MSRB Proposes Easing Independence Standard for Board Member Category

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WASHINGTON - The Municipal Securities Rulemaking Board is proposing to ease the standard of independence for one category of its public board members, having failed to gain approval for a similar but broader proposal more than two years ago.

The proposal would amend the board's Rule A-3, which governs board membership in an effort to allow investment advisers affiliated with regulated entities, such as dealers, to qualify as public investor representatives.

The MSRB made a similar push in July 2013, asking the Securities and Exchange Commission to allow it to change the independence standard. But that proposal, which was broader and applied to all public board members, was eventually withdrawn after facing significant backlash.

The Dodd-Frank Act mandated the MSRB to have a majority public board, but left the specifics up to the MSRB. The MSRB expanded its board to 21 members from 15, 11 of which are to be independent of any muni broker-dealers, banks or muni advisors. In addition, at least one member must represent issuers, at least one must represent investors, and one must have knowledge or experience in the muni industry. Of the 10 regulated members, at least one must be associated with a non-bank securities broker-dealer, one with a bank. In addition, at least one but not less than 30% of the 10 must be associated with non-dealer or non-bank muni advisors.

MSRB chief legal officer Robert Fippinger said the proposal is aimed at allowing more qualified investor representatives to potentially serve as public members. Under the current rule, he said, an investment adviser whose firm is part of a larger broker dealer entity would fail the independence test.

"We just think the present standard is too restrictive," Fippinger said. Currently, the board defines public members who are "independent of any regulated entities" to mean individuals who have "no material business relationship" with any broker-dealer or municipal advisor. The individuals must not be, and not have been, associated with a regulated entity for two years and must not have any compensatory or other relationship with a regulated entity that would affect the independence of their decision-making.

Under the new proposal, an employee or officer of an MA-affiliated or dealer-affiliated investment advisory firm being considered as a public member could qualify as independent.

"The board shall consider relevant factors," the proposal states, including whether revenue from the regulated entity accounts for a "material portion" of the revenues of the consolidated entity that includes the investment adviser and the regulated entity. Other factors will include whether the regulated entity underwrites, privately places, or otherwise facilitates the origination of municipal securities. The board also will consider whether the investment adviser has a fiduciary duty or other similar relationship of trust to investment company clients or other investor clients.

Fippinger said the 2013 proposal differed from the new one in some major ways. First, he said, the MSRB did not request comment on it but instead filed it directly with the SEC.

"That rubbed a lot of people the wrong way," he said.

Further, he said, the 2013 proposal would have changed the independence standard for all public board members, rather than narrowing it to the investor representative as the new proposal does. The MSRB's 2013 proposal drew support from investor groups but met criticism from issuers and consumer advocacy groups. The MSRB withdrew its request in October of that year.

Michael Decker, a managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, said many SIFMA members feel that a "tangential" relationship between an investment adviser and a broker dealer shouldn't preclude an adviser from serving as a public board member.

"In concept I think we are in favor of the notion, Decker said.

National Federation of Municipal Analysts industry and media liaison Bill Oliver said NFMA supported the previous attempt to amend A-3 and is at least initially supportive of this one as well.

"We feel that this new amendment would be a positive step for the MSRB by increasing the pool of analysts and portfolio managers from mutual fund companies to serve on the MSRB board," Oliver said.

Mike Nicholas, chief executive officer of the Bond Dealers of America, said the MSRB needs the ability to find knowledgeable investor representatives but must approach the proposal with care.

"While BDA appreciates the MSRB's goal of ensuring it has the most qualified individuals representing investors in the municipal market on its board, these proposed amendments do present the potential for significant conflicts of interest that MSRB will need to manage," Nicholas said.

Meanwhile, Terri Heaton, president of the National Association of Municipal Advisors said, "We do have some concerns with both diluting the independent nature of the investor representation of the board, and the implications for the board being comprised of a majority of truly public members, as well as reducing the transparency of the board selection process. NAMA will need to carefully review these items as well as extending the board term contained within the proposal."

The MSRB proposal asks whether the board should consider extending the terms of board members and whether the board should continue to publicly disclose the names of all board applicants.

"Is the MSRB's requirement to announce publicly the names of all board applicants a deterrent to potential applicants, and would eliminating or modifying it likely increase the number of applicants to the board?," it asks. "Would the publication of other identifying information, such as the names of the applicants' employers or the categories on the board for which they were considered, provide adequate transparency to the process?"

The MSRB has previously touted the publishing of those names as one of the ways it has improved transparency in recent years, pointing it out to the SEC in a Sept. 19 2011 comment letter responding to criticisms about the transparency of the MSRB's rulemaking process.

The board is soliciting public comment on the proposal through July 13.

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