The Municipal Securities Rulemaking Board will seek comment from market participants on whether it should reduce the size of its board and change how it selects its members.
In its first board meeting of the year, the MSRB voted this week to issue a request for comment on Rule A-3, on membership of the board.
“We wanted to respond to what we’ve been hearing so this is the way we’re doing that,” said Nanette Lawson, MSRB CFO and interim CEO.
The request for comment could open as soon as Tuesday and stakeholders would have 60 days to respond thereafter. The MSRB’s governance review special committee recommended the public request for comment at the board meeting. The committee was created at the start of the MSRB’s fiscal year in the fall.
The board currently has 21 board members. The MSRB has heard calls to reduce that number.
“The structure of the MSRB’s board of directors leverages the expertise of diverse municipal market participants to effectively and efficiently protect investors and issuers,” Ed Sisk, MSRB board chair, said in a press release. “We know there is room for continuous improvement, and we set out this fiscal year to carefully scrutinize our governance practices and consider input from policymakers and other stakeholders.”
Sen. John Kennedy, R-La., has proposed shrinking the size of the board and changing its composition. 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.
Also, over the past year, five senior officials left the MSRB including its CEO Lynnette Kelly.
The board also decided to seek comment on Rule G-27 on supervision, as part of its ongoing retrospective rule review and to better align with the Financial Industry Regulatory Authority’s supervision rule.
The MSRB did not have details on the timing of the Rule G-27 request for comment.
The board also agreed to file amendments to the Securities and Exchange Commission regarding rules on suitability, gifts and gratuities and books and records as it gears up for the SEC’s Regulation Best Interest. The market has to comply with the rule by June 30.
RegBI is a rule that would strengthen the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. It also requires broker-dealers and investment advisers to state clearly key facts about their relationships with their customers, including financial incentives.
Rules G-19 on suitability, G-20 on gifts and gratuities and G-8 on books and records will likely be impacted.
The MSRB said it has coordinated closely with the SEC and FINRA to mitigate potential confusion over which standards will apply with respect to recommendations to retail customers.
After the MSRB files the amendments to the affected rules, the SEC will open it up for comments.
The MSRB also plans to submit a response to comment letters regarding its proposed submission calculator in the next few weeks. The calculator would show the number of days between the posting of an annual financial disclosure and the end date of the financial period. The calculation would be triggered once the submission is made to EMMA.
The SEC invited market participants to comment on the calculator and received those in December. The SEC’s response is due by Feb. 25, said Mark Kim, MSRB’s chief operating officer and executive vice president.
The board also discussed comments on the SEC’s proposed exemptive order which would allow municipal advisors to participate in some private placement activities without registering as broker-dealers.
The MSRB was among the over 30 groups and individuals to comment on the SEC’s proposed exemptive order in December. The board supported the SEC’s goal to provide clarity for MA activity, but was concerned that the order as drafted would impact market transparency and potentially hurt retail investors.
The SEC has received questions since 2014 asking it to clarify whether an MA engaging in certain activities to facilitate a private placement would be required to register as a broker-dealer. MAs have welcomed the proposal as a way to clarify their roles in private placement deals, while broker-dealers have said the order was too broad and could hurt investors.
