NFMA Supports MSRB Proposed Rule Change on Board Standards

The National Federation of Municipal Analysts is urging the Securities and Exchange Commission to approve rule changes on standards for the Municipal Securities Rulemaking Board, saying they will increase investor representation on the board.

The NFMA made its position clear in a letter filed with the SEC Tuesday in support of a revision to MSRB 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.”

The new rule would revise the definition of “material business relationship” to read “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 NFMA supports the proposed rule changes to A 3 because we believe the changes will allow for a wider pool of investor applicants to be considered for MSRB board of directors membership and potentially increase investor representation,” states the letter from NFMA executive director Lisa Good. “As A-3 is currently written, someone who is employed at a buy-side firm that is not associated in any way with a broker-dealer is eligible to become an MSRB board member, but someone who is employed at a buy-side firm that is associated with a broker-dealer is not. Also, employees who work for mutual funds are largely disqualified from serving on the MSRB board by virtue of their firms selling 529 college savings plans though a broker-dealer. Unfortunately, there is a misperception that an analyst working for an investment firm is somehow beholden to a broker-dealer which is owned by the same parent.”

The NFMA comments are the first to support the proposed change, which other stakeholders have blasted as an attempt to weaken Dodd-Frank Act reforms that require the board to be majority public and charges the MSRB with protecting issuers. NFMA argues that an asset management representative who works for a subsidiary of a broker-dealer has a fiduciary duty to his or her clients, not to the dealer firm. Many municipal analysts also hold charters from the Chartered Financial Analyst Institute, meaning they have agreed to put their clients’ interests ahead of their own, the NFMA said.

“The NFMA is of the opinion that the proposed change to A-3 would offer the potential to increase representation for both institutional and retail investors, a large portion of whom have their municipal bonds professionally managed by mutual funds,” the comment letter concludes. “Individual investors would also benefit, as there is clearly a shared interest among all investors toward greater market transparency and improved disclosure.”

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