[Federal Register Volume 81, Number 56 (Wednesday, March 23, 2016)]
[Notices]
[Pages 15582-15585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06452]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77390; File No. SR-MSRB-2016-01]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change Consisting of
Proposed Amendments to Rule A-3, on Membership on the Board
March 17, 2016.
I. Introduction
On January 15, 2016, the Municipal Securities Rulemaking Board (the
``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (the ``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change consisting of proposed
amendments to the MSRB Rule A-3, on membership on the Board (the
``proposed rule change'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on February 4, 2016.\3\ The Commission received two comment
letters on the proposed rule change.\4\ This order approves the
proposed rule change.
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\3\ Securities Exchange Act Release No. 76999 (Jan. 29, 2016),
81 FR 6088 (Feb. 4, 2016) (the ``Proposing Release'').
\4\ See Letters from Lisa S. Good, Executive Director, National
Federation of Municipal Analysts (``NFMA''), dated February 25, 2016
(``NFMA Letter''); and Michael Nicholas, Chief Executive Officer,
Bond Dealers of America (``BDA''), dated February 25, 2016 (``BDA
Letter'').
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II. Description of the Proposed Rule Change
The Board is comprised of 21 members \5\ who, collectively, govern
the MSRB to carry out its mission primarily by regulating dealers and
municipal advisors, providing market transparency through its
Electronic Municipal Market Access (EMMA) Web site, and conducting
market leadership, outreach and education. Many general and some more
detailed aspects of the Board's composition are set forth in the
Act.\6\ It categorizes the members of the Board into two broad groups:
Individuals who must be associated with a broker, dealer or municipal
securities dealer (``dealer'') or municipal advisor (collectively,
``Regulated Representatives''), and individuals who must be independent
of any dealer or municipal advisor (``Public Representatives'').\7\ The
Act then specifies that the number of Public Representatives must at
all times exceed the number of Regulated Representatives,\8\ and sets
minimum requirements for certain types of individuals to serve in the
two groups.\9\
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\5\ See MSRB Rule A-3(a).
\6\ See 15 U.S.C. 78o-4(b)(1). MSRB Rule A-3 further establishes
the Board's composition.
\7\ See 15 U.S.C. 78o-4(b)(1); MSRB Rule A-3(a)(i)-(ii).
\8\ See 15 U.S.C. 78o-4(b)(2)(B)(i).
\9\ See 15 U.S.C. 78o-4(b)(1); MSRB Rule A-3(a).
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Congress also delegated authority to the MSRB to determine many
aspects of Board composition by rule, including the size of the Board
and the length of the term of Board member service.\10\ Currently, the
Board is divided into three seven-member classes that serve staggered,
three-year terms.\11\ The MSRB stated that under this framework, total
[[Page 15583]]
Board tenure typically is no more than three years because Board
members may only serve consecutive terms under two limited scenarios:
(1) By invitation from, and due to special circumstances as determined
by, the Board; or (2) having filled a vacancy and, therefore, having
served only a partial term.\12\
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\10\ The Act provides that ``[t]he members of the Board shall
serve as members for a term of 3 years or for such other terms as
specified by rules of the Board,'' and that the rules of the Board
``specify the length or lengths of terms members shall serve.'' 15
U.S.C. 78o-4 (b)(1), (b)(2)(B)(ii).
\11\ See MSRB Rule A-3(b)(i).
\12\ Id.
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According to the MSRB, the proposed rule change would lengthen the
term of Board member service from three years to four years, and
facilitate the new, longer term length by increasing the number of
Board classes and adjusting their sizes.\13\ Additionally, the MSRB has
stated that the proposed rule change would limit the number of
consecutive terms a Board member can serve to two, and eliminate the
requirement that there be at least one non-dealer municipal advisor per
Board class.\14\ Finally, the MSRB has stated that the proposed
amendments would delete an obsolete provision from the rule and provide
a technical update to the name of a Board committee.\15\ The MSRB
believes that the proposed rule change would ensure greater continuity
and institutional knowledge from year to year, particularly through the
rulemaking process, and increase overall efficiency, while maintaining
the benefits of having a significant number of new Board members join
the organization each year.\16\ A full description of the proposed rule
change is contained in the Proposing Release.
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\13\ See supra note 3.
\14\ Id.
\15\ Id.
\16\ Id.
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1. Lengthening the Term of Board Member Service and Increasing the
Number of Board Classes
The MSRB has proposed increasing both the Board member term length
from three years to four years and the number of Board classes from
three to four.\17\ The MSRB has proposed that one class would be
comprised of six members and three classes comprised of five
members.\18\ The MSRB has stated that it believes that having members
serve on the Board for a fourth year would improve the continuity and
institutional knowledge of the Board from year to year which is
important for the MSRB rulemaking process which can often span multiple
years from conception to full implementation.\19\ The MSRB has further
stated that the proposed changes would ensure that the MSRB nominates
and elects new members every year, maintains classes that are as evenly
distributed in size as possible, and has a Board composition that
always satisfies the statutorily-required position allocations.\20\
According to the MSRB, such changes would result in a consistent and
manageable turnover from year to year.\21\ The MSRB has further
represented that the classes would continue to be as evenly divided in
number as possible between Public Representatives and Regulated
Representatives, while also remaining majority public as is required by
the Act and Rule A-3(a) and (b)(i).\22\
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\17\ Id.
\18\ Id.
\19\ Id.
\20\ Id.
\21\ Id.
\22\ Id.
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2. Establishing a Limit on Consecutive Terms
The MSRB has proposed that a Board member could serve no more than
two consecutive terms, eight years in total, which could only occur
under the a special circumstances exception.\23\ The MSRB has stated
that this added provision would ensure that the special circumstances
exception is not overused, mitigate some commenters' concerns of Board
members becoming too dominant and unduly influential, assure
appropriate turnover of Board membership, and help maintain a robust
pool of applicants for Board service.\24\ The MSRB believes this
modification reflects good corporate governance practices as applied to
the particular characteristics of the MSRB.\25\
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\23\ See Rule A-3(b)(i).
\24\ See supra note 3.
\25\ Id.
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3. Eliminating Requirement of One Non-Dealer Municipal Advisor
The MSRB has proposed eliminating the requirement that there be at
least one non-dealer municipal advisor per class.\26\ The MSRB has
stated that it is proposing this change because the proposed amendments
would result in the creation of four classes which would create an
obligation that the Board always includes four non-dealer municipal
advisors, which could potentially diminish representation of other
regulated entities.\27\ The MSRB has represented that the proposed rule
change would not affect the existing requirement in Rule A-3(a)(ii)(3)
that for the Board as a whole ``at least one, and not less than 30
percent of the total number of [R]egulated [R]epresentatives, shall be
associated with and representative of municipal advisors and shall not
be associated with a broker, dealer or municipal securities dealer.''
\28\ The MSRB has stated that nothing in this proposed change would
reduce the minimum required representation of municipal advisors and
such proposed change would not prohibit the MSRB from deciding to
include more than three non-dealer municipal advisors on the Board.\29\
The MSRB has represented that all other provisions in Rule A-3(b)(i)
would remain unchanged.\30\
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\26\ Id.
\27\ Id.
\28\ Id.
\29\ Id.
\30\ Id.
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Clarifying and Technical Amendments
The MSRB has proposed two amendments to delete an obsolete
provision and make a technical update. The MSRB believes that these
changes will improve the clarity and readability of MSRB Rule A-3.
The MSRB has stated that MSRB Rule A-3(h) currently describes the
transition process the MSRB used to increase its Board size from 15 to
21 members during its fiscal years 2013 and 2014.\31\ The MSRB has
stated that the proposed rule change would delete this provision from
MSRB Rule A-3 because that process has been completed and the provision
is therefore obsolete.\32\
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\31\ Id.
\32\ Id.
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Additionally, MSRB Rule A-3(g)(ii) makes reference to the
``Nominating Committee,'' which is now called the ``Nominating and
Governance Committee.'' \33\ The MSRB has stated that the proposed rule
change would provide a technical update to the reference of the current
name of the committee which would promote the accuracy of the rule.\34\
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\33\ Id.
\34\ Id.
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Transition Plan
In order to effectuate the changes in term length and the number
and size of classes, the MSRB has proposed a transition plan (the
``Transition Plan''), under which each Board member, who was elected
prior to, and whose term ends on or after the end of, the MSRB's fiscal
year 2016,\35\ could be considered for a term extension not exceeding
one year.\36\ The MSRB has represented that this process would occur
over fiscal years 2017, 2018 and 2019 and that the transition would
proceed as follows: (1) For fiscal year 2017, one Public Representative
from the Board class of 2016 (i.e., members who began a three-year term
on October 1, 2013) would
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receive a one-year extension and six new members would join the Board;
(2) for fiscal year 2018, one Public and two Regulated Representatives
from the Board class of 2017 (i.e., members who began a three-year term
on October 1, 2014) each would receive a one-year extension and five
new members would join the Board; and (3) for fiscal year 2019, three
Public and two Regulated Representatives from the Board class of 2018
(i.e., members who began a three-year term on October 1, 2015) each
would receive a one-year extension and five new members would join the
Board.\37\ The MSRB has stated that the full Board would vote by ballot
on all members eligible for term extensions to determine who receives
them.\38\ Further, the MSRB has noted that the selection of Board
members whose terms would be extended would be in compliance with the
statutorily-required compositional requirements of the Board, and the
Board would continue to consist of 21 members with a majority of Public
Representatives.\39\ The MSRB has represented that in fiscal year 2020,
no further extensions would be required and five new members would join
the Board, completing the transition to four classes and from that
point forward, the Board would repeatedly nominate and elect classes in
the sequence of six, five, five, and five members.\40\ The MSRB has
further stated that while there are numerous possible combinations of
the number of Board classes and the number of members in each class,
they believe this specific combination would achieve the transition
expeditiously and efficiently while minimizing any disruption from the
changes.\41\
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\35\ The MSRB's fiscal year commences on October 1 of a given
year and ends on September 30 of the following year.
\36\ See supra note 3.
\37\ Id.
\38\ Id.
\39\ See supra notes 3, 5 and 7-9.
\40\ See supra note 3.
\41\ Id.
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III. Summary of Comments Received
As noted previously, the Commission received two comment letters on
the proposed rule change.\42\ The NFMA Letter expressed general support
and agreement with the proposed rule change.\43\ The BDA Letter also
expressed general support and agreement with the proposed rule change,
but noted interest in seeing the MSRB continue to strengthen its
training of future Board members and to continue to reevaluate its
training program to ensure it reflects changes in market practices and
new regulations.\44\ BDA made a substantially similar comment \45\ in
response to the MSRB's Request for Comment,\46\, and the MSRB responded
to such comment in the Proposing Release.\47\ Full descriptions of the
comments are contained in the comment letters.\48\
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\42\ See supra note 4.
\43\ See NFMA Letter.
\44\ See BDA Letter.
\45\ See Letter from Michael Nicholas, Chief Executive Officer,
BDA, dated November 19, 2015.
\46\ Request for Comment on Draft Amendments to MSRB Rule A-3 to
Lengthen the Term of Board Member Service, MSRB Notice 2015-18 (Oct.
5, 2015) (``MSRB Request for Comment'').
\47\ See supra note 3.
\48\ See supra notes 4 and 33.
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Increase in Term Length--Training
The MSRB noted that this comment by BDA addresses internal MSRB
matters and does not suggest any revision to the language of the
amendments in the proposed rule change.\49\ The MSRB further stated
that the MSRB already allocates significant resources to educating new
Board members as part of a robust and dedicated orientation process
that begins prior to the commencement of their terms and focuses on
organizational and other substantive matters, including, but not
limited to, rulemaking and other large initiatives.\50\ Finally, the
MSRB represented that it already routinely revises and improves this
process with the benefit of each successive experience orienting new
Board members.\51\
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\49\ Id.
\50\ Id.
\51\ Id.
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IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change as
well as the comments received. The Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to the MSRB.
In particular, the Commission finds that the rule change is
consistent with Section 15B(b)(2)(B) of the Act, which provides that
the MSRB's rules shall:
establish fair procedures for the nomination and election of members
of the Board and assure fair representation in such nominations and
elections of [P]ublic [R]epresentatives, broker dealer
representatives, bank representatives, and advisor representatives.
Such rules--
(i) shall provide that the number of [P]ublic [R]epresentatives
of the Board shall at all times exceed the total number of
[R]egulated [R]epresentatives and that the membership shall at all
times be as evenly divided in number as possible between [P]ublic
[R]epresentatives and [R]egulated [R]epresentatives;
(ii) shall specify the length or lengths of terms members shall
serve;
(iii) may increase the number of members which shall constitute
the whole Board, provided that such number is an odd number; and
(iv) shall establish requirements regarding the independence of
public representatives.
The Commission believes the increase of the term length from three
to four years, the change in the number and size of Board classes from
three classes of seven members to one class of six and three classes of
five, and the elimination of the requirement that there be one non-
dealer municipal advisor per class are consistent with the Act in that
the composition of the Board would continue to satisfy the requirements
of the Act. Further, the Commission believes the limitation of
consecutive terms to two, totaling a maximum of eight years of
consecutive service, is consistent with the Act in that it specifies
the length of term that Board members can serve when the MSRB invokes
the special circumstances exception.
Further, the Commission finds that the proposed deletion of the
transition process described in MSRB Rule A-3(h) is consistent with the
Act because removing the obsolete provision improves the clarity and
readability of the rule. The Commission also believes the proposed
update to the reference to the ``Nominating and Governance Committee''
in MSRB Rule A-3(g)(ii) is consistent with the Act because it enhances
the accuracy of the rule in regard to a reference to a component of the
Board's governance structure.
In approving the proposed rule change, the Commission has also
considered the proposed rule change's impact on efficiency,
competition, and capital formation.\52\ The Commission believes that
the effect of the proposed rule is beneficial and the proposed changes
will improve the effectiveness and efficiency of the Board by providing
the Board with increased continuity and institutional knowledge
particularly in connection with the rulemaking process. The Commission
does not believe that the proposed rule change would impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act.
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\52\ 15 U.S.C. 78c(f).
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For the reasons noted above, the Commission believes that the
proposed rule change is consistent with the Act.
MSRB Execution of the Transition Plan
In evaluating the proposed rule change, the Commission has
considered the Transition Plan to effectuate the changes in term length
and the number
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and size of Board classes proposed by the MSRB in the Proposing
Release.\53\ The Commission's approval of the proposed rule change is
premised on the MSRB executing the Transition Plan.
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\53\ See supra note 3.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\54\ that the proposed rule change (SR-MSRB-2016-01) be, and hereby
is, approved.
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\54\ 15 U.S.C. 78s(b)(2).
\55\ 17 CFR 200.30-3(a)(12).
For the Commission, pursuant to delegated authority.\55\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06452 Filed 3-22-16; 8:45 am]
BILLING CODE 8011-01-P