WASHINGTON -- The Municipal Securities Rulemaking Board has proposed a rule that would bar dealers from passing on to issuers the fees paid to the board to fund the bulk of its operations.
In a move that is expected to draw strong opposition from dealers, the MSRB also proposed amending a second rule to shorten the time dealers have to settle municipal trades from the current five days to three, beginning June 1, 1995.
The 15-member panel filed the two proposed amendments late Monday with the Securities and Exchange Commission, which is expected to publish them in the Federal Register shortly.
The board's existing Rule A-13 requires dealers to pay fees to the board based upon the par value of their participation in primary offerings.
Currently, the MSRB charges underwriters a fee of three cents per $1,000 par value for offerings that are two years or more in maturity. If the longest maturity in an offering is more than nine months but less than two years, the assessment is one cent per $1,000 par value of the issue. Exempt from the fee are short-term issues under nine months in maturity, offerings under $1 million, and limited placements.
The MSRB has argued for years that dealers pay board fees and do not forward them to issuers. But issuers contend that the fees do filter down in the form of increased underwriting fees. As a result of these and other board expenses that they contend are passed on to them, issuers have recently called for increased participation in board activities.
The proposed amendment to the rule would "make clear" that the so-called A-13 fees levied by underwriters "are to be paid by dealers and not issuers," the MSRB said in a four-page draft rule sent to the SEC Monday. Dealers should think of the fees as "overhead" expenses of doing municipal securities business, the panel said.
"The board is aware that, in negotiated underwritings, the subject of A-13 fees sometimes is raised in the context of discussion of expenses to be paid by the issuer of the securities," the board said in its filing. "The board believes that it is misleading for underwriters to characterize rule A-13 fees in this fashion."
The board said that it recognized that the basis of the fee was not perfect when it adopted Rule A-13 in 1976. But given the alternatives, the board said it decided that a fee based on underwriting participation was the best solution.
The MSRB proposal to shorten the settlement period for trades to three days is part of a push by the SEC to get trades in the securities markets paid for more quickly to reduce the time that customers have to renege on purchases and cause upheaval if there is a sharp market drop.
The SEC approved a rule in October that requires the corporate securities market to move to a so-called T-plus-three settlement system by June 1, 1995.
The commission did not mandate that the municipal market meet the deadline, but it said, nevertheless, that it expects tax-exempts to try to meet that timeframe. The MSRB responded in March by issuing a report that outlines the steps that it will take to get dealers, by the June 1 deadline, to settle all trades within three days.
The proposed amendment is expected to draw strong opposition from the Public Securities Association, which sent a letter to regulators last summer warning that the June 1995 deadline would cause major market disruption.
The group said that the plan would not allow adequate time to process retail transactions, which typically involve the mailing of a check from the client to the dealer.
"It's something we're clearly concerned about," PSA chairman R. Fenn Putman said in a telephone interview yesterday. "The discussion will heat up shortly. It's clearly a problem for many dealers, particularly those that are not fully automated or tied into a book entry system."
Putman reserved comment on the MSRB's proposed ban on dealers passing on fees to issuers until he has read the rule.