Securities and Exchange Commission Chairman Jay Clayton touched off a paroxysm of anxiety in the issuer community when he declared last year that regulators could take steps to “improve transparency around the age and type of financial information" that issuers provide.
SEC officials have since clarified Clayton’s comments in a way that has soothed most of the angst. But for all the nervousness Clayton may have caused his instincts aren’t wrong. Municipal market investors deserve as much clarity as they can reasonably get. Every market participant does. And that’s why the Municipal Securities Rulemaking Board, this market’s primary regulator, should do everything it can to provide greater transparency about how it protects both investors and issuers.
The MSRB deserves credit for the work it has done since its creation. Charged with writing rules to protect investors, the board created important standards which the SEC and the Financial Industry Regulatory Authority have used to hold dishonest brokers to account.
Dealer and muni advisor groups generally protest that new rules would be a costly burden on business, but even most brokers and municipal advisors recognize that rulemaking is complicated and that most MSRB rules have done demonstrable good. The board has also reviewed long-standing rules and solicited industry comments on how they could be improved.
The 2010 passage of the Dodd-Frank Act further charged the board with protecting issuers as well as investors. The law required the board be made up of a majority of members representing the public, rather than the securities firms, bank dealers, and (beginning with Dodd-Frank) municipal advisors the MSRB regulates.
And that’s where the MSRB, for all of the good work it does, has an image problem. The concept of a majority public board demands members whom the public can have confidence are not wearing the hat of a broker-dealer when they convene for the MSRB’s quarterly meetings.
Public board seats are frequently filled by retired investment bankers who have fulfilled the public membership requirements that they not be “associated” with a regulated firm for at least two years or “employed by” a regulated firm for at least three years. I’ve met some of these individuals over the years and have always perceived them as honest, but it stretches the imagination to think that someone can simply “turn off” their broker-dealer loyalties after a recently ended 30-year career. Louisiana Republican Sen. John Kennedy has
The MSRB could address this by being more transparent about who it selects to fill those seats. The way it currently works is that the MSRB puts out a call for applications, and then the board’s Nominating and Governance Committee reviews the applications and selects candidates for interviews.
The MSRB publishes the names of applicants, but why not create a more public process? Would-be SEC commissioners face a televised grilling by members of the U.S. Senate. Nothing so intense as that would be needed at the MSRB, but the market deserves an explanation when the board selects a retired longtime banker as a public member when the pool of applicants also included several sophisticated issuer officials highly knowledgeable about the bond market, including a former president of the Government Finance Officers Association.
There could be good reasons, but if there are then the market doesn’t hear them. One could argue that the Financial Industry Regulatory Authority maintains a similar practice, but that doesn’t mean it’s best.
I’ve known many board members over the years, and many MSRB staff. They are people of integrity and I don’t wish to call into question the motives of anyone there. But the overwhelming response I’ve gotten in discussing this subject with individuals representing every corner of the market is that the MSRB is good at writing rules and should focus on that.
The municipal market deserves the most confidence possible in its primary regulator, and some small tweaks could go a long way to providing that.
