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Groups Weigh in on MSRB Bill

WASHINGTON — Several market groups see a draft investor-protection bill that would require a majority of public members on the Municipal Securities Rulemaking Board as an opportunity to increase their influence over the self-regulatory organization, though the Securities Industry and Financial Markets Association is concerned about such a change.

The draft bill, which was publicly released on Oct. 1 by Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services capital markets subcommittee, would require that within six months of its implementation, the MSRB switch from a 15-member board dominated by 10 representatives of bank-dealer and securities-dealer firms to one in which no less than eight of its members are “public” representatives.

Though the bill was discussed during a legislative hearing yesterday, lawmakers did not address the MSRB provision, focusing on other sections of the bill.

Representatives of market groups, however, provided The Bond Buyer with their views of the bill’s MSRB provision. The securities industry’s largest group argued that the board has been an effective self-regulatory organization, or SRO, with specialized industry knowledge for over 30 years.

“While SIFMA and its members are examining the proposal in more detail, we are concerned about any significant changes that, potentially, could compromise the MSRB’s ability to act in the best interest of the municipal bond industry as a whole, and to act as a fair and effective regulator of the municipal securities broker-dealers it regulates,” a SIFMA spokesman said.

Other market groups, however, appeared to support the change, and were hopeful that the bill would lead to greater representation for their members.

Lisa Good, executive director of the National Federation of Municipal Analysts, said that any change to the composition of the MSRB should include a seat for the analysts’ group.

“As the representative of the primary users of disclosure documents, the NFMA is uniquely positioned to comment on changes to disclosure practices in the municipal market,” Good said. “Our long history of preparing recommended best practices papers and white papers would add a perspective to the board that is necessary to protect the investing community, both institutional and personal.”

The NFMA made a similar point in a letter to Securities and Exchange Commission chairman Mary Schapiro and key lawmakers earlier this year.

Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center here, said the GFOA supports Kanjorski’s proposal, and passed a policy statement at its annual board meeting in June supporting efforts to have the MSRB comprised of more issuer members.

Michael Decker, co-chief executive officer of the Regional Bond Dealers Association, said his group is concerned that making the MSRB majority public might take the “self” out of “self-regulation” to the extent that members of the industry would no longer control the board.  But he added that his group essentially concedes that a switch to majority public representation is “an unstoppable trend.”

The trend began, he said, when the National Association of Securities Dealers, a predecessor organization to the Financial Industry Regulatory Authority, announced in late 1995 that it had changed its bylaws so that most members of its board of governors would be public. That announcement followed an SEC examination, after which NASD was fined and put under outside supervision for three years for regulatory failures.

“Looking at the bill from a broad perspective, it’s likely to get enacted, if not in this environment than sometime in the not too distant future, and this is generally the direction that regulators want to see SRO boards move,” Decker said.

Decker added, however, that the RBDA believes there ought to be some technical changes to the bill. For instance, the six-month transition time from the current board composition to the one envisioned in the bill should be altered so that the majority-public board begins its first term roughly a year from now, at the beginning of next October, when it normally would start its new term.

Decker said the RBDA also is looking at provisions in the MSRB section of the bill that would require the board to have procedures in place ensuring the “independence” of its public representatives. He said it is unclear if rating agency officials or bond attorneys, who are not dealers but work in the industry, would meet lawmakers’ definition of “independence,” or if public members must be non-market participants with no financial interest in the market.

The MSRB provision in Kanjorski’s bill comes just after two SEC staff officials said at recent industry conferences that changing the board’s composition is among the commission’s legislative priorities for the muni market. Martha Mahan Haines, chief of the SEC’s office municipal securities, and Mary Simpkins, a senior special counsel to the office, have both said that the commission’s staff believes the board’s composition must change to reflect other SROs.

Christopher “Kit” Taylor, former executive director of the MSRB, said he knew in the late 1990s that the board’s composition “would come under some sort of attack or questioning,” after NASD changed its board composition. He also said that he talked “off and on” in the early part of the decade with SEC staff who said that while they did not have any desire to push legislation just for the change, they would seek to add it to a larger bill if the opportunity arose.

Because the board’s composition is set by a 1975 statute, there is little the MSRB can do without congressional action, unlike FINRA. However, Taylor said that when he relayed the SEC’s concerns to the board and tried to get it to appoint more of what he called “public public” members — meaning public members who had no financial connection to the industry — the board essentially turned him down.

“It didn’t make me well-loved,” he said, adding that the “independent” members of a changed board composition should be comprised solely of individuals with no financial relationship to the muni market. Currently, two of the five public seats on the board are reserved for a representative of issuers and an investor. The other three are often filled by individuals with ties to the market, though they may be retired. The board also has issuer and investor advisory groups.

Asked about the Kanjorski proposal last week, MSRB executive director Lynnette Hotchkiss said it was a “congressional prerogative” and declined to comment further, other than to say it is an issue that the board will discuss at its quarterly meeting next week at its offices in ­Alexandria, Va.

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