Industry Ties Are an Issue as MSRB Meets

Correction: The contribution made by Adela Cepeda was made by the mother of the president of A.C. Advisory, who bears the same name.

WASHINGTON — As the majority-public Municipal Securities Rulemaking Board formally meets for the first time Wednesday through the end of the week, market participants are questioning whether some of its public representatives are really independent from regulated dealers and advisers.

Meanwhile, two of the three advisers on the new board have given political contributions to municipal issuer officials and will have to change their practices once the board extends pay-to-play restrictions to them.

Though the 21-member board’s action items this week are expected to mostly revolve around administrative rules for advisers, the MSRB hopes to draft changes to its Rule G-37 on political contributions by the end of the year that will apply to advisers, staff have said.

Also at this week’s meeting, the MSRB plans to discuss comments it received to draft changes to Rule G-23 that it issued in August, which would eliminate the current practice of allowing a dealer-FA to resign as adviser and then underwrite the same transaction, provided it makes certain disclosures to, and receives permission from, the borrower.

In May, SEC chairman Mary Schapiro called on the board to alter the rule, deriding such role-switching as a classic conflict of interest. But many dealer-FA firms and bond attorneys have asked for an exemption from any role-switching ban for small competitively-priced transactions.

One of the new public board members under scrutiny is Robert Jackman, who spent nearly 39 years working at the former Bear, Stearns & Co., where he was the senior managing director in charge of municipal bond trading, short-term trading, and retail trading. As one of 11 “public representatives” on the new, 21-member board, Jackman must not have a “material business relationship” with dealers or advisers or have worked for them in the past two years.

While market participants said Jackman is personally above reproach and are sensitive about criticizing him in light of health issues he is facing, some questioned whether he could bring an independent perspective to the board given his extensive industry background.

Though Jackman left Bear in early 2006, he developed a close friendship there with John Young, who is now a managing director of municipal underwriting and public finance marketing at Samuel A. Ramirez & Co., and the MSRB’s vice chairman.

Jackman, who previously served a portion of a three-year term on the MSRB as a securities dealer representative, is the founder and trustee of a foundation in memory of his daughter, Brooke Jackman, who died on Sept. 11, 2001, in the north tower of the World Trade Center. Some of the contributors to the foundation are financial services companies, according to its website.

Noting that the previous, dealer-led board appointed the members of the current majority-public MSRB, multiple market participants argued that Jackman’s election is akin to tapping an 11th dealer to serve as a public representative.

“Bob’s been through a lot and he has my complete sympathy, but to call him independent is nuts,” said one issuer who did not want to be identified. “His whole experience is from the perspective of an underwriting desk.”

“It’s like having a sympathetic Democrat voting with the Republicans to filibuster a bill” in the Senate, said another the market participant who asked not to be named.

Christopher “Kit” Taylor, the MSRB’s former executive director, said: “The dealers have set it up to have a dominating influence.”

Jackman could not be reached for comment. An MSRB spokesman said the board does not comment on individual members. Young declined to comment.

But a member of the MSRB’s nominating committee that chose the existing board defended Jackman, saying it is important to have at least a couple of public representatives “with an intimate knowledge of the industry,” as the board has temporarily increased in size to 21 people from 15.

The committee member noted that Jackman has been out of the industry for nearly five years now — much longer than the two-year “cooling off” period required by the MSRB’s rules. The member also disputed that Jackman’s relationship with any other board members presented a ­concern.

“This is a business where people move around a lot and touch on lots of people,” the member said. “Having relationships is not a bad thing.”

Federal regulators, for their part, expressed no concern with Jackman’s ­selection.

However, the Securities and Exchange Commission, which signed off on the new board, required the two attorneys elected to serve on the board — C. Christopher Trower of electriclaw.com and Robert Fippinger of Orrick Herrington & Sutcliffe LLP — to recuse themselves from any direct business dealings with regulated entities during their terms.

Trower is an Atlanta-based attorney who successfully argued for Kentucky in the landmark 2008 Supreme Court decision in Kentucky v. Davis that upheld states’ rights to preferential tax treatment of their own bonds. Fippinger, senior counsel at Orrick, is the author of a seminal book on municipal securities regulation and has long served as underwriter’s counsel. His wife also is a former partner at Goldman, Sachs & Co.

Though an SEC spokesman declined to comment yesterday on the recusals, sources familiar with the matter said lawyers by definition can not take positions contrary to their clients, which would make them non-independent. While Fippinger is widely thought of as an expert on the internal workings of dealers, SEC officials wanted assurances he was not too close to them, they said. Asked about the recusals, Roger Davis, a partner and chair of public finance at Orrick, would only say that Fippinger is deeply qualified to serve on the board.

But sources said that the recusals could significantly limit the MSRB’s ability to field competent attorneys to serve as public representative unless they have recently retired.

“This whole concern is misplaced,” said another market participant who did not want to be identified. “A number of bond counsels previously filled the public member slots without any concerns of this kind and if the MSRB is hampered from finding people who understand the industry, it’s not going to be well served.”

Perhaps no issue underscores dealers’ concerns about the lack of a level regulatory playing field more than the contributions that independent advisers have made to political candidates.

Dealers have complained they are restricted from making contributions while advisers are not, putting dealers at an unfair advantage.

Specifically, the MSRB’s Rule G-37 bans muni dealers from negotiated underwritings with an issuer for two years if they, their political action committees, or municipal finance professionals make significant contributions to issuer officials or candidates who can award bond business. MFPs can, however, contribute up to $250 to candidates for whom they are eligible to vote.

But as the MSRB begins to consider how to apply the rule to advisers, at least two new board members will have to refrain from making political contributions to issuers.

The two members, Noreen White, co-president and managing director at Acacia Financial Group in Montclair, N.J., and Adela Cepeda, president of A.C. Advisory Inc. in Chicago, made contributions to issuer officials during the 2010 election cycle.

White contributed some $2,500 to Josh Mandel, the Republican candidate for Ohio state treasurer. In addition, White’s business partner, Kim Whelan, is also a significant contributor at the state level, having also made a $2,500 contribution this year to Mandel.

Cepeda, whose firm is based in Chicago, contributed $250 to New York Democratic gubernatorial candidate Andrew Cuomo, according to the National Institute on Money in State Politics, a site that tracks political contributions only made to state, and not local, officials or candidates.

White and Cepeda could not be reached for comment.

Asked during an interview last week if advisers that would trigger a two-year ban if G-37 applied to them now are too conflicted to help expand the rule, MSRB chair Michael Bartolotta said no.

“I believe the board members will make the right decision for the industry irregardless of their firm or affiliation,” said Bartolotta, the vice chairman at First Southwest in Houston. He noted that a dealer-dominated board put the interests of the industry first in deciding to create G-37 in the 1990s.

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