September 27, 2010
Within a matter of hours following the filing of comments on the MSRBs Rule A-3 proposal, the Board managed to file its own seven-page rely letter dismissing many comments or stating that they might be taken under "advisement" at some indefinite time in the future. The Board also initiated a public relations campaign to assure the market that the future will be wonderful. Yet, we have heard soothing words before. What matters is actions, not words, and in the realm of actions, the Board has fallen sadly short to date.
One argument relates to the number of municipal advisors that will serve on the Board. There seems to be a misconception on both sides of the argument that the concept of fair representation is purely a matter of numbers. While numbers may be part of the equation, the real issue is quality, not quantity. It must be remembered that the Board's prior regulated entities, constituting two-thirds of the current Board, have been primarily underwriters. Although some offer financial advisory services, they make far more money on underwriting activities and often use financial advisory positions as a means of gaining access to underwriting. To give a degree of assurance to issuers, some underwriters purport both to underwrite and to advise issuers (occasionally, stepping well beyond underwriting roles, which can both confuse and harm issuers). Nondealer municipal advisors, on the other hand, do not utilize dual roles.
Underwriters, as such (and not doubling as advisors), are in adverse roles in relation to issuers. Nondealer advisors, in contrast, are solely on the issuers side of the table. The Government Financial Officers Association has the appropriate perspective. Fair representation on the Board requires that those municipal advisors whose businesses emphasize issuer representation be in parity with the underwriters who are adverse to the issuers and do not represent issuers. Otherwise, there will be an imbalance in which the underwriters who are adverse to issuers (including firms that enter into advisory agreements with the goal of underwriting) will have substantially more influence in the rulemaking process to the detriment of the issuers that municipal advisors are supposed to protect (and who have a fiduciary duty to do so). The imbalance planned by the current underwriting majority is an important reason why sunshine rules for the Board are important.
In its response, the Board merely brushed off what may be the most significant comments葉hose critical of the Board's lack of transparency.
The Board's response and public relations campaign are inadequate responses to valid concerns, indicating vaguely that maybe someday transparency concerns might be considered. This important sunshine initiative cannot be permitted merely to be brushed off. I call for amendment of Rule A-3 to provide for open meetings and open records at the Board in conjunction with the process of selection of Board members and officers (and amendment of other Board rules for meetings and rulemaking purposes). The MSRB, unlike FINRA (which is a membership organization authorized by statute), is literally created by Congress in the Securities Exchange Act of 1934. Regulated entities do not have a choice葉hey are required by Congress to comply with the Boards rules. Those rules have the force of law. Regulated entities must pay fees and charges容ffective taxes葉o the Board. Accordingly, regulate entities, like the investors and issuers the Board is directed to protect, are entitled to see the Board's processes in operation.
As with the nomination and confirmation of SEC Commissioners and Chairmen, it is important to the market that those who are selected to serve and their qualifications be fully vetted publicly, and that the applicable selection criteria be made known. Rule A-3 should provide for such vetting. Market participants should be able to see those processes fully in the open.
Further, issuers, investors and regulated entities should be able to hear擁n public meetings, such as are conducted by the SEC in its rulemaking processes葉he varying perspectives of individual Board members on issues brought before the Board as those issues are debated. There is no longer any excuse for secrecy in rulemaking or for pretension that all decisions are unanimous. I call for open meetings on all rulemaking actions beginning immediately.
If the Board does not adopt open meeting and open records practices, I call for legislative action to remedy that serious deficiency to bring the clear light of sunshine on the Board's deliberations and actions. Unlike FINRA, which is an association, the Board has a broad public, governmental mission in the municipal market akin to the SEC's mission for broader financial markets, and the Board must function accordingly. The distressing events of this past Summer demonstrate why the Board must open its processes to the entire market.
The Board's responses regarding transparency and the flawed selection of the officers for the incoming Board are inadequate and cursory. Unlike prior Boards, this new Board is to be composed of a majority of independent public members. It is presumptuous for the current non-independent Board to purport to make decisions on officers for the new independent Board. I join Thomas DeMars of Fieldman Rolapp Associates in seeking a reversal of the officer selections.
The Board has failed to function as a public body, which it is. It is time for the Board to act in the sunshine.