WASHINGTON — The Municipal Securities Rulemaking Board may boost its oversight of the derivatives market, including guaranteed investments contracts that are at the center of a bid-rigging investigation by the Justice Department and other federal and state agencies, an MSRB official said Tuesday.
The comment was made by the board’s executive director, Lynnette Hotchkiss, during a two-hour hearing before the Senate Banking Committee, entitled “Enhanced Investor Protection After the Financial Crisis.”
In testimony and in written remarks submitted to the panel, Hotchkiss said rules recently proposed that still must be finalized by the MSRB and the SEC would have addressed much of the wrongdoing unearthed by the commission, the Internal Revenue Service, and the Justice Department in criminal and civil investigations of fraudulent bid-rigging in the municipal securities market.
The probes, which have been ongoing since 2005, are finding that firms and individuals conspired to rig bids for muni-related reinvestment contracts involving state and local issuers and conduit borrowers.
Last week, JPMorgan Chase & Co. agreed to pay $228 million to settle criminal and civil charges stemming from former employees’ fraudulent bid-rigging of 141 muni bond-related reinvestment contracts in at least 31 states over eight years.
The SEC, the IRS, the Justice Department, the Office of the Comptroller of the Currency, the Federal Reserve Board, and 25 state attorneys general announced the global settlement, which included antitrust, securities fraud, tax, and other charges.
“In light of these allegations concerning the conduct of GIC brokers, the MSRB board of directors will discuss whether additional guidance specifically directed at such conduct is warranted,” Hotchkiss said in her 12-page written statement.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the MSRB has regulatory authority over municipal advisers, including GIC brokers and swap advisers.
Since last fall, the board has proposed a series of rules that would bolster oversight of muni advisers and derivatives.
For example, in a request for comment on a draft Rule G-17 interpretive notice, which would govern fair-dealing for municipal advisers, the board said municipal advisers who recommend muni derivatives contracts must disclose the contracts’ material risks, including credit, operational and liquidity risks.
Similarly, the G-17 draft interpretive notice for underwriters said that if an underwriter in a negotiated transaction recommends a derivative contract, including a swap, it must disclose all material risks, including any conflicts of interest or incentives for the underwriter to make the financing recommendation.
The MSRB is coordinating its rulemaking efforts with the SEC and the Commodity Futures Trading Commission, which also have authority to regulate derivatives and swaps under Dodd-Frank, Hotchkiss told the committee in her written statement.
She also said the MSRB’s proposed rules would enhance the authority of the SEC, which enforces MSRB rules, to police muni market misconduct.
“This is a major increase in the arsenal of enforcement agencies that, until now, have had to address this conduct through their anti-fraud jurisdiction,” Hotchkiss said in her statement.