September 4, 2013
Thank you for the opportunity to comment. I am writing in from the perspective of a former issuer official, an investor and, most importantly, a taxpayer.
I agree with the letters that have been sent in opposition to this rule change and disagree with the letter from the NMFA group. The SEC should not allow this change to the MSRB membership to happen because it will hurt retail investors, issuers and taxpayers which are all groups the MSRB and the SEC are supposed to protect. This rule change does not promote the intent of the law to have a public majority board because it will allow dealer-affiliated institutional investors to crowd out the perspective of the public including the retail investors and issuers that most need protection under MSRB rules.
Contrary to what was said in the letter from the NMFA group, the proposed rule change does nothing to increase retail investor participation in the MSRB. In fact, it does exactly the opposite. Regulators should be very alarmed by this given two well-recognized facts about the muni bonds market. First, the muni bonds market is dominated by small retail investors and second it has very poor pricing transparency for small investors. Two recent government reports including one by the SEC confirmed this. I think it is unbelievable that the NMFA group would make the claim that this rule will enhance retail investor participation with a straight face. I dont believe I have ever heard that the majority of small investors are conflicted out of MSRB membership because they have an affiliated broker-dealer. The NMFA group just wants more power for big investors like their members and they do not care about the small retail investors.
Already the MSRB membership rule gives extra power to banks and big companies even though it is supposed to be a public majority. For example, under part (c) if a board member acts improperly or abuses their authority they can not be taken off the board unless there is agreement from at least one banker and at least one broker-dealer. No other group is given that kind of veto power. Not even the financial advisors that work for issuers. This rule change will add to that imbalance by allowing banks and broker-dealers to have a sympathetic voice on the public side allowing board members that act against the public interest to stay on the board.
A couple of other points to consider.
The ethical requirements that the NMFA group cites in their letter do not apply to their membership on the MSRB Board.
As previous letters have noted the MSRB has already shown that it can not be trusted to pick public members. Loosening the standards will just make the situation worse for retail investors and taxpayers like myself. The MSRB just chose that BDA member named Bob Cochran to be a public representative. Bond insurance companies get the vast majority of their business from financial advisors and broker-dealers that recommend their services even if issuers have to pay the premiums. It is not issuers that get invited to the fancy parties and retreats that these companies sponsor. If the MSRB does not know enough about the market it is supposed to regulate to know this then we should go back to having the SEC pick the public members as the Bond Buyer said. And this BDA member Bob Cochran should not be allowed to join the board as a public member.
The MSRB Board does not need to have 21 members and 11 public members. It is a significant waste of money as you can see that the MSRB pays most of its members at least $50,000 (which doesnt include other expenses of having such a bloated board). I would estimate that having six extra board members costs the MSRB at least $500,000 per year. That money could actually be used for regulation. The Board should be reduced back to 15 members. It doesnt cover markets as big and broad as the FINRA does and does not need to be as big. This would also undercut the supposed need for more dealer-affiliated institutional investors on the Board.
Thank you for your consideration of my letter.