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Regulation

MSRB Eyes Plan To Expand

WASHINGTON — The Municipal Securities Rulemaking Board is considering temporarily expanding its 15-member board, possibly by two to four members, as it transitions to majority-public membership by Oct. 1 to comply with the new financial regulatory reform law.

The expansion is one of several issues the board will discuss at its meeting Thursday and Friday in Chatham, Mass., MSRB chairman Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan, said in an interview yesterday.

Clarke said the board members also will consider the number of new staff and additional amount of money it will need as it scrambles to implement the numerous mandates it has been given by the bill, which President Obama signed into law yesterday.

To facilitate the expansion of the board, the MSRB is reopening the nomination process for adviser members and is ­expected today to post advertisements for nominations in The Bond Buyer and other publications, Clarke said. Nominations will be accepted over the next two weeks and those will be added to the ones the board already received from its regular nomination process earlier this year, he said.

Under the new law, the board may increase in size beyond 15 members beginning Oct. 1, the start of its new fiscal year, as long as a majority of its members are public officials. Dealers and advisers are to comprise a minority portion of the board, and the new law requires the board to hire at least one adviser.

Clarke said the temporary increase in members will be “small, just to make the transition” and is intended to allow existing members to finish their terms.

Ahead of the transition to a majority public board, though, the MSRB must implement guidelines to assure the independence of its “public” members from industry firms, another issue to be discussed at the meeting.

“We’re still debating that,” Clarke said. “It’s been a pretty active discussion, but if you look at the history of the board, we have always had public members.”

Clarke conceded that the additional resources needed for implementation of the new law’s provisions may lead to increased fees for its members.

“We can’t print money,” he said. “We have a very big mandate in addition to what we’ve been doing for 35 years, so it’s going to require more people, and they have to be funded.”

The board also will discuss the timing of the drafting and implementation of new rules it must write under the new law. Specifically, the regulatory reform law requires non-broker-dealer financial advisers, guaranteed investment contract brokers, and other unregulated market intermediaries to register with the Securities and Exchange Commission as well as the MSRB. All such intermediaries and dealers providing advice to borrowers on muni financial products will be subject to an MSRB fiduciary duty rule, business conduct standards, examinations and continuing education requirements.

The bill also authorizes the MSRB to assist the SEC and Financial Industry Regulatory Authority in examinations and enforcement of its rules and permits the board to obtain half of any penalties collected by the SEC and one third or another portion of any FINRA collections in the course of those activities.

In addition, the board may impose fines on dealers and advisers that fail to submit in a timely manner information or documents required by its rules.

While the bulk of this rulewriting and enforcement authority does not kick in until Oct. 1, the board announced last week that it will soon file administrative rule changes needed for its transition to a majority-public membership.

Another “one of the major topics” to be discussed by the board, Clarke said, is possible action on its Rule G-23.

The rule currently allows a dealer serving as financial adviser in a muni bond transaction to resign as FA and underwrite the bonds as long as it discloses to the issuer that there may be a conflict of interest, as well as its expected compensation.

But SEC chairman Mary Schapiro in May called on the board to scrap the controversial rule and prohibit broker-dealers from serving as both financial adviser and underwriter in the same muni bond deal.

“This is a classic example of conflict of interest . … The board should change G-23 and forbid this practice,” she said in a written speech delivered by another SEC official at an Investment Company Institute meeting here.

The board also plans to consider the SEC staff’s request that it modify its proposed rule changes on “priority of orders” that are designed to ensure there is broad distribution of an issuer’s securities and that dealers honor an issuer’s definition of the retail order period. Clarke declined to provide details of the SEC staff’s concerns about the proposal.

The proposed rule changes, which were drafted in August and filed with the commission in November, generally would have required a managing underwriter for a syndicate for new bonds to give priority to customer orders over orders for its own account, affiliated accounts, or other members of the syndicate, unless it reached some other agreement with the issuer. They also would have required the managing underwriter to retain records for all primary offering orders for at least six years, regardless of whether the orders were filled.

Proponents of the proposal said the record-keeping and record-retention rules were important because the lack of them recently stymied regulators’ attempts to ensure that dealers adhere to their priority of orders provisions.

But broker-dealers complained the proposed rules were unnecessary and confusing and warned they would lead to higher borrowing costs.

The board agreed at its last meeting in April to spend more time reviewing public comments before proceeding with the proposed rules.

In the meantime, it said it would file with the SEC revisions to the proposal that would highlight dated but still relevant interpretive guidance from 1987 and emphasize dealers’ obligations to document compliance with that guidance. Written prior to the proliferation of retail order periods, the 1987 guidance generally states that customer orders should receive priority over syndicate orders or orders for their affiliated accounts.

But the SEC apparently was not happy with the MSRB’s action and has provided the board with feedback.

Finally, Clarke said the board also will weigh whether additional guidance or rule changes are needed for brokers’ brokers, that match dealer sellers and buyers of bonds.

FINRA has taken enforcement action against several brokers’ brokers, most recently Butler Muni LLC of San Ramon, Calif., which was fined $70,000 for failing to inform selling brokers of higher bids for their bonds. In disciplinary actions handed down last week, FINRA announced that it found the firm violated the MSRB’s fair-dealing and supervisory rules.

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