Back to top

Contact: Jennifer A. Galloway
             (703) 797-6675


Alexandria, VA ­– The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting January 25-27, 2012 in Miami, FL, where it advanced proposals to address issues related to investor and municipal entity protection, approved a long-range plan for support of the MSRB’s market transparency systems, and further developed its work to address potential conflicts of interest in connection with municipal securities transactions.  

Ensuring that retail investors receive fair pricing in municipal bond transactions is a priority for the MSRB. At its meeting, the Board agreed to publish a rule proposal that would increase requirements on underwriters related to the distribution of new bonds to retail investors. Municipal bond issuers often seek to promote distribution of their bonds to retail investors. The MSRB believes additional requirements to ensure that underwriters honor issuers’ intentions with respect to so-called retail order periods will help provide fairer pricing for retail investors.

“The MSRB has taken a number of steps in recent years to ensure that retail investors receive fair pricing when buying or selling bonds, an issue that was also addressed by the Government Accountability Office in its report published last week,” said MSRB Chair Alan Polsky. “We believe that our proposal will serve as a powerful additional step toward fairly balancing the needs and interests of both retail investors and issuers of municipal securities.”

In another retail investor initiative, the Board agreed to seek approval from the Securities and Exchange Commission (SEC) to establish new regulations covering the activities of broker’s brokers and dealers that use them. Broker’s brokers act as financial intermediaries between selling and bidding dealers of municipal securities and can have a significant impact on the prices retail investors pay in the municipal market. The new MSRB rules would establish guidelines for broker’s brokers to satisfy their duty to make a reasonable effort to obtain a fair and reasonable price for municipal securities.

The Board also continued to address potential conflicts of interest related to municipal securities transactions, an issue it has been working on for some time. The SEC is currently considering an MSRB rule proposal that would require underwriters of municipal securities to provide their issuer clients with clear disclosure of risks and conflicts of interest. Today the MSRB is submitting comments to the SEC in response to concerns about the potential burdens of the proposal.

The existence of financial incentives to and from underwriters and municipal advisors in connection with new issues of municipal securities can result in potential conflicts of interest that erode the integrity of the municipal market.  At its meeting, the Board agreed to issue a concept proposal on whether to propose requiring public disclosure – through the MSRB’s EMMA® system – of financial incentives received or paid by underwriters or municipal advisors from or to any third party in connection with an underwriting or municipal advisory engagement with a municipal entity.

“There is clearly a need to address the potential for undue influence resulting from undisclosed payments from third-parties in connection with engagements with state and local governments,” said Chair Polsky. “Such influence has been cited in a series of bid rigging cases across the country and as one of the potential causes of the hardships faced by Jefferson County, Alabama, and other governmental entities. The MSRB is seeking information from the public about developing a disclosure regime for underwriters and municipal advisors that would shine light on relationships that could influence the professional judgment of underwriters and municipal advisors, and negatively affect investors and issuers alike.

Another issue the Board addressed that affects the rights of bondholders is the process of changes to bond documents. The Board is concerned that underwriters are providing bondholder consent to document changes, such as elimination of a reserve fund or change in priority of debt service, in cases that could adversely affect existing bondholders. The Board agreed to publish a proposal to identify particular circumstances in which underwriters would be prohibited from consenting to amendments to bond authorizing documents because of the potential impact on existing bondholders.

Issuers have a variety of financing products available to satisfy their funding needs, including bank loans. The Board agreed to publish a notice encouraging issuers to voluntarily disclose the salient terms of their bank loans to the EMMA system, which the Board agreed to modify to better categorize these disclosures.

The Board also agreed to seek SEC approval on a revised definition of “sophisticated municipal market professional” to better reflect improvements in the availability of municipal market information and to more closely harmonize the treatment of sophisticated municipal market professionals with recent changes to the Financial Industry Regulatory Authority’s (FINRA) rules on suitability for institutional accounts. The proposed updates are a precursor to the MSRB’s evaluation of its rules regarding electronic trading systems.

As part of the MSRB’s mission to ensure a fair and efficient municipal market, the MSRB is addressing the availability of consistent pricing information for new bond issues. The Board agreed to advance a proposal to prohibit underwriters from using the not-reoffered (NRO) bond designation with third-party information vendors without accompanying price and yield information.  Underwriters must report such pricing information to the MSRB, which displays it on the EMMA website. Eliminating the ability for underwriters to mask price and yield by using the NRO designation will provide full price discovery to the market and remove existing inconsistencies of information flow.

Consistent with the MSRB’s goal to provide full and free electronic access to municipal securities documents, the Board agreed to publish a concept release to collect additional public input on details related to broadening public access to 529 plan disclosure documents. The MSRB first raised the concept of providing electronic access to 529 plan disclosure documents to customers last year and the concept release will precede formal rule proposals or information system changes.

Providing transparency of information and data to the marketplace is a vital part of the MSRB’s market protection activities, particularly for retail investors. The MSRB’s EMMA website is the official source of primary and secondary municipal market disclosures and the primary source of retail investor access to data and documents. Over the last year, the MSRB has, with market input, been developing a long-range plan for further development of the systems that support EMMA’s operations.  At this meeting, the Board approved a long-range plan to guide the evolution of the MSRB’s market transparency products in a manner that will fulfill the MSRB’s statutory mandate and allow it to continue to deliver the transparency on which the market now depends. The MSRB will release details of the plan next month.

“This plan establishes a long-range vision for EMMA and all the systems that support it.  The plan will provide clear direction for the MSRB’s initiative roadmap for system enhancements over the coming years,” Chair Polsky said. “We encourage public comment on the plan so that as we move forward with specific initiatives, the MSRB has the best information with which to make decisions affecting the fairness, efficiency and transparency of the market.”

In conjunction with its Board meeting, the MSRB held an outreach event for municipal market professionals in the Miami area where Board members and staff discussed current initiatives and rulemaking for dealers and municipal advisors.

The MSRB Board of Directors meets next on April 25-27, 2012 in Alexandria, VA.