[Federal Register Volume 81, Number 23 (Thursday, February 4, 2016)]
[Notices]
[Pages 6088-6094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76999; File No. SR-MSRB-2016-01]


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

January 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on January 15, 2016, the Municipal 
Securities Rulemaking Board (the ``MSRB'' or ``Board'') filed with the 
Securities and Exchange Commission (the ``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)(i).
    \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 filed with the Commission a proposed rule change 
consisting of proposed amendments to Rule A-3, on membership on the 
Board, to lengthen the term of Board member service, change the number 
and size of Board classes, limit the number of consecutive terms a 
Board member can serve, eliminate the requirement that there be at 
least one municipal advisor representative per class that is not 
associated with a dealer (``non-dealer municipal advisor''), delete an 
obsolete transition provision and provide a technical update to the 
name of a Board committee (collectively, the ``proposed rule change''). 
The MSRB requests that the proposed rule change be effective on the 
date of Commission approval.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2016-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 (``SRO'') created by 
Congress to establish regulation for the $3.7 trillion municipal 
securities market, including rules governing the municipal securities 
activities of dealers and the municipal advisory activities of 
municipal advisors. The MSRB's mission is to protect municipal 
entities, obligated persons, investors and the public interest, and to 
promote a fair and efficient municipal securities market. The Board is 
comprised of 21

[[Page 6089]]

members \3\ who, collectively, govern the MSRB to carry out its mission 
primarily by regulating dealers and municipal advisors, providing 
market transparency through its Electronic Municipal Market Access 
(EMMA[supreg]) Web site \4\ and conducting market leadership, outreach 
and education. The MSRB believes that increasing the term length for 
Board membership from three years to four years will improve the 
Board's ability to fulfill this purpose.
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    \3\ See MSRB Rule A-3(a).
    \4\ EMMA[supreg] is a registered trademark of the MSRB.
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    Many general, and some more detailed, aspects of the Board's 
composition are set forth in the Exchange Act.\5\ It categorizes the 
members of the Board into two broad groups: Individuals who must be 
associated with a broker, dealer or municipal securities dealer 
(``dealer'') or municipal advisor (collectively, ``Regulated 
Representatives''), and individuals who must be independent of any 
dealer or municipal advisor (``Public Representatives'').\6\ The Act 
then specifies that the number of Public Representatives must at all 
times exceed the number of Regulated Representatives,\7\ and sets 
minimum requirements for certain types of individuals to serve in the 
two groups.\8\
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    \5\ See 15 U.S.C. 78o-4(b)(1). Rule A-3 further establishes the 
Board's composition.
    \6\ See 15 U.S.C. 78o-4(b)(1); MSRB Rule A-3(a)(i)-(ii).
    \7\ See 15 U.S.C. 78o-4(b)(2)(B)(i).
    \8\ See 15 U.S.C. 78o-4(b)(1); MSRB Rule A-3(a).
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    At the same time, Congress delegated authority to the MSRB to 
determine many aspects of Board composition by rule, including such 
important aspects as the size of the Board and the length of the term 
of Board member service.\9\ Currently, the Board is divided into three 
seven-member classes that serve staggered, three-year terms.\10\ Under 
this framework, total Board tenure typically is no more than three 
years because Board members may only serve consecutive terms under two 
limited scenarios: (1) By invitation from, and due to special 
circumstances as determined by, the Board; or (2) having filled a 
vacancy and, therefore, having served only a partial term.\11\
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    \9\ The Act provides that ``[t]he members of the Board shall 
serve as members for a term of 3 years or for such other terms as 
specified by rules of the Board,'' and that the rules of the Board 
``specify the length or lengths of terms members shall serve.'' 15 
U.S.C. 78o-4 (b)(1), (b)(2)(B)(ii).
    \10\ See MSRB Rule A-3(b)(i).
    \11\ Id.
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    In June 2015, the MSRB published a request for comment on several 
Board governance matters, including whether the MSRB should consider, 
at a conceptual level, proposing amendments to modify the length of 
Board member service.\12\ In response, the MSRB received nine comment 
letters that specifically addressed that issue.\13\ Most of the 
commenters generally supported the MSRB's consideration of modifying 
the length of Board member service, but they offered varying 
perspectives and approaches to the modification.
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    \12\ MSRB Notice 2015-08 (Jun. 11, 2015) (``First Request for 
Comment'').
    \13\ See infra note 28.
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    The MSRB carefully considered all of the comments received in 
response to the First Request for Comment and determined to publish a 
second request for comment on draft amendments to lengthen the term of 
Board member service from three years to four years.\14\ In response to 
the Second Request for Comment, the MSRB received five comment letters, 
all of which supported the increase.\15\ After carefully considering 
all of the comments received in response to both requests for comment, 
the MSRB determined to file this proposed rule change to increase Board 
member term length from three years to four years.
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    \14\ MSRB Notice 2015-18 (Oct. 5, 2015) (``Second Request for 
Comment'').
    \15\ See infra note 29.
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    The optimal term length for members of an organization depends to a 
great extent upon the particular characteristics of the organization, 
including the nature of its mission and its activities. It is 
necessarily a balance among numerous competing interests, such as the 
interests in continuity, institutional knowledge and membership 
experience, on the one hand, and the interest in the addition of new 
perspectives, on the other. To date, the MSRB has aimed to achieve this 
balance using a Board member term of three years, but it now believes 
that the desired balance could be better achieved using an 
incrementally longer Board member term of four years.
    Based on its experience and the views repeatedly expressed by 
former Board members, the MSRB believes that members are capable of 
making significantly increasing contributions with each year that they 
become more fully acclimated to the role and work of the MSRB.\16\ The 
existence of such a multi-year ``learning curve'' is consistent with 
views expressed in a survey conducted by the Society of Corporate 
Secretaries and Governance Professionals of board members across a 
range of industries.\17\ A number of studies suggest that longer board 
member tenures--to a point--are associated with superior 
governance.\18\ Overall, based on its experience and expertise 
regarding its mission and activities, the MSRB believes that having 
members serve on the Board for a fourth year would improve the 
continuity and institutional knowledge of the Board from year to year, 
as well as its overall efficiency and effectiveness due to the 
collective value of retaining several members who possess additional 
knowledge and experience from their service as MSRB Board members.
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    \16\ The current, standard three-year term of Board member 
service is significantly shorter than the average tenure of over 
eight years that studies have shown for members of other boards. See 
Spencer Stuart Board Index 2014, 5, available at https://
www.spencerstuart.com/~/media/pdf%20files/
research%20and%20insight%20pdfs/ssbi2014web14nov2014.pdf%20target; 
Governance Minutes by the Society of Corporate Secretaries and 
Governance Professionals--Director Tenure (February 26, 2014), 
available at http://main.governanceprofessionals.org/governanceprofessionals/memberresources/resources/viewdocument/?DocumentKey=37b09de5-7404-4eab-bc70-10741cbf7138 (stating that 
average board member tenure is eight to ten years and that board 
members typically experience a three to four year learning curve) 
(``Governance Minutes''). Although this research focuses on 
corporate boards, the MSRB believes the learning curve and evolution 
of an individual director's participation on and contributions to a 
corporate board are analogous to the experience of MSRB Board 
members as they gain more tenure.
    \17\ See Governance Minutes, supra note 16.
    \18\ See, e.g., Nikos Vafeas, Length of Board Tenure and Outside 
Director Independence, 30 J. of Bus. Fin. & Acct. 1043 (2003); 
Lucian Arye Bebchuck, Jesse M. Fried, and David I. Walker, 
Managerial Power and Rent Extraction in the Design of Executive 
Compensation, 69 U. of Chi. L. Rev. 751 (2002).
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    Greater continuity and institutional knowledge is very important 
for the MSRB rulemaking process. This process, particularly for rules 
that are complex or address unique problems, frequently spans multiple 
years from conception to full implementation.\19\ Even for rulemaking 
initiatives that can be completed in relatively less time, Board 
members have noted frequently that they are often able to engage more 
fully and effectively in the process after they have gained experience 
with the organization and have deeper knowledge of other, related 
rulemaking activities.
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    \19\ For example, the MSRB began its current rulemaking 
initiative for Rule G-42, to establish core standards and duties for 
municipal advisors, in the fall of 2013, and will not be fully 
implemented until June of 2016. The MSRB's initiative for Rule G-18, 
to establish the first best-execution rule for transactions in 
municipal securities, began as early as the spring of 2013 and will 
continue to be in an implementation period until March of 2016.
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    The MSRB believes that the proposed rule change would ensure 
greater continuity and institutional knowledge from year to year, 
particularly through

[[Page 6090]]

the rulemaking process, and increase overall efficiency, while 
maintaining the benefits of having a significant number of new Board 
members join the organization each year.
Proposed Amendments to Rule A-3
    The proposed rule change would lengthen the term of Board member 
service from three years to four years, and it would facilitate the 
new, longer term length by increasing the number of Board classes and 
adjusting their sizes. Additionally, the proposed rule change would 
limit the number of consecutive terms a Board member can serve to two, 
and would eliminate the requirement that there be at least one non-
dealer municipal advisor per Board class. Finally, the proposed 
amendments would delete an obsolete provision from the rule.
    All of the amendments included in the proposed rule change are to 
Rule A-3(b)(i). First, they would increase the Board member term length 
from three years to four years and the number of Board classes from 
three to four--one class comprised of six members and three classes of 
five. The changes in the number of classes and their sizes would ensure 
that the MSRB nominates and elects new members every year, maintains 
classes that are as evenly distributed in size as possible, and has a 
Board composition that always satisfies the statutorily-required 
position allocations,\20\ while resulting in a consistent and 
manageable rate of turnover from year to year. As required by the 
Exchange Act and Rule A-3(a) and (b)(i), the classes would continue to 
be as evenly divided in number as possible between Public 
Representatives and Regulated Representatives, while also being 
majority public.
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    \20\ See supra notes 6-8.
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    Second, no Board member could serve more than two consecutive 
terms--eight years in total--which could only occur under the special 
circumstances exception. This added provision would ensure that the 
special circumstances exception is not overused, mitigate some 
commenters' concerns of Board members becoming too dominant and unduly 
influential,\21\ assure appropriate turnover of Board membership and 
help maintain a robust pool of applicants for Board service. The MSRB 
believes this modification will reflect good corporate governance as 
applied to the particular characteristics of the MSRB.
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    \21\ See infra Section C, Increase in Term Length--Limits.
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    Third, the proposed rule change would eliminate the requirement 
that there be at least one non-dealer municipal advisor.\22\ Because 
the draft amendments would result in four classes, not eliminating this 
requirement would create an unintended obligation that the Board always 
include four non-dealer municipal advisors, thus potentially 
diminishing representation of other regulated entities. The proposed 
rule change would not affect the existing requirement in Rule A-
3(a)(ii)(3) that, for the Board as a whole, ``at least one, and not 
less than 30 percent of the total number of [R]egulated 
[R]epresentatives, shall be associated with and representative of 
municipal advisors and shall not be associated with a broker, dealer or 
municipal securities dealer.'' Therefore, nothing in this change would 
reduce the minimum required representation of municipal advisors nor 
would it prohibit the MSRB from deciding to include more than three 
non-dealer municipal advisors on the Board. All other provisions in 
Rule A-3(b)(i) would remain unchanged.
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    \22\ See MSRB Rule A-3(b)(i).
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    To effectuate the changes in term length and the number and size of 
classes, the MSRB would implement a transition plan, under which each 
Board member, who was elected prior to, and whose term ends on or after 
the end of, the MSRB's fiscal year 2016,\23\ could be considered for a 
term extension not exceeding one year. This process would occur over 
fiscal years 2017, 2018 and 2019. The transition would proceed as 
follows: (1) For fiscal year 2017, one Public Representative from the 
Board class of 2016 (i.e., members who began a three-year term on 
October 1, 2013) would receive a one-year extension and six new members 
would join the Board; (2) for fiscal year 2018, one Public and two 
Regulated Representatives from the Board class of 2017 (i.e., members 
who began a three-year term on October 1, 2014) each would receive a 
one-year extension and five new members would join the Board; and (3) 
for fiscal year 2019, three Public and two Regulated Representatives 
from the Board class of 2018 (i.e., members who began a three-year term 
on October 1, 2015) each would receive a one-year extension and five 
new members would join the Board. The full Board would vote by ballot 
on all members eligible for term extensions to determine who receives 
them. The selection of Board members whose terms would be extended 
would be in compliance with the statutorily-required compositional 
requirements of the Board, and the Board would continue to consist of 
21 members with a majority of Public Representatives.\24\ In fiscal 
year 2020, no further extensions would be required and five new members 
would join the Board, completing the transition to four classes. From 
that point forward, the Board would repeatedly nominate and elect 
classes in the sequence of six, five, five, and five members. While 
there are numerous possible combinations of the number of Board classes 
and the number of members in each class, the MSRB believes this 
specific combination would achieve the transition expeditiously and 
efficiently while minimizing any disruption from the changes.
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    \23\ The MSRB's fiscal year commences on October 1 of a given 
year and ends on September 30 of the following year.
    \24\ See supra notes 3 and 6-8.
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    MSRB Rule A-3(h) currently describes the transition process the 
MSRB used to increase its Board size from 15 to 21 members during its 
fiscal years 2013 and 2014, and to be in compliance with new 
requirements established by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010.\25\ The proposed rule change would 
delete this provision from Rule A-3 because that process has been 
completed and the provision is, therefore, obsolete.\26\
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    \25\ See Public Law 111-203, 124 Stat. 1376; Exchange Act Rel. 
No. 65424 (Sept. 28, 2011), 76 FR 61407 (Oct. 4, 2011) (SR-MSRB-
2011-11) (approving the MSRB's establishment of a Board structure of 
21 Board members divided into three classes, each class being 
comprised of seven members who would serve staggered three-year 
terms).
    \26\ In the Second Request for Comment, the MSRB included draft 
amendments to MSRB Rule A-3(h)(i) to include the transition plan. 
Since that plan is fully described herein and the inclusion of rule 
text that duplicates that description would become obsolete and 
eventually require a proposed rule change to be removed from the 
rulebook, the MSRB does not believe it should be included.
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    Finally, MSRB Rule A-3(g)(ii) makes reference to the ``Nominating 
Committee,'' which is now called the ``Nominating and Governance 
Committee.'' Accordingly, the proposed rule change would update the 
reference to the current name of the committee.

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:

establish fair procedures for the nomination and election of members 
of the Board and assure fair representation in such nominations and 
elections of [P]ublic [R]epresentatives, broker dealer 
representatives, bank representatives, and advisor representatives. 
Such rules--
    (i) shall provide that the number of [P]ublic [R]epresentatives 
of the Board shall at all times exceed the total number of 
[R]egulated

[[Page 6091]]

[R]epresentatives and that the membership shall at all times be as 
evenly divided in number as possible between [P]ublic 
[R]epresentatives and [R]egulated [R]epresentatives;
    (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.

    Specifically, the MSRB believes the increase of the term length 
from three to four years, the change in the number and size of Board 
classes from three classes of seven members to one class of six and 
three classes of five, and the elimination of the requirement that 
there be one non-dealer municipal advisor per class are consistent with 
the Exchange Act in that the composition of the Board would continue to 
satisfy all of the statutory requirements.\27\ In particular, the 
number of Public Representatives would continue to exceed the total 
number of Regulated Representatives and the classes would continue to 
be as evenly divided in number as possible between Public and Regulated 
Representatives. Further, the proposed rule change specifies the length 
of term that Board members would serve--four years, which, for the 
reasons discussed earlier, the MSRB believes will improve the 
effectiveness and efficiency of the Board.
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    \27\ See supra notes 5-8.
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    The MSRB also believes the limitation of consecutive terms to two, 
totaling a maximum of eight years of consecutive service, is consistent 
with the Exchange Act in that it specifies the length of term that 
Board members can serve when the MSRB invokes the special circumstances 
exception.
    Further, the MSRB believes the proposed deletion of the transition 
process described in MSRB Rule A-3(h) is consistent with the Exchange 
Act because removing the obsolete provision would improve the clarity 
and readability of the rule. The MSRB also believes the proposed update 
to the reference to the ``Nominating and Governance Committee'' in MSRB 
Rule A-3(g)(ii) is consistent with the Act because it promotes the 
accuracy of the rule in regard to a reference to a component of the 
Board's governance structure.
    Finally, none of the amendments in the proposed rule change alters 
the number of members that constitutes the whole Board or the 
requirements regarding the independence of Public Representatives.

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

    Section 15B(b)(2)(C) of the Act requires that MSRB rules not be 
designed to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The MSRB does 
not believe that the proposed rule change would impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act because it is concerned solely with the administration of 
the SRO.

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

    The MSRB received nine comment letters specifically addressing the 
issue of whether to modify the length of Board member service in the 
First Request for Comment \28\ and five comment letters in response to 
the Second Request for Comment.\29\ The comment letters are summarized 
below by topic.
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    \28\ See letters from: Jerry Gold (``Gold''), dated July 17, 
2015; Dustin McDonald, Director, Federal Liaison Center, Government 
Finance Officers Association (``GFOA''), dated July 20, 2015; 
Dorothy Donohue, Deputy General Counsel--Securities Regulation, 
Investment Company Institute (``ICI''), dated July 13, 2015; Bob 
Lamb (``Lamb''), President, Lamont Financial Services Corporation, 
dated July 7, 2015; Terri Heaton, President, National Association of 
Municipal Advisors (``NAMA''), dated July 13, 2015; Lisa S. Good, 
Executive Director, National Federation of Municipal Analysts 
(``NFMA''), dated July 13, 2015; Benjamin S. Thompson 
(``Thompson''), Managing Principal and Chief Executive Officer, 
Samson Capital Advisors, dated July 7, 2015; Rick A. Fleming, 
Investor Advocate, SEC (``SEC Investor Advocate''), dated July 13, 
2015; and Michael Decker, Managing Director, Securities Industry and 
Financial Markets Association (``SIFMA''), dated July 13, 2015. Lamb 
and Thompson are former Board members.
    \29\ See letters from: Michael Nicholas, Chief Executive 
Officer, Bond Dealers of America (BDA), dated November 19, 2015; 
Stephen Heaney (``Heaney''), dated November 10, 2015; NAMA, dated 
November 19, 2015; SEC Investor Advocate, dated October 29, 2015; 
and SIFMA, dated November 19, 2015. Heaney is a former Board member, 
who served a four-year term under a previous transition period 
between October 1, 2009, and September 30, 2013.
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Increase in Term Length--General
    As noted above, all of the comments in response to the Second 
Request for Comment supported increasing the length of Board member 
service from three years to four years.\30\ Notably, the SEC Investor 
Advocate agreed with the MSRB that lengthening the term would improve 
continuity and institutional knowledge of the Board from year to year, 
while retaining the benefits of the regular addition of new members, 
and that the amendments proposed are a reasonable approach to achieving 
that goal. More specifically, he noted that the increased term length 
would give Board members, particularly Public Representatives,\31\ more 
time to develop the institutional knowledge and experience required for 
fully engaged and effective oversight of the MSRB, which he believes 
would be in the best interest of investors because it may lessen what 
he considered to be the Board's natural dependence upon Regulated 
Representatives,\32\ who he presumed have greater experience on certain 
issues. To this point, Heaney, a former Board member who served for 
four years due to the Board's transition from 15 to 21 members, 
believes the MSRB would benefit significantly from the added stability 
and continuity, as he believes his extra year enabled him to contribute 
more than he would have otherwise been able to in a three-year term. 
BDA believes that a four-year term is an acceptable balance and that 
having an extra year to serve on the Board would promote continuity of 
knowledge and ensure appropriate overlap among those working on rule 
proposals and other changes that affect how the municipal securities 
market operates. Finally, the SEC Investor Advocate believes the 
proposed term length of four years is appropriate when compared to the 
structure of similar organizations with a mission to protect investors, 
all with board member terms in the range of three to five years.\33\
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    \30\ In response to the First Request for Comment, Thompson 
believed that a longer Board member term could allow the Board to 
leverage accumulated knowledge more effectively than the current 
three-year term length. Gold was generally opposed to the 
lengthening of Board member service, and GFOA stated that the 
current single three-year terms ensure consistent turnover and the 
introduction of new perspectives on the Board. Neither Gold nor GFOA 
commented in response to the Second Request for Comment, which 
contained the specific draft amendments to increase the term length 
from three years to four years.
    \31\ See MSRB Rule A-3(a)(i) (defining a Public Representative 
as an individual ``independent of any municipal securities broker, 
municipal securities dealer, or municipal advisor'').
    \32\ See MSRB Rule A-3(a)(ii) (defining a Regulated 
Representative as an individual ``associated with a broker, dealer, 
municipal securities dealer, or municipal advisor'').
    \33\ The SEC Investor Advocate made the comparison to the term 
lengths of members of the Financial Industry Regulatory Authority 
(``FINRA''), the Public Company Accounting and Oversight Board 
(``PCAOB''), the SEC, and the SEC's Investor Advisory Committee.
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Increase in Term Length--Limits
    SIFMA supported the increase in term length from three to four 
years and believes the change would improve continuity and 
institutional knowledge of the Board from year to year. However,

[[Page 6092]]

SIFMA is concerned that serving more than one term could create an 
environment in which one or more Board members with multiple terms of 
service could become too dominant in Board deliberations and have undue 
influence, particularly considering that the Board has a majority of 
Public Representatives, who SIFMA suggested may not have significant 
market or industry experience. Accordingly, SIFMA urged the Board to 
consider further specifying or limiting the circumstances under which a 
Board member may serve more than four years by: (1) More explicitly 
defining the special circumstances exception allowing consecutive 
terms; \34\ (2) imposing a maximum lifetime limit on Board service; 
\35\ or (3) specifying that when a Board member, who has already served 
a full term is retained or recalled to fill a sudden vacancy, that the 
member's extended term be temporary for only as long as necessary to 
recruit a qualified, permanent new member to fill the vacancy.
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    \34\ See MSRB Rule A-3(b)(i) (``A member may not serve 
consecutive terms, unless special circumstances warrant that the 
member be nominated for a successive term or because the member 
served only a partial term as a result of filling a vacancy pursuant 
to section (d) of this rule.'').
    \35\ In response to the First Request for Comment, SIFMA stated 
that there should be a lifetime cap of four years of Board service, 
limiting any member to one term only.
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    First, the MSRB does not believe it should more explicitly define 
the special circumstances exception, which the Commission approved in 
January 2011.\36\ In its filing, the MSRB noted a Board member 
possessing special expertise needed by the Board that is not possessed 
by other Board members or generally by persons in the pool of potential 
candidates for Board membership as an example of how the exception 
would be applied. Given that the Commission found the current provision 
to be consistent with the Exchange Act, and that the MSRB has only 
applied it twice for the purpose of maintaining the special expertise 
of a member, with the use for that purpose being consistent with the 
MSRB's explanation in the filing, the MSRB does not believe any 
additional specificity is needed in the rule.\37\
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    \36\ See Exchange Act Release No. 63764 (Jan. 25, 2011), 76 FR 
5417 (Jan. 31, 2011) (SR-MSRB-2010-17) (approving amendments to MSRB 
Rule A-3, including the special circumstances exception).
    \37\ The MSRB notes that no other commenters raised this issue.
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    Second, the MSRB does not believe it is appropriate to impose a 
maximum lifetime limit on Board service, as it would limit the pool of 
applicants to serve on the Board from year to year. The pool of 
applicants from which the MSRB can consider and select new Board 
members is already limited by the statutory requirement that each Board 
member be ``knowledgeable of matters related to the municipal 
securities markets,'' \38\ and, as recognized by the SEC Investor 
Advocate in response to the First Request for Comment, it can be a 
challenge to find talented and qualified people who are willing to 
devote time and energy to serve on the Board. Given those constraints, 
a lifetime cap, particularly one of only four years (i.e., one term) as 
SIFMA has suggested, may hinder the MSRB's ability to select from a 
robust pool of applicants. This problem could be exacerbated over time 
as additional Board members reach the end of their service and lose 
future eligibility under such a cap. The MSRB believes that former 
Board members may be highly qualified to serve on the Board with the 
benefit of their prior service, and they should not be precluded from 
consideration because of it. Additionally, several organizations with 
analogous investor-protection missions have no maximum lifetime limit 
on member service (e.g., FINRA governors, PCAOB members, SEC 
commissioners, and the SEC Investor Advisory Committee members). In 
light of all of the above, the MSRB is not including a lifetime cap on 
service in the proposed amendments as suggested by SIFMA.
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    \38\ See 15 U.S.C. 78o-4(b)(1).
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    Finally, the MSRB does not believe it should specify that, when a 
Board member, who has already served a full term is retained or 
recalled to fill a sudden vacancy, the member's extended term be 
temporary for only as long as necessary to recruit a qualified, 
permanent new member to fill the vacancy. Since a Board member can only 
be retained under the special circumstances exception, the first part 
of SIFMA's suggestion is more of a critique of that exception and/or 
the MSRB's use of it. As noted above, however, the special 
circumstances exception has been approved by the Commission. Further, 
depending on the nature and timing of a vacancy on the Board, it may be 
more efficient for the MSRB to recall a former Board member. In 
particular, for vacancies that occur in the middle of a fiscal year or 
in the middle to end of a vacating Board member's term, the amount of 
time and resources required to find, select and onboard a new member 
typically would be significantly greater than the time and resources 
required to do the same for a former Board member. This disparity in 
efficiency would be even greater when compared to a two-part process in 
which a former Board member is temporarily seated and, after a short 
period, replaced by a new Board member. Additionally, the temporary 
status of the former Board member could potentially limit his or her 
effectiveness on the Board. Accordingly, the MSRB believes it is in the 
best interest of the organization to continue to have the flexibility 
to select from among former Board members, as well as from among all 
other sources, to fill a vacancy for the remainder of a vacating Board 
member's term.
    While the MSRB does not support specifying or limiting the 
circumstances under which a Board member may serve more than four years 
in any of the ways SIFMA suggested, the proposed rule change would 
limit the number of consecutive terms a Board member can serve to two, 
which could only occur when the MSRB invokes the special circumstances 
exception, to address the general concern among commenters about unduly 
long tenures. There is empirical evidence to suggest very long board 
tenures are associated with weaker corporate governance and less 
favorable organizational performance.\39\ Additionally, in response to 
the First Request for Comment, several commenters expressed concerns 
similar to SIFMA's. Specifically, GFOA opposed two consecutive three-
year terms, NFMA was concerned that a six-year or longer term would 
limit the opportunity to bring ``fresh ideas'' to the Board, and ICI 
stated that it would support consecutive three-year terms if there was 
no longer a special circumstances exception that could create a term 
greater than six years.\40\
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    \39\ See supra note 18.
    \40\ The MSRB notes that, in response to the First Request for 
Comment, the SEC Investor Advocate and Lamb supported consecutive 
three-year terms without any qualification.
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    To address these concerns, the MSRB believes that Board members 
should be limited to two consecutive terms when the special 
circumstances exception is invoked. By doing this, under the proposed 
rule change, no Board member could serve more than eight years 
consecutively. This added provision would ensure that the special 
circumstances exception is not overused, mitigate the concern of Board 
members becoming too dominant and unduly influential, assure 
appropriate turnover of Board membership and help maintain a robust 
pool of applicants for Board service. As noted, the MSRB believes this 
modification reflects good corporate governance as applied to the 
particular characteristics of the MSRB.

[[Page 6093]]

Increase in Term Length--Training
    However, BDA encouraged the MSRB to consider instituting a robust, 
formalized training program for all incoming Board members in their 
first year of service to maximize the benefits of the proposed fourth 
year of service. Similarly, in a comment letter in response to the 
First Request for Comment, NAMA, which ``does not object'' to the 
increase in term length, suggested that the MSRB could devote extensive 
staff time and other resources to expedite the learning curve for Board 
members. These comments address internal MSRB matters and do not 
suggest any revision to the language of the amendments in the proposed 
rule change. Additionally, the MSRB already allocates significant 
resources to educating new Board members as part of a robust and 
dedicated orientation process that begins prior to the commencement of 
their terms and focuses on organizational and other substantive 
matters, including, but not limited to, rulemaking and other large 
initiatives. The MSRB also already routinely revises and improves this 
process with the benefit of each successive experience orienting new 
Board members.
Number and Size of Board Classes
    In response to the Second Request for Comment, none of the 
commenters specifically addressed the proposed change from three 
classes of seven Board members to one class of six members and three 
classes of five. In response to the First Request for Comment, SIFMA 
suggested the same structure. The MSRB continues to believe the 
proposed rule change is appropriate and, in light of the absence of any 
concern among the commenters, is not making any revision to the 
proposal in this respect.
Elimination of the Requirement That There Be at Least One Non-Dealer 
Municipal Advisor Representative per Board Class
    In response to the Second Request for Comment, only BDA commented 
on the proposed elimination of the requirement that there be at least 
one non-dealer municipal advisor representative per Board class. BDA 
supported this adjustment because it is its preference to ensure the 
number of dealer-affiliated regulated entities on the Board is as 
robust as possible. Given that no commenter opposed the change and that 
it would neither reduce the representation of municipal advisors nor 
preclude the MSRB from deciding to include more than three non-dealer 
municipal advisor representatives on the Board, the MSRB is not making 
any change to the proposal in this regard.
Transition Plan
    BDA supported the transition plan to the new term lengths proposed 
by the MSRB in the Second Request for Comment. In particular, it 
supported the part of the plan under which a special nominating 
committee comprised only of Board members not being considered for 
extensions would nominate the Board members who would receive one-year 
extensions to be voted on by the full Board. BDA believes that approach 
to be fair in that members on the special committee providing 
nominations for term extensions would not be eligible for a longer 
term, and that it would reduce any potential for self-dealing. SIFMA 
supported the plan because no existing Board member would serve for 
more than four years under the transition plan.
    After considering this part of the plan further, the MSRB believes 
it is a better approach to have the full Board vote by ballot on all 
members eligible for extensions. First, given that 18 of the 21 Board 
members would be eligible for an extension, it would be difficult for 
the MSRB to constitute a special committee that is a fair 
representation of the entire Board. Additionally, despite the change in 
the process, the ultimate authority of the full Board to determine who 
would receive an extension is unchanged--under the special committee 
nomination process, the Board could vote down every nomination until 
the member, whom the Board would support for an extended term, was 
nominated. Finally, the MSRB believes that any concerns BDA might have 
with the potential for conflicts of interest and/or self-dealing under 
the new process are mitigated because the size of the Board--21 
members--and the large number of members eligible for an extension make 
it more difficult for any one member to inappropriately affect the 
outcome of the election.
Miscellaneous
    In response to both requests for comment, NAMA stated that the MSRB 
should consider returning the size of the Board to 15 members. 
Additionally, NAMA suggested that, if there are term extensions for 
Board members, the rule amendments should address term lengths for 
leadership positions and the point in a Board member's term at which he 
or she becomes eligible for such positions. In response to the First 
Request for Comment, SIFMA suggested that making a Board member 
eligible to serve as vice chair in the third year of a four-year term, 
and as chair in the fourth year, would strengthen the leadership of the 
Board, as those individuals would be oriented fully to MSRB issues and 
processes at those points in their tenures. Lastly, Thompson believed 
the MSRB should consider reviewing the single-year term of the chair. 
Lamb believed the single-year term of the chair should remain 
unchanged.
    The recommendations regarding Board size, and term lengths and 
eligibility for leadership positions on the Board, are beyond the scope 
of the issues presented in both requests for comment. Therefore, the 
MSRB is not considering such matters at this time.

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 [email protected]. Please include 
File Number SR-MSRB-2016-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MSRB-2016-01. 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

[[Page 6094]]

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 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-2016-01 and should be submitted on 
or before February 25, 2016.

    For the Commission, pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-02062 Filed 2-3-16; 8:45 am]
 BILLING CODE 8011-01-P