
[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Notices]
[Pages 44607-44609]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-17724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70004; File No. SR-MSRB-2013-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule A-
3, on Membership on the Board, To Modify the Standard of Independence 
for Public Board Members

 July 18, 2013.
    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 July 3, 2013, the Municipal Securities Rulemaking Board (the 
``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (``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 Commission a proposed rule change 
consisting of amendments to MSRB Rule A-3 to modify the standard of 
independence for public Board members (the ``proposed rule change'').
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-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 MSRB 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 MSRB is the self-regulatory organization created by Congress to 
establish rules governing the municipal securities activities of 
brokers, dealers and municipal securities dealers (collectively 
``dealers'') and the municipal advisory activities of municipal 
advisors (collectively ``regulated entities''). It is governed by a 21-
member board composed of eleven independent public members and ten 
regulated members.
    The MSRB's mission is to protect municipal entities, investors and 
the public interest by promoting a fair and efficient municipal 
securities market. The MSRB fulfills this mission by regulating dealers 
and municipal advisors and providing market transparency through its 
Electronic Municipal Market Access (``EMMA[supreg]'') Web site.
    Given the role of the board of directors in overseeing the 
municipal securities market, it is imperative that the board identify 
candidates for the board of directors who have the requisite knowledge 
and expertise about the municipal market and its operation.
    The composition of the board of directors of the MSRB is set forth 
in the Act, and categorizes individuals into two broad groups: 
Regulated representatives and public representatives.\3\ The regulated 
representatives must be individuals who are associated with a regulated 
entity, and at least one of whom must be associated with a dealer that 
is not a bank (or subsidiary or department or division thereof), at 
least one of whom must be associated with a dealer that is a bank (or 
subsidiary or department or division thereof), and at least one of whom 
must be associated with a municipal advisor.\4\
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    \3\ 15 U.S.C. 78o-4(b)(1).
    \4\ MSRB Rule A-3 further requires that at least one, but not 
less than 30 percent of the total number of regulated 
representatives, must be associated with and representative of non-
dealer municipal advisors.
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    The public representatives must be independent of any regulated 
entity, and at least one of whom must be representative of 
institutional or retail investors, at least one of whom must be 
representative of municipal entities, and at least one of whom must be 
a member of the public with knowledge of or experience in the municipal 
industry.
    While Congress, as part of the Dodd-Frank Act, revised the 
statutory composition of the board of directors, it did not specify the 
requirements for independence of public representatives. Rather, it 
delegated the obligation to the MSRB.\5\
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    \5\ See 15 U.S.C. 78o-4(b)(2)(B)(iv).
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    In 2010, in implementing this new standard, the MSRB amended Rule 
A-3 to define independent of any regulated entity to mean an individual 
who has ``no material business relationship'' with any regulated 
entity.\6\ The MSRB defined ``no material business relationship'' to 
mean that, at a minimum: (a) The individual is not and, within the last 
two years, was not associated with a regulated entity, and (b) the 
individual does not have a relationship with any regulated entity, 
whether compensatory or otherwise, that reasonably could affect the 
independent judgment or decision making of the individual.
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    \6\ See Securities Exchange Act Release 34-63025 (September 30, 
2010); 75 FR 61806 (October 6, 2010); File No. SR-MSRB-2010-08.
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    In practice, this standard has precluded consideration of otherwise 
viable candidates who are knowledgeable of matters related to the 
municipal securities market from serving as public representatives 
because such candidates are encompassed within the broad definition of 
``associated with'' a regulated entity under the Act. This standard of 
independence disqualifies many individuals with the expertise and 
knowledge to represent investors because such persons have a regulated 
entity within their employer's corporate structure, even if the 
individual's nexus with such regulated entity is remote and cannot 
reasonably be seen as affecting his or her independent judgment or 
decision-making.
    For example, a candidate whose only affiliation with a broker-
dealer registered with the MSRB is due to the individual's service as 
an independent director on the board of directors of a company that is 
in the same corporate family as the broker-dealer would be disqualified 
from serving on the board as a public representative. Similarly, 
because many mutual fund and insurance companies have affiliated 
broker-dealers that engage in a municipal securities or municipal fund 
securities business, any non-clerical individual within such a company 
would be precluded from serving as a public representative even if the

[[Page 44608]]

individual's role and responsibilities are wholly unrelated to the 
broker-dealer activity or such broker-dealer activity is a de minimis 
portion of the company's overall business.
    To address this shortcoming, and consistent with the approach of 
the Financial Industry Regulatory Authority (``FINRA''),\7\ another 
self-regulatory organization, the MSRB proposes amending Rule A-3 to 
set forth a more function-oriented approach to defining independence. 
Specifically, the term ``no material business relationship'' will 
require that an individual is not, and within the last two years, was 
not an officer, director (other than as an independent director), 
employee or controlling person of any regulated entity. Replacing the 
``associated with'' language with the more function-oriented language 
described above does not have any effect on the portion of the ``no 
material business relationship'' provision in Rule A-3(g)(ii) that 
prohibits an individual from having a relationship with any regulated 
entity, whether compensatory or otherwise, that reasonably could affect 
the independent judgment or decision making of the individual. This 
provision of Rule A-3 ensures that an individual with a meaningful 
nexus with a regulated entity, either by position or function, will not 
be an eligible candidate to serve as a public representative.
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    \7\ FINRA Bylaws, Article I, defines an industry governor, in 
part, to include an individual who is or has served in the prior 
year as an officer, director (other than as an independent 
director), employee or controlling person of a broker or dealer and 
a public governor, in part, as in individual who is not an industry 
governor and who otherwise has no material business relationship 
with a broker or dealer.
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    The proposed rule change will, however, allow the MSRB to consider 
candidates who are associated with regulated entities solely by virtue 
of the corporate structure of their employer. Removing these 
limitations will allow the MSRB to consider a broader group of public 
representative board candidates, with an appropriate level of 
independence, and with the objective of maximizing the depth of 
municipal securities knowledge and experience on the board. Regardless 
of their status--public or regulated--all board members have a 
fiduciary duty to the MSRB and are bound by a duty of loyalty and duty 
of care and are obligated to act in the best interests of the 
organization and to avoid conflicts of interest.\8\
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    \8\ The MSRB is a Virginia nonstock corporation. See Va. 
Nonstock Corporations Act Sec.  13.1-870 (``A director shall 
discharge his duties as a director, including his duties as a member 
of a committee, in accordance with his good faith business judgment 
of the best interests of the corporation''), 13.1-871 (``A conflict 
of interests transaction is a transaction with the corporation in 
which a director of the corporation has an interest that precludes 
him from being a disinterested director.''); Bates v. Cekada, 130 
F.R.D. 52, 1990 U.S. Dist. LEXIS 1571, 16 Fed. R. Serv. 3d 
(Callaghan) 282 (E.D. Va. 1990) (``Directors have a fiduciary duty 
to act for the benefit of the corporation . . .'').
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2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
the Act and, in particular, Section 15B(b) of the Act,\9\ which 
provides, in part, that the MSRB shall be composed of a majority of 
public members who are independent (as defined by the MSRB) of 
regulated entities. This section further requires that all members of 
the board must be knowledgeable regarding the municipal securities 
market. The proposed rule change will allow the MSRB to consider 
candidates who are associated with regulated entities solely by virtue 
of the corporate structure of their employer. Removing these 
limitations will allow the MSRB to consider a broader group of public 
representative board candidates, with an appropriate level of 
independence, and with the objective of maximizing the depth of 
municipal securities knowledge and experience on the board. Having such 
expertise on the board will ensure that the board has sufficient 
knowledge and perspective of all aspects of the municipal securities 
market and is well-positioned to carry out its statutory obligation 
``to protect investors, municipal entities, obligated persons, and the 
public interest.'' \10\
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    \9\ 15 U.S.C. 78o-4(b).
    \10\ 15 U.S.C. 78o-4(b)(2)(C).
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    The proposed rule change broadens the existing independence 
standard and public representative board candidates would no longer be 
automatically disqualified solely by virtue of a tenuous corporate 
affiliation with a regulated entity. As noted above, the proposed rule 
change also makes the MSRB independence standard consistent with the 
standard utilized by FINRA for its public governors.

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

    The MSRB 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 broadens the potential pool of 
public board candidates and provides for fair representation by 
qualified members of the public on the board, consistent with the Act.

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 of up to 90 days (i) as 
the Commission may designate 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 email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2013-06 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-2013-06. This file 
number should be included on the subject line if email 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 Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than

[[Page 44609]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site 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 
10:00 a.m. and 3:00 p.m. Copies of the 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-2013-06 and should be 
submitted on or before August 14, 2013.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-17724 Filed 7-23-13; 8:45 am]
BILLING CODE 8011-01-P


