The Municipal Securities Rulemaking Board's self-regulatory model offers a distinct advantage to the muni market, the board proclaimed in a report issued Monday.

The 22-page document is largely a history of self-regulatory agencies in the securities industry, as well as history of the MSRB itself, followed by an explanation of the “advantages of the MSRB’s distinctive SRO model.” The report comes in the midst of a sustained MSRB effort to engage more frequently with the public as the board seeks to more thoroughly embrace its role as a guiding voice in the muni market.

“Oversight of the municipal securities market has been grounded in the concept of self-regulation for over 40 years,” MSRB executive director Lynnette Kelly said. “Government provides strong oversight, and market practitioners contribute expert insight into the practical realities of implementing regulatory objectives. The MSRB’s distinctive SRO model has enabled the municipal market to grow into a $3.8 trillion capital market that has earned the confidence of investors, issuers and market professionals.”

MSRB president and chief executive officer Lynnette Kelly.
MSRB president and chief executive officer Lynnette Kelly.

The history portion of the report traces the origins of self-regulation in the markets from the 19th century establishment of New York Stock Exchange rules to the MSRB’s establishment by an act of Congress in 1975.

“Because municipal securities do not trade on exchanges, the self-regulatory structure for the municipal securities market did not evolve from exchanges, as it did with the equities market,” the MSRB said in the report. “Instead, the regulatory background of the municipal securities market reflected Congress’s recognition of the unique characteristics of the market, which required a tailored legislative response.”

The report acknowledges that the self-regulatory model has drawn fire from muni market participants, who have complained about an over-representation of broker-dealer representatives on the board, because even seats required to be filled by “public” members are often filled by retired dealer representatives. The MSRB is constantly self-evaluating, the report says, before explaining how its structure is advantageous to the muni market.

Those advantages, the board claims, are specialized market expertise, representative governance, a participatory process, reduced conflicts of interest, and transparency. The MSRB’s role as a rulemaker with no examination or enforcement authority, as the Financial Industry Regulatory Authority wields, prevents conflicts of interest, the report said.

“Because the MSRB does not have the ability to conduct examinations or enforce its own rules, dealers and municipal advisors (including board members) cannot influence the zealousness of enforcement of MSRB rules,” according to the report. “Furthermore, the structure of relying on other regulators for inspections of MSRB-regulated entities and the enforcement of MSRB rules also eliminates concerns about the MSRB causing examination redundancies in these areas.”

The MSRB has recently placed a greater focus on market communications and compliance support following several years of fairly intensive rulemaking. In October it releasing its first-ever executive budget summary for this fiscal year. It also redesigning the way it communicates with the market when the board has comments or concerns about market trends.

“We are contributing our perspective in the ongoing dialogue about self-regulation in the U.S. capital markets,” Kelly said. “We think that the MSRB – while committed to continuous self-assessment and improvement – is a particularly successful embodiment of the SRO model.”

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