Keynote Address: The Evolving Landscape of Muni Market Regulation
Good afternoon. I’d like to thank the Bond Dealers of America for the opportunity to speak with you today as Chair of the Municipal Securities Rulemaking Board. Over the next twenty minutes or so, I’m going to focus on what it means to be a self-regulatory organization in a time of profound evolution and modernization of financial markets. And we’ll leave five or ten minutes at the end for any questions you may have.
The MSRB’s Board represents every segment of the municipal bond market, including issuers, bond dealers, municipal advisors, investors, and members who represent the public. As many of you know, my day job is Head of Municipal Debt Capital Markets and Capital Solutions at Citigroup in New York, but let me make clear that we are not a “Wall Street Board.” MSRB directors come from all over the country and work at large and small organizations as dealers, municipal advisors, institutional investors and issuers. The Board is accountable for representing the public interest and making decisions that protect investors and issuers and promote the fairness and efficiency of the market.
That’s the bone-dry introduction you might expect from a regulator. So let me put a little meat on the bone and tell you what gets me really excited about our market. And I’d like to start my story with dramatic events overseas, not Ukraine, though I am sure all of us are watching those events closely, but a different Central and Eastern European nation that may surprise you: Slovenia.
During this global pandemic when almost all of us had to work from home – and some of us have been fortunate enough to be able to work from anywhere – my family and I spent several months in this small country that was once part of the Austro-Hungarian Empire, later part of Communist Yugoslavia and is now a prosperous and independent member of the European Union, NATO, and the world financial system. My wife was born there, and we were fortunate to stay with her parents who still live in her childhood home.
You walk through Slovenia’s cities and countryside like through the pages of a history book, mindful of the ravages of World War I and World War II, and of Yugoslavia’s violent break-up 30 years ago that foreshadows today’s headlines.
I was just a kid in elementary school during that Balkan war. And for my kids, it’s even more remote from the Slovenia we see today: A technologically advanced and globally connected society where people enjoy the benefits of democracy, economic opportunity and market institutions.
From Slovenia, you are just a few hundred miles west of the borders of Ukraine, where millions of refugees are fleeing the Russian invasion. Where Ukrainian citizens rose up in the past decade to overthrow a corrupt regime. Where they are bravely fighting today to defend their country and their freedom. For the right to be part of a democratic society that upholds human values. To be a member of the European Union and international institutions. To be governed by the rule of law. And to be part of the global economy and market system that the United States has done so much to promote. At its heart, that system is built on rules and trust.
This global perspective, this historical lens, does much to clarify both the uniqueness and the universality of the institutions and norms that have developed over time here in America, and that we benefit from today. One of those is surely our long tradition of local government and community financing, and the market-based system of rules and self-regulation that created the conditions for municipal securities to grow into a $4 trillion engine of capital formation that has earned the trust of investors from around the world.
Our market is taking on more societal relevance than ever as our leaders and citizens come together to support a once in a generation investment in our nation’s infrastructure. With business travel coming back, I’ve had the opportunity to transit through the rebuilt LaGuardia Airport. Most of you have had the misfortune at some point of experiencing the dark, dingy, dilapidated embarrassment that was the old LaGuardia. Well, now it’s been torn down and rebuilt to give New York a new, state of the art airport. It’s the largest public-private partnership in U.S. history, financed in large part by municipal bonds.
And 3,000 miles away, on another recent trip, I found myself driving across the rebuilt San Francisco-Oakland Bay Bridge, which suffered major damage in the 1989 earthquake. It is now the widest bridge in the world, and it is engineered to withstand the largest earthquakes. It is also the largest infrastructure project in California history – and financed in large part by municipal bonds.
Let’s pause to consider how remarkable it is that local governments and transportation authorities could raise so many billions of dollars from investors, not just here in the United States but from around the world. And let’s appreciate the unbelievably and historically low cost of capital, for investments that will generate economic growth and improve the quality of life in those communities for generations to come.
The trust in the municipal bond market that made this possible did not come about overnight, or by accident. It’s the product of two centuries of local debt financing and decades of rules, market practices, institutions and transparency that create the confidence to invest – in bridges and airports, schools and health facilities, safe streets and safe drinking water, green playing fields and green buildings. The things that make life better today and that create a better future tomorrow.
And that is our vision at the MSRB: We give America the confidence to invest in our communities. That confidence is more important than ever at times of uncertainty and challenge for public health, economic resilience and global markets, and as we address national priorities to repair and rebuild our physical infrastructure, and strengthen the social fabric as well.
That is the vision that you enable, as America’s bond dealers, essential to the functioning and efficiency of this market that experienced a record $500 billion dollars in new issuance during one of the most challenging years for the capital markets in recent memory.
Make no mistake: Your work matters, and so do the institutions, traditions and trust that make your work possible.
And that is the vision for our self-regulatory model of regulation, which relies on the knowledge of experts steeped in the characteristics of a securities market that is like no other.
The prevailing estimate is that over 50,000 state and local governments in the U.S. have issued municipal securities, with approximately one million different securities outstanding, many of them held in the portfolios of long-term “buy and hold” investors. No other capital market encompasses so many issuers and so many different securities.
The self-regulatory model for municipal securities has always been predicated on the recognition by Congress of this market’s unique characteristics. Our model of regulation is the legacy of several historic financial crises, and it has adapted to changing times and stood the test of time.
In the 1930s, in the aftermath of a stock market crash and in the midst of the Great Depression, the Securities Act and the Exchange Act established the statutory foundation for tackling fraud in the municipal securities market.
On the heels of New York City’s fiscal crisis in the 1970s, which would have been the largest municipal default in U.S. history – Congress established the MSRB as the primary rulemaking authority for the municipal securities market. Subject to oversight by the U.S. Securities and Exchange Commission, the MSRB was granted the authority to create rules and associated guidance establishing fair practices and procedures for the securities firms and banks that are dealers in the municipal securities market.
And following the 2008-2009 global financial crisis, the Dodd-Frank Act expanded the MSRB’s mission to include the protection of issuers by granting it rulemaking authority over the activities of municipal advisors.
The through-line in all of this has been America’s capacity for self-correction, and the self-regulatory nature of our market. This has combined with strong checks and balances established by Congress that help to mitigate potential conflicts of interest and increase public trust in the SRO model.
· One important check? The MSRB has authority to write rules, but our rules are subject to review and approval by the SEC.
· Another is that the MSRB involves industry professionals, but has majority public board representation.
· The MSRB establishes regulations for dealers and advisors, but the SEC, FINRA and other bodies are charged with enforcement.
· And finally, the MSRB establishes transparency systems – the free EMMA website – but federal regulators are prohibited from setting disclosure requirements on state and local governments and other muni bond issuers.
Now it’s always important to ask why things are the way they are: Why did Congress establish the MSRB and not just direct the SEC to regulate municipal bonds? Wouldn’t that have been simpler? And what makes the self-regulatory model best suited for upholding the public interest and success of the municipal securities market specifically?
Well, Congress concluded that federal regulation alone would be cost-prohibitive and inefficient, and given the complexities and nuances of this market, the SRO model would provide a workable balance between federal and industry regulation. With the SRO model, the muni market would be supervised by a specialized organization with a deep understanding of market practices, and with knowledgeable SRO staff and board members involved in the oversight of regulated firms’ activities.
Though self-regulation has its critics, Congress has repeatedly scrutinized the SRO model and affirmed its benefits. And as a country we’ve made adjustments along the way to strengthen SRO accountability and governance.
The MSRB constantly reviews its performance as an SRO. I can tell you that our Board deliberations go to great lengths to ensure that all viewpoints are represented as we adapt and modernize the regulatory framework in the face of dynamic and evolving issues of interest to our market. That process includes extensive public and industry input through formal requests for comment, and through informal discussions with our stakeholders like the BDA and its member firms. It also includes the development of the MSRB’s strategic plans – most recently, our four-year strategy that went into effect on October 1 of 2021. Let me take a few minutes to talk about our new strategic plan at a high level.
Our new strategic plan has a strong focus on regulatory modernization and continued investment and improvement in transparency systems and market data innovation – always with a commitment to upholding the public’s trust. The plan, which was developed with input from our stakeholders, is available for everyone to review on the MSRB’s website. It reflects our mission to protect and strengthen the municipal bond market, enabling access to capital, economic growth, and social progress in communities across the country. Our strategy positions the MSRB to advance key priorities for rules, tech and data and anticipate and address evolving issues and potential harms for investors and issuers.
We strongly believe that the feedback we received from the BDA and other stakeholders during the Board’s planning process helped us to improve the outcome for the strategic plan and ultimately enhance the efficiency and impact our market can deliver.
As we emerge from the COVID-19 pandemic, communities need to drive economic recovery, invest in resilient infrastructure, provide our kids with a world class education, mitigate environmental risks, and generally do things that create a better life.
The financing needs for these priorities and the projects that will be made possible by the Infrastructure Investment and Jobs Act approved by Congress and signed into law by President Biden will continue to drive strong new issuance of municipal securities and demand from investors attracted to these bonds.
This makes it an especially important time for the MSRB to review our regulatory framework and do everything possible to fulfill the MSRB’s Congressional mandate.
Our Market Regulation strategic goal focuses on modernizing our rulebook to enable efficient compliance. Among the actions the MSRB is committing to as part of this plan:
· We will anticipate and address harms to investors, issuers and the public interest, and identify emerging risks and issues to keep pace with a dynamic and evolving market.
· We will conduct a comprehensive and holistic review of interpretive guidance in order to update guidance to reflect current market practices. And we will archive guidance that is no longer relevant and develop new guidance to facilitate regulatory compliance; and
· We will engage with a representative cross-section of market participants and the public throughout the regulatory process to seek diverse perspectives and data that inform our rules.
As you know, the MSRB engages with the SEC and FINRA to provide expert insights on the municipal securities market. This dialog facilitates understanding and informs the fair examination of regulated entities and enforcement of the MSRB’s rules. We continually consider the views of market participants when providing the SEC with feedback, for example, on rulemakings for fixed income electronic trading platforms and direct placements of municipal securities.
We’ve also heard loud and clear from the marketplace on the need to couple our investment strategy with disciplined budgetary management. We’re proud of the MSRB’s self-funding revenue model that goes hand in hand with self-regulation and allows us to operate without a penny of taxpayer money. By the end of this fiscal year, we will have returned $19 million in excess reserves to dealers, all while continuing to increase our investment in data and technology initiatives that will deliver significant value for regulated entities and the overall market. With the benefit of your input, we’re taking steps to change our approach to fees in order to mitigate the impact of market variability, providing a better mechanism for effectively managing reserve levels. We will shortly be seeking SEC approval to implement this sustainable financial model that will allow us to adequately fund future expenses.
Let’s talk about those investments in our digital future. Fifteen years ago, the MSRB revolutionized market transparency in the municipal market by launching the EMMA website. Our Market Transparency strategic goal is focused on the continued enhancement of EMMA as a premier municipal market transparency platform and the modernization of the MSRB’s technology systems.
As part of our last strategic plan, the MSRB executed an enterprise-wide migration of all its technology systems and market data to the cloud. And with EMMA now in the cloud, we will increasingly be able to leverage data to create powerful analytical tools that empower market participants and other data users to better identify, visualize and understand market trends.
Ultimately, the user experience on EMMA is only as good as the quality of the data. That is why in January of this year we launched EMMA Labs, an “innovation sandbox”, if you will, to evaluate the utility of prototype data analytics innovations and speed development of enhancements to the regulated EMMA website.
What is really different about EMMA Labs is we are inviting market participants into this regtech sandbox to collaborate with MSRB staff to co-create the future of municipal market transparency. I am personally very excited about EMMA Labs and its potential to drive collaboration with the broker-dealer community, issuers, investors and the public. This opens up a whole new technological pathway for engaging with our stakeholders. Any individual can create a free EMMA Labs account to provide feedback on prototypes, and we welcome ideas for future Active Labs, tools and partnerships. If you haven’t already done so, I invite you and your firms to check it out and sign up at emmalabs.msrb.org.
Our stakeholders are fully supportive of enhancements to EMMA and the Board has made it a centerpiece of our strategic plan. We envision an exciting future as EMMA evolves to facilitate the use of municipal market data for dynamic comparison, regulatory compliance and deeper market analysis.
Finally, I would like to turn to our strategic pillar of public trust. Communities across the country access capital in this market to enable economic and social progress and build a more sustainable and resilient future. The municipal bond market has financed trillions of dollars in environmentally and socially impactful projects over the past two centuries.
Across the world, capital is being catalyzed as never before for ESG investments and business, financial and government leaders are engaged on strategic and systemic issues for achieving sustainable development goals. In the past decade, tens of trillions of dollars have flowed into ESG-related investments around the world. At the COP 26 meeting last year, financial institutions – including my firm, and some of yours – with a combined $130 trillion in financial assets, committed to finance the transition to a net zero carbon economy as part of the Glasgow Financial Alliance for Net Zero. Credit rating agencies have integrated environmental, social and governance credit factors in their rating processes, and other market-based ESG scores and ratings have been developed to serve the rising information needs of investors and other market participants.
As the pace of ESG-related projects and capital formation accelerates across the capital markets, it raises important questions for the municipal market. It is undeniable that investors are increasingly adopting sustainable or impact investing strategies and the market for ESG investment products has grown significantly. And, of course, it is undeniable that U.S. cities, states and territories are being impacted by climate change and extreme weather events and are in need of resilient infrastructure to protect their residents and businesses. Green bonds and other ESG-related bonds issued in the municipal securities market can – and have been – used to fund clean energy and water projects, educational attainment, heath care outcomes, affordable housing, and economic redevelopment.
That is the market context for the Board’s decision that it is our responsibility to facilitate public dialog and serve as a forum for discussion and analysis of the important of environmental, social, and governance practices for our market. As you know, the MSRB issued a Request for Information back in December to solicit public perspectives on disclosure of ESG-risks and the labeling and marketing of municipal securities with ESG designations.
We will continue to engage with stakeholders, including the Bond Dealers of America, which has submitted a thoughtful and informative perspective on these issues. We hear you that this area is still evolving, and that rushed and ill-informed regulatory intervention could do more harm than good. As someone who works in municipal debt capital markets, I have a first-hand understanding of the complexities involved in ESG bond issuance. That’s why it was so important for us to hear from all corners of the market about the challenges and opportunities posed by both ESG-related disclosure and designated bonds. We have deep respect for the collaborative work of industry groups representing issuers, dealers, municipal advisors and analysts to develop and advance best practices in this area. And we respect the concerns raised by asset managers, pension funds, insurance groups and other investors who are committing billions of dollars to these investments, and from retail investors and members of the public – who have made their view clear that much work remains to satisfy their needs for complete and comparable information to make informed decisions. With our request for information, we took one important step forward in our goal of promoting dialog and developing effective solutions and best practices that strengthen our market. We look forward to continuing that dialog in the months to come.
Getting back to where we began, the MSRB is a self-regulatory organization that encompasses every part of this diverse and complex market. I am personally excited to serve as Chair of the MSRB and engage with the full range of voices that speak for our market and the source of its power: trust in rules, transparency and data, and trust in local self-government and the ability of our citizens to create and finance their future.
Our market is, as I said, a shining example to the world. And as I look out at the market today from my vantage point at Citi, I would add a general observation that volatility in the first quarter of 2022 has once again put our market under stress. By some measures it was the worst quarter for municipal investors since the 1980s. The rapid repricing of municipal bonds relative to Treasuries and even corporates has also been a challenge for municipal issuers, who are quickly adapting to this new rate environment with changes to prevailing coupon, call and maturity structures. But despite the volatility, the market has remained open and resilient. Just yesterday we handled nearly $2 billion in bid wanted volume, and continue to see weeks of $10 billion plus in primary market issuance. I’d be happy to expand on that if we have time for questions.
I’d like to close by reminding you of what remains constant at the MSRB, even with the constantly changing landscape. Our highest priority is to fulfill the MSRB’s Congressional mandate to protect investors, issuers and the public interest by promoting a fair and efficient market and ensuring access to capital. The Board will continue to engage with stakeholders through an open and inclusive regulatory process, and ensure accountability to the SEC, Congress and the American public.
That is the MSRB’s mandate and we will fulfill it as we address challenges and strengthen our market and the opportunities and impact it can deliver.
Thank you. I would be happy to take a few questions, reminding you that my views are my own and do not necessarily represent those of my fellow Board members or the staff of the MSRB.