Dealer groups responding to a request for information regarding the Municipal Securities Rulemaking Board's rate card process told the MSRB it should ease dealers' "unfair" fee burden by levying activity-based fees on municipal advisors, while MAs view that idea as unrealistic.
While comment letters filed by the Securities Industry and Financial Markets Association, the Bond Dealers of America and the American Securities Association urged the MSRB to consider changing how municipal advisors are assessed, the National Association of Municipal Advisors opposed that.
NAMA understands the difficulty in finding a reasonable way to assess fees of municipal advisors "due to the significant variety of business models and practices used, and in basing broker-dealer fees on market projections," NAMA Executive Director Susan Gaffney said in her letter.
"For MAs, the only common denominator between MA firms – the number of covered persons - remains the appropriate and fair way to assess fees on these professionals," Gaffney's letter said.
By shifting away from a historical practice of applying fees on a per-person basis, "the MSRB would impose significant burdens on small firms that could also lead to MAs leaving the profession," her letter said. "The key reason for the existence and regulation of MAs is to protect issuers, which is also part of the MSRB's mission."
The letters from SIFMA, BDA, ASA and NAMA were among those received by the MSRB in response to the RFI it issued last October regarding its rate card process.
An independent self-regulatory organization, the MSRB, as noted in its most recent annual report, depends on fees paid by regulated entities to fund its operations. In 2022, the MSRB instituted a new rate-setting process for certain fees and charges, which also said that stakeholders had raised concerns about the rate card process in response to the MSRB's fees for 2024.
In January 2024, the SEC suspended the MSRB's 2024 rate card filing. The MSRB withdrew its filing the following month and since then has conducted extensive stakeholder outreach, the RFI said.
In an Oct. 30, 2024 press release regarding the RFI, the MSRB said it would not file a new set of rate care fees for the 2025 calendar year. Instead, the MSRB "plans to leverage input from the RFI to determine whether any modifications to the model are warranted so that any changes can be instituted, and new rate card fees can be established for calendar year 2026 if necessary or appropriate, the release said. RFI responses were due Jan. 28.
In its letter, BDA commended the board for "taking another comprehensive look at the MSRB's fee-setting and budgeting process," but said more work was needed "to improve fee rate setting transparency and predictability."
"We do not oppose a fee structure based on market activity as opposed to some other basis like headcount or revenue, nor do we believe that the general structure of market-based fees is unreasonable," Michael Decker, senior vice president for research and public policy at the Bond Dealers of America said in the letter. "However, we do believe that tighter collars around fee rate changes from year to year are warranted."
For example, the 2024 fee rates the MSRB proposed and subsequently withdrew represented a substantial change from MSRB's 2023 fee rates, Decker's letter said. For 2024, the underwriting fee rate was slated to jump by 25%, the maximum allowed under MSRB Rule A-13, the letter said. Meanwhile, the trade count fee rate would have dropped by 48%, BDA's letter said.
"This type of variance can and should be avoided," Decker's letter said. "BDA recommends that instead of a maximum 25% increase in any market-based fee rate, the Board should consider a 10% threshold."
BDA also urged MSRB to "consider an alternate basis for MA fees based on market activity such as volume of bond issuance on which the MA was engaged," according to Decker's letter.
"There is a fairness element to a market-based fee for MAs since that is the basis for dealer fees," BDA's letter said. "Levels of market activity—volume of new issues on which the MA advised—could be made reportable by the MAs."
BDA believes the issue of fee distribution across regulated entities warrants more attention, its letter said. In the letter, Decker pointed to the MSRB's fiscal year 2024 annual report, which showed that the municipal advisor headcount fee raised $3 million in 2024 while the three market-based fees MSRB imposes on dealers raised a total of $45 million.
"MAs pay just 6% of the fees the MSRB collects from regulated entities," BDA's letter said. "The Board has provided scant justification for why MAs pay so little."
Despite their limited contribution to MSRB resources, municipal advisors "are heavy users of MSRB trade reporting and data even though they do not provide data to those databases," BDA's letter said.
In her letter, Jessica R. Giroux, general counsel and head of fixed income policy at the American Securities Association, expressed similar concerns regarding the burden borne by dealers.
"Upon reviewing the MSRB's FY 2025 Budget Summary, several concerns previously expressed by ASA remain unaddressed," Giroux said in her letter. "The budget continues to heavily depend on dealer-related fees, which account for a majority of total revenue, while municipal advisor professional fees contribute significantly less."
The disparity in fee distribution "suggests that dealers are bearing a disproportionate share of the regulatory costs while municipal advisors may be benefiting from MSRB services and regulations without contributing an equitable portion of the expenses," she said.
In its letter, SIFMA urged MSRB to "continue to seek opportunities to provide transparency into its budget, as budget levels drive the Rate Card Process and fee levels."
SIFMA's letter, signed by Leslie M. Norwood, managing director and associate general counsel at SIFMA, and Gerald O'Hara, vice president and assistant general counsel there, recommended that MSRB "assess fees on municipal advisors based on their actual market activity levels" and "lower the current percentage cap on year-over-year fee increases to achieve the MSRB's goals of more predictable and less volatile dealer fees."
In addition, SIFMA's letter said MSRB should "significantly reduce" its organizational reserves and maintain them at a more reasonable level.
"The MSRB has acknowledged that it has maintained excessive reserves for years, and those reserves largely have been funded by fees on the broker-dealer community," SIFMA's letter said.
The MSRB establishes its reserve level target annually as part of its budget process "and SIFMA believes the current target remains unnecessarily high," the letter said.
"Given that the MSRB is a regulator with the ability to charge and collect mandatory regulatory fees, which ensures access to annual revenues sufficient to fund its core regulatory obligations, the MSRB's reserve level target should not exceed six months of operating expenses," SIFMA's letter said.
