WASHINGTON — The Municipal Securities Rulemaking Board today will begin soliciting a broad range of nominees to serve on its board amid signs that Congress is likely to soon require the self-regulator to alter its composition so that a majority of its 15 members are “public” officials.
Advertisements in The Bond Buyer and the Wall Street Journal seeking candidates to serve on the board for three year terms beginning in October use uncharacteristically general language in soliciting candidates, board officials said.
Normally, they said, the MSRB solicits a specific number of bank or securities firm representatives, or public representatives unaffiliated with dealer firms, to fill the seats of departing board members.
The solicitations, which precede the board’s quarterly meeting Thursday and Friday in Austin, appear to take into account financial regulatory reform legislation that was approved by the House last month and is being drafted by Senate Banking Committee members.
While there are significant differences between the municipal-market related provisions of the bills, both would bring the board’s composition into line with other self-regulators like the Financial Industry Regulatory Authority that have put in place majority public-member boards by approving changes to their bylaws.
In contrast, the MSRB is set by statute to consist of five representatives of securities dealers, five representatives of bank dealers, and five members of the public, including one issuer official and one investor. The members all serve three-year staggered terms.
In the ads, the board says it is seeking “qualified candidates in the public/independent and industry categories,” and asks that nominations be submitted by March 15.
Without any legislative changes, the MSRB normally would seek two bank representatives, two public officials and one securities firm representative to replace members scheduled to leave at the end of September.
At its meeting in Austin, the board plans to discuss several key policy issues, including various options for adding rating information on bonds to its Electronic Municipal Market Access system.
While the board wants to add ratings to EMMA as quickly as possible, it is still weighing the risks, costs and timing of various options, MSRB executive director Lynnette Hotchkiss said in an interview this week.
Currently, issuers are required to report rating changes on their securities in material event notices filed with EMMA, but have complained they are never formally notified of the changes by the rating agencies.
Two muni market groups, the Government Finance Officers Association and the National Association of Bond Lawyers, have asked the Securities and Exchange Commission to revise the qualifications for nationally recognized statistical rating organizations so that they must file rating information directly with EMMA.
The MSRB also is expected to discuss comments filed with the SEC in response to the board’s proposed guidance and rule changes related to the priority of orders during new-issue retail periods.
Though a number of market participants claim the proposed rule changes are an attempt to curtail so-called flipping, board and SEC officials have said they are meant to ensure broad distribution of the bonds to investors as many issuers have come to rely more on retail order periods to sell their debt.
But industry groups, including the Securities Industry and Financial Markets Association and the Regional Bond Dealers Association, have slammed the proposal.
In comments filed with the SEC last month, SIFMA called it a “regulatory muddle,” owing to a perceived lack of clarity from the commission and the board on precisely what the proposal is intended to address.
The RBDA, which claimed the proposal is aimed at addressing flipping, asked the MSRB to clarify that syndicate managers and lone underwriters can refuse orders they believe originate from an “opportunistic purchaser,” or flipper. Flipping generally occurs when dealers or institutional investors purchase bonds and then immediately resell them to retail investors at higher prices.
However, some market participants were skeptical of the industry associations’ letters, saying that they were driven largely by the desire of member firms to flip bonds.
Market participants, who asked not to be named, also said that record-keeping requirements that are part of the proposal are crucial, pointing out that FINRA abandoned an informal inquiry into abusive flipping last year because there were no records for its investigators to review. A FINRA spokesman was not available to comment yesterday.
The board also will review comments it received on a proposal to revise its Rule G-37 on political contributions to require dealer-affiliated banks and bank holding-company political action committees disclose the contributions they make to issuer officials.
SIFMA and the ABA Securities Association, an affiliate of the American Bankers Association, are opposed to the measure, contending the MSRB does not have jurisdiction over PACs that are not controlled by municipal bond dealers, even if those committees are controlled by bank holding companies affiliated with dealers.
Currently, such PAC contributions are not subject to disclosure under the rule.
Under G-37, which has been in effect since April 1994, a dealer cannot engage in negotiated muni securities business with an issuer for two years if it or its municipal finance professionals make significant political contributions to officials of issuers who can influence the award of bond business. Municipal finance professionals, however, can contribute up to $250 to any issuer official for whom they can vote.
The bank PAC proposal would not restrict contributions. It would only require their disclosure in quarterly filings made with the board.
A related proposal to require dealers to disclose contributions of $250 or more to bond ballot election campaign committees was approved by the SEC last week.
Meanwhile, the MSRB will also discuss last week’s Supreme Court 5-to-4 decision in Citizens United v. Federal Election Commission, Hotchkiss said.
The ruling allows corporations to use their own funds for advertising to support or oppose political candidates. However, market participants have said the ruling does not appear to undermine the board’s G-37 restrictions.
