MSRB seeks SEC approval of board governance changes

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The Municipal Securities Rulemaking Board is filing for approval to reduce the size of its governing board to 15 members from the current 21 and to extend to five years the "cooling off" period for bankers and muni advisors seeking seats as members of the public.

The MSRB announced Friday it would seek Securities and Exchange Commission approval for these changes, which would be accomplished through amendments to MSRB rules A-3 on membership and A-6 on committees. The MSRB requested comment on the proposal in January, and then extended the original 60-day comment period to 90 days in light of the emerging coronavirus pandemic. The MSRB is proposing the change be effective Oct. 1, the start of its fiscal year.

“At the start of this fiscal year, the board committed to improving governance and transparency in ways that will ensure the MSRB continues to fulfill its mission of municipal market regulation in the public interest,” said Bob Brown, MSRB board member and chair of the board’s Governance Review Special Committee.

"An efficient and fair municipal market, with well-managed, transparent regulation, is essential to state and local governments across America,” Brown said. “Effective governance at the MSRB ensures that municipal securities investors, issuers, regulated market participants, and members of the public can have confidence in that $4 trillion market.”

Most of the proposal is similar to the version sent out for comment. In addition to shrinking the board to its pre-Dodd-Frank size, the proposal aims to improve the perceived independence of board members representing the public. The board’s current public membership requirements state that individuals may not be “associated” with a regulated firm for at least two years or “employed by” a regulated firm for at least three years.

MSRB Governance Review Special Committee Chair Bob Brown

The five years in the proposal is consistent with some suggestions the board has received over the years, and is the length of time included in legislation introduced Sen. John Kennedy, R-La. Last year. Some market participants have expressed concern over the years that many so-called "public" members had close and recent ties to dealer firms, creating the perception that they were not sufficiently independent.

The proposal submitted to the SEC makes a few tweaks from the version submitted for comment early in the year.

Brown pointed to comments noting that immediately moving to a 15-member board it would mean there would be only one issuer member next year. To avoid that, the board is proposing an interim year where it will have 17 members before moving to the 15 member size the year after.

“The Dodd-Frank Act added protection of municipal entities and obligated persons to the MSRB’s regulatory mission, and we need the valuable perspective of state and local officials on the board,” Brown said. “Particularly at a time when state and local governments are facing immense financial pressures due to COVID-19, it is important that the issuer perspective be vigorously represented. Thus, we modified our originally proposed transition plan so that the board can include a second issuer representative next year.”

The board also decided to do away with a proposal that would have allowed municipal advisors associated with dealers to fill one of the two seats to be allotted to muni advisors, so long as that dealer was not an underwriter of municipal securities. Under the proposal sent to the SEC, muni advisors associated with dealers would remain ineligible to hold municipal advisor board seats.

The SEC must approve the changes before they can become effective. The SEC could choose to approve the proposal as is or could ask the MSRB to make further changes. The SEC typically opens its own comment period for significant rule changes.

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