Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Underwriting Assessment for Brokers, Dealers, and Municipal Securities Dealers

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34601; File No. SR-MSRB-94-12]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Municipal Securities Rulemaking Board Relating to

Underwriting Assessment for Brokers, Dealers, and Municipal Securities

Dealers

August 25, 1994.

On August 15, 1994, the Municipal Securities Rulemaking (``Board''

or ``MSRB'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') a proposed rule change (File No. SR-MSRB-

94-12), pursuant to section 19(b)(1) of the Securities Exchange Act of

1934 (``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder. The

proposed rule change is described in Items I, II, and III below, which

Items have been prepared by the Board. The Commission is publishing

this notice to solicit comments on the proposed rule change from

interested persons.

I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The Board is filing a proposed amendment to rule A-13 on

Underwriting Assessment for Brokers, Dealers and Municipal Securities

Dealers. Board rule A-13 requires dealers to pay fees to the Board

based upon the dealer's individual participation in primary offerings

of municipal securities (``rule A-13 fees'') and the proposed amendment

would preclude brokers, dealers and municipal securities dealers

(``dealers'') from charging or otherwise passing through rule A-13 fees

to issuers. The Board requests that the Commission delay effectiveness

of the proposed rule change until 30 days after approval by the

Commission is published in the Federal Register to ensure their

underwriting practices are in compliance.

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 Board 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 Board 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

(a) Purpose

Rule A-13 requires each dealer to pay to the Board a fee based upon

the dealer's participation in ``primary offerings'' of municipal

securities.\1\ In addition to rule A-13 fees, the Board charges an

initial fee of $100 and an annual fee of $100 under rules A-12 and A-

14, respectively, but rule A-13 fees provide the bulk of Board

revenues. The amount of rule A-13 fees owed is based upon the par value

of the dealer's participation in primary offerings.\2\ No obligation to

pay a rule A-13 fee is generated by participation in the following

types of primary offerings: (i) Those composed exclusively of

securities less than nine months in maturity; (ii) offerings under $1

million in par value; and (iii) ``limited placement'' offerings, as

described in subsection (c)(1) of Exchange Act Rule 15c2-12.\3\

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\1\As used in rule A-13, ``primary offering'' is defined as in

Exchange Act Rule 15c2-12 on municipal securities disclosure. Thus,

a dealer's obligation under rule A-13 is triggered by its

participation in the offering of municipal securities by or on

behalf of an issuer, whether the dealer is purchasing the securities

directly (i.e., is acting as underwriter) or is acting as an agent

in placing the securities with investors. The obligation of a dealer

to deliver an official statement to the Board under Board rule G-36

also is based upon the dealer's participation in a ``primary

offering.'' Consistent use of the concept of ``primary offering'' in

rules A-13 and G-36 has created substantial administrative

efficiencies for the Board by allowing A-13 fee invoicing to be

accomplished in an automated matter with data collected under rule

G-36.

\2\Currently, the assessment under rule A-13 is $.03 per $1,000

par value for offerings containing securities two years or more in

maturity. If the longest maturity in an offering is over nine months

but less than two years, the assessment is $.01 per $1,000 par value

of the issue. For purposes of calculating the assessment, a put

option date is treated the same as a maturity date, e.g., a primary

offering of a security with a put option of one year would generate

an assessment at the $.01 rate.

\3\``Limited placement'' offerings are those that are sold to no

more than 35 persons each of whom the underwriter reasonably

believes (i) has such knowledge and experience in financial and

business matters that it is capable of evaluating the merits and

risks of the prospective investment and (ii) is not purchasing for

more than one account or with a view to distributing the securities.

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Rule A-13 states that, if a syndicate or similar account is formed

for the purpose of purchasing securities from an issuer, the managing

underwriter is responsible to pay the assessment fee on behalf of each

participant in the syndicate. Payment by the managing underwriter,

rather than by individual syndicate members, is solely an

administrative convenience for underwriters and the Board. The Board

invoices managing underwriters monthly for rule A-13 fees, based upon

information filed with the Board under rule G-36 on delivery of

official statements to the Board.

Rule A-13 is intended to provide a dealer assessment that roughly

reflects each dealer's involvement in the municipal securities market.

In adopting rule A-13 in 1976, the Board recognized that participation

in new issue offerings was not a perfect means to measure a dealer's

involvement in the market because the assessment would not, among other

things, reflect secondary market transactions and activity. However,

after looking at alternative assessment mechanisms and methods of

establishing accounts receivable available at that time, the Board

concluded that a fee based on underwriting participation was the best

available means to create verifiable assessments generally reflecting a

dealer's involvement in the market.

The Board is aware that, in negotiated underwritings, the subject

of rule A-13 fees sometimes is raised in the context of discussions of

expenses to be paid by the issuer of the securities. The Board believes

that it is misleading for underwriters to characterize rule A-13 fees

in this fashion. Since rule A-13 fees are assessments on dealers for

the operation of the Board, the Board believes that a dealer's

obligation under rule A-13 should not be charged or otherwise passed

through to an issuer as an expense to the issuer of bringing a new

issue to market. In this respect, the fees paid to the Board by dealers

under rule A-13 should be characterized by dealers to issuers no

differently than the annual fees paid to the Board under rule A-14 and

any other ``overhead'' expenses that are incurred by virtue of the

dealer engaging in municipal securities business.

(b) Statutory Basis

As set forth in Section 15B(b)(2)(J) of the Act, the Board has

authority to adopt rules to:

provide that each municipal securities broker and each municipal

securities dealer 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.

The Board believes that the proposed rule change is consistent with its

authority to charge dealers reasonable fees to defray the costs of

operating and administering the Board. The proposed rule change makes

clear that the fees levied under rule A-13 are to be paid by dealers

and not issuers.

B. Self-Regulatory Organization's Statement on Burden on Competition

The proposed rule change will equally apply to all dealers.

Therefore, the Board does not believe that the proposed rule change

will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

The Board has not solicited comments on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) As the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(A) By order approve such proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

The Board requests that the Commission delay effectiveness of the

proposed rule change until 30 days after approval by the Commission is

published in the Federal Register to ensure that their underwriting

practices are in compliance.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commissions, 450 Fifth Street, NW., Washington, DC 20549.

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. 522, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of the filing will also be

available for inspection and copying at the Board's principal offices.

All submissions should refer to File No. SR-MSRB-94-12 and should be

submitted by September 22, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-21571 Filed 8-31-94; 8:45 am]

BILLING CODE 8010-01-M