WASHINGTON - The Government Finance Officers Association is opposing the Municipal Securities Rulemaking Board's proposed easing of independence standards for one public investor representative on the board, saying it could affect the balance of power and result in a member who does not represent investors' best interests.
The MSRB proposed the changes to its Rule A-3 on board membership to allow the person filling the public investor representative seat to have limited ties to a regulated entity, such as a broker-dealer. Under the current rule, public members must be independent from muni brokers, muni advisors, and banks, meaning they have "no material business" with any of those entities.
No material business is currently defined as meaning individuals are not, and have not been, associated with a regulated entity for two years and cannot have a compensatory or other relationship with a regulated entity that would affect their independent decision-making.
Dustin McDonald, the director of the GFOA's federal liaison center, said in a comment letter sent to the MSRB, that the self-regulator's proposed change "compromises the 'public' aspects of public board membership."
"The current proposal would weaken the criteria for public board membership, and provide the MSRB alone with the subjective ability to determine when an individual meets the public membership criteria," he said.
Under its current structure, which was created after the Dodd-Frank Act mandated the MSRB board have a public majority, there are 21-members, 11 public and 10 regulated.
Of the public members, at least one must represent institutional or retail investors, one must represent issuers and one must have knowledge of or experience in the muni industry.
The change would affect one representative of institutional or retail investors and allow that person to qualify as independent even if he or she is an employee or officer of an MA- or dealer-affiliated investment advisory firm.
The proposal is a narrower version of one the MSRB released in 2013 that would have eased the independence standard for all public board positions. It was eventually abandoned after facing criticism from the GFOA and a number of other groups.
The MSRB said in its regulatory notice that it proposed the changes because the current rule is "unduly restrictive, resulting in the disqualification of qualified individuals, who have relevant knowledge and expertise that are key to the MSRB's ability to meet its statutory mandate."
McDonald repeated the GFOA's argument made in response to the 2013 proposal, that "the qualifications for public board membership are already quite lenient" by allowing "individuals who have been away from regulated parties for two years to be able to be considered for public board membership."
The further loosening of "no material business relationship" the MSRB wants to apply to the public investor representative "appears to be establishing a permanent seat for a buy-side institutional investor," McDonald said.
Instead, the GFOA suggested the self-regulator fill regulated seats with the individuals associated with regulated entities and, if it feels a specific segment of the market is underrepresented, it could increase outreach efforts to have people from that segment of the market apply for those positions.
The MSRB raised two separate questions along with its proposal to amend the rule. One was whether to increase board member terms to allow for a greater wealth of accumulated knowledge. The other was whether to continue publishing the names of everyone applying to the board positions at the risk of losing people who would not want their name published if they are not successful.
McDonald said the GFOA is "not supportive" of extending the board member terms past the current three-year limit, drawing comparisons to members of the GFOA's board who serve for the same amount of time and "are still able to participate fully in shaping the direction of GFOA during their time on the board."
GFOA also is concerned about not publishing the names of all MSRB board applicants, saying eliminating that practice would "remove a needed element of transparency in the nominating board process."
"In fact we believe that there is already a greater need for transparency in this process," McDonald said. He added publishing the names is helpful for future applicants who want to understand the board's nominating preferences.
