The Municipal Securities Rulemaking Board (MSRB)'s market regulation activities include rulemaking, regulatory support and qualification of municipal market professionals.
Rulemaking Process
MSRB rules, which have the force of federal law, seek to ensure that investors and issuers are treated fairly and that they have information to make informed financial decisions. After careful consideration of alternatives, the MSRB proposes rules that undergo a thorough review process, which includes public comment periods and approval by the Securities and Exchange Commission (SEC), before they are adopted to allow for consideration of the interests of all market participants. The MSRB also issues interpretations of its rules, which also have the force of federal law when approved by the SEC.
The Securities Exchange Act sets forth certain areas in which the MSRB is directed to conduct rulemaking, including rules to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and to serve various other specific purposes described in the Securities Exchange Act. In order to provide the maximum opportunity for industry participation, the MSRB generally publishes rulemaking proposals as requests for comment and provides for public comment periods. Substantive comments on rule proposals received as a result of these procedures continue to have an important impact on the MSRB’s deliberations.
Upon adoption by the MSRB in final form, rule proposals are filed with the SEC. In its rule filings, the MSRB is required to address the terms and purpose of the proposed rules, the statutory basis for their adoption, an analysis of the comments received and the statutory justification for any anticipated burden on competition the rule proposals might impose.
The Securities Exchange Act requires the SEC to publish the MSRB’s rule proposals in the Federal Register for public comment. MSRB rules only become effective upon approval by the SEC or, in very limited circumstances provided under the Securities Exchange Act, immediately upon filing with the SEC.
The MSRB’s rules are enforced by the Financial Industry Regulatory Authority (FINRA) for securities firms, by bank regulatory agencies (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) for banks, and by the SEC for municipal advisors and all securities firms and banks. Although the MSRB does not have inspection or enforcement powers, an important aspect of its rulemaking activities involves the ongoing interpretation of its rules. This is done by means of interpretive letters and notices.
MSRB Rules
MSRB rules reflect the special characteristics of the municipal market and its unique regulatory needs, and are designed to govern the conduct of regulated entities. MSRB rules can generally be categorized as (1) fair practice rules (e.g., requirements to provide affirmative disclosures of material facts to investors; to ensure the suitability of recommendations of municipal securities to purchase; to fairly price transactions; to avoid conflicts of interest (e.g. pay to play and acting as both financial advisor and underwriter on the same transaction); and to publish fair and accurate advertisements and price quotations); (2) uniform practice rules (e.g., rules to ensure that standard procedures are followed in underwriting, clearing, confirming and settling transactions in municipal securities; to help ensure the efficiency of market operations while accommodating the differences between municipal securities and other debt instruments); (3) professional qualification rules (e.g., requirements for market professionals to pass tests demonstrating competency; continuing education requirements); and (4) miscellaneous.
These rules require regulated entities to observe the highest professional standards in their activities and relationships with customers and municipal entities, and go significantly beyond the general anti-fraud principles that constrain federal securities laws.
Regulatory Support
The MSRB’s regulatory support activities include providing enforcement support to the regulatory authorities that enforce MSRB rules, including the SEC, FINRA and federal bank regulators. The MSRB meets regularly with these fellow municipal market regulators to discuss proper enforcement of MSRB rules and interpretations as well as to discuss other market issues. The MSRB ensures that data from its information systems are available for enforcement activities and regularly trains regulators on using MSRB data for enforcement purposes. The MSRB conducts a variety of enforcement activities, including (a) training of examination and enforcement staff; (b) interpretation of MSRB rules in connection with examinations and enforcement activities; (c) delivery of information products that assist these other regulatory authorities in their surveillance, examinations and enforcement actions; and (d) collaboration with the other regulators regarding such activities by identifying emerging risks in the municipal securities market. The MSRB also provides the Internal Revenue Service (IRS) with municipal market data to assist the IRS in its enforcement of tax laws related to municipal securities.
Professional Qualifications
The MSRB fosters competency of municipal market professionals and compliance with MSRB rules through required examinations and continuing education. Industry professionals serve on committees, established by the MSRB, that regularly develop and review content for MSRB examinations, as well as municipal securities content used in FINRA-sponsored examinations used to qualify financial professionals working in the municipal securities industry. In concert with other regulators and members of the securities industry, the MSRB also contributes to the development of content and procedures for a mandated industry-wide continuing education program.