With people around the world fighting and dying for the right to vote, it is sad that democratic elections seem increasingly rare in the U.S. securities industry.
Specifically, I am referring to the process of electing board members to the 21-person Municipal Securities Rulemaking Board, the self-regulatory body that oversees the muni finance business.
The process of installing new MSRB board members is more akin to a “selection” than an “election.”
Here is how it works.
First, the MSRB solicits nominations. Currently, seven board seats — four representing the public and three representing regulated entities (the term the MSRB uses to describe the broker-dealers, banks and municipal advisers that it regulates) — are open for three-year terms that begin Oct. 1.
Those who wish to be considered must file an application, which goes to the nominating and governance committee for review. The committee consists of six public board members and six members from regulated firms, and is headed by a public board member.
The committee nominates one person for each of the open seats, and then the 21 board members either accept or reject each nominee. If a candidate is rejected, the committee brings another nominee to the board.
When the process is completed, the board announces its new members.
That is the “election.”
I humbly submit that this Soviet-sounding process not only is antithetical to the way that elections are supposed to work, it also fails to fully protect investor interests, as mandated by the Securities and Exchange Commission.
INHERENT CONFLICT
Combining the functions of nominating board members and overseeing the governance of the MSRB in one committee is an inherent conflict that serves to protect the power of incumbent officeholders more than it protects the investing public.
Under this system, how is anyone to know why committee members accept or decline nominations? Why shouldn't any qualified person be allowed to get on the ballot, based on demonstration of muni bond knowledge and/or ownership, and face the voters?
Such a process would encourage wide participation in which all candidates' credentials would be aired fully.
In today's wired world, those regulated by the MSRB then could choose public and industry trustees from an array of candidates. What could the board find so threatening in such a system?
NO FIREBRANDS
I dare say that a slate of candidates representing businesspeople involved with municial bonds, individuals who own muni bonds and the institutions who hold them as fiduciaries on behalf of other investors — no matter how large — hardly constitutes a band of radical firebrands that the MSRB should fear.
In the interest of full disclosure, I applied last month to be nominated as one of the “regulated entities” in this year's MSRB election.
My small firm — like many of the 1,820 firms required to be members of the MSRB — sells muni bonds to individual in-vestors. Because we aren't a dealer, we don't engage in muni bond underwriting or market making.
This means we have no incentive to engage in any of the pay-to-play activities that spark periodic scandals in muni bond underwriting.
In my application, I stated that the most pressing problem that the industry faces is overregulation, which is driving small and boutique operations such as mine out of business, leaving the public with fewer options.
PROPOSALS FOR MSRB
I proposed that the MSRB do the following:
• Build bridges to regulated entities that seek assistance in revealing fraud issues of which they are aware, thereby improving the industry.
• Assist regulated entities in fulfilling their heavy compliance burdens.
• Publish a monthly newsletter alerting regulated entities to potential compliance landmines.
• Create an ombudsman position.
• Consolidate nonactionable e-mails (I receive almost one a day from the MSRB) into a weekly format.
If I presented this agenda and lost in an open election, so be it. But in this election, a few committee members select a small group of candidates who then are confirmed by another small group of members.
Elections in self-regulatory organizations should be open to all investors and to all industry participants.
May the best men and women win.
Isn't that the American way?
Alan Davidson is president and founder of Zeus Securities Inc. He also is a former governor of NASD, and founder and president of the Independent Broker-Dealer Association Inc.
