WASHINGTON – The Municipal Securities Rulemaking Board is aiming to make progress on a number of high-profile projects during its board meeting next week including markup and bank loan disclosure as well as a new municipal advisor complaint system and plans to improve EMMA.
At the meeting scheduled for July 27 and 28, the board also plans to talk about what to do with the MSRB's large reserves and to decide on, among other things, its new budget and which member will have an extended term as the board transitions to four-year member terms.
"It's a lot," said MSRB executive director Lynnette Kelly when describing the board's agenda for the meeting. "[There are] a lot of initiatives that have been really worked on for the totality of the year that are now drawing to a conclusion."
The MSRB's discussion on markup disclosure will focus on recent comments it has received on its proposal to establish a process for determining markup and markdowns. The self-regulator proposed changes on Feb. 18 to its Rule G-30 on price and commissions to create a process for dealers to determine prevailing market price. The proposed rules would require dealers to consider a "waterfall" of factors, similarly to what the Financial Industry Regulatory Authority currently requires, to determine the prevailing market price and thus markups or markdowns on bonds.
The waterfall would be a required order of considerations that dealers would have to take into account.
Issuers and dealers have subsequently criticized the proposed rules as incompatible with the municipal market. Ben Watkins, director of bond finance for Florida had the harshest critique of the FINRA-like standards, saying in a comment letter that "such stringent definitions and interpretations of rules only burden the market rather than improve it."
Dealer groups were concerned about the increased burden the proposed rules would place on dealers. Mike Nicholas, Bond Dealers of America's chief executive officer, wrote that the proposals would cause "significant market disruption" and should be amended to reflect how municipal bonds actually trade instead of using FINRA's inapplicable corporate bond template.
Kelly noted the board has been working on this rulemaking project since it first released its proposal to require reference prices in November 2014.
"[We are] working very hard with FINRA, the [Securities and Exchange Commission], and the industry to really get it right," she said.
The board's discussion about bank loan disclosure is expected to center on comments it received in response to a March 28 concept release that asked whether the MSRB should require municipal advisors to disclose information about their issuer client's bank loans or privately placed municipal securities.
Most market groups applauded the MSRB's intent to increase disclosure but presented a host of reasons for why the proposal is flawed. Multiple groups, including the National Association of Municipal Advisors, said that if the idea were enacted, it would threaten MAs' fiduciary duty to their clients under MSRB Rule G-42, which lays out municipal advisors' core duties. Many groups instead said the best way to ensure bank loan disclosure would be to amend SEC Rule 15c2-12 on disclosure, under which the SEC regulates the actions of broker-dealers in primary offerings of munis.
Several investor groups that responded to the concept release did not share others' opposition to the proposal, but agreed that amending 15c2-12 would be a good course of action.
In addition to discussing these comments, Kelly said the MSRB will be enhancing EMMA both on the submission side and search side in response to criticisms from issuers and others about the difficulty they have had filing and finding bank loans on EMMA. Issuer officials who sit on the Government Finance Officers Association's debt committee expressed their frustrations to MSRB chair Nat Singer in May during a meeting at the GFOA's annual conference.
Kelly said the MSRB had a conference call with some of the individuals who had critiqued the current bank loan disclosure process at the GFOA conference to discuss steps for improvement.
The MSRB will also be considering possible ways to deal with its large reserve fund. The question of how to use the money came up after the board's last meeting in April. The board is working under a new governance policy designed to address its reserve fund level when it falls above or below certain target levels. The MSRB policy sets a reserve target of approximately 12 months of operating expenses less depreciation expense plus three times annual capital needs, according to Kelly. Its reserves currently exceed that target. Kelly said the board will be discussing its options, which could include rebating money to members.
The meeting also will include decisions on the MSRB's new budget and the makeup of the board's various committees. Members will vote on which of the board's 11 public members will be receiving a one-year extension as the board shifts to members who will serve four-year terms.
In addition, the MSRB plans to discuss the creation of a system for municipal advisor clients to file complaints about their MAs. The MSRB currently has a system for dealer clients to file complaints, but because the MSRB only relatively recently received regulatory authority over MAs, it has not yet created such a system for them, according to Kelly.
The board will also discuss ways to bring the current dealer complaint process up to "modern standards." Both complaint systems will be similar in structure and should be helpful for future enforcement actions as well as determining possible problems with current rules, Kelly added.
A separate but broader proposition up for consideration is allowing MAs, like dealers, to communicate electronically with their customers. The MSRB has no current guidance on the subject, Kelly said. Another issue for discussion is whether a CUSIP number is necessary for a private placement. Kelly said there has always been a lack of clarity about this.
Additionally, the board members will be going over suggestions to improve the MSRB's long range plan for transparency that was published in 2012. The ideas for the updated market transparency report include such improvements to EMMA as expanded data and functionality, the addition of market-wide information, attention to ease-of-use initiatives, and more tools for issuers and MAs.
