Calling it a "unicorn regulatory body," the American Securities Association challenged the constitutionality of the Municipal Securities Rulemaking Board in a brief filed Thursday that asks a federal appeals court to scrap an order that shortened the timeframe for reporting trades to the MSRB.
The MSRB "is a quasi-public, quasi-private regulatory entity that has no place in our Constitutional structure," the ASA said in the Feb. 27
In its brief, the ASA said the case raises "important constitutional questions" about the validity of an SEC order that shortened the timeframe for reporting trades to the MSRB to one minute. Because the MSRB is unconstitutionally structured, the order must be set aside, the ASA said.
"This unicorn regulatory body—one that has no comparison anywhere in our federal system—runs afoul of the Constitution in several ways," according to the brief, which said the MSRB is "unconstitutionally structured for three reasons."
First, because the MSRB "is a nominally private corporation that exercises legislative and executive powers without adequate governmental supervision," it violates the private nondelegation doctrine, the brief said.
The MSRB also violates Article II "because it is exercising significant executive power, and the President does not have adequate control over MSRB Directors," the brief said. In addition, the MSRB violates the appointments clause because its directors "are 'Officers of the United States' who were not properly appointed," the ASA's brief said.
The MSRB is controlled by a 15-member board of directors who are appointed to those roles by other MSRB members, the brief said.
"So MSRB Directors wield significant governmental power, but they are not nominated by the President and confirmed by the Senate, or even appointed by any Heads of Departments, as required by the Appointments Clause," the ASA brief said, adding that "the MSRB is not subject to adequate control by the Executive branch through the removal power, since MSRB Directors can be removed by the SEC only for serious misconduct…"
The MSRB, which on its face looks like a "classic federal agency" was established by Congress in 1975 to regulate the trading of municipal securities, the brief said. However, the MSRB was established as a Virginia nonprofit corporation, not as a federal agency, the ASA said.
The MSRB writes rules that govern every aspect of the municipal securities market, the brief said.
"When the MSRB's rules are violated, the MSRB actively participates in enforcing them through sanctions and penalties," the brief said. "And the MSRB funds itself through tens of millions of dollars in fees and fines that regulated entities are required by statute to pay."
Officially, the MSRB has no enforcement power, and its rules are enforced by the Financial Industry Regulatory Authority and the SEC.
While the MSRB "wields classic governmental power, ASA argues, it lacks the 'accountability checkpoints' that ensure that its power is wielded by individuals who are answerable to the people," the brief said.
Aside from its constitutional problems, the SEC's order is "riddled with errors," the brief said.
"The MSRB's new rules impose massive costs on regulated entities, including smaller broker-dealers, without any evidence that the rules were needed or would provide any measurable benefit whatsoever," the ASA's brief said. "Yet the SEC rubber-stamped the changes."
An MSRB spokesperson said Friday it does not comment on ongoing litigation.
