The Municipal Securities Rulemaking Board is proposing to reduce the size of its board to 15 members and alter its composition in the wake of criticism from a prominent lawmaker.
Mark Kim, MSRB's chief operating officer and executive vice president, announced the decision at a Government Finance Officers Association debt committee meeting Monday. Kim said the board voted last week to change the board’s composition and reduce the size to 15 members from 21. The MSRB plans to put out a request for comment as soon as Tuesday. Kim said the Securities and Exchange Commission hasn't specifically endorsed the proposal, but has told the MSRB it supports governance changes.
“We’re looking forward to putting this out for comment,” Kim said.
Kim also said the MSRB wasn’t expecting a lot of opposition, but expects comments from the industry.
The MSRB board grew to 21 from 15 after the Dodd-Frank Act mandated that the board be made up of a majority of members representing the public. Its board has 11 public members and 10 regulated members. The MSRB is now proposing eight public members and seven regulated members. On the public member side, there would be one issuer, one investor and one member of the general public, while the other five would be undesignated public seats. On the regulated side, the MSRB proposed one broker-dealer, one bank dealer, two municipal advisors and the rest would be undesignated slots.
The MSRB is also now proposing a five-year cooling-off period for public board members leaving jobs at regulated firms.
Sen. John Kennedy, R-La., introduced a bill last year that would shrink the size of the board to 15 and require the board’s public representatives to have a five-year cooling-off period.
Kennedy doesn’t think the board is truly a majority public body as required by federal law because its members who represent the public are frequently retired investment bankers. 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.
A GFOA member asked Kim if the MSRB’s proposed changes would pass “Kennedy’s smell test.”
“It does address a number of the issues that Sen. Kennedy has raised around the governance of the MSRB board,” Kim said. “Certainly we hope that it does.”
GFOA’s committee also aired its concerns over a proposed tool that would more visibly track the timeliness of secondary market disclosure.
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Some committee members said they were concerned some issuers might "game" the system, though some don’t think it would become a huge problem for the industry. An issuer could feasibly mislabel a filing in order to fool the calculator into thinking it was more timely than it was.
“Our running assumption is that issuers are acting in faith, making their continuing disclosure requirements and that are checking the right boxes and putting in the right data,” Kim said.
If issuers are trying to deceive investors by falsifying information, then that would be a matter for the SEC and enforcement, Kim said.
Tim Ewell, chief assistant county administrator for the county of Contra Costa, California, wished the MSRB would have had discussions with market groups before submitting the proposal.
“These are issues that should have come out through a process and had been discussed,” Ewell said.
Ewell doesn’t think such dishonesty will be a big problem.
“I think it’s an interesting issue to discuss,” Ewell said. “If someone were to do that, there’s remedies for that already and they know they shouldn’t be doing that.”
Ewell is more focused on the MSRB’s measurements of timely disclosure. Issuers have to already comply with continuing disclosure agreements that specify when they are getting out their financial documents. Ewell said that would be a better measure compared to fiscal year-end.
That information doesn’t come directly from the issuer and CDA due dates come for the underwriter, among other issues preventing the MSRB from using the CDA instead of their fiscal year-end, Kim said.
Rebecca Olsen, director of the SEC’s Office of Municipal Securities, also discussed the staff’s forthcoming legal bulletin, which would clarify what types of public disclosures would be subject to anti-fraud laws. Olsen said it would be an accumulation of information that the SEC has written and said over time.
Olsen is hopeful that the bulletin would come out before the SEC’s
