Municipal bond groups expressed opposition to the Municipal Securities Rulemaking Board’s proposal to shrink the size of its panel, fighting for seats and asking the Securities and Exchange Commission to disapprove the plan to cut to 15 members from 21, unless changes are made.
The National Association of Municipal Advisors, Bond Dealers of America, the Government Finance Officers Association, a group of former MSRB board members and groups part of the Public Finance Network sent letters to the SEC asking for changes in how MAs and issuers are represented under the proposal.
NAMA wants MAs to have three spots on the board. The MSRB suggested in June that MA rule making was complete following the 2010 Dodd-Frank Act when MAs first became regulated, NAMA said. However, that is not true if MA rulemaking follows the same trajectory as broker-dealer rulemaking, and therefore adequate MA representation is needed, wrote Susan Gaffney, NAMA executive director.
“It is more likely that over the years changes and updates to current rules will be promulgated, MA rule guidance may be developed, and new rules may be enacted due to market and practice changes,” Gaffney wrote in a letter Wednesday. “ It is difficult to understand the MSRB’s rationale for reducing the size of MA representations based on an assertion that MA rulemaking is ‘complete,’ when that has not been the case for broker-dealer rules for 30-plus years.”
The MSRB board is divided into two categories: public and regulated. Currently, within the public representative category, at least one board member must be representative of institutional or retail investors, at least one must represent issuers and at least one has to be a member of the public. The board must be majority public, meaning dealers and muni advisors can't outnumber members not regulated by the MSRB.
In the regulated category, at least one board member must be associated with a dealer that is a bank, at least one be associated with a dealer that is not a bank, and at least one (and not less than 30%) of members must be associated with an MA.
In practice, this means the board has three MAs, as the current board does. The proposal being considered would lower to two the number of MAs needed within the group of regulated representatives.
If the SEC approves a 15-member MSRB board, the change in MA representation as a proportion of the board would slip to 28% (2 of 7 spots) from 30% (3 of 10).
Gaffney's concern arose from the planned reduction of MA representation to two members from three.
The board had been considering permitting MAs affiliated with dealers who do not underwrite muni securities to fill board seats reserved for non-dealer MAs, but that proposal was eliminated.
BDA hailed the decision to not move forward with that part of the plan.
“This was a misguided initiative that appeared to benefit a very small number of MAs,” wrote Mike Nicholas, BDA CEO. “If dealer MAs are eligible for reserved MA seats on the board, there should be no distinction between whether the affiliated dealer underwrites municipal securities”.
BDA is against reserving two spots for MAs in the regulated representative group, preferring the MSRB to divide the number of board seats between dealers and MAs based on financial contributions.
“The proposal does not address the issue that under the proposed new Rule A-3, while nearly 30% of regulated members of the board will be municipal advisors, non-dealer MAs contribute less than 10% of the MSRB’s revenue derived from industry assessments,” Nicholas wrote.
The MSRB also proposed changing to five years from two years the time that a public representative must not be associated with a dealer or MA firm before being eligible to serve as a public member.
That proposal is in line with the MSRB Reform Act of 2019 that Sen. John Kennedy, R-La., introduced over a year ago. In his bill, Kennedy had also asked the board to be whittled down to 15.
“It is likely that the SEC will approve the MSRB’s proposal without amendment,” Nicholas wrote. “It is also likely that the MSRB’s motivation for this change is to forestall action by Sen. Kennedy on his broader MSRB reform legislation.”
The required five years away from the industry would prevent numerous highly qualified and knowledgeable people from serving on the board, Nicholas wrote.
NAMA said the MSRB should ensure that those assigned to public board member spots should include people with broad knowledge of the public interest as well as those who have specialized industry expertise.
A group of former MSRB board members and former MA representatives also sent in a comment letter on Wednesday. Those MSRB alumni include Steve Apfelbacher, board member from 2014-2017; Renee Boicourt, board member from 2016-2018; Marianne Edmonds, board member from 2012-2015; Robert Lamb, board member from 2010-2013 and vice chair from 2011-2012; and Noreen White, board member from 2010-2014.
Those former board members do not agree that rulemaking for MAs is complete, referencing tensions between dealers and MAs and discussions around a recently released
The former board members said they are alarmed by the BDA’s proposal to set the ratio of board seats based on financial contributions.
“Simply put, the diverse nature of the municipal advisor community cannot be represented by two representatives on a 15-member board, nor is it reasonable to expect two municipal advisors to be able to make their voices heard when there are five broker-dealer representatives,” they wrote.
The former board members also said the MSRB has noted in the past that MAs should expect to pay a larger share of the board's budget in the future. In a letter sent to the SEC in November requesting an increase in annual professional fees for MAs, the MSRB said the higher fees would be a "measured incremental approach that moves towards a more equitable balance of feeds among regulated entities and a fairer allocation of the expenses of the regulatory activities, systems development, and operational activities undertaken by the organization, while not overly burdening municipal advisors with more accelerated fee increases at this time.”
A group of nine associations, part of the Public Finance Network, sent a letter to the SEC, asking for more issuer representation and at least two spots on the board.
MSRB Rule A-3 states there must be at least one issuer representative on the board.
GFOA sent a separate letter to the SEC asking for more issuer representation.
“We would ask that the SEC not approve the proposed changes to Rule A-3 without increasing the number of required issuer representatives,” wrote Emily Brock, director of GFOA’s federal liaison center.
