SEC Approves MSRB Proposal Regarding New Board Composition

On September 30, 2010, the Securities and Exchange Commission (the “SEC”) approved the MSRB’s amendments to Rule A-3, on membership on the Board, relating to the change in the composition of the Board to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”).[1]

The Dodd-Frank Act provides that the number of public representatives on the Board shall at all times exceed the total number of regulated representatives and that the membership must be as evenly divided in number as possible between public and regulated representatives.  As for the public members, at least one must be representative of institutional or retail investors in municipal securities, at least one must be representative of municipal entities and at least one must be a member of the public with knowledge of or experience in the municipal industry.  As for regulated representatives, at least one must be associated with and representative of broker-dealers, at least one must be associated with and representative of bank dealers, and at least one must be associated with a municipal advisor.  In addition, each member of the Board must be knowledgeable of matters related to the municipal securities markets.  Although Section 975(b) of the Dodd-Frank Act provides that the Board shall be composed of 15 members, the same section permits the Board to increase the number of Board members, so long as the total membership is an odd number.  It also requires that the public members be independent, as defined by the Board, of entities regulated by the MSRB.

To implement these terms of the Dodd-Frank Act, the amendments add sections (h) and (i) to Rule A-3.  Among other things, the amendments increase the size of the Board, on a transitional basis, from 15 members to 21 members, 11 of whom will be independent, public representatives and 10 of whom will be regulated representatives.  The term “independent of any municipal securities broker, municipal securities dealer, or municipal advisor” means that the individual has “no material business relationship” with any municipal securities broker, municipal securities dealer, or municipal advisor. The term “no material business relationship,” in turn, means that, at a minimum, the individual is not and, within the last two years, was not associated with a municipal securities broker, municipal securities dealer, or municipal advisor, and that the individual does not have a relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision making of the individual.  The Board, or by delegation its Nominating Committee, may determine that additional circumstances involving the individual constitute a “material business relationship” with a municipal securities broker, municipal securities dealer, or municipal advisor.

Of the 11 public members on the Board, at least one will be representative of institutional or retail investors, at least one will be representative of municipal entities, and at least one will be a member of the public with knowledge of or experience in the municipal industry.  Of the 10 regulated representatives, at least one will be associated with and representative of broker-dealers, at least one will be associated with and representative of bank dealers, and at least one, and not less than 30% of the total number of regulated representatives, will be associated with and representative of municipal advisors and shall not be associated with a broker, dealer or municipal securities dealer.[2]  Each member of the Board will be knowledgeable of matters related to the municipal securities markets.

In addition, the amendments provide that, on or after October 1, 2010 and prior to the formation of the Nominating Committee for purposes of nominating the next class of new Board members, the Board will amend the provisions of existing Rule A-3(c) relating to the composition and procedures of the Nominating Committee to (a) reflect the new composition of the Board as provided under the Dodd-Frank Act, (b) assure that the Nominating Committee will be composed of a majority of public representatives and to assure fair representation of bank representatives, broker-dealer representatives and advisor representatives within the meaning of Section 975 of the Dodd-Frank Act,[3] and (c) reflect such other considerations consistent with the provisions of the Securities Exchange Act of 1934 and the Dodd-Frank Act as the Board shall determine are appropriate.

September 30, 2010

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TEXT OF AMENDMENTS [4]

Rule A-3:  Membership on the Board

(a) – (g) No change

(h)  For purposes of this rule:

(i) the term “Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

(ii) the term “independent of any municipal securities broker, municipal securities dealer, or municipal advisor” means that the individual has “no material business relationship” with any municipal securities broker, municipal securities dealer, or municipal advisor. The term “no material business relationship” means that, at a minimum, the individual is not and, within the last two years, was not associated with a municipal securities broker, municipal securities dealer, or municipal advisor, and that the individual does not have a relationship with any municipal securities broker, municipal securities dealer, or municipal advisor, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision making of the individual.  The Board, or by delegation its Nominating Committee, may determine that additional circumstances involving the individual constitute a “material business relationship” with a municipal securities broker, municipal securities dealer, or municipal advisor.

(iii) the terms “municipal advisor” and “municipal entity” have the meanings set forth in Section 975(e) of the Dodd-Frank Act.

(i)   Transitional Provision for the Board’s Fiscal Year Commencing October 1, 2010. 

(i) Notwithstanding any other provision of this rule, for the Board’s fiscal years commencing October 1, 2010 and ending September 30, 2012, the Board shall consist of 21 members who are knowledgeable of matters related to the municipal securities markets and are:

(A) Public Representatives. 11 individuals who are independent of any municipal securities broker, municipal securities dealer, or municipal advisor , of which:

(1) at least one shall be representative of institutional or retail investors in municipal securities;

(2) at least one shall be representative of municipal entities; and

(3) at least one shall be a member of the public with knowledge of or experience in the municipal industry; and

(B) Regulated Representatives. 10 individuals who are associated with a broker, dealer, municipal securities dealer, or municipal advisor , of which:

(1) at least one 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;

(2) at least one shall be associated with and representative of municipal securities dealers that are banks or subsidiaries or departments or divisions of banks; and

(3) at least one, and not less than 30 percent of the total number of regulated representatives, shall be associated with and representative of municipal advisors and shall not be associated with a broker, dealer or municipal securities dealer .

(ii) Prior to October 1, 2010, the Board shall elect 11 new Board members – eight public representatives and three municipal advisor representatives – with terms expiring on September 30, 2012.

(iii) Notwithstanding any other provision of this rule, t he Nominating Committee shall publish, or shall have published at any time on or after enactment of the Dodd-Frank Act, a notice in a financial journal having general national circulation among members of the municipal securities industry soliciting nominations for municipal advisor candidates for the Board for the fiscal years commencing on October 1, 2010 and ending September 30, 2012. The notice shall require that recommendations be accompanied by information concerning the background of the nominee. The Nominating Committee shall accept recommendations pursuant to such notice for a period of at least 14 days from the date of publication of the notice. Any interested member of the public, whether or not associated with a municipal advisor, may submit recommendations to the Nominating Committee. The names of all persons recommended to the Nominating Committee shall be made available to the public upon request.

(iv) On or after October 1, 2010 and prior to the formation of the Nominating Committee for purposes of nominating potential new members of the Board with terms commencing on October 1, 2011, the Board shall amend the provisions of section (c) of this rule relating to the composition and procedures of the Nominating Committee to:

(A) reflect the composition of the Board as provided under the Dodd-Frank Act;

(B) assure that the Nominating Committee shall be composed of a majority of public representatives and to assure fair representation of bank representatives, broker-dealer representatives and advisor representatives within the meaning of Section 975 of the Dodd-Frank Act; and

(C) reflect such other considerations consistent with the provisions of the Act and the Dodd-Frank Act as the Board shall determine are appropriate.

(v) The Board may take such actions as are necessary or appropriate pursuant to this section (i) prior to October 1, 2010 for the purpose of effectuating the provisions of Section 975(b) of the Dodd-Frank Act. 

 

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