MSRB to Push for Oversight

WASHINGTON - The Municipal Securities Rulemaking Board this week plans to send to key lawmakers and federal regulators recommendations for regulating guaranteed investment contract brokers and financial advisers in the municipal market that are not currently subject to regulation.

The recommendations were discussed at the MSRB's meeting last week in New Orleans. They come after the board released a statement last month strongly urging the regulation of such market participants, citing concerns that ongoing federal investigations tied to investment advisers had created widespread confusion over how the market is regulated.

"We will be recommending that the Congress consider legislation that would bring these currently unregulated financial intermediaries in the municipal bond market under regulation," MSRB chairman Ronald Stack, who is managing director and head of public finance at Barclays Capital, said in a conference call with reporters yesterday.

"Currently they have no standards and no professional tests," he said. "Many of them [provide] terrific financial assistance to the issuers and financial assistance to the market, but we just think they should be subject to some regulations and oversight."

Stack declined to comment on whether the board will recommend that it have oversight for GIC brokers and swap advisers because the letters have not yet been finalized.

Peter Shapiro, managing director of Swap Financial Group in South Orange, N.J., said most swap advisers would welcome such regulation "if it's done intelligently."

"One note of caution is that there have been some past moves in state legislatures to limit competition under the guise of regulation," he said, pointing to a bill introduced in the Texas Legislature in 2007 that would have limited swap advisory work to broker-dealers and registered investment advisers. The bill, which was made less restrictive before it was signed into law, "would have inadvertently benefitted anyone with a broker-dealer license, even if they had never looked at a swap," Shapiro said.

Stack said the board also will recommend the creation of a federal-level position to coordinate the municipal market.

The idea of a muni "czar" has been pushed by a number of market participants in recent weeks, and Stack noted it comes after the idea was discussed publicly at the winter meeting of the Government Finance Officers Association here last week, where Matt Fabian, managing director at Municipal Market Advisors, said he had met with federal officials and that they are receptive to the idea.

Meanwhile, Stack said that the board has instructed its staff to look into ways to improve investor access to an issuers' underlying credit rating, which has become more important in the wake of widespread downgrades in the ratings of most bond insurers.

He said that the board will begin studying how to overcome "existing barriers" to making underlying ratings accessible to investors in a timely and equitable manner, possibly through the board's EMMA system. The study will explore, among other things, whether broker-dealers should make such disclosures.

But a knowledgeable market participant said that it may not be necessary for the board to consider any rulemaking because the board may be able to partner with the three major agencies that rate municipal paper to upload rating information to EMMA.

Currently, no disclosure of credit ratings is required for new bond issuances, though the Securities and Exchange Commission's continuing disclosure rules require issuers to file material event notices in the event of "rating changes."

The board made no decision on calls for it to expand its Rule G-37 on political contributions to include contributions to bond ballot campaign committees that authorize issuance of muni bonds, Stack said.

He stressed that the board is concerned about the practice but said it decided to direct its staff to first undertake a review of contributions and business practices in this area to gain a better understanding of them and their potential impact on the market.

"Are bond ballot initiatives posing a risk to market integrity? At this point we don't know," he said.

Public finance executives at the three largest underwriters for negotiated transactions -Citi, JPMorgan, and Morgan Stanley - last month wrote a letter to the MSRB arguing that the rule's restrictions on contributions to such ballot campaigns should mirror the restrictions on broker-dealer contributions to issuer officials.

Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their municipal financial professionals - known as MFPs - contribute to issuer officials who can influence the award of muni bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.

Finally, Stack noted that the board started publishing basic reset data for auction-rate securities on EMMA on Friday.

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