At a Securities and Exchange Commission (SEC) Field Hearing on the State of the Municipal Securities Market today, SIFMA offered its views on regulation of the municipal market following passage of the Dodd-Frank Act. SIFMA believes the benefits of the Municipal Securities Rulemaking Board (MSRB) are vast and that having a dedicated regulator with the expertise and focus on the municipal securities industry’s unique issues is valuable and has generally worked well since the Board was created in 1975. With the MSRB’s shift into an independent regulatory authority under the Dodd-Frank Act, however, SIFMA believes it is critical to ensure that not just the benefits but also the costs and regulatory burdens are spread among all of the MSRB’s constituents.
“We would hope that the new requirements of Dodd-Frank will be a catalyst to strengthen the relationship between all regulators, including the SEC, MSRB and FINRA to provide for more even and insightful examinations as opposed to mere checklist reporting,” said Leslie Norwood, managing director and co-head of SIFMA’s Municipal Securities Division. “However, SIFMA’s Municipal Securities Division members also generally value the separation of the rulemaking and enforcement regulators and believe this separation has served the industry as a whole quite well by managing regulatory conflicts of interest. SIFMA generally believes having a dedicated rule maker such as the MSRB whose focus can be specifically on writing clear rules that best govern the industry is integral to a well-functioning and smartly regulated marketplace.”
SIFMA believes that by bringing previously unregulated municipal advisors under regulation by the SEC and MSRB, the Dodd-Frank Act brought more fairness to all market participants. At the same time, however, SIFMA has concerns that broker-dealers continue to be subject to an unlevel regulatory playing field. FINRA enforces the MSRB rules, however, FINRA can only enforce the rules against dealer members of FINRA. Under Dodd-Frank, non-dealer financial advisors will not be subject to paying FINRA fees or undergoing FINRA enforcement exams and will only face SEC enforcement exams. Thus, the playing field is still not level for the different market participants engaging in the same types of municipal advisor activities.
SIFMA also noted in its testimony that underwriters have paid the vast majority of fees historically needed to support the MSRB’s work. SIFMA strongly believes that with the new independent nature of the MSRB, as well as the additional regulated parties and expanded authority of the Board, the burdens of fees that support the MSRB should be shared among all market participants. In addition, while noting that the MSRB has the ability to match its fees with its annual expenses, SIFMA believes the MSRB should not assess broker-dealers in excess of its expenses just to build reserve funds without a more comprehensive discussion with the dealer community about the cost of future initiatives, when they will begin, and what the benefits are.
The Dodd-Frank Act broadened the MSRB’s mission to include the protection of state and local government issuers of municipal bonds in addition to investors and the public. The MSRB’s new explicit authority to make rules for the protection of municipal entities or obligated persons is an unprecedented role for any regulator. SIFMA supports effective regulation, noting that robust capital markets require that market participants have confidence in the fairness and efficiency of the primary and secondary markets. However, regulation of dealers is too often used to achieve a result deemed desirable, not because it is the most appropriate means but because it is currently the most convenient lever available to policy makers.
“While SIFMA is always supportive of disclosure that protects investors and issuers alike, we believe that today’s regulatory system, in particular with the MSRB’s new authority, would benefit greatly from increased transparency, which, in turn, promotes accountability and increased investor confidence,” said Ms. Norwood.