The Securities and Exchange Commission approved significant changes to the Municipal Securities Rulemaking Board’s governance rules, including decreasing the size of its board.
The SEC Wednesday night approved changes to MSRB Rules A-3 on membership and A-6 on committees that would among other things, reduce the size of the MSRB’s board to 15 from 21. Applicants that want to be considered as public members on the board will now also have an increased “cooling off” period to five years from two. Board members will now have a six-year term limit as well.
The SEC did not make any changes to the MSRB’s proposal. Changes to the MSRB’s governance rule will be effective on Oct. 1, the start of its fiscal year.
“The MSRB’s governance improvements are an important step towards ensuring the board’s commitment to accountability and transparency," SEC Chair Jay Clayton said in a statement. "I appreciate the leadership of (MSRB chair) Ed Sisk and his fellow board members in moving these forward.”
The changes have, from the start, elicited strong reactions from stakeholders.
“There are elements of the rule change that are welcome like reducing the board size from 21 people,” said Michael Decker, senior vice president of policy and research at Bond Dealers of America. “That is too big of a board of directors. A smaller board is more manageable and more efficient. But there other aspects of the rule that we don’t like.”
Changes to the MSRB’s governance has been an ongoing process. The MSRB first requested comment in January and then extended that deadline to April due to the pandemic. A sticking point for industry groups has been getting representation on the shrinking board.
The National Association of Municipal Advisors wanted to have three MA spots on the board, saying adequate MA representation was needed following the 2010 Dodd-Frank Act when MAs first became regulated.
The MSRB board is divided into two categories: public and regulated. Currently, within the public representative category, at least one board member must be representative of institutional or retail investors, at least one must represent issuers and at least one has to be a member of the public. The board must be majority public, meaning dealers and muni advisors can't outnumber members not regulated by the MSRB.
In the regulated category, at least one board member must be associated with a dealer that is a bank, at least one be associated with a dealer that is not a bank, and at least one (and not less than 30%) of members must be associated with an MA.
In practice, this means the board has three MAs, as the current board does. However, now under the new changes, there will be two MAs, changing representation as a proportion of the board to 28% from 30%.
Broker-dealers, on the other hand, were against reserving two spots for MAs in the regulated representative group, preferring the MSRB divide the number of board seats between dealers and MAs based on financial contributions.
BDA was against the change to allow two spots for MAs in the regulated representative group, preferring the MSRB to divide the number of board seats between dealers and MAs based on financial contributions.
Decker said dealers pay the bulk through fees and assessments and that the MSRB should have addressed financial contributions’ among dealers and MAs.
“The board should have addressed this issue a long time ago and right-sized the relative contributions of advisors and dealers,” Decker said. “We’ll continue to press them on this and hopefully they’ll get serious on this issue soon.”
Last year, the MSRB did increase annual professional fees for MAs and the MSRB has noted in the past that MAs should expect to pay a larger share of the board’s budget in the future.
The Government Finance Officers Association hopes the MSRB will keep two issuers on the smaller board, though the new rules only require one. The MSRB did commit to two issuers during the transition period to a smaller board, which will take place when the MSRB shrinks to 17 members next year before going to 15 in fiscal 2022.
Emily Brock, director of the GFOA’s federal liaison center, said maintaining two issuers would maintain the status quo and assure fair representation.
“They (MSRB) would focus on ensuring that there is representation of diverse issuers on the board by putting at least two, is our expectation,” Brock said.
Six board member terms are set to expire at the end of this fiscal year, but two will have their terms extended so that there will be 17 members in fiscal year 2021. That allows a second issuer to remain on the board during that time.
The board would then resume electing new members in fiscal year 2022. Some term extensions will continue for the purpose of maintaining membership ratios until fiscal 2024, when the transition will be complete and no new extensions will be necessary.
Public representatives must now have five years of separation, up from two years, that they must not be associated with a dealer or MA firm.
Both that and the shrinking board are in line with the MSRB Reform Act of 2019 that Sen. John Kennedy, R-La., introduced over a year ago. Sources have said the MSRB’s motivation for these changes is to forestall Kennedy’s bill, which would give the SEC control of board membership rather than letting the MSRB select its own members.
