A proposal to modify the standard of independence for Municipal Securities Rulemaking Board members is inconsistent with federal law, the National Association of Independent Public Finance Advisors told the Securities and Exchange Commission on Sept. 12.
NAIPFA made the argument in new comments filed with the commission, in which NAIPFA president Jeanine Rodgers Caruso argues that MSRB’s proposal to loosen the standard of independence for public board members is a betrayal of legislative intent and inconsistent with the language of the Securities Exchange Act of 1934 as amended by Dodd-Frank. NAIPFA’s newest comments are in addition to previous input the group submitted in August, in which the group attacked the logic of the MSRB proposal and argued that the changes would undermine the MSRB’s function by stacking the board with “public” members sympathetic to broker-dealers.
The MSRB wants to amend 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.”
The MSRB has defended the proposal, pointing out that the rule would still bar individuals from serving as public members if their independent judgments were reasonably compromised. The change would also have the effect of allowing a greater number of knowledgeable professionals the chance to serve on the board, the MSRB has said. Rodgers Caruso counters that weakening the standard for the sake of that benefit is not permissible and violates the intent of the Dodd-Frank revisions to the 1934 Act, and essentially amounts to wordplay.
The original Senate version of Dodd-Frank illustrates the intent of that legislation, she says. It specified that public members be “individuals who are not associated with any broker, dealer, municipal securities dealer, or municipal advisor (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a municipal securities broker or municipal securities dealer).”
She further argues that the eventual final language of Dodd-Frank is even more expansive, requiring public members to be “independent of any municipal securities broker, municipal securities dealer, or municipal advisor.” Black’s Law Dictionary defines “independent” in part as “not subject to the control or influence of another,” something her comments conclude would not be true of some of the “public” members under the amended rule.
“The amendments are, therefore, inconsistent with the Exchange Act as they are inconsistent with the ordinary and natural meaning of the term independent’; the amendments would allow
public board member positions to be filled by individuals who are subject to the control or influence of another by virtue of their association with regulated entities, and whose decision
making will depend upon or be contingent upon how their decisions will impact their regulated entity affiliate,” NAIPFA’s comments state.
The proposed changes are in the hands of the SEC, which could choose to reject the MSRB proposal.
