MSRB Files with the SEC Amendments to Rule A-3 Regarding Composition of the Board

Today, the MSRB filed with the Securities and Exchange Commission (the “SEC”) a proposed rule change consisting of amendments to Rule A-3, on membership on the Board, in order to facilitate the change in the composition of the Board to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).[1]  The MSRB has requested that the proposed rule change be made effective by the SEC on an accelerated basis.

The purpose of the proposed rule change is to make changes to Rule A-3 as are necessary and appropriate prior to the election of new Board members for the fiscal year commencing on October 1, 2010 (fiscal year 2011), in order to comply with the Dodd-Frank Act and, more specifically, those provisions of the Dodd-Frank Act governing the nomination, election, and composition of the Board.[2] 

On July 21, 2010, the Dodd-Frank Act was signed into law by President Obama.  This comprehensive financial reform legislation contains various provisions that affect the governance and mandate of the MSRB.  The effective date of these provisions is October 1, 2010, which coincides with the first day of the MSRB’s 2011 fiscal year.

The Dodd-Frank Act provides that the number of public representatives of the Board shall at all times exceed the total number of regulated representatives and that the membership must be as evenly divided in number as possible between public and regulated representatives.

As for the public members, at least one must be representative of institutional or retail investors in municipal securities, at least one must be representative of municipal entities and at least one must be a member of the public with knowledge of or experience in the municipal industry.  As for regulated representatives, at least one must be associated with and representative of broker-dealers, at least one must be associated with and representative of bank dealers, and at least one must be associated with a municipal advisor.  For the first time, the MSRB has been authorized to promulgate rules governing the conduct of municipal advisors who must be fairly represented on the Board.

Although Section 975(b) of the Dodd-Frank Act provides that the Board shall be composed of 15 members, the same section permits the Board to increase the number of Board members, so long as the total membership is an odd number.  It also requires that the public members be independent, as defined by the Board, of entities regulated by the MSRB.

In order to implement these terms of the Dodd-Frank Act by the effective date of October 1, 2010, the MSRB filed with the SEC a rule change to add sections (h) and (i) to Rule A-3.  Section (h) defines certain terms consistent with the Dodd-Frank Act, including the term “independent of any municipal securities broker, municipal securities dealer, or municipal advisor,” which is similar to the independence definition used by other self-regulatory organizations. 

The term “independent of any municipal securities broker, municipal securities dealer, or municipal advisor” would mean that the individual has “no material business relationship” with any municipal securities broker, municipal securities dealer, or municipal advisor. The term “no material business relationship,” in turn, would mean that, at a minimum, the individual is not and, within the last two years, was not associated with a municipal securities broker, municipal securities dealer, or municipal advisor, and that the individual does not have a relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision making of the individual.  The Board, or by delegation its Nominating Committee, may determine that additional circumstances involving the individual constitute a “material business relationship” with a municipal securities broker, municipal securities dealer, or municipal advisor.

Section (i) is a transitional provision intended to effectuate the relevant governance provisions of the Dodd-Frank Act by increasing the Board from 15 members to 21 members, 11 of whom will be independent, public representatives and 10 of whom will be regulated representatives, as of October 1, 2010.  Of the 11 public members, at least one will be representative of institutional or retail investors, at least one will be representative of municipal entities, and at least one will be a member of the public with knowledge of or experience in the municipal industry.  Of the 10 regulated representatives, at least one will be associated with and representative of broker-dealers, at least one will be associated with and representative of bank dealers, and at least one, and not less than 30% of the total number of regulated representatives, will be associated with and representative of municipal advisors.  The Board believes that such composition is fair to each regulated constituency and to the public.

In order to achieve this composition, the Board will elect 11 new members – eight public representatives and three municipal advisor representatives – prior to the start of the 2011 fiscal year.  As a result, the Board will have 21 members in fiscal year 2011, with 11 public members, seven broker-dealer and bank dealer members and three municipal advisor members.  Although the Board had previously published a notice under the existing provisions of paragraph (a)(iii)(c) of Rule A-3 soliciting nominations of Board candidates for fiscal year 2011, in order to ensure a fair nomination process, the Board determined that it should re-advertise for Board candidates after the passage of the Dodd-Frank Act.  Hence, the transition rule provides for a second publication, on or after enactment of the Dodd-Frank Act, of a notice in a national financial journal soliciting nominations for municipal advisor candidates, with the Nominating Committee accepting recommendations pursuant to such notice for a period of at least 14 days from the date of publication.[3]

Finally, the rule change provides that, in fiscal year 2011, the Board will amend Rule A-3(c) and make other changes consistent with the Act and the Dodd-Frank Act.

Questions about the rule amendments should be directed to Lawrence P. Sandor, Senior Associate General Counsel at (703) 797-6600. 

August 27, 2010

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TEXT OF AMENDMENTS [4]

Rule A-3:  Membership on the Board

(a) – (g) No change

(h)  For purposes of this rule:

(i) the term “Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

(ii) the term “independent of any municipal securities broker, municipal securities dealer, or municipal advisor” means that the individual has “no material business relationship” with any municipal securities broker, municipal securities dealer, or municipal advisor. The term “no material business relationship” means that, at a minimum, the individual is not and, within the last two years, was not associated with a municipal securities broker, municipal securities dealer, or municipal advisor, and that the individual does not have a relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision making of the individual.  The Board, or by delegation its Nominating Committee, may determine that additional circumstances involving the individual constitute a “material business relationship” with a municipal securities broker, municipal securities dealer, or municipal advisor.

(iii) the terms “municipal advisor” and “municipal entity” have the meanings set forth in Section 975(e) of the Dodd-Frank Act.

(i)   Transitional Provision for the Board’s Fiscal Year Commencing October 1, 2010. 

(i) Notwithstanding any other provision of this rule, for the Board’s fiscal years commencing October 1, 2010 and ending September 30, 2012, the Board shall consist of 21 members who are knowledgeable of matters related to the municipal securities markets and are:

(A) Public Representatives. 11 individuals who are independent of any municipal securities broker, municipal securities dealer, or municipal advisor, of which:

(1) at least one shall be representative of institutional or retail investors in municipal securities;

(2) at least one shall be representative of municipal entities; and

(3) at least one shall be a member of the public with knowledge of or experience in the municipal industry; and

(B) Regulated Representatives. 10 individuals who are associated with a broker, dealer, municipal securities dealer, or municipal advisor, of which:

(1) at least one shall be associated with and representative of brokers, dealers or municipal securities dealers that are not banks or subsidiaries or departments or divisions of banks;

(2) at least one shall be associated with and representative of municipal securities dealers that are banks or subsidiaries or departments or divisions of banks; and

(3) at least one, and not less than 30 percent of the total number of regulated representatives, shall be associated with and representative of municipal advisors.

(ii) Prior to October 1, 2010, the Board shall elect 11 new Board members – eight public representatives and three municipal advisor representatives – with terms expiring on September 30, 2012.

(iii) Notwithstanding any other provision of this rule, the Nominating Committee shall publish, or shall have published at any time on or after enactment of the Dodd-Frank Act, a notice in a financial journal having general national circulation among members of the municipal securities industry soliciting nominations for municipal advisor candidates for the Board for the fiscal years commencing on October 1, 2010 and ending September 30, 2012. The notice shall require that recommendations be accompanied by information concerning the background of the nominee. The Nominating Committee shall accept recommendations pursuant to such notice for a period of at least 14 days from the date of publication of the notice. Any interested member of the public, whether or not associated with a municipal advisor, may submit recommendations to the Nominating Committee. The names of all persons recommended to the Nominating Committee shall be made available to the public upon request.

(iv) On or after October 1, 2010 and prior to the formation of the Nominating Committee for purposes of nominating potential new members of the Board with terms commencing on October 1, 2011, the Board shall amend the provisions of section (c) of this rule relating to the composition and procedures of the Nominating Committee to reflect the composition of the Board as provided under the Dodd-Frank Act and to reflect such other considerations consistent with the provisions of the Act and the Dodd-Frank Act as the Board shall determine are appropriate.

(v) The Board may take such actions as are necessary or appropriate pursuant to this section (i) prior to October 1, 2010 for the purpose of effectuating the provisions of Section 975(b) of the Dodd-Frank Act.