The Municipal Securities Rulemaking Board’s priorities for 2022 include responding to its recently released request for information on environmental, social and governance practices, updates to its EMMALabs system and further requests for comment and information in hopes of modernizing its rulebook.
Unlike some recent years past, the MSRB doesn't come into the new calendar year with a must-complete rulemaking agenda, as with the municipal advisor rules it created over several years following the passage of the Dodd-Frank Act in 2010. But that doesn't mean all will be quiet on the regulatory front.
One thing to watch is the emerging conversation about environmental, social and governance factors, or ESG. On Dec. 8 the MSRB released its request for information in relation to the disclosure of ESG- related information and labeling and marketing of municipal securities with ESG designations, with comments due on March 8, 2022.
The RFI is aimed at a lack of information in the muni market. “Given the absence of uniform standards surrounding ESG disclosures and bond labeling, we want to hear from stakeholders on their perspectives for how to enhance issuer and investor protections related to these matters,” Mark Kim, chief executive officer of the MSRB said.
This will matter most to issuers, Leslie Norwood, managing director and associate general counsel of Securities Industry and Financial Markets Association said. But straightening out what matters most to issuers and others in the muni market may be a first step.
“We feel that the discussion of [ESG] disclosures is, although related, separate from the classification issue as like on the asset management side,” Norwood said. “What is a green bond? What qualifies as a green bond? What may or may not be marketed as such?” she added. “Classification is a different but related issue and both are incorporated into this request for comment.”
In the midst of increased dialogue around ESG investments in almost every facet of finance today, the muni market still claims it is the original ESG market, and that its recent efforts are there to provide more standardization and consensus as investors and issuers become more interested in such labels.
“We're really looking to kind of spur the public dialogue and work with market participants to try to catapult forward and to continue to strengthen the municipal market as a source of capital for environmental, socially impactful projects, and also a destination for investors that are interested in that kind of an impact in their portfolios,” said Patrick Brett, chair of the MSRB board of directors and head of municipal debt capital market and capital solutions at Citigroup.
The MSRB is also expanding its offering with EMMALabs, the MSRB’s “innovation sandbox” that is part of a $17.5 million systems modernization project the MSRB is undertaking. Early this year the MSRB will be rolling out a keyword search engine, which uses “natural language processing, machine learning and artificial intelligence to make hundreds of thousands of disclosure documents that are submitted on EMMA, fully searchable,” Brett said.
“They're submitted as unstructured PDFs and allow the marketplace to search those documents for the first time,” he added. “I think that'll be really powerful. We're really interested to get user feedback on that and continue to refine that.”
On the secondary market front, the other update to EMMALabs will be a dashboard tool for market data analysis built to help users discover and visualize different market trends.
“Those are both really going to help make the market more transparent and make the disclosure information that's already in EMMA more accessible to the investing public, which I think strengthens the market,” Brett said.
The third pillar of the MSRB’s efforts in the new year centers around direct market regulation by modernizing its rulebook. That includes a continued response to the COVID-19 pandemic, which as the fast spread of the Omicron variant in recent weeks, is far from over.
The MSRB has recently authorized a request for comment on its supervisory Rule G-27, which is set to be released in February 2022.
Remote inspections as part of Rule G-27 are being allowed until June 2022 currently, but many market participants have called for the MSRB to move them to be conducted remotely indefinitely.
“That's one of the ways that supervisory roles had to adapt,” Brett said. “In some ways, there may be some permanent changes to that regulatory framework based on the different hybrid working arrangements that weren't really the norm before the pandemic.”
The RFC will ask questions on some proposed text to harmonize the supervisory rule with FINRA Rule 3110, and will be looking for more information from dealers on how those modernization efforts can be carried out.
But in the meantime, some questions remain. “Going forward, there are several questions to address: What should constitute an office of supervisory jurisdiction? What types of offices should need principals? Should an OSJ be based on location or function? What should happen in an office when there’s only one person? How should they be supervised?” SIFMA’s Norwood said.
Part of the aim is continued collaboration and harmonization between the MSRB’s rules and those of the Financial Industry Regulatory Authority. “SIFMA is working with FINRA on those issues and we anticipate to continue to work with the MSRB on those issues as well,” she said.
The muni market will also be watching the SEC’s Office of Municipal Securities new acting director Ernesto Lanza, who could shape the office in new ways.
“It will certainly be interesting to see what direction the Office of Municipal Securities will go in during Ernie’s tenure,” Norwood said. “We would love to see an update to the 1994 interpretative guidance related to Rule 15c12.”
That notice, which details the commission's views of the disclosure obligations related to munis, has for several years been a focus for dealers who say it needs to be updated to reflect modern technologies and practices.
