WASHINGTON — The combination of having at least three of the proposed 10 “industry” seats on its expanded board dedicated to nondealer muni advisers, along with the establishment of a council of advisers to bounce ideas off the board, will ensure that advisers are fairly regulated beginning Oct. 1, the Municipal Securities Rulemaking Board is insisting.
The MSRB made its arguments in a seven-page letter to the Securities and Exchange Commission late Thursday after several nondealer advisers criticized its proposals for the temporary expansion, claiming the industry seats would be too weighted toward regulated banks and securities firms.
In addition to a new muni advisory council, the board said it plans to establish a new municipal entity advisory council to provide further input to it on the protection of muni issuers — a responsibility added to the board’s mission by Congress as a logical extension of its new oversight of muni advisers.
Under the proposed changes, which the five SEC commissioners must approve this week so the new board can be seated Friday at the start of its fiscal year, the MSRB would expand from 15 to 21 board members, 11 of which would be independent representatives not associated with securities or bank-dealer firms or advisory businesses for at least two years.
The board rejected calls for a longer period than two years, arguing that other self-regulators have only a one-year cooling-off period for public members formerly associated with a regulated entity.
“The standard proposed by the MSRB is twice as stringent,” wrote MSRB senior associate general counsel Lawrence Sandor, adding that the board could weigh other factors to determine whether an individual has a “material business relationship” with a regulated entity making him or her unfit to serve as an independent member.
Though several advisers and an issuer group called on the board to ensure there is equal representation among advisers and dealers, the board said it believes allocating three adviser slots is appropriate, especially having reviewed representation provisions for specific classes of regulated entities at other self-regulators.
For example, the Financial Industry Regulatory Authority has a 21-member board of governors, in addition to its chief executive officer, the MSRB said. Small and large broker-dealers have the most representatives on the FINRA board, with three representatives in each category, consisting of about 30% of the regulated representatives, it said.
“Municipal advisers will have no less representation on the MSRB board,” Sandor wrote. “Given FINRA’s ability to operate effectively with a board of comparable size, the MSRB believes that it will be able to fulfill its statutory mandate with 21 members, including 11 public members, seven dealer members, and three municipal adviser members.”
Sandor acknowledged comments from Robert Doty, president of American Governmental Financial Services in Sacramento, and Peter Shapiro, managing director at Swap Financial Group in South Orange, N.J., that the board ought to tap more advisers to reflect the different sizes and roles they play in the muni market.
The MSRB is aware that municipal advisers are not homogeneous and is “committed to seeking out diversity in its membership across all categories of members based on various criteria,” including those outlined by AGFS and Swap Financial, he said.
Sandor said the board is “taking under advisement” various comments regarding how it should be composed after the initial transition to a majority of public members.
This includes comments from the Securities Industry and Financial Markets Association, which said it supports the temporary expansion to 21 members with 30% of the registered-entity seats consisting of muni advisers, given the board’s focus on drafting new adviser rules. But SIFMA warned it is opposed to any permanent rule or policy in which a minimum portion of the regulated members consists of more advisers than the one mandated by law.
Both SIFMA and the Bond Dealers of America pointed out that many dealers provide municipal advisory services and representatives of these firms should be considered for the municipal advisory positions on the board equally with nondealer municipal advisers. But Sandor said the adviser seats are “expected” to be filled by “advisers that are not affiliated with broker-dealers or banks during this transition period.”
Turning to adviser concerns that the new officers were selected without input from new members, Sandor said the elections complied with the board’s Rule A-5 that says elections must be held at a meeting of the board prior to Oct. 1.
Though he warned that such comments were beyond the scope of the A-3 proposal, the board would take them under advisement going forward, as well as concerns of Doty and others about a perceived lack of transparency at the board.
