WASHINGTON - Nat Singer recently compared chairing the Municipal Securities Rulemaking Board to running "a relay race." He said his leg of the race is to work with the board to move forward with rules such as those on municipal advisor core conduct and dealer disclosure of markups on principal trades and then hand the work off to the next chairman and board.
He discussed the issues pending before the MSRB and his career during an interview with The Bond Buyer.
Singer, senior managing director at Swap Financial Group, is based in San Diego where he says he often starts his day surfing. He has been an MSRB board member since 2013 and took over as the MSRB's chair on Oct. 1, replacing Kym Arnone, a former Barclays Capital managing director.
He said he views the role of chair as being the facilitator for the 21-member, majority-public board. Although he is optimistic about the work ahead of the MSRB in the next year, he realizes it's unrealistic to believe the board will accomplish every rule it wants to in that time.
For the more complex and unique rules, "it's more like this relay race where you're going to hand off the baton to the next class [of board members] and they are going to pick up there because it is a long process," Singer said.
He has already picked up two "batons" from Arnone: Rule G-42 on core duties of municipal advisors and the proposal for markup disclosure on principal transactions.
The Rule G-42 proposal, which Singer hopes the MSRB can complete this year, states that MAs would owe a fiduciary "duty of loyalty" to their municipal issuer clients, requiring them "without limitation … to deal honestly and with the upmost good faith with a municipal entity and act in the client's best interests without regard to the financial or other interests of the municipal advisor."
It also mandates a less stringent "duty of care" for all clients that requires MAs to: exercise due care in their work; be qualified to provide advisor services; make a "reasonable inquiry" into the facts relevant to a client's request before deciding whether to proceed; and undertake a "reasonable investigation" to determine their advice is not based on bad information.
Dealer, issuer, and investment company groups all recently urged the Securities and Exchange Commission to disapprove the rule, citing concerns over its ban on principal transactions and documentation requirements for MAs. The MSRB was scheduled to offer rebuttal comments to the concerned groups on Sept. 28, but has not yet filed them.
Singer said the rule's development has "benefitted greatly" from the comments the MSRB has received on it and that the board will be considering comments recently sent to the SEC and will respond. He said the MSRB is "close in terms of getting G-42 completed" and that the MA community is "looking to see the rule put in place."
But while G-42 may be nearing completion, the markup disclosure proposal, the first of its kind in 20 years, is just beginning what is likely to be a long process.
Released on Sept. 25 for public comment, it would require a dealer buying or selling bonds for its own account to disclose markups and markdowns when: it executes a transaction on the same side of the market as the customer; the transaction is greater than or equal to the size of the customer's; and the dealer transaction occurs within a two-hour window on either side of the customer transaction. The rule would be limited to the secondary market and would offer special protocols for dealers executing transactions from an affiliate's inventory of munis or a dealer that has independently operating trading desks.
Singer said discussion about markup disclosure has been "simmering for a while" and was a topic he brought up when he first interviewed for a board position. He attributed the recent markup discussion coming "to a head" to the SEC's enforcement case against Edward Jones, which was settled in August.
"I think we're going to get a lot of comments on how it's actually done, but my feeling is the dealer community accepts it and thinks it's a good idea," Singer said. "It would be optimistic to get that done this year, but we're going to try."
EMMA
Another challenge for the board is EMMA. "I don't think there are enough people who have really embraced EMMA and use EMMA often enough so I think that will really continue to be a challenge for the MSRB generally and me personally," Singer said. The board has conducted workshops and online training, he noted.
As Singer works with the board to tackle these issues and rules, he wants to make sure the 21 members are coming to a general consensus before proposals are released for public comment, even though proposed rules only have to be approved by a majority of members. "A 21-member board is a big board and it has a lot of people with a lot of different experience and a lot of experience generally," Singer said.
In his view, the "tremendous amount" of preparatory material board members receive before meetings and the discussion that follows generally leads to a consensus, even though the board only requires a majority vote to approve a rule.
Consensus is key, according to Singer, because "if you have a divided board on an issue, that probably means there is going to be division among the general market on the issue and you really haven't created something that has the ability to get passed."
Singer is the first non-dealer MA to hold the board chair position and his expertise will be important to the board in continuing to set up a regulatory regime for MAs, a mandate from the Dodd-Frank Act.
He said the pilot professional qualification exam the MSRB will be giving MAs from Jan. 15 through Feb. 15 will be a challenge for them because many of them are specialized and the exam is designed to test general knowledge of the market. He also noted the SEC and Financial Industry Regulatory Authority will be coming in to examine MAs and that two different regulators both enforcing the same rules "will be something new."
Swap Financial Group is one of the MA firms entering the new territory. Its advisory business was originally focused on derivatives, but is now more generally based on advising muni issuers on bond issues. The firm is also doing a "tremendous amount" of interest rate hedging for commercial real estate developers, Singer said. Swap Financial was fourth largest financial advisor in the muni market for the first quarter of 2015 but ranks 12th year to date, according to data from Thomson Reuters.
Singer said MA firms often differ from dealer firms in that many of the MAs only have between one and five people working for them. The increased burden of dealing with new record retention and compliance requirements will be time consuming and expensive for many smaller MA firms. Singer said it will take those firms "some time to get up to speed on that."
Career
Singer graduated from Princeton University with a degree in civil engineering in 1983 and credits engineering with giving him "a very quantitative approach to the work" he does.
He started in the market in 1986 working as part of Bear Stearns' Financial Analysis and Structured Transactions team, a quantitative group that developed systems to "help the traders trade and the salesmen sell." He said his group was one of the first to put together yield spread analysis charts and databases of pricing history.
The year 1987 was "a particularly turbulent time in the bond market," he said. All of a sudden he was asked to pick up a phone and start trading futures or buying bonds and hedging them with futures to the point that, in about six months, he became a junior trader on the desk.
Singer spent the next 20 years at Bear Stearns trading and underwriting munis as well as working on derivatives. In the mid-1990s he started the firm's derivative products group and ran its tender-option bond program.
In 2007, he left to start a hedge fund, which he admits was "poor timing" because of subprime loan losses, the collapse of the mortgage-backed securities market and the resulting financial crisis. In 2008, he joined Swap Financial Group as a partner.
Singer said the swap market is very different than it was 10 years ago. There are fewer counterparties. The 30-year noncallable swaps that were sort of the "trade du jour" in the early 2000s have been replaced by swaps that are much shorter in term for more sophisticated issuers. Many of the problems issuers ran into were with the bonds associated with swaps rather than the swaps themselves, he contends. The reduced availability of bond insurance and other credit enhancement has made it tougher for smaller and lower-rated issuers to issue variable rate products they used to swap for fixed rates, he added.
As he looks back on his time in the market, Singer said he's stayed over the years because of the "incredibly intelligent and interesting people with a common goal of doing the right thing for the business."
"You tend to see people stay in this market for much longer than you do in other areas of fixed income and I think that says something about our industry and it says something about the individuals," Singer said.
Singer's term on the board will end on Sept. 30, 2016. When that day comes, he said, he will have considered his chairmanship a success if the board has completed rules to protect issuers and investors, promoted retail investor use of EMMA, and left the next class of board members with additional rules and products that will allow them to continue on the same path of promoting transparency and liquidity in the market.
