When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, he empowered — for the first time — an agency specifically responsible for looking out for the interests of state and local governments regarding their capital markets activity.
The law also broadens, as of Oct. 1, 2010, the mission of the Municipal Securities Rulemaking Board to regulate the individuals and companies that provide advice to municipal governments in connection with municipal securities and other financial products.
The MSRB already protects investors in the municipal securities market by regulating the banks and securities firms that underwrite, trade, and sell municipal securities and by providing transparency and disclosure service.
With its broadened mission, the MSRB will be responsible for ensuring that both sides of the bond market — investors and issuers — benefit from the oversight of the intermediaries that bring them together in the marketplace.
The first step in this process is the establishment of a majority-public governing board that has the necessary expertise to carry out the MSRB’s mission effectively. The MSRB board currently has five public representatives who provide a critical perspective in the rulemaking process. We plan to expand that board representation, with at least one member representing institutional or retail investors, and at least one representing municipal entities.
The newly constituted MSRB board also will include representation of municipal advisers so they can participate in the development of industry rules for intermediaries. In conjunction with a public majority board, the MSRB will establish advisory councils to provide additional expertise and input into the rulemaking process.
Beginning Oct. 1, 2010, the MSRB will develop a rulemaking program designed to ensure thoughtful but prompt implementation of rules fulfilling our expanded mission. An important aspect of this program is an extensive outreach effort to key market participants, including the state and local governments and other entities the MSRB’s rules are designed to protect.
Input from municipal advisers, as well as broker-dealers and banks already subject to MSRB rules, will be considered as well as that of issuers, investors, and other market participants. The outreach effort will allow everyone with an interest or role in the municipal market to provide significant input to the MSRB during this transition period.
With a new board in place, it will be the job of the MSRB to ensure that the newly regulated municipal advisers as well as currently regulated dealers conduct their business fairly and with minimal conflicts of interest.
For example, the MSRB already limits pay-to-play — obtaining municipal securities business by means of political contributions — by dealers. We expect our board to discuss whether similar rules should apply to advisers so that their business with elected officials is not unduly influenced by political contributions.
In addition, municipal advisers will have a federal fiduciary duty toward state and local governments and will be required to put the interests of state and local governments — and their citizens and taxpayers — ahead of their own.
Municipal advisers include individuals and companies that advise municipal governments on bond offerings, the investment of bond proceeds, and derivatives transactions, among other activities.
Advisers also solicit local governments and public pension funds on behalf of others seeking to provide investment banking, financial advisory, or investment advisory work.
The rulemaking activities of the MSRB will seek to ensure that advisers conduct their business with integrity and high professional standards so that issuers, investors, and the public interest are protected and that municipal finance can continue to thrive.
Congress worked hard to ensure that the interests of state and local governments active in the capital markets are protected. The MSRB stands committed to implementing the necessary regulations and continuing its long-standing tradition of municipal market oversight.
Peter Clarke is the chairman of the Municipal Securities Rulemaking Board for fiscal year 2010.
