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Municipal Securities and the Waiting Game

Federal law gives the Municipal Securities Rulemaking Board the authority to protect issuers, but it can't do that job until the SEC gives it a tool it needs.

Jay Goldstone is frustrated. Two years ago, the passage of the Dodd-Frank federal financial reforms vastly increased the scope of authority of the Municipal Securities Rulemaking Board (MSRB), which Goldstone chairs, by making it responsible for protecting the interests of issuers--including the state and local governments that raise capital by selling bonds and other securities--well as those of investors. But to do that, the MSRB needs a tool that it can't get seem to get its hands on.

Dodd-Frank sought to extend the protection of the MSRB to issuers of municipal securities by allowing it to write rules to regulate "municipal advisers," the companies that issuers pay to help them navigate the treacherous waters of Wall Street. The law, however, did not define municipal advisers, leaving that responsibility to the Securities and Exchange Commission (SEC). The MSRB, which operates as a kind of a handmaiden to the SEC, cannot write and adopt its rules until the SEC establishes who counts as a municipal adviser.

The initial definition proposed by the SEC in December 2010 was widely panned as being overly broad, and it was withdrawn. Now, more than two years later, the SEC has still not issued a new definition. The result of this delay is that a key segment of the municipal securities market isn't being regulated.

Goldstone, who is now chief operating officer for San Diego, was previously its chief financial officer and before that was finance director for three other cities. He says that in his experience there are a lot of small issuers that don't have a high level of sophistication and don't access the capital markets often. For these cities, he says, protection is about more than rules: It's also about education and outreach. Part of the challenge for the MSRB is getting officials in these organizations to understand the need, for example, for good and timely financial disclosure--to understand that the fact that they've hired a financial adviser doesn't lessen their responsibility for price transparency.

Under Goldstone's leadership, the MSRB is addressing two additional challenges. First is a re-examination of the rules already in place. That includes coming up with a more formal, structured approach to cost-benefit analysis aimed at satisfying concerns by the SEC and Congress regarding whether the protections afforded by the new rules are worth the cost to the industry and issuers of complying with them.

The second challenge is to build on the success of the Electronic Municipal Market Access System (EMMA), the MSRB's award-winning website that provides a comprehensive, centralized online source for free access to municipal disclosures, market-transparency data and educational materials about the market. When EMMA was launched just a few years ago, no one appreciated what it would become and how well it would be received. Now the MSRB wants to make better use of EMMA to increase market transparency as well as the website's utility as a tool for research.

But on the key challenge of protecting issuers and investors, the MSRB must wait for the SEC to act. The latest reports are that the SEC will issue a new, narrower definition of municipal advisers by the middle of this year. When that happens, a little known but important player in the world of municipal securities will be able to step up and help to chart a new direction for the municipal-securities industry.

Mark Funkhouser, a former publisher of Governing and former mayor of Kansas City, is president of Funkhouse & Associates, an independent consulting firm. He can be reached at
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