About the MSRB

The Municipal Securities Rulemaking Board was established in 1975 by Congress to develop rules regulating securities firms and banks involved in underwriting, trading, and selling municipal securities- bonds and notes issued by states, cities, and counties or their agencies to help finance public projects. The Board, which is composed of members from the municipal securities dealer community and the public, sets standards for all municipal securities dealers. Like the New York Stock Exchange or the National Association of Securities Dealers, Inc., the Board is a self-regulatory organization that is subject to oversight by the Securities and Exchange Commission (SEC).

This system of regulation is unique- the only example of "functional" or "product-line" regulation. It involves both securities firms and banks in the development of standards that benefit all participants in the municipal securities market- issuers, dealers, and investors. The structure for examination and enforcement of Board rules uses existing organizations- minimizing its cost.

Creation of the Board

Prior to the creation of the Board, the municipal securities industry generally held itself to high standards of conduct and developed traditions designed to protect customers. Banks and securities firms engaged solely in municipal securities transactions were not required to register with any regulatory organization or the SEC. As a result, activity in the municipal securities market was largely unregulated.

In the early 1970s, members of the industry sensed that these traditionally rigorous standards could not easily be maintained in the face of a rapidly expanding market without some formal system of regulation. Individual investors, pushed into higher income tax brackets by inflation and often less sophisticated than institutional investors, were attracted by the tax-exempt features of these securities and entered the market in great numbers. At the same time, the growing volume of new issues of municipal securities led to a sharp increase in the number of dealers, a small portion of whom did not subscribe to industry standards.

With the support of the industry and the SEC, Congress passed the Securities Acts Amendments of 1975, which, among other things, created the Municipal Securities Rulemaking Board.

Board Structure

The Board consists of 15 members- five representatives of bank dealers, five representatives of securities firms, and five public members not associated with any bank dealer or securities firm. At least one public member must be representative of issuers and one of investors to ensure that all perspectives of the municipal securities market are represented.

Board members serve staggered three-year terms- each year five new members are elected. In addition, Board members elect a chairman and vice-chairman who serve one-year terms. The Board maintains a full-time staff in Washington, DC that handles its day-to-day operations.

Board Funding

As a self-regulatory organization, the Board is not funded by the Federal government. All Board operations are financed by fees and assessments paid by the dealer community.

Board Rules

The Board is authorized by Congress to make 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."

Scope of Board Authority

The Board has authority to make rules regulating the municipal securities activities of banks and securities firms only. It does not have authority over issuers of municipal securities or investors.

Board Rulemaking

The Board has broad rulemaking authority over municipal securities dealers' activities, including:

• professional qualification standards
• fair practice
• recordkeeping
• confirmation, clearance, and settlement of transactions
• the scope and frequency of compliance examinations
• the nature of securities quotations.

The Board has adopted rules in each of these areas as well as for the dissemination by dealers of information supplied by issuers of new issue securities.

The basic concern of Congress for equal regulation of all municipal securities dealers has guided the Board in its rulemaking activities. Whenever possible, the Board's rules are intended to apply to all municipal securities dealers in a uniform and consistent manner. The Board also has sought to write rules that give clear guidance to industry members and enforcement organizations.

The Board continually seeks to streamline and improve its rules to meet changes in the municipal securities market. To make its rules more effective or clearer, amendments sometimes are needed. At other times, interpretation and education can clarify the rules.

Enforcement of Board Rules

Responsibility for examination and enforcement of Board rules is delegated to the National Association of Securities Dealers, Inc. for all securities firms, and to the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Comptroller of the Currency for banks.

Rulemaking Procedure

There are several steps in the Board's Rulemaking procedure. Generally, when considering the adoption of a proposed rule, the Board first publishes it in MSRB Reports, its newsletter. The Board often provides a comment period of up to 60 days to provide the greatest possible opportunity for industry and public participation. Comments on rule proposals have an important impact on the Board's deliberations and often result in modifications of a proposed rule.

Upon adoption of a rule by the Board, it must be filed with the SEC for review. The law then requires publication of the rule in the Federal Register and another comment period before the SEC may approve it.

The rulemaking process may not end with SEC approval. Given the diversity of the industry and the number of organizations responsible for enforcement, further interpretation and educational efforts by the Board are sometimes needed to ensure that the rules are followed in a manner consistent with the Board's intentions.

Board Communications

To keep the industry and the public informed, the Board distributes MSRB Reports. MSRB Reports, the Board's newsletter, contains all proposed rules, interpretations, rule filings with the SEC, SEC approvals, and dates when approved rules will become effective.

The Board and its staff often meet with trade organizations, industry groups, and local bond communities to provide opportunities for direct dialogue. In addition, the Board's staff are available during business hours to answer questions about the application of Board rules.

The Board believes these activities result in greater participation in the rulemaking process. Such participation is vital to the smooth implementation of rules appropriate to the industry.