A little-known provision in the Dodd-Frank financial reform law expanded the board of directors of the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that oversees muniland. The board used to be composed of employees of municipal bond dealers and big banks, and many would say privately that MSRB rulemaking favored industry players rather the public. Dodd-Frank radically altered the board’s composition to balance representation from the municipal industry and the public. The law firm Duane Morris explained the change (emphasis mine):
The [Dodd Frank] Act alters the composition of the MSRB so that a majority of the minimum 15-member Board are independent of municipal securities brokers, dealers or advisors. The new composition of the Board meets the stated goal of the Act, to ensure that the public interest is better protected on the Board. The Board has a new charge to protect the public interest in addition to municipal entities and investors. The Board will consist of eight individuals known as “public representatives,” independent of any municipal securities broker, municipal securities dealer or municipal securities advisor. At least one of the public representatives must be a representative of institutional or retail investors in municipal securities. At least one of the public representatives must also represent municipal entities, and another of the public representatives must have knowledge or experience in the municipal securities industries.
The remaining seven “regulated representatives” will consist of individuals associated with a broker, dealer, municipal securities dealer or municipal advisor. At least one of the regulated representatives will be a “broker-dealer,” representative of nonbank brokers, dealers or municipal securities dealers. At least one individual must be a representative of banks, and at least one individual must be associated with a municipal advisor. The number of public representatives on the Board must always exceed the number of regulated representatives.
To keep the statutory balance, the board now has 11 members representing the public, 3 members representing securities firms, 3 members who are municipal advisors and 4 members representing banks. With these 21 representatives, the board exceeds the statutory requirements of a minimum of 15 members and a majority of public ones. Some of the public members do have previous ties to the municipal bond business, but if they remain “public-minded,” their past experience can be very useful.
In my view, all this public representation at the MSRB is bringing about a more open and transparent municipal bond market. What I’ve seen so far is an expanded focus on information flow to investors via enhancements to the EMMA system, the publication of an investor toolkit, a vast increase in continuing disclosure by issuers of material events (continuing disclosure documents totaled 39,549 in the first quarter of 2012), and a soon-to-be-released MSRB study on pre-trade transparency, or the market information made available before one buys a muni bond. Recently, the MSRB has announced that it is turning its attention toward online retail investing platforms to understand how investors are directly participating in muniland without going through a broker. The Bond Buyer had a great article on the issue: