Municipal Securities Rulemaking Board

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See also bond insurance, Build America bond, municipal bankruptcy, municipal securities, muni swaps and Tower Amendment.



The Municipal Securities Rulemaking Board (MSRB)is a self-regulatory organization (“SRO”) established by Congress in the Securities Acts Amendments of 1975 to write rules with respect to transactions in municipal securities effected by brokers, dealers and municipal securities dealers (collectively “dealers”).

The MSRB stands as a unique SRO for a variety of reasons.

The MSRB was the first specifically established by Congress.

Also unique is the fact that the legislation, now codified in section 15B of the Securities Exchange Act (“Exchange Act”), dictates that the Board shall be composed of members who are equally divided among public members (individuals not associated with any dealer), individuals who are associated with and representative of banks that deal in municipal securities (“bank dealers”), and individuals who are associated with and representative of securities firms.1

At least one public member serving on the Board must represent investors and at least one must represent issuers of municipal securities. Further, the MSRB was created as a product-specific regulator, unlike most other securities regulatory bodies.

Members of the Board meet periodically throughout the year to make policy decisions, approve rulemaking and review developments in the municipal securities market. Day-to-day operations of the MSRB are handled by a full-time professional staff. The operations of the Board are funded through assessments made on dealers for initial fees, annual fees, fees for underwritings and transaction fees.

The MRSB does not operate a market or conduct examination and enforcement of its own rules.

MSRB - Board membership

  • 5 securities firms
  • 5 bank dealers
  • 5 public members
  • At least one issuer
  • At least one investor
  • Serve three-year terms; 1/3 of Board changes each year
  • Meets four times a year

MSRB - what they do

The MRSB writes rules ONLY for securities firms and bank dealers. The rules must be approved by SEC. The rules have the force and effect of Federal law.

The rules are enforced by:

  • FINRA for securities firms
  • OCC, Federal Reserve and the FDIC for bank dealers

MSRB - Rulemaking process

  • Identify an issue
  • Board discussion
  • Rule proposal
  • Comment process is key
  • Board discussion of comments
  • Proposed rule filed with SEC for approval
  • SEC publishes proposed rule for comment
  • SEC approval

Source: Municipal Securities Rulemaking Board Presentation to the National Association of State Treasurers Annual Conference, July 11, 2006

What MSRB rules must do

  • Prevent fraud and manipulative acts and practices
  • Promote just and equitable principles of trade
  • Foster coordination and cooperation with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions
  • Remove impediments to and perfect the mechanism of a free and open market


The substantive areas of the Board’s rulemaking authority are described in Section 15B(b)(2) of the Exchange Act, which lists several specific purposes to be accomplished by Board rulemaking with respect to the municipal securities activities of dealers and provides a broad directive for rulemaking designed to:

  • Prevent fraudulent and manipulative acts and practices
  • To promote just and equitable principles of trade
  • To foster cooperation and coordination with persons engaged in regulating, clearing, settling and processing information with respect to and facilitating transactions in municipal securities
  • To remove impediments to and perfect the mechanism of a free and open market
  • In general, to protect investors and the public interest

Like other SROs, the Board must file its proposed rule changes with the Securities and Exchange Commission (“SEC”) for approval prior to effectiveness.

Although the Board was created to write rules that govern dealers’ conduct in the municipal securities market, the Exchange Act directs that inspection of dealers for compliance with, and the enforcement of, Board rules be carried out by other agencies.

For securities firms, the NASD, along with the SEC, perform these functions.

For bank dealers, the appropriate federal banking authorities, in coordination with the SEC, have this responsibility.3

The use of existing enforcement authorities for inspection and enforcement of Board rules provides for an efficient use of resources.

The Board works cooperatively with these enforcement agencies and maintains frequent communication to ensure both that:

  • (1) the Board’s rules and priorities are known to examining officials; and
  • (2) general trends and developments in the market discovered by field personnel are made known to the Board.

While Section 15B of the Exchange Act provides the Board with broad authority to write rules governing the activities of dealers in the municipal securities market, it does not provide the Board with authority to write rules governing the activities of other participants in the municipal finance market such as issuers and their agents (e.g., independent financial advisors, trustees, etc.).

Municipal securities also are exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 and are exempt from the registration and reporting requirements of the Exchange Act.

While Section 15B of the Exchange Act provides the Board with broad authority to write rules governing the activities of dealers in the municipal securities market, it does not provide the Board with authority to write rules governing the activities of other participants in the municipal finance market such as issuers and their agents (e.g., independent financial advisors, trustees, etc.).

Municipal securities also are exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 and are exempt from the registration and reporting requirements of the Exchange Act.

In adopting Section 15B of the Exchange Act, Congress provided in subsection (d) specific provisions that restrict the Board and the SEC from regulating the disclosure practices of issuers in certain ways.

Paragraph (1) of subsection (d) prohibits the Board (and the SEC) from writing rules that directly or indirectly (i.e., through dealer regulation) impose a presale-filing requirement for issues of municipal securities.

Paragraph (2) of subsection (d) prohibits the Board (but not the SEC) from adopting rules that directly or indirectly require issuers to produce documents or information for delivery to purchasers or to the Board. Paragraph (2), however, specifically allows the Board to adopt requirements relating to such disclosure documents or information as might be available from “a source other than such issuer.” The provisions of subsection (d) commonly are known as the “Tower Amendment.”

Priority of orders

At a meeting today and tomorrow in Philadelphia, the Municipal Securities Rulemaking Board plans to discuss proposed rule changes that would dictate the priority of retail and other customer orders in primary offerings, as well as where the board stands on its push to provide rating changes over its EMMA site.

MSRB executive director Lynnette Hotchkiss said there is “widespread agreement” by the 15-member board on the priority of orders proposal, which aims to ensure there is broad distribution of an issuer’s securities and that dealers honor an issuer’s definition of the retail order period.

At the same time, the proposal, which is pending before the Securities and Exchange Commission, would give dealers flexibility to get the best price for issuers while imposing record-keeping requirements “to allow an auditor to go in to reverse-engineer the deal and nail people if they didn’t abide by priority of orders or issuers’ desires or didn’t have appropriate disclosures,” Hotchkiss said in a brief interview this week.

“It’s a very complicated issue … but I don’t think the controversy is on the main substantive points,” she said. “Sometimes the board is simply arguing about the fact that this sentence doesn’t look quite right.”

Rule G-18 Execution of orders

Each broker, dealer and municipal securities dealer, when executing a transaction in municipal securities for or on behalf of a customer as agent, shall make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions. A broker, dealer or municipal securities dealer acting as a "broker’s broker" shall be under the same obligation with respect to the execution of a transaction in municipal securities for or on behalf of a broker, dealer, or municipal securities dealer.

Definition of "Municipal Advisory Activities"

MSRB considers banning dual role for underwriters

The Municipal Securities Rulemaking Board Tuesday said it is contemplating a rule change that would prohibit dealers from underwriting new negotiated or competitive bond issues if they served as the issuer's financial adviser on the transaction.

The MSRB is seeking public comment on the draft changes to its controversial Rule G-23 through Sept. 30. The proposal, which would completely reverse the existing rule, would eliminate what some supporters of the restrictions have described as routine business practices in certain states. Those include Colorado and Texas, in which dealer-FAs generate underwriting work by first serving as an issuer's financial adviser.

The proposal comes at the request of the Securities and Exchange Commission chairman Mary Schapiro. "Right now, a financial professional advising a municipality can guide the municipality towards securities tailored to his firm's advantage, then resign and act as underwriter," she said in a May speech. "This is a classic example of conflict of interest. … The board should change G-23 and forbid this practice."

MSRB executive director Lynnette Hotchkiss also noted that the draft changes come three weeks after financial regulatory reform legislation was enacted authorizing the board to oversee muni financial advisers and require them to adhere to a fiduciary duty rule.

"All financial advisers — dealers that act as advisers as well as independent advisers — will have a fiduciary duty to their issuer clients under the new federal financial reform law and removing any real or perceived conflicts of interest in such transactions is more important than ever," Hotchkiss said in a statement.

But dealers and industry groups yesterday were quick to express concerns about the proposal, warning that they believe the existing rule is fair and effective.

Hill Feinberg, chief executive officer of First Southwest Co., which has strongly opposed past consideration of changes to the rule, said there is no need to extend the restrictions to transactions that are competitively priced. In such deals, there is no conflict with a dealer-FA bidding on the transaction, he argued.

Feinberg said that his firm switches roles only on deals brought to market by issuers too small to attract bids from larger firms. The vast majority of such deals are priced competitively with only one or two bidders, he said, adding that he is unaware of any instances in which issuers have complained about the dealer-FA's participation in buying the securities.

Mike Nicholas, chief executive officer of the Regional Bond Dealers Association, said the proposal would make it "more cumbersome" for small municipalities to sell debt.

"The proposal would limit an issuer's options to get the lowest cost of financing and that doesn't make sense," he said. "It limits competition and options to issuers."

Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association's municipal securities group, said in a statement: "We believe Rule G-23, in its current form, strikes an appropriate balance between providing bond issuers with low-cost service and protecting them from potential conflicts of interest. The rule has been effective, and no compelling case has been made for amending the rule in such a drastic manner. We hope the MSRB will reconsider its proposal."

But issuer groups and non-dealer FAs have echoed Schapiro in warning that role-switching in general is fraught with conflicts of interest. Guidance approved by the Government Finance Officers Association in 2008 warns of an "inherent" conflict, while the National Association of Independent Public Finance Advisors has routinely called on the MSRB to tighten the rule. Since 2006, the board had twice declined to do so.

"NAIPFA believes that G-23 is inconsistent with the Dodd-Frank legislation that requires a municipal advisor's fiduciary duty to its client, the municipal issuer, and is pleased to see the MSRB's progressive step in revisiting this matter," Steve Apfelbacher, president of both NAIPFA and Ehlers & Associates in Roseville, Minn., said in a statement.

Robert Doty, president of American Governmental Financial Services in Sacramento, disputed that there is no conflict with a dealer-FA bidding in a competitive deal. He said it could structure a transaction for an issuer so that it is best suited to buy and market the bonds to its own clients, but that would not necessarily be in the issuer's best interests.

He also said that he has worked with many small, remote issuers and that if there are no bids for their bonds, it is because the FA isn't doing its job. "It's not unreasonably difficult, except when an issuer's credit is so bad that no one wants to touch it," Doty said.

Patrick Born, chief financial officer of Minneapolis, who helped write the GFOA guidance, said that the proposal reflects the expanded mission of the MSRB in overseeing a larger segment of the muni market that is much broader than just banks and broker-dealers.

"Now their point of view is much more balanced among all participants in the municipal market," he said. "I think that's progress."

It was unclear how many dealer-FAs switch roles to underwrite transactions. Kathleen McKinney, a shareholder at Haynsworth Sinkler Boyd PA in Greenville, S.C., and president of the National Association of Bond Lawyers, said there is heightened awareness among issuers about potential conflicts and a "strong desire" against role-switching. She said many issuer RFPs specify that issuers are looking for continuity throughout with the transaction with the FA.

Currently, the rule allows dealer-FAs to become underwriters in negotiated transactions if they disclose to the issuer possible conflicts of interest stemming from the role switch, disclose their expected compensation, and obtain the issuer's consent to the switch. In competitive deals, dealer-FAs must obtain the issuer's written consent before bidding on the bonds.

The rule also currently requires dealer-FAs that become underwriters or syndicate members to disclose the existence of their FA relationship with the issuer to customers who want to purchase the bonds.

But in seeking to prohibit such role-switching, the provisions regarding disclosures, terminations, and consents become "unnecessary and are eliminated," the board said in a notice Tuesday morning describing the draft proposal.

However, the draft proposal would add language to the rule that would allow dealer-FAs to switch roles in narrow circumstances, such as for certain financing transactions with governmental entities, like local government bond banks, where an FA may assist in placing an issuer's note or bond with a governmental entity. But such role-switching would only be allowed if the dealer-FA does not receive compensation other than for its financial advisory work and does not receive compensation for underwriting any contemporaneous transaction "directly or indirectly" related to the placement with the government agency.

Though no dealer-FA would be allowed to serve as a remarketing agent on a new floating-rate deal for which it has worked as financial adviser, the dealer-FA would be allowed to serve as "successor remarketing agent" on the issue at a later date as long as the FA relationship has been terminated for at least one year.

The board is seeking comment on several specific topics, including whether a dealer should be precluded for a specific timeframe from entering into an FA relationship with an issuer after underwriting one of the issuer's prior debt offerings. It also asks if there should be an exception from role-switching for dealer-FAs that participate in competitively bid transactions.

In addition, the MSRB asked: "Should a financial adviser be allowed to bid in a competitively bid transaction in which a failed bid had occurred? How would the situation be handled in which there is a failed bid and the financial adviser cannot step in to buy the bonds because of the prohibition? Is this a common occurrence?"

SEC officials declined to comment on the proposal. Asked about some of the industry's concerns about its breadth, MSRB general counsel Ernesto Lanza said in a statement that the SEC's concerns ran to both competitive and negotiated deals.

"We did recognize, however, that some market participants may have differing views on this subject, and the notice asks a series of questions on whether to include competitive offerings within the prohibition on switching roles to ensure that the pros and cons are considered before the MSRB takes final action."

MSRB deliberates on advisor registrations

The Municipal Securities Rulemaking Board’s executive director on Friday tried to allay some of the concerns nondealer financial advisers have about the regulatory burdens they may face under MSRB oversight.

Speaking at the annual conference of the National Association of Independent Public Finance Advisors, Lynnette Hotchkiss outlined the rules, recordkeeping requirements, and professional standards that the MSRB will likely mandate nondealer advisers adhere to as the board begins to regulate their industry.

But Hotchkiss stressed that the specifics remain up to the new, majority-public board that was seated Oct. 1 and will not formally meet to discuss policy issues for two more weeks.

MSRB raises muni trade fees

The Municipal Securities Rulemaking Board, which regulates the municipal bond industry, is set to add a $1 fee to each transaction in addition to hiking fees paid by dealers to 1 cent per $1,000 in securities.

The fees are expected to generate an additional $17 million in revenue for the MSRB. Bond dealers have been fighting the increases, saying they aren't justified for an agency that posted a budget shortfall of just $1.7 million in 2009.

The MSRB says the fees are necessary to help it absorb costs associated with implementing wide-ranging financial reform legislation passed by Congress over the summer. The legislation is set to expand the agency's authority, which is expected to also increase its operating costs.

Dealers previously paid $0.005 per $1,000 in securities. They now also will face new technology fees, which the MSRB hinted could be temporary.

"The MSRB will review it annually as part of its normal budgetary process to determine whether it continues to be necessary," the agency said Thursday.

The new fee structure goes into effect Jan. 1.

A municipal bond is a general-obligation bond issued by a state, county, city, town, village, possession or territory, or a bond issued by an agency or authority set up by one of these governmental units.

2009 muni trade data from the MSRB

The Municipal Securities Rulemaking Board (MSRB) today released its 2009 Fact Book, an annual sourcebook that analyzes trading data and statistics for the $2.8 trillion municipal bond market. The Fact Book includes analysis on nearly every trade reported to the MSRB by municipal securities dealers in the last five years and provides key municipal market statistics unavailable elsewhere.

This year's Fact Book includes for the first time interest rate resets information and trading statistics for auction rate securities and variable rate demand obligations. The MSRB began collecting this data in 2009. Also new to this year's Fact Book are lists of the most actively traded municipal securities and trading volume for newly issued securities.

The MSRB, which regulates municipal securities dealers, collects and disseminates official data about the municipal securities market as part of its mission to protect and educate investors. The MSRB makes municipal trade data available free of charge on its EMMA website. Daily and historical summaries of trade data based on security type, size, sector, maturity, source of repayment and coupon type are housed in EMMA's Market Statistics section. An electronic version of the MSRB 2009 Fact Book also is available free of charge on EMMA and at

First Southwest’s Michael Bartolotta Elected MSRB Chairman

Michael Bartolotta, vice chairman of First Southwest Co., a dealer financial advisory and underwriting firm, has been elected the new chairman of the Municipal Securities Rulemaking Board beginning Oct. 1, drawing concerns from non-dealer advisers that will fall under the board’s regulatory regime at the start of his term.

Bartolotta was elected chairman at the MSRB’s quarterly meeting in July, but the board did not announce his new post until Thursday evening.

The board said also that the vice chairman will be John Young 2d, managing director of municipal underwriting and public finance marketing at Samuel A. Ramirez & Co. It said it will announce the other new board members after the Securities Exchange Commission approves its proposal to expand the board.

Bartolotta will succeed Peter Clarke, managing director and vice chairman of tax-exempt capital markets at JPMorgan.

MSRB posts names of its 11 new members

The author of a seminal primer on municipal securities regulation, along with an attorney who successfully argued for Kentucky in the landmark Supreme Court case on states' preferential tax treatment, are among the 11 new members of the Municipal Securities Rulemaking Board.

The board posted the names of its new members on its Web site this morning to comply with the mandate that it become a majority-public self-regulator under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Eight of the new members are "public representatives," while three are non-dealer municipal advisers.

As part of its transformation into a majority-public self-regulator, the board expanded to 21 members, with 11 public officials and 10 regulated officials.

The public members include Robert Fippinger, senior counsel at Orrick, Herrington & Sutcliffe LPP in New York, who is the author of the two-volume "The Securities Law of Public Finance," as well as C. Christopher Trower, the owner of in Atlanta, who successfully argued for Kentucky in the Kentucky v. Davis Supreme Court case in 2007 that reaffirmed more than 40 states' preferential tax treatment of their own debt.

The other new public members are: Milroy Alexander, former chief executive officer of the Colorado Housing and Finance Authority; Sheryl Bailey, deputy county administrator for management services in Chesterfield County, Va.; Jay Goldstone, chief operating officer of San Diego; Robert Jackman, founder and trustee of the Brooke Jackman Foundation Inc. in New York; David Madigan, chief investment officer at Breckinridge Capitol Advisors in Boston; and Benjamin Thompson, a founding principal at Samson Capitol Advisors in New York.

The three advisers will join seven bank and broker-dealers from the previous industry-led board whose terms did not expire Thursday. They are: Adela Cepeda, president of A.C. Advisory Inc. in Chicago; Robert Lamb, president of Lamont Financial Services Corp. in Wayne, N.J.; and Noreen White, co-president of Acacia Financial Group in Montclair, N.J.

The new public representatives join the three non-dealers from the previous board: Frank Thomas Howard, executive director of financial management in Kentucky's finance and administration cabinet; Kathleen McDonough, former senior managing director of Ambac Financial Group in New York; and Mark Muller, senior vice president and municipal portfolio manager at Loews Corp. in New York.

They join three continuing bank representatives: Michael Bartolotta, vice chairman at First Southwest Co. in Dallas, who is chairman of the MSRB for its new fiscal year; Martin Vogtsberger, managing director and head of institutional brokerage at Fifth Third Securities Inc. in Columbus, Ohio; and Kevin Willens, managing director at Goldman, Sachs & Co. in New York.

The four continuing securities firm representatives are: Stanley Grayson, vice chairman and chief operating officer at M.R. Beal & Co. in New York; Stephen Heaney, managing director and head of public finance at Stone & Youngberg LLC in Los Angeles; Alan Polsky, senior vice president at Dougherty & Co. in Minneapolis; and John Young 2d, managing director at Samuel A. Ramirez & Co. in New York.

SEC hearing on municipal underwriting, July 15, 2009

Open Meeting on Wednesday, July 15, 2009 at 10:00 a.m., in the Auditorium, Room L-002.

The subject matter of the Open Meeting will be:

The Commission will consider a recommendation regarding amendments to Rule 15c2-12 ("Rule") under the Securities Exchange Act of 1934 ("Act"), concerning the responsibilities of a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities and interpretive guidance intended to assist municipal securities issuers, brokers, dealers and municipal securities dealers in meeting their obligations under the antifraud provisions of the Act.

MSRB Files Disclosure Proposals Bond Buyer, July 14, 2009


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