Fifty years ago today, something big happened in municipal market history: Congress created the Municipal Securities Rulemaking Board.
And for nearly 29 of those 50 years, Christopher "Kit" Taylor served as executive director at the MSRB – the muni market's principal regulator. Taylor's 1978 to 2007 tenure saw a wide array of rules established, including a rule requiring CUSIP numbers that set the stage for muni market computerization and a groundbreaking pay-to-play rule regarding political contributions.
The MSRB was created on June 4, 1975, to combat "the scandals and the rip-offs that were happening at the time," Taylor said, noting a muni bond scam that targeted former prisoners of war returning from Vietnam. Commenting in 1974 on the POW scandal, John R. Evans, a member of the Securities and Exchange Commission at the time, called it "one of the most egregious" violations of the securities laws.
"Of particular importance is the fact that the firm was not registered with the Commission because under present law it was exempt as a dealer solely in municipal bonds, and thus was not subject to our regulatory standards," Evans said in remarks contained in an SEC news release.
Today, the MSRB – which is tasked by Congress with protecting investors, issuers and the public interest by promoting a fair and efficient market – regulates not just banks and broker-dealers operating in the municipal securities market as it did during Taylor's era but municipal advisors as well.
"There is no question that MSRB has made the municipal securities market a safer place for investors and all market participants," said Warren "Bo" Daniels, current chair of the board of directors of the MSRB.
The municipal securities market today "is a $4 trillion uniquely American capital market that finances approximately two-thirds of the nation's public infrastructure," MSRB President and CEO Mark Kim added.
"Congress established the MSRB to protect and strengthen this vital capital market, and we have faithfully advanced that mission over the last 50 years," Kim said.
Lynnette Kelly, who succeeded Taylor as executive director, was at the helm in 2010 when what's commonly known as
"This was a group of highly influential advisors to state and local governments but who were not regulated at the federal level," Kelly said. "And so Congress, number one, determined that they should be regulated, and number two, gave the responsibility to create those regulations to MSRB. I think that was a huge vote of confidence for the MSRB."
Frequent, large, sophisticated bond issuers generally have had the expertise necessary to work effectively with their municipal advisors, "but the majority of issuers are small and infrequent issuers," she said.
"So I think that for certain segments of the market it was incredibly important," Kelly said regarding municipal advisor regulation. "I certainly don't want to disparage the industry, but it gave a level of professionalism to the advisor community that didn't exist before."
Key changes occurred during the tenures of both Taylor and Kelly, who joined the MSRB as executive director in 2007 but whose title had changed to president and CEO by the time she
Taylor recalled that during his first year as executive director, some holdovers from the MSRB's initial board of directors remained.
"They were big thinkers in the sense that they looked down the road and they said, 'Things have got to change, this market has got to get better,'" Taylor said in a recent interview, adding that one of those inaugural board members was the late
"I give him tons of credit in the sense that he sat there and said 'We have to get this market computerized,'" Taylor said. "And you have to understand in 1975 – or in 1978 when I came in – computers were just starting to get into people's heads."
In a Municipal Finance Journal article titled The Past and Future of Municipal Securities: Fortieth Anniversary of the Municipal Securities Rulemaking Board, which was based on a 2015 panel, Taylor, one of the panelists, recalled how municipal securities transactions used to be settled.
"Prior to 1984, transactions were settled by sending documents back and forth across the country with bond opinions and documents attached; payments would go back and forth that way, and none of it was computerized," Taylor said in the article, adding that what he saw during a visit to Salomon Brothers back in that era typified the situation.
The head of back office at the time took Taylor up to a floor where desks were piled high with documents and pointed out four people in a corner of the room indicating that they were tasked with settling corporate bond and stock transactions.
"The rest of the floor is munis," the back office chief told Taylor, according to the article.
While computerization was ultimately good for the muni market, it came with costs, the former MSRB executive director said in the interview.
"You know that whole floor of Salomon Brothers? There were a lot of people in there handling bonds," Taylor said. "I hate to say it – computerization did lead to layoffs, but it dramatically lowered the costs for a number of firms."
Similarly, while requiring CUSIP numbers unquestionably benefited the muni market, it also prompted a realization that some securities people had thought of as quite similar were "fundamentally" different, Taylor said.
"In the 80s, when CUSIP numbers were assigned, it broke up a market in certain California securities," Taylor said, adding that California had issued "a whole bunch" of securities, all with the same coupon and the same maturity.
"So people knew exactly what was there, they knew the volume of outstanding securities that had that same maturity and that same coupon, and they could trade off the price of those securities" he said, adding, however, that when the CUSIP requirement came in, it became apparent that those securities all had different call features. "And that's what blew the thing apart."
For a market to work efficiently, investors need to understand what they are buying and be able to reliably gauge where competitive pricing is for particular securities, said Taylor, who holds a Ph.D. in economics from Princeton University. The wide variety of products available in the muni market makes that difficult, which he believes has inhibited its growth.
"You want the ability to advertise the market," Taylor said. "But .. how are you going to do that with, you know, a million-and-a-half different CUSIP numbers out there? You can't."
While change is needed, "I don't think regulation can do it," he said.
"You really need less differentiation in the market," Taylor said, adding that it will "take a certain amount of creativity on the part of public finance people and issuers" to achieve that.
One thing that could boost demand for munis in the long run would be to find a way to create more "benchmarks that were actually trades," he said.
"And I think that would have to start with the states or the very largest issuers," he said.
Taylor's tenure also saw the MSRB adopt the first incarnation of Rule G-37. The rule bans a dealer or municipal advisor from doing many types of business with an issuer within two years after the firm or one of its municipal finance professionals makes a political contribution to an issuer official, though it does carve out certain exclusions.
"And the state treasurer turned to these two guys, both from a very large firm, and said: 'I don't give a goddamn what the MSRB says, you better figure out how to get me the money!'" Taylor recalled in the article.
Taylor declined to name the parties involved when asked during an interview for this article.
Bringing change to the way the municipal market operates is something that Kelly is familiar with having presided over the development and launch of EMMA. While reception to the launch was generally "quite positive," some people were wary initially, Kelly recalled.
"I think some groups were a little suspicious about is this the camel's nose under the tent? Is this going to be used to regulate municipal issuers or regulate market participants in a way that they had not been regulated before," she said. "So I think there was some healthy skepticism."
When Kelly took the executive director reins at the MSRB in 2007, "there was a long, rich history of very good rulemaking," she said.
"What I tried to do is take the organization from a rulemaking organization to one that operated on a three-point model," Kelly said, adding that she "felt very strongly" that in addition to rulemaking, transparency and education were also key tools that the MSRB could use to fulfill its mandate from Congress to protect investors.
The introduction of EMMA made information "available and transparent," which helps to protect investors, Kelly said. Similarly, education helps to protect investors, issuers and other participants by helping them understand the market and how it works, she said.
Change is the only constant in the municipal securities market, "and the pace of change seems to be quickening," Kim said.
"There are some interesting trends that we are paying attention to," the MSRB CEO said.
Those trends include "an evolving municipal market structure towards greater use of electronic trading and [alternative trading systems], changing investor behavior in accessing the market through ETFs and SMAs, and the potential for new technologies like AI to transform the way we work and our market," he said.
"I think all of these are examples of both challenges and opportunities for us in the years ahead," Kim said.
One challenge the MSRB is currently facing involves the U.S. Constitution. The MSRB "is a quasi-public, quasi-private regulatory entity that has no place in our Constitutional structure," the American Securities Association said in the Feb. 27 opening brief for a case it filed against the Securities and Exchange Commission. The case has been stayed until August.
It's fair to say that Daniels sees things much differently.
"For 50 years, MSRB has served as a non-partisan, apolitical, self-regulatory organization that is governed by an independent board of directors composed of industry experts whose market knowledge and practical experience allow us to make decisions objectively and based upon a deep understanding of the market we regulate," the board chair said.
Daniels said there's no doubt in his mind that the municipal market benefits from having the MSRB as its principal regulator, "which is exactly what Congress intended."
