MSRB anticipates amendments to governance rule

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The Municipal Securities Rulemaking Board, under pressure from lawmakers to reduce the influence of recently retired brokers, plans to alter its board membership rule in the midst of hiring a search firm in the next month to look for its new leader.

The MSRB announced the actions Friday after its first quarterly board meeting of the 2020 fiscal year. The meeting was the first for new Chairman Edward Sisk.

The board plans to review its Rule A-3 on membership of the board, said Nanette Lawson, MSRB CFO and interim president and CEO, which will be conducted by its new governance committee.

The board anticipates that the review may lead to amendments of the rule, Lawson said. That could mean reducing the size of the board, which currently has 21 members, or changing its composition, though Lawson could not give specifics.

This comes as the MSRB’s longtime President and CEO Lynnette Kelly, Chief Regulatory Officer Lanny Schwartz, Chief Education Officer Ritta McLaughlin and General Counsel Michael Post announced plans to leave within weeks of each other. Its Chief Communications Officer Jennifer Galloway also left.

Lawson said the governance review committee will meet frequently to discuss the MSRB's board size and composition.

“We just think that this is such an important topic and we’re taking it very seriously to enhance our governance structure,” Lawson said. “This is an opportunity to make progress not only on some matters that Sen. Kennedy has raised, but also things about our governance structure that we have considered looking at for a while.”

Sen. John Kennedy, a Louisiana Republican, introduced his Municipal Securities Rulemaking Board Reform Act in April, which proposed shrinking the size of the board and changing its composition.

Kennedy believes that the MSRB’s board is not truly a majority public body as required by federal law because its members who represent the public are frequently retired brokers. The board’s public membership requirements state that individuals may not be “associated” with a regulated firm for at least two years or “employed by” a regulated firm for at least three years.

Kennedy’s bill would stretch that time period to five years and require the Securities and Exchange Commission to approve the MSRB’s board member selections.

Sen. Kennedy and two cosponsors of the MSRB bill — Sens. Elizabeth Warren, D- Mass., and Doug Jones, D-Ala. — did not respond to requests for comment on possible changes to the MSRB’s board membership rule.

The MSRB is also in need of a new CEO and president. Its newly created search committee interviewed three search firms on Tuesday and plans to select one firm in the coming weeks.

“The committee is in the process of reflecting on that and determining which search group to engage,” Lawson said. “Once they are selected, that firm will assist us in opening up a search and publicizing what the board is seeking in a candidate and how interested candidates can apply.”

During the meeting, the board also decided to coordinate with the Financial Industry Regulatory Authority to further analyze the practice of pennying in the market. The SEC’s Fixed Income Market Structure Advisory Committee recommended that the two groups work together on the issue.

“We’re now going to be working in concert with FINRA on it and addressing it more comprehensively to make sure that we are harmonizing rules across both sets,” said Mark Kim, MSRB's chief operating officer.

Pennying, which is sometimes called “last look,” occurs when a dealer places a retail client’s bid-wanted out to the market and determines the winning bid, but then rather than executing the trade with the winning bidder marginally outbids the high bid and buys the bid for its own account.

While the practice can appear beneficial in isolation because the dealer technically provides the customer a price equal to or better than the best bid, the MSRB is concerned that widespread pennying disincentivizes participation in the bid-wanted process, discourages bidders from giving their best price in a bid-wanted and “may impact the efficiency of the market.”

The board also discussed the SEC’s recent exemptive order on private placement activity by municipal advisors and plans to analyze the regulatory and market impacts of that on its rule book.

The SEC opened a request for comment for exemptive relief this month for MAs to be involved in some private placement activities. The proposal would give relief to registered MAs to act in certain limited activities in connection with private placements without registering as a broker-dealer.

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