SEC Approves Amendments to Rule A-3(c) to Establish New Nominating and Governance Committee

On January 25, 2011, the Securities and Exchange Commission (the “SEC”) approved a proposed rule change consisting of amendments to MSRB Rule A-3, on membership on the Board, to allow the MSRB to establish a new Nominating and Governance Committee.[1] The amendments provide for the creation of an MSRB Nominating and Governance Committee that reflects the composition of the MSRB as provided under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and assure that the Nominating and Governance Committee is composed of a majority of public members and has fair representation of broker-dealers, bank dealers, and municipal advisors, consistent with MSRB Rule A-3(i) as approved by the SEC.

The MSRB adopted the amendments pursuant to MSRB Rule A-3(i), a transitional rule previously approved by the SEC, intended to implement the requirements of the Dodd-Frank Act. [2]  The transitional rule provides that on or after October 1, 2010, and prior to the formation of the Nominating Committee for purposes of nominating members of the Board of Directors for fiscal year 2012, the MSRB will amend the provisions of Rule A-3(c) to: (a) reflect the composition of the Board of Directors as provided under the Dodd-Frank Act; (b) assure that the Nominating Committee will be composed of a majority of public members and will have fair representation of broker-dealers, bank dealers, and municipal advisors; and (c) reflect such other considerations consistent with the provisions of Section 15B of the Securities Exchange Act of 1934 and the Dodd-Frank Act as the MSRB deems appropriate.  The rule change amends Rule A-3(c) to comply with the requirements of transitional Rule A-3(i).

Amendments to Rule A-3(c)

Consistent with Rule A-3(i), the Nominating and Governance Committee consists of eleven members, six of whom are public members and five of whom are industry members.  The Chair of the Committee is a public member.  Establishing an eleven member committee allows for fair representation of regulated entities by reserving five positions for brokers, dealers, municipal securities dealers, and municipal advisors.

Each constituency identified in the Dodd-Frank Act is guaranteed a minimum of one seat on the Nominating and Governance Committee but the level of each constituency is capped to avoid overweighting of any one over the others.  These ranges of membership are as follows:

• six public members consisting of (a) at least one, but no more than three, representative of investors; (b) at least one, but no more than three, representative of municipal entities; (c) at least one, but no more than three, public member who is not representative of investors or municipal entities; and
• five regulated members, consisting of (a) at least one, but no more than two, representative of broker-dealers; (b) at least one, but no more than two, representative of bank dealers; and (c) at least one, but no more than two, representative of non-dealer municipal advisors.

The SEC also approved certain administrative amendments to Rule A-3(c) to reflect that members may serve staggered terms, and may only serve consecutive terms under two scenarios – invitation by the Nominating and Governance Committee due to special circumstances as determined by the Board, or having filled a vacancy under Rule A-3(e) and, therefore, served only a partial term.  Additionally, the SEC approved revisions to Rule A-3(c) whereby the MSRB will solicit nominations for Board membership in a financial journal having general national circulation, as well as a financial journal having national circulation among members of the municipal securities industry.  The SEC also approved changes to Rule A-3(c) to require the publishing on the Board’s website of the names of all applicants for Board membership.[3]

Questions about the rule amendments should be directed to Lawrence P. Sandor, Senior Associate General Counsel at (703) 797-6600. 

February 2, 2011

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TEXT OF RULE AMENDMENTS [4]

Rule A-3:  Membership on the Board

(a) – (b) No change

(c) Nomination and Election of Members.

(i) Members shall be nominated and elected in accordance with the procedures specified by this rule. All members of the Board shall be elected for terms of three years, so that the terms of office of one-third of the whole Board shall expire each year. The terms of office of all members of the Board shall commence on October 1 of the year in which elected and shall terminate on September 30 of the year in which their terms expire.  Members may be elected to staggered terms.  A member may not serve consecutive terms, unless special circumstances warrant that the member be nominated for a successive term or because the member served only a partial term as a result of filling a vacancy pursuant to section (e) of this rule.  A member of the Board may serve additional terms as a Board member upon nomination and election for each such additional term in accordance with the procedures specified by this rule, provided that, a member of the Board may immediately succeed himself or herself in office for only a single successive term and only upon nomination and election for such successive term in accordance with the procedures specified by this rule.  No broker-dealer representative, or bank representative, or municipal advisor representative may be succeeded in office by any person associated with the broker, dealer, or municipal securities dealer, or municipal advisor with which such member was associated at the expiration of such member’s term except in the case of a Board member who succeeds himself or herself in office.

(ii) The Board will appoint a Nominating Committee composed of nine members. The membership of the Nominating Committee shall consist of six Board members and three persons who are not members of the Board. Of the six Board members, two shall be bank representatives, two shall be broker-dealer representatives, and two shall be public representatives. Of the three non-Board members, one shall be associated with and representative of bank dealers, one shall be associated with and representative of brokers, dealers, and municipal securities dealers other than bank dealers, and one shall not be associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling any broker or dealer which is not a broker, dealer or municipal securities dealer that effects municipal securities transactions).  Candidates for Board membership shall be nominated by a committee (the “Nominating and Governance Committee”) consisting of six public Board members and five Board members representing entities regulated by the MSRB.  Among the six public Board members, at least one but no more than three shall be representative of institutional or retail investors in municipal securities, at least one but no more than three shall be representative of municipal entities, and at least one but no more than three shall be members of the public with knowledge of or experience in the municipal industry and not representative of investors or municipal entities.  Among the representatives of entities regulated by the MSRB, at least one but no more than two shall be associated with and representative of brokers, dealers or municipal securities dealers that are not banks or subsidiaries or departments or divisions of banks, at least one but no more than two shall be associated with and representative of municipal securities dealers that are banks or subsidiaries or departments or divisions of banks, and at least one but no more than two shall be associated with and representative of municipal advisors and shall not be associated with brokers, dealers or municipal securities dealers. The Chair of the Nominating and Governance Committee shall be a public member. In appointing persons to serve on the Nominating and Governance Committee, factors to be considered include, without limitation, diversity in the geographic location, size and type of brokers, dealers, and municipal securities dealers, and municipal advisors represented on such Committee.

(iii) The Nominating and Governance Committee shall publish a notice in a financial journal having general national circulation among members of the municipal securities industry and in a separate financial journal having general national circulation soliciting nominations applicants for the positions on the Board to be filled in such year. The notice shall require that applicant recommendations be accompanied by a statement of the position for which the person is recommended, the background and qualifications for membership on the Board of the person recommended and, if applicable, information concerning such person's association with any broker, dealer, or municipal securities dealer, municipal advisor, municipal entity, or institutional investor. The Nominating and Governance Committee shall accept recommendations pursuant to such notice for a period of at least 30 days. Any interested member of the public, whether or not associated with a broker, dealer, or municipal securities dealer, municipal advisor, municipal entity, or institutional investor, may submit recommendations to the Nominating and Governance Committee. The names of all persons recommended to the Nominating Committee shall be made available to the public upon request.

(iv) The Nominating and Governance Committee shall nominate one person for each of the Board positions to be filled and shall submit the nominees to the Board for approval. In making such nominations, the Nominating and Governance Committee shall take into consideration such factors as, without limitation, diversity in the geographic location, size and type of brokers, dealers, and municipal securities dealers, and municipal advisors represented on the Board, as well as the background, experience, and knowledge of the municipal securities markets of the public Board members.  Each nomination shall be accompanied by a statement indicating the position for which such person is nominated, the nominee’s qualifications to serve as a member of the Board, and information concerning the nominee’s association, if any, with any broker, dealer, or municipal securities dealer, municipal advisor, municipal entity, or institutional investor. The names of the nominees will shall be confidential.

(v) The Board shall accept or reject each nominee submitted by the Nominating and Governance Committee. In the event that If the Board rejects a nominee, the Nominating and Governance Committee will shall propose another nominee for Board consideration.

(vi) The public representatives on the Board will, prior to their assumption of office, be subject to approval by the Commission to assure that no one of them is associated with any broker, dealer or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a broker, dealer or municipal securities dealer that effects municipal securities transactions) and that at least one of the public representatives of the Board is representative of investors in municipal securities and at least one is representative of issuers of municipal securities.

(vii) (vi) Upon completion of the procedures for nomination and election of new Board members, the Board will announce the names of the new members not later than October 1 of each year.  The names of all applicants who agreed to be considered by the Nominating and Governance Committee shall be made available on the Board’s website no later than one week after the announcement of the names of new Board members for the following fiscal year.

(vii) The Nominating and Governance Committee shall also be responsible for assisting the Board in fulfilling its oversight responsibilities regarding the effectiveness of the Board’s corporate governance system.

(d) – (i) No change