Communities have long raised capital from investors to build bridges, schools and other public projects. The issuance of municipal bonds dates back to the early 1800s. For much of this history, banks, insurance companies and other large institutional investors were the primary customers for municipal bonds. Over time, participation by communities and individual investors in the offer and purchase of municipal bonds developed into a multi-trillion-dollar market.
In the 1970s, the expanding market attracted increasing numbers of comparatively less sophisticated individual investors. The absence of any regulations on sales practices, documentation or licensing led to costly consequences for municipal securities investors. Unscrupulous dealers seized on the opportunity to prey on investors using high-pressure sales tactics. Meanwhile, some states and municipalities were racking up high deficits. Fraudulent and manipulative activity by some dealers drew the attention of the more scrupulous industry practitioners and lawmakers in Washington.
With the support of the industry and the Securities and Exchange Commission (SEC), Congress created the Municipal Securities Rulemaking Board (MSRB) in June 1975. The timing coincided with one of the largest municipal issuers, New York City, coming to the brink of default. Congress charged the new self-regulatory organization with creating rules 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 municipal securities, and, in general, to protect investors and the public interest.”
The MSRB immediately set out to fulfill this Congressional mandate, developing standards of uniform practice, fair practice and transparency for municipal securities dealers. The creation of uniform standards of trading and delivery helped remove impediments to the development of systems of automated clearance and settlement. MSRB market leadership facilitated an orderly transition into the digital age in the early 1980s, when paper bearer bonds gave way to electronic book-entry only bonds.
New York City’s crisis was neither the first nor the last scare to strike the municipal market. In 1983, the Washington Public Power Supply System, whose acronym is aptly pronounced “whoops,” defaulted on more than $2 billion in municipal bonds. The SEC, with support from the MSRB, created SEC Rule 15c2-12 to ensure that, unlike the deal team for WPPSS, dealers on other transactions receive and adequately review the terms and risks laid out in the official statement prepared by the issuer. Shortly thereafter, the MSRB developed a rule requiring disclosure of official statements to investors and created the Municipal Securities Information Library to collect disclosure documents and make them available to the public on microfiche.
MSRB continued to monitor the market for new areas of concern, identifying the use of political contributions to secure underwriting business as a major threat to the integrity of the market. In 1994, the MSRB created Rule G-37, its landmark restrictions on pay-to-play practices, which served as a model for other rules addressing the issue of pay-to-play, including New York State’s prohibitions on pay-to-play activities involving public pension funds and the SEC’s rules for investment advisers.
That same year, Orange County, California declared bankruptcy after a series of risky investments left the county overextended. The situation had widespread effects on the trading activity of municipal bonds, prompting calls for stronger disclosure requirements and greater accountability around new and complex investment instruments.
The following year, the MSRB introduced daily trade reporting for trades between dealers and added reporting of customer trades a few years later. By 2005, the MSRB and the industry had the technological capacity to transition to the collection and dissemination of trade reports in real-time.
Technological innovation also enabled the MSRB to make perhaps its single greatest contribution to the municipal market — the launch of the Electronic Municipal Market Access (EMMA®) website. The EMMA website has served as the official source of free public access to municipal bond trade data and disclosure documents since 2009. EMMA has evolved into an indispensable resource for the market, with interactive tools to help users understand municipal trade prices and access current information about their bonds.
In recognition of the MSRB’s success with protecting municipal securities investors, Congress in 2010 broadened the MSRB’s original investor protection mandate to explicitly include the protection of state and local governments and other municipal entities. To assist the MSRB in fulfilling this expanded mandate, Congress extended the jurisdiction of the MSRB to include the regulation of municipal advisors, a previously unregulated class of professionals who provide advice to municipal entities on public finance matters.