $1.10 in Year 1, the maximum rate in Year 2 would be $1.38
under the 25% maximum cap on assessment rate increases. In addition,
if the assessment rate decreased in Year 2--such as to return excess
revenue collected in Year 1--then the cap for Year 3 would be
calculated based on the higher assessment rate in the year prior to
the decrease.
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If the proposed rule change becomes operative, the MSRB Funding
Policy will be updated as of such operative date to reflect the Annual
Rate Card Process, including the Maximum Cap on Targeted Revenue and
the Maximum Cap on Assessment Rate Increases. It should be noted that,
pursuant to its terms, the principles described in the MSRB Funding
Policy do not bind individual Board decisions but instead generally are
intended as a guide to provide continuity in funding decisions and to
help align strategic, operational, and financial planning.\73\ If the
Annual Rate Card Process becomes operative and a future proposed
amendment to the rates of assessment for the Rate Card Fees would
exceed the Maximum Cap on Targeted Revenue or the Maximum Cap on
Assessment Rate Increases, as applicable, then such future amendment
would address any such deviation in the corresponding proposed rule
change.
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\73\ See MSRB Funding Policy (link at note 26 supra).
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Proposed Rate Card Amendments
The proposed Rate Card Amendments are designed to promote the
collection of reasonable fees and charges from MSRB regulated entities
as are necessary or appropriate to defray the costs and expenses of
operating and administering the Board.\74\ The Board believes that the
Annual Rate Card Process enables it to consider the necessary factors
and to sufficiently deliberate on those factors in order to arrive at
reasonable fees and charges as may be necessary or appropriate to
defray the costs and expenses of operating and administering the Board.
Accordingly, among the other reasons discussed herein, the Board
believes that the proposed rule change achieves reasonable fees and
charges consistent with the Act because the Rate Card Amendments
adhered to the Annual Rate Card Process. Specifically, the Board (i)
developed the Operational Funding Level for Fiscal Year 2023 based on
existing pro forma estimates; (ii) incorporated other anticipated
revenue into its funding analysis; and (iii) forecasted expected volume
activity to appropriately set the rates of assessment for each of the
Rate Card Fees, all as further described above.\75\
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\74\ See Section 15B(b)(2)(J) of the Act. 15 U.S.C. 78o-
4(b)(2)(J).
\75\ The Board did not engage in the reconciliation of any
material reserves variances because the Board anticipates that
organizational reserves would be at or near target on the proposed
effective date of October 1, 2022. Nor did the Board engage in the
reconciliation of any Rate Card Fee Variances because, as noted,
this is the first use of the Annual Rate Card approach, so no such
Rate Card Fee Variances yet exist.
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[[Page 36172]]
Proposed Annual Rate Card. The Rate Card Amendments would establish
the Municipal Advisor Professional Fee specified in Rule A-11 and the
Market Activity Fees specified in Rule A-13 in accordance with the
chart below.
----------------------------------------------------------------------------------------------------------------
Current rate
Basis \76\ Proposed rate
----------------------------------------------------------------------------------------------------------------
Underwriting Fee.......................... Per $1,000 Par Underwritten...... $0.0275 $0.0297
Transaction Fee........................... Per $1,000 Par Transacted........ 0.0100 0.0107
Trade Count Fee........................... Per Trade........................ 1.00 1.10
Municipal Advisor Professional Fee........ Per Covered Professional......... 1,000 1,060
----------------------------------------------------------------------------------------------------------------
These revised rates would become effective on October 1, 2022 and
are expected to apply to activities occurring through December 31,
2023. The Board anticipates amending the rates of assessment specified
in this proposed Annual Rate Card with a subsequent rule filing with
the Commission that would become effective as of January 1, 2024.\77\
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\76\ The Rate Card Fees listed do not indicate the current
temporary fee reductions for the Market Activity Fees that expire on
September 30, 2022. See Rule A-13(h) and the 2021 Temporary Fee
Reduction (citation and description at note 12 supra).
\77\ The Rate Card Amendments are intended to revise the rates
of assessment for the Market Activity Fees prior to the expiration
of the 2021 Temporary Fee Reduction on October 1, 2022. As a result,
the Board notes that its fifteen-month budgetary and rate
assumptions are subject to a greater degree of uncertainty than
would be expected in future years, which would only have twelve-
month budgetary and rate assumptions. Consequently, there is an
increased risk that the Board may need to exercise its flexibility
to revise this rate card prior to its implementation on October 1,
2022 in accordance with the totality of the circumstances and as
prudence necessitates. However, that is not the current expectation.
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Purpose and Description of the Technical Amendments
Consistent with the Board's Fee Review, the MSRB identified
instances across Rule A-11, Rule A-12, and Rule A-13 where amendments
would improve the clarity of application of these MSRB rules.
Specifically, the MSRB determined that Rule A-11, Rule A-12, and Rule
A-13 could benefit from: (i) the creation of defined terms for existing
concepts that would help streamline the rule text and improve
readability; (ii) the clarification of existing terms and concepts
through the consolidation of previously published regulatory guidance
into the proposed rule change and the direct incorporation of cross-
referenced definitions from other MSRB rules into the proposed rule
change; and (iii) the deletion of obsolete rule language to streamline
the rule text and avoid the potential for regulatory confusion as to
why such obsolete language continues to be incorporated into MSRB
rules. Accordingly, the proposed rule change would also amend Rule A-
11, Rule A-12, and Rule A-13 with certain technical, non-substantive
amendments.
Technical Amendments to Rule A-11
The proposed Technical Amendments would amend Rule A-11 to (i)
create a separately defined term for the concept of a ``covered
professional;'' (ii) reformat the applicable subsections of Rule A-11
with the appropriate subsection designations and update the applicable
cross-references in the rule text; and (iii) directly incorporate the
definition for ``Prime Rate'' into the text of the rule. Importantly,
the proposed definition for the new term ``covered professional'' is
intended to be non-substantive and to match the existing rule text and
understanding of the descriptive phrase in Rule A-11 regarding a
``person associated with the municipal advisor who is qualified as a
municipal advisor representative in accordance with Rule G-3 and for
whom the municipal advisor has on file with the Commission a Form MA-I
as of January 31 of each year.'' The proposed amendment would also
incorporate the concept of an ``active'' Form MA-I to make expressly
clear the existing application of Rule A-11 that, if a firm has filed
an amendment to indicate that an individual is no longer an associated
person of the municipal advisory firm or no longer engages in municipal
advisory activities on its behalf, then that individual's Form MA-I
would not be deemed as active for purposes of the Municipal Advisor
Professional Fee and would not be counted in the January 31st
calculation regarding the assessment of the Municipal Advisor
Professional Fee. In this way, the proposed amendments are intended to
define the same category of associated persons as the existing text of
the rule and, all else being equal, would not capture any greater or
fewer individuals in its scope. Consequently, the proposed defined term
for a covered professional would not change the MSRB's current method
for calculating and applying the amount of the Municipal Advisor
Professional Fee under Rule A-11. The proposed amendment is merely
intended to provide greater regulatory clarity for the application of
Rule A-11. Therefore, the MSRB believes it is a technical, clarifying
amendment to the rule text that would improve its readability and would
not modify any existing regulatory burdens or obligations, nor create
any new regulatory burdens or obligations.
Consistent with separately defining the term ``covered
professional,'' the proposed rule change would also reformat the
applicable subsections of Rule A-11 with the appropriate subsection
designations and update the applicable cross-references in the rule
text. These related amendments are merely intended to provide internal
consistency to Rule A-11 in light of the other amendments and,
therefore, the MSRB believes they are technical, non-substantive
amendments.
Lastly, the proposed Technical Amendments to Rule A-11 would strike
the current reference to the MSRB Registration Manual from current
subsection (b) and directly incorporate the definition for ``Prime
Rate'' in Supplementary Material .02. The new definition provided in
Supplementary Material .02 would match the existing definition provided
in the MSRB Registration Manual, stating that ``. . . the Prime Rate is
the annual rate of the commercial prime rate of interest as last
published in The Wall Street Journal prior to the date such charge is
computed.'' Given that this proposed definition is the same as the one
currently provided in the MSRB Registration Manual, the MSRB believes
this amendment is a technical, clarifying amendment to the rule text
that would improve regulatory understanding of Rule A-11 and would not
modify any existing regulatory burdens or obligations, nor create any
new regulatory burdens or obligations. Moreover, the MSRB believes that
moving this language directly into Rule A-11 consolidates the operative
regulatory text and, thereby, is likely to lead to less regulatory
confusion for regulated entities, who would no longer
[[Page 36173]]
have to separately reference Rule A-11 and the MSRB Registration
Manual.
Technical Amendments to Rule A-12
The proposed Technical Amendments would amend Rule A-12 to (i)
eliminate its existing reference to Rule A-13 regarding the imposition
of late fees under Rule A-13; (ii) delete the now obsolete language in
Supplementary Material .01 regarding the temporary suspension of late
fees from March 1, 2020 to July 1, 2020; and (iii) directly incorporate
the definition for ``Prime Rate'' into the text of the rule. In terms
of deleting the reference to the imposition of late fees owed pursuant
to Rule A-13, the MSRB believes that regulatory clarity would be
improved if this fee concept was deleted from Rule A-12 and
incorporated directly into Rule A-13. The proposed amendment to Rule A-
13 that would incorporate this concept in an amendment to that rule
text and, thereby, retain this fee concept in the MSRB's fee structure
is discussed in the following section. Notably, the deletion of this
fee concept in Rule A-12 and its incorporation in Rule A-13 would not
change the MSRB's current method for calculating and applying the
amount of such late fees; and, therefore, the MSRB believes it is a
technical, clarifying amendment to the rule text that improves its
readability and does not modify any existing regulatory burdens or
obligations, nor create any new regulatory burdens or obligations.
In terms of deleting the language in Supplementary Material .01 of
Rule A-12, the language is no longer operative at this time and,
therefore, the MSRB believes that deleting it from the rule text would
improve the clarity of the application of Rule A-12. Specifically, the
deletion of the text of Supplementary Material .01 from Rule A-12 would
help streamline the rule text and reduce the potential for regulatory
confusion as to why it continues to be included in the text of the
rule.
In addition, the proposed Technical Amendments to Rule A-12 would
strike the reference to the MSRB Registration Manual from subsection
(d) and directly incorporate the definition for ``Prime Rate'' in
Supplementary Material .01. The new definition provided in
Supplementary Material .01 would match the existing definition provided
for in the MSRB Registration Manual, stating that ``. . . the Prime
Rate is the annual rate of the commercial prime rate of interest as
last published in The Wall Street Journal prior to the date such charge
is computed.'' Given that this proposed definition is the same as the
one currently provided in the MSRB Registration Manual, the MSRB
believes this amendment is a technical, clarifying amendment to the
rule text that would improve regulatory understanding of Rule A-12 and
would not modify any existing regulatory burdens or obligations, nor
create any new regulatory burdens or obligations. Moreover, the MSRB
believes that moving this language directly into Rule A-12 consolidates
the operative regulatory text and, thereby, is likely to lead to less
regulatory confusion for regulated entities, who would no longer have
to separately reference Rule A-12 and the MSRB Registration Manual.
Technical Amendments to Rule A-13
The proposed Technical Amendments would amend Rule A-13 to: (i)
reformat and clarify the definition of ``primary offering'' consistent
with the historical understanding and current application of Rule A-13;
(ii) further clarify that certain transactions in municipal securities
must meet the definition of a ``variable rate demand obligation'' or
``VRDO'' under Rule G-34, on CUSIP numbers, new issue, and market
information requirements, in order to be exempt from Transaction Fees
pursuant to Rule A-13(d)(iii)(c)'s subsection identifying
``Transactions Not Subject to Transaction Fee;'' \78\ (iii) uniformly
revise Rule A-13's references to the term ``technology fee'' to ``trade
count fee;'' (iv) incorporate the existing concept regarding the
imposition of late fees into the rule text (which concept currently
exists in Rule A-12, but is being deleted from Rule A-12 as part of the
proposed amendments, as discussed above); (v) delete the language that
would become obsolete on September 30, 2022 regarding the temporary fee
reduction of the Market Activity Fees for activities occurring between
April 1, 2021 through September 30, 2022; (vi) delete the now obsolete
language in Supplementary .01 regarding the waiving of certain
assessments for transactions with the Municipal Liquidity Facility
established by the Federal Reserve Board of Governors; and (vii)
directly incorporate the definition for ``Prime Rate'' into the text of
the rule.
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\78\ This language is currently found in subsection (d)(iii)(c)
of Rule A-13 and the proposed rule change would not amend its
location.
---------------------------------------------------------------------------
The proposed Technical Amendments regarding the definition of
primary offering for purposes of Rule A-13 would reformat the existing
definition to the first subsection of the rule, as well as incorporate
clarifying revisions expressly codifying the existing application of
Rule A-13 to private placements.\79\ Specifically, the proposed
amendment would incorporate text expressly stating that, consistent
with the definition for the same term found in Rule 15c2-12(f)(7) under
the Act,\80\ certain circumstances where a dealer acts as an agent for
an issuer to arrange the placement of a new issue of municipal
securities would be included in the definitional scope of a ``primary
offering'' under Rule A-13. Accordingly, the MSRB believes that these
amendments are technical, clarifying modifications to the rule text
that (i) would improve the readability of Rule A-13 and facilitate
greater regulatory clarity regarding the current application of the
Underwriting Fee and (ii) would not modify any existing regulatory
burdens or obligations, nor create any new regulatory burdens or
obligations.
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\79\ Since the inception of the Underwriting Fee, the
application of Rule A-13 has encompassed those primary offerings
where a municipal securities dealer acts agent for the issuer
arranging the direct placement of new issue municipal securities
with institutional customers or individuals. See ``Underwriting
assessment: application to private placements'' (Feb. 22, 1982),
available at <a href="https://msrb.org/Rules-and-Interpretations/MSRB-Rules/Administrative/Rule-A-13?tab=2">https://msrb.org/Rules-and-Interpretations/MSRB-Rules/Administrative/Rule-A-13?tab=2</a>. Given this amendment to Rule A-13,
the February 22, 1982 guidance will be removed from the MSRB rule
book as of the operative date of the Technical Amendments and will
be archived by relocating it to a dedicated MSRB Archived
Interpretive Guidance page at: <a href="http://www.msrb.org/Rules-andInterpretations/Archived-Guidance-Rule-Book-Review.aspx">www.msrb.org/Rules-andInterpretations/Archived-Guidance-Rule-Book-Review.aspx</a>. The
guidance will be clearly labeled with its date of archival and can
be accessed for its historical value.
\80\ 17 CFR 240.15c2-12(f)(7) (stating that the term ``primary
offering'' means ``an offering of municipal securities directly or
indirectly by or on behalf of an issuer of such securities'').
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In addition, the proposed Technical Amendments to Rule A-13 would
clarify that only transactions in municipal securities that meet the
definition of a ``variable rate demand obligation'' under Rule G-34 are
exempt from Transaction Fees pursuant to Rule A-13's language regarding
``Transactions Not Subject to Transaction Fee.'' Specifically, the
current definitional language in that subsection of Rule A-13 does not
precisely match the corresponding definition in Rule G-34.\81\ Yet, the
MSRB's internal billing process currently relies on reports made
[[Page 36174]]
pursuant to Rule G-34's Short-term Obligation Rate Transparency System
and, thereby, Rule G-34's variable rate demand obligation definition,
to identify such transactions that should not be billed under Rule A-
13. To avoid the possibility of any potential unintended consequences
resulting from the differences between the definition currently stated
in Rule A-13 versus the variable rate demand obligation definition in
Rule G-34 that is currently utilized for purposes of the MSRB's
internal billing logic, the proposed rule change would amend Rule A-13
to expressly cross-reference Rule G-34(e)(viii) and expressly restate
the variable rate demand obligation definition directly in the text of
Rule A-13. The MSRB believes that the proposed amendments to expressly
incorporate Rule G-34's variable rate demand obligation definition into
Rule A-13 will improve regulatory clarity for regulated entities
regarding the MSRB's billing process and which transactions are exempt
from certain fees. In this way, the proposed definition is intended to
define the same category of activity and instruments as the existing
text of the rule and, all else being equal, would not capture any
greater or fewer transactions than the current application of the Rule
A-13.
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\81\ See Rule G-34(e)(viii) (``The term `variable rate demand
obligation' shall mean securities in which the interest rate resets
on a periodic basis with a frequency of up to and including every
nine months, where an investor has the option to put the issue back
to the trustee, tender agent or other agent of the issuer or
obligated person at any time, typically within a notification
period, and a broker, dealer or municipal securities dealer acts as
a remarketing agent responsible for reselling to new investors
securities that have been tendered for purchase by a holder.'')
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As previously mentioned above, the proposed Technical Amendments
would uniformly revise Rule A-13's references to the term ``technology
fee'' to the term ``trade count fee.'' The MSRB believes that this non-
substantive change is warranted because the use of the phrase
``technology fee'' is outdated. The MSRB believes ``trade count'' fee
is a better descriptor because the revenue generated from this fee is
not strictly used for technology expenses but is aggregated with the
other fee revenue the MSRB collects and utilized for the most
appropriate organizational uses.\82\ Accordingly, the MSRB believes
that the term ``trade count fee'' is a more accurate descriptor and,
thereby, less likely to lead to regulatory confusion about this fee.
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\82\ See Exchange Act Release No. 75751 (Aug. 24, 2015), 80 FR
52352 (Aug. 28, 2015) File No. SR-MSRB-2015-08, at 52355 (discussing
the fact that the revenue from the technology fee will no longer be
designated exclusively for capitalized hardware and software
expense).
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Consistent with Technical Amendments to Rule A-11 and Rule A-12,
the proposed Technical Amendments to Rule A-13 would also copy language
into new Rule A-13(g) incorporating the existing concept currently
articulated in current Rule A-12(d) regarding the imposition of late
fees on the fees assessed pursuant to Rule A-13. As noted above,
currently, the operative rule text for this late fee concept is
provided for in Rule A-12(d), and the proposed rule change would delete
this language from Rule A-12(d) specific to Rule A-13's fees.
Importantly, the incorporation of this language directly into new Rule
A-13(g) would not change the MSRB's current method for calculating and
applying the amount of such late fees; and, therefore, the MSRB
believes it is a technical, clarifying amendment to the rule text that
improves the readability of both Rule A-12 and also Rule A-13 and would
not modify any existing regulatory burdens or obligations, nor create
any new regulatory burdens or obligations. The MSRB believes that
moving this language into Rule A-13 consolidates the operative
regulatory text and, thereby, is likely to lead to less regulatory
confusion for regulated entities, who would no longer have to
separately reference Rule A-12 to identify that such late fees were
applicable to the fees assessed pursuant to Rule A-13.
Relatedly, and similar to the proposed amendments to Rule A-11 and
Rule A-12 on the same topic of late fees, the proposed Technical
Amendments to Rule A-13 would also directly incorporate the definition
for ``Prime Rate'' in new Supplementary Material .02. This definition
provided in Supplementary Material .02 would match the current
definition provided in the MSRB Registration Manual, stating that ``. .
. the Prime Rate is the annual rate of the commercial prime rate of
interest as last published in The Wall Street Journal prior to the date
such charge is computed.'' Given that this proposed definition is the
same as the one currently provided for in the MSRB Registration Manual,
the MSRB believes this amendment is a technical, clarifying amendment
to the rule text that would improve regulatory understanding of Rule A-
13 and would not modify any existing regulatory burdens or obligations,
nor create any new regulatory burdens or obligations.
In addition, the proposed Technical Amendments to Rule A-13 would
delete the language that would become obsolete on September 30, 2022,
regarding the temporary fee reduction of the Market Activity Fees for
those activities occurring between April 1, 2021 through September 30,
2022. Given the MSRB's proposed effective date for this proposed rule
change, the MSRB believes that this deletion would improve regulatory
clarity for regulated entities because this language would no longer be
operative as of October 1, 2022, and, therefore, its continued
inclusion in the rule text may cause regulatory confusion. Similarly,
the proposed Technical Amendments would delete the now obsolete
language in Supplementary .01 of Rule A-13 regarding the waiving of
certain assessments for transactions with the Municipal Liquidity
Facility (the ``MLF'') established by the Federal Reserve Board of
Governors. Given that the MLF and the language used to reference it
here is no longer operative, the MSRB believes that this deletion would
improve regulatory clarity for regulated entities.
Lastly, consistent with all the other proposed Technical Amendments
to Rule A-13, the proposed rule change would also reformat the
applicable subsections of Rule A-13 with the appropriate subsection
designation and update the applicable cross-references in the rule
text. These related amendments are merely intended to provide internal
consistency to Rule A-13 in light of the other amendments and,
therefore, the MSRB believes they are technical, non-substantive
amendments.
2. Statutory Basis
Statutory Basis for the Rate Card Amendments
The MSRB believes that the proposed Rate Card Amendments are
consistent with Section 15B(b)(2)(J) of the Act,\83\ which states that
the MSRB's rules shall provide that each municipal securities broker,
municipal securities dealer, and municipal advisor shall pay to the
Board such reasonable fees and charges as may be necessary or
appropriate to defray the costs and expenses of operating and
administering the Board.\84\ Such rules must specify the amount of such
fees and charges, which may include charges for failure to submit to
the Board, or to any information system operated by the Board, within
the prescribed timeframes, any items of information or documents
required to be submitted under any rule issued by the Board.\85\
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\83\ 15 U.S.C. 78o-4(b)(2)(J).
\84\ Id.
\85\ Id.
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The MSRB believes that the Rate Card Amendments provide for
reasonable fees and charges to be paid by regulated entities. Moreover,
the MSRB believes that the Rate Card Amendments are necessary and
appropriate to fund the operation and administration of the Board and,
thereby, satisfy the requirements of Section 15B(b)(2)(J) \86\ through
the achievement of a reasonable
[[Page 36175]]
fee structure that ensures (i) an equitable balance of necessary and
appropriate fees among regulated entities and (ii) a fair allocation of
the burden of defraying the costs and expenses of the MSRB.\87\
Specifically, the Board believes that the Rate Card Amendments will
achieve reasonable fees on regulated entities \88\ that (i) are
necessary and appropriate to sustain the operation and administration
of the Board by defraying the MSRB's anticipated Fiscal Year 2023
operating and administrative expenses; \89\ (ii) reasonably and
appropriately allocate fees among firms by equitably distributing fees
in accordance with each individual firm's overall market activities;
\90\ and (iii) reasonably and appropriately adjust for the annual
fluctuations in the volume of market activity as compared to budget
expectation by incorporating the actual amounts of Market Activity Fees
collected as compared to budget into this and future rate-setting
processes.\91\ As a result, the MSRB believes that the proposed rule
change satisfies the applicable requirements of Section 15B(b)(2)(J) of
the Act,\92\ and the Board has developed a reasonable and appropriate
fee mechanism that will sufficiently fund future expenses and better
manage reserves at appropriate levels.\93\
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\86\ Id.
\87\ See, e.g., Exhibit 3, ``Chart 14--Distribution of
Registrants by Range of Total Fees Assessed Under Current Fee
Structure Compared to Projected Distribution Under the Rate Card
Model (Exclusive of Late Fees and Examination Fees).''
\88\ In addition to the following citations within this sentence
in support of the reasonability of the Rate Card Amendments, see
also related discussion supra under ``Board Review of the Current
Fee Structure--Maintaining a Fair and Equitable Balance of Fees,--
Mitigating the Impact of Market Volatility, and--Funding the MSRB's
Anticipated Near-Term Operating Expenses'' and ``Proposed Rate Card
Amendments.'' See also related discussion infra under ``Self-
Regulatory Organization's Statement on Burden on Competition.''
\89\ See Exhibit 3, ``Chart 10--Historical and Projected Revenue
without Rate Card Model Compared to Historical and Pro Forma
Expenses'' and ``Chart 11--Historical and Projected Revenue with
Rate Card Model Compared to Historical and Pro Forma Expenses.''
\90\ See related discussion supra under section entitled ``Board
Review of the Current Fee Structure--Mitigating the Impact of Market
Volatility.'' See also Exhibit 3, ``Chart 14--Distribution of
Registrants by Range of Total Fees Assessed Under Current Fee
Structure Compared to Projected Distribution Under the Rate Card
Model (Exclusive of Late Fees and Examination Fees)'' (reflecting
that the distribution of registrants by range of total fees assessed
under the current fee structure are currently anticipated to be
relatively stable if the proposed Rate Card Amendments are
implemented).
\91\ See related discussion supra under section entitled ``Board
Review of the Current Fee Structure--Mitigating the Impact of Market
Volatility.'' See also Exhibit 3, ``Chart 2--Historical Budget vs.
Actual Revenue for the Rate Card Fees'' and ``Chart 4--Rate Card
Fees: Historical Activity Volume Variance Budget to Actual.''
\92\ 15 U.S.C. 78o-4(b)(2)(J).
\93\ See also related discussion supra under ``Board Review of
the Current Fee Structure--Maintaining a Fair and Equitable Balance
of Fees,--Mitigating the Impact of Market Volatility, and--Funding
the MSRB's Anticipated Near-Term Operating Expenses'' and ``Proposed
Rate Card Amendments.'' See also related discussion infra under
``Self-Regulatory Organization's Statement on Burden on
Competition.''
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Statutory Basis for the Technical Amendments
The MSRB believes that the proposed Technical Amendments are
consistent with Section 15B(b)(2)(C) of the Act,\94\ which states that
the MSRB's rules shall be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in municipal
securities and municipal financial products, to remove impediments to
and perfect the mechanism of a free and open market in municipal
securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the
public interest.\95\
---------------------------------------------------------------------------
\94\ 15 U.S.C. 78o-4(b)(2)(C).
\95\ Id.
---------------------------------------------------------------------------
The MSRB believes that the Technical Amendments would promote just
and equitable principles of trade by ensuring that existing rule
provisions are accurate and understandable by: (i) creating newly
defined terms for existing concepts that will help streamline the rule
text and improve its readability; (ii) clarifying the application of
existing terms and concepts through the consolidation of previously
published regulatory guidance into the proposed rule change and the
direct incorporation of cross-referenced definitions from other MSRB
rules into the proposed rule change; and (iii) deleting obsolete rule
language to streamline the rule text and avoid the potential for
regulatory confusion as to why such language continues to be
incorporated into MSRB rules. While the Technical Amendments would
affect rules applicable to MSRB regulated entities, the amendments are
meant to clarify Rule A-11, Rule A-12, and Rule A-13, respectively, and
would not (i) modify any existing regulatory burdens or obligations,
(ii) create any new regulatory burdens or obligations, or (iii) affect
the registration status of any persons under MSRB rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act requires that MSRB rules
not be designed to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\96\ The
MSRB has considered the economic impact of the proposed rule change,
including a comparison to reasonable alternative regulatory
approaches.\97\
---------------------------------------------------------------------------
\96\ Id.
\97\ Id.
---------------------------------------------------------------------------
The Annual Rate Card Process proposed by the Rate Card Amendments
is intended to introduce a new fee structure that would (i) better
mitigate the impact of market volatility on the MSRB's revenue
structure (and, consequently, also better mitigate the impact of market
volatility on the MSRB's organizational reserves), and (ii) maintain
rates within a reasonably predictable range that, while subject to more
incremental changes each year, would be comparably more stable over the
long term than the MSRB's current fee structure.\98\ Furthermore, the
Annual Rate Card process applies equally to all those MSRB regulated
entities who may pay dealer Market Activity Fees and/or the Municipal
Advisor Professional Fees. Accordingly, the MSRB believes that the
proposed Annual Rate Card Process would not have an impact on
competition and, consequently, would not impose any burden on
competition, relieve a burden on competition, nor promote competition.
The MSRB therefore believes the Annual Rate Card Process would not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------
\98\ See related discussion supra under ``Board Review of the
Current Fee Structure--Mitigating the Impact of Market Volatility''
and ``Proposed Annual Rate Card Approach--Limitations on Rate
Changes to Promote Predictability and Stability'' (discussing
various limitations on future increases of the Rate Card Fees). See
also Exhibit 3, ``Chart 5--Historical Effective Fee Rate Changes.''
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The increase in the rates of assessment for the Rate Card Fees
proposed by the Rate Card Amendments (i.e., the Underwriting Fee,
Transaction Fee, Trade Count Fee, and Municipal Advisor Professional
Fee) are necessary and appropriate to cover the currently anticipated
operating deficit for Fiscal Year 2023, which would have occurred even
with the current fee structure, to ensure prudent funding for the
operation and administration of the Board. Moreover, the Board's Rate
Card Amendments apply equally to each MSRB regulated entity who may pay
the Rate Card Fees and, thereby, equitably
[[Page 36176]]
and non-discriminatorily distribute the fee burden across all MSRB
regulated entities who participate in the municipal securities market.
In this way, no firm would be unduly burdened as compared to another
firm. In particular, smaller municipal advisory firms would continue to
pay less Municipal Advisor Professional Fees than larger municipal
advisory firms, and, therefore, the Rate Card Fees proposed by the Rate
Card Amendments are not unduly burdensome, comparatively, between small
municipal advisory firms and large municipal advisory firms. Because
the Rate Card Fees proposed by the Rate Card Amendments would equitably
and non-discriminately distribute the fee burden across all MSRB
regulated entities, the MSRB believes that the Rate Card Fees proposed
by the Rate Card Amendments would not have an impact on competition
and, consequently, would not impose any burden on competition, relieve
a burden on competition, nor promote competition. Accordingly, the MSRB
believes the Rate Card Fees proposed by the Rate Card Amendments would
not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
The Board determined it was necessary and appropriate to conduct a
comprehensive review of the MSRB's overall fee structure to devise a
methodology that reasonably and appropriately defrays the costs and
expenses associated with operating and administering the Board, with a
goal of arriving at a longer-term solution for MSRB's revenue
generation process that continues to ensure a sustainable financial
position. The current fee structure has a semipermanent fixed rate of
assessment for each of the above categories. Under the proposed Annual
Rate Card Process, categories of fees assessed for regulated entities
would remain the same. However, the Board proposes using an annual
rate-setting method to recalculate fee rates every year for each
category based on factors described herein.\99\
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\99\ The SEC and FINRA use this approach for some fees. See SEC
Section 31 rate fees: <a href="https://www.sec.gov/divisions/marketreg/sec31feesbasicinfo.htm">https://www.sec.gov/divisions/marketreg/sec31feesbasicinfo.htm</a>; see also FINRA Trading Activity Fee (TAF)
<a href="https://www.finra.org/rules-guidance/guidance/trading-activity-fee">https://www.finra.org/rules-guidance/guidance/trading-activity-fee</a>.
---------------------------------------------------------------------------
With the proposed Annual Rate Card Process, the Board is adopting a
programmatic methodology for assessing the fees in each category. While
the current categories of fees divided amongst regulated entities would
not change (i.e., the Underwriting Fee, Transaction Fee, Trade Count
Fee, and Municipal Advisor Professional Fee) in the proposed Annual
Rate Card Process, the proportional share of each category would vary
less over the long term than under the current fee structure and would
be consistent with the average shares paid by each category of fees in
recent fiscal years.\100\ The proposed Annual Rate Card Process allows
the Board to review a change in budgeted expenses compared to the prior
year and compare it to the projected market activities for each
category of fees in the upcoming year. Any over/under assessment in the
prior year within each class of fee payer would be factored into any
change in the fee rate for the subsequent year. Fee rates would be
established prior to or in the fourth quarter of each calendar year to
be effective on the following January 1 and would last until December
31. However, for Fiscal Year 2023, the first year of adoption, the
effective date would start from October 1, 2022 and end on December 31,
2023 for a fifteen-month period. Following the inaugural fifteen-month
Annual Rate Card proposed by the Rate Card Amendments, in subsequent
years, the fee rates for each category would be adjusted on a calendar
year basis starting in January to compensate for any over/under
assessment in the prior fiscal year, in addition to accommodating any
change in other considerations (e.g., change in annual expenses, change
in projected market volume, prior year revenue variances as compared to
budget, change in reserve target and certain limitations on fee
increases).
---------------------------------------------------------------------------
\100\ See Exhibit 3, ``Chart 3--Historical Actual Revenue for
the Rate Card Fees as a Percentage of the Total Rate Card Fee
Revenue,'' ``Chart 4--Rate Card Fees: Historical Activity Volume
Variance Budget to Actual,'' ``Chart 5--Historical Effective Fee
Rate Changes,'' and ``Chart 14--Distribution of Registrants by Range
of Total Fees Assessed Under Current Fee Structure Compared to
Projected Distribution Under the Rate Card Model (Exclusive of Late
Fees and Examination Fees)'' (reflecting that the distribution of
registrants by range of total fees assessed under the current fee
structure are currently anticipated to be relatively stable if the
proposed Rate Card Amendments are implemented). As to how the
proportion was devised, in addition to the costs of regulatory
activities, the cost of servicing each category of fees is also a
consideration, as it costs the MSRB significantly more to collect
and disseminate trading data for transparency purposes than
municipal advisory firm professional data. It should be noted that
all regulated entities benefit from this publicly available
transparency information.
---------------------------------------------------------------------------
For Fiscal Year 2023, the Board is also projecting a revenue/
expense imbalance (i.e., an operating deficit) without a change in the
current fee structure.\101\ In the past, excess organizational reserves
buffered budget deficits (though the budgeted deficits were typically
not realized due to excess revenue collected versus budget or expense
savings, unless intended deficits due to rebates or temporary fee
reductions); however, now that the excess reserves are being eliminated
because of the Fiscal Year 2021 Temporary Fee Reduction, any deficit
would require a fee increase in Fiscal Year 2023 to cover the gap and
maintain a balance between revenues and expenses, regardless of the fee
structure used. Therefore, the proposed rule change also includes a
rate increase for the Underwriting Fee, Transaction Fee, Trade Count
Fee, and Municipal Advisor Professional Fee for the Annual Rate Card
proposed by the Rate Card Amendments. It should be noted that the Board
last raised the rate for the Transaction Fee and technology fee in
Fiscal Year 2011 when the technology fee was first imposed, and last
raised the rate for the Underwriting Fee more than 20 years ago.\102\
---------------------------------------------------------------------------
\101\ See Exhibit 3, ``Chart 10--Historical and Projected
Revenue without Rate Card Model Compared to Historical and Pro Forma
Expenses.''
\102\ The Municipal advisory firm professional fee was raised
three times since inception in Fiscal Year 2014 (Fiscal Year 2018,
Fiscal Year 2020, and Fiscal Year 2021).
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Necessity of the Rate Card Amendments
The Board believes Rate Card Amendments are necessary and
appropriate to:
(i) maintain a fair and equitable balance of reasonable fees and
charges among regulated entities; \103\
---------------------------------------------------------------------------
\103\ See discussion supra under ``Statutory Basis for the Rate
Card Amendments'' near notes 87 and 88.
---------------------------------------------------------------------------
(ii) better mitigate fee assessment volatility based on Market
Activity Fees,\104\ which has contributed to the growth of the MSRB's
excess reserves; \105\ and
---------------------------------------------------------------------------
\104\ See related discussions supra under sections entitled
``Board Review of the Current Fee Structure--Mitigating the Impact
of Market Volatility'' and ``Proposed Annual Rate Card Approach--
Limitations on Rate Changes to Promote Predictability and
Stability.'' See also Exhibit 3, ``Chart 2--Historical Budget vs.
Actual Revenue for the Rate Card Fees,'' ``Chart 4--Rate Card Fees:
Historical Activity Volume Variance Budget to Actual,'' and ``Chart
5--Historical Effective Fee Rate Changes.''
\105\ Id.
---------------------------------------------------------------------------
(iii) ensure a prudent long-term approach to organizational funding
that addresses projected structural operating deficits under the
current fee structure in near-term fiscal years.\106\
---------------------------------------------------------------------------
\106\ See, Exhibit 3, ``Chart 8--Historical Actual Expenses''
(showing a ten-year historical compound annual growth rate of
4.2%),''Chart 10--Historical and Projected Revenue without Rate Card
Model Compared to Historical and Pro Forma Expenses,'' ``Chart 11--
Historical and Projected Revenue with Rate Card Model Compared to
Historical and Pro Forma Expenses,'' ``Chart 12--Total Reserves vs.
Target: Historical and Projected without Rate Card Model,'' and
``Chart 13--Total Reserves vs. Target: Historical and Projected with
Rate Card Model.''
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[[Page 36177]]
Because market events, when combined with the current fee
structure, partially contributed to the excess reserves in recent
years, the Board believes it is reasonable and appropriate to adopt a
new approach to reduce the variability over time in fee assessments and
mitigate the impact of market volatility over time by adjusting for
budget surpluses or shortfalls annually, therefore providing a better
mechanism for effectively managing fee rates and reserve levels.\107\
In the recent past, higher-than-expected new issue and secondary market
volumes caused fees assessed from dealers to exceed budgets and,
combined with lower-than-expected expenses, led to increases in
reserves that necessitated rebates or temporary fee reductions to
manage reserve levels. To reduce excess reserves, the Board instituted
ad hoc rebates in Fiscal Year 2014 and Fiscal Year 2016 and temporary
fee reductions via filings with the Commission for Fiscal Year 2019 and
for Fiscal Year 2021 and Fiscal Year 2022 to reduce the excess
reserves.\108\ As a result, there has been volatility in fee
collections (since these are market-based fees) and MSRB's reserve
levels in recent years.\109\ The same dynamics could also exist if
actual new issue and secondary market activities fail to meet projected
volumes, resulting in a revenue shortfall, which would prompt new
filings to increase rate assessments to close the gap.
---------------------------------------------------------------------------
\107\ See related discussion supra under section entitled
``Board Review of the Current Fee Structure--Mitigating the Impact
of Market Volatility.'' See also Exhibit 3, ``Chart 1--Historical
Revenue Variances: Budget vs. Actual,'' ``Chart 2--Historical Budget
vs. Actual Revenue for the Rate Card Fees,'' and ``Chart 4--Rate
Card Fees: Historical Activity Volume Variance Budget to Actual.''
\108\ The 2021 Temporary Fee Reduction is the MSRB's largest
temporary fee reduction, which was initiated during Fiscal Year 2021
and is expected to last until September 30, 2022. Link to the 2021
Temporary Fee Reduction and related citations supra at note 12. The
MSRB also filed for a separate temporary fee reduction during Fiscal
Year 2019. See Exchange Act Release No. 85400 (Mar. 22, 2019), 84 FR
11841 (Mar., 28 2019) File No. SR-MSRB-2019-06.
\109\ See Stakeholder Comments to the MSRB's Strategic
Priorities (link at note 34 supra). Specifically, one commenter
asked the MSRB to better address the volatility in revenues and the
corresponding excess in MSRB organizational reserves. See, e.g., BDA
Comment Letter, at p. 3-4 (link and citation at note 51).
---------------------------------------------------------------------------
Without devising a new fee approach, it is likely the MSRB would
again be forced to deal with large reserve excesses or shortfalls on an
ad hoc basis in the future, which would not be a sustainable path going
forward.\110\ Specifically, the proposed Annual Rate Card Process would
(i) better mitigate the impact of market volatility on the MSRB's
revenue structure (and, consequently, also better mitigate the impact
of market volatility on the MSRB's organizational reserves), and (ii)
maintain rates within a reasonably predictable range that, while
subject to more incremental changes each year, would be comparably more
stable over the long term than the MSRB's current fee structure.\111\
In this way, the Annual Rate Process is intended to establish a fee
framework that is more transparent and predictable for the MSRB's
stakeholders that would mitigate market volatility over time, while
also retaining the Board's ability to flexibly react to changing
circumstances year-to-year when establishing reasonable fees on
regulated entities.\112\
---------------------------------------------------------------------------
\110\ See related discussion supra under section entitled
``Board Review of the Current Fee Structure--Mitigating the Impact
of Market Volatility.'' See also Exhibit 3, ``Chart 1--Historical
Revenue Variances: Budget vs. Actual,'' ``Chart 2--Historical Budget
vs. Actual Revenue for the Rate Card Fees,'' and ``Chart 4--Rate
Card Fees: Historical Activity Volume Variance Budget to Actual.''
\111\ See related discussion supra under ``Proposed Annual Rate
Card Approach--Limitations on Rate Changes to Promote Predictability
and Stability'' (discussing various limitations on future increases
of the Rate Card Fees). See also Exhibit 3, ``Chart 5--Historical
Effective Fee Rate Changes.''
\112\ See related discussion supra under ``Proposed Annual Rate
Card Approach.''
---------------------------------------------------------------------------
Baseline and Reasonable Alternative Approaches
The current fee assessment structure is used as a baseline to
evaluate the benefits, the costs, and the burden on competition of the
proposed Annual Rate Card Process. Furthermore, the proposed rate
increase for Market Activity Fees and Municipal Advisor Professional
Fee for the Fiscal Year 2023 Annual Rate Card would have occurred
regardless of which fee structure is adopted since excess reserves are
being eliminated through the 2021 Temporary Fee Reduction and the need
to cure the Fiscal Year 2023 structural budget deficit; therefore, the
Board's assessment in this section focuses on the comparison of the two
fee structures setting aside the increases to the rates of assessment
for the Rate Card Fees proposed by the Rate Card Amendments for Fiscal
Year 2023 extending to December 2023.
In addition to the proposed new fee rate setting approach, the MSRB
also considered a few other fee assessment options but ultimately
decided that the proposed Rate Card Fee structure is the best approach
to ensure a stable revenue stream for the MSRB while reducing the
volatility from Market Activity Fees assessed and the need for ad hoc
fee filings with the Commission, without instituting a fundamental
change in how the MSRB assesses fees that may disrupt regulated
entities' financial expectations and operations.
For example, one alternative the MSRB reviewed was to include other
sources of revenue in the Annual Rate Card Process. The MSRB evaluated
whether to include in the variable rate card pool approach the
municipal funds underwriting fees, annual fees, and initial fees.
However, the MSRB ultimately decided not to include those fees for a
variety of reasons, including the fact that each of those fees
constitutes a much smaller proportion than the four categories in the
proposed Annual Rate Card Process.\113\
---------------------------------------------------------------------------
\113\ See notes 14, 15, 18, and 22 supra and related discussion
for explanations of why the Board to determined not to include
certain fees in the Rate Card Fees and the Annual Rate Card Process.
---------------------------------------------------------------------------
Additionally, the Board also considered a different way to
apportion fees within each class of fee payer but decided that the
proposed Annual Rate Card Process is the best way to achieve
proportionate revenue based on the MSRB's available information, i.e.,
underwriters pay based on their volume underwritten, trading firms pay
based on their trading activities (in par value and trade count), and
municipal advisory firms pay based on the headcount of a firm.
A fee assessment method based on a percentage of each municipal
advisory firm's revenue, for example, would not be feasible at this
time as the MSRB does not currently require municipal advisory firms to
report such information under existing rules; and, more importantly,
many municipal advisory firms would likely have business activities not
solely related to municipal advisory services. In addition, it would
increase the burden on municipal advisory firms as municipal advisory
firms would have the responsibility to collect the relevant information
to be used for MSRB's fee assessment and also would then be required to
report it. The MSRB believes at this time that the costs and burdens
associated with collecting and reporting such information are not
justified, and the Municipal Advisor Annual Professional Fee for each
person associated with the firm who is qualified is a reasonable proxy
for the size of relevant business activities conducted by each
municipal advisory firm.
Benefits, Costs, and Burden on Competition
The proposed amendments to MSRB rules would result in a new fee
[[Page 36178]]
approach intended to align revenues and expenses more closely and to
reduce the year-to-year volatility in the amount of fees assessed (and,
as a result, reduce the likelihood of accumulating excess reserves) by
targeting each fee category to a pre-determined proportion of the total
revenue based on respective projected volumes.\114\ The proposed Annual
Rate Card Process would result in more frequent (annual), but smaller
downward and upward, adjustments to keep revenues more closely aligned
with budgeted expenses.
---------------------------------------------------------------------------
\114\ See, e.g., related discussion supra under ``Proposed
Annual Rate Card Approach--Objectives of the Annual Rate Card'' and
``Proposed Annual Rate Card Approach--Process for Setting the Annual
Rate Card.''
---------------------------------------------------------------------------
The proposed Annual Rate Card Process addresses the following goals
and issues the Board identified before initiating the Fee Review and
would therefore achieve the intended benefits:
<bullet> Continue to maintain a fair and equitable balance of fees
among all regulated entities, as the MSRB's new fee approach proposal
does not change the division of fees amongst regulated entities;
<bullet> Design a durable fee structure for MSRB's long-term needs;
<bullet> Ensure that excess reserves would not likely be built up
at a high level again by reviewing the actual reserves compared to the
targeted reserves annually and incorporating any needed adjustments
directly into the Annual Rate Card Process;
<bullet> Mitigate the need for an ad hoc ``rebate'' process, as any
excess revenue would be used to reduce future years' fees; and
<bullet> Lower year-to-year variability in fee assessments, which
would smooth out regulated entities' budget outlays.
For the Annual Rate Card proposed by the Rate Card Amendments, the
proposed rate increases for Market Activity Fees,\115\ which would be
applicable to all dealers who conduct municipal market business, and
for Municipal Advisor Professional Fee, which would be applicable to
all municipal advisory firms, are intended to pay for the expenses of
operating and administering the Board, including execution of the
MSRB's Strategic Plan for ongoing technology and data investments, and
would occur regardless of which fee structure the MSRB would adopt.
Aside from the proposed rate increases for this Annual Rate Card, the
Board does not believe the proposed Annual Rate Card Process would
create any additional costs for regulated entities when compared to the
current fee structure, as the aggregate fees assessed using the
proposed Annual Rate Card Process over the course of multiple years
would be equivalent to the aggregate fees assessed using the current
fee structure, except with less year-to-year fluctuation since over or
under revenue assessments related to market volatility would be
operationalized through the Rate Card Process.
---------------------------------------------------------------------------
\115\ These increases would be the first rate increases to any
of the three Market Activity Fees since Fiscal Year 2011. As
mentioned above, the Transaction Fee was last raised in Fiscal Year
2011 and the Trade Count Fee was initiated in Fiscal Year 2011 as
the technology fee. The Underwriting Fee was not changed in Fiscal
Year 2011 but was last changed in Fiscal Year 2016, when it was
reduced. In addition, the annual and initial fees paid by both
dealers and municipal advisory firms were last raised in Fiscal Year
2016.
---------------------------------------------------------------------------
The proposed Annual Rate Card Process would introduce a new fee
structure to reduce year-to-year fluctuation in the amount of market-
based fees paid by each regulated entity over time. The MSRB believes
that the proposed Annual Rate Card Process would not have an impact on
competition and, consequently, would not impose any burden on
competition, relieve a burden on competition, nor promote competition.
The MSRB believes the proposed rate increase for the Fiscal Year 2023
Annual Rate Card (extending to December 2023) is necessary and
appropriate to ensure prudent funding for the Board and that such fee
increases are reasonably and fairly designed to be proportionately
distributed across regulated entities in such a way that would not harm
competition among regulated entities, nor otherwise harm the
functioning of the municipal securities market. As a result, the Board
does not believe that the proposed rate increase would result in any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as it would be applicable to
all regulated entities. The Board also believes that no firm would be
unduly burdened as compared to another firm in terms of the proposed
rate increase. Dealers with different levels of underwriting and
trading activities as well as municipal advisory firms with a range of
headcounts would all be impacted proportionately by the proposed Annual
Rate Card Process, including the proposed increases for the rates of
assessment for the Fiscal Year 2023 Annual Rate Card.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Board did not solicit comment on the proposed rule change.
Therefore, there are no comments on the proposed rule change received
from members, participants, or others.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change related to the Rate Card Amendments has
become effective pursuant to Section 19(b)(3)(A) of the Act \116\ and
paragraph (f) of Rule 19b-4 \117\ thereunder. Because the foregoing
proposed rule change related to the Technical Amendments does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \118\ and Rule
19b-4(f)(6) \119\ thereunder.
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\116\ 15 U.S.C. 78s(b)(3)(A).
\117\ 17 CFR 240.19b-4(f).
\118\ 15 U.S.C. 78s(b)(3)(A).
\119\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#cebcbba2abe3ada1a3a3aba0babd8ebdabade0a9a1b8"><span class="__cf_email__" data-cfemail="d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5">[email protected]</span></a>. Please include
File Number SR-MSRB-2022-03 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2022-03. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/
[[Page 36179]]
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549 on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be
available for inspection and copying at the principal office of the
MSRB. All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MSRB-2022-03 and should be
submitted on or before July 6, 2022.
For the Commission, pursuant to delegated authority.\120\
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\120\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12839 Filed 6-14-22; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.