Municipal Securities Rulemaking Board (MSRB) Overview

What Is the Municipal Securities Rulemaking Board (MSRB)?

The Municipal Securities Rulemaking Board (MSRB) is a regulating body that creates rules and policies for investment firms and banks in the issuing and sale of municipal bonds, notes, and other municipal securities. States, cities, and counties issue municipal securities for a variety of reasons.

Activities regulated by the MSRB include the underwriting, trading, and selling of municipal securities that are financing public projects. 

Understanding the Municipal Securities Rulemaking Board

The Municipal Securities Rulemaking Board, (MSRB) is a self-regulating organization (SRO) managed by a Board of Directors, with four committees that oversee specific aspects of the organization’s governance and operation. Like the New York Stock Exchange (NYSE) or the National Association of Securities Dealers (NASD/FINRA), the MSRB sets its own rules and standards, but which are subject to ultimate supervision by the Securities and Exchange Commission (SEC).

The U.S. Congress created the Municipal Securities Rulemaking Board in 1975. It was given the assignment of creating rules and policies that would help prevent fraud and misleading acts in the securities industry. The MSRB was also designed to implement and support fair trading principles. In addition, it was tasked with creating and maintaining a system that would allow free and open trade in the securities market. One of its first accomplishments was creating a set of uniform standards dictating fair practices that municipal securities dealers should follow. The organization was also instrumental in paving the way for a smooth transition from traditional paper bonds to electronic versions in the 1980s. 

Types of Municipal Securities the MSRB Oversees

A municipal bond is categorized based on the source of its interest payments and principal repayments. A bond can be structured in different ways offering various benefits, risks and tax treatments. 

1. General Obligation (GO) backed by the creditworthiness of the issuer which has taxing power. Voter approval is prerequisite for issuance. These issues are the safest and yields tend to be lower as a result.
2. Revenue bonds are securitized by a specific revenue stream, such as tolls or other user fees. Because these bonds are riskier than general obligation bonds, their yields tend to be higher for similar maturities.
3. Short-term municipal bonds such as Tax Anticipation Notes (TANs), Revenue Anticipation Notes (RANs), Bond Anticipation Notes (BANs)
4. Exotic or Unique bonds are usually some variation on the earlier categories and include Certificates of Participation and Private Activity Bonds. These are generally part of a state or local government bond issue.

Disclosure and the Regulatory Role of the MSRB

In the 1980s, the Municipal Securities Rulemaking Board played a central role in assisting the SEC in creating SEC Rule 15c2-12, which focuses on continuing disclosure. This ensures that issuers of municipal securities must agree to provide specific information to the MSRB on a regular basis about the investment securities they handle. This information includes annual financial reports and notices about events such as delinquencies, defaults, unscheduled draws on debt service reserves and any activities that would affect the tax-exempt status of the security.

This rule and related principles involving disclosures were prompted by an incident in 1983 in which the Washington Public Power Supply System defaulted on more than $2 billion in municipal bonds, representing one of the biggest and most costly municipal bond disasters in U.S. history.

More recently, the Municipal Securities Rulemaking Board has served a role as a pioneer in helping to usher in the age of open electronic records in the securities industry. In the late 2000s, the MSRB launched the Electronic Municipal Market Access website, which provides free public access to information related to municipal bond trading, along with important disclosure documents.