
[Federal Register Volume 76, Number 163 (Tuesday, August 23, 2011)]
[Notices]
[Pages 52724-52727]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21557]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65158; File No. SR-MSRB-2011-11]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Amendments to Rule A-3, on Membership on the 
Board

August 18, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 11, 2011, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the MSRB. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the SEC a proposed rule change consisting 
of amendments to Rule A-3, on membership on the Board, in order to 
establish a permanent Board structure of 21 Board members divided into 
three classes, each class being comprised of seven members who would 
serve three year terms. The terms would be

[[Page 52725]]

staggered and, each year, one class would be nominated and elected to 
the Board of Directors.
    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

 1. Purpose
    The purpose of the proposed rule change is to make changes to MSRB 
Rule A-3 as are necessary and appropriate to establish a permanent 
Board structure of 21 Board members divided into three classes, each 
class being comprised of seven members who would serve three year 
terms. The terms would be staggered and, each year, one class would be 
nominated and elected to the Board of Directors.
    In order to facilitate the transition to three staggered classes, 
Rule A-3 would include a transitional provision, Rule A-3(h), 
applicable for the Board's fiscal years commencing October 1, 2012, and 
ending September 30, 2014, which would provide that Board members who 
were elected prior to July 2011 and whose terms end on or after 
September 30, 2012, may be considered for term extensions not exceeding 
two years, in order to facilitate the transition to three staggered 
classes of seven Board members per class. The transitional provision 
would further provide that Board members would be nominated for term 
extensions by a Special Nominating Committee formed pursuant to Rule A-
6, on committees of the Board, and that the Board would then vote on 
each proposed term extension. The selection of Board members whose 
terms would be extended would be consistent with ensuring that the 
Board is in compliance with the composition requirements of revised 
Section (a) of Rule A-3 during such extension periods.
    In an order approving changes to MSRB Rule A-3 to comply with the 
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the ``Dodd-Frank Act'') (Pub. L. 111-203, 124 Stat. 1376 (2010)) 
requiring the Board to have a majority of independent public members 
and municipal advisor representation,\3\ the Commission approved a 
transitional provision of the rule that increased the Board from 15 to 
21 members, 11 of whom would be independent public members and 10 of 
whom would be members representing regulated entities. Of the public 
members, at least one would be representative of municipal entities, at 
least one would be representative of institutional or retail investors, 
and at least one would be a member of the public with knowledge of or 
experience in the municipal industry. Of the regulated members, at 
least one would be representative of broker-dealers, at least one would 
be representative of bank dealers, and at least one, but not less than 
30% of the regulated members, would be representative of municipal 
advisors that are not associated with broker-dealers or bank dealers.
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    \3\ See SEC Release No. 34-63025, File No. SR-MSRB-2010-08 
(September 30, 2010).
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    The Commission also approved a provision in MSRB Rule A-3 that 
defined an independent public member as one with no material business 
relationship with an MSRB regulated entity, meaning that, within the 
last two years, the individual was not associated with a municipal 
securities broker, municipal securities dealer, or municipal advisor, 
and that the individual has no relationship with any such entity, 
whether compensatory or otherwise, that reasonably could affect the 
independent judgment or decision making of the individual. The rule 
further provided that the Board, or by delegation, its Nominating and 
Governance Committee, could also determine that additional 
circumstances involving the individual could constitute a material 
business relationship with an MSRB regulated entity.
    In finding that the proposed rule change was reasonable and 
consistent with the requirements of the Securities Exchange Act of 1934 
(the ``Exchange Act'') (15 U.S.C. 78o-4), in that it provided for fair 
representation of public representatives and MSRB regulated entities, 
the Commission noted that the MSRB had committed to monitor the 
effectiveness of the structure of the Board to determine to what 
extent, if any, proposed changes might be appropriate. Additionally, in 
its response to comment letters, the MSRB suggested that, at the end of 
the transitional period, the MSRB would be in a better position to make 
long-term decisions regarding representation, size and related matters.
    While the transitional period has not yet concluded, the Board 
believes it is now in a position to establish a permanent structure. 
The MSRB has now operated as an expanded, majority-public Board with 
representation of municipal advisors, as approved by the Commission, 
for approximately one fiscal year. During this period, the Board has 
engaged in the full range of MSRB activities. In a typical year, the 
Board meets quarterly but this year, due to the requirements of the 
Dodd-Frank Act and the new rulemaking authority over municipal 
advisors, the Board met six times in person and numerous times by 
phone. Additionally, Board members participated in committee meetings 
and informal conversations. The Board has undertaken many significant 
rulemaking initiatives regulating the activities of brokers, dealers, 
municipal securities dealers and municipal advisors that would provide 
important protections for investors, municipal entities, obligated 
persons and the public interest. In particular, notwithstanding its 
larger size, the Board acted swiftly to propose and, in many cases, 
adopt baseline rules for municipal advisors, and also promulgate 
additional rules and interpretive guidance applicable to brokers, 
dealers and municipal securities dealers. The insight of Board members 
with diverse backgrounds and viewpoints contributed considerably to the 
quality of the initiatives. In addition, the Board has continued to 
develop, operate and maintain information systems critical to 
investors, municipal entities and market professionals. Furthermore, 
the Board has made significant efforts to orient previously unregulated 
municipal advisors to the realities of a regulated environment through 
an unprecedented level of outreach and education activities.
    Given the extensive interaction among Board members, the Board was 
able to evaluate its effectiveness, particularly in the development of 
a body of rules governing the activities of municipal advisors while 
maintaining its prior level of regulatory and other activities in 
connection with brokers, dealers and municipal securities dealers. The 
Board believes that it has acted effectively as a regulator carrying 
out the functions contemplated by the Exchange Act and

[[Page 52726]]

the Dodd-Frank Act and that its current size and composition have been 
significant factors in the Board's efficient and effective operation 
during this transition period. The Board further believes there has 
been sufficient time to evaluate its effectiveness and has determined 
to proceed at this time with this proposed rule change to ensure that 
the federally mandated rule proposal process necessary to obtain SEC 
approval can be completed in time for the MSRB to undertake its Board 
member election process in a thorough and orderly manner for the first 
class of Board members to serve after the conclusion of the transition 
period.
    In order to evaluate the effectiveness of the Board, the Nominating 
and Governance Committee developed a survey of the members of the Board 
that addressed various governance issues, such as participation in 
Board deliberations by individual Board members and constituencies, 
development of Board agendas, skills and experience of Board members, 
role of Board committees and staff, and management of Board meetings. 
The survey inquired as to the ability of industry and public Board 
members to participate in Board meeting discussions and debate, such as 
whether the Board considers adequately the interests of municipal 
advisors in its deliberations, and whether discussions on key issues 
include a balance of perspectives. The survey results indicated that 
Board members believe the 21-member Board is working effectively and 
that the Board, as constituted, can carry out its mission and 
objectives. Board members also believe that all constituents, industry 
and public, are appropriately represented by Board members who are able 
to provide input into the development of Board agendas and participate 
actively in deliberations.
    While the Board proposes a composition greater than the statutory 
minimum of 15, the Board believes this membership level is appropriate, 
given the diversity of the municipal securities marketplace and its 
constituencies, many of whom are required by statute to be represented 
on the Board. The Exchange Act requires the Board to have at least one 
retail or institutional investor representative, at least one municipal 
entity representative, at least one member of the public with knowledge 
of or experience in the municipal securities industry, at least one 
broker-dealer representative, at least one bank dealer representative, 
and at least one municipal advisor representative. Given the diversity 
of municipal entities, broker-dealers, bank dealers, and municipal 
advisors, a Board of 21 members provides more flexibility to provide 
representation from various sectors of the market. For example, at a 
21-member level, the Board would be in a position to appoint municipal 
entity representatives that serve large and small constituencies, such 
as states and state agencies, cities, and other municipal entities, 
while at the same time retaining the flexibility to appoint academics 
and others with a broader view of the market. A smaller Board would be 
constrained in this regard. Moreover, at a 21-member level, the Board 
would be similar in size to its counterpart, the Board of Governors of 
the Financial Industry Regulatory Authority (``FINRA''), the self-
regulatory organization that works closely with the Board to enforce 
Board rules applicable to FINRA members. Consequently, a Board of 21 
members is appropriate and consistent with industry norms.
    The survey results confirm the individual sentiments of Board 
members that the Board, as currently constituted, is effective and 
provides fair representation of public and industry members. 
Consequently, the Board voted to approve changes to MSRB Rule A-3 to 
make permanent a Board of 11 independent public members and 10 
regulated members, with at least 30% of the regulated members being 
municipal advisors who are not associated with brokers, dealers or 
municipal securities dealers (``non-dealer municipal advisors''). The 
Board further voted to divide itself into three classes of seven, 
serving staggered three-year terms. Each class would be as evenly 
divided as possible between public members and regulated members, and 
there would be at least one non-dealer municipal advisor in each of the 
three classes. The Board believes this permanent structure is 
consistent with the Exchange Act and provides fair representation of 
public members, broker-dealers, bank dealers and municipal advisors.
    Finally, the Board voted to permit existing Board members to be 
considered for extended terms of up to two years, in order to 
transition to three staggered classes. A transition plan is necessary 
to balance the classes with public and regulated representatives and to 
ensure there is at least one non-dealer municipal advisor per class. In 
order to carry out the transition plan, the Board voted to create, by 
resolution, a Special Nominating Committee of five disinterested Board 
members to nominate certain Board members for extended terms. 
Disinterested Board members are those members who are ineligible for a 
term extension and, therefore, are less likely to have a personal 
interest in the nomination process that could affect their independent 
judgment. The class of 2011 is ineligible and, hence, disinterested 
because the term extensions would commence as of fiscal year 2013, and 
these members would no longer be on the Board at that time. 
Additionally, one public member from the class of 2012 is disinterested 
because the transition plan does not contemplate an extension for 
public members from that class. Therefore, there are six disinterested 
Board members, five of whom comprise the Special Nominating Committee, 
which includes three public members and two regulated members. The 
Chair of the Committee was selected from amongst the public members. 
The Board believes that a Special Nominating Committee of disinterested 
members, led by a public chair and with a public majority, is in the 
best position to nominate Board members for term extensions, in that 
these members are least likely to have personal interests regarding the 
term extensions that could affect their independent judgments.
    The Dodd-Frank Act provides that the Board shall be composed of 15 
members or more, provided that such number is an odd number, as 
specified by the rules of the Board. The Board has voted to increase 
its membership to 21 and to eliminate Rule A-3(b), which provides that 
the Board may increase or decrease its membership by multiples of six, 
in order to maintain an odd number, and that the membership be equally 
divided among public members, bank dealers, and broker-dealers, so long 
as the membership is not less than 15. This section is no longer 
applicable, since the Dodd-Frank Act eliminated the prior statutory 
requirement that the Board consist of five public members, five bank 
dealer representatives, and five broker-dealer representatives. 
Moreover, there is no necessity to specify in a Board rule that the 
membership may be greater than 15, provided that the membership is set 
at an odd number, since such a provision is incorporated into the 
Exchange Act. Future changes in size of the Board, if any, would be 
effected through the rule change process consistent with the Dodd-Frank 
Act provisions. Hence, section (b) is no longer necessary.
2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(B) of the Act, which provides that the MSRB's rules shall:


[[Page 52727]]


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. Such rules--
    (i) Shall provide that the number of public representatives of 
the Board shall at all times exceed the total number of regulated 
representatives and that the membership shall at all times be as 
evenly divided in number as possible between public representatives 
and regulated representatives;
    (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 MSRB believes the proposed rule change is consistent with the 
Exchange Act in that the proposal provides that the number of public 
representatives of the Board shall exceed the total number of regulated 
representatives by one so that the membership shall be as evenly 
divided as possible between public representatives and regulated 
representatives--11 to 10. The proposal specifies the length of term 
that Board members will serve--three years--which is consistent with 
the length of the terms served by Board members prior to the adoption 
of the Dodd-Frank Act. The proposal increases the size of the Board 
from 15 to 21, consistent with the size of the Board during the 
transitional period that commenced on October 1, 2010. For the reasons 
discussed earlier, the Board believes a 21-member Board is effective 
and fairly represents all constituencies referenced in the Exchange 
Act, including public representatives and regulated representatives. 
Finally, the proposed rule change maintains the existing requirement 
regarding the independence of public representatives.
    Section 15B(b)(1) of the Exchange Act further sets forth minimum 
representation requirements for certain categories of public 
representatives, as well as for bank dealer, broker-dealer and 
municipal advisor representatives. The proposed rule change complies 
with these requirements. The Exchange Act does not, however, 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. Thus, the MSRB believes that its proposal 
does provide for fair representation of public representatives, broker-
dealers, bank dealers and municipal advisors under the Exchange Act, 
and it believes that providing a minimum number of non-dealer municipal 
advisors--at least 30% of the regulated representatives--is reasonable, 
and consistent with the Exchange Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act since it is solely concerned 
with the administration of the MSRB and, in any event, provides for 
fair representation on the Board of public representatives, broker 
dealer representatives, bank dealer representatives and municipal 
advisor representatives.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the 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-2011-11 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-2011-11. 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 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 
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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 am and 3 
pm. Copies of such filing also will be available for inspection and 
copying at the MSRB's offices. 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-2011-11 and should be submitted on or before 
September 13, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
Elizabeth M. Murphy,
Secretary.
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    \4\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2011-21557 Filed 8-22-11; 8:45 am]
BILLING CODE 8011-01-P


