
[Federal Register: October 6, 2010 (Volume 75, Number 193)]
[Notices]               
[Page 61806-61812]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc10-152]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63025; File No. SR-MSRB-2010-08]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendment No. 1 to and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, to Amend Rule A-3, on Membership on the Board, To 
Comply With the Dodd-Frank Wall Street Reform and Consumer Protection 
Act

September 30, 2010.
    On August 27, 2010, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend MSRB Rule A-3, on 
membership on the Board, to comply with the requirements of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'').\3\ The Commission published the proposed rule change for 
comment in the Federal Register on September 8, 2010.\4\ The Commission 
received ten comment letters, the MSRB's response, and a supplemental 
response to the MSRB's response.\5\ On September 30, 2010, the

[[Page 61807]]

MSRB filed Amendment No. 1 to the proposed rule change.\6\ This notice 
and order provide notice of Amendment No.1 to the proposed rule change 
and approves the proposed rule change, as modified by Amendment No. 1, 
on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Public Law No. 111-203, 124 Stat. 1376 (2010).
    \4\ See Securities Exchange Act Release No. 62827 (September 1, 
2010), 75 FR 54673.
    \5\ See e-mail from Peter Shapiro, Managing Director, Swap 
Financial Group, LLC, dated September 14, 2010 (``Swap Financial 
Letter''); email from Kevin Olson, dated September 17, 2010 (``Olson 
Letter''); letter from Mike Nicholas, Chief Executive Officer, Bond 
Dealers of America, dated September 17, 2010 (``Bond Dealers 
Letter''); letter from Robert W. Doty, President, American 
Governmental Financial Services, dated September 21, 2010 (``AGFS 
Letter I''); letter from Joy A. Howard, Principal, WM Financial 
Strategies, dated September 21, 2010 (``WM Financial Letter''); 
letter from Steve Apfelbacher, President, National Association of 
Independent Public Finance Advisors, dated September 22, 2010 
(``NAIPFA Letter''); letter from Michael Decker, Managing Director 
and Co-Head, Municipal Securities Division, Securities Industry and 
Financial Markets Association, dated September 22, 2010 (``SIFMA 
Letter''); letter from Susan Gaffney, Director, Federal Liaison 
Center, Government Finance Officers Association, dated September 22, 
2010 (``GFOA Letter''); letter from Thomas M. DeMars, Managing 
Principal, Fieldman, Rolapp & Associates, dated September 22, 2010 
(``Fieldman Letter''); letter from Lawrence P. Sandor, Senior 
Associate General Counsel, MSRB, dated September 23, 2010 (``MSRB 
Response Letter''); email from Robert W. Doty, President, American 
Governmental Financial Services, dated September 27, 2010 (``AGFS 
Letter II''); letter from Lawrence P. Sandor, Senior Associate 
General Counsel, MSRB, dated September 30, 2010 (``MSRB Supplemental 
Response Letter'').
    \6\ In Amendment No. 1, to address concerns raised by 
commenters, MSRB proposes that advisor representatives (as defined 
below) shall not be associated with a broker, dealer or municipal 
securities dealer. In addition, in Amendment No. 1, the MSRB 
proposes to amend Rule A-3(i)(iv) to provide that on or after 
October 1, 2010 the MSRB will propose amendments to its rules that 
would assure that for future board elections that the Nominating 
Committee will be composed of a majority of public representatives 
and that would assure fair representation of bank representatives, 
broker-dealer representatives and advisor representatives (as such 
terms are defined below) on the Nominating Committee.
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I. Background and Description of the Proposal

A. Dodd-Frank Act

    The Dodd-Frank Act, among other things, amended provisions of 
Section 15B of the Exchange Act governing the nomination, election and 
composition of members of the Board.\7\ These amendments to Section 15B 
of the Exchange Act will be effective on October 1, 2010.\8\
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    \7\ See Section 975(b) of the Dodd-Frank Act.
    \8\ See Section 975(i) of the Dodd-Frank Act.
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    Prior to enactment of the Dodd-Frank Act, Section 15B(b)(1) of the 
Exchange Act provided that the Board must be composed initially of 
fifteen members appointed by the Commission.\9\ In addition, the 
Exchange Act required that the initial members of the Board must 
consist of five individuals who are public representatives,\10\ five 
individuals who are broker-dealer representatives \11\ and five 
individuals who are bank representatives.\12\ Consistent with the 
requirements of the Exchange Act, the MSRB adopted Rule A-3 regarding 
membership on the Board. MSRB Rule A-3, among other things, provided 
that the Board shall be composed of 15 members, at all times equally 
divided among public representatives, broker-dealer representatives and 
bank representatives.
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    \9\ Section 15B(b)(1) of the Exchange Act also provided that 
``[p]rior to the expiration of the terms of office of the initial 
members of the Board, an election shall be held under rules adopted 
by the Board (pursuant to subsection (b)(2)(B) of this section) of 
the members to succeed such initial members.''
    \10\ Section 15B(b)(1)(A) defined the term ``public 
representatives'' to mean individuals who are not 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 municipal broker, 
municipal dealer or municipal securities dealer), at least one of 
whom shall be representative of investors in municipal securities, 
and at least one of whom shall be representative of issuers of 
municipal securities.
    \11\ Section 15B(b)(1)(B) defined the term ``broker-dealer 
representatives'' to mean individuals who are associated with and 
representative of municipal securities brokers and municipal 
securities dealers which are not banks or subsidiaries or 
departments or divisions of banks.
    \12\ Section 15B(b)(1)(C) defined the term ``bank 
representatives'' to mean individuals who are associated with and 
representative of municipal securities dealers which are banks or 
subsidiaries or departments or divisions of banks.
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    The Dodd-Frank Act amended Section 15B(b)(1) of the Exchange Act to 
provide that the members of the Board shall consist of two separate 
groups: eight ``public representatives'' and seven ``regulated 
representatives.'' Section 15B(b)(1)(A) of the Exchange Act defines 
``public representatives'' to mean individuals who are independent of 
any municipal securities broker, municipal securities dealer, or 
municipal advisor, at least one of whom shall be representative of 
institutional or retail municipal securities investors (``investor 
representative''), at least one of whom shall be representative of 
municipal entities (``issuer representative''), and at least one of 
whom shall be representative of the public with knowledge of or 
experience in the municipal industry (``general public 
representative'').\13\ Section 15B(b)(1)(B) of the Exchange Act defines 
``regulated representatives'' to mean individuals who are associated 
with a broker, dealer, municipal securities dealer, or municipal 
advisor, including at least one individual who is associated with and 
representative of brokers, dealers, or municipal securities dealers 
that are not banks or subsidiaries or departments or divisions of banks 
(``broker-dealer representative''), at least one individual who is 
associated with and representative of municipal securities dealers 
which are banks or subsidiaries or departments or divisions of banks 
(``bank representative''), and at least one individual who is 
associated with a municipal advisor (``advisor representative'').\14\ 
In addition, Section 15B(b)(1) of the Exchange Act provides that each 
member of the Board must be knowledgeable of matters related to the 
municipal securities markets.\15\
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    \13\ See 15 U.S.C. 78o-4(b)(1)(A) (as amended by the Dodd-Frank 
Act).
    \14\ See 15 U.S.C. 78o-4(b)(1)(B) (as amended by the Dodd-Frank 
Act).
    \15\ See 15 U.S.C. 78o-4(b)(1) (as amended by the Dodd-Frank 
Act).
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    The Dodd-Frank Act also amended Section 15B(b)(2)(B) of the 
Exchange Act to provide that the Board shall establish fair procedures 
for the nomination and election of the members of the Board, and shall 
assure fair representation in such nominations and elections of public 
representatives, broker-dealer representatives, bank representatives 
and advisor representatives.\16\ Further, the Dodd-Frank Act amended 
Section 15B(b)(2)(B) to provide that the Board shall establish rules 
that: Set forth requirements regarding the independence of public 
representatives; provide that the number of public representatives at 
all times exceed the number of regulated representatives; and provide 
that membership on the Board is at all times as evenly divided as 
possible between public and regulated representatives. In addition, the 
Dodd-Frank Act amended Section 15B(b)(2)(B) to provide that the MSRB, 
by rule, may increase the number of members on the Board, provided that 
such number is an odd number.\17\
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    \16\ See 15 U.S.C. 78o-4(b)(2)(B) (as amended by the Dodd-Frank 
Act).
    \17\ See id.
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B. Proposal

    To implement the terms of the Dodd-Frank Act by the effective date 
of October 1, 2010, the MSRB proposes to add subsection (i) to Rule A-3 
to implement, among other things, a transitional provision for the 
Board's fiscal year commencing October 1, 2010 that would increase the 
size of the Board from 15 members to 21 members (who are knowledgeable 
of matters related to the municipal securities markets), with 11 public 
representatives and 10 regulated representatives. This transitional 
provision would be in effect until September 30, 2012. In addition, 
prior to October 1, 2010, the MSRB proposes to elect 11 new Board 
members, of which eight would be public representatives and three would 
be municipal advisor representatives. The MSRB proposes that the terms 
of these new Board members would expire on September 30, 2012.
    Of the 11 public representatives, the MSRB proposes that at least 
one would be an investor representative, at least one would be an 
issuer representative, and at least one would be a general public 
representative. With respect to the 10 regulated representatives, the 
MSRB proposes that at least one would be a broker-dealer 
representative, at least one would be a bank representative, and at 
least one (but not less than 30% of the total number of regulated 
representatives) would be an advisor representative, who shall not be

[[Page 61808]]

associated with a broker, dealer or municipal securities dealer.
    For purposes of determining whether an individual is a ``public 
representative,'' the MSRB proposes to add Rule A-3(h), among other 
things, to define the term ``independent of any municipal securities 
broker, municipal securities dealer, or municipal advisor'' to mean 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, would mean 
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, could also determine that additional 
circumstances involving the individual could constitute a ``material 
business relationship'' with a municipal securities broker, municipal 
securities dealer, or municipal advisor.
    To help ensure a fair nomination process, the MSRB also proposes, 
in its transitional provision under MSRB Rule A-3(i), to allow the 
Nominating Committee to solicit nominations for municipal advisor 
representatives by publishing a notice in a financial journal having 
general national circulation among members of the municipal securities 
industry on or after enactment of the Dodd-Frank Act. The proposal 
provides that the Nominating Committee shall accept recommendations for 
14 days following the date of publication of such notice and shall make 
the names publicly available.\18\
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    \18\ The Dodd-Frank Act was signed into law on July 21, 2010. 
The MSRB published a notice on July 22, 2010, pursuant to which it 
received a number of additional recommendations for persons to serve 
as municipal advisor representatives on the Board. See MSRB Notice 
2010-22 (July 22, 2010).
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    The proposal also provides that prior to the formation of the 
Nominating Committee for purposes of nominating potential new members 
to the Board with terms commencing on October 1, 2011, the Board shall 
amend the provisions of subsection (c) of Rule A-3 relating to the 
composition and procedures of the Nominating Committee to reflect the 
composition of the Board as provided under the Dodd-Frank Act, to 
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, and ``to reflect such other considerations consistent 
with the provisions of the Act and the Dodd-Frank Act as the Board 
shall determine are appropriate.''

II. Discussion of Comments and MSRB's Response

    The Commission received ten comment letters and the MSRB's 
responses.\19\ The MSRB provided two responses to the comments.\20\ The 
comments and the MSRB's responses are discussed in greater detail 
below.
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    \19\ See supra note 5.
    \20\ See MSRB Response Letter; see also MSRB Supplemental 
Response Letter.
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1. Comments Regarding Requirements Relating to Independence of Public 
Representatives

    Some commenters disagreed with the MSRB's proposed definition of 
the term ``independent of any municipal securities broker, municipal 
securities dealer, or municipal advisor.'' \21\ In particular, these 
commenters did not agree with the proposed definition of ``no material 
business relationship'' and the requirement that an individual is not 
and, within the last two years, has not been, associated with a 
municipal securities broker, municipal securities dealer, or municipal 
advisor.\22\ One commenter suggested that a five-year ``cooling off '' 
period would be more appropriate.\23\ Another commenter stated that 
under the proposed definition of the term ``independent of any 
municipal securities broker, municipal securities dealer, or municipal 
advisor,'' it is unclear whether any independent municipal advisor 
would be appointed to the Board because potentially 100% of the Board 
members could be, or could have been, associated with, or employed by, 
a municipal securities broker or dealer.\24\ This commenter stated that 
it believes that an individual who has been affiliated with, or 
employed by, a municipal securities broker, dealer, or municipal 
advisor cannot be truly independent, regardless of when the affiliation 
or employment ended.\25\ Thus, the commenter recommended that public 
representatives of the Board should consist solely of individuals ``who 
have never been associated with, employed by and do not otherwise 
possess a material business relationship with a [sic] municipal 
securities brokers, municipal securities dealers, or municipal 
advisors.'' \26\
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    \21\ See AGFS Letter I; WM Financial Letter.
    \22\ See id.
    \23\ See AGFS Letter I.
    \24\ See WM Financial Letter.
    \25\ See id.
    \26\ See id.
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    In response to these comments, the MSRB stated that it believes 
that ``the two-year cooling off period is appropriate as a standard for 
independence'' and referenced the one year cooling-off period imposed 
by other self-regulatory organizations (``SROs'') in determining the 
independence of public members.\27\ Further, the MSRB noted that the 
Board or the Nominating Committee could determine whether other 
circumstances involving the individual would constitute a ``material 
business relationship'' that would result in the person not being 
viewed as independent.\28\
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    \27\ See MSRB Response Letter; see also infra note 30.
    \28\ See MSRB Response Letter.
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    The Commission understands commenters' concerns regarding whether a 
public representative would be ``independent of any municipal 
securities broker, municipal securities dealer, or municipal advisor'' 
if the public representative previously has been associated with a 
municipal securities broker, municipal securities dealer, or municipal 
advisor, even where such association occurred at least two years prior 
to membership on the Board. Under Section 15B(b)(2)(B)(iv) of the 
Exchange Act,\29\ the MSRB must have rules establishing requirements 
regarding the independence of public representatives. The Commission 
believes the proposed requirements in Rule A-3(h) are consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB. In particular, as noted by the MSRB 
in the MSRB Response Letter, the proposal is consistent with and 
indeed, stricter than, cooling-off periods required by other SROs in 
determining whether public members are independent.\30\ Further, the 
proposed two-year cooling off period is a minimum requirement and, as 
noted by the MSRB in the MSRB Response Letter, the proposal would allow 
the Board, or by delegation, its Nominating Committee, to determine

[[Page 61809]]

additional circumstances involving the individual that would constitute 
a ``material business relationship'' with a municipal securities 
broker, municipal securities dealer, or municipal advisor.
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    \29\ 15 U.S.C. 78o--4(b)(2)(B)(iv) (as amended by the Dodd-Frank 
Act).
    \30\ See Independence Policy of the NYSE Euronext Board of 
Directors (stating a ``Director is not independent if he or she is, 
or within the last year was, or has an immediate family member who 
is, or within the last year was a Member, allied member or allied 
person or approved person * * *'').
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2. Comments Regarding Composition of the Board

    Several commenters expressed concerns that the representation of 
municipal advisors on the proposed Board is inadequate.\31\ For 
example, one commenter noted that during the transitional period (from 
October 1, 2010 to September 30, 2012), advisor representatives would 
constitute less than 15% of the entire Board and consequently may be 
outnumbered by broker-dealer representatives and bank representatives 
on the Board.\32\ This commenter suggested that four out of the ten 
regulated representatives should be advisor representatives and that 
these four advisor representatives should represent a variety of 
advisors.\33\ Another commenter recommended that five out of the ten 
regulated representatives should be advisor representatives, four of 
whom would be independent municipal advisors who are not, and have not 
been, associated with, or employed by, a municipal securities broker, 
dealer, bank or underwriter.\34\ This commenter, however, noted that 
even with this increase in the number of municipal advisor 
representatives, such representatives would constitute only 19% of the 
entire Board.\35\ Another commenter suggested that the number of 
independent advisor representatives on the Board should be equal to the 
number of bank and broker-dealer representatives on the Board.\36\ One 
commenter stated that due to the different services offered by 
municipal advisors, a strict limitation on the number of advisor 
representatives could not adequately represent this diversity.\37\ Five 
commenters stated that advisor representatives should be independent of 
bank and broker-dealer representatives because bank dealers and broker-
dealers are already represented on the Board.\38\
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    \31\ See NAIPFA Letter; Swap Financial Group Letter; AGFS Letter 
I; AGFS Letter II; WM Financial Letter; see also GFOA Letter.
    \32\ See Swap Financial Group Letter.
    \33\ See id. The commenter suggested that the four advisor 
representatives should represent each of the following categories: 
(1) General financial advisory firm with a national scope; (2) 
regional financial advisory firm whose client base is principally 
governmental entities; (3) financial advisory firm whose client base 
is obligors who borrow through tax-exempt conduit agencies; and (4) 
swap or financial products advisor.
    \34\ See WM Financial Letter.
    \35\ See id.
    \36\ See GFOA Letter; see also AGFS Letter II (stating that 
independent advisor representatives should be equal in numbers to 
broker-dealer representatives and bank representatives as municipal 
securities dealers are in an adverse role in relation to municipal 
issuers, while municipal advisors represent only the municipal 
issuers).
    \37\ See AGFS Letter I.
    \38\ See WM Financials Letter; NAIPFA Letter; GFOA Letter; 
Fieldman letter; AGFS Letter II.
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    One commenter stated that the Board should not require that at 
least 30% of regulated representatives be advisor representatives.\39\ 
This commenter stated that the proposal goes beyond the requirements of 
the Dodd-Frank Act and effectively increases the minimum number of 
advisor representatives.\40\ This commenter further stated that 
advisors who work for dealers should be eligible as advisor 
representatives.\41\ Another commenter generally supported the proposed 
amendments to Rule A-3, but suggested that after the transitional 
period, the Board should consider reducing its size back to 15 members 
and, at that time, reduce the number of advisor representatives on the 
Board to less than 30% of the regulated representatives.\42\ This 
commenter further noted that the Board should not establish, as a 
matter of policy, that advisors make up at least 30% of regulated 
representatives, especially because the Board has not established a 
minimum number of dealer or bank representatives.\43\ This commenter 
also stated that it believes that the requirement that at least one 
member of the Board be an advisor representative can be satisfied by 
representatives of ``independent'' municipal advisors or of dealers or 
banks whose firms also provide municipal advisory services.\44\
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    \39\ See BDA Letter.
    \40\ See id.
    \41\ See id.
    \42\ See SIFMA Letter.
    \43\ See id.
    \44\ See id.
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    One commenter suggested that the proposed MSRB Board does not 
provide adequate issuer representation.\45\ This commenter recommended 
that the public representatives on the Board be comprised of four 
issuers, four investors, and three general public members.\46\ The 
commenter believes that the issuer members should represent various-
sized state and local governments.\47\ This commenter also recommended 
that ``[a]s the MSRB determines the composition of future boards, these 
numbers--as a percentage of the total number of board members--should 
not be altered.'' \48\ Another commenter stated that the Board should 
be comprised of five investor representatives, five issuer 
representatives, and five vendor representatives.\49\
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    \45\ See GFOA Letter; see also NAIPFA Letter (stating that 
``fair representation also means that the issuers of municipal 
securities are appropriately represented'').
    \46\ See GFOA Letter.
    \47\ See id.
    \48\ See id.
    \49\ See Olson Letter.
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    In its response, the MSRB stated that it believes that, during the 
transitional period, 30% regulatory representation on the Board for 
municipal advisors is appropriate because it will ensure fair 
representation of such entities, will assist the Board in its 
rulemaking process with respect to municipal advisors and ``will inform 
the Board's decisions regarding other municipal advisory activities 
while not detracting from the Board's ability to continue its existing 
rulemaking duties with respect to broker-dealer and bank activity in 
the municipal securities markets.'' \50\ The MSRB also noted that, 
during the transitional period, the three municipal advisors on the 
Board are expected to be ``advisors that are not affiliated with 
broker-dealers or banks.'' \51\
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    \50\ See MSRB Response Letter.
    \51\ See id.
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    At the same time, the MSRB noted that it does not believe that 
setting the minimum advisor representation at 30% of regulated 
representatives is too low.\52\ In support, the MSRB noted the 
processes it has, or will have, in place, to maximize municipal advisor 
participation in the rulemaking process.\53\ The MSRB also stated that, 
having reviewed the composition requirements of other SROs, ``it is 
comfortable that the proposed size and composition of the MSRB 
represents best practices in SRO governance and will be effective in 
meeting the full range of obligations that the MSRB will be undertaking 
beginning on October 1, 2010.'' \54\
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    \52\ See id.
    \53\ See id. (noting, for example, the establishment of a new 
advisory council to help address municipal advisor issues).
    \54\ See id.
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    With respect to comments regarding the composition of public 
representatives on the Board, the MSRB stated that ``it is comfortable 
that the expanded number of public representatives will provide ample 
opportunity for municipal entity representation on the Board at levels 
above those that have historically occurred under the prior Board 
composition formulation that limited public representation to only five 
members.'' \55\ In addition, with respect to the one commenter that 
suggested that the Board should be comprised of five

[[Page 61810]]

investor representatives, five issuer representatives, and five vendor 
representatives,\56\ the MSRB noted that such composition formulation 
would not comply with the Dodd-Frank Act, which requires that of the 
public representatives, at least one must be an investor 
representative, at least one must be an issuer representative, and at 
least one must be a general public representative.
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    \55\ See MSRB Response Letter.
    \56\ See Olson Letter.
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    The MSRB noted that the Board is aware that municipal advisors are 
not homogeneous and is committed to seeking out all categories of 
members based on various criteria.\57\ In addition, the MSRB stated 
that the proposal would establish the Board composition for a two year 
transitional period only and, at the end of the transitional period, 
the MSRB will be in a better position to make ``long-term decisions'' 
regarding representation, size and related matters.\58\
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    \57\ See MSRB Response Letter.
    \58\ See id.
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    The Commission believes that the proposal is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder applicable to the MSRB, including the fair representation 
requirements of the Exchange Act. Section 15B(b)(2)(B) of the Exchange 
Act requires, among other things, that the rules of the Board establish 
fair procedures for the nomination and election of members of the Board 
and assure fair representation in such nominations and elections of 
public representatives, broker-dealer representatives, bank 
representatives, and advisor representatives.\59\ Section 
15B(b)(2)(B)(i) of the Exchange Act provides that the number of public 
representatives of the Board must at all times exceed the total number 
of regulated representatives.\60\ The MSRB proposes that the Board 
consist of 11 public representatives and 10 regulated representatives. 
Of those 10 regulated representatives, the MSRB proposes that at least 
one, and not less than 30%, shall be advisor representatives.
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    \59\ See 15 U.S.C. 78o-4(b)(2)(B) (as amended by the Dodd-Frank 
Act).
    \60\ See 15 U.S.C. 78o-4(b)(2)(B)(i) (as amended by the Dodd-
Frank Act).
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    Previously, the Commission has considered whether an SRO's proposed 
governance rules are consistent with the Exchange Act's requirements 
under Sections 6 and 15A for fair representation of SRO members 
generally.\61\ For example, the Commission has approved an SRO's 
governance rules that require that the SRO's members as a whole be able 
select at least 20% of the total number of directors of the exchange's 
or association's board.\62\ In addition, the Commission has previously 
found SRO rules that provide sub-categories of regulated persons with 
the right to select a specified number of directors to be consistent 
with the Exchange Act.\63\
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    \61\ Section 6(b)(3) of the Exchange Act provides that: ``An 
exchange may not be registered as a national securities exchange 
unless the Commission determines that * * * (3) The rules of the 
exchange assure fair representation of its members in its selection 
of its directors and administration of its affairs and provide that 
one or more directors shall be representative of issuers and 
investors and not be associated with a member of the exchange, 
broker, or dealer.'' 15 U.S.C. 78f(b)(3). Section 15A(b)(4) of the 
Exchange Act contains an identical requirement with respect to the 
rules of a national securities association. See 15 U.S.C. 78o-
3(b)(4).
    \62\ See, e.g., Securities Exchange Act Release No. 58324 
(August 7, 2008), 73 FR 46936 (August 12, 2008) (stating that ``the 
requirement under BSE By-Laws that at least 20% of the BSE Directors 
represent members * * * [is] designed to ensure the fair 
representation of BSE members on the BSE Board''); Securities 
Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 
(January 23, 2006) (stating that ``the requirement in [Nasdaq's] By-
Laws that twenty percent of the directors be `Member Representative 
Directors' * * * provides for the fair representation of members in 
the election of directors * * * consistent with the requirement in 
Section 6(b)(3) of the Exchange Act''); Securities Exchange Act 
Release No. 48946 (December 17, 2003), 68 FR 74678 (December 24, 
2003) (stating that the amended Constitution of the New York Stock 
Exchange, which gives Exchange members the ability to nominate no 
less than 20% of the directors on the Board, satisfies the Section 
6(b)(3) fair representation requirement); see also Securities 
Exchange Act Release No. 50699 (November 18, 2004), 69 FR 71126 
(December 8, 2004) (stating that ``[c]onsistent with the fair 
representation requirement, the [Commission's] proposed [SRO] 
governance rules would require that the Nominating Committee 
administer a fair process that provides members with the opportunity 
to elect at least 20% of the total number of directors (`member 
candidates'). * * * This `20% standard' for member candidates 
comports with previously-approved SRO rule changes that raised the 
issue of fair representation'').
    \63\ See, e.g., Securities Exchange Act Release No. 56145 (July 
26, 2007), 72 FR 42169 (August 1, 2007) (approving the composition 
of the FINRA (f/k/a NASD) Board of Governors to include three small 
firm Governors, one mid-size firm Governor, and three large-firm 
Governors, elected by members of FINRA according to their 
classification as a small firm, mid-size firm, or large firm).
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    Under the MSRB proposal, of the 10 regulated representatives, at 
least one would be a broker-dealer representative, at least one would 
be a bank representative, and at least one, and not less than 30% of 
the total regulated representatives (i.e. three out of 10), would be an 
advisor representative. Section 15B(b)(2)(B)(i) of the Exchange Act 
requires the Board to consist of a majority of public representatives, 
leaving a minority of the Board available to achieve ``fair 
representation'' of the three sub-categories of regulated 
representatives.\64\ Accordingly, ``fair representation'' of each of 
the sub-categories must necessarily mean something less than the 20% 
standard, in relation to an entire board, previously approved by the 
Commission for SRO members generally under Sections 6 and 15A of the 
Exchange Act.
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    \64\ See 15 U.S.C. 78o-4(b)(2)(B)(i) (as amended by the Dodd-
Frank Act).
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    The Commission also notes that Section 15B(b)(1) of the Exchange 
Act sets forth minimum representation requirements for bank, broker-
dealer and advisor representatives.\65\ It does not mandate the 
specific number of any class of representative that should serve on the 
Board, nor does it set forth maximum Board composition or 
representation requirements.\66\ Thus, as with the interpretation of 
``fair representation'' with respect to other SROs, the Commission has 
flexibility in determining what constitutes ``fair representation'' for 
purposes of the Board's composition under Section 15B of the Exchange 
Act. Based on the constraints of Section 15B(b)(2)(B)(i) noted above, 
and the Commission's consideration of ``fair representation'' in other 
contexts, the Commission believes that the MSRB's proposal to ensure 
that representatives of municipal advisors (that are not associated 
with a broker, dealer or municipal securities dealer), which, for the 
first time will be subject to MSRB rulemaking,\67\ would constitute at 
least 30% of the directors that may be representatives of the three 
sub-categories of regulated representatives, is reasonable, and 
consistent with Section 15B(b)(2)(B) of the Exchange Act.\68\
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    \65\ See 15 U.S.C. 78o-4(b)(1) (as amended by the Dodd-Frank 
Act).
    \66\ See id.
    \67\ See 15 U.S.C. 78o-4(b)(2) (as amended by the Dodd-Frank 
Act). In addition, the Dodd-Frank Act amended Section 15B of the 
Exchange Act to require municipal advisors to register with the 
Commission as of October 1, 2010. See Securities Exchange Act 
Release No. 62824 (September 1, 2010), 75 FR 54465 (September 8, 
2010) (adopting interim final temporary Rule 15Ba2-6T under the 
Exchange Act to require the temporary registration of municipal 
advisors on Form MA-T).
    \68\ See 15 U.S.C. 78o-4(b)(2)(B) (as amended by the Dodd-Frank 
Act).
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3. Other Comments

    Four commenters discussed the MSRB's process for determining the 
Board's leadership for the next year.\69\ Three commenters made 
statements expressing concern about a lack of transparency to this 
leadership selection process, and stated their belief that the Board's 
action was contrary to the goals of the Dodd-Frank Act and 
disenfranchises the new Board.\70\

[[Page 61811]]

Another commenter also expressed concern with the ``secrecy around the 
election of officers during this past summer.'' \71\ One commenter 
recommended ``reversing the July election and allowing the 
reconstituted public majority Board to determine its leadership.'' \72\ 
Two commenters suggested that there be substantially more transparency 
with regard to Board action.\73\
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    \69\ See NAIPFA Letter; GFOA Letter; Fieldman Letter; AGFS 
Letter II.
    \70\ See NAIPFA Letter; Fieldman Letter; AGFS Letter II.
    \71\ See AGFS Letter I. The commenter suggested that the Board 
release all staff and Board member analyses and communications 
relating to: (1) the selection of the new officers and Board 
members, and the composition and structure of committees and 
advisory groups; (2) the need for regulation of municipal advisors; 
or (3) contacts with members of Congress and congressional staff 
members regarding municipal advisor regulation and the composition 
of the new independent Board. The commenter also opposed the manner 
in which the Board considers and takes actions with regard to its 
rules. See also AGFS Letter II (calling for the MSRB to hold open 
meetings on all rulemaking actions and selection of Board members 
and officers).
    \72\ See Fieldman Letter. See also GFOA Letter.
    \73\ See AGFS Letter I; Fieldman Letter; AGFS Letter II.
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    Although the provisions of the proposed rule change do not directly 
relate to these matters, the Commission notes that with respect to 
comments regarding the Board's election of its officers for the 2011 
fiscal year, in its initial response, the MSRB noted that officer 
elections are governed by MSRB Rule A-5(b), and that the MSRB followed 
the process set out in that rule.\74\ In addition, in a supplemental 
response, the MSRB has agreed to hold a ratification vote with respect 
to the prior election of the MSRB officers by the newly constituted 
Board at its first meeting in October.\75\ In addition, as noted above, 
the proposal provides that prior to the formation of the Nominating 
Committee for purposes of nominating potential new members to the Board 
with terms commencing on October 1, 2011, the Board shall amend the 
provisions of subsection (c) of Rule A-3 relating to the composition 
and procedures of the Nominating Committee to reflect, among other 
things, the composition of the Board as provided under the Dodd-Frank 
Act and to 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.
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    \74\ See MSRB Response Letter.
    \75\ See MSRB Supplemental Response Letter.
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    With respect to the comments regarding transparency of the Board's 
governance process, the MSRB stated that it believes that these 
processes are transparent.\76\ The MSRB stated, however, that it would 
take the comments regarding these processes under advisement as its new 
Board is seated on October 1, 2010.\77\
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    \76\ See MSRB Response Letter; see also MSRB Supplemental 
Response Letter.
    \77\ See id.
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III. Discussion and Commission's Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's responses to the comment 
letters and finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB.\78\ In particular, the proposed rule 
change is consistent with Section 15B(b)(1) of the Act, which requires, 
among other things, that the Board shall consist of at least eight 
public representatives (with at least one investor representative, at 
least one issuer representative, and at least one general public 
representative) and seven regulated representatives (with at least one 
broker-dealer representative, at least one bank representative, and at 
least one advisor representative). The proposed rule change is also 
consistent with Section 15B(b)(2)(B) of the Act,\79\ which requires, 
among other things, that the rules of the Board shall establish fair 
procedures for the nomination and election of members of the Board and 
assure fair representation in such nominations and elections of public 
representatives, broker-dealer representatives, bank representatives, 
and advisor representatives.\80\
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    \78\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \79\ 15 U.S.C. 78o-4(b)(2)(B) (as amended by the Dodd-Frank 
Act).
    \80\ See id.
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    In the Commission's view, the proposed composition of the Board is 
consistent with the requirements of the Exchange Act that there is fair 
representation on the Board of public representatives, broker-dealer 
representatives, bank representatives and advisor representatives. In 
addition, the composition of the Board with respect to advisor 
representatives will help assure that municipal advisors will have 
appropriate representation on the Board during this period of 
transition when, for the first time, municipal advisors will be subject 
to MSRB rulemaking. The Commission further believes that the proposed 
two-year ``cooling-off'' period for public representatives is 
appropriate because it is a minimum requirement for establishing 
independence and it is consistent with other SRO requirements for 
establishing independence of board members.
    The Commission notes that the proposed rule change with respect to 
the composition of the Board is being implemented as a transitional 
provision that will be effective for two years, until September 30, 
2012. During this period, the MSRB will be able to monitor the 
effectiveness of the structure of the Board to determine to what 
extent, if any, proposed changes might be appropriate. The Commission 
is sensitive to commenters' concerns regarding fair representation. The 
Commission notes that the proposal by the MSRB for the establishment of 
a permanent Board structure must be filed with, and considered by, the 
Commission pursuant to Section 19(b) of the Exchange Act \81\ before 
the proposal can be effective, as would rules the MSRB seeks to 
implement with respect to oversight of municipal advisors.
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    \81\ See 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Exchange Act. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2010-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2010-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the

[[Page 61812]]

Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of the MSRB. All comments received will 
be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MSRB-2010-08 and should be submitted on 
or before October 27, 2010.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1, before the 30th day after the 
date of publication in the Federal Register. The Commission notes that 
the proposal was published for notice and comment, and the Commission 
received ten comment letters, which comments have been discussed in 
detail above. Amendment No. 1 proposes to amend proposed Rule A-
3(i)(i)(B)(3) to explicitly provide that, of the regulated 
representatives on the Board, ``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 a municipal securities dealer.'' 
The Commission notes that in the MSRB's Response Letter, the MSRB 
expressed its expectation that the advisor representatives would be 
``advisors that are not affiliated with broker-dealers or banks.'' \82\ 
Amendment No. 1 provides additional clarification that the advisor 
representatives on the Board during the transitional period will be 
independent advisors not associated with brokers, dealers or municipal 
securities dealers.
---------------------------------------------------------------------------

    \82\ See MSRB Response Letter.
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    In addition, Amendment No. 1 proposes that, with respect 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 Rule A-3 
relating to the composition and procedures of the Nominating Committee, 
among other things, to 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. Section 15B(b)(2)(B) of the Exchange Act 
provides that the MSRB's rules must, at a minimum, ``establish fair 
procedures for the nomination and election of members of the Board and 
assure fair representation in such nominations and elections of public 
representatives, broker dealer representatives, bank representatives, 
and advisor representatives.'' \83\ In addition, as discussed above, 
Section 15B(b)(2)(B)(i) of the Exchange Act provides that the MSRB's 
rules shall provide that the number of public representatives of the 
Board shall at all times exceed the total number of regulated 
representatives. Amendment No. 1 proposes that the Nominating Committee 
would reflect the new composition of the Board with a majority public 
representation and with fair representation of bank representatives, 
broker-dealer representatives and advisor representatives.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78o-4(b)(2)(B) (as amended by the Dodd-Frank 
Act).
---------------------------------------------------------------------------

    The Commission believes that Amendment No. 1 is consistent with the 
requirements of the Exchange Act and finds good cause, consistent with 
Section 19(b)(2) of the Act,\84\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
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    \84\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB, and in particular, Sections 
15B(b)(1) \85\ and 15B(b)(2) \86\ of the Exchange Act.
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    \85\ 15 U.S.C. 78o-4(b)(1) (as amended by the Dodd-Frank Act).
    \86\ 15 U.S.C. 78o-4(b)(2) (as amended by the Dodd-Frank Act).
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    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Exchange Act,\87\ the proposed rule change (SR-MSRB-2010-08), as 
modified by Amendment No. 1 be, and it hereby is, approved on an 
accelerated basis.
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    \87\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25108 Filed 10-5-10; 8:45 am]
BILLING CODE 8010-01-P

