September 21, 2010
Thank you for this opportunity to comment on the proposed amendments to MSRB Rule A-3.
With all due respect, proposed Rule A-3 does not reflect the intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act in at least two senses.
First, nothing in the Dodd-Frank Act provides justification for existing MSRB members to seek to use their current positions to continue to preserve their power, positions and prerogatives.
Second, the definition of the independence of future Board members with reference to merely a two-year absence from association with dealers or municipal advisors is inadequate. For an independent perspective to develop, I suggest respectfully that a five-year period is more appropriate.
With reference to the number of municipal advisor members on a 21-member Board, I suggest respectfully that a larger number then three is required to achieve fair representation under the circumstances. The principal mission of the Board for the next several years will be structuring municipal advisor regulation. That regulation will not consist only of extending certain current MSRB rules to municipal advisors, but also will involve—
--Complex application of the new statutory fiduciary duty of advisors in a regulatory context, including rules on conflicts of interest
--Application of the new special antifraud provision to municipal advisor
--Development of professional standards
--Fashioning continuing education requirements
--Designing exceptions and special rules for the quite diverse universe of municipal advisors
Each of these tasks is unique to municipal advisor regulation, and lacks a counterpart in the existing dealer regulatory pattern already in existence. Moreover, the fiduciary duty that lies at the heart of municipal advisors duty to the issuer clients has been distorted and misapplied by prior MSRB members.
The municipal advisor community includes large and small firms that offer divergent services. Municipal advisors include bond financial advisors, swap financial advisors, private placement agents, solicitors and others. A strict limitation on the number of municipal advisors on the Board to only three members cannot possibly represent such diversity adequately.
I also suggest respectfully that the Board must become substantially more transparent, and that Rule A-3 or other administrative rules of the Board (such as Rules A-4 and A-8) should mandate that transparency. At a time when the municipal securities market is criticized severely by many observers for a lack of transparency, and when municipal issuers are under tremendous direct and indirect pressures brought by the Board and others to become ever more transparent, it does not speak well for the market when its regulator—the MSRB—does not conduct open meetings or follow open records practices. The secrecy of this past Summer relating to the election of officers is exemplary of the Boards antitransparent tendencies.
The MSRB is vastly different from FINRA. The MSRB is created by Congress in Section 15B of the Securities Act of 1934. The Board is the regulator for the municipal securities market, and now is to be governed by a majority of independent members. The Boards rules have the force of law, violations of which can lead to suspensions, civil penalties, disgorgement, cease-and-desist orders, injunctions, and other remedies and penalties. Moreover, unduly burdensome rules also can drive firms out of the market. That statutory creation and enormous governmental power should be accompanied by complete openness in governance. Secrecy has no place in this environment, and contributes to distrust and cynicism.
In that vein, I suggest respectfully that the Board should release all staff and Board member analyses and communications (1) relating to the selection of the new officers and Board members and the composition and structure of committees and advisory groups (2) relating to the need for regulation of municipal advisors or (3) relating to contacts with members of Congress and congressional staff members regarding municipal advisor regulation and the composition of the new independent Board.
Moreover, I strongly oppose Board consideration of or action with respect to its rules in the dark. Given that the Board is the markets regulator, all meetings should be fully open to the public, as should the Boards records.
If the Board does not believe that it is subject to open meeting requirements or to open records laws, then I submit respectfully that there should be congressional hearings to obtain, release and discuss the documents identified above and there should be legislation to prevent a continuation of Board secrecy in the future.
Thank you for this opportunity to comment.
Robert Doty, AGFS