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Securities Law

Review of Muni Indexes Among MSRB's Next Initiatives

WASHINGTON — The Municipal Securities Rulemaking Board announced it will begin a multi-month review of muni bond indexes with the aim of increasing transparency and educating market participants about how the they are developed and used.

The announcement was made Monday in an MSRB conference call during which board chair Alan Polsky reviewed the items discussed during the board's annual meeting, held last week in Seattle.

In addition to studying indexes, Polsky said the board plans to issue rule changes and interpretive guidance related to bond-ballot contributions,, electronic brokerage and 529 savings plans.

The indexes the board plans to examine include those created by private organizations, such as the Securities Industry and Financial Markets Association's municipal swap index, Thomson Reuters' Municipal Market Data (MMD) index and indexes published by Municipal Market Advisors.

While SIFMA's index is used as a basis for some swap agreements and payments, the others are primarily used by market participants as muni-market benchmarks.

The review follows allegations of widespread manipulation of the London Interbank Offered Rate, or Libor, but Polsky said he has "no reason to believe" there has been manipulation of other indexes.

Rather, he said the review is an effort to make the indexes more transparent. Polsky said the effort will result in educational materials for market participants.

Thomas Doe, founder and chief executive officer of MMA, called the study "long overdue." He said indexes can be valuable benchmarks for investors, issuers and traders, but warned that market participants must understand the data, and how it is compiled, to reap the most benefit.

MMA publishes two muni indexes: a standard par-coupon curve index and a 5% coupon curve index.

Doe said he has, in the past, offered to provide the indexes for free to the MSRB, which could then make them available to market participants online.

Though the MSRB has not accepted the offer, Doe planned to make the request again in an email to Polsky.

Robert Nelson, managing analyst at MMD, is not surprised the MSRB will examine indexes, given the Libor allegations.

Nelson said MMD has been speaking to the MSRB "closely about muni benchmarks and the opportunity to provide the market with new and different benchmark data sets."

Nelson declined further comment until MMD officials speak to the MSRB about Monday's announcement.

Leslie Norwood, managing director and co-head of the muni division at SIFMA, said all market participants have a role in ensuring municipal market indexes "have integrity and function well."

In addition to the index review, Polsky said the MSRB plans to publish for comment proposed changes to regulations governing bond-ballot contributions.

Currently municipal finance professionals and non-executive MFPs must disclose to the MSRB on a quarterly basis significant contributions they make to bond ballot campaigns, The board is considering requiring additional disclosures from dealers in an effort to "provide the MSRB and the public with more information on market practices related to bond ballot campaign contributions and their relationship to the award of business," the board said in a release.

Any link between contributions and underwriting can "contribute to the public perception of corruption in the municipal market and damage the integrity of the market," the board said.

Mike Nicholas, chief executive of Bond Dealers of America, said transparency can ensure the fairness of bond ballot contributions, but said additional rules could "limit the ability of an underwriter to work with issuers to ensure bond-ballot initiatives are well funded."

"How much [underwriters] are helping should be disclosed, but that in no way implies wrongdoing," he said.

Nicholas added that contributions are already regulated by the MSRB and state and local laws.

Norwood said SIFMA has long supported rules to prohibit "pay-to-play" practices.

"We continue to support any effort to eliminate any perception of impropriety," Norwood said.

Transparency "would reap benefits that would outweigh additional compliance burdens and costs for the municipal securities broker-dealer community," she said.

Polsky said the MSRB will also publish a concept release about providing protections for individual investors who trade municipal securities online through electronic brokerages. The release will explore whether the brokerages should be required to strengthen their account-opening and supervisory procedures for individual online investors.

The MSRB launched a review of "electronic brokerage systems" last year and has seen demonstrations of systems from Fidelity Brokerage Services LLC, TD Ameritrade, Charles Schwab & Co., Scottrade and E*Trade Financial Corp., the board said in May.

The MSRB said it wants to ensure firms fulfill pricing obligations and provide online retail investors adequate access to material-event notices and other material facts.

The MSRB is also planning to seek Securities and Exchange Commission approval to display on EMMA, in real-time, the exact par value for all trades of $5 million and less. That would be an easing of an earlier proposal to require dealers to report the par values of all trades over $1 million, which have been masked as "1MM+." Dealers had complained the proposal would reduce liquidity in the market. The board also plans to refine a proposal on retail order periods, change telemarketing rules and continue examining the costs and benefits of rulemaking. In addition, it plans to draft a rule to create a centralized system to collect market information related to 529 college savings plans.

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