Why senator blasted MSRB as 'a club' that is 'incestuous'

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WASHINGTON – Sen. John Kennedy blasted the Municipal Securities Rulemaking Board during a hearing on Tuesday, calling it a “club” that’s “incestuous” because many of its so-called public members have industry backgrounds.

“I can’t figure out who really represents consumers” on the MSRB’s 21-member board, Kennedy, R-La., told Elad Roisman, President Trump’s nominee to become a member of the Securities and Exchange Commission at his confirmation hearing before the Senate Banking Committee.

The Dodd-Frank Act, enacted in 2010, mandated that the MSRB have a majority public. The MSRB, not wanting to kick any of its members off the board at that time, raised the number of board members to 21 from 15. Eleven of the 21 are supposed to be public representatives and the remaining 10 are to represent banks and securities firms.

“What does that mean? What do these public members mean?” Kennedy asked rhetorically during the hearing. “Do they represent the public, the consumer, are they consumer advocates?”

“Let me tell you the problem,” he told Roisman. “They’re supposed to represent the public. And I’m not saying they aren’t good people. I’m just saying the whole thing’s incestuous.”

Kennedy said that based on the resumes of the board members, at least four of them have had extensive experience at JPMorgan, a bank, Artemis, an investment banking firm, Vanguard, an investment advisor and Nuveen, an investment manager.

One of the board members to whom Kennedy appears to have been referring to is Donna Simonetti, who the MSRB lists as retired and a public board member. Simonetti was an executive director at JPMorgan for seven years through May 2015, a managing director principal at Bear Stearns for two years, and a senior vice president of First Albany Capital for more than 25 years.

He also appeared to refer to MSRB public board member Rita Sallis, a senior advisor at Blueprint Capital Advisors, a partner to sophisticated institutional investors in hedge fund and other alternative investment strategies. Sallis was with private equity and capital venture firm The Yucaipa Companies for more than eight years. She was also with New York City’s Bureau of Asset Management for four years and was deputy comptroller for public finance for New York City for four years. Before that she was a managing director at RBC Dain Rauscher/Artemis Capital Group, Inc. for more than 11 years.

Kennedy seemed to point his finger at William Fitzgerald, another public member, who was a founder of Fitzgerald Asset Management where he managed debt portfolios for institutional and high-net worth investors. Previously, he was chief investment officer at Nuveen Asset Management, where he helped manage $67 billion in assets.

An additional apparent reference was to Christopher Ryon, a public member who is a managing director at Thornburg Investment Management and previously headed Vanguard’s long municipal bond group.

Kennedy did not mention Ronald Dieckman, who MSRB lists as retired and a public member. He was an executive at JJB Hilliard, WL Lyons and worked at that securities firm for 34 years.

“I’m not saying these aren’t good men and women, but they’re insiders,” Kennedy told Roisman.

Kennedy also complained that MSRB members “pick themselves” and that the MSRB “is a little club.”

“It needs to be changed, it needs to be fixed,” Kennedy said, suggesting that he and Rep. Elizabeth Warren, D-Mass., plan to introduce legislation to require MSRB public members to represent consumers.

Roisman told Kennedy that he didn’t want to “pre-judge the issue” since it may require SEC rulemaking, but that he understood Kennedy’s point and supports accountability and transparency.

MSRB General Counsel Mike Post responded to Kennedy's complaints later, saying the Senator was lumping buy-side representatives with those have industry ties, when the MSRB doesn’t regulate buy-side firms or representatives.

He also said that the Securities Exchange Act of 1934 states that the MSRB will elect new members to replace those with expiring terms. “That’s set in federal law,” Post said.

Also the MSRB’s Rule A-3 on board membership, which was approved by the SEC, sets forth the process for selecting board members and the MSRB follows that process, casting a wide net for candidates by advertising in newspapers, Post said. The rule says that public members can’t have been with a regulated entity – a bank, broker-dealer or municipal advisor – for the previous two years.

In addition, the Securities Exchange Act requires that of the individuals who are independent from regulated entities, at least one be a representative of institutional or retail investors, at least one be a representative of municipal entities such as issuers, and one be a member of the public “with knowledge of or experience in the municipal industry.”

Meanwhile, Rep. Sherrod Brown from Ohio, the ranking Democrat on the committee, said he is concerned the SEC’s enforcement program and that the commission is not doing enough to hold bad actors in the securities markets responsible.
Brown said he plans to ask the U.S. Government Accountability Office to access the reliability and transparency of the SEC’s enforcement statistics.

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