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Securities Law

New MSRB Chair Backs Rule Reviews

WASHINGTON — The incoming chairman of the Municipal Securities Rulemaking Board plans to urge the board to review the effectiveness of existing muni rules and to standardize the process the board uses to analyze costs and benefits of new rules.

Person in Focus: Jay Goldstone

Jay Goldstone, who begins his one-year term as board chair Oct. 1, also told The Bond Buyer in a recent interview that new muni rules aren’t the only tools regulators can use to promote fairness and transparency in the market.

Public education, outreach efforts and strong enforcement measures can also be useful, said Goldstone, the 61-year-old chief financial officer and chief operating officer of San Diego.

“I am not a strong believer that creating new rules to address problems is the only approach to move forward,” said Goldstone, who will succeed current chair Alan Polsky, senior vice president of Dougherty & Co.

Though Goldstone plans to leave his San Diego job in December, he said his experience working for the city and other local governments has showed him the real-world impact, financial and otherwise, that regulations can have on market participants.

“What I want us to be able to do is ... review the existing rules and make sure they are fulfilling” the board’s original intent, he said.

Goldstone, who is credited by some colleagues for vastly improving San Diego’s financial structure and disclosure processes, noted that the MSRB’s entire 21-member board sets the group’s direction. He only has one vote, he said, but he’ll use his post to pursue an agenda that includes examining the cost-effectiveness of the MSRB’s new and existing rules and promoting disclosure, among other things.

Goldstone plans to ask the board to develop a “template” that staff can use to evaluate potential benefits of new board rules, as well as costs the rules might impose on issuers, dealers and other market participants, he said. The template, which could be developed by a board subcommittee, will help staff determine components that should go into a cost-benefit analysis, he said.

“I would hope [market participants] can provide input to help identify the costs, and [whether the costs] are real or not,” he said.

He wants the board to be mindful of the “unintended consequences” of regulations.

The San Diego official said, for example, that he has already experienced first-hand the impact of the MSRB’s recent interpretive notice to Rule G-17 on underwriters’ fair-dealing obligations to issuers. That notice, which took effect in August, requires underwriters to disclose the nature of their relationship with issuers as well as conflicts of interest and the potential risks of muni transactions.

As a result of the new guidance, underwriters have been presenting issuers with lengthy documents for new bond deals. Goldstone he recently had to sign such a document, which was roughly five pages long.

“It was a lot longer than I thought it would be, and I think I got by easy,” he said. “I’ve heard that some are in the 15- or 16-page” range.

MSRB executive director Lynnette Kelly, who sat in on the interview, noted that the disclosure documents required by the notice may be long if they review conflicts of interest or risks associated with complex financial transactions.

Goldstone has spent more than three decades working for cities and counties in the Southwest, as an analyst for California’s San Mateo County, assistant director of finance for Santa Clara, finance director and acting city manager of Richmond, along with director of finance for Pasadena, Calif., and manager of finance for Maricopa County, Ariz.

He became CFO of San Diego in Jan. 2006, after the city had been sanctioned by the Securities and Exchange Commission for failing to accurately disclose pension information, a violation of securities fraud laws. The SEC also filed charges against five city officials in April 2008, alleging that they knew, but failed to disclose, that San Diego intentionally underfunded pension obligations. The officials agreed to pay fines in 2010.

When Goldstone started work in San Diego, the city hadn’t filed comprehensive annual financial reports, or CAFRs, since 2003, and the city’s credit rating had been rescinded by Standard & Poor’s in 2005. San Diego, which has a policy against issuing bonds without ratings from the three major rating agencies, left the muni market and turned to private placements with banks to fund sewer and other projects.

Goldstone went to work straightening out the city’s financial reporting processes and management structure. Overhauling a system under which some departments report to the City Council and others to the city manager, he consolidated financial operations under his office and helped oversee a “disclosure practices working group,” which included disclosure lawyers and staffers from the city’s finance division and the city attorney’s office. In 2008, his staff filed all outstanding CAFRs.

It returned to the bond market soon after and issued a $100 million bond in 2009 for capital improvements to roads and facilities, and has been issuing bonds ever since.

Goldstone, who later was also named the city’s chief operating officer, said his experience in San Diego taught him that issuer officials must “own their disclosure. You can’t rely on your paid professionals. They may play an important role in pulling together information and wordsmithing, but ... the issuer has to take ownership,” he said.

As MSRB chair, Goldstone said he plans to promote efforts to improve disclosure, including pension disclosure. He also supports plans to improve the online EMMA system and efforts to educate issuers about their disclosure responsibilities.

Goldstone discussed current MSRB initiatives and recent muni market news, including a recent report from Merritt Research Services that found that fewer than 10% of issuers of general obligation bonds file annual financial statements within 120 days after the end of their fiscal years.

Filing CAFRs within a 120-day period can be challenging, especially when issuers depend on information from other components. In California, for example, many issuers can’t file until they receive pension data from CalPERs, he said.

A 150-day period is a more “realistic” goal than 120 days, he said, but added that issuers can potentially file unaudited financial information earlier.
For instance, unaudited revenue, expense and budget information might be available for disclosure within 90 days of the close of the fiscal year, he said.

Goldstone said he is disappointed with the SEC’s delay in finalizing its definition of municipal advisors, and that the MSRB is eager to resume MA rulemaking.

“There is a whole segment of our market that is not regulated right now,” he said, referring to non-dealer affiliated MAs. “I am hoping the SEC will not wait a whole year .... We will do whatever we can to try to encourage movement on that front.”

The MSRB drafted rules and rule changes for MAs, but withdrew them in 2011 pending a final MA definition from the SEC. In response to questions about the SEC’s August report on the muni market, Goldstone said the board plans to work on improving pre- and post-trade price transparency in the next year, but could not provide specific details about the efforts.

The SEC report called on the MSRB to consider requiring brokers brokers to publicly disseminate best bids and offers, as well as responses to “bid-wanted” actions. The board could also require dealers to report yield spreads and the amount of markups and markdowns, and require them to seek “best execution” for retail orders, the report said.

Kelly declined to speculate on whether the board would propose a best-execution rule, but said MSRB staff will brief board members in October about activities related to the SEC’s report.

Goldstone, isn’t the first issuer official to be MSRB chair — Alice Handy, former University of Virginia treasurer, was board chair for the 1996 fiscal year.

But Goldstone is the first issuer chair since the passage of the Dodd-Frank Act in July 2010. The act required that the majority of the board be so-called public members — those not affiliated with brokers, dealers or municipal advisors. It also expanded the board’s mission to include the protection of state and local governments.

“I’m hoping [this] sends a positive message to the industry that the MSRB is moving forward in this respect,” Goldstone said. “I hopefully will bring the perspective from the issuer community [and] some credibility from my work experience.”

Goldstone, who reports to San Diego Mayor Jerry Sanders, said he will leave his city job when Sanders’ term expires Dec. 3, even if the new mayor asks him to stay.

The time has come to move on, Goldstone said, adding that he may consider becoming a consultant, but will not do anything to jeopardize his role as a public member and chairman of the MSRB.

“Most of my time will be devoted to my family and the MSRB,” he said.

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