“It was a whole new experience. If you ask anybody from the industry, would you rather be regulated or unregulated, I think most of them would have said, ‘We’d rather be unregulated.’ But there were a lot of responsible people in the industry who saw the need for regulation, and if they weren’t excited about it, they were at least willing to support it… I think the board members certainly came with their own prejudices, given what their role was. They were leaders of their firms and this was revenue that was at stake for them…At the same time, my recollection is that I was constantly somewhat surprised that the number of them could look at it from an industry perspective – from the perspective of what is best for the industry. What is the right thing. I’m not saying that they necessarily totally divorced themselves from their own interests, but they did try to take the bigger view.”
The Securities Acts Amendments of 1975 created the Municipal Securities Rulemaking Board (MSRB) as a new self-regulatory organization. As its name indicated, the MSRB could only write rules, and those would have to be approved by the SEC. Enforcement was left to the SEC, the NASD and bank regulators. Broker-dealers were made subject to MSRB rules, but issuers remained exempt from disclosure. In April 1975, Congress adopted an amendment introduced by U.S. Senator John Tower (R-Texas) that explicitly prohibited regulators from imposing filing requirements on municipal issuers. Although purely symbolic, the “Tower Amendment” was and remains shorthand for the wall between federal regulators and state and local issuers.
With 15 members representing issuers, broker-dealers and other market participants, the Board of the MSRB was, in structure as well as in its function, “a great compromise.” 8 Although Congress created the institution, the MSRB itself defined its role in the financial markets after going into operation in 1976. Some had assumed that the MSRB would spend a few years writing basic rules and then go out of business or be merged into the NASD. Following a brief period of leadership under former banker and Maryland State transportation official Jerold Glick, attorney Frieda Wallison became MSRB Executive Director. With about a dozen staff, she provided direction to the unwieldy and sometimes disengaged Board.
From the start, divisions appeared. There was contention between members from Wall Street firms and those representing regional broker-dealers, and friction between large firms, which could afford to undertake new regulatory tasks, and small firms less able to do so. Many MSRB Board members were “partners who had been in the business for years, they had zero interest in dealing with regulatory compliance matters.” 9
For its first years, the Board worked hard, meeting three to five times a month to develop basic recordkeeping and uniform practice rules. Members did not always take positions that directly reflected economic interests, but contention remained. Broker-dealers resisted a September 1977 rule requiring underwriters to disclose whether they had a financial advisory position with municipalities, and thus a potential conflict of interest.
In 1978, Christopher “Kit” Taylor took over as MSRB Executive Director. A Ph.D. economist formerly with the Federal Reserve, Taylor saw the MSRB’s job as removing information monopolies that disadvantaged bond buyers. The MSRB took up a requirement that yield to maturity be disclosed. The rule was about “providing sufficient information to the customer to be able to know what they’re buying.” 10 This rule was hotly debated.
In 1979, the MSRB considered removing another information monopoly by requiring that all bonds bear CUSIP numbers, a code developed 15 years earlier by the Committee on Uniform Security Identification Procedures of the American Bankers Association. Some broker-dealers preferred selling bonds with identical names and different properties that only they understood, but the measure passed as Rule G-34. The rule became the building block for nearly all subsequent efforts to create a more open and efficient market. For the first time, “people could identify one bond issuer from another.” 11
By 1979, the Board of the MSRB had settled into a relatively productive routine, meeting every other month, with the pushes and pulls among the Board members making for well-considered and effective rules. 12 Any thoughts of disbanding were set aside and the MSRB settled into the tough business of regulating an innovative market despite its strictly-limited mandate.
(8) June 22, 2011 Interview with Mark Sisitsky.
(9) August 2, 2011 Interview with Donald Donahue.
(10) April 2, 2014 Interview with Christopher Taylor.
