September 14, 2010
Swap Financial Group is the largest dedicated swap advisor serving the municipal market. We welcome the new regulatory regime created by the Dodd-Frank Act, but are concerned about inadequate representation of advisors on the MSRB Board, particularly during the transitional period of the next year or more. The proposed expansion of the Board to 21 members has the practical virtue, as I understand it, of not requiring existing dealer members to have to resign. This practical exigency produces the math that ends up resulting in the regulated members being 70% dealer/30% advisor (assuming no two hat advisors that are also dealers). My concern is as follows: During the transition period, advisors will constitute less than 15% of the Board and among the regulated members, their voices will be dwarfed by the dealers. And it is during the transition period when the voices of advisors are most needed, as the largest new task facing the Board will be the inaugural formulation of a vast new array of rules affecting advisors. If anything, this is the time to bend over backward to make sure that there is a good, diversified group of advisors on the Board. I would take much greater comfort if there were 4 advisors out of the 10 regulated members. I recognize that this would require one existing dealer member to stand down prior to the expiration of his or her term, but the Act does not seem to have been designed with preservation of existing Board positions as a fundamental goal.
Our most direct concern is that there be a diversity of advisors represented, as the advisory community is far from homogeneous. I would suggest, at a minimum, that the advisors include one member from each of the four following categories: (1) a member from a general financial advisory firm with a national scope: (2) a member from a regional financial advisory firm whose client base is principally governmental entities (3) a member from a financial advisory firm whose client base is obligors who borrow through tax-exempt conduit agencies, like a health care or higher ed advisor and, (4) a swap or financial products advisor. Each of these groups has dissimilar interests and perspectives, and would add greatly to the Boards considerations. There also happen to be fine professionals available in each of these categories who would be consistent with the high standards of professionalism that the Board has always sought to uphold. Especially during this key transitional year, I think it would be in the best interests of the Board and the public to make sure that each of these groups participated actively in the rulemaking process in a manner that only Board membership can assure. Moreover, the inclusion of each of these categories would help to endow the Boards rulemaking with greater credibility in the eyes of all of the new constituencies who will now form part of the MSRBs expanded domain.
Furthermore, we believe that when the Board goes back to 15 members (including 7 regulated representatives), at that point not less than 30% of those 7 should be advisors. I think that would be satisfactory, subject to an important caveat. The caveat would be that the advisors would be non-dealer advisors. As you know, of course, there are many dealer/bank firms that intermittently serve as financial advisors. It would be regrettable if any member of the MSRB were, in effect, a two hat member It is not clear to me from the proposed rule whether or not that would be precluded.
We are deeply enthusiastic about the MSRB taking on the new set of responsibilities that lies before it. We believe it is a major step forward for the professionalism, ethical standards, and public safeguards that are necessary to make sure this market is a model for fairness, openness and honesty. Please let us know if there is any way that we can assist in helping to advance this crucial mission.