Plan to Keep 21-Member MSRB Faulted

WASHINGTON — Dealers and municipal advisors are criticizing the Municipal Securities Rulemaking Board’s proposal for a permanent 21-member board.

In comment letters filed earlier this week with the Securities and Exchange Commission, the Securities Industry and Financial Markets Association and the National Association of Independent Public Finance Advisors voiced several concerns about the board and its governance.

The issues ranged from the board’s composition and size to its deliberative processes and rulemaking. Last month, the board asked the SEC to approve proposed amendments to MSRB Rule A-3 on board membership, making the 21-member body permanent.

The comment period on the MSRB’s proposal ended Tuesday.

“We feel such a board is too big, would result in problems filling the 'public’ seats with qualified members and would impose unnecessary costs,” wrote Michael Decker, managing director and co-head of SIFMA’s municipal securities division.

The remarks come just days after the MSRB pulled five proposed municipal advisor rules that had been pending with the SEC. The proposals — including proposed Rules G-20 on gifts and gratuities, G-36 on fiduciary duty and G-42 on political contributions — reflected key initiatives of the current board and its outgoing chairman, Michael Bartolotta, vice chairman of First Southwest Co. in Dallas, whose chairmanship runs through the end of September.

For months, industry groups and market participants had urged the MSRB not to move forward with rulemaking until the SEC finalized its muni advisor registration scheme and definition, which are expected this fall.

Last fall, the board increased to 21 from 15 members on a transitional basis in order to implement the Dodd-Frank Act, which required the MSRB to have a majority-public board with 15 or more members.

Previously, a majority of the board’s members were broker-dealer and bank dealer representatives.

In its filing, the MSRB told the commission it decided to maintain the board’s current size after surveying board members, who said they thought the 21-member body was working effectively and could, as constituted, carry out its mission and objectives.

In the survey, board members also said they believed all constituents — from both the industry and the public — are appropriately represented by board members, who participate in deliberations and provide input into developing the board’s agendas.

In its notice, the MSRB also said the board’s 21 members would be divided into three groups with staggered, three-year terms.

Each group would be divided as evenly as possible between regulated and public members.

Only 10 of the 21 members would represent regulated entities such as banks, broker-dealers and municipal advisors. The rest would be public members.

The 10 regulated members would include at least one representative of a broker-dealer, one from a bank dealer and at least three representatives of independent municipal advisors that are unaffiliated with broker-dealers or banks.

In a four-page letter dated Sept. 13,

SIFMA said the MSRB had supplied “little justification for a 21-member board and no justification at all for the requirement that at least 30% of regulated representatives be associated with nondealer advisors.”

In particular, Decker wrote, the 21-member board imposed “unnecessary” travel and related costs on the MSRB, at a time when the self-regulator has discussed a “'revenue shortfall’” and imposed “substantial new assessments” on dealer members to defray expenses related to its Dodd-Frank mandates.

NAIPFA, meanwhile, did not raise objections to the board’s size, but in a two-page letter dated Sept. 12, the group voiced concerns about the board’s “general makeup.”

In an interview, NAIPFA president Colette Irwin-Knott, a partner at H.J. Umbaugh & Associates LLP in Indianapolis, said the group believes the MSRB should fairly reflect participants within the muni marketplace and suggested the board may have too many representatives of broker-dealers and banks.

“Fair representation is what we are looking for,” Irwin-Knott said.

NAIPFA’s letter also said the board lacks transparency in key areas, including rulemaking and selection of its members and leaders.

In particular, the group said, the MSRB should post meeting agendas 48 hours in advance and allow public attendance, including during telephone meetings, when members of the public could listen but not participate.

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