Clarke: MSRB Arrives At a 'Turning Point’

WASHINGTON — The Municipal Securities Rulemaking Board is wrestling with how much it needs to increase its staff, technological capability, and funds to implement provisions of the new financial regulatory reform law that require it to make the most expansive changes since its creation in 1975.

“The MSRB is truly at a turning point in its 35-year history,” the board’s chairman, Peter Clarke, told reporters Monday during a teleconference about the board’s meeting last week in Chatham, Mass.

“The financial reform law deepens the public mission of the MSRB by giving it the responsibility to protect state and local governments in their financial transactions and creating a majority independent governing board consistent with that mission,” he said.

“We plan to implement these changes in a transparent manner that includes considerable input from the industry, including the municipal adviser community,” Clarke added.

The new law requires the MSRB to have a majority of public members.

It also charges the board with registering and regulating muni financial advisers, including guaranteed investment contract brokers, solicitors, finders, third party marketers, and placement agents.

The board will have to write a rule ensuring advisers are subject to a fiduciary duty that requires them to place their clients’ interest over their own.

“That’s clearly good for the industry,” said MSRB executive director Lynnette Hotchkiss, who was also on the call.

In addition, the new law authorizes the board to assist the Securities and Exchange Commission and Financial Industry Regulatory Authority with examinations and enforcement of its rules and to develop new informational systems.

“The budget’s going to grow,” Clarke said.  “It’s going to be a question of how much it’s going to grow, which we’re still working out.”

The MSRB plans to submit a proposal for increasing resources with the SEC in August or September, he and Hotchkiss said.

The resource question is “a very high-priority item” for the board, Clarke said. It is discussing resources and fees with both the SEC and FINRA and will be looking at “diversifying revenue sources, particularly in the area of market information and market transparency,” he added.

The MSRB currently receives dealer registration, annual, underwriting, and transaction fees, as well as fees from information vendors and others that subscribe for disclosure and trade data.

However, Hotchkiss pointed out that the board is tasked with regulating new entities and said it is considering a more robust subscription program, areas where the board could collect fees but is not currently doing so, and whether current exemptions from fees make sense.

“The goal is to have a more equitable distribution of fees and to better align the fees with the services and regulatory activities that the MSRB provides,” she said.

“We think there may be some other ways to raise money,” Clarke said. “We’re not going to do anything that’s unfair or irresponsible.”

The board’s most daunting task is likely to be regulating non-dealer muni FAs. Hotchkiss said the board plans to issue an interpretive notice in the next few weeks that will detail some of the board’s more mechanical rules that will become effective on Oct. 1, such as the requirement that FAs register with the MSRB and provide a contact name.

It could take months, if not one or two years, to put in place other rules, such as those prohibiting pay-to-play practices or curbing gifts and conflicts of interest, Hotchkiss and Clarke said.

The board plans to obtain a lot of input on these rules, particularly from the affected parties, and many of them probably will be prospectively, not retroactively, effective, Hotchkiss said.

Meanwhile, the MSRB plans to take action on its Rule G-23 during the next week or two, according to Clarke. But he declined to specify what that action will be, other than to say the board will issue a notice for public comment.

The SEC has essentially asked the MSRB to scrap the controversial rule, which for years has drawn complaints from non-dealer FAs for allowing a broker-dealer serving as the financial adviser in a transaction to switch roles and become underwriter in the same deal.

SEC chairman Mary Schapiro recently sided with non-dealer FAs, warning the rule clearly creates conflicts of interest that are not appropriate.

The MSRB also plans to move forward with its original proposed rule changes for priority of orders, with some minor revisions such as the clarification that the proposals apply to sole underwriters as well as syndicate managers, despite opposition from the broker-dealer community.

Proposed last August, the rule changes would have required underwriters in primary offerings to give priority to customer orders over those for itself or affiliated entities, unless they reached some other agreement with the issuer.

It also would have required managing underwriters to retain records for all primary offering orders for at least six years, regardless of whether they were filled.

Broker-dealers opposed the changes, claiming they were unnecessary, burdensome and confusing. The MSRB pulled back from the proposal in April, saying it would study it further and noting it had issued guidance in 1987 on priority of orders.

But SEC officials insisted the original proposed rule changes move forward, with the tweaks.

“We want to make sure that there is a broad distribution of municipal securities among all investors and that issuers’ wishes are honored, especially when it comes to retail orders,” Clarke said.

The MSRB also plans in August or September to issue interpretive guidance or rule changes for brokers’ brokers, firms that match dealer buyers and sellers of bonds.

Several such firms have been subject to enforcement action from FINRA in recent months, typically for failing to inform selling dealers about the highest bids for their bonds. But Clarke said the guidance is part of the MSRB’s efforts to review all of its “G” rules.

“A lot of it’s going to be in the area of clarification of what the rules are pertaining to them and their mission,” he said. “We want to make sure that brokers’ brokers fulfill their obligations to dealer clients under Rule G-18. This will go a long way to achieving our goal of fair transparency for dealer clients to their retail customers.”

In fact, the board’s Rule G-18 on execution of transactions is only two sentences long and merely states that a broker’s broker “shall be under the same obligation with respect to the execution of a transaction in municipal securities” as a dealer.

At its meeting, the board also elected a new chairman and vice chairman who will take their posts on Oct. 1.

But Clarke and Hotchkiss declined to name them, saying the board will issue a notice during the next few weeks.

Asked about ratings, Hotchkiss said the MSRB is moving forward with plans to post a free, real-time feed of municipal bond ratings on its EMMA site, despite Standard & Poor’s refusal to participate in the process.

While Moody’s Investors Service and Fitch Ratings have been open to the idea, Standard & Poor’s said it would undercut the revenue it generates from subscriptions to its own direct ratings feed and an historical database.

But Hotchkiss, noting that the program will be voluntary, said: “That’s absolutely fine. … If Standard & Poor’s doesn’t want to participate, clearly that’s their choice. We’re still proceeding toward our projected dates with Fitch and Moody’s.”

Neither Hotchkiss nor Clarke would specify the timing of the program, saying they still have to test it and make any needed technology fixes.

Hotchkiss said the board wants to ­ensure that “when we release it, we will have done the appropriate testing to just make sure it’s a system that the industry can rely on.”

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