Municipal Securities Watchdog Relents on the Meaning of Independence

In a quiet victory for reform, the Municipal Securities Rulemaking Board (MSRB) has dropped its proposal to let big-bank employees serve as independent ”public” members of the Board. The MSRB cited “unexpected opposition” to its idea – opposition that came in significant part from Americans for Financial Reform and our member organizations.

Had the MSRB’s proposal gone forward, employees of bank holding companies would have been allowed to dominate this little-known agency, reversing a move towards greater public accountability mandated by the Dodd-Frank Act. The MSRB is supposed to be a first line of defense against the kind of abusive practices that, in the runup to the financial crisis, trapped hundreds of cities and towns in swaps deals and other forms of risky financing that required taxpayers to pay exorbitant fees to Wall Street. Prior to the financial crisis, the MSRB clearly failed to protect municipalities from these abusive practices or even to clearly warn public entities of the dangers of the exotic new financing structures being sold by Wall Street.

To bolster the MSRB’s integrity and effectiveness, the Dodd-Frank Act of 2010 called for a majority of board members to be “independent of any municipal securities broker, municipal securities dealer, or municipal advisor.” In July 2013, however, the board appealed to the Securities and Exchange Commission for permission to loosen the new rule so that it would no longer exclude employees of big banks and major dealers who were not directly involved in municipal securities work.

AFR and our allies opposed this change as fatally undermining the independence that the law called for. As we pointed out in an August letter to the SEC, “this proposal would permit a so-called independent Member to be a current employee or director of a corporate entity that includes a municipal securities broker, dealer, or advisor as a subsidiary or affiliate, so long as the individual was not a current or recent employee of the specific subsidiary active in the municipal markets. For example, a current employee of JP Morgan Chase Bank NA could qualify as a Public Member of the MSRB, simply because they were not currently employed by JP Morgan’s municipal securities broker affiliate.”

Organizations weighing in opposition included AFR members the Consumer Federation of America and AFSCME along with the National Association of Independent Public Financial Advisors and the Government Finance Officers Association.

Now that the MSRB has withdrawn its proposal to weaken the standards of independence, the next step is to make sure that members who genuinely represent the public interest, not the dealer interest in selling risky deals to public entities, are in fact appointed to the Board.