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Securities Law

Issuers, Non-Dealer FAs Blast MSRB Proposals for Public Board Members

WASHINGTON — Issuers, non-dealer municipal advisors, and financial reform advocates are upset that the Municipal Securities Rulemaking Board' "public members" continue to have close ties to dealer firms, complaining this undermines the Dodd-Frank Act's intent that the board be majority public.

They made their views clear in comments to the Securities and Exchange Commission on the MSRB's proposed rule changes that would weaken the standard of independence for the board. Of the five sets of comments submitted to the SEC, none supported the MSRB's effort to revise its Rule A-3, which governs how board members are appointed. The revision would follow the last one that occurred after the 2010 Dodd-Frank Act mandated that board be made up of a majority of public member. The rule states that public board members cannot have worked for a broker-dealer in the past two years and cannot have a "material business relationship" with broker-dealers, which it defines as a "relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory otherwise, that reasonably could affect the independent judgment or decision making of the individual."

But the board's latest proposal would alter that language in a way that its opponents said would allow people associated with broker-dealers to qualify as public members, further limiting the effectiveness of a rule they already view as too weak. The new rule would revise the definition of "material business relationship" to read "at a minimum, the individual is not and, within the last two years, was not an officer, director (other than an independent director), an employee, or a controlling person of any municipal securities broker, municipal securities dealer, or municipal advisor."

The MSRB has said that the proposed changes would widen the pool of potential public members, making available a range of experienced muni professionals who would be independent enough to achieve the issuer and investor protection goals of the Dodd-Frank reforms. It has also cited the structure of the Financial Industry Regulatory Authority's board as a potential model. Sources have said the board was prompted into proposing the changes when it found many institutional investors have broker-dealer affiliates that market college savings plans.

Comments to the SEC flatly reject those arguments, and attack the proposed changes from all angles.

"The proposed amendment will undermine the integrity of the municipal securities market and will adversely impact the interests of issuers, investors and the public," wrote National Association of Independent Public Finance Advisors president Jeanine Rodgers Caruso. "The composition of the board will, for all intents and purposes, resemble the composition of the board that existed prior to the enactment of Dodd-Frank, one comprised exclusively of industry members."

"Contrary to the MSRB's apparent belief, if Congress had intended the board to be comprised of industry 'experts', it would have retained the board's pre-Dodd-Frank industry-only composition," NAIPFA's letter continues. "This, however, was clearly not what Congress intended."

NAIPFA's comments also singled out Robert Cochran, a public member appointee to next year's MSRB who is also managing director and chairman of the board of Build America Mutual Assurance Company, a bond insurer and a member of Bond Dealers of America.

"NAIPFA finds Mr. Cochran's association to the BDA to be troubling and believe that this kind of close association with industry groups whose interests clearly do not align with that of the 'public' creates a significant conflict of interest" NAIPFA said.

Dustin McDonald, director of the Government Finance Officer's Association's federal liaison center, also criticized the proposed amendment as a "watering down" of an already lenient rule.

"While there are hundreds of marketplace individuals who could contribute well to the board, this allows — as we have seen in the MSRB board member selection process — those who have spent their entire career as a regulated individual, to become public members if they are retired or working outside of the private sector for only two years," McDonald wrote. "However, the balance of their career may have 20-30 years associated with the broker/dealer or municipal advisor community."

Americans for Financial Reform echoed those sentiments.

"A board dominated by employees of major banks and dealers with subsidiaries active in the municipal market will not be a truly independent board," the group wrote in its comments. "Given the complexity of modern financial holding companies, which frequently have hundreds or even thousands of legal entities within the corporate structure, it will be impossible for the MSRB to police the relationships within a corporate entity."

Kerry Korpi, director of research & collective bargaining at the American Federation of State, County and Municipal Employees said the change would make a "mockery" of Dodd-Frank. Barbara Roper, director of investor protection at the Consumer Federation of America, said the new language represents "a subjective standard that could easily be abused."

Former MSRB board member Ben Watkins, head of the GFOA's debt committee and Florida's bond finance director, said in an interview that a two-year cooling-off period is not long enough to establish independence from a broker-dealer association. He agreed with NAIPFA that the current board is already not living up to Dodd-Frank's intent. He said the list of candidates submitted to MSRB as potential public members, which the board released, shows that there is no shortage of experienced and truly public members.

"There are plenty of good people to choose from," he said.

GFOA's comments suggested that the MSRB could allow individuals working for companies that have a division regulated by the MSRB to simply bring their views to the board as non-public members. Institutional investors are probably adequately represented already, and the MSRB could actively solicit applications from market segments it feels are underrepresented, the group said.

Dealer groups said they do not plan to comment on the proposal.

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