WASHINGTON — The Municipal Securities Rulemaking Board's proposed rule changes to lengthen its board members' terms to four years from three has garnered general support from dealer and advisor groups as well as the Securities and Exchange Commission's Investor Advocate.
Market participants said they welcomed the changes to MSRB Rule A-3 on board membership in comment letters to the MSRB. The 21-member MSRB board has 11 public and 10 regulated members.
The Oct. 25 regulatory notice on the proposed changes said they would "improve continuity and institutional knowledge of the board from year to year, while retaining the benefits of the regular addition of new members."
Rick Fleming, the SEC's Investor Advocate, agreed with the MSRB and noted that the changes are similar to other term lengths in similar organizations, like the Financial Industry Regulatory Authority's Board of Governors and SEC commissioners. The time limits may also be in the best interest of investors because "it may lessen the board's natural dependence upon the regulated representative board members who, presumably, have greater experience on certain issues," he said.
The Investor Advocate also commended the MSRB for abandoning its earlier proposal to modify the standard of independence for the board's public investor representative, which he had said was "deeply flawed" and a change that "would undermine the very purpose" of Dodd-Frank Act provisions.
Bond Dealers of America's chief executive officer Mike Nicholas said BDA appreciates the need to manage the learning curve associated with the process board members go through in studying, evaluating, and eventually making recommendations for regulatory proposals and revisions for the market.
"Since these changes impact the municipal market in such meaningful ways, we believe having an extra year to serve on the board would promote continuity of knowledge and ensure appropriate overlap among those working on these initiatives," Nicholas said.
He also suggested the MSRB take advantage of the extra year by instituting "a robust, formalized training program" for each of the incoming board members in their first year. The training program would "maximize the benefits of the proposed fourth year of service," he said.
The Securities Industry and Financial Markets Association has preferred four-year board terms ever since the MSRB floated its contentious public investor idea. SIFMA managing director and co-head of municipal securities Michael Decker said in his comment letter on the four-year term that SIFMA maintains that it supports the general focus of the proposal.
However, he said SIFMA has concerns about board members who serve more than one term because of special circumstances, like the need to fill a vacated position.
SIFMA suggested three ways the MSRB could mitigate those risks, including: more explicitly defining the "special circumstances" under which a board member may serve longer than his or her four-year term; imposing a maximum lifetime limit on board service; or specifying that if a board member is retained or recalled, the member's term is temporary until a new qualified member can fill the position.
Terri Heaton, president of National Association of Municipal Advisors, said NAMA does not oppose the MSRB's proposal but still would like to see the board return to a 15-member structure and have a stronger vetting process for public members that includes an independence standard requiring no association with a regulated entity for more than the currently mandated two years.
The changes being discussed would eventually create a system for the MSRB board where the number of new members every year would be either five or six instead of the current seven. Starting in 2021, there would be six new members, followed by five new members in each of the next three years. The six, then five, then five, then five cycle would repeat every four years.
The board considers the members that come in on the same year one "class" and names the class according to the year they end their terms. There are currently three rotating classes and if the proposal is approved, there would be four.
In fiscal year 2017, one public representative from the class of 2016 would get a one-year extension and six new members would join the board. The next year, one public and two regulated representatives from the class of 2017 would receive a one-year extension and five new members would join. Then in 2019, three public and two regulated members from the class of 2018 would get one-year extensions and five new members would join the board. And by 2020, the board would have completed the transition and welcome a class of five new members who would serve four year terms.
A committee of board members not being considered for extensions would nominate the members eligible for extensions in each of the transition years and then the board would vote on each proposed term extension.
The MSRB said its plan will ensure the classes of board members are as evenly divided as possible and that the transition is carried out "expeditiously and efficiently while minimizing any disruption."
