WASHINGTON — The Municipal Securities Rulemaking Board has withdrawn its proposal to loosen the standard of independence for public board members, citing "unexpected opposition."
The MSRB announced Friday that it is no longer seeking to amend its Rule A-3, which governs how board members are appointed.
The change would have allowed individuals closely affiliated with broker-dealers to serve as public members of the board if they had not worked directly for a dealer firm in two years, a contrast from the current bar for individuals "associated with" a dealer. The rule already prohibits public board members from having a "material business relationship" with dealers "that reasonably could affect the independent judgment or decision making of the individual."
The MSRB said the proposed change, which it filed with the Securities and Exchange Commission in July, would allow individuals associated with dealer firms through a corporate structure, such as investment advisors, to serve as public members. But non-dealer FAs and issuers blasted the proposal as a move that would essentially return the board to the dealer-dominated structure that existed prior to 2010, when the Dodd-Frank Act mandated that the MSRB board be majority public. The MSRB countered with its own comment to the SEC, pointing out that investment advisors owe their loyalty to their clients and not to the dealer firms with which they are associated.
"The proposed amendments faced unexpected opposition despite the MSRB's goal of attracting additional investor experience to its board," the MSRB said in a notice. "The MSRB remains committed to identifying qualified candidates and expanding the pool of public applicants to its board, and will reconsider alternatives to address the need for greater investor representation."
Sources said the MSRB probably withdrew its proposed amendment to A-3 because the SEC was unlikely to approve it. The SEC has been aware of the concerns regarding the MSRB board's makeup. The SEC's 2012 muni market report stated that market participants had asked for open meetings and were dissatisfied with the secrecy surrounding the self-regulator.
MSRB executive director Lynnette Kelly said Monday the MSRB did not assume the change would be rejected by the SEC. "The MSRB can't prejudge what the SEC's decision would have been," Kelly said.
The issue of public board membership has been growing more contentious in recent months. Some market participants are unhappy with the standard of independence even as it exists now.
The National Association of Independent Public Financial Advisors has taken issue with the appointment of Robert Cochran, managing director and board chair of Build America Mutual, as a public member. BAM, a bond insurer, is a member of the Bond Dealers of America.
The SEC currently has no oversight over the board's makeup, a change from the past, and some market participants have expressed frustration at what they see as a lack of transparency present in the board selection process.
The MSRB has begun publishing the names of all individuals considered for board membership, but that has only resulted in more criticism from the issuer community when the names of dozens of seemingly well-qualified public servants without dealer ties are rejected in favor of members who worked at dealer firms for years.
