MSRB Urges Expansion of Exemption for Governmental Obligations Under Proposed Federal Proprietary Trading Rule

Date: January 31, 2012

Contact: Jennifer A. Galloway, Chief Communications Officer
             (703) 797-6600


The Municipal Securities Rulemaking Board (MSRB) today urged expansion of the exemption for governmental obligations in a proposed federal banking rule on proprietary trading because the MSRB is concerned that a significant class of municipal securities would be excluded from the exemption, resulting in a “bifurcation” of the municipal securities market without benefiting the soundness of the banking system.

In a letter filed today with the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, the MSRB responded to a proposed rule, also known as the Volcker Proposal, that would implement a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act that contains certain prohibitions and restrictions on the ability of banks and their affiliates to engage in proprietary trading.

The MSRB urged the agencies to broaden the “governmental obligations” exemption from the proposed rule’s restriction on proprietary trading to include all “municipal securities” as defined in the Securities Exchange Act of 1934.  The MSRB feels strongly that this change is needed to avoid a bifurcation of the municipal securities market that will, in the MSRB’s view, achieve no meaningful additional benefit to the safety and soundness of the banking system,” the MSRB’s letter says.  

The letter points out that “the narrowness of the ‘government obligations’ exemption is not mandated by the statute” and that, “In fact, banking and securities law definitions of ‘political subdivision’ that pre-dated the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),  and that gave expansive meaning to the words ‘political subdivision’ to effectively parallel the definition of ‘municipal securities’ under the Exchange Act, might well have been considered by Congress in drafting this provision of the Dodd-Frank Act.”

The MSRB told the agencies that, “It is essential that the governmental obligations exemption be expanded, because the other exemptions from the proprietary trading prohibition (for underwriting activities, trading on behalf of customers, and market making activities) are structured in such a way that they are not useful in the municipal securities market.  The MSRB is respectfully of the view that, without modification, the Volcker Proposal will serve as an impediment to a free and open market in municipal securities to the detriment of investors and issuers of municipal securities.”

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.