WASHINGTON — The Municipal Securities Rulemaking Board plans to study the idea of restricting, or possibly banning, muni bond dealers' contributions to bond-ballot campaigns.
In a conference call with reporters Wednesday, MSRB board chair Jay Goldstone said recently-proposed rules that would require more dealer disclosures about bond-ballot contributions would give the board information needed to evaluate whether to pursue additional restrictions.
"We intend to collect additional information to determine if there's a case to be made [for] these contributions to be restricted," said Goldstone, who is also chief financial officer and chief operating officer of San Diego. "We are trying to gather some additional information to see if … more times than not, firms that are making these contributions are getting subsequent bond business."
The MSRB held the conference call to review 2013 fiscal-year initiatives that were discussed during its quarterly meeting, which was held Oct. 24 -26. The board's fiscal year began Oct. 1.
In an accompanying media release, the MSRB said it recognizes that many market participants support restrictions of bond-ballot contributions. "The decision to require disclosure of additional information is an important step in determining whether such a ban is merited," the MSRB said.
In the next several weeks, the board plans to file proposed rules with the Securities and Exchange Commission that would require dealers to disclose the timing of their contributions, the timing of the award of related underwriting business, and the identity of the municipal issuer and the bonds on the ballot.
Further disclosure is needed because the link between contributions and the award of underwriting business "can give rise to real or perceived conflicts or related concerns that can adversely affect the integrity of the municipal market," the MSRB said.
In the coming fiscal year the board may also address "unintended consequences" arising from a G-17 interpretive notice that details underwriters' fair-dealing obligations to issuers, Goldstone said. The notice, which took effect Aug. 2, requires underwriters to disclose to issuers their role, compensation, conflicts of interest, incentives and the existence of swaps tied to the bonds. Underwriters must also disclose that they do not have a fiduciary duty to put issuers' interests above their own, and they must disclose material aspects and risk associated with some deals.
Goldstone said many of the new disclosures dealers make to issuers are more complicated than the MSRB expected. Some of the documents are 10 to 15 pages long, he said. "I don't believe that was the board's intent or expectation," he said.
Goldstone said the MSRB will seek feedback from market participants about the notice. The board wants to know, for instance, whether dealers' lawyers are writing lengthy disclosures in an effort to ensure their clients are protected.
During last week's meeting the board also met with SEC chairman Mary Schapiro and John Cross, director of the SEC's muni office. They discussed the SEC's July 31 report, which made a number of recommendations aimed at improving issuers' disclosures and price transparency.
Many of the MSRB's initiatives are consistent with the report, Goldstone said. For instance, the MSRB is harmonizing its rules with those of the Financial Industry Regulatory Authority, he said. The board also has improved the EMMA system, adding user accounts and information like yield curves, which can help issuers and investors evaluate bond prices. In addition, the board has released investor and issuer toolkits, he said.
Goldstone said the board will also focus on protecting retail investors who trade munis online through "electronic brokerages." These are operated by firms like Fidelity Brokerage Services LLC, TD Ameritrade, Charles Schwab & Co.
The board plans to review feedback from an August "concept proposal" that floated the idea of requiring the firms to collect profile information from customers and provide them with education materials, he said.
The board will also "refine" an August proposal that restricts dealers from consenting to alterations in bond authorizing documents. Under the proposal, dealers could violate fair-dealing obligations if, when underwriting new bonds, they consent to changes that affect bonds that have a claim on the same underlying revenue.
In addition, the board will seek comment on a plan to create a market information database for 529 college savings plans. The MSRB regulates dealers that sell and distribute the plans on behalf of states.
