MSRB Membership Move Irks Advisers

WASHINGTON — Independent municipal advisers are strongly opposed to the Municipal Securities Rulemaking Board’s draft proposal that would temporarily expand the board’s membership to 21 while reserving just three, or 14%, of those slots for advisers that will fall under its oversight Friday for the first time.

Their opposition comes only one week before the MSRB must appoint new members for its 2011 fiscal year, which begins Oct. 1.

In comment letters filed this week with the Securities and Exchange Commission, nondealer muni advisers said they are angry about the MSRB’s proposed changes to its Rule A-3 and that they want equal representation with bank and securities dealers.

“The proposal of seven broker-dealer and bank-dealer members compared to three municipal adviser members does not constitute fair representation” required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, wrote Steve Apfelbacher, president of the National Association of Independent Public Finance Advisors and Ehlers & Associates in Roseville, Minn.

Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, agreed with NAIPFA that the number of nondealer financial advisers on the board should equal those representing banks and broker-dealers.

Comments on the proposal were to have been submitted to the SEC by Wednesday. The proposal is designed to accommodate the board’s new oversight of nondealer advisers, as well as a Dodd-Frank provision that the board switch to a majority public membership — a change from its current composition, in which securities dealers and bank representatives make up 10 of 15 members.

In its notice on the proposed rule changes, the MSRB said it plans to elect 11 new members: eight from the public and three from the municipal advisory community.

Sources have said that expanding the board to 21 allows all but one of the eight existing dealer members to continue to serve out their terms without cutting them short. The expanded structure also would ensure that advisers do not at any given time outnumber bank or securities dealers, they said, adding this is reasonable “in terms of regulatory concerns and in terms of sheer numbers” because there are far more individuals working at dealer firms than muni advisory shops.

Though the Dodd-Frank law only mandates the board have at least one adviser, SEC staff have insisted it should have at least three, they said.

The independent advisers also are upset that the existing board has already appointed officers for the new board for fiscal 2011. The board kept the names of those officers secret until last week, releasing them ahead of plans by The Bond Buyer to publish them. The board had previously planned to announce the officers with the new members after the SEC approved its proposal to expand the board.

Michael Barolotta, vice chairman of First Southwest Co., a dealer financial advisory and underwriting firm, has been elected the new chairman, while John Young 2d, managing director of municipal underwriting and public finance marketing at Samuel A. Ramirez & Co., will serve as co-chairman.

Thomas DeMars, managing principal at Fieldman Rolapp & Associates in Irvine, Calif., called on the SEC to invalidate the July election and allow the larger, public majority board to decide its leadership.

“For the prior board to take action in July to elect new leadership, and to keep that information from the public and industry participants, causes dismay and disappointment,” DeMars wrote. “Even against the backdrop of reform and the mandate of a majority public board and inclusion of new regulated members, the existing MSRB board has apparently maintained prior practices that, in effect, disenfranchise the incoming board.”

“The secrecy of this past summer relating to the election of officers is exemplary of the board’s anti-transparency tendencies,” wrote Robert Doty, president of the Sacramento-based financial advisory firm American Governmental Services Co. “At a time when the municipal securities market is criticized severely by many observers for a lack of transparency, and when municipal issuers are under tremendous direct and indirect pressures brought up by the board and others to become ever more transparent, it does not speak well for the market when its regulator — the MSRB — does not conduct open meetings or follow open records practices.”

To eliminate “distrust and cynicism” created by a secretive environment, Doty said that board should make public its internal communications and analyses.

Nondealer advisers also criticized the criteria the board is setting for the 11 “public” members. The board has proposed these individuals have “no material business relationship” with dealers or advisers within the past two years.

Doty said five years is more appropriate, but Joy Howard, principal at WM Financial Strategies in St. Louis, wrote: “There is no time period that can make individuals previously affiliated with [a dealer or adviser] … truly 'independent.’ ”

The Securities Industry and Financial Markets Association reacted more favorably to the proposal, saying it supports allocating 30% of the industry seats to advisers on a temporary basis. However, Michael Decker, the industry group’s co-head of municipal securities, wrote that SIFMA would oppose any permanent rule or policy in which a minimum portion of the regulated members consists of more advisers than is mandated by law.

Similarly, the Bond Dealers of America said that allocating 30% of the regulated seats to advisers may make sense now, given the board’s significant new responsibilities in this area. It “would be a very unfortunate precedent that is not in the board’s best interest, or the interest of the municipal securities community, and may prevent the board from organizing itself to best carry out its duties in the future,” wrote chief executive officer Michael Nicholas.