The Controversy of Increased Regulation: A Discussion with Lynette Hotchkiss, Executive Director of the Municipal Securities Rulemaking Board

By Lisa Dolan (New York City)

The Municipal Rulemaking Board (MSRB) has proposed new regulations for this $2.6 trillion market. Under the proposed regulations, municipal dealers would face more detailed reporting requirements and enforcement of heightened MSRB rules concerning fair dealing, fair pricing and disclosure. The Glass Hammer recently interviewed Lynette Hotchkiss, Executive Director of the Municipal Securities Rulemaking Board on her thoughts on the financial disaster and how the proposed regulations by the to prevent a recurrence will impact the investment business as a whole.

Ms. Hotchkiss has more than 20 years of legal, business, and regulatory experience in public finance and other fixed-income securities. Before joining the MSRB, Ms. Hotchkiss was a managing director and associate general counsel at the Securities Industry and Financial Markets Association (SIFMA) and associate general counsel at The Bond Market Association, which merged with the Securities Industry Association to form SIFMA. Prior to that, she worked at law firms in New York and London as a bond, underwriters’, and special disclosure counsel and was a general counsel for the New York City Municipal Assistant Corporation.

What are your thoughts on the impact of the possible regulations?

Obviously, additional regulation may be more costly and may limit risk taking.  Firms will need to access the cost/benefit of staying in certain business lines.

How, if at all, might your role change thanks to higher disclosure standards?

[It] remains to be seen.  Legislation is pending in the House Financial Services Committee which affects the municipal market, which may impact the MSRB’s role and activities.

What are your overall feelings on the increased financial regulations?  

I believe in regulation that is sound, rational and specifically geared to the activity or behavior being addressed.  Additional regulation is certainly warranted in some areas/activities given the lessons learned from the financial crisis of the past 2 years.

Could you comment on the key points of the new financial regulations that are within your scope of expertise as Executive Director of the MSRB?

As to the new regulations on over-the-counter derivatives, the MSRB has consistently called for the inclusion of municipal derivatives in any comprehensive regulatory scheme developed for the broader derivatives market.

We are following the issue of credit rating agencies with great interest as retail investors rely on ratings as a proxy for credit quality.  

The MSRB released a new interpretive notice to dealers indicating that they are not only responsible for access to material secondary market disclosures in meeting these regulations, but they are also responsible for interpreting and disclosing this content to investors. How do you think these new standards will reshape the municipal and corporate bond investment management business?

I believe that firms will continue to conduct top down reviews of all business units to insure that risk, legal and compliance issues are addressed.  I also think that the recent rules, interpretations and enforcement actions in the municipal area are similar to the increased regulatory focus throughout all securities areas, and should not disadvantage these business units vis a vis other areas.

What do you think of increased disclosure in municipal bonds and their insurers? Do you have a recommendation as to how the regulators can approach the situation?

The MSRB does not regulate bond insurance companies but follows with interest, the activities of the various regulatory bodies charged with this oversight responsibility.  Now that bond insurers are significantly less active in the municipal area, it is even more important that disclosures reach the investor community and that a thorough analysis of the credit is performed.  The MSRB’s EMMA system is an internet based central repository which delivers free primary and secondary disclosures and trade data for the over 1.2 million municipal bonds outstanding.

What do you think of increased regulation and disclosure in all of the following: banking organizations, non-bank financial institutions, money-market mutual funds, hedge funds and other private pools of capital and government-sponsored enterprises?

This is somewhat outside of my scope as a regulator of the municipal bond market.  However, disclosure and transparency have been the hallmarks of our financial system.  Additional thoughtful regulation which promotes those goals should be encouraged.

It seems like the increased regulation to prevent a run on funds has involuntarily become a two party battle—Washington vs. Wall Street. What is your take on the Washington versus Wall Street duality on investment regulation presented in the news?

As to the duality between Washington and Wall Street, the best legislation is crafted with knowledge of the issues, implications and consequences, and cost benefit analysis, which can only be accomplished through full and open discussion and a thorough and thoughtful process.  Members of the industries being affected can provide information to Congress so that the drafting process can be as effective as possible.