WASHINGTON — As House lawmakers this week vote on a bill that would require a majority of the Municipal Securities Rulemaking Board’s members to be public, the new chairman is stressing that the MSRB’s existing dealer-dominated structure has served the market and investors well since its creation in 1975.
Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan in New York, who became chairman of the board at the start of the month, is quick to note that the makeup of the MSRB is entirely a prerogative of Congress. But there should be no doubt, he said, that the MSRB has a “proud history” of investor protection and that self-regulation has worked “really well.”
“From the very beginning, the initial rules that the board passed,” on uniform practice and fair dealing, for instance, “were very thorough and very good,” Clarke said in a recent interview. “The board has done a very good job since its inception of codifying and putting into writing rules that were, frankly, innate in most of the people in the business, in what was then a your-word-is-your-bond business.”
“We’ve done a darn good job since 1975 with rule-writing to protect investors,” he added, stressing repeatedly that the board has tried to act in the best interests of the market.
Among some of the controversial measures that the MSRB implemented in the interest of investors, he said, was its Rule G-37, which was designed to prohibit pay-to-play practices by restricting dealer political contributions to issuer officials. More recently, the MSRB developed and launched its successful — and expensive — Electronic Municipal Market Access site as a central disclosure repository, a system Clarke described as a “huge stride in transparency.”
Clarke strongly defended the board’s independence, and said that no member of the board, as far as he knows, has ever pushed a personal agenda. In fact, he said board members have historically voted for proposals that they knew would be difficult or onerous to implement because they ultimately would be good for investors and the market.
“That’s an SRO [self-regulatory organization] doing what it’s supposed to be doing,” he said. “We say it outright that when you come to these meetings and join the board, we call it 'check your hat,’ but you check your business card at the door. So when you come on the board, you’re acting as a member of the board and representing the MSRB and the goals of the MSRB, not your own agenda or your firm’s agenda.”
Clarke’s remarks come as Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services capital markets subcomittee, has drafted legislation that would alter the composition of the board so that no less than eight of its 15 members are “public” representatives. The MSRB provision is included in an investor protection bill that is scheduled to be debated and voted on tomorrow.
The switch to a majority-public MSRB is a change long pushed for by the Securities and Exchange Commission to make it more like other SROs, which altered their composition through changes to their respective bylaws after the Sarbanes-Oxley Act of 2002 was enacted. But unlike other SROs, the MSRB’s composition is set by statute and can only be changed by Congress.
Ahead of the release of Kanjorski’s bill, SEC staffers told industry officials that changes were needed because the MSRB was not as independent as other SROs since too many of its members were aligned with dealers.
Others have been more critical, including former SEC chairman Arthur Levitt, who testified at a Senate Banking Committee hearing in March that self-regulation through the MSRB has “all too often come at the expense of the public interest” and repeatedly called the municipal market corrupt.
But Clarke disputed the contention that MSRB members have not worked in the public interest. He said that over the course of two board terms — first from 1990 to 1993 and now during his second three-year term — he has “a very hard time thinking of a person we interviewed [to serve on the board] that clearly was in there to push an agenda that would help a firm or a person or any one constituency.”
“That’s very refreshing,” he added. “It speaks very highly of the kind of participants we have in the market and that people really care about it and want it to be there for a long, long time.”
Clarke, who declined to specifically comment on Levitt’s criticisms, returned multiple times to the board’s implementation of G-37, which bars municipal dealers from doing business with state and local governments for two years if the dealer, its municipal finance professionals, or its political action committee contribute to an officeholder who could influence the awarding of bond business.
“G-37 is an example of the board reacting to something that got to be a big problem, and I think it was handled extremely effectively,” Clarke said.
The MSRB began its new term this month after what was one of its busiest years, spurred largely by the financial crisis. For this calendar year, it has already issued nearly 60 notices, compared to just over 40 at the same time last year and about 30 in 2007.
Over the last 12 months, the board has also implemented a number of major new systems, including the New Issue Information Dissemination System, which is designed to improve the accuracy and timeliness of information about new muni issues that is disseminated to market participants in almost real time.
It has also successfully launched Access Equals Delivery, which allows dealers to send electronic copies of offering documents to customers in lieu of having to send paper versions, as well as the first phases of a short-term transparency system for auction-rate securities and variable-rate demand obligations. The board expects to announce details of the second phase of the ARS/VRDO system by the end of the year.
And in it what may be its most important effort, the MSRB successfully launched EMMA this summer as a free, central repository for continuing disclosure documents, becoming the sole nationally recognized municipal securities information repository, or NRMSIR.
Asked about the board’s agenda for the coming year, Clarke said one of its primary goals is to focus on improvements and refinements to EMMA, though he declined to provide many specific details. He said there is still a mountain of comment letters for the board to “chew through.”
The board is working with the SEC on how to implement a proposal that would give special designation to issuers on EMMA that voluntarily agree to four disclosure undertakings. One of the four undertakings, to file annual financial information within 120 days of the end of each fiscal year, is strongly opposed by issuers and issuer groups, which said it would be unduly burdensome if not impossible to meet. However, SEC staff say 120 days is “liberal” compared to quarterly corporate-filing deadlines.
MSRB staff have said that they will meet with SEC officials during the next month to discuss comments the board received about voluntary undertakings. A formal decision on how to implement them may not come until very late this year or early next year, when the SEC is expected to simultaneously consider both the MSRB proposal and related changes to the commission’s Rule 15c2-12 on disclosure.
Though Clarke said the board is still working to improve EMMA, he eventually hopes that the system will allow users to get a variety of up-to-date information, including ratings or rating changes for securities.
The Government Finance Officers Association and the National Association of Bond Lawyers have asked the SEC to revise the qualifications for nationally recognized statistical rating organizations so that they must file rating information directly with EMMA. Currently, issuers are required to report rating changes on their securities in material event notices, but have complained they are never formally notified of the changes by the rating agencies.
As the board continues to spend money to develop EMMA, it has had to raise its annual fees for member firms and proposed removing some fee exemptions for short-term debt. Asked if the MSRB plans any additional fee increases, Clarke said no, but stressed that any prudent organization is always looking ahead to make sure that it has the resources to fulfill its mission.
Meanwhile, Clarke said that the board was about half done with a review of its “G” rules, which cover dealer behavior, and hopes to finish by the end of the year. The review, which began last year, has led to changes to several rules, including G-11 on new-issue syndicate practices and G-12 on uniform practices, that were meant to expedite the timetable for syndicate managers to disburse profits to other dealers that are part of new-issue syndicates.
Clarke became chairman of the MSRB Oct. 1, succeeding Ron Stack, who heads the northeast group in Wells Fargo & Co.’s public finance department.
Entering his 33rd year at JPMorgan, Clarke said he never tires of working in the muni industry, where he has helped underwrite a wide variety of deals over the years, from an $800,000 transaction for an AIDS clinic to an enormous $7 billion deal for the California Department of Water Resources.
“I enjoy that variety, and never get bored by the issuers,” he said. “Some are very sophisticated and can be very challenging while others are less sophisticated, and I see that as a role where we work closely with the issuer and its advisors and provide a significant market education function.”
“What I love doing is getting them to come back year after year, and that tells me we’ve really done a good job,” he added.
As senior underwriter, Clarke is responsible for pricing deals on a day-to-day basis. He also has broad client responsibilities at a senior level throughout the department, and says he spends a lot of his time looking for new business.
His rise to MSRB chairman comes at a time when JPMorgan and other firms are under investigation by the Justice Department and SEC for possible anticompetitive practices with regard to derivatives and reinvestments. But Clarke declined to comment and sources said his job does not directly involve his firm’s derivatives desk. Amid the federal investigations, JPMorgan announced last September that it will stop structuring interest-rate derivatives for governmental issuers while also instituting a number of measures designed to tighten controls across its tax-exempt capital markets business.
Clarke began his career in the trust department of Chase Manhattan Bank in 1974 on his birthday, two days after graduating from the University of Virginia. He started in munis three years later at Morgan Guaranty Trust Co., first in institutional sales and then in underwriting in 1982. He was given full responsibility for underwriting in 1984 and held various management positions in the business prior to becoming vice chairman earlier this year.
Clarke also has served on SIFMA’s syndicate and trading committee, is a former board member of the Municipal Forum of New York, and is a past president and treasurer of the Municipal Bond Club of New York.