WASHINGTON — The Municipal Securities Rulemaking Board sent letter to the Securities and Exchange Commission defending the MSRB’s proposal to loosen the standard of independence for public board members.
The letter is a response to largely negative comments that issuers, non-dealer municipal advisors, and financial reform advocates have filed with the SEC regarding the MSRB’s proposed modification to its Rule A-3, which governs how board members are appointed. The rule states that public board members cannot have worked for a broker-dealer in the past two years and cannot have a “material business relationship” with broker-dealers, which it defines as a “relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory otherwise, that reasonably could affect the independent judgment or decision making of the individual.”
MSRB wants to alter that language to clarify the definition of “material business relationship” to mean “at a minimum, the individual is not and, within the last two years, was not an officer, director (other than an independent director), an employee, or a controlling person of any municipal securities broker, municipal securities dealer, or municipal advisor.”
Opponents of the change contend that the rule would allow individuals working for broker-dealer firms to become “public” board members, exacerbating a situation many issuer officials have already complained about. Many of the board’s current public members are retired, and the newly-selected Robert Cochran works for a Bond Dealers of America member firm, Build America Mutual. The change would effectively destroy the intent of Congress when it passed the Dodd-Frank Act and required a majority public board, the issuers and non-dealer FAs told the SEC previously.
The MSRB missive, signed by general counsel Gary Goldsholle, contends that the proposed change is consistent with Congressional intent and would make the MSRB more effective.
The new rule would take a more “function-oriented” approach, Goldsholle wrote, rather than the “vague 'associated with’” standard currently in place. The MSRB has contended from the start that the change would widen the pool of experts available to them, while the National Federation of Municipal Analysts told the SEC it supports the change because it would allow more representatives from buy-side investment firms.
Goldsholle’s letter also argues that Dodd-Frank did not specify an independence requirement, and instead entrusted MSRB to develop the standard. The letter states that opponents of the change have been ignoring the second aspect of the independence standard, which excludes anyone with a relationship to a regulated entity that could “reasonably” affect their independent judgement, whether they are paid or not.
The SEC has ultimate oversight over the proposed change.
