Representation under MSRB proposal an issue for dealers

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Dealers are not pleased with what they perceive as a lack of proper representation under the Municipal Securities Rulemaking Board’s proposed changes to its board of directors, saying the MSRB “missed the mark.”

The reaction followed the MSRB's action last week, when it filed for approval from the Securities and Exchange Commission to make several changes to its governing board. The changes would shrink the board to 15 from 21 members and tighten the independence standard for members representing the public, among other tweaks. Dealers objected that the filing did not include a proposal that would have allowed municipal advisors associated with dealers to fill one of the two seats to be allotted to MAs, so long as that dealer was not an underwriter of municipal securities.

Some of the changes to MSRB's board of directors are "short-sighted," said SIFMA's Leslie Norwood.

"SIFMA is disappointed the views of the industry are not reflected in the version of this rule which was sent to the SEC today,” wrote Leslie Norwood, a managing director, associate general counsel, head of munis at the Securities Industry and Financial Markets Association.

Norwood objected specifically to the proposals to mandate two non-dealer muni advisors be on the board, extend to five years the "cooling off" period for dealers or MAs seeking to fill seats as public members, and to cap MSRB board membership at six years.

“The MSRB’s decision to mandate an overweighted number of non-dealer municipal advisor representatives, increase the required separation of a board member from a regulated entity from two to five years, and institute a six year cap on service is short-sighted,” Norwood said.

Norwood added that the rule amendments “miss the mark’ and reduce the “value proposition of the MSRB as an independent regulator.”

The board is broadly separated into two categories — public and regulated, and must be majority public under federal law. Under current rules, at least one regulated 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 but not less than 30% of the regulated representatives must be associated with a non-dealer MA.

The board has typically had 10 regulated members on its 21 member board, meaning that in practice the rules require three MAs.

The MSRB’s proposal says that MAs associated with dealers would remain ineligible to hold MA board seats, though draft amendments released in January would have allowed one seat to be filled by a dealer MA so long as that dealer was not an underwriter of municipal securities.

Bond Dealers of America supported the MSRB reducing its board size, but said dealers fund most of the MSRB’s budget.

“While dealers continue to fund 80% of the MSRB’s budget, the tremendous funding discrepancy between dealers and non-dealer MAs remains a problem in both appearance and in hard dollars and cents,” wrote Mike Nicholas, BDA CEO, in a statement. “The BDA will continue to raise this issue with the MSRB, the SEC, and Congress.”

The American Securities Association welcomed the MSRB’s changes, but said more reforms to increase accountability and transparency are needed. The group said Congress should pass Sen. John Kennedy’s, R-La., MSRB Reform Act of 2019, which was introduced last year. Kennedy’s bill is similar to changes the MSRB plans to make such as decreasing its board size and the five-year cooling-off period.

The board’s current 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.

“Congress should pass the bipartisan MSRB Reform Act, sponsored by Senator Kennedy, to benefit consumers and ensure Congress and the SEC have appropriate oversight,” wrote Chris Iacovella, ASA CEO, in a statement.

The National Association of Municipal Advisors said the MSRB’s proposal has positive attributes, but still believes additional MA and issuer representation is needed on the board.

The Dodd-Frank Act needs to be corrected, said Nathaniel Singer, a former MSRB board chair who is a registered muni advisor. In 2010, Dodd-Frank categorized board members in two groups — people who are independent of any dealer or MA, i.e. public representatives and people who are associated with a dealer or MA, i.e. regulated representatives.

“Dodd Frank was incorrect when it lumped together all of the regulated entities when it comes to board representation,” Singer said.

Instead, MAs should be grouped with public representatives, including issuers, Singer said.

“To me that would solve a lot of the problems that had been addressed in the comment letters where the dealers want more representation,” Singer said. “That would be fine and it would happen if the municipal advisors were not taking away any of their seats and the municipal advisors were on the other side being grouped with the public entities.”

That would mean seven dealers in the regulated category, and three MAs and five other public board members for a total of 15.

It would take an act of Congress to change that composition.

Under the MSRB’s proposal, there would be an interim year from when the board changes from 21 members to 15, meaning there would only be one issuer member next year. To avoid that, the board is proposing an interim year where it will have 17 members.

“In general, GFOA members were mostly concerned about representation and to ensure that there is issuer representation,” said Emily Brock, director of the Government Finance Officers Association’s federal liaison center.

The MSRB is proposing the change be effective Oct. 1, the start of its fiscal year.

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