MSRB told to stay in its lane and focus on its rulebook

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Municipal market participants want the Municipal Securities Rulemaking Board to focus more on its role as a regulator and refrain from engaging in initiatives not clearly within its authority, while focusing on rulebook modernization and emerging pandemic trends.

Municipal market groups wrote to the MSRB this week on what the board should be focused on over the next three to five years as the board develops its strategic plan. Its last strategic plan was created in 2017. The MSRB has the congressional authority to develop rules for broker-dealers and municipal advisors and disseminate market data, education and outreach.

“The MSRB has often though, in the past, engaged in activities that go beyond the congressionally mandated and SEC-approved items,” Susan Gaffney, executive director at the National Association of Municipal Advisors. “These expanded activities include focus on market leadership and an education role, which we consider ancillary activities.”

The MSRB’s stated focus on its rulebook should serve as a recalibration in how the MSRB views itself, Gaffney said. Some of those changes include changing references of financial advisors to municipal advisors, matching its rules to the Financial Industry Regulatory Authority to avoid duplicative and burdensome requirements, among others.

In the past, the MSRB has engaged in activities beyond its Congressional mandate, said Susan Gaffney, executive director at the National Association of Municipal Advisors.

Broker-dealers agree with the MSRB’s stated focus on its retrospective rule review over the next few years.

The pandemic has highlighted the challenges of outdated rules and the need to modernize rules through technology, the Securities Industry and Financial Markets Association said.

Working remotely will be a long-term impact of the pandemic and SIFMA wants the MSRB to work with the Securities and Exchange Commission and FINRA to ease regulatory burdens to promote remote work. SIFMA also called for harmonizing rules, noting differences among FINRA and MSRB rulebooks.

SIFMA wants the MSRB to consider its “appropriate role” as it considers its goals and priorities in the next few years.

“The concern is that the MSRB has engaged in or considered regulatory initiatives that were more appropriate for another regulator to address and strayed from its core mission,” Norwood said.

In 2017, the MSRB issued a market advisory on selective disclosure to increase awareness among market participants that some non-public information is given to a small group of investors, frequently inadvertently. The advisory warned of the problems such selective disclosures could cause, including, potentially, insider trading liability.

Some in the industry blamed the MSRB for frightening issuers into being less willing to discuss their financials with buy-side analysts.

SIFMA said many members felt that advisory was not within MSRB’s jurisdiction.

“It may be hard to ignore newsworthy issues, like derivatives, Environmental, Social and Corporate Governance (ESG), or other issues on its radar, but the MSRB must ask itself – and its stakeholders – whether an initiative would be best left to another regulator with primary regulatory responsibility, and importantly, expertise,” SIFMA said.

“The MSRB has a role with its EMMA product to be a repository of issuer disclosures,” said Leslie Norwood, SIFMA managing director and associate general counsel. “There is a concern in terms of disclosure content which would be more in the realm of the SEC.”

The MSRB has a role with its EMMA system to be a repository of issuer disclosures, said Leslie Norwood, SIFMA managing director and associate general counsel.

SIFMA was also concerned about MSRB’s Compliance Corner, a quarterly electronic newsletter, which SIFMA says inadvertently introduces new, conflicting or duplicative requirements.

The MSRB’s mission should not interfere directly with or unduly influence matters of state and local governments, the Government Finance Officers Association said. That includes reporting financial information and the frequency of disclosures made to EMMA.

“Initiatives such as market announcements regarding selective disclosure, yield curve exploration, submission calculator, and general advocacy to Congress about the municipal bond market and infrastructure are all concepts already well covered by industry education efforts,” said Emily Brock, director of GFOA’s federal liaison center.

A submission calculator — a tool to more visibly track the timeliness of secondary market disclosures — went into effect in July 2020.

The National Association of State Treasurers wants the MSRB to include a state treasurer on its board.

Bond Dealers of America urged the MSRB to refrain from issuing guidance where it doesn’t have jurisdiction such as selective disclosure and a 2018 brief on municipal market derivatives.

Issuer disclosure is a Securities and Exchange Commission issue while derivatives are in the Commodity Futures Trading Commission’s purview, said Michael Decker, BDA vice president of policy and research.

“It immediately raises the question of whether the SEC agrees with the MSRB views on issuer disclosure or whether the CFTC agrees with the MSRB’s views on derivatives,” Decker said.

BDA also asked that when the MSRB communicates guidance to the market that they highlight it, instead of putting it in other MSRB communications that are less important, such as the MSRB’s weekly Compliance Tip of the Week emails. One example was a November email that including guidance on applying MSRB Rule G-20 on gifts and gratuities to online meetings.

“Labeling this important information as a ‘compliance tip’ and transmitting it via an email subscription channel does not give it sufficient prominence,” BDA wrote.

BDA also wants the MSRB to focus on incoming trends that could affect investors, such as making sure they know the effects of an Internal Revenue Code section. Section 1278 specifies the tax treatment of bonds sold at market discount. The difference between a taxpayer’s acquisition price of the bond and par represents the amount of market discount subjected to Section 1278.

It’s inevitable that in an extremely low yield environment that yields will rise and the market value of outstanding fixed-rate bonds will fall, BDA said. That would expose investors who acquire bonds in the secondary market to earning ordinary, taxable income on their otherwise tax-exempt investment.”

“An investor who buys the bond in the secondary market could face tax consequences that they’re not expecting,” Decker said.

Other groups chimed in Tuesday. The American Securities Association supported modernizing rules to keep up with working from home and modernizing EMMA and ensure its security as well as information gaps to be continuously updated. ASA also called for less duplicative rules.

As the MSRB continues to modernize EMMA, it should review its security measures and protocols, the American Bankers Association said. The group referenced a December cyber-attack that affected government, military and private-sector institutions.

Other groups wanted the MSRB to take a proactive role in examining the impact of climate change. Ceres, a sustainability nonprofit, said the MSRB should declare climate as a systemic risk to the muni bond market, establish a task force, write annual reports on climate risks, and adopt disclosure standards such as machine-readable reporting among others.

XBRL US, a nonprofit standards organization, also pushed for financial reports to be machine-readable, i.e. through its Extensible Business Reporting Language.

Climate Advisory LLC warned in its letter that municipal reporting fails to capture or disclose the actual costs of climate change.

“The MSRB has an important role to play in promoting a fair and efficient market by increasing investors' access to timely, relevant, high quality, and consistent data about municipal issuers' growing climate change risks,” the group wrote.

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