WASHINGTON — A trend towards more detailed regulation of muni markets by the Municipal Securities Rulemaking Board could have negative, long-term consequences on market participants, the Securities Industry and Financial Markets Association warned the board in a recent letter.
In its letter, a response to the MSRB’s request for comments on its priorities for fiscal 2013, SIFMA noted that the board has been particularly active in new rulemaking in the past few years.
SIFMA said it fears new and proposed rules could affect market efficiency, possibly without increasing compliance.
“Merely piling redundant or overly prescriptive regulation on top of existing regulation will not halt parties that are intent on circumventing the rules. … It will only serve to stymie the parties that earnestly want to comply,” the association said in the letter, which addressed a host of MSRB initiatives and threats faced by the municipal securities market.
SIFMA applauded the board for its work to boost transparency and “Herculean efforts” to expand the Electronic Municipal Market Access system, but urged the regulator to be careful in its rulemaking.
“Before any new regulations are created, it first should be determined whether vigorous enforcement of existing regulations would not be sufficient to address regulators’ and market participants’ concerns,” the group wrote.
It urged the board to pursue more “principle-based” regulations, which Leslie Norwood, SIFMA’s co-head of municipal securities, said are based on values.
Norwood called the MSRB’s Rule G-17 on fair dealing a good example of principle-based rules. She noted that overseas regulators, such as the United Kingdom’s Financial Services Authority, have advocated such rules.
But Norwood said some recent MSRB interpretive notices, such as the February 2011 notice on underwriters’ fair-dealing duties, have very specific requirements.
“When you get very prescriptive about regulation, it does not permit any flexibility for firms that have different business models [and] deal with clients that may be differently situated,” Norwood said. “Issuers are not all at the same level of sophistication.”
Despite its concerns, SIFMA agreed with the MSRB on other issues, such as the threats posed to the muni market by the Volcker Rule. The rule — which would restrict proprietary trading at banks and is slated to take effect July 21 — could bifurcate the market and create “tremendous confusion,” according to SIFMA.
It also expressed concern that independent municipal advisors are not required to pass qualification exams required of dealer-advisors. The association urged that a test be developed for advisors without securities licenses.
Bond Dealers of America also responded to the MSRB’s request for comment.
BDA urged the board to complete its municipal advisor rules, which it called the “most significant regulatory reform in the Dodd-Frank Act relating to the municipal market.” BDA said the MSRB should use its platform to urge the SEC “at both the staff and commissioner level” to finalize the definition of municipal advisor.
The group also asked the MSRB to put “continued pressure” on the SEC to define bank loans to municipalities, which may be subject to federal regulations. “The confusion surrounding when a bank loan is a security is causing considerable dysfunction in the municipal markets, and our membership believes that the markets would substantially benefit from an interpretive release by the SEC,” BDA wrote.
The bond dealers group said it supports the MSRB’s March 13 proposal to require dealers to provide initial price and yield information on “not reoffered” muni securities, as well as the board’s guidance aimed at ensuring underwriters and dealers comply with issuers’ retail order periods.
The MSRB announced in February that it was seeking public feedback on market risks that it will use to develop its fiscal 2013 priorities. The board asked that comments address activities of brokers, dealers, and advisors that pose risks to investors or compromise the integrity of the municipal market.
