MSRB: Don't Forget Us

WASHINGTON - As federal officials and lawmakers move forward with initiatives to address the financial crisis and regulatory reform, Ron Stack, the new chairman of the Municipal Securities Rulemaking Board, wants to make sure they don't forget about the muni market.

In a recent wide-ranging interview, Stack talked about his push to enhance the MSRB's relationships with regulators at the Federal Reserve and the Treasury Department, a move that has been received with mixed emotions in the municipal market.

"We think it is our role as a rulemaking board and part and parcel of the regulatory system responsible for municipal securities to provide fellow regulators with information, data, and different alternative proposals that may be available to improve the workings of the municipal market and to increase the ability of the market to function in a fair and efficient manner," said Stack, who is also managing director and head of public finance at Barclays Capital. "We will not, and have no plans to, advocate any positions."

The MSRB's efforts to play a role in the deliberations of Treasury and Federal Reserve officials stems from the "tremendous liquidity problems" facing state and local governments, which have been forced to either pay higher interest rates to access the capital markets or delay bond sales altogether because of those high rates, Stack said.

State officials have been scrambling for assistance from Treasury under the $700 billion bailout package that Congress approved in September, though Treasury officials appear reluctant to help them either through direct lending or liquidity facilities.

In late September, California Gov. Arnold Schwarzenegger informed the Treasury that his state was temporarily unable to borrow in the short-term markets and was considering asking for a federal loan. Though the state subsequently was able to raise $5 billion in the short-term market at higher than normal rates, lawmakers have warned the Fed and the Treasury that states and localities still need help.

"The overwhelming consensus is that local and state governments and investor confidence require solutions at the federal level," Stack said, adding that the MSRB will only present "facts and data" for regulators in an "unbiased and objective way."

But Stack's initiative has drawn varying reactions. Though most broker-dealers view it as constructive, some issuer officials have expressed concerns that the board would advocate for policies that favor the broker-dealer community, which funds the MSRB's operations.

Stack denied the board will lobby for securities and bank-dealer firms.

"The mantra of the board is truly that you leave your hat at the door as to which firm you're with," he said. "The only thing I represent as chairman is investors and a fair and efficient marketplace."

Several market participants characterized the board's new initiative to communicate with the Treasury and Fed as constructive, saying the muni market historically has been underrepresented at the federal policy level.

"The question is, is there anybody speaking up for the marketplace?" said Kenneth Gibbs, executive managing director and chief executive officer of Depfa First Albany Securities LLC, who served on the MSRB from 2004 to 2007. "The board is one of the few groups that has data and resources and is trying to do practical things about the market."

One market participant who did not want to be identified said that it is "disingenuous" for the MSRB to say that their initiative would not benefit dealers "because that's who's paying their salaries. But another source, who previously served on the board, argued that the muni market is underrepresented by Wall Street's primary industry group, the Securities Industry and Financial Markets Association, which has just one staff member, Leslie Norwood, working as a "one-armed paper hanger" for munis. The only other group of dealers that is consistently pushing muni issues is the much smaller Regional Bond Dealers Association, the source noted.

"Regulatory reform is out there and the MSRB is trying to be intelligent about what it's value will be, and I think that's a good thing," the source added. "It's one of the few organizations that has a tremendous amount of knowledge about the marketplace."

Meanwhile, issuers have mixed levels of support for the initiative, with many saying that they trust Stack and MSRB executive director Lynnette Hotchkiss.

"The board under Ron's direction has clarified that they have no desire to drive the agenda on municipal legislation or regulatory issues," said Alan Anders, deputy director for finance in New York City's office of management and budget, who also serves on the MSRB's advisory group of issuers. "They want to make available both their influence in getting the attention of the proper authorities where there are problems and to also bring to bear their internal resources and make them available to the various groups. I think that that's all extremely constructive."

Turning to Stack, Anders said: "He's an experienced, old hand who's been at several major firms and knows all of the players and the issues very well."

But Ben Watkins, director of Florida's Division of Bond Finance, who said he is cautiously supportive, stressed that the board needs to reach out to the issuer community if it's going to be advocating on behalf of the overall muni market, "because issuers are the cornerstone" of the market.

Dealers "make their living off it, but we live with it everyday," he said. "They need to include our input."

Other issuer officials said the MSRB needs to be transparent about its discussions with regulators by making its presentations public.

EMMA UNDERWAY The biggest project underway at the board remains the Electronic Municipal Market Access system. Once it is completed sometime next year and receives approval from the Securities and Exchange Commission, EMMA will serve as a free, centralized repository for primary and secondary market disclosure documents.

Currently EMMA is functioning in a pilot format that launched in late March and that includes only historical primary market information and ongoing trade data from the board's real-time transaction reporting system.

Though EMMA will function as a single system, it is actually the combination of several different platforms, including a primary market "access equals delivery" portal that the board hopes to launch by the end of the year. Under that system, dealers will be able to electronically post official statements for bond issues in lieu of having to send paper copies to investors.

The MSRB also is gearing up for EMMA to house secondary-market disclosure documents under a proposal preliminarily endorsed by the SEC. Under the proposal, EMMA will replace the four existing nationally recognized municipal securities information repositories as the required repository for continuing disclosures.

The MSRB's push to host and develop EMMA comes after SEC chairman Christopher Cox last year included the development of a centralized repository, similar to the corporate Edgar system, as one of eight proposed initiatives to boost municipal accounting and disclosure standards. EMMA is the only one of those initiatives that gained widespread support throughout the market.

The MSRB has argued that it is uniquely positioned to host such a site, partly because it will be hard for private businesses to make money off the type of system that the SEC envisions, which would be free for issuers and dealers to file to, and free for investors to access.

Hotchkiss, who was also present for the interview, said that the board is still on budget for the development of EMMA, which is slated to cost between $2.5 million and $3 million, though that price tag does not include one-time add-ons, such as a transparency system for short-term securities like variable-rate demand obligations that the board announced earlier this year. The short-term transparency system will be launched in three phases beginning in January.

In the coming days, the board plans to ask the SEC for permission to start a pilot continuing-disclosure component of EMMA that will include roughly a six-month trial period. The pilot period will be followed by full operation of EMMA on or about July 1, 2009. The board also plans to ask the SEC for permission to collect additional voluntary disclosures that issuers can submit to EMMA, beyond what is required under the SEC's Rule 15c2-12 on disclosure.

Under 15c2-12, a dealer may not underwrite munis unless the issuer of the bonds has contractually agreed to disclose to the repositories financial and operating information at least annually, as well as the occurrence of any of 11 specified material events, such as rating changes, bond calls, and adverse tax opinions or events affecting the tax-exempt status of the bonds.

The voluntary disclosures could include a variety of documents, such as quarterly financial statements or city council meeting minutes, according to MSRB spokeswoman Jennifer Galloway, who also attended the interview.

Turning to the short-term transparency system, Stack said he is hopeful it will play a large role in "cleaning up" the turmoil in the action-rate securities and VRDO markets by giving investors "a lot more information."

"The more educated the investor, the better they are and the better we are as broker-dealers and banks, and the better the industry is," he said.

When completed, the system will collect and disseminate 10 to 12 data points for ARS and VRDOs, including reset and maximum rate information. Currently, there is no source of comprehensive same-day data about auction-rate securities that is available to non-market professionals - even information as basic as the clearing rates set through the auction process. The VRDO market is similarly opaque.

Some market participants have been pushing for the MSRB to establish the transparency system more quickly, arguing that the VRDO and ARS system is unlikely to improve the liquidity problems in those markets until it includes comprehensive data in a manner that replicates the disclosure provided by the Treasury for its auctions. Treasury disclosures include such information as the bid-to-cover ratio, which represents the amount of bonds that were bid compared to the total amount of securities in the particular auction.

"If the information isn't available until the later part of 2009, it's too late," Christopher "Kit" Taylor, the former executive director of the MSRB, said in an interview earlier this month. "It's almost too late now."

Though Hotchkiss first publicly discussed the system in October 2007, the board did not propose a transparency system for ARS until March, after the auction-rate market collapsed in February when broker-dealers stopped bidding on the auctions. The board proposed a second system for VRDOs in May, and since then the two systems have coalesced into one.

But Stack rejected criticism that the MSRB is acting too slowly to implement the system, arguing that the board must work carefully to make sure the system is "accurate, reliable, auditable, and efficient" for broker-dealers to use.

"The most important thing when the MSRB undertakes anything related to its rules or requiring market information is that we make sure it's done right," he said.

Stack also noted that there is more than $450 billion of outstanding VRDOs and municipal ARS, most of which is resetting on a weekly, and in some cases, daily basis.

"That's a lot of data that is going to be reported," he said. "It's so darn important, I want to make sure it's done right even if some market observers think it needs to be done quicker."

POLITICS AND FINANCE As a banker and self-described political junkie, Stack said that he prefers to hang out with people in government and is close with both Republican and Democratic officials in New York.

Of his passion for public finance, he said: "I would not finance widgets. I don't care about widgets. I care about financing the [Metropolitan Transportation Authority] and I care about Gov. [David] Paterson trying to close his $4.5 billion budget gap this year. I find that stuff interesting. That gets my juices going, not just finance."

Stack started his career teaching American politics and urban economics at Fordham University and Columbia University, while also working on the side as a speechwriter for political candidates.

He was working for then-Rep. Hugh Carey in the 1974 gubernatorial race against incumbent Malcolm Wilson when Carey unexpectedly won. From 1975 until 1982, Stack served as deputy chief of staff in the Carey administration, which coincided with New York City's financial crisis. He described his work in the Carey administration as the greatest eight years of his life.

"Every day we were affecting policy, dealing with the Congress, dealing with the Feds, dealing with city, the mayor - it was just a really exciting time," he said.

Stack is one of the few banker-dealers who is also an issuer official. He has chaired the board of the Nassau County Interim Finance Authority since 2003, and has served on its board since it was established in 2000.

NIFA was created by the New York Legislature eight years ago when Nassau County faced a fiscal crisis and a series of ratings downgrades. The authority was created under a structure that is used in only the most dire of circumstances, in which NIFA legally owns all sales taxes in the Long Island county and uses them to pay debt service and administrative costs before turning the remainder over to the county.

While segregating part of Nassau's revenue stream allows the authority to get better credit ratings and borrow more cheaply than a distressed municipality would be able to, relations sometimes can be strained between a board imposed by the state with oversight powers over a local government's budget and borrowing. Nevertheless, the relationship between NIFA and Nassau County has been cooperative, said Stack, noting that the authority is prohibited from doing deals with his firm.

In addition to over 20 years of experience in investment banking, Stack was a management consultant for Touche Ross, a predecessor of Deloitte & Touche, from 1982 until 1985, when he joined Shearson Lehman, which subsequently became Lehman Brothers. He worked there until mid-September, when Lehman's holding company filed for bankruptcy, except for a three-year period when he became a vice president at Goldman, Sachs & Co. between 1992 and 1995.

Since Barclays purchased the investment banking component of Lehman, officials at the British banking giant have essentially said that the 160-member national municipal group remains unchanged.

In an interview with The Bond Buyer last week, Barclays' head of municipal finance, Jerry Rizzieri, reiterated the firm's commitment to the municipal market. The muni department has heads in areas such as banking, sales, underwriting, trading, derivatives, and research who all report to Rizzieri, and Stack heads the banking group.

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