Unions call for MSRB to go further in board reform efforts

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The nation’s largest organized labor interests and other reform-minded groups want the Municipal Securities Rulemaking Board to take significant steps to reform its governance and board member selection criteria, citing conflict of interest woes.

In a comment letter sent to the MSRB last week, Action Center on Race and the Economy; the American Federation of State, County and Municipal Employees; the American Federation of Labor and Congress of Industrial Organizations; Americans for Financial Reform Education Fund; Consumer Federation of America; and Public Citizen supported a longer "cooling off" period for board members to be considered public representatives.

The groups say the board needs reform to better represent the public interest.

“The board’s governance and membership selection process is at the heart of needed reform,” the unions wrote. “The MSRB has gained a reputation as dominated by the sell-side intermediaries it is supposed to regulate -- banks and dealers that sell products that have all too often imposed unnecessary and sometimes ruinous costs on issuers.”

Prior to the financial crisis in 2008, states and localities were sold derivative deals that were supposed to lower interest rates, but swiftly changed when the crisis hit, leaving those municipalities with huge bills, said Marcus Stanley, policy director at AFR.

A five- year gap for MSRB board members to become public is a good first step, said Marcus Stanley, policy director at Americans for Financial Reform.

Afterwards, the Dodd-Frank Act required the majority of the MSRB board to be public members. The board grew to 21 from 15 members, and municipal advisors came under the regulatory umbrella for the first time.

“This change has not been very real when you look at how the MSRB has operated,” Stanley said. “The criticism of the MSRB was always that it was an insider club. It was in fact dominated by the same big dealers whose behavior it was supposed to oversee.”

The MSRB is seeking to amend its Rule A-3 on governance to make changes to its board from reducing its 21-member board to 15 members, changing the makeup of how many MAs would be in a smaller board, and other changes.

The MSRB is proposing changing the amount of time to five years from two years that a public representative must not be associated with a dealer or MA firm before being eligible to serve as a public member per MSRB Rule A-3 on governance.

The unions said many of the MSRB’s past and current public board members have had significant pasts or recent connections with MSRB regulated dealers or banks.

“If the normal process at the MSRB continues to be that half of so-called independent members have significant professional ties to dealer banks, then the MSRB will clearly face barriers to acting as an independent watchdog that forcefully protects the public interest,” the groups wrote.

The MSRB will also face conflicts when protecting issuers, which is what it is required to do, they added.

“What we’re saying is when you look at the independent members, they turn out to be the same insider club, just recent retirees from it,” Stanley said.

The unions want the MSRB to reconsider its approach to how public members are selected, saying that those members do not need to have worked at a regulated entity to be knowledgeable on the municipal markets.

"The goal of selecting independent representatives is not to replicate these contributions of regulated representatives with individuals who do not happen to currently work for a bank," the unions wrote. "It is instead to bring a broad view informed by all the goals and objectives of a well-functioning municipal finance market."

Proposed amendments to MSRB Rule A-3 are “inadequate” to satisfy the statutory intent in the Dodd-Frank Act that the MSRB has a true public interest majority, they wrote.

“The five year period is a great first step, but we won’t know if real change has happened until we see the first couple of batches of people appointed after that change and whether those kinds of people really represent a change,” Stanley said.

The MSRB sent out a request for comment earlier this year and though comments were originally due on March 30, the MSRB extended that deadline due to the coronavirus.

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