November 9, 2010
RW Smith Associates, Inc. (RW Smith) appreciates the opportunity to respond to the MSRB's recent proposal to amend Rule A-13 to increase transaction assessments for certain municipal securities transactions and institute a new technology fee. RW Smith opposes these increases for a number of reasons as detailed below.
The MSRB is proposing a doubling of the existing transaction fee as well as a brand new flat-rate per-trade technology fee. These fees are hitting an industry that has already experienced decreased income in the form of smaller spreads, fewer transactions, and an enormous increase in regulatory fees and assessments, including FINRA and SIPC fees (SIPC fees are assessed to all firms, regardless of the firms business model or whether the firm has customer accounts that could actually benefit from SIPC). Small firms are an integral component of job creation in this country and we are being assessed out of business due to the never-ending flood of regulatory fee increases. In this instance, the MSRB has a captive audience in that any firm desiring to transact business in municipal securities must necessarily adhere to whatever fee structure is dictated by their rules. RW Smith has been an active participant in the secondary municipal market providing liquidity in the inter-dealer market for over 25 years. In those 25 years RW Smith has never increased its commission schedule (a rather incredible fact) and note that in the recent past we have seen already conservative commissions on individual transactions shrink by half or more while the regulator assessments have increased by two times or more.
The MSRB has stated that they need additional funds for their new regulatory oversight as outlined in the Dodd-Frank Act, including regulation of municipal advisors. However, the MSRB has not yet determined a fee structure for the specific groups new to the MSRBs oversight, specifically municipal advisors they have simply proposed a fee increase on existing dealer (and inter-dealer) member firms. The MSRB needs to include the new fees that will be levied against these new municipal advisor member firms and, subsequent to that process, evaluate their financial position. It is not prudent to calculate their financial needs now without that revenue data.
MSRB annual reports show their average annual revenue over the last four years has been $20.3 million. In its proposal, the MSRB projects it will have an annual increase in revenue of $17 million, an 84% increase over the previous four year average. In addition, the MSRB already has close to $20 million in revenue surplus, which, based on non-profit accounting best practices, is four times more than they need. The MSRB should spend down some portion of these reserves before seeking an increase that more than doubles current member assessments and fees. Finally, we request transparency from the MSRB in all matters that concern fee raising so we can participate meaningfully in the conversation and process.
For firms such as RW Smith, an inter-dealer broker acting only as intermediary between two principal contra parties, there is always a corresponding sell transaction for each buy transaction. This means that for every single municipal securities two-sided IDB trade for which RW Smith facilitates, the MSRB will necessarily get its transaction fee and technology fee two times: once when the dealer counter party sells to RW Smith, and again when RW Smith brokers (sells) the securities out. Once again in the rule-making process, there is no accounting for brokers' brokers or agency transactions in the MSRB's proposal they simply intend, through this omission, to double dip for every single agency transaction in the secondary market with a final stated maturity greater than nine months. We oppose the double-dipping aspect of this proposal on broker's brokers and agency transactions.
RW Smith urges the SEC to reject the MSRB's fee proposal. We also urge the MSRB to make a much stronger effort to work with its existing and new members to determine a fee structure that is fair and reasonable going forward. Finally, we encourage the MSRB to remember that the vast majority of their members are small firms. These small companies are comprised of individuals all across the country working hard every day in support of the municipal infrastructure market of the United States, no one will be well served (least of all the market) if these contributors are forced out of business by seemingly arbitrary and endless regulatory fee increases. Small firms matter, jobs matter.
RW Smith participated in the drafting process of the SIFMA comment letter submitted to the SEC on this same issue and supports the views expressed in that letter.