After much consultation with the BDA Municipal Division and Legal and Compliance Committee leadership, along with BDA outside counsel-Nixon Peabody and Davis Polk, the BDA has submitted a letter to the SEC opposing the recent requests for guidance regarding private placement activity by non-dealer municipal advisors, while providing framework on potential relief at the request of Commissioner Robert Jackson.

The letter can be viewed here.

Following mid-September meetings with leadership at the SEC Office of Trading and Markets, including chief counsel, and the Office of Municipal Securities and Commissioner Robert Jackson, the BDA was tasked with finding a narrow framework for exemptive relief.

While BDA remains opposed to the SEC issuing any form of the requested relief, we believe that, if relief were to be granted, it should be in the form of a narrowly tailored exemptive order that makes clear that engaging in the activity constitutes acting as a broker-dealer but, under the limited circumstances, the SEC would exempt municipal advisors from broker-dealer registration requirements.

The BDA is planning follow a follow up meeting with Commissioner Jackson to discuss the proposal, as well meetings with other Commissioners and staff in the coming weeks.

Prior Actions

Following multiple rounds of meetings with SEC staff, the BDA has sent two prior letters in response to the PFM and NAMA requests for guidance regarding private placement activity by non-dealer municipal advisors. The September 9th letter, which can be viewed here, focuses on historical precedent, competitive disadvantages and the erosion of investor protections provided by the broker-dealer regulatory regime.

The first letter submitted by the BDA on June 28th addressed directly the problems that would arise from the request for interpretative guidance if granted, including rolling back decades of settled law on what constitutes broker-dealer activity.

The letter can be viewed here.

Background

PFM, the municipal advisory firm, sent a letter to the SEC last fall asking that the firm “not be required to register as a broker dealer” when conducting certain placement agent activity. They requested guidance exempting them from BD registration, which they argued “is essential for PFM and other MAs to fulfill their statutory mandate to protect [municipal entity] issuers, and to provide clarity and transparency regarding the role of the MA in municipal financing transactions.”

Shortly after learning about the letter, BDA staff met with the SEC and the conversation with SEC staff focused on concerns we have with the request, including that it would negate the substantial regulatory protections under BD regulations in place to protect investors. The BDA also argued that the guidance PFM is asking for would create an unbalanced competitive environment between dealer and non-dealer MAs, and we emphasized that the act of finding investors, even for a direct placement, is inherently BD activity.

Bond Dealers of America

rcrodriguez

September 25, 2019

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced its organizational priorities and published its budget for Fiscal Year 2020, beginning October 1, 2019. The FY 2020 priorities include a comprehensive focus on governance, with the formation of a new special Board committee to examine the MSRB’s governance practices.

Governance and Leadership
“The Board recognizes that how we govern ourselves as an organization is fundamental to our ability to effectively protect municipal securities investors, issuers and the public interest,” said MSRB Chair-Elect Ed Sisk. “We see room for continuous improvement in this area and welcome ideas from policymakers, regulators and stakeholders. Under the leadership of the special committee on governance, we will examine all aspects of our governance practices, including the size and composition of the Board, to identify opportunities to improve fairness and transparency.”

The Board also created a special committee to lead the nationwide search for a new president and CEO following the retirement of President and CEO Lynnette Kelly at the end of FY 2019. The committee will begin the search process by conducting interviews for outside executive search firms in connection with the first quarterly Board meeting of the fiscal year in October.

“While the Board is eager to identify the right candidate to lead the MSRB into the future, we remain confident in the staff’s dedication and ability to continue to advance our mission during this time of organizational change,” Sisk said. The Board named MSRB Chief Financial Officer Nanette Lawson as interim CEO effective October 1.

Stakeholder Engagement
In addition to establishing two special committees, the Board added a new standing committee on stakeholder engagement to its five permanent committees on audit and risk, finance, nominating and governance, steering, and technology. Board members, including the historic incoming class of five women, serve on one or more committees.

“Under outgoing Board Chair Gary Hall, the MSRB greatly expanded the opportunities for stakeholders to provide feedback directly to the members of the Board,” Sisk said. “This standing committee will ensure the Board’s strategic discussions and decisions continue to benefit from the diverse perspectives in our market.”

Regulation for the Future
In recognition of the rapidly evolving municipal market, the MSRB plans to continue its retrospective rule review and development of new compliance resources. For the third consecutive year, the Board’s compliance initiatives will be informed by a Compliance Advisory Group. The Board also will continue for the second year with a Municipal Fund Securities Advisory Group to provide input to the Board on municipal market rules, practices, transparency and education related to municipal fund securities, including 529 savings plans and ABLE programs.

Technology and Data
The Board has authorized an enterprise-wide migration of the MSRB’s Electronic Municipal Market Access (EMMA®) website and related market transparency systems to the cloud. A new dedicated data management and analytics department will focus on data governance, quality and analytics, including exploring potential opportunities to leverage cloud technologies to advance the organization’s data strategy.

“Making municipal securities data and disclosures available at no cost to investors and the public on the EMMA website was a radical advancement in market transparency a decade ago,” Sisk said. “The MSRB believes moving to the cloud will position us to make market data even more accessible, usable and reliable for all market participants.”

FY 2020 Budget
Funding these organizational priorities requires rigorous stewardship of resources. In support of the MSRB’s continued commitment to public accountability, transparency and responsible financial management, the MSRB is releasing its FY 2020 budget, which provides insights about the organization’s revenue, expenses and reserves. Operating expenses of $42 million reflect a 4 percent increase from the prior fiscal year and are indicative of the MSRB’s steady commitment to the long-term strategic goals of the organization. Revenues reflect the higher professional fees to be paid by municipal advisors to advance the MSRB’s goal of fair and equitable fees across regulated entities. The Board’s strategic focus on managing reserves is continuing, with excess reserves dedicated to fund a $2.3 million operating deficit in addition to funding the MSRB’s technology transition to the cloud.

Date: September 23, 2019

Contact: Leah Szarek, Director of Communications
202-838-1500
[email protected]

The Governmental Accounting Standards Board is expected to propose three alternatives for counties and cities to adjust their hedges or interest rate swaps after Libor expires at the end of 2021.

GASB has not yet officially voted on the proposal, which would offer the Secured Overnight Financing Rate (SOFR), the effective federal funds rate or Treasury rate as the replacements.

“The board will be proposing that if the only thing the government is doing is replacing Libor with a rate that is intended to be essentially equal, that will not be considered a termination for hedge accounting purposes,” said Jeffrey Previdi, GASB’s vice chairman.

GASB is taking action because changing the reference rate on the hedge is ordinarily considered a termination event.

GASB touched on a similar issue in the wake of the credit crisis during the Great Recession when it issued Statement 64 saying that replacement of a counterparty or credit support provider would not be a termination.

In a related but separate move, the Treasury is expected to soon release guidance clarifying that replacement of Libor-based debt does not trigger a reissuance.

Previdi spoke to The Bond Buyer Monday to summarize the overview of GASB initiatives he presented last week at a workshop in Chicago for members of the National Association of Bond Lawyers.

Last week was the deadline for state and local governments to comment on GASB’s latest exposure draft involving public-private partnerships.

The 48-page exposure draft released by GASB June 6 expands the guidelines for P3s in more varieties of agreements than covered by Statement 60, which was issued in November 2010 when only a few state and local governments had undertaken them.

Under an original P3, a private partner would operate and maintain the infrastructure, collect revenues such as tolls and handle the debt payments connected to any bond offerings.

But newer P3s may have the government entity collecting the revenue or require that the private operator turn over the revenue to the government before a payment is made back to the private partner. Those variations wouldn’t meet GASB’s current definition of a service concession arrangement. But in terms of economic substance all of them are very similar transactions.

Two years ago GASB released updated guidance on government leases in Statement 87.

Previdi said GASB will review the comments it has received and expects to issue a final rule on P3s in the first quarter of 2020.

In a third GASB initiative, research staff members are looking into the metrics that could be used to define financial distress. The results of that research will be presented to the board sometime next year, at which time a decision will be made on whether to go ahead.

“It may happen that based on the research conducted that we decide that there isn’t a project here because we can’t improve upon what we have,” Previdi said.

He emphasized that the initiative is in its very early stages and that determining when distress is going to occur “is a tricky matter.”

Another initiative that is further along is the development of a concept statement on disclosure which would define what material has “essentiality” in the footnotes.

“I thought it was important to know from the muni market, bond lawyer world that they understand one of the things we are working on is an exposure draft that is going to discuss what we feel is appropriate for note disclosures in financial statements,” Previdi said.

Some governmental units issue many complex footnotes and the question that arises is whether all that information is necessary.

GASB’s research has found that many users find value in the footnotes.

The draft exposure statement on “essentiality” is scheduled to be released in the first quarter of 2020.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 09/16/19 02:43 PM EDT

Litigation Release No. 24602 / September 19, 2019

Securities and Exchange Commission v. Ruben James Rojas, No. 5:19-civ-01799 (C.D. Cal. filed September 19, 2019)

The Securities and Exchange Commission today charged Montebello Unified School District (“Montebello” or the “District”), its former Chief Business Officer, and its Superintendent of Schools with defrauding investors by failing to disclose fraud and internal controls concerns raised by the District’s independent auditor.

According to the SEC’s complaint and order, immediately before and concurrently with the District’s sale of $100 million of general obligation bonds in December 2016, Montebello’s independent auditor repeatedly raised concerns about allegations of fraud and internal controls issues to the District’s Board of Education and management. In response, Montebello allegedly refused to authorize the fees needed for the audit firm to complete its audit and instead decided to terminate the audit firm. The offering documents for Montebello’s December 2016 bonds failed to disclose this information to investors and instead included a copy of the District’s audit report from the prior fiscal year, which included an unmodified or “clean” audit opinion from the firm. The SEC alleges that Ruben Rojas, Montebello’s former Chief Business Officer, helped prepare the misleading offering documents and also concealed the audit firm’s concerns by providing deceptive updates about the status of its pending audit to various gatekeepers, including the disclosure lawyers who worked on the bond offering. The SEC’s order found that Anthony Martinez, Montebello’s Superintendent of Schools, signed the final bond offering document and made false certifications in connection with the bonds.

The SEC’s complaint, filed in U.S. District Court for the Central District of California, charges Rojas with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act of 1933, and seeks permanent and conduct-based injunctions as well as a financial penalty.

Montebello and Martinez agreed to settle with the SEC and consented to the SEC’s order without admitting or denying the findings. Montebello was ordered to cease and desist from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as Section 17(a) of the Securities Act of 1933. It also agreed to engage an independent consultant to evaluate its policies and procedures related to its municipal securities disclosures. Martinez was ordered to cease and desist from future violations of Section 17(a)(3) of the Securities Act of 1933 and also ordered to pay a $10,000 penalty.

The SEC’s investigation was conducted by Jason H. Lee and Creighton Papier, and supervised by Monique Winkler, of the Public Finance Abuse Unit. The litigation against Rojas will be led by John Yun and Mr. Lee.

Investors and the public are not served by a board filled with Wall Street lifers

For a self-regulatory group that oversees a $4 trillion (that’s 12 zeroes) municipal-bond market that finances public projects across the United States, the Municipal Securities Rulemaking Board has all the trappings of an insular Wall Street eating club.

The MSRB director made $1.05 million last year. The chairman of the Securities and Exchange Commission only makes $165,300. Transparency at the MSRB is dubious with data downloads too costly for all but the Vanguards of the world.

Public seats on the board largely go to those with close former ties to broker-dealers and banks. The current MSRB chairman is an equity partner at a Wall Street investment bank. The vice chair is a managing director at Bank of America Merrill Lynch.

Break up the club

Some reforms have been made, but it’s clear that many more are needed. The recent flurry of resignations and retirements among MSRB executives makes it an especially appropriate time to break up the Cosmos Club of bonds, and better protect investors as well as the public interest.

I filed the MSRB Reform Act, along with Sens. Elizabeth Warren and Doug Jones, because the board that oversees the muni-bond market is too secretive and too incestuous. Its membership shares the same DNA. That means the rulebook for municipal bonds is in the hands of a board that resembles a revolving door of longtime industry confederates.

The irony is that the MSRB exists because regulations were needed to tame a mammoth municipal-bond market that finances schools, bridges, roads and other public projects.

In theory, the MSRB is supposed to protect the public interest, investors, and state and local governments. In practice, the MSRB membership structure is more shaded toward protecting the financial professionals who broker the deals.

Public seats

The Dodd-Frank Act was supposed to level the playing field by ensuring that the majority of the board represents the public. That’s why there are “public seats” and “private seats” on the board. But a lot of those public seats still go to retired investment bankers and other Wall Street lifers who earned their livings profiting off the sale and issuance of municipal bonds.

Board members make $45,000 a year. Staff makes a lot more. A partial source for the largesse is the pricey annual subscription that the MSRB charges for data downloaded through the Electronic Municipal Market Access System, or EMMA.

Those who do pay for a subscription to EMMA help provide the funding that’s needed to pay the MSRB’s executives and board members. Compensation at other agencies, such as the SEC, is capped. There’s no such restriction at the MSRB.

EMMA generated a lot of buzz about transparency when it launched a few years ago because it was supposed to offer a window into municipal-bond trading. Smaller investors would finally be able to see investment data and the prices for which bonds are trading, allowing them to better build their portfolios.

The problem with EMMA is that it is cost prohibitive for the small investors who were supposed to benefit from the new transparency. Bulk downloads of primary market disclosure documents, such as municipal securities official statements (a prospectus for bonds) and certain preliminary official statements, cost $20,000. Access to continuing disclosure documents, such as audited financial statements, costs $45,000. Average mom-and-pop investors can buy two cars for that price.

My legislation makes necessary changes to ensure that the MSRB satisfies its original purpose of protecting investors and municipalities.

Much-need distance

My bill whittles down the board from 21 to 15 members. It creates some much-needed distance between board members and their industry ties by requiring that anyone who holds one of the public board seats must be separated from his employment as a banker, broker or municipal adviser for at least five years.

It also requires a salary cap for board members and requires that the SEC approve their selection. At present, the MSRB board selects its own members in a closed meeting, kind of like picking the pope.

I’ve got nothing against the MSRB board members personally. I know several of them, and they are fine people. I’m sure the others are, too. I just don’t think the $4 trillion municipal bonds market should be overseen by a structure that resembles Skull and Bones.

MARKET WATCH

By SEN. JOHN KENNEDY

Sept 17, 2019 2:28 p.m. ET

John Kennedy is a Republican senator from Louisiana.

Kenneth E. Bentsen, Jr., SIFMA president and chief executive officer, and Leslie Norwood, managing director, associate general counsel and head of the municipal division, recently sat down with The Bond Buyer’s John Hallacy and Lynne Funk to discuss SIFMA’s advocacy and regulatory priorities for the municipal market. The conversation also included considerations for the future of public finance.

For more information, listen to the podcast.

September 19, 2019

Treasury is finalizing the reissuance rule it released at the end of 2018 and is preparing to release proposed guidance to facilitate the transition away from Libor.

U.S. Treasury Associate Tax Legislative Counsel John Cross told attorneys attending a National Association of Bond Lawyers conference in Chicago on Thursday that other the other regulatory actions involving the municipal bond market constitute small administrative guidance.

Among the administrative guidance in the works are answers to continuing questions about student loan bonds and using economic defeasance to “turn off” Build America Bonds.

Treasury also is considering offering guidance on the definition of an instrumentality in terms of public universities that are exempt from a new federal excise on large university endowments.

That project could impact the municipal bond market in the same way as the effort to redefine political subdivisions did prior to Treasury’s withdrawal of that proposed regulation.

Internal Revenue Service enforcement officials told NABL workshop attendees in another workshop session the service is hiring five new revenue agents, up from the current 20, and two additional tax law specialists.

The new positions, which are posted on the USJOBS website, will reverse what has been a long term decline in staffing in the tax-exempt bonds section of the IRS through attrition, mostly because of retirements.

IRS officials also are reconsidering the 2017 reorganization that combined the tax-exempt bond office with the office of Indian tribal governments to form a new ITG/TEB office within the Tax Exempt & Government Entities Division (TEGE) managed by Christie Jacobs.

Allyson Belsome, senior manager of ITG/TEB Technical, said her unit which does the selection of audits would be unaffected by a reorganization, but the field audit group may be split into separate TEB and ITG teams.

The guidance on the elimination of the London Interbank Offered Rate (Libor) was sent by Treasury to the White House Office of Management and Budget on Aug. 28.

“We have gone through most of the gauntlets for public release,” Cross said. Review by OMB’s Office of Information and Regulatory Affairs is the final step in the process.

The Federal Reserve considers the release of the guidance sometime this fall to be “critical” to making the transition because it impacts $2 trillion in swaps in the marketplace, Cross said.

The Alternative Reference Rates Committee sent a letter to the Treasury in April summarizing on what issues the guidance should consider, including new rates other than the Secured Overnight Financing Rate (SOFR).

“People are looking for other alternatives,” Cross said, indicating that there will be an effort to provide flexibility.

NABL members have expressed concern that if floating rate bonds based on Libor switch to another benchmark rate, the switch may be considered a material change to the bonds that causes them to be considered newly reissued.

A re-issuance would make the bonds subject to the latest tax laws and rules and could even make them taxable.

The proposed Treasury guidance is expected to address that potential problem.

The Securities Industry and Financial Markets Association listed $76.9 billion in publicly issued municipal bonds from 872 issuances that used floating rate debt as of Dec. 18, 2018. That’s only 2% of the $3.8 trillion municipal bond market and includes debt that uses the SIFMA index but doesn’t include swaps.

Libor-based municipal debt was an even smaller amount at $47.6 billion or about 1.3% of the overall muni market.

As for the proposed reissuance rule, NABL, the Bond Dealers of America, the Government Finance Officers Association and the Securities Industry and Financial Markets Association submitted comments earlier this year requesting a continuation of the practice that allows remarketing reissuances at a premium.

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 09/12/19 02:43 PM EDT

Broker-dealers want the Securities and Exchange Commission to know exactly where they stand when it comes to municipal advisors and private placements of municipal debt, again asking the SEC not to grant regulatory relief sought by a major MA firm.

The Bond Dealers of America sent a letter to the Securities and Commission on Monday, its second on this subject in three months, asking for municipal advisor and broker-dealer roles to be kept separate. Both BDA and the Securities Industry and Financial Markets Association have written to the SEC to oppose an earlier letter sent by leading MA firm PFM.

After meeting with the SEC after sending its first letter and talking with its members, BDA CEO Mike Nicholas said the group wanted to consolidate its major points so “that the SEC knows very clearly what the industry view is.”

The SEC is preparing “very soon to move on this issue,” BDA said.

This all follows a PFM letter in October 2018 where the large non-dealer municipal advisor asked the SEC for written guidance confirming that the firm wouldn’t need to register as a broker-dealer when engaging in certain activities when advising on private placements of municipal bonds. Municipal advisors have said that they do not want to act as unregistered placement agents, but want to feel secure they aren’t breaking the law when they engage in certain negotiations with potential buyers or coordinate certain aspects of a transaction.

Muni advisors generally view this activity as consistent with their fiduciary duties, but dealers oppose it and view those roles as properly the place of a registered dealer firm. While dealers are not fiduciaries of an issuer, they are subject to certain regulations MAs are not, such as a requirement to perform due diligence before a transaction in order to protect investors.

“The BDA is concerned that the requested relief is inconsistent with the SEC and its staff’s long held views regarding the need for broker-dealer registration and the purposes of that regulatory regime,” Nicholas said.

Nicholas said that if guidance were issued to allow non broker-dealers to participate in private placement activity, it would essentially eliminate the participation of dealers in such transactions.

“If municipal advisors can receive transaction-based compensation for engaging in private placement broker-dealer activities, there would be little reason for dealers to engage in this activity within a municipal securities dealer entity,” Nicholas wrote.

In the letter, BDA further emphasized investor protection issues that it believes could be at stake. Broker-dealers serving as placement agents have a due diligence obligation to protect investors, and BDA argued that the requested relief would erode away investor protections.

“Presumably rules are in place for a reason,” Nicholas told The Bond Buyer. “This is a very, very regulated industry, presumably for a reason, and so we feel like investor protection is a big part of this issue.”

The National Association of Municipal Advisors wrote a letter to the SEC in July, pressing them to provide permission to participate in certain deals without risking enforcement action.

“NAMA’s letter commented on the need for MAs to be able to perform their MA duties and represent their clients without having that labeled as broker-dealer activity,” said Susan Gaffney, NAMA executive director. “We are not asking for MAs to be able to perform broker-dealer activity without being registered.”

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 09/10/19 10:26 AM EDT

After much consultation with the BDA Municipal Division and Legal and Compliance Committee leadership, along with BDA outside counsel-Nixon Peabody and Davis Polk, the BDA has submitted a letter to the SEC strongly opposing the recent requests for guidance regarding private placement activity by non-dealer municipal advisors.

The BDA learned late last week that the SEC is preparing very soon to move on this issue and is inclined to issue exemptive relief in some capacity. With this new development, the BDA has drafted a letter building off the information received during the member call in late July, and continued contact by staff and outside resources with the SEC.

The BDA is meeting with the SEC this week to further address our concerns. Meetings include the leadership at Trading and Markets, including chief counsel, and the Office of Municipal Securities. Later in the week, the BDA has a confirmed meeting with SEC Commissioner Robert Jackson, and likely others.

The letter, which can be viewed here, focuses on historical precedent, competitive disadvantages and the erosion of investor protections provided by the broker-dealer regulatory regime.

Prior BDA Actions

In late June, the BDA submitted a letter in response to the PFM and NAMA requests for guidance regarding private placement activity by municipal advisors. The letter submitted addresses directly the problems that would arise from the request for interpretative guidance if granted, including rolling back decades of settled law on what constitutes broker-dealer activity.

The BDA has met with the SEC and MSRB, including during the quarterly Fixed Income Working Group fly-in earlier this summer, to discuss our positions and gauge the regulators next steps.

The letter can be viewed here.

Background

PFM, the municipal advisory firm, sent a letter to the SEC last fall asking that the firm “not be required to register as a broker dealer” when conducting certain placement agent activity. They requested guidance exempting them from BD registration, which they argued “is essential for PFM and other MAs to fulfill their statutory mandate to protect [municipal entity] issuers, and to provide clarity and transparency regarding the role of the MA in municipal financing transactions.”

Shortly after learning about the letter, BDA staff met with the SEC and the conversation with SEC staff focused on concerns we have with the request, including that it would negate the substantial regulatory protections under BD regulations in place to protect investors. The BDA also argued that the guidance PFM is asking for would create an unbalanced competitive environment between dealer and non-dealer MAs, and we emphasized that the act of finding investors, even for a direct placement, is inherently BD activity.

Bond Dealers of America

September 9, 2019

If you have any questions, please contact Brett Bolton at [email protected]

Read about highlights from the August Board meeting, CEO Lynnette Kelly’s retirement and new resources and publications in the latest MSRB Update newsletter.

• Cooperation with U.S. criminal probe noted in civil settlement
• German lender agrees to pay $15 million to resolve civil suit

Deutsche Bank AG is cooperating with the Justice Department’s antitrust investigation into whether several of the largest global banks conspired to rig trading in unsecured bonds issued by Fannie Mae and Freddie Mac.

The bank earned leniency by providing information about other banks accused of rigging trading in the bonds. The cooperation deal emerged Thursday when Pennsylvania’s Treasurer, Joe Torsella, announced that Deutsche Bank had agreed to pay $15 million to resolve allegations in a civil lawsuit filed in federal court in Manhattan, that accuses traders at about a dozen large banks of rigging the bond prices.

According to the deal, the German lender came forward in May to assist Pennsylvania and other plaintiffs in the civil lawsuit. Under federal law, companies seeking criminal leniency in antitrust matters, which includes immunity from prosecution, can also limit their financial exposure by assisting price-fixing victims seeking damages.

Deutsche Bank’s settlement, which requires the bank to install an antitrust compliance program, shows that the bank has been providing the Justice Department with electronic chats and other evidence that could be used to prosecute individuals and institutions. It also suggests that the bank, which is the middle of multiple criminal investigations by the Justice Department, is looking to win some good will with investigators.

In late May, lawyers accusing the banks of manipulating the bond prices said in a court filing that they were working with a cooperator who was providing “smoking gun” evidence including electronic chats. Though they didn’t name Deutsche Bank at the time, examples of chats in the filing were between traders at Deutsche Bank and others at Goldman Sachs Group Inc., Morgan Stanley and BNP Paribas SA.

The lawsuit accuses financial institutions of ripping off pension funds and others from 2009 to 2016.

Torsella said the settlement on Thursday was “an important first step, but just a first step, toward greater accountability on Wall Street.” He said government-sponsored-entity (GSE) bonds like those of Fannie Mae and Freddie Mac “are foundational to public investment portfolios, particularly for state governments, school districts, county governments and local municipalities.”

“We’re pleased to have resolved the matter,” said Troy Gravitt, a Deutsche Bank spokesman.

The Justice Department opened a criminal investigation into whether some traders manipulated prices in the market for unsecured bonds issued by Fannie and Freddie, the government-backed companies whose financing underlies most U.S. home purchases, Bloomberg News reported last year. No individuals or banks have been charged.

The market for their agency debt — which finances the companies’ operations but doesn’t directly fund mortgages — runs into the hundreds of billions of dollars.

The lawsuit in Manhattan alleges that the chats about the pricing of the bonds in the secondary market also directly implicate Bank of America Corp. and its Merrill Lynch subsidiary, Barclays Plc, Cantor Fitzgerald LP, Citigroup Inc., Credit Suisse Group AG, First Tennessee Bank NA, HSBC Holdings Plc, JPMorgan Chase & Co., Nomura Holdings Inc., TD Securities Inc. and UBS Group AG.

In addition to Fannie Mae and Freddie Mac, these GSE bonds finance the Federal Farm Credit Banks and the Federal Home Loan Banks.

Deutsche Bank approached the lead counsel for the plaintiffs on May 8 and said it was willing to provide them with cooperation materials pursuant to a federal law that allows companies to seek criminal leniency in antitrust matters, the settlement agreement said. The law also limits the financial exposure of companies that assist price-fixing victims seeking compensation.

Judge Jed Rakoff in federal court in Manhattan ruled this month that the case against BNP Paribas, Deutsche Bank, Goldman Sachs, Merrill Lynch and Morgan Stanley could move forward. He dismissed the other financial institutions from the case but allowed the plaintiffs to seek to bring additional evidence forward that could bring those institutions back in to the case, which they did in a filing on Tuesday.

Bloomberg Markets

By Tom Schoenberg

September 12, 2019, 8:41 AM PDT Updated on September 12, 2019, 10:13 AM PDT

SUMMARY

SIFMA provided input to the Securities and Exchange Commission on the Proposed Rule Change to Amend and Restate the Municipal Securities Rulemaking Board’s August 2, 2012 Interpretive Notice Concerning the Application of Rule G-17 to Underwriters of Municipal Securities. Although SIFMA recognizes the modifications that the MSRB has made to the rule based, in part, upon our comments to MSRB, SIFMA requests that the SEC disapproves of this Filing until such time that the MSRB amends the Filing to address our further comments described herein.

Read the letter.

In the coming weeks, Treasury Secretary Steven Mnuchin, Housing and Urban Development Secretary Ben Carson and Federal Housing Finance Agency Director Mark Calabria are all scheduled to testify before Congress regarding the Trump Administration’s plan to reform Fannie Mae and Freddie Mac. The administration’s blueprint document on a reform plan is likely to be released in the next week.

Due to BDA’s unique position in the mortgage market, a small group of BDA members have drafted a policy “white paper” on specific broker-dealer priorities within GSE reform. The document details the following principles:

• Preserve the “TBA” mortgage securities market
• UMBS is a welcome advancement
• Focus on agency capital-building
• Recognize the vital role state and local governments play in the GSE market
• Preserve access to local lending models

BDA will share this document with policymakers as the conversation on GSE reform begins in Washington.

Bond Dealers of America

September 4, 2019

On August 16, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 19-28 (Notice) reminding member firms of their supervisory obligations under FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) if they 1) hold or transact in customer accounts owned by municipal entities or obligated persons (i.e., municipal clients), as defined in Section 15B of the Securities Exchange Act of 1934, as amended; and 2) participate in investment-related activities with municipal clients (e.g., recommending or selling non-municipal securities products to such municipal clients).

The Notice advises that member firms with municipal clients should evaluate whether such firms must register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board (MSRB) as “municipal advisors” or if they can rely upon an applicable exclusion from registration and/or a registration exemption.

The Notice also reminds member firms engaging in investment-related activities with municipal clients that they must establish, maintain and enforce supervisory systems and controls pursuant to FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) that are reasonably designed to prevent and detect unregistered municipal advisory activity and non-compliance with its attendant obligations. In establishing and maintaining a supervisory system and controls that account for the municipal advisor registration requirements, member firms are advised to consider the unique risks of their business activities with municipal clients.

The Notice does not create any new requirements or expectations. Rather, the Notice is intended to assist member firms in complying with their existing obligations under FINRA, SEC and MSRB rules.

The Notice is available here.

by Susan Light, Michael T. Foley and Stanley V. Polit

August 30, 2019

Katten Muchin Rosenman LLP

Norwalk, CT—August 28, 2019 — The Board of Trustees of the Financial Accounting Foundation (FAF) today announced the appointment of California State Treasurer Fiona Ma to the Governmental Accounting Standards Advisory Council (GASAC), effective immediately. Her initial term will conclude December 31, 2020.

The GASAC advises the Governmental Accounting Standards Board (GASB) on strategic and technical issues, project priorities, and other matters that affect standards setting. The GASAC provides the GASB with diverse perspectives from individuals with varied governmental and professional backgrounds.

Ms. Ma, a Certified Public Accountant, was elected California State Treasurer in 2018. Previously, she served four years as chair of the California State Board of Equalization. From 2006 to 2012, she was a member of the California General Assembly, attaining the role of Speaker Pro Tempore. Prior to that, she spent four years as a member of the San Francisco Board of Supervisors.

“Fiona Ma brings to the GASAC a distinguished track record of leadership and expertise not only in government financial reporting, but also as a former legislator in state and local government,” noted FAF Chairman Charles H. Noski. “We look forward to her contributions to GASAC discussions as part of the group’s mission to provide input to the GASB.”

Ms. Ma was nominated to the GASAC by the National Association of State Treasurers.

For a full list of current GASAC members, visit the GASAC webpage.

The Disclosure Committee is pleased to release the draft of the Recommended Best Practices in Disclosure (RBP) for Dedicated Tax Bonds. To view the draft, click here.

Comments on this draft will be accepted through November 30, 2019.

This paper represents the latest of sixteen distinct sectors addressed by the NFMA’s Disclosure Committee over the past two decades via RBPs. In addition to RBPs, the NFMA has released eight white papers on disclosure-related issues.

If you are unfamiliar with the NFMA’s efforts related to disclosure, go to Resources/Best Practices in Disclosure for more information.

Is information posted on EMMA subject to greater scrutiny under the antifraud provisions of the federal securities laws than when posted only on an issuer’s website?

That is the question raised by Securities and Exchange Commission Chairman Jay Clayton’s introductory remarks to the SEC’s Fixed Income Market Structure Advisory Committee on Monday, July 29. Chairman Clayton said that he had heard of issuers being advised that disclosing information through the Municipal Securities Rulemaking Board’s EMMA municipal disclosure system triggered a “more rigorous liability standard for that information than disclosing the same information to investors through other means.” Clayton said he had “significant questions about this advice” and whether it was correct as a matter of law and policy. He added that he would ask the SEC’s Office of Municipal Securities to create a staff legal bulletin on the topic.

BACKGROUND

The SEC’s Rule 10b-5, which was promulgated in 1943 under the authority of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), provides that it is unlawful “in connection with the purchase or sale” of a security “to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” Section 17(a) of the Securities Act of 1933 (the “Securities Act”) provides for similar misstatement or omission antifraud liability “in the offer or sale” of a security.

In 1975, both the Exchange Act and the Securities Act were amended in a number of ways. Among the changes was the so-called “Tower Amendment,” which precludes the SEC and the MSRB from requiring filings, registration, or the provision of information by municipal issuers in connection with the sale of municipal securities. Also included in the 1975 amendments were changes that subjected municipal issuers to the antifraud provisions of Securities Act Section 17(a), Exchange Act Section 10(b) and SEC Rule 10b-5.

Prior to the promulgation of Rule 15c2-12 in 1989, issuers had no obligation to provide any sort of prospectus in connection with a public offering of municipal bonds; indeed, the Tower Amendment prevented the SEC from requiring such a thing. With Rule 15c2-12, the SEC used its ability to regulate securities broker-dealers to bring municipal securities disclosure to the primary market. The new rule required underwriters of municipal securities to obtain and review an “official statement” from the issuer containing the proposed terms of the securities and financial and operating data material to an evaluation of the offering and to send a copy of the official statement to any potential customer in the offering upon request.

In 1994, Rule 15c2-12 was amended to require not only primary market disclosure (the official statement) but also secondary market disclosure (so-called “continuing disclosure”). As with the original rule, the continuing disclosure provisions of Rule 15c2-12 achieve their aim through the regulation of broker-dealers rather than requiring or mandating issuer disclosure or registration, requiring underwriters to obtain from an issuer or obligated person a contractual undertaking to provide annual financial and operating information and to provide notices of certain material events to certain designated dissemination services. This requirement is similar to the reporting requirements for issuers under the Exchange Act, although the required disclosures are narrower in scope and the Rule recognizes a number of differences between municipal issuers and other types of issuers. The SEC has since expanded these continuing disclosure requirements to cover variable rate demand or tender obligations (which in earlier versions of the Rule were exempt) and has twice amended the rule to require disclosure of additional events. The SEC has also demonstrated more recent emphasis on continuing disclosure in its Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”), where more than 140 municipal issuers and other obligated persons were subject to Enforcement actions between 2014 and 2016.

After many years of experience and general dissatisfaction with private dissemination services, the MSRB created the EMMA website in 2008, and a year later the SEC designated EMMA as the official repository for municipal securities disclosures. The EMMA system is now widely regarded as an efficient, useful and easily accessible platform for disclosing and obtaining information about an issuer and its publicly traded securities. Particularly for issuers that do not maintain investor relations websites – which is the majority of them – EMMA is the first place investors look to for information.

THE ISSUE

Do statements made through EMMA trigger a “more rigorous liability standard” than the same statements disclosed to investors through other means? It actually depends on a number of circumstances, including whether the statements are directed to investors and what is meant by “other means.” It is unlikely, however, that the SEC’s Division of Enforcement will focus on or distinguish between the mediums of dissemination as opposed to the content of the information provided.

It has long been recognized that a statement need not be directed specifically at investors to be subject to the antifraud provisions. Contemporaneously with its release of the proposed continuing disclosure amendments in 1994, the SEC issued a “Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others” – known generally as the “interpretive release.” An expansive statement of the SEC’s view of municipal securities disclosure practices, the interpretive release contained two statements particularly relevant to this discussion. While municipal issuers are not required to comply with continuous reporting and disclosure practices required of public companies, when a municipal issuer does release information to the public “that is reasonably expected to reach investors and the trading markets, those disclosures are subject to the antifraud provisions.” Second, even if such statements are not published “for the purposes of informing the securities markets,” they may nonetheless give rise to antifraud liability under the Securities Act and the Exchange Act.

While statements made on EMMA, on an issuer’s investor relations web page, in a press release, or on an issuer’s general website, can all give rise to antifraud liability, a statement specifically directed to investors (such as through EMMA or on a specific investor relations page) may be more likely to be noticed or reviewed by investors and thus raise greater concern within the SEC’s Division of Enforcement. This could be particularly true in the case of material omissions, which is the most typical concern for issuers. We can stipulate that very few issuers make false representations intentionally, whether on EMMA or otherwise, in connection with the purchase or sale of municipal securities. Municipal issuers sometimes face scrutiny, however, when they post completely accurate statements that are alleged to be incomplete for securities law purposes – i.e., statements that omit to state other material facts necessary to make the otherwise accurate facts not misleading in light of the circumstances under which the statements are made.

The way in which a particular statement is published or otherwise communicated to investors can affect the degree to which additional statements are necessary to make the statement not misleading for securities law purposes. Issuers have many reasons to communicate, and by and large the constituents they intend to communicate with are not investors but rather the citizens and residents of their communities. It is not reasonable to expect that every statement published on an issuer’s general government website be scrubbed by securities lawyers and examined in depth to ensure that it does not contain a material omission. Antifraud liability under the federal securities laws, however, ordinarily does not turn on where and how a statement is made or posted. Reasonable investors, as well as the SEC, are likely to expect that all statements, whether on EMMA or otherwise, are accurate and complete.

LOOKING AHEAD

The SEC frequently receives requests from institutional investors and industry groups for more disclosure in the municipal market, and the SEC seems sympathetic to that view, even though the instances of defaults in the municipal market are quite low. At this point, the SEC, municipal investors, underwriters and even issuers appear to have largely coalesced behind EMMA as the site for disclosure of issuer information for investors.

Issuers, on the other hand, are often reluctant to post information on EMMA that is not legally or contractually required. Municipal issuers often do not have the resources to maintain a dedicated staff of securities disclosure professionals or to keep a securities lawyer on retainer to assist with secondary securities market disclosure issues including difficult questions of “materiality.” Similarly, the accounting and other reporting systems of many municipal issuers are not set up to provide information as quickly or as completely as would typically be required in the corporate market, and for many municipal issuers, particularly small or infrequent issuers, requiring more sophisticated disclosure would impose a substantial burden on the issuers without clearly producing significant benefits. Nonetheless, those statements and other information that is posted on EMMA are unquestionably statements intended for the investment community, are not infrequently reviewed by the SEC, and need to be reviewed by the issuer with that in mind prior to such statements being posted.

The staff legal bulletin Chairman Clayton said he would request will likely clarify the SEC’s view on the differences, if any, between communicating with investors through EMMA and communicating with investors through other means. Until such guidance is issued, however, municipal issuers and other obligated persons should assume that the SEC remains focused on continuing disclosure, as evidenced by the MCDC Initiative, and thus they should remain equally focused on the content and completeness of their disclosures.

by Floyd Newton III & Matthew Nichols

August 30, 2019

King & Spalding

SEC Fixed Income Market Structure Advisory Committee Meeting

Discussion Panels

• Draft Recommendation for Investor Education Regarding Retail Notes
• Draft Recommendation on Certain Principal Transactions with Advisory Clients
• Updates from the Technology and Electronic Trading Subcommittee and ETFs and Bond Funds Subcommittee
• Content and Timeliness of Municipal Issuer Disclosures
• Credit Ratings: Future Modifications or Status Quo

Opening Statements

In his opening statement, Securities and Exchange Commission (SEC) Chairman Jay Clayton highlighted some of the developments from past Fixed Income Market Structure Advisory Committee (FIMSAC) recommendations and the importance of the recommendation to increase education for retail investors. SEC Commissioner Allison Lee also highlighted the importance of clear disclosure. Division of Trading and Markets Director Brett Redfearn discussed the distinct challenges of the Fixed Income market and thanked the FIMSAC members for their efforts.

Draft Recommendation for Investor Education Regarding Retail Notes

• Susan Sheffield, GM Financial
• Sarah Tucker, Raymond James
• Brian Walker, Incapital
• Brad Winges, Hilltop Securities
• Moderator: Mihir Worah, PIMCO

Winges described the retail note market compared to the other areas of corporate bonds (institutional and intermarket). He said that in contrast to institutional advisors who need liquidity, most retail investors tend to buy and hold and are willing to forgo some liquidity for higher yield. Worah added that as long as investors are aware of the liquidity trade-off, it should be their choice.

Sheffield and Scott Krohn described how retail investors purchase these securities and how retail bonds are used in their company’s capital structure. Sheffield stated that GM Financial issued approximately $558 million over last two years with a two- to ten-year maturity. Krohn stated that Verizon has about $1 billion retail bonds outstanding which represents about one percent of its total bond issuance. Sheffield and Krohn explained that retail bonds allow investors to buy these bonds at par on the primary market and could be compared as an alternative to a CD. While these bonds have a call option Sheffiled and Krohn stated their companies have not exercised it to date. Tucker stated that during the last down cycle of interest rates, some issuers exercised the call option but most investors understood this feature.

Walker described the process of issuing the retail bonds, and emphasized that this is the first time retail investors can participate in new issuances of individual companies rather than a collective of secondary bonds in ETFs or bond funds. Walker stated investors make their decision to invest over one week and have the note come due at par. He continued that the corporates distribute to the investors through numerous brokers and dealers but will only have to settle one note.

Tucker said that investors typically purchase these retail notes when they want an individual bond with stated predictable income and maturity, and these investors typically have a specific time in mind when they want the money back to pay for something, such as college tuition. Tucker said she does not see a high volume of trading, especially compared to the institutional market, but that this is not surprising since these notes are most appropriate for buy and hold retail investments. She said that investors are able to build in liquidity over time by laddering the bonds to come to maturity over several years. Tucker stated that while the brokerage transaction cost may initially appear high for investors, she highlighted that there is only an initial brokerage cost and the cost of ownership over time is less because investors are holding to maturity.

Question & Answer

Clayton stated that he wants to ensure advisors understand these retail notes and that investors especially understand the differences in costs compared to institutional notes. Walker stated that investors can compare the cost of retail notes to institutional notes on the Trade Reporting and Compliance Engine (TRACE) but there is no single page comparison. Tucker stated that her firm provides tools for advisors to provide a comparison to show trade-offs. However, Tucker stated that the investors focus on yield and maturity. Walker said that his firm creates their own marketing materials that reiterate the same risks described in the notes’ prospectuses that dealers can use to ensure customers are aware of the risks.

Gilbert Garcia of Carcia Hamilton & Associates asked what the typical yield or coupon differential is, whether investors know about TRACE and whether these bonds are traded on the same or different books. Walker stated there is typically a 20-25 basis point coupon differential. Tucker noted that fees in a commission account will be about the same for the primary and secondary market, and that investors know of TRACE and her firm gives links to TRACE and bond facts website on trade confirmations. Tucker added that traders do both institutional and retail and can evaluate both markets.

Larry Harris asked what happens to the survivor option upon secondary transfer and with the note being conditioned on a life, whether life insurance regulators have focused on these. Walker and Tucker stated the survivor option passes with the bond and will be based on the purchaser’s life span. Additionally, Tucker explained that insurance companies issue these notes and they go through their analysis.

Horrace Carter asked whether this is different from the inter-note program and whether those issues have been addressed. Winges stated this is not just an inter-note program and with technology developments there are more electronic trading platforms where issuers can issue securities in any structure an investor wants. Winges further said this other market is continuing to grow with the ability to create bespoke bonds, which may have different education needs.

Rich McVey asked the panelists about any downside to the recommendation to enhance education. Tucker stated that there is no downside to education but it needs to be properly framed. Walker stated that any efforts need to be balanced and not overly onerous so they do not restrict their use.

Redfearn referenced Regulation Best Interest and asked how dual-registrants decide whether they are acting as a broker or advisor. Tucker explained that with a buy and hold investment there is not as much necessary advice, so they may elect to act on a brokerage or commission-based agreement but brokers will continue monitoring the notes. Tucker added that most retail investors can choose their appropriate advice model by purchasing at par with an upfront transaction cost or purchasing less than par with concession done on an agency basis.

The recommendation was unanimously approved.

Draft Recommendation on Certain Principal Transactions with Advisory Clients

• Jude Arena, Bank of America Merrill Lynch
• John Bagley, MSRB
• John Cahalane, Tradeweb
• Chris Ferreri, Hartfield, Titus, and Donnelly
• Craig Noble, Wells Fargo Advisors
• Moderator: Lynn Martin, ICE Data Services

As to whether and how this preliminary recommendation on blind bidding would benefit retail investors, Arena stated that allowing advisor clients to access those bids is a positive but having a different market structure and blind bidding creates unnecessary confusion. Noble stated that this will help with liquidity and that the subcommittee should look to the individual Rule 206 exemption for client advised accounts as to how it helped clients.

The panelists then discussed what needs to be built to implement a blind bidding protocol. Cahalane stated this would require minimal additional work as the platform already has functionality, noting that some customers could bid in the blind but those connecting through API may need additional technology changes. Ferreri stated that the work is straightforward for those parts of the workflow but may be more difficult for those not already in the system. Arena added that most smaller broker-dealers would have to rely on alternative trading systems (ATSs) but larger dealers would decide whether to create their own process or rely on ATSs.

Noble expressed concern that the recommendation only focuses on municipal securities which requires additional coding for all managed accounts. Bagley said he views the recommendation as a positive for providing liquidity but expressed concern that this will make managed accounts even more profitable.

Martin asked whether improvements to best execution would obviate the need to bifurcate the process. Jude stated that a better way forward would be to rely on the best execution and fair and reasonable requirements and have an explicit prohibition on pennying. Bagley said that it would be better to address this problem now rather than wait for an express prohibition on pennying.

Question & Answer

Carter said he thought it would be superior to have one process, but asked whether it is possible to have two. Cahalane replied that it is still possible to have two processes as some clients already bid in the blind, adding that it should be one way or the other but Tradeweb can handle both processes.

Sonali Thiesen asked whether a prohibition on pennying and unsetting 206 would be a better solution from a cost-benefit perspective. Bagley replied that the concern is there is no guarantee or time frame on what will happen with pennying. Noble and Arena said that allowing a blanket waiver to 206 and a prohibition on pennying would allow advisory clients to get access to bids without major changes to market structure. Noble added that a more general exemption, rather than just the individual exemption for client advised managed accounts, would be a fair process and would help.

The recommendation was approved in a 12-4 vote.

Updates from the Technology and Electronic Trading Subcommittee and ETFs and Bond Funds Subcommittee
Technology and Electronic Trading Subcommittee Update

Richard McVey discussed the two issues of focus for the subcommittee: (1) pennying; and (2) reviewing the comment on FINRA’s new issue proposal. On the pennying recommendation, he said the subcommittee is working on adding the discussed language into the recommendation and clarifying the difference between pennying and legitimate last look. As for the FINRA new issue proposal, he explained the committee filed a letter to reiterate the need for this service and clarify its recommendations.

ETFs and Bond Funds Subcommittee Update

Ananth Madhavan stated that the subcommittee’s recommendations are timely considering the recent European Systemic Risk Board (ESRB) report on this issue. Additionally, Madhavan discussed the two potential upcoming panels on: (1) the role of authorized participants and potential market structure improvements to deal with step away risk during times of stress; and (2) bond index construction funds which requires frequent predictable trading that leads to non-fundamental trading effects.

Content and Timeliness of Municipal Issuer Disclosures

• Tom Doe, Municipal Market Analytics
• Sheila May, GW&K Investment Management
• Tom McLoughlin, UBS
• Tim Schaefer, Office of the California State Treasurer
• Kendel Taylor, City of Alexandria
• James Wallin, Alliance Bernstein
• Rebecca Olsen, Office of Municipal Securities, SEC

Olsen gave an overview of the regulation of the municipal securities market, saying the municipal market does not have the same regulations as other securities largely due to the broad exemptions from the Securities Act of 1933 and Securities Exchange Act of 1934. In the absence of typical registration and reporting requirements for municipal securities, she said that investors are protected by: (1) enforcement of anti-fraud provision prohibiting deceit, misrepresentation and fraud; (2) registration and regulation of broker-dealers and municipal security dealers; (3) Rule 15c2-12, which provides a basic disclosure framework; (4) registration and regulation of municipal advisors; and (5) SEC guidance.

Schaefer described the information provided to rating agencies, saying that California is unique in that it typically raises $4-6 billion in each the spring and fall and it provides the rating agencies a draft of its Appendix A, which provides material investor information, and will amend Appendix A to reflect the rating agencies’ questions before making it public. Taylor said Alexandria typically raises $23-100 million each year, and the disclosures focus on describing the changes from the previous year.

As to whether rating agencies receive additional useful information, Wallin expressed his belief that rating agencies have the advantage of receiving information on an ongoing basis while investors only receive information when the issuer is in need. However, McLoughlin stated that the primary disclosures are typically sufficient but investors don’t receive unaudited interim financial statements. May said that rating agencies receive additional information but most of that information may not be material. Doe added that issuers typically make themselves available to investors but face additional costs associated with providing that information.

Wallin, McLoughlin and May stated that financial reports lose their relevance the later they are published, and in those cases, firms must rely on independent sources and interim information. Wallin and McLoughlin explained their firms will first look for this information on EMMA and then look at the issuers’ websites for this important information, but both sources are primarily useful only for institutional investors and vary in their usefulness. May said her firm goes to issuer websites first and then uses EMMA for new documents or event notices.

The panelists discussed whether disclosure practices affect issuers’ cost of borrowing. Wallin said that there is anecdotal evidence that the lack of accurate and timely disclosures impacts issuers’ borrowing ability, but there is no quantifiable evidence. McLoughlin and Doe stated that there is more demand than supply, so there is no penalty for not disclosing timely, accurate information. McLoughlin noted that smaller issuers don’t always see the cause and effect between price and publishing financial information. However, both Taylor and Schaefer stated they believe their disclosure practices help their ability to issue bonds.

Credit Ratings Future Modifications or Status Quo

• Daniel Gates, Moody’s Investors Service
• Yann Le Pallec, S&P Global
• Otis Otih, Mars
• Susan Sheffield, GM Financial
• Rachel Wilson, Iron Mountain

Gates stated that the analytical approach for credit rating agencies relies on quality and consistency. He said that investor demand is important for producing high-quality ratings, and added that it is essential for rating agencies to regularly analyze the performance and their methodology to produce the “best” possible ratings. He said that the issuer pay model provides the most rational and easy process to disseminate information.

Le Pallec said that competition for commercial approaches to credit ratings depends on structure, classes, and performance based on investor demand. He stated that rating performance is contingent on the time, class, and methodology, with a rank of risk and stability. He added that review of performance and the path to defaults are important for rating agencies to be transparent and predictable. Le Pallec suggested continuing to operate on the current issuer pay model, as he said it provides the highest level of public transparency and has the least amount of conflicts.

Otih stated that based on his experience with the credit rating process, the system was “smooth” and transparent for Mars to achieve its goals in the debt market. He said there were three credit rating agencies to choose from, and the policies for disclosures were clear. Otih suggested that reform to the current payment model would cause a potential conflict of interest for the relationship between investor and issuer transparency. He recommended not changing the current system, as a change could create the impression that certain agencies were being “favored” by issuers.

Sheffield said that GM has engaged in the unsecured and asset-backed security (ABS) market, which both require a good relationship with rating agencies and investors. She said that GM has a team of analysts that consider the pool of collateral and the historical performance of ratings to ensure a “smooth” process. Sheffield said GM rotates between S&P Global, DBRS, Moody’s and Fitch to include two of the credit ratings on each transaction report for flexibility and consistency. She added that the issuer payment model, as an alternative to the current model, works “pretty well,” but depends on timing and flexibility for investors, as well as the consideration of fees and will change relationship structures in the process.

Wilson said that issuers respond to what investors need and want through consideration of costs and other dialogue. She noted that the analyst and rating agency relationship depends on fit, metrics and different levels of the process. Wilson stated that she would like to improve the current payment model and is concerned about the benefits.

Question & Answer

Clayton asked about the rigor of covenant-lite loans. Gates said there have been more covenant-lite loans in the market than ever before, and they provide issuers financial flexibility through their tight control. However, he said they do not address concerns of liquidity, but instead offer more leverage for issuers.

Redfearn asked about the pros and cons of sale side research. Sheffield said that sale side research is not helpful in the rating decisions process. She added that at times, there is non-public information that influences decisions and suggested working to create a more transparent process.

Michael Heaney, Chair of FIMSAC, asked about concerns of the multi-pay model. Le Pallec said that in “minority” instances credit rating agencies use the multi-pay model. He said credit rating agencies would have to adopt a transition in models and avoid potential conflict if this were to change. Gates said that a shift to such a model depends on impacts and its usefulness while preventing side effects.

Harris asked about learning from mistakes in the quality of ratings and how the review process works. Gates said that S&P publishes their tables for default rates annually and analyze the defaults for various reasons. He recommended placing ratings at the “right” level, implementing tools to prevent drastic movement of ratings, and maintaining the independence of the rating process. Le Pallec added that it is important to analyze rating transitions, as ratings should not drop more than one notch over a year.

For more information on this event, please click here.

MSRB Board Chair Gary Hall and President and CEO Lynnette Kelly recently sat down with Ken Bentsen, CEO of @SIFMA, to discuss Regulation Best Interest, the MSRB’s retrospective rule review, mark-up disclosure and more.

Watch here.

Read about highlights from the August Board meeting, CEO Lynnette Kelly’s retirement and new resources and publications in the latest MSRB Update newsletter.

On July 31, Sarasota County, Florida, priced $10.215 million refunding bonds, with annual tranches ranging from 2020 to 2038. The bonds will be callable on Oct. 1, 2029. There is an asterisk on the official statement indicating that the 3% 2038 tranche, whose dollar price of 101.925, is “priced to the first optional redemption date.”

The phrase “priced to the first optional redemption date” is usually associated with yields. This is consistent with the yield-to-worst quoting convention for munis, (YTW) being the lower of yield-to-call (YTC) and yield-to-maturity (YTM). But what does it mean for a dollar price to be “priced to the first optional redemption date”?

Muni professionals’ knee-jerk response is that the phrase is clear, until they attempt to explain it. And then they realize that it is nonsensical.

The phrase, “priced to the first optional redemption date”, is intended for yields, so that they can be converted to dollar prices. Unfortunately, mislabeling dollar prices, i.e. indicating that they are “priced to the first optional redemption date” is surprisingly common in official statements. It is undoubtedly attributable to boilerplating — the same error is passed on by generations of junior associates of investment banks and bond counsels.

To be fair, the Sarasota deal also displays a 2.78% YTC corresponding to the 101.925 dollar price; however, there is no asterisk indicating that 2.78% is a YTC. In even more egregious cases there is only a dollar price, and a footnote indicating that the bond is priced to the call date, without a corresponding YTC.

See, for example, issues by the city of Bridgeport going back for several years — they show dollar prices “priced to the first optional redemption date,” but without the corresponding yields. For those who would like to dig deeper into this problem with official statements, MuniOS.com is a wonderful free resource.

The Municipal Securities Rulemaking Board has been making strides toward increasing transparency and improving disclosure in the muni market. In spite of recognizable advances, there are surprisingly many instances of superfluous and confusing pricing information in official statements. By imposing a standard format, the MSRB could eliminate such sloppiness.

By Andy Kalotay

BY SOURCEMEDIA | MUNICIPAL | 08/26/19 02:24 PM EDT

SUMMARY

SIFMA sent comments to the MSRB on Rule G-23 on Activities of Dealers Acting as Financial Advisors. In connection with the ongoing retrospective review of its rules and guidance, the MSRB is seeking comment on Rule G-23, revisited last in 2011, and its interaction with the more recent municipal advisor regulatory framework and other rules and guidance adopted or updated since then.

SIFMA welcomes a retrospective review of rules to ensure that they reflect current market practices, do not create unwarranted burdens on market participants, and are appropriately harmonized with other rules.

SIFMA applaudes the MSRB’s choice to review Rule G-23 with a goal to appropriately update the rule in light of the adoption of the SEC’s municipal advisory regulatory framework and eliminate any inconsistencies between the two. We share common ground with the MSRB in this goal, and hope our comments are helpful to update the rule to reflect Congress’ intent of municipal advisor regulation and issuer protection. Below are our responses to select questions posed in the Request.

Read the Comment Letter.

Muni market groups are at odds on whether or not a Municipal Securities Rulemaking Board rule that contains a prohibition against financial advisors switching roles and serving as underwriters on the same deal should be tossed.

The MSRB reopened the discussion in May in a retrospective review of its Rule G-23 on activities of financial advisors and a 2011 amendment to that rule that prohibits a dealer from serving as a financial advisor and underwriter on a transaction. In comment letters, stakeholders asked for a plethora of changes to the rule ranging from having it absorbed into other rules, creating new exceptions to its prohibitions, and taking out the term “financial advisor.”

Some opposed significantly changing the rule at all.

“NAMA strongly believes that, as amended in 2011, Rule G-23 has been effective in eliminating the conflicts of interest that would arise if a firm acting as municipal advisor to an issuer were to then become the underwriter in the transaction,” wrote Susan Gaffney, the National Association of Municipal Advisors’ executive director.

Issuers and non-dealer advisory firms generally told the MSRB they oppose major changes to the rule, while groups representing broker-dealers want the board to consider changes that would allow role-switching under certain circumstances.

The Securities Industry and Financial Markets Association wants an exception in the rule that would apply when a dealer MA, after providing issue-specific advice, leaves due to termination or the end of a contract term, and the issuer then hires a new MA.

“Once an issuer engages a successor municipal advisor, the predecessor dealer municipal advisor that provided issue-specific advice should be able to engage in underwriting activities for that issue,” SIFMA wrote in its letter.

However, if an issuer does not hire a new MA, then the dealer MA should be subject to a one-year cooling-off period before it could underwrite the transaction, SIFMA proposed.

“We believe that these exceptions would provide clarity to market participants about the obligations, or lack thereof, owed to issuers when a dealer municipal advisor is disengaged after providing issue-specific advice,” SIFMA wrote.

It’s unclear what would come of the MSRB deciding to eliminate either all of or the role-switching prohibition of Rule G-23, which like all MSRB rule changes would require the approval of the Securities and Exchange Commission. The SEC has said that under federal law a broker-dealer acting as an MA has a fiduciary duty to the issuer with respect to that issue, and “must not take any action inconsistent with its fiduciary duty to the municipal entity.”

Underwriters are considered to be engaging in “arm’s length” transactions with issuers, and under the MSRB’s Rule G-17 on fair dealing provide issuers with disclosures saying so.

Leslie Norwood, a managing director, associate general counsel and head of municipals at SIFMA, told The Bond Buyer that SIFMA believes that the SEC prohibits role-switching relating to an issuance of municipal securities, not all issuances of that issuer.

If the issuer hires a new MA, relevant conflicts of interest are addressed by the presence of a successor MA, Norwood said.

SIFMA also noted in its comment letter that a municipal advisory framework for dealer and non-dealer MAs along with Rule G-23 for dealer financial advisors only has created role-clarity confusion.

In October 2018, PFM, a large non-dealer municipal advisory firm, asked the SEC for interpretive guidance that since it is subject to a fiduciary standard, it can perform certain tasks to facilitate private placements of municipal debt.

SIFMA and BDA sent responses, objecting to the PFM request. Dealers consider such activity to be placement agent activity requiring that a firm be a registered broker-dealer. Dealers complained that allowing MAs to be placement agents, which PFM and NAMA have repeatedly said is not their aim, would essentially benefit only non-dealer MAs because G-23 prohibits dealers with a “financial advisory relationship” with an issuer from acting as a placement agent for that issuance.

“We want to ensure that the rules treat all regulated parties fairly,” Norwood said.

BDA wants to consolidate underwriter and MA rulemaking guidance and address the rule’s restrictions on private placement.

“We also highlight the need for the MSRB to address G-23’s private placement restriction if the SEC acts on the misguided requests for non-dealer MAs to perform placement agent activities,” wrote BDA CEO Mike Nicholas in a statement.

NAMA opposes any significant changes to the rule.

“In general, G-23 has been working well since the changes in 2011 and we don’t see the need to make significant changes to the rulemaking,” Gaffney said.

Gaffney does want to see the MSRB replace any references to “financial advisors” with the term “municipal advisors” in the rule. In the letter, Gaffney writes that NAMA thinks both terms mean the same thing, and want to be sure MSRB also knows that to be true.

“We believe that they mean the same thing, we want to make sure that the MSRB thinks they mean the same thing,” Gaffney said. “That change probably should move forward.”

SIFMA wants to eliminate the term financial advisor as well.

NAMA said it isn’t aware of small and infrequent issuers having problems with hiring MAs and being able to sell their bonds since the 2011 amendment, which is an argument the dealer community has sometimes employed.

NAMA doesn’t think Rule G-23 should be eliminated and folded into Rule G-42, which is the core conduct rule for municipal advisors. NAMA believes that Rule G-23 speaks to a specific subset of MAs that are broker-dealers and so that sets it apart from Rule G-42.

NAMA told the MSRB it opposes allowing a firm to resign from being an MA and become the underwriter, even if another MA is hired. Nor does the group support the idea of a cooling-off period.

The Government Finance Officers Association encouraged the MSRB to prohibit role-switching and said that an underwriter’s responsibility is to the investor, not the issuer.

“Prohibiting role switching ensures that the issuer is represented throughout the transaction by a municipal advisor whose sole responsibility is to issuers,” wrote Emily Brock, director of GFOA’s federal liaison center.

The MSRB could now choose to propose changes to its rules, or could choose to leave them as they are.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 08/20/19 02:55 PM EDT

A Financial Industry Regulatory Authority notice has highlighted what some market participants say is confusion among broker-dealers on whether they would have to register as municipal advisors in some instances.

Late last week FINRA sent out a notice reminding its members to register as MAs if they engage in investment-related activities with their clients. FINRA regulates broker-dealer firms, and under the Securities and Exchange Commission’s MA registration rule advice about investing the proceeds of municipal bonds is a muni advisory activity in most instances.

“Recent FINRA examinations have found that some member firms are engaged in investment-related activities with municipal clients, but have not registered as municipal advisors and do not have reasonably designed supervisory systems and controls to determine whether they are required to register as municipal advisors,” FINRA said.

The Securities Industry and Financial Market Association said the FINRA notice highlighted the complexities of MA activity rules.

“We appreciate the FINRA reminder, and it highlights the complexities of compliance with this rule set,” said Leslie Norwood, a managing director, associate general counsel and head of municipals at SIFMA.

However, the industry doesn’t see it as a frequent issue.

An MA who did not want to be named said they hadn’t seen a lot of registered broker-dealers participate in unregistered MA activities compared to the early days of Dodd-Frank.

The Dodd-Frank Act required those acting as MAs to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board and was intended to mitigate problems involving financial intermediaries providing unregulated advice.

“The question that people ought to ask themselves is, is my firm registered for that type of activity, am I individually registered?” the MA said. They said if that is a no, then they need to find what exemption they are relying on.

Crossover could occur when broker-dealers go to market with a new transaction or the investment of municipal bond proceeds.

The Government Finance Officers Association has said that due to the SEC’s MA rule, brokers may be considered MAs if they provide advice on investments or bonds proceeds to governments.

If the funds are identifiable as municipal bond proceeds, that broker-dealer would need to have a registered MA involved. The one exemption for that would be if an investment adviser was involved, they said.

Also, broker-dealers need to check to see when opening a new brokerage account whether funds in that account could be co-mingled between bond proceeds and non-bond proceeds. With bond proceeds, broker-dealers would have to comply with MA rules because they’re providing advice on municipal products or investments, they said.

“The enforcement is good in giving people a reminder and helping to provide some further indication of the types of activities that people may cross into either knowingly or unknowingly and put themselves in peril around registration,” they said.

Robert Zondag, CFO and managing partner at American Deposit Management Co., an independent MA firm, has not seen registered broker-dealers participating in unregistered MA activities, but said there is confusion around MA activities since it’s still fairly new compared to other municipal roles.

Zondag said FINRA could have put out the notice to address members already registered in other roles such as broker dealers and investment advisors and not as MAs.

The National Association of Municipal Advisors said FINRA’s notice was useful so professionals can understand MA activities in determining if they should register.

“NAMA has been increasingly concerned, in general, with professionals who provide MA services but who are not registered,” said Susan Gaffney, NAMA executive director. “While we have seen evidence of this in the non-BD space, this release again highlights this important issue.”

Rod Kanter, partner at law firm Bradley, said he hasn’t seen many broker-dealers cross the line to unregistered MA activity. However, he said it wasn’t unusual for FINRA to put out such notices.

“It’s not uncommon for regulatory and similar bodies to alert the market when they spot behavior that they disagree with before taking more aggressive action,” Kanter said.

The notice happened shortly before MSRB Rule G-40, on advertising by MAs, went into effect Friday. Rule G-40 is a milestone because it will formally regulate MA advertising for the first time, requiring among other things that advertisements not be misleading and prohibiting MAs from using client testimonials in an advertisement.

“Social media is new for everyone and so it’s a matter of understanding the different types of social media your firm might use and what the new requirements are,” Zondag said. “It’s going to be a new landscape for all firms trying to understand how to best use the new technologies and make sure they comply with the rules.”

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 08/23/19 02:36 PM EDT

Summary

FINRA is issuing this Notice to remind member firms of their supervisory obligations under FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) if they hold or transact in customer accounts owned by municipal entities or obligated persons (municipal clients), as defined in Section 15B of the Securities Exchange Act of 1934 (Exchange Act), and participate in investment-related activities with municipal clients, such as recommending or selling non-municipal securities products to such municipal clients. Under these circumstances, member firms are obligated to determine if such activities require registration as a municipal advisor.

Questions concerning this Notice should be directed to:

• Cynthia Friedlander, Senior Director, Fixed Income Regulation, at (202) 728-8133; or
• Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104.

View Full Notice

In newly issued guidance, FINRA reminded firms doing business with municipalities to implement appropriate supervisory procedures to avoid conducting unregistered municipal advisory activities.

FINRA stated that the definition of “municipal advisor” is extremely broad and includes any “person recommending an investment strategy to a municipal client regarding how to invest the proceeds from the issuance of municipal securities.” FINRA noted that the advice need not be in any way related to transactions in municipal securities and that the standard for registration is extremely low. As a result, a firm providing regular brokerage services to a client that is a municipal entity can cross the line and become a municipal advisor.

FINRA cautioned broker-dealers to implement “reasonably designed” supervisory systems and controls to (i) identify new and existing municipal client accounts and (ii) determine the source of funds deposited into the accounts of such municipal clients. Should a municipal client’s account hold the proceeds of a municipal securities offering, FINRA warned, making recommendations as to the investment of those funds may trigger registration as a municipal advisor absent an exemption. Firms seeking to fall outside the scope of municipal advisor registration must implement procedures to prevent personnel from making recommendations as to the investment of proceeds of municipal securities offerings, or fall within an exemption from municipal advisor registration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Cadwalader, Wickersham & Taft LLP

August 21 2019

In this episode of “The View from Washington,” outgoing Municipal Securities Rulemaking Board (MSRB) President and chief executive officer Lynnette Kelly and Chair of the Board Gary Hall sit down with SIFMA President and CEO Kenneth E. Bentsen, Jr. to discuss the landscape for municipal securities. From the Retrospective Rule Review to moving to the cloud, watch their discussion for insight into the primary regulator of the municipal securities markets and what matters most for the marketplace.

View the conversation.

TYPE: Pennsylvania + Wall
DATE: August 21, 2019
BY: Kenneth E. Bentsen, Jr.
COMMITTEE: Municipal Securities Committee

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced new officers and members of its Board of Directors who will begin their terms on October 1, 2019. The Board also announced that, after 12 years successfully leading the organization, MSRB President and CEO Lynnette Kelly will be retiring from the organization at the end of the fiscal year.

The 21-member MSRB Board consists of four “classes” with staggered terms, and annually elects a class in accordance with the Securities Exchange Act of 1934 and MSRB rules. For the first time in the MSRB’s history, women make up the entirety of the incoming class and the majority of the full Board.

“Our incoming Board members are just exceptional,” said outgoing MSRB Board Chair Gary Hall. “Their diverse perspectives and experience will breathe fresh air into our initiatives for Fiscal Year 2020 and beyond. The impressiveness of these incoming Board members is a real testament to the trailblazing women in our market, including our very own Lynnette Kelly, who has served this organization with distinction for over a decade.”

Kelly joined the MSRB in 2007, overseeing the launch of the MSRB’s Electronic Municipal Market Access (EMMA®) website, which has transformed the level of transparency in the municipal securities market. Kelly also led the organization through the implementation of a new regulatory framework for municipal advisors after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“I am proud of the MSRB’s tremendous contributions to the municipal securities market over the past 12 years,” Kelly said. “It has been an honor to lead a staff of dedicated, mission-driven colleagues, and I know the MSRB is poised to continue to advance our mandate of ensuring a fair and efficient market.”

The Board has appointed Nanette Lawson, Chief Financial Officer, as interim CEO while it conducts a nationwide search for Kelly’s replacement. Kelly will serve as a consultant to the Board to help with the transition.

The Board, which has 11 independent public members and 10 members from firms regulated by the MSRB, including broker-dealers, banks and municipal advisors, establishes regulatory policies and oversees the operations of the MSRB. New public members joining the MSRB Board beginning October 1 are: Meredith Hathorn, Managing Partner at Foley & Judell, L.L.P.; Carol Kostik, retired; and Thalia Meehan, retired. Joining the Board as regulated members are: Angelia Schmidt, Managing Director at UBS Financial Services, and Sonia Toledo, Managing Director at Frasca & Associates, LLC. New members were selected from approximately 80 applicants this year.

The MSRB also annually elects officers and announced that Edward Sisk, Managing Director, Head of Public Finance at Bank of America Merrill Lynch, will chair the Board beginning October 1, 2019. Manju Ganeriwala, Treasurer of the Commonwealth of Virginia, will serve as Vice Chair.

In addition to Sisk and Ganeriwala, continuing Board members are Patrick Brett, Robert Brown, Julia Cooper, Caroline Cruise, Joseph Darcy, Ronald Dieckman, Frank Fairman, William Fitzgerald, Jerry Ford, Daniel Kiley, Kemp Lewis, Seema Mohanty, Donna Simonetti and Beth Wolchock.

New MSRB Board Members, Fiscal Year 2020

Meredith Hathorn is a Managing Partner at Foley & Judell, L.L.P., practicing as bond counsel in public finance. Ms. Hathorn began her career at Foley & Judell, L.L.P., first working as a law clerk. She is the president of the Louisiana Chapter of Women in Public Finance and a member and prior Board member and secretary of the National Association of Bond Lawyers (NABL) and the American College of Bond Counsel. Ms. Hathorn has a bachelor’s degree from Louisiana State University and juris doctor from Tulane University School of Law.

Carol Kostik is retired and the former deputy comptroller for public finance for the City of New York, where she directed and managed a debt portfolio of over $110 billion. Prior to joining the Office of the New York City Comptroller in 2006, Ms. Kostik served as the senior vice president and chief financial officer for the New York City Housing Development Corporation. Earlier in her career, she worked in investment banking, rising from public finance associate to vice president at Merrill Lynch & Co. In 2015, she received the Freda Johnson Public Sector Award from the Northeast Women in Public Finance, and in 2010, The Municipal Forum of New York’s Public Service Award. Ms. Kostik has a bachelor’s degree from Williams College and a master’s degree in business administration from Stanford University.

Thalia Meehan is retired and a former portfolio manager and tax-exempt team leader at Putnam Investments. At Putnam Investments, Ms. Meehan built and managed a team of portfolio managers, traders and analysts. She began her career there as senior credit analyst and later worked as head of municipal credit research. Previously, Ms. Meehan worked as a financial analyst at the Colonial Group, Inc. in Boston, Massachusetts. She served on the MSRB’s Investor Advisory Group in 2016. She is a board member of Boston Women in Public Finance and an independent director for Safety Insurance Group and Cambridge Bancorp. Ms. Meehan, a Chartered Financial Analyst, has a bachelor’s degree in mathematics from Williams College.

Angelia Schmidt is Managing Director and Head of Underwriting at UBS, where she leads the new issue execution for Public Finance tax-exempt and taxable bond transactions. Ms. Schmidt has extensive fixed income capital markets experience, underwriting and distributing products for and to a wide range of issuer and investor clients. Previously, Ms. Schmidt was a Managing Director and Senior Underwriter in the Public Finance group at J.P. Morgan, where she partnered with the banking and sales teams to originate and execute deals for sophisticated issuer clients. Prior to covering municipal issuers in Public Finance, Ms. Schmidt oversaw debt distribution for taxable products in J.P. Morgan’s Global Structured Syndicate group. Ms. Schmidt began her career at J.P. Morgan Investment Management, working in the Fixed-Income Applied Research Group. She is a co-founder of UBS’s Public Finance Women’s Network and is on the firm’s Executive Advisory Council for All Bar None. Ms. Schmidt was honored as a 2018 Trailblazing Woman in Public Finance by the Bond Buyer and a 2010 Rising Star by the Women’s Bond Club. Ms. Schmidt earned her B.S. in Engineering from Cornell University and her Executive MBA from Columbia University.

Sonia Toledo is Managing Director at Frasca & Associates, LLC, serving as a municipal advisor to a range of large municipal securities issuers. At Frasca & Associates, Ms. Toledo has worked successfully to expand their business to general municipal finance. Prior to her current role, she worked as managing director in the Northeast Public Finance Region at Wells Fargo Securities. Before Wells Fargo Securities, Ms. Toledo served as a managing director at Lehman Brothers and later at Merrill Lynch & Co. She is the vice chair of GrowNYC and member of the Women Entrepreneurs NYC Council. Ms. Toledo has a bachelor’s degree from Harvard University and a masters in business administration from Columbia University.

Date: August 6, 2019

Contact: Leah Szarek, Director of Communications
202-838-1500
[email protected]

Municipal-bond regulator searches for new chief, a role where salary exceeds $1 million

One of the highest-paying jobs in public service just became available: heading a small but powerful regulator responsible for overseeing the $4 trillion market for state and local bonds.

The job leading the Municipal Securities Rulemaking Board currently pays more than $1 million. That is roughly six times the salary of the chairman of the Securities and Exchange Commission, which oversees the board—an entity some policy makers have criticized in recent years as too cozy with Wall Street.

Lynnette Kelly, who has headed the industry self-regulator since 2007, plans to retire at the end of September, the MSRB said last week. Ms. Kelly’s tenure was marked by improvements to the transparency of the municipal-bond market, such as the creation of a website where mom-and-pop investors can see pricing data and financial disclosures from the issuers of their bonds.

“We had been filing all the information for 20 years, but nobody could find it to read. EMMA fixed that,” said Ben Watkins, director of Florida’s Division of Bond Finance, referring to the nickname for the board’s website.

Ms. Kelly is among several staffers departing from the board. Lanny Schwartz, the MSRB’s chief regulatory officer since last year, resigned just before the board announced Ms. Kelly’s departure, according to people familiar with the move. And Jennifer Galloway, who had served as the MSRB’s longtime chief communications officer, left last month, the regulator said.

MSRB officials said they are in the early stages of a national search to replace Ms. Kelly. They declined to comment on the additional departures.

The board, which has 21 directors and a full-time staff of about 120, crafts regulations for banks and other firms involved in the sale of bonds by states and localities, such as restrictions on political donations to officials involved in the awarding of bond business. It has no enforcement power.

The SEC and the Financial Industry Regulation Association, another self-regulatory body for the brokerage industry, enforce MSRB rules. The board is funded by industry fees and sets its own budget, including for compensation.

“The MSRB has deployed lots of different tools to reach retail investors, to protect retail investors, to help educate and inform them,” Ms. Kelly, 59 years old, said in an interview last week. “That’s a legacy that will remain and hopefully be built upon.”

Ms. Kelly said she has discussed stepping down for a long time to pursue other opportunities. She declined to elaborate on her plans.

For 2017, the most recent year for which records are available, Ms. Kelly’s salary was $865,397 and she received another $169,966 in other compensation. SEC Chairman Jay Clayton made $165,300 last year.

The MSRB says it benchmarks its salaries to other self-regulators, such as the much-larger FINRA, whose chief executive Robert Cook was expected to receive approximately $2.5 million this year, according to the organization’s annual report.

Congress targeted the MSRB for an overhaul following the financial crisis, after it was slow to speak out against banks’ urging unsophisticated municipalities to enter into complex financial instruments that ultimately soured during the crisis. The 2010 Dodd-Frank financial law gave the board an added mission to protect municipalities and required a majority of its directors to be representatives of the public, with the aim of better insulating the regulator from industry influence.

It also put in place tougher rules on advisers to municipal governments, for example by extending to such firms pay-to-play restrictions that previously applied only to banks.

A decade later, the board came under fire for delays on a new requirement that banks disclose their profits when they buy or sell certain bonds for retail clients. The MSRB completed the rule jointly with Finra only after prodding from the SEC, which signs off on regulations written by both entities. The rule went into effect in 2018.

Some lawmakers say the MSRB remains beholden to banks that underwrite municipal bonds. The board has appointed to its public board a number of retirees who spent their careers working at large banks. That has made the board reluctant to aggressively regulate the market, its critics in Congress have said.

Sen. John Kennedy (R., La.) said the board is unduly secretive and run by insiders who receive inflated salaries. A former state Treasurer who applied twice to join the board but wasn’t selected, Mr. Kennedy said the group remains too insular and opaque in how it selects directors.

“It’s like being voted into a fraternity or a sorority,” he said.

MSRB officials say they will review their governance practices but haven’t committed to making changes.

Mr. Kennedy has introduced legislation aimed at making the MSRB’s public directors more independent. The measure has support from Democratic presidential candidate Sen. Elizabeth Warren of Massachusetts, along with Sen. Doug Jones (D., Ala.). Still, it faces a difficult path to becoming law in a gridlocked Congress.

The Wall Street Journal

By Andrew Ackerman and Heather Gillers

Aug. 13, 2019 7:00 am ET

Imagine your business could treat borrowings as revenues, avoid cost recognition by not paying expenses and report less debt than actually owed.

Fortunately, accounting for private-sector enterprises doesn’t enable such activities. But accounting for state and local governments does, and with big consequences.

The Financial Accounting Standards Board (FASB), which governs financial reporting by private-sector enterprises, requires accrual accounting and truthful reporting of liabilities. Under FASB, borrowings aren’t revenues, costs must be accrued whether or not paid, revenues are recognized as earned, and retirement liabilities can’t be understated. But the Governmental Accounting Standards Board (GASB), which governs financial reporting by state and local governments, doesn’t impose accrual accounting and permits aggressive assumptions for valuing retirement obligations. As a result, state and local officials aren’t prevented from reporting balanced budgets, and sometimes even surpluses, that would pass the test of traditional accounting methods.

For example, Chicago used proceeds from the sale of 75 years of parking meter revenues to plug a single year’s budget shortfall; last year California’s budget ignored more than half of the actuarial costs of insurance subsidies provided retired state employees (adding to $85 billion of liabilities already accumulated from non-recognition of previous such costs). And pension costs that today are crowding out state and local services all across the country would’ve been identified more than a decade ago as addressable threats to government budgets but for GASB rules permitting public pension funds to underreport the real size of pension promises.

Today, state and local governments are using GASB’s permissive rules to report unfunded pension liabilities at just one quarter of the $4 trillion the same liabilities are valued by the Federal Reserve’s Financial Accounts of the United States.

Budgets enabled by GASB’s permissiveness can produce painful consequences. For example, despite record tax revenues and a 30 percent income tax increase, the school district serving Sacramento is laying off teachers because money is being diverted to past retirement promises whose true size and underfunded nature had been hidden by GASB’s permissive rules. Under FASB-type rules, those costs would’ve been made visible when incurred, in time to act on them and well before they started crushing classroom budgets.

The key to reforming GASB lies in its chair, who is the only full-time GASB board member. At FASB, all board members serve full time and are required to sever connections with firms or institutions they served before joining FASB’s board. But GASB board members other than the chair are part time and may be employed by other organizations, including state and local governments. As a result, at GASB it has been much easier for the regulated to control their regulator. But that can change if GASB’s next chair is a reformer and independent of state and local governments.

GASB’s chair is selected by the 18 trustees of the not-for-profit Financial Accounting Foundation (FAF) — Charles Noski is the chairman and Diane Rubin is the vice chair. Later this year they will appoint a new chair for a seven-year term. They have the sole power to install a reform-oriented GASB chair who is independent of state and local governments. Some state and local governments will resist such a voice, but just as private-sector firms are not given a veto over the FASB officials who regulate their accounting, neither should state and local governments.

The federal government has a strong interest in GASB requiring state and local governments to account truthfully for their financial activities because states provide the lion’s share of domestic services, including public education, public safety and infrastructure. The next recession will expose those state and local governments that have used GASB’s permissive rules to cover up deep financial problems, potentially forcing the federal government to step in to finance core public services.

State and local governments spend more than $3 trillion per year, compensate nearly 20 million public employees, and provide the vast majority of domestic government services to more than 325 million Americans. GASB’s rules permit state and local government financial statements to bury facts that eventually produce devastating consequences for critical public services and taxpayers. FAF trustees should select a reform-minded GASB chair who is independent of state and local governments.

George P. Shultz is a former U.S. secretary of state, labor and Treasury; a distinguished fellow at Stanford University’s Hoover Institution; and author of “Thinking about the Future.” David G. Crane is a lecturer in Public Policy at Stanford University and president of Govern for California.

The San Francisco Chronicle

By George P. Shultz and David G. Crane

Aug. 16, 2019

The municipal bond market is worth nearly four trillion dollars and directly supports municipal infrastructure that Americans use every day. Despite its size and importance, the market has relatively little oversight compared to other asset classes, such as stocks, options and futures. In fact, the Securities and Exchange Commission (SEC) described the market as “too opaque” as recently as 2012.

The Municipal Securities Rulemaking Board, or MSRB, is a Congressionally-chartered, self-regulated organization responsible for protecting investors, state and local government issuers, other municipal entities and the public interest by promoting a fair and efficient market. Since its inception, the organization has addressed these concerns.

Let’s take a closer look at the MSRB and how it impacts the muni bond market on a day-to-day basis.

Continue reading.

municipalbonds.com

by Justin Kuepper

Aug 07, 2019

Read about new EMMA predictive search enhancements and more in our latest It’s Your Deal newsletter.

The House of Representatives concluded business last Friday with legislators heading to their home districts for the August recess. The Senate will follow suit after completing business at the end of the week, and lawmakers in both chambers are set to resume legislative work on September 9th.

Before heading to their home districts, lawmakers in the House managed to pass legislation that lifts the debt ceiling and sets spending limits for the next 2 fiscal years. The Senate is expected to approve the measure this week before leaving town. Agreeing on budget limits and suspending the debt ceiling will help stave another politically dangerous shutdown while easing the concerns in the financial markets.

With lawmakers back home, now is the time for GFOA members to be heard by contacting your representative. Hearing from constituents in their home districts is a powerful way to advocate to members of Congress and the GFOA needs your support!

Support Bank Qualified Debt/Small Issuer Exceptions

On July 25th, Representatives Terri Sewell (D-AL) and Tom Reed (R-NY) introduced HR 3967 to expand access to financial resources for local governments, non-profits and other public serving entities that issue relatively smaller amounts of tax-exempt debt. The bill would increase the annual limit on designating bank qualified bonds from $10 million to $30 million, permanently peg the limit to inflation, and apply the new limit to the individual borrower, as opposed to any conduit issuer borrowers might work through.

By making the proposed changes in the bill more tax-exempt bonds can be deemed as “bank qualified”, allowing borrowers that issue less than $30 million per calendar year to forgo traditional underwriting processes. These changes would expand access to resources for many public serving infrastructure projects & services including schools, hospitals, roads and more.

The FLC encourages all GFOA members to reach out to their representatives and ask them to cosponsor this bill. If you are interested in finding more information to support your advocacy do not hesitate to contact the FLC for more information.

Support Advance Refunding

A bill to restore advanced refunding in the federal tax code, HR 2772, the Investing in Our Communities Act, was introduced in the House and referred to the Committee on Ways & Means on May 15th. The push for HR 2772 is being led by the co-chairs of the House Municipal Finance Caucus, Dutch Ruppersberger (D-MD) and Steve Stivers (R-OH).

The FLC will continue to advocate for this important legislation and all GFOA members are encouraged to reach out to their representatives and ask them to cosponsor this bill. The FLC has produced multiple research and advocacy materials to inform Congress of the impact the loss of advance refunding has had on public finance officers and the communities they serve.

Government Finance Officers of America

Securities and Exchange Commission Chair Jay Clayton’s observation that issuers are being advised that the information they supply on EMMA is subject to more scrutiny under federal anti-fraud laws than other platforms is plausible, lawyers say, since the site has more exposure in the industry.

At Monday’s SEC Fixed Income Market Structure Advisory Committee meeting, Clayton said in introductory remarks that he was informed recently that some issuers were receiving advice from certain market participants that by disclosing information on the Municipal Securities Rulemaking Board’s EMMA site, it triggered a “more rigorous liability standard for that information than disclosing the same information to investors through other means.”

Some lawyers and issuers attributed Clayton’s comments to mean that EMMA has more exposure than other platforms, such as issuers’ own websites.

Clayton on Monday directed the SEC’s Office of Municipal Securities to put together a staff legal bulletin to summarize the application of the federal securities laws to various disclosure scenarios.

The MSRB declined to comment for the story.

However, there are detractors to Clayton’s statements.

Jonas Biery, business services manager for the city of Portland, Oregon, Bureau of Environmental Services, said he could understand the perception that posting on EMMA gives issuers more exposure and thus an elevated risk to anti-fraud provisions, but he still thinks that exposure is a good thing. He also still sees the same risk on both EMMA and other platforms.

“I’m not aware of either that advice being provided and I’m not aware of there being enforcement risk difference based upon the tool by which disclosure information is disseminated,” Biery said. “If it’s on EMMA or it’s published elsewhere, the enforcement risk, so to speak, to my knowledge is identical.”

If lawyers are advising issuers that information filed on EMMA is under more scrutiny, then they’re giving bad advice, said Ben Watkins, director of the Florida Division of Bond Finance.

“It’s not only bad advice,” Watkins said. “It’s simply wrong.”

Watkins said he thinks Clayton was trying to portray that it shouldn’t matter how issuers communicate with the investor community — it’s subject to the security laws and he agrees with him.

Watkins’ department maintains its own investor relations website, which it uses as its primary mode of communicating with investors and other stakeholders.

The division updates its site continually and lets investors know when updates are made and understands that posting information on it means they are subject to anti-fraud laws.

For smaller issuers that may not have their own website, filing on EMMA may be their main mode of communicating with the market. However, they usually have financial planners or other professional helping them file, putting them naturally under more scrutiny, Watkins said.

“If you’re just posting constituent information on your website, not intending to speak to the credit markets, you’re not thinking securities laws,” Watkins said. “You’re thinking I’m putting up information for my citizens and taxpayers.”

Watkins said he hopes Clayton is not suggesting that anytime governments speak, that they’re subject to securities laws, saying it would chill issuers’ willingness to provide information.

From Watkins perspective, someone intending to speak to the marketplace is different from posting meeting minutes, for example.

Watkins referenced Harrisburg, Pennsylvania, where the SEC charged it with securities fraud for its misleading public statements in 2013. It was the first time the SEC charged a municipality for misleading statements made outside of its securities disclosure documents.

“If the SEC takes the position that whatever information you provide is subject to the anti-fraud laws, then that’s going to scare people that are routinely providing information via their website for entirely different purposes than designed to reach analysts and investors,” Watkins said.

Theoretically, the SEC would be right to say all communication to the public is subject to securities laws, but Watkins said it needs a common-sense approach.

If an issuer has a designated site to communicate, such as his division, then the other information shouldn’t count, Watkins said.

Clayton’s comments aren’t something on issuers’ radars right now, said Kenton Tsoodle, Oklahoma City’s finance director. Tsoodle is also on the Government Finance Officers Association’s debt committee and said it has not been brought to their attention.

“Our understanding would be that we are responsible for everything we say in any form or fashion,” Tsoodle said.

Tsoodle had not heard of issuers getting advice that disclosing on EMMA would be subject to more liability than an investor website. He said he wonders whether there is an assumption that disclosing on EMMA makes it more official, but many issuers know they’re responsible for what’s put out into the market, despite the format.

The SEC may look at EMMA first for information, so that may be behind Clayton’s comments, Tsoodle said.

Issuers do have more exposure when they file statements on EMMA, which could in turn lead to a greater risk that an omission of a material fact could be found misleading, said Fredric Weber, a counsel at Norton Rose Fullbright.

“There’s a greater risk that an omission of a material fact is misleading if it’s an omission from a statement filed on EMMA as opposed to an omission from a wealth of information that’s filed on an issuer’s website for reasons other than communicating with investors,” Weber said.

Anytime issuers speak to the market, anything they say or write could be subject to anti-fraud laws. Some issuers don’t maintain websites so they rely on EMMA to disclose information.

Issuers will hear from their counsel that voluntary disclosures on EMMA result in incremental exposure to liability, Weber said. He also added that additional work is needed to prepare a statement for filing on EMMA.

“So in deciding whether to make a voluntary disclosure or not, they see those two negatives and then they look for what’s the offsetting benefit, and that’s been absent,” Weber said.

By that he means, issuers want to see an offsetting benefit to filing an EMMA, such as in the nonprofit healthcare market, where they can commit to provide quarterly disclosures to give more access to the market. The catch, though, is that healthcare credits can change over shorter periods of time compared to other municipal credits. Since most

“If the SEC would issue some public statement to the effect that issuers don’t have exposure to an enforcement action for material omissions if they do make a voluntary disclosure and what they do say is correct, then at least part of the disincentive for issuers to make voluntary disclosures would be taken away,” Weber said.

Currently, issuers are encouraged to put voluntary information up on EMMA, said Rod Kanter, partner at the law firm Bradley.

When issuers go to market to sell debt, they are focused on disclosure and anti-fraud provisions. However when posting annual reports and other items on EMMA, officials are generally more focused on the continuing disclosure agreement requirement and may easily lose focus on anti-fraud issues, Kanter said.

“I have not heard anyone say that filings on EMMA are going to be subject to great scrutiny from an anti-fraud perspective,” Kanter said. “That’s a new one for me. But I’ve been in many conversations with lawyers advising clients, saying hey remember when you’re filing on EMMA, you’re speaking to the market, so be careful about anti-fraud provisions.”

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 08/02/19 11:34 AM EDT

Securities and Exchange Commission Chair Jay Clayton raised a new concern about the state of secondary market disclosure in the muni market, on the same day that the Municipal Securities Rulemaking Board announced a step aimed at addressing another of Clayton’s worries.

Clayton raised the concern during his introductory remarks to kick off Monday’s meeting of the SEC’s Fixed Income Market Structure Advisory Committee. Clayton, who has previously said he is worried about muni investors relying on stale financial disclosures, said Monday that he has heard of a trend of issuers being advised that information they supply on EMMA is subject to more scrutiny under federal anti-fraud laws than information provided to the market in other ways.

“I have significant questions about this advice,” said Clayton, expressing doubt that it was correct in terms of “either law or policy.”

Clayton said he has asked the SEC’s Office of Municipal Securities to create a legal bulletin on the topic, and said he believes that continuing disclosure in the muni market is an important focus.

“This is an important topic, particularly for our main street investors,” Clayton said.

Clayton first raised the issue of stale financial reporting late last year, touching off debate over issuers’ responsibilities. The Municipal Securities Rulemaking Board announced Monday that it has voted to file with the SEC a proposal to enhance EMMA with new features to emphasize the timing of issuers’ annual financial disclosures.

The subject was also on tap for FIMSAC’s discussion, where talk focused on disclosure practices and the experiences of investors in seeking the information they feel they need to make informed decisions about whether or not to buy particular bonds.

Kendel Taylor, director of finance for the city of Alexandria, Virginia, said it takes until August to get all of the financial data for Alexandria’s fiscal year ending June 30. The city still posts it in November, which she said she considers a fairly quick turnaround.

Investor panelists said states and large cities tend to be the most sluggish disclosures, as well as very small issuers. Not-for-profit healthcare and some parts of the education sector disclose much more quickly, the investors said.

Tom McLoughlin, a managing director at UBS, said that market conditions right now are such that issuers don’t see an impact on their cost of borrowing when they don’t do a good job on disclosure.

“There’s no penalty for not disclosing right now, because there’s a complete imbalance between supply and demand,” McLoughlin said.

FIMSAC also discussed a preliminary recommendation from FIMASAC’s Municipal Securities Transparency Subcommittee regarding certain principal transactions with advisory clients seeking to liquidate bond positions.

Section 206(3) of the Advisers Act makes it unlawful for any investment adviser acting as principal for his/her own account to sell any security to or purchase any security from a client without disclosing to the client in writing before the completion of the transaction the capacity in which the investment adviser is acting and obtaining the consent of the client. The disclosure and consent is required on a transaction-by-transaction basis.

The recommendation is aimed at improving market liquidity by allowing broker-dealers registered as investment advisers to act as a principal with regard to client positions so long as the dealer enters a “blind bid,” meaning that there is no “last look” at competing bids.

MSRB Chief Market Structure Officer John Bagley said that the subcommitee’s discussion of this recommendation became wrapped up in the consideration of the practice of “pennying,” about which the MSRB may produce rulemaking. Pennying occurs when a firm takes a “last look” and then marginally outbids its competitors to purchase a security for its own account. The practice is believed by some to hurt market liquidity.

Bagley said the decision was made to move forward with the recommendation because it would be subject to the SEC’s rulemaking process, which would provide an opportunity for fulsome comment.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 07/29/19 03:14 PM EDT

The municipal market is saying goodbye to a year-old requirement for all municipal advisors when advising on competitive sales.

At the Municipal Securities Rulemaking Board’s quarterly board meeting last week, it decided to do away with Rule G-34’s provision that all municipal advisors, whether dealer or non-dealer, have to apply for a CUSIP number in competitive sales. The MSRB still has to file the change with the Securities and Exchange Commission and get it approved.

“It is a rare step for the MSRB to rescind a new requirement so soon after adoption, but we learned through the comment process that the requirement imposed burdens on municipal advisors that were not necessary or appropriate in light of the limited benefits to the functioning of the market,” MSRB Chair Gary Hall said in a press release.

Hall said the board determined that no real market harm was being solved with the provision, which only took effect last year after being approved by the SEC in late 2017, so it made sense to eliminate it.

“The hope is that you won’t do this frequently, but we thought this alteration was warranted.” Hall said.

The provision was part of the MSRB’s ongoing retrospective rule review. Market participants were torn on the requirement, some saying it should be an underwriter’s job and that apply for CUSIP’s was burdensome to MA’s, while other market groups disagreed and said the rule did not need to be revisited.

Hall emphasized the issuers could still request that their MA’s obtain CUSIP’s on their behalf.

The board also addressed at its meeting SEC Chair Jay Clayton’s comments in December on improving the timeliness of financial disclosures. The MSRB will file a proposal with the SEC on looking for ways to enhance its EMMA site to enhance transparency of the timeliness of the issuers’ annual audited financials.

The board considered a “counter” approach for enabling more transparency on filing times on EMMA. A counter would allow stakeholder to know how long it has been since an issuer has filed a financial statement and indicate how recent the issuer’s information is.

The MSRB could take existing information on EMMA and put it into a format so that the user can have a better sense of when the issuer actually filed their annual financial information either audited or unaudited, said MSRB President and CEO Lynnette Kelly.

After filing, the MSRB will reach out for comments from the market.

“We want the entire community to engage in a public comment period because there clearly are lots of different perspectives on this very complicated issue and we think the public comment period can elicit all of those comments and concerns from different market participants,” Kelly said.

The board adopted its $42 million budget for the fiscal year that begins Oct. 1, 2020, a $2 million increase from last fiscal year. The MSRB will publish an executive budget summary on Oct. 1.

The increase was due to a temporary fee reduction they did for dealers for underwriting, transaction and technology fees last year, the MSRB said. Dealers had a three-month break in 2018 from paying those fees.

The board also discussed changes to the current fee structure for regulated entities. About 80% of the MSRB’s revenue is driven by market volume, connected to dealers. There will be a focus to see how that could be more equitable given increased work done in the MA space since muni advisors became regulated.

The board also elected new board members and leadership which will be announced in August. Hall’s term as chair ends Sept. 30.

The board is set to issue guidance soon on prearranged trading under its Rule G-11, on priority of order provisions, and Rule G-17 on fair dealing. The guidance could be similar to a current request for comment published in January.

In March, dealer groups responded in comment letters writing that the MSRB cast too wide a net with its January guidance and want clarification on what conduct constitutes a violation of Rule G-17.

The guidance warned that arrangements in which a dealer firm uses an intermediary to allow the firm to purchase bonds it might not have been able to obtain itself are against the rules and a threat to market integrity.

The type of prearranged trading the MSRB is focused on occurs when, prior to the completion of the distribution of a new issue, a dealer that is not a member of the underwriting syndicate arranges to purchase the bonds at or above the list offering price from either a syndicate member or an investor, typically once the bonds are free to trade. The non-syndicate dealer enters into the prearranged trade to increase the likelihood that it can purchase the bonds for its own account because an order for an investor would receive a higher priority allocation than an order placed directly by the non-syndicate dealer for its own account.

Participants in those arranged trades could be violating G-17, G-11 and G-25 on improper use of assets, the guidance said.

However, some groups said the guidance goes too far in roping in dealers who are not part of an underwriting syndicate.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 07/29/19 02:53 PM EDT

Washington, DC – Market structure experts at the Municipal Securities Rulemaking Board (MSRB) today shared their analysis on the impact on municipal bond market trading activities from recently effective MSRB rules requiring dealers to disclose their compensation for certain retail customer transactions in municipal bonds, commonly known in the industry as mark-up and mark-down disclosure. In the year since the disclosure requirement took effect, there has been no discernible market impact attributable to the new disclosure requirement based on metrics analyzed by the MSRB.

Requirements to disclose dealer compensation for certain retail transactions went into effect on May 14, 2018, through amendments to MSRB Rule G-15 and Rule G-30. The amendments aimed to expand investors’ access to information about the cost of buying or selling a municipal security.

“Our analysis indicates that dealer trading behavior has been consistent with historical variation, and, based on our measures, we have not seen any unintended consequences of the mark-up disclosure rule,” said MSRB Chief Economist Simon Wu.

The report, Mark-up Disclosure and Trading in the Municipal Bond Market, also builds on a previous MSRB analysis conducted in 2018, Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline?

“The continuing downward trend in transaction costs for retail-sized trades we observed is also occurring for institutional-sized trades that are not subject to the mark-up disclosure requirement, so other factors seem to be driving that decline,” Wu said. “To date, the effect of the mark-up disclosure rule as measured in the MSRB analysis appears to be muted. The MSRB will continue to monitor the trends as investors become aware of the availability of mark-up information.”

The MSRB evaluates municipal market trends as part of its mission to promote a fair and efficient market and plans to continue studying trading activity.

Date: July 19, 2019

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

WASHINGTON — The expected decline of coal production amid growing momentum for climate change action makes it urgent for municipal bond market participants to demand more disclosure, according to a Brookings Institution expert.

Adele C. Morris, a senior fellow and policy director for Climate and Energy Economics at Brookings, said better disclosure is needed to highlight risks certain local economies face from relaying on the increasingly obsolete energy source.

“Local governments — including coal-reliant counties — have yet to grapple with the implications of climate policies for their financial conditions,” according to a paper Morris delivered Monday at the Brooking Institution’s 8th Annual Municipal Finance Conference. It was co-authored by Noah Kaufman of the Columbia University SIPA Center on Global Energy Policy and Siddhi Doshi of Brookings.

Morris said a “fiscal tsunami” is heading toward coal-backed assets and that “vague and “incomplete” disclosures often seen now in bond documents from issuers heavily reliant on the coal industry create bad governance and may also violate regulatory obligations to bondholders.

“The municipal finance industry can do a better job of determining what the impact of the coal industry means,” Morris said in an interview. “If we’re going to do something significant on climate change, or even something modest, it’s going to have a disruptive impact on the coal industry.”

A “moderately stringent” climate policy could create potential declines in U.S. coal production of around 75% in the 2020s, according to Morris. Coal production dipped by one-third between 2007 and 2017 due largely to lower costs for natural gas and renewables coupled with air quality regulations and clean electricity standards, she said.

Morris noted that despite regulations requiring disclosures of financial risk posed to municipalities, a review of outstanding bonds in coal-reliant localities showed “uneven” and in some cases “misleading” by omission information about climate risks. Credit rating agencies have also failed in many cases to highlight risks from dependence on coal revenues, Morris said.

“It is up to municipal bond market participants to determine ways to account for risks from the coal industry,” Morris said. “The problem is not going to go away, so we’d best pay attention.”

Debt issuance from state governments that top coal-producing rankings made up about 10% of the $388 billion of total bond volume in 2018, according to data from MSRB’s Electronic Municipal Market Access website. Morris noted that some of the bond maturities extended to 2039, which would fall nearly a decade after a 2030 date when the U.S. Energy Information Administration projects the nation’s coal production will fall 77% below 2016 levels.

The complex nature of tracking coal revenue creates some barriers toward transparency in the municipal market space. Most states have some version of tax levy for severing valuable deposits like coal that can prove to be very volatile. Morris noted that West Virginia’s severance taxes garnered $483 million of revenue in 2011 and then just $262 million five years later in 2016, underscoring the fiscal effects of coal’s downturn.

S&P Global Ratings credit analyst Timothy Little said that severance taxes such as those levied on coal extraction have greater revenue volatility than more common government revenue sources and can create budgetary pressures for issuers without revenue diversity.

“Broadly speaking, the decline of the coal industry has contributed to our view of more negative economic assessments and demographic changes in parts of the country,” Little said.

Little, who is the agency’s primary analyst for West Virginia and Kentucky, said S&P has encouraged “broad transparency” about volatile financial performance from declining coal production and will share in credit reports when they see risks. He said they ask coal-reliant issuers about revenue concentration, volatility and changes in large private employers.

“Management’s preparedness for the pace and severity of climate change is an important credit consideration, whether the risk comes from rising sea levels and extreme weather events or economic changes to industries that contribute to climate change,” Little said. “In coal-reliant communities we would want to know what management is doing to offset the risk of plant or mine closings, the effect it may have on the tax base or regional economy, and if revenue flexibility exists should coal-related revenues decline.”

The coal industry’s negative projections underscore the need for policymakers to prioritize expanding their economies and revenue systems, Morris said. She said that achieving noticeable changes won’t be easy since coal-dependent localities have been intertwined with the industry for generations.

“Coal-reliant communities need to diversify their economies,” Morris said, “but that is a challenge since many of these areas are remote and may require major environmental cleanups to attract investment.”

By Andrew Coen

BY SOURCEMEDIA | MUNICIPAL | 07/16/19 11:53 AM EDT

The SEC charged a municipal advisor with breaching its fiduciary duty by failing to provide its promised services to a public library client.

According to the complaint, filed in the Northern District of Illinois, Comer Capital Group, LLC (“Comer”) did not provide its promised level of advisory services to its client, but instead effectively left all decisions regarding the sale and pricing of the client’s bonds to the underwriter. Allegedly, the underwriter did not have adequate experience to lead an underwriting for this type, and the SEC further stated that the underwriter made multiple mistakes at the client’s expense, including (i) making insufficient marketing efforts, (ii) failing to contact appropriate buyers for the bonds and (iii) mismanaging the order period for the sale of the bonds. These actions ultimately led to the bonds being sold at an unfair price that will require the issuer to pay at least $500,000 in additional interest over the life of the bonds, according to the SEC.

The SEC is seeking (i) a Court determination of the alleged violations by the municipal adviser, (ii) permanent enjoinment from engaging in violations of Exchange Act Section 15B(c)(1), (iii) disgorgement of ill-gotten gains and (iv) civil money penalties.

In a related action, the underwriter settled SEC charges for violating the MSRB’s “fair dealing” rule (MSRB Rule G-17) and SEA Section 15B(c)(1) for marketing and selling failures pursuant to its role as the sole underwriter of the bond offering. The underwriter agreed to pay a civil penalty of $50,000 to the SEC, of which $12,500 will be transferred to the MSRB.

Commentary / Steven Lofchie
This is an interesting case, particularly in light of the SEC’s recent interpretation regarding the duties of an investment adviser to its client, as it is one of the few cases that turns upon the existence of a duty of care, in addition to a duty of loyalty (although both failures are alleged to be present in this case).

July 12 2019

by Steven D. Lofchie

Cadwalader, Wickersham & Taft LLP

House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

“Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures”

Key Topics & Takeaways

• Future of ESG Disclosures for Public Companies: Mohin said that environmental, social and governance (ESG) disclosures will help support ongoing efforts by organizations to reach sustainable growth and profits. Wright stated that risk can be hard to measure for investors due to the lack of disclosed information available in the economy.
• ESG Disclosures Impact Regarding Investors: Andrus said that financial reporting disclosures allow providers of capital to make informed decisions whether to buy, sell, or hold certain securities. Atkins said that the SEC generally should focus on disclosures that are truly relevant to the investor. He also stated that the cost of disclosures are a significant problem for the investor.

Continue reading.

Wednesday, July 10, 2019

GFOA’s Federal Liaison Center has released two new advocacy resources in the campaign to modernize laws that govern municipal bonds. In a full production effort, the two educational videos detail the importance of restoring advance refunding to the federal tax code, and updating the laws behind bank qualified debt.

These informative videos take on the task of explaining the current status of laws governing municipal bonds while simultaneously promoting needed changes that will help public issuers remain capable of providing vital services for their stakeholders. This significant effort is supported by several members of the Public Finance Network (PFN), a coalition united in support of public finance, and was introduced during the “Unlocking Municipal Bond Potential – How Modernization Can Drive Local Investment” event.

Sponsored by the PFN and held at the U.S. Capitol, the event was attended by both leaders of the House Municipal Finance Caucus and members of the House Ways and Means Committee. The event featured remarks from leaders of public finance and members of Congress.

The educational videos can be viewed through the following links:

• Advance Refunding
• Small Issuer Exception

The Federal Liaison Center will continue to advocate for the interests of GFOA members and those serving the interest of the public.

Wednesday, July 10, 2019

New Course on Order Periods and Syndicate Practices

Take our latest MuniEdPro® course to learn about the roles and activities of the issuer and underwriting syndicate in a primary offering.

Click here to learn more.

Last week, a federal appeals court decision forcefully and thoroughly reaffirmed the MSRB’s pay-to-play rule, which was first upheld under the First Amendment a quarter century ago. The case involved a challenge to a pay-to-play rule adopted by the Financial Industry Regulatory Authority (FINRA) in 2016, but the case has important implications for the promotion of the integrity of the municipal securities market.

On June 18, 2019, the U.S. Court of Appeals for the D.C. Circuit rejected a First Amendment challenge to the U.S. Securities and Exchange Commission’s (SEC) approval of FINRA Rule 2030. That rule, with some exceptions, limits the ability of broker-dealers and certain of their personnel to solicit municipal entities for business when they have made political contributions to relevant municipal officials. FINRA openly modeled the rule on the MSRB’s Rule G-37, which the MSRB adopted in 1994, and FINRA supported the new rule’s constitutionality according to the same rationale underlying Rule G-37.

Rule G-37, with some exceptions, imposes a two-year ban on business with a municipal entity when municipal securities dealers or municipal advisors, or certain of their personnel, make political contributions to relevant municipal officials. The rule excepts contributions of up to $250 by municipal finance professional to candidates for whom they are entitled to vote. The MSRB carefully crafted the rule to sever even the appearance of a connection between political contributions by municipal bond dealers and the award of municipal securities business. After the MSRB’s jurisdiction was expanded by the Dodd-Frank Act in 2010 to regulate municipal advisors, the MSRB amended Rule G-37 to cover them as well.

When the MSRB adopted Rule G-37 in 1994, a market participant challenged it as an unconstitutional abridgment of political speech, in a case called Blount v. SEC. The same D.C. Circuit upheld Rule G-37, in a 1995 decision finding that the rule served an important interest in preventing the appearance of political corruption and was well tailored to serve that interest.

The recent challengers to the FINRA rule argued, as a major thrust of their case, that the controlling law of the Supreme Court had since changed. The MSRB filed an amicus brief in the case to help answer that charge. The D.C. Circuit agreed with the SEC’s and MSRB’s position, and made clear that the court’s prior decision on Rule G-37 is just as sound today as it was in 1995.

Rule G-37 is widely regarded as having been a highly effective measure that has well promoted the integrity of the municipal securities market for some 25 years. Not only has FINRA modeled a rule on Rule G-37, but so have the SEC and Commodities Futures Trading Commission. Last week’s important D.C. Circuit decision is a welcome vindication of the MSRB’s approach to balancing the need to promote market integrity with vital First Amendment rights.

by Lynnette Kelly

President and CEO at Municipal Securities Rulemaking Board

Published on June 27, 2019

After extensive feedback from BDA membership and consultation with various Committees, the BDA has submitted a letter to the SEC in response to a fall 2018 Request for Interpretative Relief from the municipal advisory firm PFM regarding private placements.

The letter can be viewed here.

BDA Response

The letter submitted addresses directly the problems that would arise from the request for interpretative guidance if granted, including rolling back decades of settled law on what constitutes broker-dealer activity. The BDA strongly disagrees with the request and works to address both the legal and factual misstatements.

The letter focuses on:

• The Current State of the Direct Placement Market;
• The Extent of Municipal Advisor Activity in the Municipal Securities Market;
• The Problematic Rollback of Essential Protections for Investors;
• The Failure to Establish Need that Guidance is Essential for Issuers; and
• The Exacerbation of a Long-Standing Competitive Imbalance Between Non-Dealer and Dealer Municipal Advisor.

Background

PFM, the municipal advisory firm, sent a letter to the SEC last fall asking that the firm “not be required to register as a broker dealer” when conducting certain placement agent activity. They requested guidance exempting them from BD registration, which they argued “is essential for PFM and other MAs to fulfill their statutory mandate to protect [municipal entity] issuers, and to provide clarity and transparency regarding the role of the MA in municipal financing transactions.”

Shortly after learning about the letter, BDA staff met with the SEC and the conversation with SEC staff focused on concerns we have with the request, including that it would negate the substantial regulatory protections under BD regulations in place to protect investors. The BDA also argued that the guidance PFM is asking for would create an unbalanced competitive environment between dealer and non-dealer MAs, and we emphasized that the act of finding investors, even for a direct placement, is inherently BD activity.

Bond Dealers of America

June 28, 2019

Today, after consultation with various members and Committees, the BDA summited a letter to FIMSAC in favor of their recent proposal titled, “Preliminary Recommendation Regarding Certain Principal Transactions with Advisory Clients in Negotiated Municipal Underwritings.”

In the letter, the BDA urges the FIMSAC to adopt the Municipal Securities Transparency Subcommittee’s Recommendation for a rule change related to Section 206(3) of the Investment Advisers Act that would permit RIAs with affiliated BDs to offer negotiated municipal new issues to non-discretionary advisory clients under a streamlined compliance approach along the lines of Rule 206(3)-3T. The BDA also urges the SEC to act on the FIMSAC’s recommendation promptly.

The letter can be found here.

Background

At its April 15, 2019 meeting, the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) discussed a recommendation made by the FIMSAC’s Municipal Securities Transparency Subcommittee. The recommendation is to reinstate in amended form a change to SEC Rule 206(3) under the Investment Advisers Act. Under current rules a member of a negotiated municipal underwriting syndicate is prohibited from selling the bonds to its non-discretionary advisory clients “without disclosing to such client in writing before the completion of such transaction the capacity in which he/she is acting and obtaining the consent of the client to such transaction.” These disclosures and consents have to be undertaken for each transaction. From 2007 through 2016, the SEC implemented on a temporary basis SEC Rule 206(3)-3T. This temporary amendment allowed broker-dealers to sell their non-discretionary advisory clients certain securities on a principal basis that might not be available on an agency basis, or might be available on an agency basis only on less favorable terms, while protecting clients from conflicts of interest as a result of such transactions. 206(3)-3T expired in 2016.

The FIMSAC is considering recommending that the SEC consider a rule that permits members of negotiated underwriting syndicates to meet the requirements of section 206(3) of the Advisers Act when acting in a principal capacity to sell new-issue municipal bonds during the negotiated order period. The FIMSAC did not come to a final decision on this recommendation at its April meeting. Instead, the group decided to further discuss the issue by phone and raise it again at the next FIMSAC meeting.

Bond Dealers of America

June 28, 2019

The Securities and Exchange Commission approved changes to Municipal Securities Rulemaking Board rules, requiring more information from underwriters about new offerings of bonds and eliminating the need for dealer financial advisors to provide the official statements to the underwriter.

The SEC approved the changes to amendments Rule G-11 on primary offerings and Rule G-32 on disclosures in connection with primary offerings late last week after a two-year review process by the MSRB.

Changes to the rules will increase transparency and improve access to information, said Margaret “Peggy” Blake, MSRB associate general counsel.

The compliance date for the amendments will be January 13, 2020. For amendments to Form-32, the MSRB will publish one or more notices within 180 days of June 25, 2019, specifying compliance dates for the changes after getting stakeholder outreach.

The MSRB published the draft amendments after a broader request for comment on primary offering practices, and received feedback from market participants in September 2018. The MSRB asked for SEC approval in March 2019.

The MSRB eliminated the requirement under Rule G-32(c) that a dealer financial advisor that prepares an official statement make it available to the managing or sole underwriter after the issuer approves it for distribution.

Underwriters will also be required to input more data in Form G-32 about new issue bonds, auto-populated from the New Issue Information Dissemination Service (NIIDS). The MSRB is adding 57 new data fields to Form G-32 to capture data already required to be entered into the NIIDS, and nine new data fields for manual completion.

The NIIDS system, developed by the Depository Trust Company at the Securities Industry and Financial Markets Association’s request, collects information about a new muni issue from underwriters or their representatives in an electronic format and then makes that data immediately available to vendors that provide such information to market participants.

Form G-32 is submitted to the MSRB by underwriters and provides information about a new issuance, such as the underwriting spread, maturity date, initial offering price, minimum denomination, and more.

MSRB President and CEO Lynnette Kelly said that information would not be provided for the life of the bonds, just as of the date of a new issue. The MSRB will extract information from the NIIDS database so that the underwriter doesn’t have to populate the information in both NIIDS and Form G-32.

In the past, market groups said the underwriter submitting the initial NIIDS data should have no obligation to update that information over the life of the bonds.

In addition to the data fields, the MSRB will also add nine data fields to Form G-32 to be manually completed by underwriters in NIIDS-eligible offerings.

In one of the data fields, the MSRB will ask for the underwriter to indicate yes or no at the time of an issuance whether the original minimum denomination for an issue can change.

In a 2018 comment letter, Mike Nicholas, CEO of Bond Dealers of America, said his group supports the yes/no indicator for changing minimum denominations.

The changes to Form G-32 will require identifying additional syndicate managers and municipal advisors on an underwriting, a provision which has been controversial in the past.. Currently, the data only shows syndicate managers.

In BDA’s 2018 comment letter, Nicholas wrote that BDA objected to identifying municipal advisors, saying the information is obtainable from the final official statement.

The data field for adding identifying a municipal advisor will autofill or the MSRB will provide a drop-down function. Both options will include all municipal advisors registered with the MSRB and will include an option to enter “no municipal advisor.”

Under changes to G-11, a senior syndicate manager will have to provide certain information to the issuer of a primary offering on designations and allocations of its municipal securities and also simultaneously communicate to the syndicate and selling groups when an issue is free to trade.

Changes to the rule would then eliminate any potential for unfair advantages in secondary market trading that could result from having advance notice that an issue is free-to-trade, the MSRB wrote.

The MSRB also announced that former MSRB Director of Systems Development Adam Cusson will be named chief information officer. Cusson will oversee IT operations, data and infrastructure management, enterprise architecture and systems development.

“He will be very instrumental along with other leaders in the IT department to help our transition to the cloud,” Kelly said, referencing MSRB’s efforts to transition to cloud-based data storage.

Al Morisato held the position of chief operations and technology officer and left the MSRB in April 2017. In the interim, Chief Operating Officer Mark Kim took the helm of IT operations.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 07/01/19 01:52 PM EDT

The U.S. Court of Appeals for the D.C. Circuit yesterday issued a long-awaited opinion upholding, on the merits, a recent update to the SEC’s pay-to-play rule. While the case involved only a narrow piece of the rule, the decision’s logic is worded more broadly and could apply to the SEC rule as a whole, making future challenges to the rule much more difficult, at least in the D.C. Circuit.

For years, opponents of the SEC pay-to-play rule have tried to obtain a court ruling declaring the rule unlawful or unconstitutional. Until now, those challenges had been stymied on procedural grounds. Yesterday, these opponents to the rule narrowly overcame these procedural obstacles only to be a dealt a substantive, precedent-setting defeat.

Background: 25 Years of Challenges To Pay-to-Play Rules

To understand the significance of yesterday’s opinion, we need to travel back to 1994, when the Municipal Securities Rulemaking Board (“MSRB”) adopted a “pay-to-play” rule to reduce the role of political contributions in the awarding of municipal securities business. The rule effectively restricted broker-dealers and those affiliated with them from making certain political contributions. The rule was challenged shortly thereafter but, in an important case called Blount v. MRSB, the D.C. Circuit rejected a constitutional challenge to this rule on the merits.

Having survived a constitutional challenge, the MSRB rule became the predicate for the well-known pay-to-play rule for investment advisers, adopted by the Securities & Exchange Commission (“SEC”) in 2010. That rule, among other things, prohibits investment advisers from providing paid investment advisory services to a government entity within two years of a political contribution to certain government officials by the adviser and certain “covered associates” of the adviser.

In 2015, the Financial Industry Regulatory Authority (“FINRA”) adopted a similar pay-to-play rule for FINRA members. Pursuant to the rule, FINRA members may not “engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by a covered member or a covered associate” of the FINRA member. The rule also prohibits FINRA members and their covered associates from “solicit[ing] or coordinat[ing] any person or political action committee” to make any contributions to a covered official or certain political parties. As a result of the rule, certain individuals affiliated with FINRA members are effectively barred from making or soliciting certain political contributions, even if their motive for making the contribution or solicitation was purely ideological and unrelated to their work for FINRA members.

The SEC approved the FINRA rule in 2016 and two state Republican parties then challenged that SEC order in the 11th Circuit. The 11th Circuit transferred the case to the D.C. Circuit. In a consequential decision, instead of dropping the case, the parties decided to pursue the challenge in the D.C. Circuit, notwithstanding the bad, on-point precedent in Blount.

The D.C. Circuit’s Decision

Yesterday’s decision, authored by Judge Ginsburg, reached the merits of the challenge for the first time. The court found that the political parties had standing because they had submitted an affidavit from a regulated placement agent stating that he would have solicited friends and family to donate to the parties but for the rule. This possible loss of future contributions was sufficient to establish injury-in-fact and standing, in the court’s view. (Judge Sentelle dissented, arguing that any such injury was too speculative and that parties had therefore not established standing.)

Turning to the merits, the court dismissed the parties’ legal arguments one-by-one. First, the court concluded that the rule fell “within the authority of the SEC to reduce distortion in financial markets.” It concluded that, notwithstanding Congress’s choice to set contribution limits directly in the Federal Election Campaign Act (“FECA”), Congress did not “reserve[] to itself the authority to determine when a political contribution poses a risk of corruption”: “In our view, that the Congress has increased the contribution limits to keep pace with inflation and that it has prohibited certain groups from making contributions is not evidence of a ‘clear congressional intention’ to preclude the SEC from limiting campaign contributions that distort financial markets.” The court also held that FECA and the SEC pay-to-play rules “can peacefully coexist” notwithstanding an earlier (and arguably later-superseded) D.C. Circuit opinion invalidating a postal regulation that imposed political mail disclosure requirements beyond those imposed by FECA.

The court next rejected the claim that the pay-to-play rule was arbitrary and capricious in violation of the Administrative Procedure Act because the rule was a reasonably-drawn “prophylactic” attempt to reduce corruption or its appearance. Further, because the court concluded that the rule was “closely drawn to serve a sufficiently important governmental interest” — preventing corruption and its appearance — the parties’ First Amendment arguments also failed. In reaching this constitutional decision, the Court relied heavily on Blount, which, as noted above, upheld the very-similar MSRB rule against constitutional challenge.

Recognizing that the pay-to-play rules impose another federal limit on contributions to candidates on top of the per-candidate limits, the parties argued that the Supreme Court undermined Blount in the McCutcheon case, a case in which the Court struck down aggregate contribution limits, criticizing the then-existing overlap between per candidate and aggregate limits as a “prophylaxis-upon-prophylaxis approach” to reducing corruption and its appearance. The D.C. Circuit rejected this argument, concluding that Blount was still good law.

It also rejected perhaps the best argument of petitioners — that the pay-to-play rule has a “disparate impact … on candidates running for the same seat,” “where one candidate is a covered official and the incumbent (or another candidate) is not.” The court simply concluded that, even though there is a disparate impact, it is justified by the interest in preventing corruption and its appearance. Curiously, the court described this “disparate effect” “as a feature, not a flaw” of the rule.

What Comes Next?

So, what’s next for pay-to-play rule challenges? While opponents of the pay-to-play rule have faced a string of defeats, this merits decision is the worst loss yet for the rule’s opponents as it rejects their substantive arguments and sets a precedent from a highly-regarded appellate court, in an opinion supported by judges appointed by Presidents from both parties.

As next steps, the political party committees may seek en banc review or petition the Supreme Court to take the case, but the absence of a circuit split and the composition of the D.C. Circuit panel may make both options difficult. A challenge to the rule could be pursued in another circuit, although the likelihood of success for such a challenge has decreased with yesterday’s D.C. Circuit opinion. Opponents might instead try a more targeted attack on the rule. Instead of seeking the wholesale abandonment of the rule, opponents might decide to bring a tailored challenge to the most constitutionality vulnerable parts of the rule, such as the extremely broad definitions of covered “officials” and “covered associates,” the low de minimis thresholds, or the ban on solicitations, which restricts direct political speech.

Regardless of what happens next, for opponents of the SEC rule, the hill got much steeper yesterday.

by Zachary G. Parks

June 19 2019

Covington & Burling LLP

Municipal advisors are periodically examined by the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, Inc. and other regulatory authorities for compliance with Municipal Securities Rulemaking Board rules. This episode discusses considerations for municipal advisors when preparing for a review by an examining authority.

Listen to the Podcast.

6/18/2019

Norwalk, CT, June 17, 2019 — The Governmental Accounting Standards Board (GASB) has issued a new Implementation Guide that contains questions and answers about the GASB’s recently issued standards on accounting and financial reporting for fiduciary activities.

Implementation Guide No. 2019-2, Fiduciary Activities, answers many questions about how to apply the provisions of GASB Statement No. 84, Fiduciary Activities. GASB Implementation Guides are intended to clarify, explain, or elaborate on the requirements of Board pronouncements.

The Guide is available for download at no charge on the GASB website, www.gasb.org. Printed copies will be available through the GASB Store in the coming weeks.

The questions and answers contained in GASB Implementation Guides constitute Category B authoritative guidance under generally accepted accounting principles (GAAP). The guidance is applicable to all state and local governments that follow GAAP when preparing their financial statements.

Thank you to those who participated in BDA’s calls regarding FINRA’s proposal (Notice 19-12) to implement a pilot program to test changes in TRACE dissemination rules on corporate bond market liquidity.

The final BDA comment letter is available here.

Summary of BDA’s comment letter:

• BDA opposes the pilot program proposal.
• The proposed 48-hour delay in disseminating any trade information would introduce significant and damaging opacity to the market.
• The pilot would disadvantage institutional and retail investors in several ways.
• The proposal includes no incentives for middle market firms to increase their capital commitment or provision of liquidity. In practice, the proposal would likely reduce liquidity in trading for smaller block sizes as mid-size dealers would be reluctant to take risk positions without knowing whether a large, undisseminated block trade has taken place in the last 48 hours.
• If FINRA decides to move forward with the pilot, several key changes would be required to protect investors and maintain market integrity.

Bond Dealers of America

June 12, 2019

Read the report.

JUNE 6, 2019

The NFMA publishes a newsletter three times per year. To view the most recent newsletter, the Municipal Analysts Bulletin, Vol. 29, No. 2, click here.

The MSRB Podcast’s new episode discusses two measures of market liquidity that provide insights into municipal securities trading activity.

Listen to learn more.

Earlier this month, GFOA’s Executive Board approved a new Code of Ethics. This new code represents the first update in more than 30 years.

Click here to view the new code.

Read More.

06/03/19

Market participants are torn on whether the Municipal Securities Rulemaking Board should eliminate a one year-old requirement that municipal advisors apply for CUSIP numbers when advising on competitive sales.

Some stakeholders said it should be an underwriter’s job and that applying for the CUSIP is burdensome to MA’s, while other market groups disagreed and said the rule did not need to be revisited. The debate stems from the MSRB’s February decision to seek comment on whether it should do away with 2018 amendments to its Rule G-34 on CUSIP requirements. Those amendments said all municipal advisors, whether dealer or non-dealer, needed to apply for CUSIP numbers when advising on a competitive new issue.

CUSIP numbers are six and nine sets of numbers and letters that identify an issuer and each maturity of a municipal issuance. The board said in its notice that in light of the market’s experience with the rule in operation after its effective date, along with additional stakeholder input and the burden on municipal advisors in practice that it determined a retrospective review of the CUSIP requirement was needed.

The National Association of Municipal Advisors said Tuesday that many of the issues the group raised in 2017 reflect its current comments and that there were no market problems relating to CUSIP numbers that necessitated the rule change last year.

“…Instead of taking the Rule that was developed prior to 2010 and applying it to all MAs, the MSRB should have – in light of a federal definition of municipal advisors coming into play – withdrawn CUSIP responsibilities for any municipal advisor,” Susan Gaffney, NAMA executive director wrote in an email. “We believe that rules for MAs should – or should not – apply to all MAs in the same fashion; and that obtaining CUSIPs should be done by underwriters for both policy and practical reasons.”

The Bond Dealers of America told the MSRB on Tuesday that the board did not need to revisit the CUSIP requirement so soon after it took effect and that applying for CUSIPs is not a burden to municipal advisors.

“The BDA does not believe that a retrospective evaluation of the CUSIP requirement is appropriate,” BDA CEO Mike Nicholas wrote in the comment letter. “As a practical matter, the CUSIP requirement with respect to any municipal securities market participant does not impose significant burden on the participant and does not merit re-opening MSRB Rule G-34 so soon after it has been finalized.”

Nicholas added that the original intent of the Rule G-34 amendments was to clarify when underwriters and municipal advisors were required to obtain CUSIP numbers in private transactions.

“If the MSRB deletes the CUSIP requirement for municipal advisors, then that will allow municipal advisors to engage in ‘competitive sales’ that are private in nature and do not have a dealer acting as a placement agent without obtaining a CUSIP number,” Nicholas wrote. “As the MSRB believed in 2017, if municipal advisors engage in these kinds of transactions, the market needs to have the visibility into the existence of these transactions that a CUSIP number provides and deleting the requirement would be inappropriate.”

Among the issues raised by comment letters to the MSRB and SEC in 2017 was an exception to the private placement requirement that said CUSIP numbers are not needed for direct purchases by banks, their non-dealer control affiliates and consortiums, where the dealer or municipal advisor reasonably believes the purchaser’s intent is to hold the securities to maturity. Issuers and dealers alike had raised concerns that investors would be hesitant to certify that they planned to hold “to maturity,” since muni bonds often have much earlier call dates.

Under the revision filed with the SEC, titled Amendment No. 1, that exception now reads that a dealer or MA ?may elect not to apply for assignment of a CUSIP number or numbers if the underwriter or municipal advisor reasonably believes (e.g., by obtaining a written representation) that the present intent of the purchasing entity or entities is to hold the municipal securities to maturity or earlier redemption or mandatory tender.?

At a minimum, if the MSRB decides to get rid of the CUSIP requirement for municipal advisors, Nicholas wrote they should do so only with respect to “competitive sales” as to which there is no broker-dealer acting as an underwriter.

The Securities Industry and Financial Markets Association does not want any changes made to Rule G-34, said Leslie Norwood, SIFMA managing director and associate general counsel. However, if the MSRB does decide to reopen the issue, it should be mindful of private placements and Norwood said removing the requirement for municipal advisors to obtain CUSIP numbers runs counter to the intent for changes made in 2017.

“If CUSIPs are to be obtained in private placements, the MSRB should consider that the placement agents should obtain the CUSIPs once the investor has been determined though not when a request for bids is distributed,” Norwood said.

The MSRB should consider, if the MSRB wants to make any changes, relief for municipal advisors with getting CUSIP numbers for competitive public offerings of notes and that underwriters should get those CUSIPs, Norwood said.

For competitive underwritings of securities, there is likely one underwriter and one coupon per maturity, Norwood said. Competitive notes transactions have multiple underwriters for the same maturity, resulting in multiple coupons, each with its own CUSIP numbers. So an underwriter should get the CUSIP for notes transactions, Norwood said.

Municipal advisors should not have to provide CUSIP numbers for competitive sales, wrote Dennis Dix Jr., founder of MA firm Dixworks LLC.

“I continue to be bewildered by the new imposition on municipal advisors to provide CUSIP numbers for competitively bid new issues,” he wrote.

Dix added that broker-dealers have effectively applied for CUSIPs for decades. Shifting the CUSIP burden from underwriters to MA’s isn?t useful, Dix wrote, and poses an undue burden on small shops like his.

“I urge in the strongest terms that the rule be revoked or revised to relieve MA’s of the CUSIP obligation,” Dix wrote. “If the intent of the current rule is to accelerate the obtaining of CUSIPs, I simply don?t see the need or market benefit under the current regulation.”

Rule G-34 does not accomplish what the board set out to do, which is to improve the disclosures on bank direct purchases, wrote Robert Lamb, president of Lamont Financial Services Corporation. Instead, it places additional burdens on independent municipal advisors and makes the market less efficient, Lamb added.

Lamb took issue with the rule requiring that an independent municipal advisor seek and obtain CUSIP numbers before the award on a competitive sale.

He wrote that the par amount of the bonds may change as a result of the bid, needing changes and multiple communications with the CUSIP bureau. The bonds would also have to be made Depository Trust Co. eligible, so an underwriter would have to take the CUSIPS to DTC to make them eligible.

Lamb noted that the limitations with respect to DTC does not apply to broker dealer firms since they are already a member of DTC.

“Even if DTC changed its policies to allow non-broker dealers to become DTC participants, the cost would be significant, at over $8,000 per year,” Lamb wrote. “However, it is not currently possible for an independent municipal advisor to become a DTC participant, so the threshold problem is more acute than the cost.”

Any changes to the rule would need Securities and Exchange Commission approval before they could become effective.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 05/28/19 02:50 PM EDT

SUMMARY

SIFMA provides comments to the Municipal Securities Rulemaking Board (MSRB) regarding MSRB Notice 2019-08: Request for Comment on MSRB Rule G-34 Obligation of Municipal Advisors to Apply for CUSIP Numbers When Advising on Competitive Sales.

The MSRB is seeking public comment on a provision of MSRB Rule G-34 that generally requires a municipal advisor advising an issuer with respect to a competitive sale of a new issue of municipal securities to apply for the assignment of a CUSIP number or numbers with respect to such issue within a specified time frame. In early 2018, the MSRB extended an existing requirement for dealers acting as financial advisors to apply for CUSIP numbers in competitive offerings to all municipal advisors advising on such offerings. However, based on the municipal securities market’s experience with the provision, and stakeholder input regarding the utility and the burden of this requirement in practice, MSRB determined that a retrospective review of the operation of the CUSIP requirement was merited. MSRB notice can be found here.

Read the Comment Letter.

After consultation with various members and committees, the BDA has submitted a response to the recent the MSRB request for comment on MSRB Rule G-34, the “CUSIP Requirement”, which requires a municipal advisor advising an issuer with respect to a competitive sale of a new issue of municipal securities to apply for the assignment of a CUSIP number or numbers with respect to such issue within a specified time frame, subject to exceptions. The notice can be viewed here.

The BDA comment letter can be viewed here.

Background

The CUSIP Requirement was approved by the U.S. Securities and Exchange Commission (SEC) in 2017, as part of a package of amendments to MSRB Rule G-34, on CUSIP numbers, new issue and market information requirements (the “2017 G-34 Amendments”) and became effective June 14, 2018.

Prior to the effective date of the 2017 G-34 Amendments, brokers, dealers and municipal securities dealers (collectively, “dealers”) acting as underwriters or as financial advisors to an issuer in competitive sales of new issue municipal securities were subject to the CUSIP Requirement, but non-dealer municipal advisors were not.

The 2017 G-34 Amendments extended the CUSIP Requirement to all municipal advisors, whether dealer or non-dealer.

Bond Dealers of America

May 28, 2019

The Governmental Accounting Standards Board has issued new guidance that provides a single method for government issuers to report conduit debt obligations and related commitments.

GASB Statement No. 91, Conduit Debt Obligations, calls for conduit issuers to stop reporting conduit debt in their financial statements and to report all of it in their accompanying notes starting Dec. 15, 2020.

“It’s not their liability,” said Dean Mead, senior research manager for GASB. “And so this note is actually about something that does not appear in the financial statements which makes it a little unusual. But it’s fairly clear that financial statement users need information about conduit debt obligations.” The notes will help users know the total amount of debt a conduit issuer has authorized.

In addition, Mead said, “The information that bond analysts get from the disclosure should be more useful to them after the implementation of Statement 91.”

The primary benefit is that the notes on outstanding conduit debt will be organized into three types of commitments that the government may have made with respect to that debt.

The first type is a limited commitment, which is traditionally the way most conduit debt is authorized, with the issuer not making any commitment to make payments on the third party’s bonds.

The second type is where there is an additional commitment by the conduit issuer to make a debt service payment if it is necessary.

The third type is a voluntary commitment that occurs when the conduit issuer hasn’t made a promise to make a debt service payment, but could do so in the future.

The new standard also will require the disclosure of cumulative payments by the conduit issuer and how they have changed over the course of the past year, including any provisions that allow the conduit issuer to eventually recover those payments.

Most conduit issuers already do not report conduit debt on their financial statements, but according to GASB an unspecified minority do report it.

“It was something you would often see among financing authorities that don’t have much in assets and liabilities apart from the conduit debt they issue, so some of them chose to report the conduit debt in their financial statements as liabilities even though they are not obligated to repay that debt,” said Mead.

Mead said the bigger issue was ending “the diversity in practice and the confusion that existed about what conduit debt arrangements needed to be reported in their financial report.”

When the prior standards were issued, GASB had no conceptual standard for what a liability meant. Conduit debt does not meet the definition that now exists.

Michele Mark Levine of the Government Finance Officers Association Technical Services Center said in an email that the new guidance “clarifies that issuers continue to be required only to provide disclosures on their conduit debt, if they have not made any commitments to pay, or request appropriations to pay, debt service in the event the obligor is unable to do so.”

“If they have made other commitments, they must report a liability when they determine there is a greater than 50% chance they will actually pay,” Levine wrote. “They will, however, have to track the amount of their conduit debt that remains outstanding in order to make the required disclosures, which also include information about all of their conduit-debt associated commitments, recognized liabilities, and the amount of debt service payments they have made on conduit debt. They will also be required each year to assess the likelihood of their making payments to support debt service on an annual basis if they have made commitments to do so, or if something happens that makes them consider
voluntarily paying debt service.”

The Bond Buyer

By Brian Tumulty

May 29 2019, 2:47pm EDT

Municipal bonds will soon qualify as high-quality liquid assets under Federal banking regulations, a designation market participants expect to provide banks a greater incentive hold their debt.

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. said Thursday they were adopting, without change, the August 2018 interim rule to allow investment-grade munis that are “liquid and readily marketable” to qualify as level 2B HQLA. The rule will take effect 30 days after publication in the Federal Register, which usually takes about three business days.

“The efforts of issuers over the past few years has helped establish what we all know to be true: municipal securities are both high quality and liquid assets,” said Emily Brock, director of the Government Finance Officers Association?s federal liaison center. “We look forward to seeing the benefits of the final rulemaking for issuers and the market as a whole.”

The rule change was required by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which President Donald Trump signed into law in May 2018. The issue is important to the muni market because banks would have had less incentive to hold muni debt had it lacked the HQLA designation.

The rule change followed a struggle that began in 2014, when the regulators adopted Liquidity Coverage Ratio rules to require banks with at least $250 billion of total assets or consolidated on-balance-sheet foreign exposures of at least $10 billion to have a high enough liquidity coverage ratio ? the amount of HQLA to total net cash outflows ? to deal with periods of financial stress.

All of the bank regulators initially excluded munis as HQLA in the LCR rules because they believed they were not liquid. Muni market groups protested.

The Fed later revised its rules, but its muni HQLA provisions were seen by many in the market as too restrictive. Specifically, they allowed only general obligation bonds to count as HQLA and limited the amount of securities issued by a single issuer that a bank could include as eligible HQLA to two times the average daily trading volume of that issuer. In addition, munis could comprise no more than 5% of a bank?s overall HQLA.

The final rule will now allow many revenue bonds, including private activity bonds in some cases, to qualify as Level 2B HQLA. That will put these munis on a par with mortgage-backed securities. Muni market groups have said they believe the long track record of munis as a stable investment warrants them being classified as level 2A assets, the same as foreign sovereign debt. The level matters because regulators apply a larger discount to level 2B assets when calculating rick-based capital than to level 2A assets: 25% instead of 15%.

“We look forward to assessing future opportunities that may afford further enhancements to the final rulemaking,” said Brock.

Bank holdings of munis had grown steadily for years excepting a dip during the recession 10 years ago, but the federal tax law passed in 2017 slashing the corporate tax rate to 21% from 35% has made munis less appetizing for banks and their holdings have dropped.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 05/31/19 12:10 PM EDT

The GFOA’s Awards for Excellence in Government Finance recognize innovative programs and contributions to the practice of government finance that…

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Washington, DC – In connection with its ongoing retrospective review of its rules and guidance, the Municipal Securities Rulemaking Board (MSRB) is seeking comment on MSRB Rule G-23 and related MSRB interpretive guidance. MSRB Notice 2019-13 solicits input on whether Rule G-23’s requirements for brokers, dealer and municipal securities dealers (collectively, “dealers”) acting in a financial advisor capacity remain appropriate in light of the regulatory framework implemented for municipal advisors and other changes in the municipal securities market since Rule G-23 was last amended in 2011.

Rule G-23 establishes ethical standards and disclosure requirements for dealers who act as financial advisors to issuers with respect to the issuance of municipal securities, and importantly, prohibits such a dealer from underwriting the same issuance. The rule predates the implementation of rules for municipal advisors established by the MSRB and the U.S. Securities and Exchange Commission (SEC).

“As part of our retrospective rule review this year, we are evaluating Rule G-23 to determine whether changes may be necessary in light of the new regulatory framework for municipal advisors,” said MSRB President and Chief Executive Officer Lynnette Kelly. “Because Rule G-23’s obligations for dealer-financial advisors predates obligations for municipal advisors that include a fiduciary duty to issuers, we are seeking broad public comment on new considerations and market practices that will inform any possible changes to the rule.”

Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the MSRB adopted rules for municipal advisors, including MSRB Rule G-42, which establishes conduct standards and other requirements for municipal advisors. The MSRB also adopted an interpretive notice under Rule G-17, on fair dealing, which provides requirements for dealers serving as underwriters of municipal securities. Because of the interrelationship between these requirements and Rule G-23, the MSRB seeks input on whether these requirements are appropriately aligned and to ensure that there are no inconsistencies or unwarranted burdens associated with them.

The MSRB began a formal retrospective rule review in 2012 to help ensure MSRB rules and interpretive guidance are effective in their principal goal of protecting investors, issuers and the public interest. The retrospective review also seeks to ensure that MSRB rules are not overly burdensome, are clear and harmonized with the rules of other regulators, as appropriate, and are reflective of current market practices. In October 2018, the Board identified the continuation of its ongoing retrospective rule review as a strategic priority for its current fiscal year and subsequently developed criteria to help identify priority rules or rule areas for review.

Date: May 20, 2019

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

Norwalk, CT, May 21, 2019 — The Governmental Accounting Standards Board (GASB) has proposed new guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs), which have become increasingly prevalent among state and local governments over the past several years.

The Exposure Draft, Subscription-Based Information Technology Arrangements, effectively would apply many of the provisions of Statement No. 87, Leases, to subscription-based transactions. The Exposure Draft proposes:

• Defining a SBITA as a contract that conveys control of the right to use a SBITA vendor’s hardware, software, or both, including IT infrastructure, for a period of time in an exchange or exchange-like transaction
• Governments with SBITAs would recognize a right-to-use subscription asset and a corresponding subscription liability (with an exception for short-term SBITAs with a maximum term of 12 months).In addition, the Exposure Draft includes proposals related to outlays other than subscription payments, including implementation costs and note disclosures related to a SBITA.

Although existing GASB literature addresses on-premise computer software—either internally developed or acquired through perpetual licensing agreements—stakeholders have raised questions regarding the proper accounting for and reporting of cloud computing and other remote-access forms of software applications and data storage, which are subscription based. The lack of guidance caused inconsistency in accounting and financial reporting for SBITAs.

The proposed Statement would be effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Early application would be encouraged.

The Exposure Draft is available on the GASB website, www.gasb.org. The GASB invites stakeholders to review the proposal and provide comments by August 23, 2019.

Read the Priorities.

Bond Dealers of America

May 20, 2019

Norwalk, CT—May 23, 2019 — The Financial Accounting Foundation (FAF) today posted its 2018 Annual Report to the FAF website. The report is available in print, PDF, and interactive digital versions.

The annual report theme is “Standards That Work: Rising to Meet the Future.” It provides a glimpse of how the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) develop standards that work today and for the future—and how the FAF supports that process. For the FASB and the GASB, it includes robust research, implementation support, and an eye toward technical innovation. For the FAF, it includes appointing the right people to the Boards and implementing the right systems to support successful standard setting.

The 2018 Annual Report includes:

• Letters from FASB, GASB, and FAF leaders
• Snapshots of 2018 outreach and other activities that contribute to making standards work now and for the future, and
• Complete 2018 management’s discussion and analysis and audited financial statements (previously posted to the FAF website).

The interactive, mobile-friendly version of the annual report incorporates video and visuals to tell the story. It also includes complete lists of all FASB and GASB advisory group members, including the Emerging Issues Task Force and the Private Company Council.

The Municipal Securities Rulemaking Board reopening discussion about the roles of municipal advisors and underwriters could open up a can of worms and bring back “shady” practices, issuers fear.

Members of the Government Finance Officers Association told MSRB officials about their concerns during the Saturday meeting of the GFOA’s Committee on Governmental Debt Management. The MSRB told issuers it was preparing to ask for comments on its Rule G-23 on activities of financial advisors as part of its retrospective rule review.

Kathy Kardell, senior department administrator at the Hennepin County, Minnesota Office of Budget and Finance, said she opposed reopening that discussion. It was a long battle to get G-23 amended in 2011, she said, but the MSRB landed on a solution that protects issuers.

The concern among some issuers is that prior to the amendments to Rule G-23, an underwriter firm serving as an issuer?s municipal advisor could get insight and leverage a deal, only to then resign as advisor and underwrite a transaction or at least submit a bid on a competitive deal.

Kardell called that an “inherent conflict of interest” for a municipal advisor and/or financial advisor to then go on to underwrite the bonds. The 2010 Dodd-Frank Act created the requirement that “municipal advisors” be registered and owe a fiduciary duty to their municipal clients, but “financial advisor” has remained a common term in the muni market.

On the flip side, some municipal market participants say by not allowing that broker-dealer firm to switch roles and underwrite the bonds, it takes one more firm out of the equation that can actually submit a bid.

Some issuers who primarily use competitive sales, especially small and infrequent ones, have relatively low underwriter coverage, Mike Nicholas, CEO of the Bond Dealers of America, wrote in a commentary published in The Bond Buyer last week.

“If the issuer chooses one of the possible underwriter bidders on a competitive deal to serve as FA, the issuer will get one less bid at the auction,” Nicholas wrote. “In some places in the country, that additional bid can be crucial.”

Bond dealers may be looking for more opportunities to go for bids after the loss of tax-exempt advance refunding, said Kenton Tsoodle, Oklahoma City’s finance director.

“I suspect it’s motivated by some of the decreases in volume we’ve seen,” Tsoodle said. “With the loss of advance refundings, I’m sure underwriters want to have every opportunity they can to underwrite bonds.”

Tsoodle said issuers were concerned that role-switching was harmful, especially for issuers with less experience in the market.

“There’s just a lot of concern that, that was a really bad practice,” he said. “It took advantage of especially infrequent, smaller issuers.”

But Kardell said she doesn?t see any evidence G-23 is hurting competitive bids, and says she sees people getting competitive bids under the current rules.

“There’s no clamoring that people are losing out on their competitive sales at all,” Kardell said.

Kardell wants to see a group do an analysis that shows less competitive sales because of Rule G-23, adding that she has never seen that occur.

The BDA wants the MSRB to remove the rule?s restriction on competitively bid transactions and should consider eliminating Rule G-23 altogether, Nicholas wrote.

Issuers don’t want to see that practice making a comeback and Tsoodle said if the MSRB wants to protect issuers, keeping Rule G-23 is one way to do so.

“We don?t want to see issuers taken advantage of, and this rule is something that really helps to protect issuers,” he said.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 05/19/19 12:29 PM EDT

The Municipal Securities Rulemaking Board earlier this year announced that as part of its ongoing retrospective rule review, they are examining MSRB Rule G-23, “Activities of Financial Advisors.” The purpose of the initiative is “to ensure MSRB rules are up-to-date, effective and reflective of the current reality of the municipal market.”

Our market has evolved in the more than eight years since the MSRB last made significant changes to G-23, and participants should welcome the review.

Rule G-23 governs some elements of municipal advisor activities. At the highest level, the current version, adopted in 2011, prohibits dealers from serving as municipal advisors and also as underwriters on the same transactions. The pre-2011 version of G-23 permitted such “role switching” under limited circumstances.

In a proposal filed with the Securities and Exchange Commission in 2010, the MSRB said that pre-2011 G-23 permitted “inherent conflicts of interest, which are not cured by the disclosure and waiver provisions of the rule.” The MSRB also argued that the prohibition on serving as underwriter and FA on the same transaction should apply to both negotiated and competitive deal.

When Rule G-23 was last amended, there was a concern raised that the application on competitively bid transactions could seriously hurt issuers. Many commenters at the time, including some issuers, opposed how the amendments to Rule G-23 would prevent a firm that is acting as a financial advisor with respect to a competitively bid transaction to also submit a competitive bid as an underwriter. The concern was—and still is—that some competitive issuers, especially small and infrequent ones, have relatively little underwriter coverage. If the issuer chooses one of the possible underwriter bidders on a competitive deal to serve as FA, the issuer will get one less bid at the auction. In some places in the country, that additional bid can be crucial.

Further, as long as the dealer submits a competitive bid on the same basis as other potential underwriters, the issuer can only be aided by the potential of an additional bid. That is, the traditional concern of a dealer acting as a financial advisor only to turn around and serve as the underwriter is not present in these competitively bid transactions.

The market data demonstrates how this issue is a problem for many state and local governments. The BDA has recently examined data from Ipreo on competitive new-issue municipal auctions. A very large percentage of competitive new issues are executed through the Ipreo platform, so it provides a good source of data.

As one might expect, there is a wide disparity in the number of bidders on competitive deals based on deal size. In 2018, for example, competitive municipal deals of between $50 million and 100 million had on average nearly nine bidders per deal, the largest average for the segments of the market at which BDA looked.
On the other hand, competitive deals less than $1 million in size had on average only 2.8 bidders per deal. Clearly if 2.8 is the average, many had fewer than that.

The picture isn’t much better for slightly bigger transactions. Deals between $1 million and $5 million had an average of just 4.4 bidders, half the average for the $50 million to $100 million group. Deals between $5 million and $10 million had 5.6 bidders on average.

As this data shows, removing one bidder from smaller competitive deals impairs execution. Simply put, the more bidders at auction, the better execution issuers will see, and better execution translates directly into lower borrowing costs. Taking a potential underwriter out of the bidding mix because they were the issuer’s choice for FA is not in the best interest of small issuers.

The BDA believes that in addition to removing the Rule’s restriction on competitively bid transactions, the MSRB should consider simply eliminating Rule G-23 altogether.

Here’s why.

The MSRB has now finalized a full set of rules governing the activities of municipal advisors including Rule G-42, a comprehensive rule governing many aspects of an MA’s relationship with an issuer, including defining the MA’s fiduciary responsibilities.

The current Rule G-23 was finalized less than a year after the enactment of the Dodd-Frank Act, which finally for the first time brought the previously unregulated nondealer FAs under federal oversight.

The operative provisions of Rule G-23 were adopted to address regulatory concerns that were dealt with much more comprehensively in Rule G-42, finalized in 2016. Now G-23 and G-42 are overlapping regimes, and Rule G-23 has lost its regulatory purpose. If any elements of G-23 need to be retained, they can be folded into Rule G-42.

Given that the Board initiated the Rule G-23 review earlier this year, we are likely to see action from the MSRB on this soon. The MSRB’s focus on Rule G-23 is welcome. The Rule is overdue for review. The process gives the MSRB an opportunity to address long-standing issues that were controversial nine years ago and remain so today. We look forward to the conversation.

by Mike Nicholas

May 16, 2019

Bond Dealers of America

The MSRB’s latest podcast highlights the MSRB Fact Book and municipal bond data available from the MSRB.

Listen here.

CHARLESTON, S.C. – Investors and analysts want the Municipal Securities Rulemaking Board to take action to make clear when issuers have last filed financial disclosures, and perhaps even allow investors to file disclosures themselves.

National Federation of Municipal Analysts members made those requests of MSRB board members at the groups’ annual meeting in Charleston, South Carolina Thursday. The dialogue followed closely on the heels of a letter NFMA sent to the MSRB and Securities and Exchange Commission asking for the SEC to take action on issuer disclosure.

NFMA also asked the MSRB to improve its EMMA site to make it easier to find information through linking bonds to obligors and projects, standardizing industry classifications and providing a mechanism to identify active material events and provide greater transparency on the currency of audit filings.

Investors suggested to board members at the Thursday luncheon ways to improve transparency in the timeliness of issuers? financial information on the site.

The MSRB has discussed using a “counter” so stakeholders could know how long it has been since an issuer has filed a financial statement, said MSRB Board Member Renee Boicourt. The counter would be some kind of indication of how recent the issuer’s information was, but Boicourt did not offer specifics about what form the counter would take.

SEC Chair Jay Clayton has said he is concerned about “stale” financial statements and indicated that the SEC may be looking to take additional steps to improve disclosure in the municipal market.

“Shining a light on how dated the financials are could motivate people and CFO?s to go in and say, we look bad, we need to do better internally,” Boicourt said.

Though some issuers disclose voluntarily throughout the year, others adhere to the minimum required under their continuing disclosure agreements.

“One of the questions that comes up is that issuers have continuing disclosure agreements they’re undertaking, and is meeting the terms of those agreements the standard” Boicourt asked. The reaction you’ll hear from issuers at times is ‘well, as long as we?re meeting our contractual commitment, we’re doing what we said we would do, we?re doing enough.'”

There is a difference between filing in 180 days to 270 days, said Bill Oliver, NFMA industry and media liaison. He said he understood why some filings come in late from four months to six months. But for issuers that don?t file at all, they should incur a kind of liquidity premium, he said.

MSRB President and Chief Executive Officer Lynnette Kelly said she worried about unintended consequences from using a counter because there are many reasons why financials are filed late, but added that she didn’t intend to make excuses for issuers.

Oliver said traders would want to know how long it?s been since an issuer filed and said it would affect what they would want to pay for the bonds.

“The more that information becomes available, the more efficient the marketplace and so I would think that?s something you?d definitely want to work toward,” he said.

An attendee asked if investors could submit material information onto EMMA.

Kelly said issuers would not be in favor of investors submitting that information, adding they like to control information on EMMA.

EMMA is set up as a repository for disclosures from the issuer community to the market, Kelly said. It’s not set up as a “chat room” for sharing information, though it could evolve to that point perhaps at some time in the future, she said.

“Not disagreeing that it wouldn’t be a good idea for some stakeholders, but it’s not possible right now,” Kelly said.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 05/10/19 11:09 AM EDT

Financial Accounting Foundation Board of Trustees

Notice of Meeting

[05/08/19]

Interested in learning more about dealer and customer trading activity in the municipal securities market in 2018?  Read the MSRB’s new report.

This week’s episode of the MSRB Podcast highlights the MSRB Fact Book and data available through the MSRB on trading patterns, disclosures and more. Listen here.

EMMA’s search is getting smarter. In late May, a new algorithm with predictive features will allow users to quickly find information by typing just a few characters in the Quick Search box.

Check out EMMA today.

The NFMA released a letter on May 3, 2019 on the current state of disclosure in the municipal market in an initiative to work with the SEC and MSRB to improve disclosure, close the information gap between financial statement filings, get an update on interpretive guidance from the Commission, and modernize EMMA.

To read the letter, click here.
To read the press release, click here.

SUMMARY

SIFMA provides comments to the U.S. Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s Notice of Filing of a Proposed Rule Change to Amend Rules G-11 and G-32 and Form G-32 Regarding a Collection of Data Elements Provided in Electronic Format to the EMMA Dataport System in Connection With Primary Offerings.

Read the letter.

Norwalk, CT, May 2, 2019 — The Governmental Accounting Standards Board (GASB) today issued question-and-answer guidance intended to clarify, explain, or elaborate on the implementation and application of certain GASB Statements.

Implementation Guide No. 2019-1, Implementation Guidance Update–2019, addresses new questions about application of the Board’s standards on multiple topics, including but not limited to:

• Derivative instruments
• Disaster-related expenditure-driven grants
• Irrevocable split-interest agreements
• Postemployment benefits
• Tax abatement disclosures
• Transfers of capital assets within a financial reporting entity.

Implementation Guide 2019-1 also includes amendments to previously issued implementation guidance.

The requirements of Implementation Guide 2019-1 are effective for reporting periods beginning after June 15, 2019. Early application is encouraged for guidance related to standards that already have been implemented.

[05/02/19]

Members of the Bond Dealers of America (BDA) recently completed a 10-year retrospective survey on the cost of regulation and the associated impact to regional, middle-market, and small firms exclusively focused on the U.S. fixed income markets. Our members were asked to compare their firm’s legal and compliance costs from the beginning of the 2008 credit crisis to present.

The survey presents a distinctive image of the rising cost of service to the investor as the increased cost of regulations and examinations have ultimately been passed on to the end user.

• The results of this survey can be found here.

Middle-Market Dealers Report Steep Regulatory Costs

By: Kyle Glazier

WASHINGTON — Bond Dealers of America members have spent an average of more than $17 million on regulatory costs since the beginning of the 2008 credit crisis, according to a BDA member survey.

The survey, conducted from December 2018 to February 2019, was made available to The Bond Buyer this week. BDA members, primarily middle-market and regional broker-dealers, reported spending about 20% more money and time on regulatory compliance than they did before 2010.

“The goal of this survey is to paint a picture on how burdensome and onerous” fixed-income regulation has become in the years since the crisis, BDA said.

Muni market dealers, like other capital markets participants, have had to adjust to a raft of new regulations over the past decade. The 2010 Dodd-Frank Act led to the creation of an entirely new municipal advisor regulatory regime, including new MSRB rules governing firms and individuals who provide bond advice to state and local governments.

In addition, the past 10 years have also seen new best execution requirements for dealers and a mandate that they provide certain customers with disclosures of the markups and markdowns on a transaction.

A Securities and Exchange Commission enforcement program, the Municipalities Continuing Disclosure Cooperation initiative, also sent underwriters scrambling to review several years’ worth of offering documents and continuing disclosure by the issuers they underwrote for, in an effort to determine whether any investors might have been misled about issuers’ compliance with continuing disclosure requirements.

According to the survey, over 70% of BDA members reported that compliance costs have increased by 20% or more since the Dodd-Frank Act. The average firm reported that over the past 10 years it has spent $9.9 million on staff, $6.2 million on technology $1.4 million on legal and outside counsel, and $300,000 in fines.

BDA member firms reported spending most of their compliance costs on new staff and technology investments.

Compliance personnel have increased by an average of three persons at each BDA member firm since 2008, according to the survey, with over 30% expecting to hire between one and three more compliance personnel this year. On average, new rule implementation has increased the firm workload by 15 hours per week, per person at BDA member firms, those firms said, and 20% of BDA members said they have spent $1million or more on legal fees associated with new rule implementation and/or examinations.

Dealers also provided feedback on how they feel regulation has affected their business.
“There is less liquidity for investors and profitability for a regional broker dealer is terrible,” according to the survey. “The return on capital does not meet the risk required to operate a regional broker dealer.”

Regulators and others have pointed out that regulations put in place since the crisis have improved transparency for investors and particularly improved the quality of secondary-market disclosure. But data reveal attrition among muni dealers as mergers and exits from the business have piled up since 2009. The number of MSRB-registered dealers has fallen by almost one-third since then, according to an MSRB report released last year. There were 1,346 MSRB-registered dealers in 2017, down from 1,967 in 2009.

Bond Dealers of America

April 29, 2019

WASHINGTON _ Issuers will soon see more concise disclosures from underwriters as the Municipal Securities Rulemaking Board prepares to file amendments to interpretive guidance on its fair dealing rule.

The new amendments to be filed to the Securities and Exchange Commission, which the MSRB said were “generally articulated” in its request for comment in November 2018, will give responsibility to the lead underwriter to make certain disclosures on behalf of the syndicate rather than each firm providing very similar disclosures. The board made the decision to file for SEC approval during its quarterly meeting last week. If approved the amendments would be effective at least six months after the filing.

?We?ve worked diligently through the comment process and additional stakeholder outreach to arrive at a set of improvements that preserve the intent of the rule in protecting issuers,? said MSRB Chair Gary Hall.

The MSRB’s 2012 guidance on Rule G-17 established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market. The disclosures include both actual and potential conflicts of interest.

?We looked at the requirements and streamlined them, made them more efficient, gave responsibility to the lead underwriter to make the disclosures so that the deal specific and underwriter specific disclosures that go to the issuer are much more meaningful,? said MSRB President and CEO Lynnette Kelly.

The board?s intent was to make sure an issuer understood any potential conflicts of interest and that they received appropriate disclosure from the syndicate, Kelly said.

The MSRB is seeking to amend the standard of potential conflicts of interest by underwriters to include those most relevant to the transaction. The objective is to provide a reasonable balance between reducing the volume of disclosures and ensuring issuers receive essential information.

In the past, dealers said that the MSRB should amend existing the Rule G-17 guidance to require that only actual rather than potential conflicts of interest be disclosed to issuers before a new issuance. The new guidance, if approved, will narrow the required conflict disclosures, according to the MSRB.

During the meeting, the board also decided not to take any action related to the timeliness of issuer financial disclosures at this time. Late last year, SEC Chair Jay Clayton said he has asked the commission?s Office of Municipal Securities to work with the MSRB to improve transparency about the timeliness of that information.

The board is continuing to have discussions about the age of the disclosure and possible implications for investors. Talk swirled around leveraging EMMA to highlight when financial disclosures are made available, Hall said, but the board is not taking any action at this time.

?The board is going to continue discussing the issues around the age of issuer financial statements,? Kelly said.

The board also approved the publication of a “compliance resource” for its Rule G-20, on gifts and gratuities.

?We believe this resource will supplement existing FAQ?s on G-20 and include supervisory considerations for complying with the limited exclusion for business entertainment,? Hall said.

The board discussed comments received from a draft interpretive guidance published in September about the potential harms of ?pennying.? Pennying occurs when a dealer places a retail client?s bid-wanted out to the market and determines the winning bid, but then rather than executing the trade with the winning bidder marginally outbids the high bid and buys the bonds for its own account.

Dealer groups and individual firms weighed in, in November in comment letters, emphasizing that the seller?s intent was important in deciding if a firm is being abusive.

The board is continuing to discuss pennying and prearranged trading in the future, Hall said. Dealer groups have said the MSRB cast too wide a net with its draft January guidance on prearranged trading, and want clarification on what conduct constitutes a violation of its fair dealing rule.

The board also previewed the application of a new algorithm on EMMA that would create predictive searching. Users could type a few characters in the search box on the home page and get a drop-down list of suggested items. It will be available in May.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 02:28 PM EDT

The newest episode of the MSRB Podcast is now available. Listen to “Professional Qualifications: A Conversation About MSRB Rule G-3” here.

The municipal securities market is composed of more than one million unique bonds, each with its own specific structural characteristics, ratings and yields. Market benchmarks such as yield curves, provide sector-specific or broad market information about the general level of municipal interest rates. Not all benchmarks and yield curves are created equal. Hear about how different yield curves are used to evaluate a bond’s yield or performance.

Listen to audio.

Posted: 4/9/2019

WASHINGTON — The Securities and Exchange Commission is discussing two new rule recommendations to address systematic “pennying.”

The SEC’s Fixed Income Market Structure Advisory Committee and its Technology and Electronic Trading Subcommittee at a panel on Monday dug into pennying, discussing two preliminary recommendations, which would address the practice.

“Although the increased use of electronic trading has had a variety of positive impacts on both the corporate and municipal bond markets, one troubling trading practice immediately came to the Subcommittee’s attention: the systematic use of last-look, often referred to as ‘pennying,’ by certain bond dealers,” the subcommittee wrote.

“Pennying,” sometimes also referred to as “last-look,” occurs when a dealer purchases bonds for its own account, following the dissemination of a bid-wanted (through either an alternative trading system or a broker’s broker) for a customer who is seeking to sell a municipal security, according to the Municipal Securities Rulemaking Board.

The dealer, after reviewing bid information received, either matches the high bid received in response to the bid-wanted or purchases the bonds at a price that is nominally higher than the high bid. The dealer technically provides the customer a price equal to or better than the best bid, but the MSRB said last year it was concerned that widespread pennying disincentivizes participation in the bid-wanted process, discourages bidders from giving their best price in a bid-wanted and “may impact the efficiency of the market.”

The SEC subcommittee said the SEC should make a statement disapproving of the repeated use of last-look in either the municipal or corporate bond markets on any electronic trading venue, as the practice harms price discovery and market efficiency.

“The SEC should consider setting the clear expectation that the use of last-look should occur only in the rare situation when the dealer does not receive any reasonable response to an auction request and/or needs to use the practice to conform with its best execution responsibilities,” the subcommittee wrote.

It added that last-look shouldn’t be a part of the dealer’s everyday practice and the SEC should encourage dealers to have clear policies and procedures in place delineating when last-look may be used.

It also asked the SEC to encourage the Financial Industry Regulatory Authority to publish a request for comment on the use of last-look in the corporate bond market, similar to the MSRB’s 2018 Request for Comment. The committee also asked the SEC to encourage FINRA and the MSRB to coordinate their respective final response.

SEC Chair Jay Clayton said the commission should be concerned about systematic bidding but also be cautious with being prescriptive in not eliminating good bidding while trying to get rid of bad bidding.

“I do get the sense that this is something you think the commission should continue to look at,” Clayton said.

“The subcommittee was concerned by the systematic use of last-look on alternative trading platforms ATS platforms, known as pennying, so there was a differentiation there of a type of last-look that we would deem to be most problematic,” Rick McVey, a member of the SEC’s Fixed Income Market Structure Advisory Committee, and founder of MarketAxess (MKTX), said.

After the meeting, the subcommittee asked for two days to refine the recommendations and clarify systematic pennying versus last-look.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 04/15/19 03:48 PM EDT

Introducing the MSRB Podcast, our new series about the regulatory and market structure of the largest source of US infrastructure financing.

Listen to episode one – A Conversation About Yield Curves –  here.

The BDA, in partnership with the Bond Buyer, held its Annual National Municipal Bond Summit at the Renaissance Nashville Hotel in Nashville, TN on March 25-27. The Summit offered market leaders the opportunity to meet and network with senior issuers, state and local officials, as well as transaction participants from across the country. The Summit featured several key contacts from BDA firms on various panel discussions. A recap of the BDA led panel discussions are below and the event agenda can be read here.

BDA Member Panel Highlights

The Status of Infrastructure:

BDA Panel participants included: Brett Bolton, Vice President of Federal Legislative & Regulatory Policy at Bond Dealers of America, Alex Wallace, Managing Director/Head of Public Finance at US Bank, and Mitch Rapaport, Partner at Nixon Peabody, LLP.

• Summarized key muni tax provisions the BDA is advocating to be included in any infrastructure package including the reinstatement of tax-exempt advance refundings
• Discussed the advocacy efforts of the BDA in 2019 including the recent outcomes of the Capitol Hill fly-in and went over the current political environment in DC
• Highlighted the importance of remaining vigilant with advocacy efforts protecting the tax-exempt status of municipal bonds and highlighted the draft legislation that would reverse the repeal of tax-exempt advance refundings
• Stressed the need to advocate for PAB expansion and other muni bond financing tools in potential infrastructure package

Keynote Address: Current State of the U.S. Economy
Craig Dismuke, Chief Economist at Vining Sparks

• Discussed the current state of the U.S. economy and factors that are working for and against the current robust state
  A look back over the longest span of growth in history, the question was raised: is this the ceiling for the American economy?
• With tariffs and a possible trade war on the horizon and the effects of the tax cut stimulus showing signs of tapering, what can be expected this year and beyond?
• You can find a copy of Mr. Dismuke’s presentation here

Mayors Panel: Focus on Local Priorities
BDA panel participants included: Moderator Justin Underwood, Director of Federal Policy and Fixed Income Research at Bond Dealers of America and Mayor Steve Benjamin, Columbia, South Carolina and Chairman of the Municipal Bonds for America Coalition.

• Discussed local priorities and challenges faced by mayors in 2019
• The impact of the loss of advance refundings in 2017 to local development
• Discussed the appetite the Trump Administration has on partnering with state and local governments concerning the needs of U.S. infrastructure

Regulatory Panel: Implementation of Recent Disclosure Guidelines
BDA member panel participants included: Don Winton, Chief Operating Officer at Crews & Associates, Inc.

• Discussed the impact of the newly implemented disclosure requirements to the broker/dealer community under the amended SEC Rule 15c2-12
• The panel featured representatives from the SEC, FINRA, and the MSRB, along with the issuer community
• Discussed the idea of improving the timeliness of disclosure of issuers’ financial disclosures and the idea that the SEC should create a “safe harbor” to allow issuers to safely disclose unaudited financial information without fear of enforcement action

Can Technology Save the Municipal Market?
BDA member panel participants included: Gregg Bienstock, President, and Founder at Lumesis.

• The panel discussed the pressure placed on the viability of the municipal market due to diminished cross-sell opportunities and increased regulatory burdens
• The main topic was the smart use of how technology can substantially improve market efficiency and lower costs for all

Technology Panel: Electronic Trading Focus
BDA member panel participants included: Moderator Hardy Manges, Head of Municipal Dealer Sales at MarketAxess.

• The panel discussed the operational benefits of an “all-to-all” solution for market participants in the municipal bond market
• How does market quality improve in an electronic trading environment?
• The panel also addressed the impacts electronic trading advances would have on transparency, liquidity, and spreads in the market

Pricing, “Pennying”, Retail Confirms and Other Process Matters
BDA member panel participants included: Moderator Dan Deaton, Partner, Nixon Peabody, LLP, Johanna Frebes, Senior Vice President and Director of Municipal Securities Compliance at KeyBanc Capital, Gwendolyn Taylor, Chief Compliance Officer, and General Counsel, Stern Brothers and Thomas Meder, Director and Head of Trading, TMC Bonds, ICE.

• Discussed ongoing regulatory policies at the SEC, MSRB, and FINRA
• Heard a summary of the status of ongoing MSRB proposals including the request for comment for guidance on “pennying” and prearranged trading
• MSRB staff discussed the multiple comment letters submitted by the BDA and gave BDA membership further opportunity to respond
• Discussed the outcome of the retail confirms regime and any issues that have occurred since implementation

ESG: Current Status
BDA panel participants included: Moderator Michael Stanton, Head of Strategy and Communications at Build America Mutual.

• Why are municipal bonds and ESG a natural fit?
• A large percentage of municipal bond projects are focused on ESG factors, including mass transit, public hospitals, and public education facilities
• Discussed emerging trends in green bonds and the impact to investors seeking to invest in the municipal market

Diversity and Inclusion: The Future of the Muni Business
BDA panel participants included: Linda Matkowski, Chief Operating Officer, Stern Brothers.

• Discussed the business case for why diversity and inclusion matters for those in the municipal industry
• How ethnic diversity correlates with profitability
• How gender diversity correlates with financial performance
• Companies with more diverse leadership teams report higher revenue
• The panel addressed the challenges that minority and women-owned firms face in the current environment and solutions to overcome the disparity at the table
• You can find a copy of the presentation here

Technology Panel: Fixed Income Data Mining
BDA panel participants included: Timothy Stevens, Chief Financial Officer, President, Chief Operating Officer and Co-Founder at Lumesis and Ken Hoffman, President at DPC DATA.

• Discussed the various corners of the fixed income markets and how data technology is used in their respective workflows
• The panel addressed the acceleration of technological advancements and the collection of big data and why it’s relevant to the fixed income markets
• How is big data is improving efficiency and scalability in the fixed income markets?

Cybersecurity
BDA panel participants included: Moderator Jeffrey Peelen, Partner at Quarles & Brady, LLP.

• Discussed ongoing issues with cybersecurity for BDs, issuers, and borrowers
• The idea of “phishing” was discussed as a major problem going forward and the ability these attacks can have on credit profiles
• FinCEN CDD rules and other regs were debated such as 15c2-12 disclosure requirements
• The presentation can be viewed here

For more information on any of these panel discussions and topics, please contact: Brett Bolton at [email protected] or Justin Underwood at [email protected]

Bond Dealers of America

rcrodriguez

April 1, 2019

Norwalk, CT—April 1, 2019 — The Board of Trustees of the Financial Accounting Foundation (FAF) today announced the search for new chairs of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

Both the current FASB Chairman, Russell G. Golden, and the current GASB Chairman, David A. Vaudt, will conclude their terms on June 30, 2020. To find their successors, the FAF Board of Trustees Appointments Committee is commencing the search for candidates with varied backgrounds and experience from diverse talent pools.

• Ideal candidates for the FASB and the GASB chair positions should possess these critical competencies for success in each role:Commitment and passion for the Board’s mission. This includes an appreciation for the importance of independent standard setting for financial accounting and reporting, concern for the public interest, and an understanding of the varying interests and perspectives of users of financial information, preparers, and auditors of financial reports.
• Strong knowledge and technical competency in financial accounting and reporting.
• Collaborative leadership and communication skills. An inspiring and pragmatic leader will command respect, instill confidence, and help lead organizational change in a consensus-driven organization.

Candidates for both positions should also possess additional skills and experiences relevant to the unique roles. The FASB and GASB Chairs will each serve for a single seven-year term.

More information on the FASB Chair and GASB Chair positions, including applications, can be found here.

For more information on the FAF’s recruitment process, including a brief video about the FASB and GASB Chair searches, visit the FAF website.

The Municipal Market Analytics partner built a database to track issuers’ difficulties, and says the outlook is bleak.

The $3.8 trillion U.S. municipal bond market is home to more than 50,000 individual issuers. That’s almost 10 times the number of corporations that sell debt. Yet muni issuers, which range from a tiny California school district to an economic powerhouse such as New York City, aren’t beholden to the same reporting requirements that companies must follow. Matt Fabian, a partner at Concord, Mass.-based research firm Municipal Market Analytics Inc., scours their often haphazard filings for signs of troubled borrowers. His database tracks events such as issuers dipping into reserves or skipping payments, informing his weekly reports to clients.

This labor-intensive undertaking has yielded surprising insights into where defaults cluster and may offer investors a road map. Fabian, based in Westport, Conn., joined MMA in 2006 after working at a ratings company, bond insurer, and investment bank. Here, he talks about his process, his bleak outlook for the U.S., and the implications for investors.

ROMY VARGHESE: You started your database in 2009, when the Municipal Securities Rulemaking Board rolled out the Electronic Municipal Market Access [EMMA] service for disclosures that could affect the value of bonds. Describe your process.

MATT FABIAN: Every two weeks, we look at every event notice that has been posted to EMMA. Usually there are 2,000 to 3,000 event notices. Any notice that’s not a bond call or rating change, we’ll open and read. To the extent that the PDF file has information about some kind of trouble, we’ll enter that into our database. It takes a couple days. It’s a serious time commitment. The issuers and their attorneys who do these filings don’t necessarily make it easy for you.

We keep one database of unique borrowers that are in trouble and a linked page that has all the Cusips. It’s a combination of hand-punched data fields and data fields extracted from Bloomberg that go to either the borrower tab or Cusip tab.

RV: How large is the database?

MF: We have 2,020 individual borrowers that have filed some sort of trouble since the summer of 2009. There’s just over 20,000 Cusips.

RV: You recently analyzed the data by county level. Did you uncover any surprising trends?

MF: Traditional credit metrics would argue that the weaker the economy in an area, the more likely there will be impairments and defaults. That is true. The thing I didn’t expect was that from the traditional debt analysis, you would think there would be more defaults the more debt outstanding there was in an area. But that’s not true. At least on the county level, the less debt outstanding, the more likely a large portion of that debt is impaired.

RV: You’ve shown that defaults and impairments tend to cluster in metropolitan areas that are smaller and poorer than average. Why is it that entirely rural counties are home to about 5 percent of impaired bonds and account for just 2 percent of all outstanding debt?

MF: To the extent that you’re in an urban area or on the coasts or close to a growth area in the country, there should be more investors willing to support a Plan B. But the more rural the area gets, the more the projects reflect the interests of just one party. So when it fails, that takeout interest is harder to come by. If you finance a jail in rural Texas [in an effort to create jobs and support the local economy], and the jail doesn’t work, there aren’t many other ways to reuse that project. If you’re financing a jail in Manhattan, there would be plenty of alternate buyers willing to refinance that debt and take it over.

RV: Your analysis found that counties in the Midwest and Southeast are home to about 37 percent and 22 percent, respectively, of outstanding bonds that are in default. Excluding bankrupt Puerto Rico, about $19 billion of the $31.8 billion in defaulted and impaired bonds are in those two regions. What does that show?

MF: The kinds of munis that default are often the kinds that are financing economic speculation. And areas in the Southeast and in the Midwest have accounted for more disappointment as far as economic speculation than other areas in the country.

Speculative capital attracts more speculative capital. In the Southeast, where there has been growth, governments and borrowers will be more prone to overborrowing.

RV: Considering that defaults are rarer than in corporate bonds, why should muni bond investors care where they are clustered?

MF: Most muni investors are not looking to profit off of municipal distress, they’re looking to avoid it. Investors should underweight areas most prone to defaults. To reduce your portfolio’s overall exposure to risk, you should be thinking about its regional exposure, how exposed it is to rural as opposed to urban, or the kinds of economies that underlie the bonds even if the sector isn’t explicitly tied to the economy—like a charter school or a senior living project or a hospital. The economic effects from that credit being located in an urban or a rural area are going to be increasingly important in the America of the next few decades.

RV: Do you expect more defaults?

MF: Because our sector is so lumpy, we have so many tiny credits and so many extremely large credits, it’s hard to know. The default data in the database do suggest that the default rates are going to rise in the near term. For the number of bonds coming into the database and staying there, the number of bonds defaulting is too low right now.

RV: Why is it important to keep this database going?

MF: Things are going to get worse. The credit cycle will turn. As the economy softens, we will see the effects in muni credit in real time and we’ll be able to provide context on just how bad it is and where things are likely to go.

RV: Why should people other than muni bond investors care about the trends you’ve unearthed?

MF: It’s one more reason to rethink how we spend our economic development dollars nationwide. And long term, the level of the concern we have for these communities, where speculative financings tend to fail, are areas that are likely going to need more help going forward. It’s part of the long-term America-in-decline trend.

RV: Which is …?

MF: The idea that long-term federal budget deficits combined with slow growth and large legacy spending obligations on the part of the states together mean less money trickling down to the local level. Local governments will be faced with either rolling out increasingly severe austerity in their spending or raising tax rates. Either one will slow the economy further.

RV: And income inequality will worsen.

MF: As local governments are forced to go their own way as federal and state aid is reduced, affluent communities will increasingly outperform poorer communities. Affluent communities are best able to navigate a future where communities are left on their own. And poorer communities are not.

Bloomberg Munis

By Romy Varghese

April 3, 2019, 2:00 AM PDT

Varghese covers state and local finances for Bloomberg News in San Francisco.

• Secured Overnight Financing Rate has made headway with GSEs
• But wider adoption elusive as market awaits term structure

Happy birthday, SOFR. It was one year ago that the Federal Reserve Bank of New York debuted the Secured Overnight Financing Rate, seeking to create a new global benchmark for dollar-based funding and ultimately put the much maligned London interbank offered rate out of its misery.

No one ever said it was going to be easy. Yet few predicted the reference rate’s growing pains would be quite so, well, painful. Two weeks after its introduction, the New York Fed disclosed it made errors calculating the rate. More recently, it’s faced renewed scrutiny amid greater-than-expected volatility, especially around month-end.

That’s not to say it hasn’t had its successes either. Futures and swaps trading continues to gain traction. And some bond issuers have successfully sold securities linked to the rate. But if SOFR is ultimately going to replace Libor, it still has a lot of work to do.

More than anything, market participants remain hesitant to commit resources to SOFR when there’s a chance that Libor’s administrator and the panel banks that determine its setting could keep the old rate alive past 2021, when global regulators intend to sound the death knell for the scandal-plagued benchmark.

For a story looking at various alternatives to Libor, click here.

“The market has done very little to curb or meaningfully slow its exposure to Libor,” said Jonathan Cohn, the head of interest-rate strategy at Credit Suisse Group AG in New York. For clients the transition to SOFR “is one of interest, not yet action.”

Here’s the state of play as SOFR turns one.

What’s Working

• Trading in one- and three-month SOFR futures continues to grow. Aggregate open interest across both contracts was roughly 149,000 as of March 19, before dropping modestly at the end of the month.
• Swaps transactions tied to SOFR had roughly $13.1 billion of notional value in March, according to Swap Data Repository figures. That was almost double the $6.9 billion traded during the entire month of January, itself a record at the time.
• Organizations have been issuing SOFR-linked debt since July, with sales dominated by government-sponsored entities such as Fannie Mae and the Federal Home Loan Banks. Supranational institutions, banks and municipalities have also sold debt tied to the benchmark, with Credit Suisse estimating that offerings to date have totaled around $79 billion.

What’s Holding It Back

• SOFR has shown a tendency to jump at the end of each month since December, when it rose by almost 70 basis points in the second half of the month to finish 2018 at 3 percent. These moves have been spurred by primary dealers pulling back from the market at points when they need to get their balance sheets into shape for regulatory purposes. The rate spiked to 2.65 percent at the end of March, but has since pulled back to 2.46 percent.
• Even though GSEs and financial issuers have started to sell SOFR-linked debt, companies outside the financial-services industry have yet to enter the market. Given that new non-financial corporate bonds tend to price with larger credit premiums, it suggests that greater clarity around SOFR is needed before riskier issuers begin to embrace the rate.
• There is still a lack of clarity from regulators themselves surrounding the transition away from Libor, and hence uncertainty for any potential heir, including SOFR. The Alternative Reference Rates Committee, which has been tasked with developing and implementing SOFR, has released proposals for fallback language that could be included in documentation for Libor-related loans and securities, but final recommendations are still pending.
• Market participants are also awaiting the creation of an indicative term structure, which officials had said would be introduced some time in the first quarter. While there’s no term rate as of yet, the January Federal Open Market Committee meeting minutes showed that New York Fed staff have begun work aimed at publishing a series of backward-looking average rates as a way of supporting benchmark reform. Separately, Fed staff issued a paper in February about inferring term rates from SOFR futures prices.

Bloomberg Markets

By Alex Harris and Allan Lopez

April 2, 2019, 9:01 PM PDT Updated on April 3, 2019, 5:06 AM PDT

WASHINGTON — A U.S. Supreme Court decision handed down last week may have strengthened the Securities and Exchange Commission’s enforcement powers in the municipal market and ramped up the pressure on market participants to be cautious in their disclosure undertakings, legal experts believe.

Bond lawyers said this week that the high court’s 6-2 decision in Lorenzo v. SEC strengthens the SEC’s hand in enforcement actions by broadening the scope of individuals it could charge as “primary” violators under the anti-fraud Rule 10b-5 of the Securities Exchange Act of 1934. The court’s majority opinion held that Francis Lorenzo, a director of investment banking at an SEC-registered brokerage firm was violating subsections of Rule 10b-5 when at the direction of his supervisor he sent two emails containing fraudulent information to prospective investors.

The Supreme Court has previously held that only “makers” of false statements with authority over those claims have primary liability under Rule 10b-5(b), which prohibits making untrue statements of material fact and material omissions. While the case was not a muni case, lawyers said the opinion could allow the SEC to charge a broader group of participants with primary, rather than secondary violations.

“It’s a win for the SEC,” said Stacey Lewis, partner at Pacifica Law Group. “It strengthens the SEC’s hand in enforcement proceedings and being able to bring primary violator actions against a broader group of folks. Even people who were not themselves the maker of the fraudulent statements are now held to be a primary violator of the Rule 10b fraud requirements and so that certainly adds something to the SEC’s hand in enforcement proceedings.”

In its 2011 decision in Janus Capital Grp., v. First Derivative Traders, the Court held that to be a “maker” of a statement under subsection (b) of the rule, “one must have ultimate authority over the statement, including its content and whether and how to communicate it.”

But last week the court found that disseminating false statements can be violations of the other parts of Rule 10b-5, subsections (a) and (c), as well as related provisions of the securities laws. Rule 10b-5(a) makes it unlawful to “employ any device, scheme or artifice to defraud” and 10b-5(c) makes it unlawful to “engage in any act, practice or course of business” that “operates as a fraud or deceit.”

“The Supreme Court did nothing to narrow the exposure of issuers and other municipal parties under the federal securities laws or limit the rights of investors,” said Paul Maco, a partner at Bracewell in Washington, D.C.

The SEC has historically brought secondary violations against others involved in fraudulent conduct, so Lewis said she doesn’t think the decision has behavioral implications among muni market participants who are already conscious of anti-fraud requirements. Rather than pursuing a particular individual on secondary fraud violations, the SEC now has a stronger card to play when going after somebody with a primary cause, Lewis said.

“It certainly kind of tilts the playing field slightly in that regard,” Lewis said. “If anything, it’s a win for the SEC and strengthens their hand.”

Emails forwarded from Lorenzo’s boss described a potential investment in a company with confirmed assets of $10 million. However, Lorenzo knew before sending the emails to investors that the company recently disclosed that its total assets were worth less than $400,000. Lower courts found that Lorenzo acted with knowledge of wrongdoing, and he did not appeal that scienter finding. That makes it harder for participants to know what the standard would be when it comes to passing down information, lawyers said. Lewis said she’d be interested to know what that standard would be.

“I do think it gives pause to folks who are really just following the fact pattern of forwarding on information that they have concern about,” Lewis said. “That’s probably the takeaway.”

Frederic Weber, of counsel at Norton Rose Fulbright, noted it was a case dealing with an intent to deceive and that it did not address a knowing standard.

“One might worry about whether if the person who passed on the information did not know it was false, but might have been reckless in not checking it,” Weber said. “Could they have the same liability even if they were not a maker of the statement?”

For example, Weber asked, if a broker hasn’t checked information for a file on EMMA, but sends it to a retail investor and the information turned out to be wrong, would the broker have liability under Rule 10b-5 for not having taken any steps to check it? He said that he believes it wouldn’t but that the decision didn’t address the question.

However, overall, the decision won’t have an impact on the course of disclosure in the municipal securities market, Weber said.

“The decision is limited to passing on information that’s known to be materially false or misleading,” Weber said.

Stakeholders like underwriters already have a duty to not only not pass on information they know to be false or misleading, but also have a duty to make a reasonable investigation to confirm that the key representations are not false or misleading, if they’re underwriting a primary offering, Weber said.

Lawyers and municipal advisors have a duty under Municipal Securities Rulemaking Board rules and ethical codes of conduct to speak up if they know of a material misstatement or misleading omission in an offering document.

“So I don’t think the decisions should be expected to have any real impact on the course of conduct in primary offerings,” Weber said. “It could in secondary market transactions.”

Under MSRB time of trade disclosure requirements, brokers are required to give customers known or readily accessible material facts that are supposed to be forwarded to customers, so there would be a violation of MSRB rules if that’s not done, Weber said.

“As a result of the decision, if brokers know that the information they are passing on to customers, for example an issuer’s EMMA filing, is materially incorrect or misleading, they now might be subject to an enforcement action for violating the anti-fraud provisions,” Weber said.

Another impact could be that issuers might view the decision as another case where the SEC is bringing an enforcement action against somebody for a document containing a material misstatement. As the SEC and MSRB are encouraging more frequent disclosure to the market by issuers, this could make them more reluctant, Weber said.

“It makes issuers even more reluctant to make voluntary interim disclosure without some form of comfort from the SEC that they won’t be held liable if it turns out to have errors in it,” Weber said.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 04/03/19 11:07 AM EDT

Keith Borge of the College of New Rochelle agreed to a partial settlement over allegations he misstated assets.

The Securities and Exchange Commission announced charges against the former controller of the College of New Rochelle, Keith Borge, alleging he defrauded municipal securities investors by concealing the college’s poor financial condition.

Investigators said Borge created false financial records, did not file payroll tax submissions, and did not assess the collectability of pledged donations that were unlikely to be received as donors became frustrated with the college’s operations.

Investigators said Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Borge for violating antifraud provisions of federal securities laws.

Borge agreed to a partial settlement of the SEC charges. He pleaded guilty to one count of failing to pay over federal payroll taxes and one count of securities fraud in White Plains federal court.

“Financial difficulties are no excuse for engaging in accounting misconduct and concealing critical information from investors,” LeeAnn Ghazil Gaunt, the chief of the SEC enforcement division’s public finance abuse unit, said in a statement.

The SEC did not charge the College of New Rochelle, citing the school’s extensive cooperation and remediation.

Under Borge’s partial settlement, monetary sanctions were still to be determined. The partial settlement was subject to court approval.

Prosecutors also alleged Borge also defrauded the City of New Rochelle Industrial Development Agency by providing false and misleading statements in the college’s financial statements. The development agency issued $35.7 million in bonds to pay for the renovation of campus facilities, including the library and administration building.

The scandal at the college was exposed in 2016 after $31 million in debts were discovered after Borge retired.

Borge had worked at the college since 1979. He faces up to 20 years in prison.

cfo.com

by William Sprouse

March 29, 2019

“Financial difficulties are no excuse for engaging in accounting misconduct and concealing critical information from investors,” said the SEC’s LeeAnn Ghazil Gaunt.

The Securities and Exchange Commission said Thursday that it has charged the former controller of a New York-based not-for-profit college with defrauding municipal securities investors by concealing the college’s deteriorating finances.

According to the complaint, Keith Borge made numerous fraudulent misrepresentations and omissions regarding the financial condition of the College of New Rochelle to the investing public in its fiscal year 2015 audited financial statements.

The cumulative impact of Borge’s misconduct was significant: he prepared the college’s FY 2015 financial statements that falsely reported some $25 million in net assets, when actual net assets were in the red by about $8.8 million — an overstatement of roughly $33.8 million, the complaint states.

“Like many small private colleges prior to 2013, the college came under considerable financial stress as student enrollment declined and tuition revenues decreased, leading to chronic cash flow issues,” the complaint states.

Starting as early as 2013, Borge improperly withdrew funds designated for the college’s endowment to fund various operational expenses at the college.

The college is expected to cease operations in August 2019 as a result of its financial difficulties.

Borge created false financial records, failed to file payroll tax submissions as well as to assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations, according to the SEC.
Borge also falsely certified the accuracy of the college’s financial statements.

The financial statements were published by Borge to an online repository in connection with the college’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds.

“Financial difficulties are no excuse for engaging in accounting misconduct and concealing critical information from investors,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit, in a statement.

“Municipal bond investors, including those in the secondary market, depend on the accuracy of financial statements, and the SEC will hold accountable those who take steps to mislead the investing public,” added Marc Berger, director of SEC’s New York Regional Office.

The SEC’s complaint, filed in federal district court in Manhattan, charges Borge with violating, and aiding and abetting violations of, the antifraud provisions of the federal securities laws.

Borge agreed to a partial settlement that would permanently enjoin him from future misconduct, with potential monetary sanctions to be determined at a later date. The partial settlement is subject to court approval.

ThinkAdvisor

By Melanie Waddell | March 28, 2019 at 07:36 PM

The settlement over securities fraud allegations requires a monitor for the town’s securities disclosures, but allows it to continue, which works in the town’s favor, experts said.

Oyster Bay’s proposed settlement with the Securities and Exchange Commission in a lawsuit accusing it of fraud related to concessionaire loan guarantees allows the town to keep borrowing, municipal finance experts said.

The town board last month agreed to settle the case and is looking to move on, officials said. The settlement must still be approved by a judge.

“They got a good deal in [the] settlement that allows the town to go forward, and the SEC got its case out there,” Christine Chung, co-director of the Institute for Financial Market Regulation at Albany Law School, said. “You only litigate if you think the SEC can’t prove it or if you think you’ll get a better deal.”

The federal agency responsible for overseeing securities markets sued Oyster Bay and former Town Supervisor John Venditto in November 2017, alleging securities fraud over the town’s failure to disclose disputed indirect loan guarantees to concessionaire Harendra Singh in its bond offering documents and making misleading statements about those guarantees when the town disclosed them. The lawsuit noted that Venditto invoked his Fifth Amendment right against self-incrimination when he was interviewed by SEC attorneys. The SEC and federal prosecutors alleged the town backed about $20 million in loans to creditors on behalf of Singh.

The SEC had sought an unspecified fine and a court-appointed overseer for five years with the power to block the town’s borrowing. The proposed settlement imposed no fine and a court-appointed consultant is to have a limited advisory role for three years.

“The settlement doesn’t reflect a weakness [in the SEC’s case],” Chung said. “It just reflects sort of the reality of what’s the better outcome.”

A court-appointed overseer that could have blocked borrowing would have been a credit risk for the town.

“Had Oyster Bay been restricted from issuing notes or had there been any problems in doing so, this would have been a very major risk for them,” Moody’s Investors Service analyst Douglas Goldmacher said. “It could have made it more difficult for them to carry out their regular functions as a municipality.”

The agreed-to court-appointed consultant in an advisory role and making recommendations could be a positive, Goldmacher said.

“An extra set of eyes to go through and make sure that all the disclosure is properly in order definitely cannot hurt and has the potential to help,” he said.

Town Attorney Joseph Nocella said the town settled after “the parties finally came to an agreement that both could live with.”

In a Feb. 21 memo, Nocella said the consultant would increase investor confidence in the town’s bonds, which would “only further enhance the town’s already improving bond rating.”

Goldmacher said Moody’s is “quite comfortable where the rating is currently” at Baa3, its lowest investment grade rating.

The town has spent more than $5 million on legal fees related to the concessions investigations and civil lawsuits brought by the SEC and Singh’s creditors since 2015.

While the legal fees are more than several recent fines that the SEC obtained against municipal bond issuers — in 2016, the city of Miami agreed to a $1 million SEC fine, and in 2017, the Port Authority of New York and New Jersey agreed to pay $400,000 to settle a bond disclosure cases — a fine and a consultant who could halt borrowing would have had market consequences.

“They could have a drag on their ability to access markets on favorable terms going forward more so than the one time payment of legal fees,” Chung said.

Before the SEC filed its lawsuit, the town tried to stave off any enforcement action, arguing in 2017 to the commission that the town couldn’t have disclosed some of the loan guarantees because it hadn’t known about them, claiming all but one had been concealed by a single rogue deputy town attorney.

That argument fell with the testimony of former Town Attorney Leonard Genova last year during the federal corruption trial against Venditto and former Nassau County Executive Edward Mangano and his wife, Linda. Venditto was acquitted on corruption-related charges in that trial while a mistrial was declared in the Mangano case.

Mangano was convicted of conspiracy to commit federal program bribery, federal program bribery, conspiracy to commit honest services wire fraud, honest services wire fraud and conspiracy to obstruct justice in a second trial earlier this year. Linda Mangano was found guilty of conspiracy to obstruct justice, obstruction of justice and two counts of lying to the FBI.

The first indirect loan guarantee to Singh’s creditors in 2010 for a $1.5 million line of credit, which town officials have said was legitimate, wasn’t disclosed in bond offerings.

Genova, who received immunity from criminal prosecution in return for his testimony, testified some of the disclosures were intentionally misleading.

“We had access to the information,” Genova testified last year, referring to bond disclosures in 2015, after the FBI had started investigating the transactions with Singh. “We chose not to include it at that point.”

Genova testified that a 2012 bond document “was not accurate, and it did omit a material fact … liabilities with the loans that were backed for Mr. Singh.”

The town’s settlement doesn’t include Venditto.

“Mr. Venditto maintains he didn’t do anything wrong in the civil realm just like the criminal realm,” Venditto’s attorney Marc Agnifilo said. His client was “essentially a victim of this fraud,” he said.

“If the SEC will agree to something like that [the settlement with the town] and agree he doesn’t have to pay any money, there’s the possibility we’d settle the civil case,” Agnifilo said.

newsday.com

By Ted Phillips

March 26, 2019 6:00 AM

New York, NY, February 19, 2019 – SIFMA today issued two new model placement agent engagement agreements, along with related commentary. One of the agreements covers conduit bonds and the second covers non-conduit bonds.

“These new agreements add to SIFMA’s suite of model and master agreements that aid our member firms and others in the marketplace by reducing compliance risk and legal costs and increasing regulatory certainty,” said Leslie Norwood, managing director, associate general counsel and co-head of SIFMA’s Municipal Division.

The two new agreements are intended for use by brokers, dealers, and municipal securities dealers acting as a placement agent. Federal securities laws require a broker dealer to have an adequate and reasonable basis for recommending a security to an investor. Use of these agreements will assist broker dealers in ensuring their compliance with federal securities laws.

WASHINGTON — The Municipal Securities Rulemaking Board has filed rule changes with the Securities and Exchange Commission, which would require underwriters to provide more information about new offerings of bonds and eliminate the need for dealer financial advisors to provide the official statements to the underwriter.

On Thursday, the MSRB filed rule changes to G-11, on primary offering practices, and G-32, on disclosures in connection with primary offerings, after a two-year review process. The new amendments would ultimately increase transparency and equal access to information, the MSRB said.

“Engagement with our stakeholders has been an integral part of our retrospective review of MSRB rules related to primary offering practices,” said MSRB Chair Gary Hall. “As a result of the feedback we have received over the past several years, we believe the proposed enhancements will increase transparency and promote the fair dissemination of information.”

The MSRB published the draft amendments after a broader request for comment on primary offering practices, and received feedback from market participants in September 2018.

If approved by the SEC, the new amendments to Rule G-32 will require additional data about new issue bonds to be included on Form G-32 and would auto-populate data from the New Issuer Information Dissemination Service (NIIDS) onto that form.

The NIIDS system, developed by the Depository Trust Company at the Securities Industry and Financial Markets Association’s request, collects information about a new muni issue from underwriters or their representatives in an electronic format and then makes that data immediately available to vendors that provide such information to market participants.

Form G-32 is submitted to the MSRB by underwriters and provides information about a new issuance, such as the underwriting spread, maturity date, initial offering price, minimum denomination, and more.

Some market groups said that the underwriter that submits the initial NIIDS data should have no obligation to update that information over the life of the bonds, in 2018 comment letters.

MSRB will ask for dealers to provide the minimum denomination of a new issue and to indicate yes or no on whether a minimum denomination is subject to change.

In his 2018 comment letter, Mike Nicholas, CEO of Bond Dealers of America, said his group supported a yes/no indicator for changing minimum denominations.

The MSRB will also require data on names of additional managers and municipal advisors in a deal. Currently, the data only shows syndicate managers.

However, Nicholas in 2018 wrote that the BDA objected to identifying the municipal advisors, saying the information is obtainable from the final OS.

“The BDA objects to this data field,” Nicholas wrote in 2018. “The information is obtainable from the final official statement and does not represent valuable information in the secondary market trading of municipal securities.”

The final proposal also dropped a subsection in Rule-32 that said a dealer financial advisor that prepares an OS would have to deliver it to the managing or sole underwriter after the issuer approves it for distribution.

A new amendment in Rule G-11 would align the time frame for the payment of group net sales credits (sales credits for orders in which all syndicate members benefit according to their participation in the account) with the payment of net designation sales credits. Both would then be paid within 10 calendar days after the date the issuer delivers securities to the syndicate.

Currently, group net sales credits are paid out of the syndicate account when it settles, meaning some syndicate members must wait 30 days following the receipt of the securities before they receive the credits. In contrast, sales credits due to a syndicate member as designated by a customer in connection with the purchase of securities (net designated orders) are supposed to be distributed within 10 calendar days after the date the issuer delivers the securities to the syndicate.

The MSRB began its formal retrospective rule review in early 2012 and in October 2018, it said it would continue its review into 2019.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 03/21/19 02:26 PM EDT

This Advisory summarizes guidance that the SEC staff has provided to date in public forums regarding the recent Rule 15c2-12 amendments.

Read the Advisory.

The Municipal Analysts Bulletin, Vol. 29, No. 1, is available by clicking here.

The penalty stems Wells Fargo Securities’s disclosure failures associated with a municipal bond offering it underwrote to finance startup video game company 38 Studios.

A federal court has ordered Wells Fargo Securities to pay more than $800,000 in civil penalties for disclosure failures associated with a municipal bond offering it underwrote to finance startup video game company 38 Studios. The relevant announcement was made by the United States Securities and Exchange Commission (SEC) earlier today.

The Securities and Exchange Commission charged Wells Fargo in 2016.

According to the SEC’s complaint filed in federal district court in Providence, the Rhode Island Economic Development Corporation (RIEDC), aka the Rhode Island Commerce Corporation, loaned $50 million in bond proceeds to 38 Studios. Remaining proceeds were used to pay related bond offering expenses and establish a reserve fund and a capitalized interest fund. The bond offering document produced by the RIEDC and Wells Fargo failed to disclose to investors that 38 Studios had conveyed it needed at least $75 million in funding to produce a particular video game.

Therefore, investors were not fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing. When 38 Studios was later unable to obtain additional financing, the video game did not materialize and the company defaulted on the loan.

The SEC’s complaint alleged, among other things, that Wells Fargo, which served as the placement agent for the 38 Studios bond offering, failed to disclose that the project being financed by the bonds, the development of a video game, could not be completed with the financing the bonds would provide. The SEC also alleged that the defendants did not disclose that even with the proceeds of the loan financed by the 38 Studios Bonds, 38 Studios faced a known shortfall in funding. Further, the SEC alleged that Wells Fargo and its lead banker on the deal, Peter M. Cannava, failed to disclose to bond purchasers that Wells Fargo was receiving additional compensation from 38 Studios, totaling $400,000, that was directly tied to the issuance of the municipal bonds.

The final judgment against Wells Fargo, entered on March 20, 2019 by the Honorable John J. McConnell, Jr. in federal court in Rhode Island, enjoins Wells Fargo from violating provisions of the federal securities laws that require disclosure of material information and fair dealing in municipal bond transactions, specifically Section 17(a)(2) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rule G-17 promulgated by the Municipal Securities Rulemaking Board. Wells Fargo is also ordered to pay a $812,500 civil penalty.

Wells Fargo consented to the entry of the judgment without admitting or denying the allegations.

The SEC’s litigation against Cannava continues.

financefeeds.com

by Maria Nikolova

March 20, 2019

PROVIDENCE, R.I. — Wells Fargo Securities has agreed to pay an $800,000 civil penalty to settle a U.S. Securities and Exchange Commission lawsuit over Rhode Island’s failed $75 million deal with former Boston Red Sox pitcher Curt Schilling’s video game company.

Wells Fargo and the SEC announced the proposed settlement in filings Monday with the U.S. District Court in Providence. A federal judge must approve it.

According to details of the agreement, Wells Fargo does not admit or deny wrongdoing. If approved, the company would be permanently barred by the judge from violating certain municipal securities and other laws.

A Wells Fargo spokeswoman said she would not comment because the matter is still pending and has not yet been approved.

The case represents the final legal battle over 38 Studios.

Schilling struck a deal in 2010 to move his company from Massachusetts to Rhode Island in exchange for a $75 million loan guarantee. The state’s economic development agency used bonds to fund the deal. Less than two years after the move, 38 Studios ran out of money and went bankrupt.

The SEC sued Wells Fargo and Rhode Island’s economic development agency in 2016, accusing them of making misleading statements about the bonds.

It said they failed to disclose that 38 Studios needed at least $75 million but would receive only $50 million of proceeds from the offering, leaving a gap of $25 million. It also said Wells Fargo represented 38 Studios while also representing the state economic development agency as bond placement agent, something it failed to disclose.

The economic development agency previously settled the case, paying a $50,000 penalty without admitting wrongdoing.

Claims against a Wells Fargo employee are still pending. A message was left with his lawyer.

In a separate lawsuit in state court, Rhode Island sued several people and companies involved in the deal. It received about $61 million in settlements in that case, which ended in 2017.

By The Associated Press

March 19, 2019

Washington, D.C. – March 21, 2019—The Bond Dealers of America today announced it has formed a working relationship with Michael Decker, former co-head of the Municipal Securities Division at SIFMA, to broaden and deepen the BDA’s overall fixed income advocacy and representation of member firms. Michael will strategically focus on federal regulatory and legislative issues as well as market practice issues specific to the U.S. fixed income markets. Michael was a co-founder of the Regional Bond Dealers Association in 2008, along with Mike Nicholas, before departing back to SIFMA in 2009 to co-head SIFMA’s municipal securities division.

“Over the past ten years, the BDA has expanded from 14 to 70 member firms, has become the “Main Street” thought leader on market structure, and continues to establish itself as the predominant, effective advocate for dealers active in the US fixed income markets. I’ve worked with Michael since our days at the Public Securities Association in the mid 1990s and I’m confident that this working relationship will immediately provide the BDA more depth, experience and know-how across markets, while enhancing the BDA’s DC and industry presence, and resulting in the BDA being more tangibly beneficial to all member firms whether bank or independent, taxable or municipal, retail or institutional focused. Michael will be an excellent complement to the work currently being led by BDA staff” said Mike Nicholas, CEO, Bond Dealers of America.

The addition of Michael also allows the BDA to deepen the Capitol Hill roles for Kelli McMorrow, Brett Bolton and Justin Underwood. This, in turn, will broaden the BDA’s Washington, DC presence, resulting in more impactful advocacy for BDA member firms.

“I’m thrilled to be working with BDA again. They are a strong and influential organization, as indicated by their membership growth and their impact on fixed income policy over the past ten years. I look forward to working with BDA’s members and staff to promote public policies that will make the US bond markets better for all participants,” Michael Decker said.

“Speaking for the BDA Board, we are excited to work with Michael Decker. Michael’s experience and industry knowledge will expand and enhance the BDA’s focus, resulting in stronger overall advocacy,” stated Angelique David, BDA Board Chair, Chief Operating Officer and General Counsel of Ziegler.

Bond Dealers of America

March 21, 2019

In less than three weeks, Norman voters will consider three propositions on the ballot at the April 2 Special Election, which, if passed, will authorize three city ordinances that dictate how voter-approved funds will be spent.

The first two propositions are a transportation bond and a stormwater bond, and the third is a stormwater utility, which would be established as an enterprise fund that only allows collected fees to be used for stormwater needs.

There are several categories of bonds under the Oklahoma Constitution available to municipalities, each of which has specific guidelines for allowed use. The city worked with its bond counsel to develop the two separate general obligation bonds authorized by Oklahoma bond laws.

“The authorization and issuance of general obligation bonds by a city are governed by specific provisions set forth in the Oklahoma Constitution and related Oklahoma statutes,” said Nathan Ellis, of the Public Finance Law Group, PLLC. “Propositions, or what appears on the ballot, are limited by State of Oklahoma election law to 200 words or less. After including the required technical language, there is little room for more than a general statement of purpose. However, all of the detail within the ordinance is incorporated as a matter of law.”

The ordinances for the transportation and stormwater bonds list specific projects for which voters would be approving funds and direct the city on where to spend any excess funds.

The proposed transportation bond, or Proposition 1, which would fund needed transportation infrastructure projects, is authorized under the Oklahoma Constitution Article X, Section 27 — “indebtedness for purchase, construction or repair of public utilities.” It is a $72 million bond and is limited to the purpose of constructing, reconstructing, improving or repairing streets or bridges.

The Bond Issue Proceeds Act, Title 62, Oklahoma Statutes Section 571 et seq., requires that the city state the general purpose of the bond issue and further identify specific projects for which at least 70 percent of the bond proceeds shall be expended. The city specifically described the 19 transportation projects, outlined in Ordinance O-1819-25 of the city, which represent 100 percent of the bond proceeds; remaining funds, if any, after completion of all of the specific projects will be used for other projects in the city’s comprehensive transportation plan.

The proposed stormwater bond, or Proposition 2, which would fund critical stormwater infrastructure projects, is a $60 million bond authorized under the Oklahoma Constitution Article X, Section 35 — “Municipal and county levy for securing and developing industry” — as further governed by the provisions of the Municipal and County Economic and Community Development Bonds Act found in Title 62, Oklahoma Statutes Section 801 et seq.

The act allows cities to call bond elections for a “qualified economic or community development purpose.” Public infrastructure facilities, including specifically stormwater projects, are defined as having a qualified economic or community development purpose.

Although it was not possible to list all of the specific projects and adhere to the word limit, the city did, in its Ordinance O-1819-26, further specify that the purpose of the bonds is “to include, constructing, improving and equipping stormwater drainage facilities.” In this ordinance, the city listed the 33 specific stormwater projects that will be completed with the bond proceeds so the public will know exactly how the funds will be spent.

Moreover, should funds remain after the stormwater projects are complete, the ordinance states that any surplus funds shall be utilized to complete other projects identified in the Storm Water Master Plan. The SWMP was completed in 2009 and contains only stormwater projects.

“It is certainly true that the city could use the same act to ask the citizens to authorize indebtedness for a variety of other projects,” Interim City Attorney Kathryn Walker said. “However, that is not the case here, and the language in the ordinance clearly does not contemplate or allow for the use of the bond proceeds for anything that is not a stormwater project identified either in the provided list or in the SWMP.”

Additionally, because the two bonds up for election April 2 are authorized under separate constitutional provisions, Proposition 1 does not impact Proposition 2’s borrowing capacity and vice versa. Also, while a cap on the interest rate percentage must be set in the bond ordinances, these are not the expected interest rates.

For example the not-to-exceed interest rate defined for Proposition 1 is 10 percent per year. However, Finance Director Anthony Francisco said bids for municipal bonds are competitive and based on current market rates.

“By statute, we cannot exceed 10 percent for transportation bonds or 14 percent for community development bonds, but based on current market conditions and the city’s AA rating, we expect to be way below that, somewhere in the 4 to 3.5 percent range,” Francisco said. “In my time here, when market rates were higher we’ve had some bonds at 6 percent, but certainly nothing close to 10 percent.”

Voters can read the ballot language and see the ordinances, as well as other information, at VisionForNorman.com.

The Norman Transcript

Mar 18, 2019

FINRA is providing these Frequently Asked Questions about its 529 Plan Share Class Initiative (the “Initiative”) in response to a number of inquiries it has received from firms and trade associations. In order to allow firms sufficient time to consider the additional information provided here and to provide firms more time to review their supervisory systems and procedures with respect to 529 plan sales, FINRA is extending the due dates set forth in Regulatory Notice 19-04.  New due dates: Participating firms must provide FINRA Enforcement notice of their self-report by April 30, 2019, and then must confirm their eligibility by submitting the additional information specified in Regulatory Notice 19-04 by May 31, 2019.

1. Is FINRA asking firms to review all of their 529 plan sales and to identify unsuitable transactions?

No. Firms that choose to participate in the Initiative should review how they have supervised sales of 529 plan shares since January 2013. Firms should assess for such matters as: whether their procedures require that appropriate supervisory personnel review share class suitability and obtain the information necessary to do so; whether they actually conducted reviews for share class suitability; and whether the firm provided training to its registered representatives so that they could make suitable recommendations. For example, FINRA has observed firms that: were unable to review 529 plan transactions for suitability because they failed to keep records of those transactions1 or failed to capture information relevant to the suitability determination, such as the age of the beneficiary and the number of years until the funds are needed for the beneficiary’s qualified education expenses; failed to have a process or procedures in place to review 529 transactions for suitability; or failed to provide training or guidance to registered representatives regarding 529 share classes and the factors to consider, such as beneficiary age. These are the types of issues that firms participating in the Initiative might review.

If a firm reviews its supervisory systems and procedures and concludes that they were reasonably designed and implemented, that is the end of the assessment. There is nothing more to do. A firm might choose to test some transactions according to risk-based criteria as part of its review concerning the reasonableness of its supervision, but that is not required. FINRA is encouraging firms to undertake a qualitative review, not a quantitative analysis.

If, however, a firm discovers that there was a weakness in its systems, procedures or training, so that the firm concludes that it may not have had a supervisory system reasonably designed to achieve compliance with its suitability obligations, then the firm should self-report to take advantage of the Initiative. FINRA will then discuss with the firm how the firm has responded or plans to respond to the issue, including different ways to assess impact on customers. Assessing customer impact is likely to require firms to review transactions, but FINRA would work with firms to identify an appropriate, risk-based way to analyze transactions.

2. Do all firms have to conduct this assessment? Is my firm required to participate?

No. This is a voluntary program.

3. Will a firm that chooses not to participate incur a penalty or an increased sanction should FINRA find violations in this area post-Initiative?

There is no penalty for choosing not to participate. If FINRA later determines that a firm that did not participate in the Initiative failed to reasonably supervise 529 plan sales, it will evaluate that matter in the ordinary course based on the facts and circumstances presented. The firm would not be eligible for an automatic fine waiver. However, FINRA will not increase the sanctions that it otherwise would have imposed solely because the firm did not participate in the Initiative.

4. What concerns prompted FINRA to create this Initiative?

In several ongoing examinations and investigations, FINRA found deficiencies in firms’ supervision of 529 plan recommendations. For example, FINRA found that firms did not:

• keep records of 529 plan transactions and were therefore unable to review those transactions for suitability;
• capture information relevant to the suitability determination, including the age of the beneficiary and the number of years until the funds are needed to pay for the beneficiary’s qualified education expenses;
• have a process or procedures in place to review 529 transactions for suitability; or
• provide training or guidance to registered representatives regarding 529 share classes and the factors to consider, such as beneficiary age.

FINRA has also observed some firms that have reasonably designed supervisory systems for 529 plan recommendations, so this has not been a uniform issue across the industry. However, given the number of firms that have had issues, FINRA determined that many member firms could quickly address weaknesses in their supervision and return money to harmed customers if FINRA were to identify this compliance issue promptly, offer firms the opportunity to voluntarily report potential supervisory deficiencies, and work collaboratively with firms to fix any supervisory deficiencies and remediate affected customers.

5. What is the benefit of participating in the Initiative?

A firm that participates in the Initiative will avoid any fine that FINRA might otherwise impose in an Enforcement action concerning the firm’s failure to supervise the suitability of 529 plan share class recommendations. In addition, a firm that participates in this Initiative will have the benefit of a discussion with FINRA about the steps it plans to take to remediate its supervisory failures and pay restitution to customers. FINRA believes dialogue is an important part of this process, and is centralizing and coordinating its responses to best provide consistent feedback to participants in the Initiative. FINRA staff working on this Initiative may be able to provide the firm with guidance or observations to help the firm achieve compliance and make harmed customers whole in a manner that is fair and efficient. As a result of information that FINRA learns through these discussions, it may also identify additional information or guidance that would be helpful for the industry.

6. Can a firm participate in the Initiative and not face formal disciplinary action?

Yes. It is possible that, as a result of participating in the Initiative, a firm could receive a cautionary action, or FINRA could close the matter with no action. As with every case, FINRA will consider a number of factors in making this determination, such as the impact of the misconduct, the scope, the timeframe and the cause of the supervisory failure.

7. Does FINRA take the position that certain 529 plan share classes are per se unsuitable? For example, does FINRA believe that Class C shares are inappropriate for 529 plans because 529 plans are long-term investments?

MSRB rules and guidance do not take the position that there is a per se inappropriate share class.2 The obligation to recommend a suitable share class under MSRB rules requires a case-by-case analysis, and there may be circumstances in which a recommendation to purchase Class C shares is suitable in light of the customer’s facts and circumstances. This underscores how important it is for representatives to know each customer’s unique needs and understand the impact of 529 share classes, and for firms to train representatives and supervise their recommendations of 529 plan share classes.

8. Is FINRA establishing a new rule about the suitability of 529 plan share classes through the Initiative?

No. A representative’s obligation to recommend a suitable share class when recommending a 529 plan transaction is well established, as is a firm’s obligation to supervise such recommendations.3 This Initiative does not change that, nor does it mandate that a broker or a firm recommend a specific share class under certain circumstances. Rather, the Initiative encourages firms to review information about a potential risk – the risk that their supervision may not be reasonable – and work with FINRA to address any deficiencies efficiently and promptly. In return for this effort, FINRA would waive the fine it might otherwise impose.

9. Does FINRA expect firms’ supervision of 529 plan share classes to be perfect? Can a firm determine that it has a reasonable supervisory system even if it identifies one or two isolated transactions that might be problematic?

FINRA and MSRB rules require that a firm establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable laws and regulations, including suitability rules. In addition, firms are required to establish, maintain and enforce written supervisory procedures that are reasonably designed to achieve compliance with those rules. The Initiative encourages firms to qualitatively assess whether their supervisory systems and procedures were reasonably designed and enforced. As described in question 1 above, FINRA is not asking firms to review all of their 529 transactions in order to participate in the Initiative. If, however, a firm knows of a specific unsuitable transaction, it should reasonably respond to such a “red flag” in the normal course of its supervision of its registered representative.

10. What if a firm identifies a potential supervisory deficiency related to its sale of 529 plan shares but determines that there was no resulting customer harm; should the firm still self-report?

FINRA would encourage the firm to participate in the Initiative under those circumstances. After self-reporting, the firm can discuss with FINRA how it has changed its supervisory system to address the problem, and FINRA may be able to provide the firm with additional guidance or observations to help the firm achieve compliance. While that is a clear benefit of self-reporting, some firms may be concerned that the self-report would also trigger a formal Enforcement action. But not all self-reports will necessarily result in formal disciplinary action. (See question 6 above.) Under these circumstances, FINRA would consider the lack of customer harm when determining an appropriate outcome and may, based on the facts and circumstances, determine that the matter should be resolved informally or with no further action.

11. If firms identify concerns about the reasonableness of their 529 plan supervisory systems that are unrelated to the share class recommended, should firms self-report these concerns?

This Initiative only encompasses potential deficiencies with respect to firms’ supervision of 529 plan share class recommendations. Firms are encouraged to immediately correct any additional supervisory deficiencies detected during their self-evaluation and to report those deficiencies under FINRA Rule 4530 if required by that rule. See Reg. Notice 19-04, fn. 14.

12. If a firm identifies a potential issue in its supervision but has not concluded that its overall supervision was unreasonable, can it participate in the Initiative?

Yes. FINRA encourages firms to self-report potential supervisory issues, so that FINRA staff and the firm can discuss the potential issue and whether it requires remediation. If it does require remediation, the firm will be eligible for a fine waiver if applicable. If it does not, no additional steps will be necessary.

13. If FINRA examiners previously reviewed a firm’s supervision of 529 plan sales and did not recommend formal action, should the firm still conduct this self-assessment?

Firms are not required to participate in the Initiative; it is voluntary. A firm might consider a previous exam, or a previous internal audit or other analysis, and decide that based on the information the firm has, it will not perform any additional review. There is no penalty for that decision.

But there may be reasons that the firm decides that a new review could still be helpful. It may be, for example, that FINRA’s review was limited to a particular aspect of the firm’s supervision, or FINRA’s consideration of 529 plan supervision might have been part of a larger, thematic review of the firm’s supervisory system and therefore wasn’t focused on 529 plan supervision. Alternatively, it may be that the firm’s process for supervising 529 plans has changed or that the firm’s sale of 529 plan shares has grown exponentially, but the firm failed to adjust its supervisory system accordingly. If the firm self-reports those issues as part of the Initiative, it will avoid any fine that might otherwise have resulted.

14. If a firm participates in the Initiative, must it also file a report pursuant to FINRA Rule 4530?

Not necessarily. Rule 4530 requires a firm to self-report if it concludes, or reasonably should conclude, that it violated the securities laws if the conduct has widespread or potential widespread impact to the firm, its customers or the markets, or if conduct arises from a material failure of the firm’s systems, policies or practices involving numerous customers, multiple errors or significant dollar amounts. In contrast, firms can participate in the Initiative when their conduct does not meet the criteria set forth in Rule 4530.

15. Should firms document their self-assessment under the Initiative?

Firms do not have to document their review. Indeed, as noted, firms may choose not to conduct any review at all. If, however, a firm chooses to conduct a review, it is a good practice to document that review, and may assist the firm in responding to questions from FINRA in any future exams and investigations.

16. Regulatory Notice 19-04 advises firms to provide certain information regarding their 529 plan share class supervision for the period January 2013 through June 2018 (the “disclosure period”). When calculating customer harm, should firms use that same period?

As a first step, firms choosing to participate in the Initiative need only determine whether there was a potential supervisory violation; they need not calculate customer harm. After the self-reporting due date of April 30, FINRA will confer with self-reporting firms on an acceptable methodology and period for calculating restitution. Our focus will be on the firm’s customers who paid more in fees than they would have if they purchased a different share class during that relevant time period.

17. Why did FINRA select a 5 1/2 year time-period (from January 2013 through June 2018) for this Initiative? What should firms who improved their supervisory system during the disclosure period do with respect to this Initiative?

FINRA sought to select a period that is fair for investors who might have been affected by any supervisory failures, but not so broad that reviewing the supervisory system becomes onerous. To the extent that a firm conducts a review and determines that its 529 plan supervision may not have been reasonably designed and implemented at any point before or during the disclosure period, we encourage that firm to self-report pursuant to the Initiative so that FINRA and the firm can have a dialogue about the firm’s remediation, whether there was customer impact, and, if so, how to address it.

18. Can a firm receive an extension of the April 30 self-reporting deadline?

Yes. Firms that cannot complete their supervisory review before the new April 30 deadline may request an extension by emailing [email protected]. Firms may also request an extension of time to provide FINRA the additional information due by May 31, 2019.

______________________________________

1. Some matters concerning 529 supervisory failures may also include related violations of securities laws and rules, such as failure to retain required books and records. Where such violations are considered to be integrally related to the firm’s supervisory failures, FINRA Enforcement would recommend including such violations in a no-fine settlement pursuant to the Initiative.

2. See, e.g., MSRB Rules G-19, on suitability of recommendations and transactions and G-17, on conduct of municipal securities and municipal advisory activities; MSRB Interpretation on Customer Obligations Related to Marketing of 529 College Savings Plans (Aug 7, 2006).

3. FINRA and the MSRB repeatedly have stated that firms and their representatives must select a share class tailored to the customer’s investment profile, both in the context of mutual fund shares generally and with respect to 529 plan shares in particular. See, e.g., NASD Regulatory & Compliance Alert (Summer 2000); MSRB Interpretation on Customer Obligations Related to Marketing of 529 College Savings Plans (Aug. 2006); and MSRB Fair Practice Notice, Application of Fair Practice and Advertising Rules to Municipal Fund Securities (May 2002). In particular, the MSRB has stated that information known about the designated beneficiary generally would be relevant in weighing the investment objectives of the customer, including information regarding the age of the beneficiary and the number of years until the funds will be needed to pay qualified education expenses of the beneficiary. See MSRB Interpretation on Customer Obligations Related to Marketing of 529 College Savings Plans (Aug 7, 2006). For more than a decade, FINRA and the SEC have brought enforcement actions against broker-dealers who failed to reasonably supervise representatives’ sales of 529 plan shares. See, e.g., In re 1st Global Capital Corp., SEC Rel. No. 34-54754 (Nov. 15, 2006); MetLife Securities, Inc., AWC No. EAF0401020003 (Nov. 6, 2006); and American Express Financial Advisors Inc., AWC No. EAF0400340002 (Sept. 20, 2005).

SUMMARY

SIFMA responded to MSRB Notice 2019-01 in which the MSRB is requesting comment on draft interpretive guidance on application of MSRB rules and prior interpretive guidance to certain prearranged trading in connection with primary offerings of municipal securities.

SIFMA and its members reiterates its call for the MSRB to withdraw the Notice, or otherwise defer proceeding on any related guidance or rulemaking until the SEC concludes its enforcement activity in this area.

Read the SIFMA Comment Letter.

After consultation with various members and committees, the BDA has submitted a comment letter in response to the MSRB request for comment on draft interpretive guidance concerning the application of MSRB rules and prior interpretive guidance to certain prearranged trading in connection with primary offerings of municipal securities.

The comment letter can be viewed here.

The BDA letter focuses on the following points:

• Opposition to the extension of issuer restrictions to non-syndicate dealers; and
• The belief that the Guidance should focus on the misrepresentation by a syndicate member as the violation of Rule G-17; and
• The belief that the MSRB should be very clear about the kind of evidence that would establish a violation of G-17; and
• The MSRB should be more precise about the timing of events set forth in the scenarios.

Background

Specifically, the draft interpretive guidance illustrates how MSRB Rule G-11, on primary offering practices, Rule G-17, on the conduct of municipal securities and municipal advisory activities, and other rules and existing interpretive guidance related to certain prearranged trading of primary offerings. The draft guidance would remind dealers of MSRB requirements and how prearranged trading may violate those requirements.

Additional Information

In the summer of 2018 the BDA, at the request of the MSRB, responded to an inquiry on the topic of prearranged trading. The response can be view here.

Bond Dealers of America

March 11, 2019

It’s healthy and transparent for Kroll to make the rare objection to a Morningstar credit rating.

Who watches the watchers?

The age-old question is littered throughout political and economic thought, as well as popular culture, from the graphic novel “Watchmen” to episodes of “Star Trek” and “The Simpsons.” It’s typically asked as a prompt for pondering how to provide a check to those in power.

In the bond market, the major credit-rating companies are the gatekeepers. Corporations, governments and structured products must pass muster with them to receive more favorable treatment from investors (or get access to funding at all). The competition for business is intense: S&P Global Ratings, Moody’s Investors Service and Fitch Ratings are the “Big Three,” with other firms vying for a smaller share. Still, it’s rare for any of them to publicly acknowledge one another, let alone question a rival’s grades. Usually that’s left to money managers, who like to say their in-house analysts are ahead of the game.

That’s why it came as such a surprise that Kroll Bond Rating Agency directly criticized Morningstar Credit Ratings’ grades on a commercial mortgage bond last week. From Bloomberg News’s Adam Tempkin:

A bond that Morningstar graded is backed by property loans which only have to suffer losses of 4.5 percent before a group of investment-grade noteholders potentially lose money, according to Kroll. Most deals have a bigger cushion now, usually above 5 percent, for the securities rated a step above junk at BBB-.

In a report on Thursday, Eric Thompson, senior managing director of the real estate group at Kroll, called Morningstar’s ratings a “head scratcher.”
…

“For Morningstar to come out with this now doesn’t bode well for the broader credit rating agency space,” Thompson said in a phone interview. “It’s important for the market that rating agencies maintain their discipline, particularly at the late point where we are in the credit cycle.”

That sort of commentary is stunning because it just doesn’t happen. I’ll give you an example. A few years ago, I wrote about how S&P was winning market share over Moody’s in the U.S. municipal-bond market, and how some strategists were concerned it was because a methodology change boosted many ratings. Here was S&P’s response, which is more or less what you’d expect to hear:

“Whether someone decides to use one rating or another, we don’t control that,” said Jeff Previdi, one of the primary analysts on the criteria change for S&P. “What we do control is our analytics. We’re going to be measured on our opinions as to how they perform over time, so you can be certain that we’re going to be very careful and informed.”

It’s hard to argue with that. For the largest credit raters, which trace their roots back more than a century, you can understand why the short-term benefit of lowering standards to win more business might not outweigh the longer-term ramifications of their grades not holding up. After all, no history of the financial crisis seems complete without questioning how these companies could have possibly awarded their top scores to subprime mortgage investments, even if the reality is more complicated.

It’s important to note that Kroll isn’t just saying that this commercial mortgage deal is one bad rating, but rather that it’s a red flag for industry practices as a whole. The pool, titled MSC 2019-L2, had a BBB- rating from Morningstar, the lowest investment grade, while Fitch considered it BB-, three steps lower. As Tempkin noted, Morningstar had avoided rating these specific kinds of mortgage bonds, known as “conduit deals,” for two years, before updating its methodology in November. Such changes are by no means nefarious, of course — it would arguably be more alarming if they always remained static — as long as they’re done based on sound analysis.

Kurt Pollem, the head of CMBS ratings and analytics at Morningstar, said the firm was comfortable with its ratings, providing a similar answer as S&P gave me almost five years ago.

“This pool of loans is of lower leverage, and has better metrics than other pools,” Pollem said. “Our methodology is transparent and calibrated off a data set of 80,000 loans through history. Our view is different than other rating agencies, and the market welcomes diverse credit opinions.”

Investors should also welcome this type of back-and-forth between competing companies. It’s too soon to say whether Kroll’s critique is justified, given its inherent self-interest, but any sort of self-policing among the “watchers” nonetheless feels more noteworthy than a similar rebuke from a strategist or fund manager.

For better or worse, the incentive structure within the credit-rating business tends to tilt toward higher grades — issuers pay for them, so they’ll seek out the best ones. But if the agencies can agree on lines they won’t cross, or at least call each other out from time to time, that only enhances their overall credibility and could help prevent any missteps in the future.

Bloomberg Opinion

By Brian Chappatta

March 12, 2019, 2:00 AM PDT

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

Follow @BChappatta on Twitter

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

February 27, 2019 is the compliance date for newly adopted Securities and Exchange Commission (the “SEC”) amendments to Rule 15c2-12, adding two new event notices. The event notices are aimed at prompting timely, continuing disclosures by issuers and other obligated persons of direct purchases, direct loans or bank placements and other private placements. Along with the new event notices, the amendments define “financial obligation” to capture debt obligations of issuers that are not municipal securities for which a final official statement has been provided to the Municipal Security Rulemaking Board’s electronic portal, the Electronic Municipal Market Access (“EMMA”) system.

Read the Hunton Andrews Kurth Client Alert.

Read an update on the MSRB’s Compliance Advisory Group, newly available compliance resources, an FAQ on dealers’ obligations related to SMMPs and more in the latest Compliance Corner.

The government finance officer often goes unnoticed, but in many situations is the unsung hero. Government finance officers serve their organizations by managing day-to-day accounting operations, balancing the budget, establishing financial policies and behind-the-scene roles that improve their communities. For the first time, GFOA would like to publicly recognize these influencers through a new “GFOA Hero” program.

Read more

Read the request for research.

When numbers are big, little things can add up. That’s why Philadelphia says that price-fixing by seven Wall Street banks has cost states and municipalities billions of dollars — and why the city says it was unaware of the scam until whistle-blower Johan Rosenberg came forward. Philadelphia’s charges are echoed in suits filed by the whistle-blower on behalf of California, Illinois, Massachusetts and New York. The banks are contesting the whistle-blower’s charges. The suits, over what are known as variable-rate demand obligations, or VRDOs, represent the biggest legal challenge to the generally staid municipal bond market in over a decade.

1. What are VRDOs?

Long-term bonds issued by states and municipalities whose interest rate resets on a monthly, weekly or sometimes even daily basis.

2. What’s their appeal?

For borrowers like Philadelphia, VRDOs combine long-term maturities of as much as 30 years with short-term interest rates, which are generally lower. For the investors who buy them, VRDOs have a selling point that sets them aside from other kinds of municipal bonds: they come with a “put,’’ that is, a promise by the issuers who sell them that they’ll buy them back if an investor wants out. That limits their risk if, for instance, yields fall when a VRDO rate is rest.

3. Then who bears the risk?

Ultimately, the issuers. VRDOs carry bank liquidity facilities, such as letters of credit or a standby purchase agreement, although remarketing agents usually take bonds that are put back into inventory for resale. VRDOs that are put back to the issuer are presented to the bank providing the liquidity, and become so-called bank bonds, their payment accelerated so that those bonds maturing in 30 years become due in four or five years, with the municipality making quarterly payments.

4. What do the lawsuits say?

That to avoid having investors put the bonds back, the banks set their interest rates a little bit higher than market conditions would have otherwise justified. And that to avoid having borrowers switch to a bank offering a lower rate, they conspired to keep rates in line with each other. According to one of the suits filed by the whistle-blower, the banks “engaged in a coordinated ‘Robo-Resetting’ scheme where they mechanically set the rates en masse without any consideration of the individual characteristics of the bonds, the associated market conditions or investor demand.”

5. How does the whistle-blower know about this?

According to the suits, Rosenberg became suspicious that the remarketing agents were “working in coordinated fashion” and resetting VRDO interest rates “on an algorithmic or some other mechanical basis.” He confirmed these suspicions by performing a forensic analysis of interest rates and other market data.

6. Is there other evidence to back up these claims?

Philadelphia’s lawsuit says there is. It says that emails and other communications exist showing bank officials sharing information about VRDO rate-setting. And it cites an analysis of the VRDO market by Rosenberg showing banks may have set interest rates higher than was warranted.

7. How much would that add up to?

The total size of the outstanding VRDO market has been estimated at $150 billion. An additional 25 basis points on that much debt could have cost borrowers billions of dollars, although the Philadelphia lawsuit doesn’t specify how much and merely asks that the amount be determined at trial. The series of whistle-blower qui tam suits seeks at least $3.6 billion in damages.

8. What do the banks say?

Philadelphia is suing seven banks who acted as remarketing agents for $1.6 billion in VRDOs. They are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., RBC Capital Markets LLC and Barclays Plc. Philadelphia is also seeking class status for other states and municipalities that sold VRDOs. So far, the banks have declined to comment on the Philadelphia suit and have asked that the qui tam whistleblower lawsuits be dismissed, although in Illinois, a judge decided that the matter must proceed to trial. The other lawsuits are making their way through the system.

9. What else might happen?

The Philadelphia lawsuit says that both the Securities and Exchange Commission and the Department of Justice are conducting investigations into the whistle-blower’s allegations.

The Reference Shelf

• A primer on VRDOs by Morgan Stanley.
• The case filings in Philadelphia’s lawsuit. is City of Philadelphia v. Bank of America Corp., 1:19-cv-01608, U.S. District Court, Southern District of New York (Manhattan).
• The Encyclopedia of Municipal Bonds, by Joe Mysak (Bloomberg Press/Wiley) 2012.

Bloomberg Quicktake

By Joe Mysak

March 8, 2019, 8:11 AM PST

• Whistle-blower is Minnesota bond adviser with checkered past
• Johan Rosenberg was involved but never charged in past cases

In 2015, Johan Rosenberg was granted U.S. Patent No. 8,935,181 on an unusual invention: software that he claimed could ferret out Wall Street chicanery.

With the help of MuniPriceTracker, Rosenberg combed through thousands of deals in the vast U.S. municipal-bond market.

Now, after working for years under a cloak of anonymity, Rosenberg has finally stepped forward — and put his name to some startling allegations. He says 16 banks colluded to set the interest rates artificially high on a certain kind of municipal debt, potentially profiting at taxpayers’ expense.

The claims are all the more remarkable because they’re coming from Rosenberg, 52, whose former muni advisory firm in Minnesota had its own brush with trouble.

Three false-claims lawsuits, in Illinois, Massachusetts, and California, are demanding $3.6 billion in damages. They were filed by an entity called Edelweiss Fund LLC, which was revealed Friday for the first time to be Rosenberg. He stands to get millions of dollars if he wins the suits. The Bond Buyer was first to identify him. Rosenberg confirmed to Bloomberg News that he is behind the litigation.

Continue reading.

Bloomberg Markets

By Amanda Albright

March 8, 2019, 7:24 AM PST

Following an August 2018 rule change by the Securities and Exchange Commission, municipal issuers, conduit borrowers and other “obligated persons” will be required to file an event notice with EMMA for the incurrence of certain material “financial obligations” and for certain defaults, accelerations and other events related to financial obligations. The rule applies only to continuing disclosure undertakings for new bond issues that close on or after February 27, 2019, and does not change existing continuing disclosure undertakings.

This post will discuss compliance methods for municipal issuers, borrowers and other “obligated persons” (referred to in this post as “issuers”). For more details about the rule changes, see Impact of Rule 15c2-12 Amendments.

Why will compliance be different than it is now for the existing list of “material” events?

The existing list of 14 events requiring an event notice filing is primarily comprised of two groups: (1) events that reflect financial challenges or other extremely rare events (such as payment defaults, insolvency, or credit substitutions) and (2) events that are relatively frequent, but are likely to involve outside advisors and professionals such as a financial advisor, bond counsel or a trustee (e.g., rating changes or bond calls). New Event 16 falls within group (1) and likely (2) above because it relates to certain events under the terms of a financial obligation that reflect financial difficulties.

By contrast, new Event 15, which generally requires notice for the incurrence of a material financial obligation, material agreement or amendment to covenants, or certain guarantees, is not likely to fall within the two groups above. Accordingly, the practical responsibility for identifying circumstances that might require a notice will largely rest with the issuer’s internal staff. Once those circumstances are identified by the issuer’s staff, then the issuer’s financial advisor, disclosure counsel or bond counsel should be available to assist with determining whether an instrument or agreement is a “financial obligation” or “material” and preparing the requisite filings.

What can my organization do to comply with the new Event 15?

We understand that every issuer is different. Some issuers have large finance teams managing multiple credits and complex enterprise systems, other issuers have only one or two staff members and may only infrequently issue bonds, and many fall somewhere in the middle.

It will be important for each issuer to consider how to best promote compliance with the new event notice requirements within the context of its particular circumstances. Because an event notice will be required to be filed within 10 business days after the incurrence of a new material financial obligation or a material amendment to an existing financial obligation, many of the recommendations below are intended to identify those financial obligations before they are signed by the issuer.

Issuers should consider the following steps:

• Understand the requirements.  Ask your bond counsel, financial advisor and underwriter about the changes when bonds are issued and a new continuing disclosure undertaking is signed. Make sure that you understand what types of new or existing leases, bank loans, agreements or other obligations your organization needs to monitor to promote compliance. It may be that you only need to monitor limited materials or information.
• Identify the right people.  Most (if not all) of the agreements that would require an event notice filing under the new financial obligation rules are likely to cross the desk of at least one of the following:              —  Finance Director/CFO/Treasurer
  –  Internal Attorney/General Counsel
  –  Clerk or Corporate Secretary
• Internal training.  It’s important that the above-listed individuals within your organization are educated on what might constitute a material “financial obligation” so that a decision can be made either internally or in consultation with external advisors whether an event notice needs to be filed. The more individuals who are trained on identifying financial obligations, the greater likelihood of compliance with the new requirements.
• Governing body approvals. For most governmental issuers and nonprofit borrowers, agreements likely to trigger an EMMA filing requirement will be presented to a governing body or board for approval prior to execution. Review the processes already in place for agenda items that could be updated to include consideration of the new events.
• Pick a point person. Identify one person within your organization to receive the initial “call” from an individual who identifies a potential financial obligation. For most organizations, the point person will naturally be the staff member who manages bond financings and continuing disclosure, typically the finance director, chief financial officer or treasurer. This central individual will, in consultation with counsel and other advisors, decide whether an event notice will be filed. Centralizing this process will promote consistency across the organization in the application of legal analyses and centralize compliance information for future official statement disclosures about continuing disclosure compliance.
• Next steps. If the appropriate group of internal professionals is identified and trained on the new requirements and considers the new requirements as part of their regular review of contracts and other arrangements, compliance with the new requirements should be relatively straightforward. Those individuals will identify potential material “financial obligations,” report them to the point person, and the point person will reach out as needed to counsel or other advisors to conduct the proper analysis and file any necessary event notices.
• What about record-keeping? It’s good practice to keep a record of your processes and conclusions, particularly if an issuer determines a financial obligation is not material or that an agreement is not a “financial obligation.” However, it is our view that the most important activity is conducting an analysis in furtherance of compliance efforts and not necessarily keeping a record of every single conclusion or analysis. Issuers and their counsel and advisors should be skeptical of committing to prepare or preparing a list of “financial obligations” for an underwriter’s records.

What else might be changing?

We expect that there will be additional due diligence by underwriters and disclosure counsel in connection with new financings, whether in the form of questionnaires or discussions. We think this can be done practically and reasonably without unnecessary busywork for the issuer’s staff.

Note for competitive sale issuers

Issuers that regularly utilize a competitive process or public sale for their bond issues should be aware that prospective underwriters may inquire about compliance with these new requirements (once effective for your organization). There is typically a short timeline between the posting of the notice of sale/POS and the date of the sale, sometimes as short as one week. Accordingly, issuers should work with their finance team in advance of posting the notice of sale in order to demonstrate or describe compliance to potential bidders quickly and efficiently. We cannot be sure prospective bidders would decline to bid if the issuer does not have compliance evidence available prior to the date of the public sale, but until established practice is developed in the public sale market, it is a good idea to discuss with your finance team early in the financing process.

by Colleen R. Duncan | Feb 26, 2019

Gilmore Bell

The recent amendments to SEC Rule 15c2-12 (the “Rule”), which must be incorporated into continuing disclosure undertakings effective on or after February 27, 2019, have caused municipal underwriting firms to review existing due diligence processes and procedures. In this post, we provide a proposed approach to due diligence for the new aspects of the Rule that we believe would satisfy underwriters’ obligations under federal securities laws. We think a reasonable approach will, consistent with the SEC’s purposes, promote increased disclosure of and about “financial obligations,” without adding unnecessary costs and burdens to municipal issuers.

Some municipal market groups have suggested that issuers create and maintain lists of material financial obligations to promote compliance with the new event notice requirements. While we believe these lists may be helpful to certain issuers, particularly certain large issuers, we do not believe underwriters need to require issuers to maintain lists solely for the purpose of satisfying underwriters’ due diligence responsibilities, for the reasons discussed below.

For background on the recent amendments to the Rule, see the following:

Continue reading.

by William D. Burns, Richard M. Wright, Jr. | Feb 19, 2019

Gilmore Bell

Today, February 26, 2019, the MSRB established the effective date for amendments to MSRB Rule G-21, on advertising by brokers, dealers and municipal securities dealers, and new MSRB Rule G-40, on advertising by municipal advisors (the “advertising rules”), and established new interpretive guidance to the rules on the use of social media.

The MSRB also amended the advertising rules regarding the application of supervisory pre-approval requirements to interactive advertising content. The new effective date is August 23rd, 2019.

Thanks to continued efforts from membership, BDA proposals were adopted by the MSRB.

The notice can be read here.

MSRB Adopts BDA Position

In a September comment letter, the BDA stated in reference to Draft FAQ 11 that, “It believes that record-keeping and record retention rules should apply to posts by third parties on an associated person’s personal social networking page only in extremely limited circumstances.” The MSRB agreed with this sentiment and added further guidance and clarification.

The FAQ’s provide guidance regarding when a post by a customer, a municipal entity client or another third party (collectively, a “third-party post”) on a regulated entity’s social media page may be considered advertising under the advertising rules. Further, the new guidance lays out differences on how an associated person’s personal social networking page activity may be deemed “advertising.”

The MSRB also worked to draw the distinction between interactive and static websites as requested by the BDA. The present amendments to the advertising rules now address interactive content that is an advertisement.

Background

In May, the SEC approved the MSRB’s proposed Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities, despite opposition from almost all broker-dealer groups. Both new Rule G-40 and amendments to G-21 were initially set to be effective on February 7, 2019, however the date was extended in early 2019.

In September, the BDA submitted a comment letter to the MSRB concerning the Request for Comment on Draft Frequently Asked Questions Regarding Use of Social Media under MSRB Advertising Rules. The final comment letter can be viewed here.

Bond Dealers of America

February 27, 2019

The new initiative promises standard settlements for qualifying self-reported violations.

On January 28, 2019, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 19-04 announcing its 529 Plan Share Class Initiative (Initiative) to encourage member firms to self-report potential rules violations involving 529 plan recommendations. The Initiative follows the model of prior self-reporting initiatives undertaken by the Securities and Exchange Commission (SEC), including the 2014 Municipalities Continuing Disclosure Cooperation Initiative and the 2018 Share Class Selection Disclosure Initiative, and is the latest step in furtherance of FINRA360, a program that aims to increase the organization’s efficiency and transparency. In announcing the Initiative, FINRA noted its concern that members’ supervisory functions had a blind spot on 529 plans. The Initiative aims to remedy that blind spot by offering settlements of restitution and censure but no fine for qualifying self-reported violations.

Please see full Alert for more information.

by John Sikora Jr. & Stephen Wink

March 1, 2019

Latham & Watkins LLP

Read the Guide.

Butler Snow LLP | Feb. 25

Read the Client Alert.

Hunton Andrews Kurth LLP

March 4 2019

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual Fact Book that highlights key market trends and statistics for 2018. Last year, the par amount of municipal securities traded increased 3.7% to $3.09 trillion and trades rose 2.9% to 10.2 million—up from 9.89 million in 2017 and the highest since 2013.

“Trading of municipal securities rose significantly in 2018,” said MSRB Director of Research Marcelo Vieira. “We saw the number of securities traded daily in the secondary market increase from an average of about 14,000 in 2017 to 15,500 last year, in line with the increase in the number of transactions in the municipal securities market.”

The MSRB’s annual Fact Book includes comprehensive and historical statistics on municipal market trading, primary market and continuing disclosures, among other data, and provides municipal market participants, policymakers, regulators, academics and others with historical statistics that can be further analyzed to identify market trends and activity.

One highlight in terms of historical data is a decline in the number of financial and event disclosures received by the MSRB through its Electronic Municipal Market Access (EMMA®) website, where issuers of municipal bonds submit financial and other ongoing disclosure documents about events affecting a bond. In 2018, the number of total financial and event disclosures the MSRB received decreased 9.8% to approximately 147,000 disclosures—the lowest since 2012. Event disclosures, including bond calls, defeasance and rating changes, accounted for most of the decline. In total, event disclosures decreased 16.7% to 50,722 in 2018 from 60,883 in 2017. Financial disclosures decreased 5.6% to approximately 97,000 and is the lowest since 2013

The 2018 Fact Book includes monthly, quarterly and yearly aggregate market information from 2014 to 2018, and covers different types of municipal issues, trades and interest rate resets. All data in the Fact Book are based on information submitted to the MSRB by municipal securities dealers, issuers and those acting on their behalf. Some of the data in the Fact Book can be accessed digitally on EMMA, which allows users to view trading and new issuance statistics for different date ranges, types of trades and securities. Daily and historical summaries of trade data based on security type, size, sector, maturity, source of repayment and coupon type can be found in EMMA’s Market Statistics section.

To protect investors and other market participants, the MSRB promotes market transparency and access to real-time, municipal market bond information by collecting and publicly disseminating information through EMMA and other market transparency systems.

Date: February 19, 2019

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

As a reminder, the new amendments to Rule 15c2-12 of the Securities Exchange Act (the “Rule”) take effect on February 27, 2019. The amendment, summarized in Increased Transparency to Continuing Disclosure Requirements, will change the reporting requirements for issuers (and conduit borrowers) under their continuing disclosure agreements for bonds issued on and after February 27, 2019.

The following two new requirements related to “financial obligations,” including private placements and bank loans, were added to the Rule (the Amendment):

• Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material.
• Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.

Additionally, the definition of “financial obligation” was added to the Rule to mean a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule.

We recommend that you stay in touch with your counsel to discuss how the new requirements may affect your continuing disclosure obligations.

McCarter & English, LLP

by Sarah Smith

February 20, 2019

On January 22, 2019, FINRA released its 2019 Annual Risk Monitoring and Examination Priorities Letter (the “Priorities Letter”). Late last year, as part of FINRA360 – the organization’s ongoing improvement initiative – FINRA announced its plans to consolidate its Examination and Risk Monitoring Programs, integrating three separate departments into a uniform program. As reflected in the title of the Priorities Letter, FINRA’s priorities apply to both its examination program and its risk monitoring responsibilities.

In past years, FINRA’s priorities consistently focused on areas such as suitability, outside business activities, private securities transactions, private placements, communications with the public, anti-money laundering (“AML”), best execution, fraud, market manipulation, net capital requirements, customer protection, trade and order reporting, recordkeeping, risk management, and supervision. This year, with respect to sales practice risks, FINRA emphasized that it will continue to review and monitor firms’ customer suitability reviews, protection of senior investors, and controls relating to outside business activities and private securities transactions. FINRA will also continue to prioritize market and financial risk areas relating to best execution practices; manipulative trading activities; compliance with Exchange Act Rule 15c3-5 risk management controls; short sales and short tender activities; and credit risk and liquidity.

Notably this year, FINRA has highlighted five emerging areas of concern, which we focus on in this alert: (1) online distribution platforms; (2) supervision of digital assets business; (3) compliance with FinCEN’s Customer Due Diligence Rule; (4) fixed-income mark-up and mark-down disclosure obligations; and (5) regulatory technology.

Online Distribution Platforms

The first highlighted item in the Priorities Letter pertains to securities offered through websites, which are described as “online distribution platforms.” These types of securities offerings most commonly facilitate capital raising efforts under Rule 506(c) of Regulation D and Regulation A of the Securities Act of 1933. FINRA has observed that broker-dealers are increasingly involved in the distribution of securities through online platforms, raising concerns that firms are not complying with FINRA rules in the process. While FINRA has identified varying degrees of broker-dealer participation in such platforms – ranging from limited involvement of broker-dealers performing narrow functions such as custody, escrow, or back-office duties to full participation by broker-dealers that own and operate platforms – any firm participation in these activities will be subject to enhanced regulatory review. If a firm is associated with selling, recommending, or facilitating the sale of securities through an online platform, FINRA may evaluate how the firm:

• Conducts reasonable-basis and customer-specific suitability analyses for clients investing in online offerings. Depending upon the particular offering, a member firm may be required to demonstrate that it evaluated each investor’s risk profile, tolerance, investment history, and goals.
• Ensures compliance with AML obligations. In accordance with the particular facts and circumstances of each offering, a member firm should obtain appropriate information regarding the investors and sources of investment funds and determine how the transactions – both individually and in aggregate for the entire deal – will be reviewed.
• Evaluates the risks associated with offering documents and communications with the public. Given the widespread circulation of marketing materials targeting potential investors for participation in these offerings, a member firm should ensure that each offering meets FINRA’s advertising regulation standards of being fair, balanced, and not misleading. This includes the disclosures contained in the offering materials, which may not include false or misleading statements, or omit material information.
• Addresses the risk of sales to non-accredited investors, specifically for offerings under Rule 506(c) of Regulation D. Given the variance in size, structure, and requirements of these offerings, guaranteeing participation by only “accredited” investors is essential. A firm should apply a risk-based approach when verifying that each investor qualifies as accredited (and thus allowed to participate in such offerings).
• Assesses the risk of excessive or undisclosed compensation arrangements between firms and issuers, specifically for offerings under Regulation A. A member firm should ensure that prospective investors have access to all the appropriate information regarding the offerings in which the firm participates, including where and how the funds are allocated.

Supervision of Digital Assets Business

Firms participating in activities related to digital assets are now a key priority for FINRA. The digital assets business encompasses cryptocurrencies, virtual coins, tokens, and any other use of distributed ledger or blockchain technology. In prior years, FINRA expressed concerns regarding the potential for harm to investors in the cryptocurrency and initial coin offering (“ICO”) spaces. This year, FINRA has broadened its focus to the entire digital assets sector. As part of its efforts, on July 6, 2018, FINRA issued Regulatory Notice 18-20 which encouraged firms to notify FINRA if they plan to engage in activities related to digital assets. Firms are asked to notify FINRA of their involvement by July 31, 2019, during which time broker-dealers may find themselves subject to this year’s examinations. In addition to complying with FINRA’s request for information, member firms must ensure that their involvement in the digital assets business complies with FINRA Rules, including those regarding custody, sale, valuation, and AML.

Customer Due Diligence and Suspicious Activity Reviews

This year, FINRA will concentrate on assessing firms’ compliance with the Financial Crimes Enforcement Network’s (“FinCEN”) final rule on Customer Due Diligence Requirements for Financial Institutions (the “CDD Rule”). The CDD Rule adds a “fifth pillar” to the Bank Secrecy Act (“BSA”) and is intended to both clarify customer due diligence requirements for covered financial institutions[i] and strengthen their ability to detect, prevent, and report illicit activities. The CDD Rule codifies and expands upon existing BSA/AML requirements by explicitly requiring covered financial institutions to: (i) identify and verify the identities of the beneficial owners of legal entity customers; (ii) understand the nature and purpose of customer relationships in order to develop customer risk profiles; and (iii) conduct ongoing monitoring for suspicious transactions and, on a risk-basis, maintain and update customer information.[ii]

Previously, the BSA required covered financial institutions to develop written AML compliance programs that, at a minimum, consisted of the following four pillars: (i) a system of internal controls to ensure ongoing BSA/AML compliance; (ii) independent testing for compliance; (iii) a designated person or persons responsible for implementing and monitoring the operations and internal controls of the AML program; and (iv) ongoing training for appropriate persons. Consistent with these requirements, FINRA adopted Rule 3310 (formerly NASD Rule 3011) requiring all member firms to maintain AML programs and procedures that satisfy the four pillars of the BSA, as well as put in place policies and procedures that can reasonably be expected to detect and cause the reporting of suspicious transactions. Because the CDD Rule requires firms to maintain appropriate risk-based procedures for conducting ongoing customer due diligence as a required “fifth pillar” for adequate AML compliance programs, FINRA is considering whether FINRA Rule 3310 should be amended to more closely align with FinCEN’s CDD Rule.[iii]

FinCEN implemented the CDD Rule on May 11, 2016, and it became effective on July 11, 2016.[iv] Covered financial institutions had until May 11, 2018 to comply with the new provisions. Prior to May 11, 2018, under the BSA, covered financial institutions were required to create customer identification programs that included procedures to conduct due diligence on both individuals and legal entities opening new accounts. However, firms were not explicitly required to perform customer due diligence on the beneficial owners of legal entity customers. Now, incorporated into the fifth pillar of the BSA, the CDD Rule requires firms to maintain written AML procedures that are reasonably designed to identify and verify the identity of any individual who owns 25 percent or more of a legal entity customer, and at least one individual who controls the legal entity (i.e. the legal entity customer must identify its ultimate beneficial owner or owners and not “nominees” or “straw men.”).[v]

With respect to the CDD Rule, FINRA indicated in its Priorities Letter that it will concentrate on the “data integrity [of a firm’s] suspicious activity monitoring systems, as well as the decisions associated with changes to those systems.” Because FinCEN allowed firms a lengthy two-year period to comply with the CDD Rule, most firms should already have in place systems that incorporate these new customer due diligence obligations. Nonetheless, some best practices for firms seeking to ensure compliance with the CDD Rule include the following:

• Confirm that all AML written supervisory policies and procedures are properly updated to incorporate CDD Rule obligations. The procedures should detail individual responsibilities in connection with the CDD Rule, including what party or parties will review and approve changes to a customer’s risk profile. Procedures should also address instances in which the firm has obtained insufficient or inaccurate customer information.
• Conduct ongoing training for compliance professionals on new CDD requirements, including how to properly: (1) gather required customer information; (2) verify and record beneficial owners of legal entity customers; (3) conduct appropriate ongoing risk profiling; and (4) perform periodic customer reviews.
• Confirm that all internal and outsourced technologies used to perform ongoing customer due diligence are CDD Rule-compliant.
• Verify that customer due diligence reporting data is up-to-date and accurate.
• Confirm that customer risk profile information and collected beneficial ownership information is verified, recorded, and incorporated into AML compliance screening programs, and being used in connection with suspicious activity reporting.
• Check that current programs and procedures require the collection of beneficial ownership information for existing clients that open new accounts.
• Review all recordkeeping procedures for customer risk profiles, and beneficial ownership identification and verification information.
• Periodically conduct a sampling of new accounts opened and review customer data for compliance with the CDD Rule.

Fixed Income Mark-ups/Mark-downs on Trade Confirmations

Another focal point for FINRA’s examination and risk monitoring programs this year will be firms’ compliance with mark-up and mark-down disclosure obligations on fixed-income transactions with customers, pursuant to last year’s coordinated amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15 (Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers). Taken together, the amendments require member firms to provide retail customers with additional transaction-related information for certain trades in corporate, agency and municipal debt securities. Firms were previously required to disclose transaction cost information when acting as principal with customers for only equity trades, pursuant to Securities and Exchange Act Rule 10b-10. The amendments added comparable requirements for bond trades.

In its December 2018 Report on FINRA Examination Findings, FINRA noted certain critical failings in some member firms’ implementation of changes required under FINRA Rule 2232 and MSRB Rule G-15 as amended. FINRA has included mark-up and mark-down disclosure obligations under revised Rule 2232 in the “Highlighted Items” section of its 2019 Priorities Letter. FINRA’s repeated emphasis on firms’ compliance with mark-up and mark-down disclosure obligations indicates that this is a significant area of concern that FINRA exam teams will scrutinize in the coming year.

FINRA Rule 2232 as amended requires member firms to disclose to retail customers the amount of mark-up or mark-down the customer paid for a purchase or sale in a corporate or agency debt security,[vi] if the member firm also executes one or more offsetting principal trades in the same security on the same trading day in an aggregate trading size meeting or exceeding the size of the trade with the customer.[vii] Mark-ups must be disclosed both as a total dollar amount for the transaction and as a percentage of the prevailing market price (“PMP”) for the security – to be calculated pursuant to FINRA Rule 2121 (Fair Prices and Commissions). Rule 2232 also now requires customer confirmations to contain the time of execution of the trade and a security-specific link (with CUSIP) to the FINRA or MSRB website, where the customer can find additional details about the transaction.[viii]

For disclosure purposes, firms must “look through” to offsetting principal trades exercised by affiliate broker-dealers if those trades did not occur at arm’s-length, and disclose the mark-up associated with those trades. While the amendments to FINRA Rule 2232 contain new disclosure obligations, there are two exceptions: i) member firms need not disclose mark-ups for principal trades executed on a functionally separate trading desk from the one that executes the customer trades (as long as the firm’s policies and procedures are designed to ensure that the functionally separate trading desk has no knowledge of the customer trades); and ii) mark-up disclosure is not required for bonds that a member firm obtained in a fixed-price offering and subsequently sold to a retail customer at the same offering price on the same day.

Takeaways and potential pitfalls for member firms seeking to comply with FINRA Rule 2232 are as follows:

• FINRA Rule 2121 defines PMP presumptively as the contemporaneous cost incurred by the dealer when purchasing the debt security. When contemporaneous cost is not indicative of PMP, however, Rule 2121 sets forth nuanced waterfall provisions dictating the manner in which PMP must be calculated. Member firms using third-party vendors or automated systems to perform such waterfall analyses must have a reasonable basis to believe that the resulting PMP calculations are correct. The ultimate responsibility for calculating PMP and disclosing mark-ups in compliance with Rule 2232 lies with member firms.
• Individual brokers should receive adequate training and supervision to ensure that they understand what information to include in customer confirmations pursuant to Rule 2232, and the exceptions to the rule’s disclosure requirements. Firms should also take reasonable steps to ensure that brokers do not intentionally delay execution of customer trades to avoid triggering Rule 2232’s disclosure requirements.
• Member firms should consider periodically sampling and reviewing customer confirmations falling under Rule 2232’s fixed income mark-up disclosure provisions to ensure that the information contained therein is complete and accurate.

Regulatory Technology

Like others in many industries, broker-dealers are turning to new and innovative technology to assist them in meeting their regulatory and compliance obligations. FINRA has identified Regulatory Technology as another highlighted area of focus in 2019. The Priorities Letter incorporates by reference a white paper FINRA published in September 2018 titled “Technology Based Innovations for Regulatory Compliance (“RegTech”) in the Securities Industry,” which contained a detailed discussion of common applications and implications for firms using RegTech to make compliance systems more efficient and effective. In doing so, FINRA identified five areas in which it observed member firms applying RegTech tools to conduct traditional compliance activities: (1) surveillance and monitoring; (2) customer identification and AML compliance; (3) regulatory intelligence; (4) reporting and risk management; and (5) investor risk assessment. FINRA noted that replacing traditional compliance functions with RegTech tools may present heightened risk to supervisory control systems, customer data privacy, and cybersecurity, among other areas.

Given the vast opportunities presented by RegTech, including improved surveillance quality and reduced costs, how are firms to decide which technologies to adopt and how aggressively to embrace these innovations? What are the known pitfalls to be avoided? What additional considerations should firms and compliance officers weigh? We provide the following four suggested tips to minimize regulatory exposure when implementing RegTech tools:

• Maintain an Integration Plan

Firms that see the long-term benefits of employing RegTech tools to automate compliance systems need to develop a risk-based integration plan. In the short-term, this likely means duplicating certain compliance efforts. Leaving old systems in place and comparing traditional data with results achieved through automated systems will permit firms to understand both benefits and shortcomings of new technology. In addition, to the extent tools engage in so-called “machine learning” to refine processes and increase output quality, those systems should be given a long enough learning curve to analyze what data falls away as false positives or noise. Firms should also conduct ongoing and rigorous testing of automated compliance systems to ensure efficacy.

Firms should also appreciate the disconnect between what FINRA calls structured and unstructured data when implementing RegTech tools. Marrying together data from disparate sources requires a well-planned long-term approach and may require keeping traditional compliance systems in place for years until a holistic RegTech system can be implemented and tested across all of a firm’s business lines and information sources.

Though there have yet to be any RegTech-related enforcement actions taken by FINRA, a firm is more likely to avoid formal discipline if it takes a patient approach to implementation and makes several distinct efforts to identify blind spots before abandoning traditional compliance systems.

• Envision the Worst-Case Scenario

Firms should evaluate the impact automation has on their compliance systems under a worst-case scenario. When implementing new compliance systems, firms should determine the potential harm that would result from a system failure. For example, firms should ask whether the system impacts high regulatory priorities like protecting retail investors, achieving anti-money laundering compliance or effecting regulatory reporting. Firms should also determine the scope of a potential system failure – is harm limited to a broken trade or failed wire transmission or would it have a widespread impact on market activity? Developing a risk matrix that accounts for these types of questions will enable firms to apply resources to the systems with the greatest potential for harm in areas of high regulatory priority.

• Appreciate the Dangers of Outsourcing to Third-Parties

Many of the early entrants in the RegTech tool development space are technology start-ups that offer products to financial institutions through third-party vendor support. This introduces risks concerning third-party data breaches and other data privacy concerns. FINRA has specifically cautioned that firms remain “ultimately responsible for compliance with all applicable securities laws and regulations and FINRA rules” in connection with outsourced activities or functions.

Step one for minimizing risks related to third-party vendors is to conduct reasonable initial and ongoing vendor due-diligence. Firms should ensure that vendors are technically, operationally and financially sound, and have adequate cybersecurity systems in place to safeguard data. Further, firms should be satisfied that they can adequately supervise the outsourced functions and that vendors understand regulatory requirements for record retention.

Firms must also be vigilant in protecting customer data. Whenever possible, firms should limit data provided to vendors to the minimum information essential to achieve the outsourced activity. For example, if a vendor conducts transaction review that is not related to customer identity, firms should ensure that the vendor cannot access customer-specific information. Firms should also ensure that customers provide consent as needed when new or additional information is collected by or shared with a third-party vendor.

• Don’t Be Afraid to Maintain a Dialogue with FINRA and Other Regulators

FINRA has expressed a strong desire to foster an open dialogue with its members to help work through growing pains of emerging technologies. Consistent with this approach, FINRA has previously invited member firms and other interested parties to submit comments to identify benefits and risks associated with new financial technologies. FINRA consistently encourages stakeholders to actively engage with it on areas where additional guidance will support adoption of new technologies.

Member firms should take advantage of FINRA’s willingness to listen and engage in active dialogue concerning RegTech by, among other things, notifying their regulatory point of contact when considering upgrading traditional compliance systems with new technology tools. Cooperating with regulators to identify potential technology failings not only increases the likelihood of “getting it right” but also helps make the case against formal action if something goes wrong.

FINRA’s Priorities Letter, taken together with other recent notices and publications by the regulator, puts member firms on notice of the need to review and revise as appropriate their FINRA compliance programs both in areas of longstanding concern and in emerging areas of risk that FINRA took care to underscore. Firms should expect an increased focus by FINRA in examinations and risk monitoring in the highlighted areas of concern.

[i] The term “covered financial institution” includes U.S. banks, registered brokers or dealers in securities, mutual funds, and future commission merchants and introducing brokers in commodities. See 31 CFR § 1010.605(e)(1).

[ii] See 31 CFR §§ 1023.210(b)(5)(i) and (ii).

[iii] See FINRA Regulatory Notice 17-40, November 21, 2017 (The CDD Rule does not change the requirements of FINRA Rule 3310, but instead “amends the minimum statutory requirements for member firms’ AML programs by requiring such programs to include risk-based procedures for conducting ongoing customer due diligence.”).

[iv] https://www.govinfo.gov/content/pkg/FR-2016-05-11/pdf/2016-10567.pdf

[v] 31 CFR § 1023.210.

[vi] The security must also be a TRACE-Eligible Security required to be reported to TRACE under FINRA Rule 6730.

[vii] Because customers purchase bonds from member firms more often than sell them to member firms, for ease of reference our discussion going forward will refer only to mark-ups.

[viii] Firms must also include in the customer confirmation a brief description of the information available on the relevant website.

King & Spalding

February 22, 2019

FINRA announced on January 28, 2019, the launch of a new initiative encouraging broker-dealers that offer 529 plans to self-report potential supervisory violations involving share class recommendations to customers (529 Plan Initiative).1 Under the 529 Plan Initiative, in exchange for a firm’s assessment of its supervision of 529 plan share class recommendations, self-reporting and remediation of potential violations, and preparation of a restitution plan for harmed customers, FINRA’s Department of Enforcement will recommend a settlement that includes restitution and a censure but no fine.2 Broker-dealers that wish to participate in the 529 Plan Initiative must notify FINRA in writing by April 1 and must submit to FINRA information regarding their systems and procedures for supervising 529 plans (discussed below) by May 3.

Investment in 529 Plans

529 plans are tax-advantaged municipal securities that allow individuals to save for a designated beneficiary’s future educational expenses. They are typically sold in different share classes, which carry different fees and other costs. While 529 plans have traditionally been used to save for higher education, amendments to the Internal Revenue Code that became effective in 2018 expanded the permitted use of 529 plans to certain kindergarten, elementary school and secondary school (i.e., high school) expenses. Because 529 plan share classes have different fee structures, the financial impact to the customer will depend in part on the class of share purchased and the number of years the customer expects the assets to be invested. For example, Class A shares generally impose a front-end sales charge but have lower annual fees, whereas Class C shares impose no front-end sales charge but have higher annual fees. As a result, a customer who plans to invest in a 529 plan for a period of several years may pay significantly more in fees if invested in Class C shares rather than Class A shares.3

Purpose and Scope of the 529 Plan Initiative

Broker-dealers must have systems and procedures to supervise registered representatives’ share class recommendations to customers and ensure they are consistent with those customers’ investment goals. However, FINRA’s examination of some firms identified supervisory gaps with respect to 529 plans.4 The 529 Plan Initiative is intended to encourage firms to review their systems and procedures governing 529 plan share class recommendations and to self-report and remediate identified gaps. The initiative appears to be modeled after the SEC’s 2018 Share Class Selection Disclosure Initiative, under which the SEC offered favorable settlement terms to investment advisers that self-reported potential violations of securities laws relating to their failure to make certain disclosures concerning mutual fund share class selection.5

Firms that offer 529 plans should assess their supervisory systems and procedures and evaluate areas including

• training regarding the costs and benefits of different 529 plan share classes
• understanding and assessing the different costs of share classes for individual transactions
• receiving or reviewing data reflecting 529 plan share classes sold
• reviewing share class information, including potential breakpoint discounts or sales charge waivers in determining the suitability of 529 plan recommendations
• the potential impact of any identified supervisory failures (by either conducting a customer-specific analysis or using a statistical approach to identify customers who received 529 plan share class recommendations that were unsuitable)

Regardless of whether it elects to participate in the 529 Plan Initiative, FINRA encouraged any firm that engages in 529 plan activity to conduct this review — including a firm that is confident that it has established, and is enforcing, 529 plan supervisory systems and procedures. In a video released in connection with the launch of the 529 Plan Initiative, FINRA Executive Vice President of Enforcement Susan Schroeder emphasized that FINRA’s review of firms’ 529 plan supervision will not be limited to firms that elect to participate in the initiative.6 To the extent violations are identified at a firm that elects not to participate, FINRA will recommend sanctions greater than what would be recommended under the initiative.7

How to Participate

The deadline for broker-dealers participating in the 529 Plan Initiative to submit the results of their assessments to FINRA is May 3. Some broker-dealers have already begun the assessment process and indicated their intention to participate. Given the volume of data FINRA is requiring from participants, firms that timely notify FINRA of their intention to participate but anticipate they will not be able to meet the May 3 submission deadline may request an extension.8

Sidley Perspective

The 529 Plan Initiative is the most recent effort by FINRA to address broker-dealer compliance obligations and is consistent with FINRA’s ongoing focus on obligations related to suitability determinations.9 Participating firms should anticipate certain challenges in assessing their supervisory systems and procedures and preparing their submissions to FINRA. For example, many firms that participated in the SEC’s ongoing Share Class Selection Disclosure Initiative have found collecting the required data to be challenging and burdensome.

Moreover, as is the case with all suitability reviews, determination of suitability is often a nuanced, fact-dependent process involving numerous considerations. For example, the appropriateness of a share class may vary depending on the availability of breakpoints based on the customer’s holdings of mutual funds managed by the 529 plan sponsor. Certain features of 529 plans also may create particular supervision and monitoring challenges including, but not limited to, the availability of information related to beneficiaries10 and the manner in which 529 plan transaction information is tracked internally.

Broker-dealers that offer 529 plans should consult legal counsel to discuss undertaking a self-assessment of their 529 plan supervisory systems and procedures and the benefits and drawbacks of participating in the 529 Plan Initiative.

___________________________________________________________

1 See FINRA Regulatory Notice 19-04 (Jan. 28, 2019), available here.

2 Broker-dealers that have already been contacted by FINRA’s Department of Enforcement as of January 28, 2019, regarding potential violations involving 529 plan share classes are not eligible to participate in the 529 Plan Initiative. See id., n. 12. The 529 Plan Initiative also does not apply to individuals, and FINRA has stated that it provides no assurance that an individual associated with the broker-dealer who sold 529 plans in violation of federal securities laws and regulations or self-regulatory organization rules would be offered similar terms. See FINRA Regulatory Notice 19-04.

3 Importantly, FINRA acknowledges that a recommendation of a higher-expense class share is not per se unsuitable but must be reviewed in light of the customer’s particular facts and circumstances. See FINRA Regulatory Notice 19-04, n. 13. Nevertheless, the 2018 amendments to the Internal Revenue Code expanding the permitted use of 529 plans further complicates this analysis.

4 FINRA Executive Vice President of Enforcement Susan Schroeder noted that FINRA’s review found supervisory “blind spots” within some firms. See A Few Minutes with FINRA – 529 Plan Share Class Initiative (January 28, 2019), available here.

5 See Announcement, Share Class Selection Disclosure Initiative, SEC Division of Enforcement (Feb. 12, 2018), available here.

6 Additionally, broker-dealers that elect not to participate in the 529 Plan Initiative are still subject to the self-reporting obligations under FINRA Rule 4530.

7 See A Few Minutes with FINRA – 529 Plan Share Class Initiative (stating that FINRA’s examination program will continue to review firms that offer 529 plans for share class recommendation and supervisory violations).

8 FINRA Regulatory Notice 19-04, n. 15.

9 See, for example, FINRA 2019 Risk Monitoring and Examination Priorities Letter, at 3 (Jan. 17, 2019), available here.

10 Because 529 plans are municipal securities, they are subject to the oversight of the Municipal Securities Rulemaking Board, which has stated that since investors purchase 529 plans for a beneficiary, registered representatives should also consider information known about the beneficiary in evaluating the investment objectives of the customer in order to recommend a share class that is tailored to the customer’s particular circumstances and needs. See FINRA Regulatory Notice 19-04.

Sidley & Austin

February 13, 2019

NEW YORK (Reuters) – The city of Philadelphia has filed an antitrust lawsuit accusing seven major banks of conspiring to inflate interest rates for a type of bond used by cities, towns and other public entities, costing them potentially billions of dollars.

In a complaint filed on Wednesday night, Philadelphia accused Bank of America Corp, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Canada and Wells Fargo & Co of secretly manipulating rates for tax-exempt bonds known as VRDOs, or variable-rate demand obligations.

Philadelphia, which said it issued more than $1.6 billion of the bonds, said the banks colluded to collect hundreds of millions of dollars in fees they did not earn, reducing critical funding for public services such as hospitals, power and water supplies, schools and transportation.

“The alleged misconduct of the defendants potentially resulted in Philadelphia – and entities across this country -paying above-market interest rates for years,” City Solicitor Marcel Pratt said.

Philadelphia also said the banks’ conduct is the subject of a preliminary criminal probe by the U.S. Department of Justice’s antitrust division, while the U.S. Securities and Exchange Commission has contacted four of the banks. The Bond Buyer reported the Justice probe in September, citing unnamed sources.

Bank of America, Citigroup, Goldman, JPMorgan, RBC and the SEC declined to comment on Thursday. The other banks and the Justice Department did not respond to requests for comment. The complaint was filed in the U.S. District Court in Manhattan.

VRDOs are long-term bonds that let issuers borrow at lower short-term rates because they contain a “put” feature.

This lets investors redeem bonds early by tendering them to banks, such as the seven being sued. The banks then remarket the bonds to other investors and charge issuers for their services.

According to the complaint, the banks secretly agreed in person, by phone and electronically not to compete with each other for remarketing services from February 2008 to June 2016, when they controlled about 70 percent of VRDO remarketing.

Philadelphia said the banks did this to keep rates artificially high, ensure investors would not exercise their put options, and collect fees “for doing, essentially, nothing.”

The city is represented by Daniel Brockett, a partner at Quinn Emanuel Urquhart & Sullivan who has filed several antitrust lawsuits against banks in the Manhattan court.

That court is home to a wide array of private litigation accusing banks of conspiring to rig various financial markets, interest rate benchmarks and commodities.

The case is Philadelphia v Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 19-01608.

by Jonathan Stempel

FEBRUARY 21, 2019

• Suit follows others making similar claims in state courts
• City alleges that banks fixed prices on variable-rate debt

Philadelphia sued seven banks including JPMorgan Chase & Co. and Bank of America Corp., accusing them of costing local governments billions of dollars by colluding to fix the prices on floating-rate bonds issued to finance public works.

The city alleges the banks conspired to inflate the interest rates on the bonds from as early as 2008, according to a class-action filed in federal court in Manhattan on Wednesday. According to the complaint, the Justice Department opened a preliminary criminal investigation into the banks’ practices after meetings with a whistle-blower in 2015 and 2016. The Securities and Exchange Commission has contacted at least four banks “regarding their conduct in the VRDO market,” according to the complaint.

Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., RBC Capital Markets LLC and Barclays Plc were the other banks named in the suit. Scott Helfman, a spokesman at Citigroup, declined to comment, while representatives at the other banks were not available for comment.

The lawsuit appears similar to several filed by Edelweiss Fund LLC on behalf of California, Illinois, Massachusetts and New York that center around the pricing of variable-rate demand obligations, a type of long-dated bond that carries low interest rates because buyers have the option to sell them back to banks periodically. Edelweiss, which is backed by an anonymous principal with experience in the municipal-bond industry, is seeking at least $3.6 billion in damages and penalties as part of three of the suits.

The Philadelphia suit seeks to represent a group including municipalities, hospitals and universities, according to the complaint, and a judge must agree to certify the suit as a class action. The city is being represented by Quinn Emanuel Urquhart & Sullivan LLP, a firm that says it has won $30 billion in settlements over the past five years.

Representatives of JPMorgan didn’t immediately respond to emailed requests for comment on the suit sent outside regular business hours. Bill Halldin, a spokesman for Bank of America, declined to comment.

Philadelphia and the purported class of issuers paid “billions of dollars” in inflated interest rates, according to the lawsuit.

“By artificially increasing the rates paid by plaintiff and the class, defendants’ conduct necessarily decreased the amount of funding available for critical public projects and services, as well as the operations of 501(c)(3) organizations,” the city said in the complaint.

Banks that are hired as remarketing agents on the bonds set the rates and often take securities that have been put back into inventory for resale, giving them an incentive to set the rates higher if they want to avoid holding them.

According to the Edelweiss suits, instead of “actively and individually” marketing and pricing bonds at the lowest possible interest rates, the banks “engaged in a coordinated ‘Robo-Resetting’ scheme where they mechanically set the rates en masse without any consideration of the individual characteristics of the bonds, the associated market conditions or investor demand.”

“Defendants ‘Robo-Reset’ these rates in order to keep the bonds in the hands of their holders, and thus alleviate the need for defendants to remarket the bonds,” Edelweiss claimed.

In the early 2000s, issuers sold between $30 billion and $60 billion of such debt annually, often in conjunction with interest-rate swaps, according to Thomson Reuters Deals Intelligence.

In 2008, they sold more than $115 billion in such paper as they refinanced both auction-rate and insured floating-rate debt, as the auction market froze and insurance companies were downgraded. Since then issuance has dwindled, totaling $7 billion in 2018. The total size of the outstanding VRDO market has been estimated at $150 billion.

The case is City of Philadelphia v. Bank of America Corp., 1:19-cv-01608, U.S. District Court, Southern District of New York (Manhattan).

Bloomberg Markets

By Joe Mysak and Amanda Albright

February 21, 2019

— With assistance by Chris Dolmetsch

The city of Philadelphia filed a lawsuit Wednesday accusing Bank of America Corp, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Canada and Wells Fargo & Co of defrauding the city and public entities out of millions of dollars. The antitrust action claims the banks conspired to inflate the interest rates of tax exempt bonds known as Variable Rate Demand Obligations (VRDOs).

VDROs are issued by public entities as fundraisers for infrastructure and public services like water, public education and transportation. With VDROs, investors receive long term borrowing for short term rates. The banks then “remarket” the bonds to investors and charge the municipality for that service. The city accuses the banks of conspiring to not compete with each other by keeping rates artificially high and not remarketing the bonds. Philadelphia has issued $1.6 billion of VRDOs, therefore the banks may have profited significantly from the accused scheme.

The Antitrust Division of the US Department of Justice has an ongoing a preliminary criminal investigation into defendants’ remarketing practices in connection with VRDOs.

jurist.org

by Brianna Bell

FEBRUARY 21, 2019

The city says seven big banks conspired to inflate rates on VRDO bonds so they could “continue to collect re-marketing fees for doing nothing.”

The City of Philadelphia has accused seven of the largest U.S. banks of conspiring to “substantially inflate” interest rates on floating-rate municipal bonds to benefit themselves and money market funds they managed at the expense of issuers.

The harm inflicted by the banks, including JPMorgan Chase and Bank of America, “likely amounts to billions of dollars,” the city said in a class-action lawsuit that focuses on the market for bonds known as “variable rate demand obligations.”

VRDOs offer a built-in “put” feature that allows investors to redeem the bond at any periodic reset date, making them a low-risk and high-liquidity investment.

According to the city’s antitrust complaint, the banks, which acted as “re-marketing agents” (RMAs) for VRDOs, agreed as far back as February 2008 not to compete against each other, and instead to keep VRDO rates artificially high, “to maximize the likelihood that existing holders of VRDOs would not put their bonds back” to them.

“This allowed defendants to continue to collect re-marketing fees for doing, essentially, nothing,” the city said, in part because they did not have to spend time and resources to re-market tendered bonds to new investors.

RMAs typically pocket high annual fees amounting to an average of 10 basis points of the VRDO debt balance. In 2008, issuers sold more than $115 billion in VRDO paper.

Allegations of collusion among RMAs first came to light through a whistleblower who filed a complaint with the U.S. Securities and Exchange Commission in 2015. The city said its own investigation found evidence of direct communications between competing banks, with RMA staff calling each other on the phone before setting rates.

“According to former senior RMA personnel at JPMorgan, it was a ‘dirty little secret’ that RMAs would talk to each other about rates,” the city’s complaint said.

The suit alleges the banks also benefited from the artificially high rates because if an RMA “fails to find a buyer for the tendered VRDO, the RMA is obligated to repurchase the bond and assume the risk that the issuer will default on its payments.”

by Matthew Heller

February 22, 2019 | CFO.com

MSRB Retrospective Rule Review Overview.

The municipal bond market is often seen as a safe-haven among investors. After all, the bonds are issued by governments and are often backed by taxpayer dollars. Investors may be aware of default risks in rare cases, but for the most part, they remain unaware of the rampant securities fraud taking place.

In recent years, it has become increasingly apparent that fraud is commonplace in the $3.7 trillion muni bond market. The Securities and Exchange Commission (SEC) described the market as “too opaque” in a 2012 report and has taken action against large and small governments to curb the problem.

Let’s take a look at some common types of fraud in the muni bond market and how the proper due diligence can avoid it.

Continue reading.

municipalbonds.com

Justin Kuepper

Feb 06, 2019

Read the Newsletter.

The BDA recently released the results of its Index of Fixed Income Activity covering the period June 2018 through December 2018, as compared to the previous six months of activity in 2018. As a result of this survey, we were able to produce a report comparing such activity from two dozen BDA member firms.

The survey results can be found here.

Bond Dealers of America

February 15, 2019

While public corporations are required to file an annual audit within 60 days after the close of the year, municipal bond borrowers often take close to triple that time or longer.

Although this issue has been lingering for decades, the time it takes to complete and sign an audit after the close of the fiscal year hasn’t changed much over the last 10 years. The county, state and city sectors are the poorest performers even amid an improvement since 2015.

While investors need the audit documents for credit evaluation and securities pricing purposes, they are not the only stakeholders that have a need to see timely audited financial reports.

Governing boards associated with public bodies and not-for-profit organizations need to review the audits in order to fulfill their duty for proper oversight. Like municipal bond analysts and investors, they are better able to respond to issues disclosed in an audit if the documents are timelier.

Audit timeliness is a simple, common sense principle based on the expectation that accountability and transparency are best achieved if audited financial reporting is swiftly dispatched. That should hold true not only as a standard for responsible government but also for investors and taxpayers.

There’s an added fiduciary responsibility for municipal bondholders in that late or stale audits inhibit accurate bond pricing and cloud assessments of risk. The absence of significant improvement in the overall speed in which are audits are signed and delivered begs the question as to why the market is not imposing a greater penalty on those that consistently are late to report.

Merritt Research Services, LLC, an independent municipal bond credit data and research company based in Hiawatha, Iowa and Chicago has been tracking the time it takes municipal bond borrowers to complete their audits since Merritt Research released its first report in 2010. Its latest findings looked at more than 10,500 Fiscal Year 2017 audits by credit sector and over 110,000 audits since 2008.

Latest Results

The latest analysis focused on 2017 audits found a modicum of good news in that there was a modest improvement in completion time rates over the past two years as governmental audits have made the adjustments to more detailed pension reporting in line with changes in GASB rules 67 and 68 that occurred mostly in the 2015 audits. Audits from non-governmental municipal bond borrowers, such as power agencies, hospitals and private universities, finished much faster than those for governments.

As has been the case in other years, the median completion time for reports related to governmental type municipal bonds still hovers between 170 and 180 days. That’s still a long way from the target reporting times in the corporate bond market and well below what the municipal bond industry considers to be a muni guideline of 120 days.

Merritt Research’s latest report continues to show that certain types of municipal bond borrowers, mostly associated with corporate like enterprise entities and not-for–profit organizations (issued under the IRS 501c-3 code), are consistently faster to finish their audits than the governmental state and local governmental sectors. These non-governmental issuer sectors have median times which range from 99 days to 161 days.

Consistently placing fastest on the list of all municipal bond credit sectors are (1) public power wholesale electric agencies (also known as joint action agencies and quasi-government enterprises), (2) hospitals, (3) private higher education institutions and (4) Tollroads. Each of these sectors show a median audit completion time of 120 days or less, meeting the unofficial municipal bond guideline most frequently cited as best practice.

Fastest Reporting Sectors for Fiscal Year 2017

Public Power Wholesale electric audits achieved the best sector reporting time, boasting a median completion time of 99 days after the close of the fiscal year.

Hospitals, which often carry higher interest rates since many consider them as one of the riskier major credit sectors in the muni market, annually place nearly as well as wholesale electric entities in the audit time contest. As a group, they recorded a median audit completion time of 111 days, the same as the prior year.

The Private Higher Education sector took the third best sector finish for fiscal year 2017 with a median audit time of 115 days. Again, this sector has consistently completed its audits in a narrow range of between 107 and 115 days since 2008.

The Tollroads sector showed the best gain of any of the categories by improving its median from its already good audit time level of 126 days to 120 days. Fifty-one percent of the sector completed their audits in 120 days.

Slowest Reporting Sectors in Fiscal Year

On the other side of the speed continuum were the main governmental sectors – counties, states and cities.

Despite their absolutely disappointing finish times, each of these sectors showed a modest improvement and reduction in their median audit times from last year and further progress since 2015.

That’s the year in which governments were required to apply more detailed pension accounting information in line with the new Governmental Accounting Standards Board (GASB) 67 and 68 rules concerning pension accounting that went into effect.

The County Sector showed the slowest financial reporting as a group. The median sector audit time came in at 179 days, several days better than two years ago and one day better than last year, but still nothing to boast.

States & Territories, which was the second slowest sector in 2017 and the tardiest of all sectors in the previous two years, inched up a notch with a median audit time of 175 days. Only 5.7% of this sector was able to have their audits signed for completion within 120 days.

The City Sector was the third slowest sector, albeit the best, among the major governmental categories. Its median audit time was 173 days. Like states and counties, it has fallen among the bottom three in each of the last 10 years. It tied states for having the same 5.7% of signed audits within 120 days of the end of the fiscal year.

By Richard Ciccarone

BY SOURCEMEDIA | MUNICIPAL | 02/14/19 09:00 AM EST

AUSTIN, TEXAS – A Securities and Exchange Commission Official tried Tuesday to provide some clarity on disclosure issues in the municipal market, as the effective date of a major amendment to the disclosure requirements looms in two weeks.

Ahmed Abonamah, senior counsel to the director in the SEC’s Office of Municipal Securities, discussed the soon-to-be effective amendments to the SEC’s Rule 15c2-12 and other disclosure topics during a panel discussion at The Bond Buyer’s Texas Public Finance Conference being held here this week. The amendments, which add two new material events to the list which issuers must agree to disclose on a continuing basis, take effect Feb. 27.

Abonamah, who arrived at the SEC in 2016 after several years in the private sector, told conference attendees that the SEC does not endorse any particular way for underwriters to fulfill their duties to reasonably determine that issuers for whom they underwrite bonds will comply with the new material events in their continuing disclosure agreements. Event 15 says issuers have to disclose when they incur material financial obligations, while event 16 says that issuers have to disclose events connected to those obligations which “reflect financial difficulties,” such as a default or modification of terms.

One bright line rule is that underwriters can’t rely solely on an issuer’s reputation to determine whether the representations in the offering document are accurate, Abonamah said, though he allowed that the determination includes an element of judgment on the underwriter’s part.

Abonamah said the commission has received a lot of requests to clarify what sort of “non-debt debt” might qualify as requiring disclosure under event 15. The key determination is whether there is a borrowing in the transaction such as in those that involve a lease development corporation. The rule was not intended to capture more straightforward leases, such as those of city vehicles, he said.

Other panelists also weighed in on disclosure topics. Bill Oliver, a spokesman for the National Federation of Municipal Analysts, said the SEC could be helpful by providing the market with clarity on how comfortable the commission is with issuers disclosing unaudited financial information. The industry is wrestling with how to overcome the stale nature of the numbers in issuers’ comprehensive annual financial reports, and Oliver said unaudited data could be useful to analysts. Such information is already routinely disclosed in certain sectors, such as healthcare, he noted.

The SEC could further offer issuers some reassurance on the permissibility of talking to investors, when investor-issuer communication is “at an all-time low,” Oliver said. Some buy-side analysts have said they believe issuers are hesitant to speak to them in any detail because they are afraid of “selectively disclosing” non-public information over the phone.

Panel member Gregg Bienstock, the CEO and a Co-Founder of Lumesis, said that whatever regulators might do to try to improve the timeliness of issuer disclosure, including technological investments, they have to keep in mind that disclosure is only as good as the data provided. Many of documents posted to EMMA aren’t actually word-searchable, Bienstock said.

“Data has to be useful to the market participants,” said Bienstock.

Abonamah said the SEC is studying those disclosure issues, but did not commit to any commission action.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 02/12/19 03:45 PM EST

Read the notice.

Whistleblower Edelweiss LLC and its team of attorneys, led by attorney Michael Behn, scored an early victory in this False Claims Act lawsuit filed on behalf of the State of Illinois.

The whistleblower suit against multiple Wall Street banks, including JPMorgan Chase, Citibank, and Bank of America, cleared a major hurdle after an Illinois court rejected the defendants’ motion to dismiss the case. The suit was filed by Edelweiss LLC under the Illinois False Claims Act, by Chicago attorney Michael Behn of Behn & Wyetzner, Chartered. (State of Illinois ex rel. Edelweiss LLC (Case No. 2017 L 000289).

Judge Diane Shelley of the Illinois state court in Chicago stated after reviewing the arguments, that Edelweiss’ whistleblower “complaint articulates in myriad detail how false claims could have been presented to the State of Illinois.”

Judge Shelley’s decision means the case against the banks will move forward. If successful, the State of Illinois could recover hundreds of millions of dollars in fines and damages from the defendants.

Behn described the ruling as “a major victory for Illinois tax payers and municipalities.”

“We welcome Judge Shelley’s decision, and intend to prove that defendants defrauded the government as alleged,” added Dan Hergott, also of Behn & Wyetzner and another of Edelweiss’ attorneys.

The banks will now have to answer Edelweiss’ complaint, which alleges that the defendants engaged in a deliberate scheme to overcharge government entities while providing financial services relating to municipal bonds.

Behn founded the law firm Behn & Wyetzner to represent whistleblowers under the False Claims Act. Behn was formerly a federal prosecutor with the U.S. Attorney’s Office in the Southern District of New York (Securities and Futures Fraud Unit) and with the Commodity Futures Trading Commission.

Behn & Wyetzner has achieved extensive recoveries for state and federal taxpayers on behalf of the firm’s whistleblower clients. The firm is of counsel to Siprut PC and based out of Chicago, Illinois.

CHICAGO (PRWEB) FEBRUARY 06, 2019

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) convened on January 29–31, 2019, to discuss its market oversight activities and fiscal year 2019 strategic initiatives that support the MSRB’s mission to protect municipal securities investors, issuers and obligated persons and promote a fair and efficient municipal market.

This year, the Board has renewed its commitment to stakeholder engagement to further inform its retrospective rule review, compliance support and other initiatives. In an outreach effort unprecedented in its scope, Board members this year are meeting with municipal securities dealers and municipal advisor firms around the country. At the Board’s meeting last week, the full Board met with leadership of the Securities Industry and Financial Markets Association (SIFMA) Municipal Securities Division, the National Association of Municipal Advisors (NAMA) and the Government Finance Officers Association (GFOA) Debt Committee. “These meetings were a tremendous advancement in our stakeholder engagement efforts,” said Board Chair Gary Hall. “The conversations we are having both with industry representatives and critical market participants allow for a necessary and valuable exchange of information about municipal market oversight.”

Retrospective Rule Review

Another strategic MSRB initiative is the prioritization of its retrospective rule review. Since 2012, the MSRB has been conducting a retrospective rule review to ensure MSRB rules are up-to-date, effective and reflective of the current reality of the municipal market. Chair Hall in October 2018 elevated the retrospective rule review initiative to a strategic priority and at last week’s meeting, the Board agreed on a formal approach and the highest priority rules to review in 2019. “The municipal market is evolving, and we recognize—and indeed are acting on—the imperative to keep our rules current,” he said.

The Board has prioritized an analysis of MSRB Rule G-23, on activities of financial advisors, MSRB Rule G-34, on CUSIP numbers, new issue, and market information requirements and MSRB Rule G-29, on availability of Board rules. The retrospective rule review plan also includes a goal to eliminate outdated information and references in the full rule book. The MSRB will publish a notice this week with details of the 2019 retrospective rule review plan designed to achieve its objectives while obtaining critical feedback from stakeholders in a way that respects their competing priorities.

As part of the MSRB’s ongoing retrospective rule review, it has been evaluating whether interpretive guidance concerning the application of MSRB Rule G-17 to underwriters of municipal securities to ensure and promote fair dealing practices by underwriters with issuers should be amended. The Board discussed feedback received on a second request for comment on draft amended interpretive guidance and plans to further review possible amendments to the guidance.

The MSRB is also working to clarify existing guidance on its rule on best execution of municipal securities trades. At its meeting, the Board discussed comments received on draft amendments to the guidance and, as a result of feedback received, agreed to clarify guidance that dealers’ do not need to post bid-wanteds on or through multiple alternative trading systems (ATSs) or broker’s brokers to satisfy their best-execution requirements. The MSRB expects to publish this guidance this week.

The Board discussed comments received on its November 2018 notice on draft interpretive guidance about the potential harms of “pennying.” This practice involves a dealer’s purchase of bonds for its own account from a customer seeking to sell a municipal security—after the dealer has reviewed other dealers’ bids—by matching a high bid or purchasing the bond at a price that is nominally higher than the highest bid. The Board directed staff to conduct additional analysis before considering next steps.

Market Transparency

The Board discussed the topic of the timeliness of financial disclosures by municipal securities issuers and agreed to begin a project to improve the form (MSRB Form G-32) through which underwriters provide information about the expected availability of annual financial information to the Electronic Municipal Market Access (EMMA®) website. The improvements will be aimed at helping underwriters fulfill their existing regulatory requirements and provide accurate data. The Board also agreed to continue to evaluate how to leverage the EMMA website and the MSRB’s ability to educate investors to enhance understanding about the timeframes for municipal financial disclosures. “This is an important and complex issue,” Chair Hall said. “The MSRB is committed to working within its Congressional authority to ensure that investors have the information they need regarding financial disclosures.”

The Board also discussed adding third-party evaluated pricing services to the EMMA website. These services, used to estimate the value of individual bonds and to price fixed income portfolios including mutual fund holdings, would provide investors with an additional set of market data and enhance EMMA’s existing tools and resources. The Board directed staff to continue to explore adding evaluated pricing services on EMMA.

As a result of outreach efforts and the MSRB’s request for information on municipal market benchmarks, the Board directed staff to continue to engage with market participants on ways to promote transparency and availability of benchmarks.

Financial Oversight

As part of its commitment to long-term financial sustainability, the Board continued its ongoing discussion of the MSRB’s reserve levels, which as previously communicated, are above the organizational target. The Board will continue its evaluation of reserve levels—incorporating input from an outside expert’s reserves analysis—and determine additional steps to responsibly manage reserves to appropriate target levels. “The level of MSRB reserves is a high priority for the Board,” said Chair Hall. “We are getting close to addressing this important issue.”

Date: February 4, 2019

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

On January 28, the Financial Industry Regulatory Authority (FINRA) issued a Regulatory Notice announcing the 529 Plan Share Class Initiative, a self-reporting initiative to promptly compensate harmed investors and promote firms’ compliance with the rules governing the recommendation of 529 savings plans (“529 Plans”) (the “Initiative”).1 Under the Initiative, broker-dealers are encouraged to review their supervisory systems and procedures governing 529 plan share-class recommendations, self-report supervisory violations and provide FINRA with a plan to remediate harmed customers. In response, FINRA’s Department of Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact on affected customers and a censure, but no fine, consistent with one of FINRA’s principal aims—investor protection.

With the publication of the Notice, FINRA also issued a video interview with Susan Schroeder, Enforcement Chief, titled “A Few Minutes With FINRA: 529 Plan Share Class Initiative.”2 Together, the Notice and the interview introduce this new type of self-reporting program. To be eligible for the Initiative, firms must self-report by providing written notification to FINRA Enforcement by April 1 and submit required information by May 3.

Background and Discussion

529 Plans are tax-advantaged municipal securities designed to encourage saving for the future educational expenses of a designated beneficiary. As municipal securities, the sale of 529 Plans are governed by the rules of the Municipal Securities Rulemaking Board (MSRB), including MSRB Rule G-19 (Suitability of Recommendations and Transactions)3 and MSRB Rule G-27 (Supervision).4

As Schroeder explained in the interview, FINRA learned through its examination process that 529 Plans can be a “blind-spot” for some firms. Given the importance of 529 Plans to the investing public and the importance of expedited restitution, FINRA designed this Initiative to inform member firms of its concerns, and ask the firms to be proactive about assessing, correcting and reporting its processes.

529 Plans are commonly sold in different classes with varying fee structures. Class A shares typically impose a front-end sales charge but with lower annual fees comparative to other classes, whereas Class C shares typically impose no front-end sales charge but have higher annual fees than Class A shares. The recommendation of suitable share classes of 529 Plans were made more complex upon amendments made to the Internal Revenue Code (the “Code”) in January 2018, that expanded the use of 529 Plans for tuition for grades K-12, subject to certain limitations. Instead of a “one-size fits all” approach to 529 Plan share classes, the changes to the Code underscore the importance of recommending a share class that is uniquely tailored and suited to the needs of the individual customer and beneficiary, in addition to the importance of supervising these recommendations.

The 529 Plan Share Class Initiative

Firms are encouraged to review their supervisory systems and procedures, including the failure to:

• provide training regarding the costs and benefits of different 529 Plan share classes;
• understand and assess the different costs of share classes for individual transactions;
• receive or review data reflecting 529 Plan share classes sold; and
• review share-class information, including potential breakpoint discounts or sales charge waivers, when reviewing the suitability of 529 Plan recommendations.

Further, firms are encouraged to assess and self-report the potential impact of such supervisory failures.

Eligibility for the Initiative

To qualify for the Initiative, firms must self-report by providing written notification to FINRA Enforcement on April 1 and provide additional, specified information by May 3.

The Notice explains that if a firm is deemed to meet the requirements of the Initiative, and FINRA Enforcement decides to recommend formal action based on the firm’s compliance with the self-reporting obligations encouraged by the Initiative, FINRA Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact of affected customers and a censure, but no fine. Schroeder explains in the interview that a settlement under this Initiative would be to supervisory violations and would not trigger a statutory disqualification.5

It is worth noting that FINRA intends to continue to examine and investigate firms’ supervision of these issues. If a firm does not self-report under the Initiative and FINRA uncovers supervisory failures by that firm, any resulting disciplinary action and sanctions imposed in connection therewith are likely to exceed those contemplated by the Initiative. Further, FINRA does not offer the same initiative to individuals associated with member firms who sold 529 Plans to customers in violation of MSRB rules, or violated any state or federal securities laws. Individual liability will be assessed on a case-by-case analysis of the facts and circumstances.

Conclusion

The Initiative presents a unique and limited opportunity for firms to assess their supervisory systems and procedures governing 529 Plan share-class recommendations, to identify and remediate any defects, and to compensate any investors harmed by supervisory failures, while possibly avoiding fines for such conduct. As the deadline to take advantage of this program approaches, we recommend working with legal counsel to review and assess eligibility for the Initiative and for preparing the FINRA submission.

_____________________________________________

1 FINRA Regulatory Notice 19-04.

2 FINRA video: “Video: A Few Minutes With FINRA – 529 Plan Share Class Initiative.”

3 MSRB Rule G-19.

4 MSRB Rule G-27.

5 Section 3(a)(39) of the Securities Exchange Act of 1934

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by Leonard Licht, Susan Light, and James Normile

February 7, 2019

Katten Muchin Rosenman LLP

As reported in our October 10, 2018 alert, the Securities and Exchange Commission has amended Rule 15c2-12 (the “Rule”), which governs continuing disclosure by state and local governmental borrowers to add two new material events requiring disclosure within 10 business days after they occur. Unlike the other 14 material event notice requirements, application of these two new requirements may be less obvious and requires more careful analysis.

The two new events are:

(15) Incurrence of a financial obligation of the issuer or obligated person[1], if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

(16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

With the February 27, 2019 compliance date approaching, and with many underwriters and municipal advisors focusing more closely on the new requirements, this alert offers more detailed analysis of steps governmental borrowers can take to facilitate compliance when they are required to do so.

When Will Issuers Need to Comply?

The amendments apply to continuing disclosure undertakings (CDU’s) for publicly offered bonds or notes which are delivered on or after February 27, 2019. Until an issuer sells debt obligations with a CDU containing the new material events, the amendments have no effect on that issuer’s continuing disclosure obligations.

What Are The New Material Events?

While the existing 14 events (including payment defaults, draws on reserves, unscheduled draws on credit enhancement, or changes in credit enhancement, adverse tax actions or opinions, material changes to bondholder rights, refundings, bond calls, rating changes, changes in trustee, mergers or bankruptcy) which continue to apply are fairly straightforward, the new requirements require disclosure within 10 business days of:

• “material” new financial obligations (or agreements concerning covenants, events of default, remedies, property rights or similar terms) incurred by the borrower for which there is no CDU and which could materially affect bondholders’ interests [event (15)]
• events occurring in connection with a financial obligation which reflect financial difficulties for the borrower [event (16)]

What Is A “Financial Obligation?”

A financial obligation does not include any debt obligation for which the borrower posted an official statement and provided a CDU, or ordinary operating liabilities.

A financial obligation does include:

• a debt obligation
• a derivative instrument, such as a swap, entered into in connection with a debt obligation
• a guarantee of either a debt obligation or a derivative.

“Debt Obligations” include:

• privately placed bank or state authority purchases of bonds or notes or lines of credit
• installment contracts or lease purchase agreements
• energy conservation improvement financing contracts
• emergency loans from the State
• judgments
• any other obligation that is “debt-like”

What Information Must Be Filed?

The answer to this question is a bit open-ended, involves the exercise of judgment and depends on the facts and circumstances in the broader context.

Under event (15), only “material” financial obligations must be disclosed. The SEC release does not define “material.” In addition, borrowers must provide certain information about the financial obligation, where material. While guidance on this question is likely to evolve, a rule of thumb may be that if a holder of a security for which the borrower has provided a CDU would find financial obligation terms relevant to a decision to buy or sell the security, and the price at which to do so, the name of the financial obligation and relevant terms should be included in the event filing.

Examples of terms to be disclosed include:

• amount financed and term and interest rate
• security and source of payment, including priority of payment
• defaults and events of defaults
• remedies, including acceleration, penalties and default rates
• modifications of terms and triggers for modifications
• key covenants, such as maintenance of ratings, most favored nations provisions, coverage and additional debt tests

Under event (16), the occurrence of an event under a financial obligation creates an obligation to disclose if that event reflects financial difficulties. In this circumstance, default (even if not yet an event of default triggering remedies), acceleration, termination events which obligate the borrower to pay a penalty, modification of terms and the imposition of remedies may each trigger a disclosure obligation. In this case, the relevant financial obligation may be one the borrower incurred before or after it executed a CDU which included new events (15) and (16), if the triggering event occurs after delivery of the new CDU.

Whether a disclosure obligation arises will depend on the context – the size of the borrower, the magnitude of the financial obligation relative to the size of the borrower and the impact or potential impact of the covenant or covenant breach on the borrower generally and on the bondholders to be benefitted by the CDU. An event which by itself may be immaterial may become material or reflect financial difficulty if it occurs in the context of multiple other events.

Managing Compliance with the New CDU Requirements

While borrowers have no obligation with respect to the new material events until they issue publicly offered securities on or after February 27, 2019 pursuant to an official statement, it wouldn’t hurt to take an inventory of any outstanding financial obligations to identify those which may be material and to catalog material terms of those obligations. Underwriters have a responsibility under the amended rule not only to obtain a CDU satisfying the Rule from the borrower, but also to determine the ability and willingness of the issuers whose bonds they buy to comply with the Rule and as part of their due diligence may request the details of those obligations.

Borrowers will need to develop a system (which may or may not rise to the level of a formal policy or procedure) for identifying, cataloging and tracking these obligations so they can have confidence they will be able to post, within 10 business days, both (i) notice that a material financial obligation has been incurred together with material terms of such obligations or agreements and (ii) the occurrence of events arising in connection with any financial obligation or agreement which reflect financial difficulties.

Many borrowers will have very few obligations to track while others may have several, with many material terms.

How Do You Post?

The Municipal Securities Rulemaking Board has updated EMMA to include the new material events. Once a borrower has identified a material financial obligation, the borrower or its agent may post the details of the financial obligation or identify the financial obligation with and attach the entire document. If a borrower chooses to post the full document, certain types of sensitive information, such as account numbers and signatures, should be carefully redacted, while material terms should remain viewable.

For events which reflect financial difficulties, a description of the event and/or notice from the holder of the related obligation, should be disclosed.

[1] An “obligated person” is an entity, other than the nominal issuer or credit enhancer, which is legally committed to support all or a material portion of the payment of the obligation. Materiality here also depends on the context, but generally is regarded as translating to a commitment to support payment of at least 20% of the financial obligation

January 29, 2019

Miller Canfield

Since 1995, states and local governments have been subject to Rule 15c2-12 (the “Rule”), promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Under the Rule, governmental entities that issued securities (and persons obligated under those securities (“obligated persons”)) were required to enter into continuing disclosure agreements (generally referred to as “undertakings”). These undertakings obligated the governmental entity to make regular annual filings of financial information and also to file notices whenever certain “listed events” occurred. The undertakings remained in effect for the entire life of the bond issue or defeasance of the bonds.

In August 2018, the SEC announced an amendment to the Rule. This amendment will take effect on February 27, 2019. These amendments have been the topic of substantial public discussion in seminars and written releases in the press and numerous law firm blogs. Regardless of what you have read or heard, however, this amendment may or may not increase your future financial reporting obligations or otherwise affect your community. Before you spend a lot of time in seminars or meetings learning about the Rule, consider whether it will have an impact on your public entity/community.

In general, a public entity will not be affected by the changes in the Rule, if:

1. The public entity has no outstanding debt;
2. The public entity’s only outstanding debt is in the form of bank loans; or
3. The public entity does have outstanding bond issues (issued prior to February 27, 2019) and the public entity has no expectation of going to the public market with new bond issues in the foreseeable future.

If, however, your community does expect to issue publicly offered bonds in the foreseeable future, then you should understand more about the Rule.

The discussion below provides information to help you understand more about the Rule and the changes incorporated under the Rule’s recent amendment and includes information about Government Accounting Standards Board (“GASB”) Statement No. 88:

The SEC has indirectly regulated the obligations of states and local governments in the financial markets through its ability to regulate the activities of brokers/dealers in the municipal industry. [1] The Rule was originally promulgated in 1989 by the SEC under authority of the Securities Exchange Act of 1934. The original Rule required that dealers acting as Participating Underwriters in Offerings (an offering of municipal securities by a municipal issuer with an aggregate principal amount of $1,000,000) obtain, review, and distribute to potential customers copies of the issuer’s official statement. The Rule was amended in 1994, and this amendment accomplished, albeit indirectly, what the SEC could not do directly. When the SEC adopted paragraph (b)(5) of the Rule, Participating Underwriters could no longer purchase or sell municipal securities unless the issuer had adopted an undertaking for the issue. With that change, the Rule now imposed regulations on states and their local governments. [2]

Paragraph (b)(5) of the Rule prohibits a Participating Underwriter from purchasing or selling municipal securities covered by the Rule in an Offering unless the Participating Underwriter has reasonably determined that an issuer or obligated person of those municipal securities has undertaken in a continuing disclosure agreement (an “undertaking”) to provide specified information to the Municipal Securities Rulemaking Board (MSRB) in an electronic form as prescribed by the MSRB. [3] The information to be provided consists of: (i) certain annual financial and operating information and audited financial statements, if available (“annual filings”) [4]; (ii) timely notices of the occurrence of certain events (“event notices”) [5]; and (iii) timely notices of the failure of an issuer obligated person to provide required annual financial information on or before the date specified in the continuing disclosure agreement (“failure to file notices”). Event notices are required to be filed within 10 business days of the occurrence of the listed event. [6]

The SEC has been considering expanding the list of the disclosure events for some time. In particular, there has been a focus on the increased number of private placements of bonds and bank loans, as they have not been not subject to the Rule. On August 20, 2018, the SEC released adopted amendments to the Rule. [7] These amendments apply to all undertakings entered into on and after February 27, 2019. From this February date and after, all new undertakings are required to comply with the amended Rule. The amendments added two additional events, expanding the list from 14 to 16 events, in a continuing disclosure undertaking. Future undertakings are required to include the following event notices:

(15) Incurrence of a material financial obligation of the issuer or obligated person or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

(16) Default, event of acceleration, termination event, modification of terms or other similar events under the terms of a financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The amendments define the term “financial obligation” as a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term “financial obligation” does not include any obligation for which a final official statement has been provided to the MSRB. In other words, the issuer does not need to file an event notice for the incurrence of any security that is already disclosed to the market through a final official statement.

Key considerations for the amended Rule include:

1. The amendments are not retroactive.
The amendments do not add any new requirements to issuers’ current undertakings. Accordingly, issuers may continue to comply with their existing undertakings in the same manner as they have been filing and posting with EMMA.

2. If a governmental entity enters into an undertaking in the future, that undertaking will include the two additional event notice requirements.
With respect to those new event requirements:

1. The additional disclosure requirement identified in (15) above applies to debt or “debt-like” obligations.  The issuer is not required to disclose ordinary operating liabilities.
2. The disclosure requirement identified in (15) only applies to those debt obligations that are “material.” The amendments do not define the term “material,” and issuers are permitted to make their own determination of what debt obligations are material. On a going-forward basis, issuers may consider developing procedures or protocols for identifying which debt or “debt-like” obligations are material.
3. If an issuer determines that the incurrence of a debt or “debt-like” obligation is material, the notice of the event should include the material terms of the financial obligation. The SEC provided examples of “material terms” as: (i) date of the incurrence, (ii) principal amount, maturity, and amortization; (iii) interest rate (if fixed) or method of computation (if variable) plus any default rates and other depending on the circumstances. Accordingly, the disclosure may be satisfied by filing a term sheet or by filing the entire document.
4. If the issuer enters into a derivative instrument (e.g., swaps and hedges) relating to a municipal security, that transaction must always be disclosed.
5. The additional disclosure requirement identified in (16) above is limited to those occurrences that reflect financial difficulties. For example, if the issuer enters into a loan modification agreement with respect to a loan (regardless of whether the original obligation has previously been disclosed on EMMA), that event would be required to be disclosed in an event notice.

3. GASB Statement No. 88.
The GASB recently issued its Statement No. 88 — Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placement (March 2018), requiring that additional information related to debt be included in audited financial statements. [8]

This requirement is in effect for reporting periods beginning after June 15, 2018. Accordingly, many issuers are likely developing protocols for identifying the types of information that are now required be disclosed under the amendments to the Rule.

Inclusion of this information in an issuer’s financial statement will not, however, satisfy the requirements of the Rule, because the Rule will now require that a separate event notice be filed on a timely basis upon the incurrence of each new the debt or “debt-like” obligation (within 10 business days).

Notes

[1] The SEC directly regulates the issuers of corporate securities, primarily to prevent disclosure-related abuses in the corporate securities market, under the authority of the Securities Act of 1933 and the Securities and Exchange Act of 1934 (together, the “Securities Act”). Municipal securities are exempt from registration under Section 3(a)(2) of the Securities Act, but are subject to the Securities Act’s anti-fraud provisions. Municipal securities brokers and dealers are also regulated by the SEC and by the MSRB. When drafting the Securities Act, Congress did not have concerns about abuse in the municipal securities market. Since then, perception of abuses in the municipal securities market have increased with the complexity and volume of the market. The Securities Act’s provisions are broadly written, and so federal securities anti-fraud law has evolved primarily through the courts. Court decisions have found the anti-fraud provisions applicable in a number of municipal securities transactions, leading to the development of a framework for municipal disclosure responsibilities, driven as well by the MSRB and the Dodd-Frank Act provisions. The SEC’s Office of Municipal Securities has initiated enforcement actions against municipal issuers, municipal employees, and other market participants.

[2] See Exchange Act Release No. 34-26985 (June 28, 1989), 54 FR 28799 (July 10, 1989) (“1989 Adopting Release). For additional information relating to the history of the Rule, see Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590 (Nov. 17, 1994) (“1994 Amendments Adopting Release”), Exchange Act Release No. 34-59062 (Dec. 5, 2008), 73 FR 76104 (Dec. 15, 2008) (“2008 Amendments Adopting Release”), and Exchange Act Release No. 34-62184A (May 27, 2010), 75 FR 33100 (June 10, 2010) (“2010 Amendments Adopting Release”).

[3] On December 5, 2008, the SEC adopted amendments to the Rule to provide for the Electronic Municipal Market Access (“EMMA”) system. EMMA is established and maintained by the MSRB and provides free public access to disclosure documents. The 2008 Amendments designated the EMMA system as the single centralized repository for the electronic collection and availability of continuing disclosure information about municipal securities. The 2008 Amendments require the Participating Underwriter to reasonably determine that the issuer or obligated person has undertaken in its continuing disclosure agreement to provide continuing disclosure documents: (i) solely to the MSRB; and (ii) in an electronic format and accompanied by identifying information, as prescribed by the MSRB. See 2008 Amendments Adopting Release; see also Exchange Act Release No. 34-58255 (July 30, 2008), 73 FR 46138 (Aug. 7, 2008) (“2008 Proposing Release”). The 2008 Amendments became effective on July 1, 2009.

[4] See 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).

[5] See 17 CFR 240.15c2-12(b)(5)(i)(C). Under the Rule prior to these amendments, the following events require notice in a timely manner not in excess of ten business days after the occurrence of the event: (1) principal and interest payment delinquencies; (2) nonpayment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security; (7) modifications to the rights of security holders, if material; (8) bond calls, if material and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the obligated person; (13) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into an agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, Rule 15c2-12(d) provides full and limited exemptions from the requirements of Rule 15c2-12. See 17 CFR 240.15c2-12(d).

[6] See 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event notices and failure to file notices are referred to collectively as “continuing disclosure documents.”

[7] See the SEC Report on the Municipal Securities Market, (July 31, 2012) (“2012 Municipal Report”), available at: https://www.sec.gov/news/studies/2012/munireport073112.pdf.

[8] GASB Statement No. 88 is available at: http://www.gasb.org/jsp/GASB/Document_C/Documentage?cid=1176170308047&acceptedDisclaimer=true.

by Scott McJannet & Cynthia Weed

January 29, 2019

K&L Gates LLP

WASHINGTON — With Rule 15c2-12 amendments set to take effect at the end of February, issuers at the Government Finance Officers Association meeting aired out their confusion over how the changes will affect their continuing disclosure responsibilities.

Issuer officials discussed their concerns during a meeting of the GFOA’s Committee on Governmental Debt Management at the group’s winter meeting here Monday. The angst is fueled by the Securities and Exchange Commission’s August 2018 decision to add two new material events to the list of occurrences that issuers will have to agree to disclose within ten business days of their happening.

Event 15 says issuers have to disclose when they incur financial obligations, if material, as well as agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer that could affect security holders.

Event 16 says that in connection with those financial obligations, issuers have to disclose events which “reflect financial difficulties,” such as a default or modification of terms.

Members of the debt committee said they’re having trouble pinning down the requirements. It can be hard to determine when financial difficulties start, and the rule doesn’t specify it, they said.

Without knowing, issuers will have to turn to their lawyers to figure it out, said Kenton Tsoodle, Oklahoma City’s finance director.

“It’s thinking through and making that list of what are all the things that have to be included in these two new filings, but also then when,” said Tsoodle, who will speak at The Bond Buyer’s upcoming Texas Public Finance conference.

The SEC lacks the authority to directly regulate issuers except through the antifraud provisions in the securities laws, so the rule requires underwriters of new issues of $1 million or more to “reasonably determine” that the issuer has entered into a written agreement to provide such disclosures to bondholders.

State revolving fund loans, wherein states make loans to cities for water utilities, may have to be disclosed starting Feb. 27 because they likely fall under Event 15.

Guarantees of lower-rated credits could also be disclosed, committee members said. Tsoodle said he would disclose guarantees.

“It’s somewhat broad and it’s going to be a lot more work and a lot more things for issuers to monitor, Tsoodle said. “It will remain to be seen if it’s a good thing for investors.”

A partial government shutdown caused some hiccups for issuers looking for the SEC to answer questions, and Tsoodle said for areas where they don’t get clarification, issuers will turn to their bond counsel for answers.

Cindy Harris, chief financial officer at the Iowa Finance Authority said she plans to spend more time with her bond counsel to get more guidance if she doesn’t receive more from the SEC.

At the meeting, issuers debated whether or not they would disclose a bank loan document in its entirety, terms and all, on EMMA.

“I think the issue is that you could disclose the entire agreement, so if you have a bank loan, the agreement would have all of the terms of the loan,” Harris said. “Sometimes the person you have the agreement with, may not want all of that information for the public to see like the terms, or the rate at which you’re borrowing.”

Harris worries that at the end of the day, the SEC could take enforcement action against an issuer who comes up short in its disclosure obligations, so wants to cover all bases.

“I think muni issuers are probably struggling with these new amendments,” she added.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/28/19 02:38 PM EST

Read the Newsletter.

The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published its 2019 examination priorities on Dec. 20, 2018. Since this occurred just prior to the implementation of a partial government shutdown, OCIE has had little chance to demonstrate how it will execute on these priorities.

With furloughed staff back in place, however, registered investment advisers, registered funds and broker-dealers can be certain that OCIE staff will quickly begin examinations focused on these identified priorities.

Please see full Issue for more information.

by Kelley A. Howes

February 1, 2019

Morrison & Foerster LLP

On January 22, 2019, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released its annual priorities letter highlighting its regulatory program’s points of emphasis for the coming year. The most immediately recognizable difference between this year’s edition and previous ones is that its traditional title, “Examination Priorities,” has been updated to include “Risk Monitoring,” the process by which the self-regulatory organization initially identifies problem areas through surveillance, firm reporting, surveys, questionnaires, and examination findings.

FINRA’s 2019 “Risk Monitoring and Examination Priorities Letter” (the “Letter”) also discusses three entirely new priorities: online distribution platforms, fixed income mark-up disclosure, and regulatory technology. Finally, the Letter lists ongoing areas of focus, and alerts firms that it will continue to assess protocols to handle the risks posed by “bad actors” with problematic regulatory histories.

New Priorities

Online Distribution Platforms

FINRA expressed concern that member firms increasingly engage with online platforms that distribute securities through Rule 506(c) of Regulation D and Regulation A under the Securities Act of 1933, yet incorrectly fail to treat such engagements as the sale or recommendation of securities that would trigger FINRA’s rules.

An online platform is a web-based marketplace for securities that automatically displays orders, executes trades, and provides transaction data. If a platform meets the definition of an “exchange” under the federal securities laws, it must register as a “national securities exchange” or operate under an exemption, such as the one available in Regulation ATS requiring registration as a broker-dealer. Although some platform operators are not broker-dealers, many FINRA members support these platforms by acting as selling agents or brokers of record, or performing custodial, escrow, back-office, or financial technology-related functions.

FINRA made clear that even when its members do not act as operators, such support constitutes the sale or recommendation of securities and falls within the scope of FINRA’s jurisdiction. Accordingly, FINRA intends to evaluate how firms conduct reasonable basis and customer-specific suitability analyses, supervise communications with the public, and meet AML requirements with respect to this business. In addition, as these platforms are often widely accessible to the public via the internet, FINRA will evaluate how firms address the risks of offering documents or other communications that omit material information, contain false or misleading statements, or promise high returns.

Regulations D and A set forth exemptions to the 1933 Act’s requirement that all offerings of securities be registered with the Securities and Exchange Commission (“SEC”). Rule 506(c) of Regulation D permits broadly-advertised private offerings, but only if all investors qualify as “accredited investors” under Rule 501 (i.e., high net worth individuals, banks, insurance companies, brokers, and trusts). As such, FINRA will look closely at how member firms involved with online platforms distributing these offerings verify that all investors are accredited.

Regulation A exempts registration of public offerings that do not exceed $50 million in any one-year period, as long as issuers file offering statements with the SEC and provide investors documentation called offering circulars, similar to prospectuses (more information on offering circulars available here). Crucially, such offerings need not be limited to accredited investors, and increasingly take place via online platforms. When member firms assist with such offerings online, FINRA will evaluate the risk of excessive or undisclosed compensation arrangements between members and issuers.

Fixed Income Mark-Up Disclosure

This year, FINRA will also focus on ensuring compliance with the newest version of FINRA Rule 2232, “Customer Confirmations.” Amended in May 2018, Rule 2232 now requires a member to disclose the amount of mark-up or mark-down applied to a trade in fixed income securities with a retail customer, if the member also executes an “offsetting” principal trade in the same security on the same trading day. “Offsetting” occurs when the customer’s order must be satisfied out of the member’s prior inventory, rather than securities that the member gained through principal transactions that day. The purpose of the amendment is to ensure disclosure of transaction cost information with respect to bond trades to parallel the existing, comparable requirement set forth in Exchange Act Rule 10b-10 for equity trades. FINRA has further encouraged consistent disclosure regarding bond trades by working with the Municipal Securities Rulemaking Board to establish similar requirements through Rule G-15. In light of these goals, FINRA has pledged to monitor any changes in firms’ behavior to avoid triggering these mark-up and mark-down obligations altogether.

Regulatory Technology

Lastly, FINRA will monitor firms’ use of technological tools meant to streamline compliance with the securities laws, to catch any risks arising from supervision and governance systems, third-party vendor management, safeguarding customer data, and cyber security.

Ongoing Priorities

In addition to these three new areas, the Letter also discussed ongoing areas of focus. These include Sales Practice Risks, Operational Risks, Market Risks, and Financial Risks. Although these areas have long held FINRA’s attention, the Letter emphasized aspects of these topics that will be particularly important in 2019.

Sales Practice Risks

Within Sales Practice Risks, FINRA highlighted the importance of monitoring protection of senior investors, as well as controls related to outside business activities and private securities transactions. In light of the increasing number of “baby boomer” customers who are seniors, FINRA will assess firms’ supervisory systems to ensure that they exercise heightened scrutiny over these types of accounts to prevent conflicts of interest and financial exploitation. In particular, FINRA will examine how firms stop representatives who act as fiduciaries to elderly clients outside of their employment—i.e., by holding power of attorney or acting as trustee—from using their broker roles to direct funds to themselves. FINRA will also review controls instilled to meet the requirements of new FINRA Rule 2165, which permits a member to temporarily hold disbursements of funds or securities from the account of a “specialized adult” if the member believes that the client is being exploited.

FINRA continues to keep eye on outside business activities and private securities transactions, and particularly cited situations in which associated persons raise funds from their customers for outside entities beyond the reach of their firms’ supervision. The Letter emphasized this scenario is especially concerning when an associated person controls or has an interest in such outside entity, and when the entity has a potentially misleading name similar to the name of an established issuer. FINRA also pointed readers towards proposed FINRA Rule 3290, which would replace its current rules regarding outside business activities and private securities transactions. FINRA is currently considering public comments to this proposal.

Operational Risks

Among Operational Risks, FINRA will focus on customer due diligence and supervision of digital assets. FINRA plans to monitor compliance with FinCEN’s Customer Due Diligence Rule, which became effective last year, requiring firms to identify the beneficial owners of customers that are legal entities, and monitor their accounts to recognize and report suspicious activity.

As digital assets are increasingly transacted in the securities marketplace, FINRA is particularly focused on how member firms handle these assets in compliance with the securities laws. The Letter prioritizes review of the approach firms use to determine whether a particular digital asset is a security, and whether firms have appropriate protocols in place to mitigate the risks of these transactions. FINRA pledged to pursue these goals in close coordination with the SEC.

Market Risks

One prominent market risk FINRA continues to monitor is market manipulation. This year, FINRA will do so with attention to correlated exchange-traded products and correlated options that track broad market indices. FINRA will use pattern exploration to better identify the exploitation of unique characteristics of these products through machine learning.

Financial Risks

Finally, FINRA will continue to evaluate firms’ business models, particularly with respect to liquidity funding and plans in place to address potential financial crisis. The Letter specified that firms may need to update their stress test assumptions, in light of increased volatility in the market last year. Additionally, as the government securities repurchase agreement (“repo”) market experienced significant rate spikes in 2018, FINRA will check whether firms whose liquidity plans rely on government repo funding have established protocols to account for similar disruptions in the future.

In Step with the SEC

Some of FINRA’s concerns overlap with the SEC’s priorities for the coming year, which were released in December by the Office of Compliance Inspections and Examinations (“OCIE”). OCIE is a department within the SEC that examines market participants to ensure compliance with the securities laws and monitor risk.

Like OCIE’s letter, FINRA’s Letter flagged digital assets and potential conflicts of interest arising from an advisor’s fiduciary status as critical areas for regulatory focus. Given the recent uptick in use of digital assets in the securities space, for the first time, OCIE considered digital assets important enough to be its own prioritized category in the coming year. FINRA also echoed OCIE’s attention to potential abuse when an advisor acts as a fiduciary to a client.

Conclusion

As the foregoing reflects, FINRA’s 2019 regulatory slate is a mix of the old and new, reflecting the Wall Street watchdog’s intent to remain true to its core regulatory mission while simultaneously staking out fresh ground. FINRA’s three new priorities represent an effort to keep pace with today’s ever-evolving technological landscape, and to warn its member firms this landscape is not without regulatory risk.

by Jeff Kern & Kate Ross

January 31, 2019

Sheppard Mullin Richter & Hampton LLP

Jacob assisted Babylon Town with annual bonding by acting as a “liaison between the town, the brokerage firms, and bond counsel,” according to a town spokesman.

The U.S. Securities and Exchange Commission has concluded its investigation into Babylon Town’s former municipal finance adviser and is taking no further action.

Sheldon Pollock, assistant regional director for the SEC’s Division of Enforcement, sent a letter to the town in November that stated the SEC had finished its investigation of Doug Jacob, a subcontractor for the town. “Based on the information we have as of this date, we do not intend to recommend any enforcement action by the Commission against the Town,” the letter stated.

However, according to SEC guidelines, the notice “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation,” Pollock noted. An SEC spokeswoman declined to comment to Newsday.

On June 30, 2017, the SEC sent a letter to the town asking employees to preserve documents related to municipal bonding work by Jacob because the SEC believed the information was “relevant to an ongoing investigation.” For more than a decade, Jacob assisted the town with annual bonding by acting as a “liaison between the town, the brokerage firms, and bond counsel,” according to town spokesman Kevin Bonner.

The SEC’s letters did not detail the nature of the investigation but town Supervisor Rich Schaffer has said they were looking into whether Jacob’s dual roles as finance adviser and subcontractor with the town had violated the federal Dodd-Frank Act by not putting the municipality’s interests ahead of his own. Jacob did not respond to a request for comment.

Jacob owns Red Hill, a general services company founded in 2007 that provides more than two dozen nonunion workers for various departments through a contract the town has with Herbert L. Greene, a solid waste consultant who lives in Williamsburg, Virginia. In the town’s latest contract with Greene, which took effect in December, Greene earns $85 per hour, while Jacob, listed as a subconsultant, earns $93.50 per hour.

After the SEC announced the investigation, Jacob, who lives in Pelham in Westchester County, stepped down as finance adviser, in what the town called a temporary move pending the outcome of the investigation. Since 2017 the town has been using Capital Markets Advisors LLC of Great Neck for its annual bonding. Bonner said yesterday that the town will continue to use the company.

In a statement, Schaffer said the investigation result did not surprise him. “Doug Jacob always does what is best for the Town of Babylon,” he wrote. “He has spent the last three decades helping improve the town’s finances and is a big reason for our Triple-A bond rating.”

Newsday

By Denise M. Bonilla
[email protected] @denisebonilla

Updated January 29, 2019 9:59 PM

With heightened attention to investment and depository rules as well as increased enforcement of federal and state pay-to-play rules, registered investment advisers (RIAs) and broker-dealers should address the unique legal considerations that may arise when a firm provides or seeks to provide services to U.S. state and local government entities.

Investment Rules

Jurisdiction- and government entity-specific rules apply to firms that manage, hold or invest money for the government. A government entity with significant funds will often adopt a policy specifying how the funds may be invested or what securities may be purchased — delineating the types of investments that are permissible (e.g., prohibitions on swaps, equities, or investments in certain countries and industries), how the government entity views risk, how a portfolio must be diversified and the standard of care required for managers. Agreements with investment advisers or broker-dealers may even incorporate these policies by reference. Additionally, similar restrictions contained in a jurisdiction’s statutes or ordinances may apply to the investments of a particular government entity or to all government funds in the jurisdiction.

Similar restrictions contained in a jurisdiction’s statutes or ordinances may apply to the investments of a particular government entity or to all government funds in the jurisdiction.

How restrictive they are often depends on whether the money is designated for investment, held by a retirement system or dedicated for some other particular purpose. Although government entities are less diligent about alerting investment advisers and broker-dealers to these restrictions, they can in some cases impose direct liability on the firm if it invests government funds in a manner that is not permitted by the applicable rules.

Depository Rules

The laws of many jurisdictions specify custodial requirements, such as that all government funds be maintained with approved depositories. In some jurisdictions, this means all funds must be held in banks rather than brokerage accounts. Moreover, firms typically need to go through a formal application and review process to become approved depositories.

Federal Pay-to-Play Rules

Under these rules, political contributions made by a company or its covered donors prohibit a covered company from engaging in, or receiving compensation for, certain business with state or local government entities. Importantly, federal pay-to-play rules are strict liability in nature, meaning criminal intent is not needed to trigger their prohibitions. Current federal pay-to-play rules are:

• The Municipal Securities Rulemaking Board’s Rule G-37, which covers broker-dealers that underwrite municipal securities and municipal advisers who solicit investment advisory business for third parties, or provide advice to or on behalf of a government entity or obligated person with respect to municipal financial products or the issuance of municipal securities.
• The Securities and Exchange Commission’s (SEC) Rule 206(4)-5, which covers registered investment advisers and exempt reporting advisers that provide investment advisory services to state or local government entities either directly (e.g., via a separate managed account) or through a covered investment pool. Covered investment pools include unregistered investment funds in which a government entity invests directly, as well as registered mutual funds that are selected as an option for a participant-directed plan sponsored by a government entity.
• The Commodity Futures Trading Commission’s Rule 23.451, which covers swap dealers that offer or engage in commodities-based swaps with state or local governmental counterparties.
• The Financial Industry Regulatory Authority’s (FINRA) Rule 2030, which covers FINRA members engaged in soliciting investment advisory services covered by the SEC rule from state or local government entities.

State and Local Pay-to-Play Rules

Certain states and localities have laws that automatically prohibit a company from having government contracts if a covered donor makes a political contribution or solicits one for a covered official or political committee. Common categories of covered donors include:

• the firm itself;
• any affiliate or the affiliate’s political action committee;
• senior officers of the firm (e.g., management committee);
• members of the firm’s board of directors;
• employees who solicit or manage state or local contracts; and
• in some cases, the spouses and dependent children of the individuals listed above.

These bans on business can, in some cases, last for more than five years. These laws also may impose disclosure requirements regarding political contributions. It is very common for government contracts and requests for proposals (RFP) in these jurisdictions to require a company to certify its compliance with these laws.

Lobby Laws, Placement Agent Policies and Contingent Fee Restrictions

What Triggers Lobbyist Registration

In 31 states and many localities, attempting to obtain the award of government business meets the definition of lobbying and may give rise to an obligation to register as a lobbyist. These laws vary, and many contain useful exemptions, such as for formally responding to an RFP or for in-house employees of the company who act as salespersons. In addition, some lobby laws have a threshold for triggering registration that may be based on the amount of time spent lobbying in the jurisdiction (e.g., North Carolina’s threshold is 5 percent of one’s working time in a month), the compensation received for lobbying in the jurisdiction (e.g., Indiana’s threshold for executive branch lobbying is $1,000 per year) or number of contacts with covered officials (e.g., San Francisco’s threshold is five lobbying contacts in a month). In some jurisdictions, registration may be triggered when gifts and entertainment are provided to public officials and employees. Importantly, some jurisdictions aggregate all firm activity for these thresholds, so while a single action may not give rise to an obligation to register, it could when combined with other activities at the firm.

Requirements Once Registration Is Triggered

If registration is triggered, the individual lobbyist and/or company will need to register and report on a periodic basis. These reports typically require the disclosure of gifts and entertainment provided to public officials in the jurisdiction, compensation for lobbying and the issues lobbied. Some jurisdictions impose training requirements and special gift and political contribution restrictions on lobbyists.

Placement Agent Policies

Separate from lobby laws, government entities (particularly public pension funds) have increasingly adopted policies with respect to the use of placement agents by external investment managers. The policies range from requiring investment managers to disclose who is soliciting business to imposing outright prohibitions on investment managers’ use of third-party solicitors. The rules may apply even when a firm is using in-house marketing employees to solicit business.

Contingent Fee Prohibitions

Some lobby laws prohibit the payment of contingent fees — any payment (such as a commission or formulaic bonus) that is in whole or in part attributable to a government decision (such as the decision to engage the firm). In addition, some jurisdictions (e.g., Illinois, South Carolina) prohibit contingent fees paid for soliciting certain government business, even if the solicitor does not trigger lobbyist registration. Placement agent policies also can prohibit contingent fees.

Gift Laws

When providing a thing of personal value to an official or employee of a government entity, one must consider the gift rules of that jurisdiction. These restrictions apply to personal benefits such as meals, entertainment, travel and gift items as opposed to political contributions, which may be subject to pay-to-play restrictions as described above. Most jurisdictions have some restriction on gifts and entertainment for public officials, whether it be an absolute ban regardless of value, a fixed dollar limit per occasion or per month or year, or a prohibition on providing gifts that might reasonably tend to influence an official. These gift laws often extend to things of value provided to the official’s spouse or dependent children. In some instances, state and local gift laws, such as those in the state of New York, can include gifts given to a third party, such as a charity, at the request or behest of a public official. As noted above, lobbyists and companies employing lobbyists often need to report the gifts or entertainment they provide. Government entities also may have policies requiring vendors or contractors to disclose gifts they provide to their officials.

Legal liability for a violation of these laws can attach to the donor, donee or both, depending on the law. This is especially important to keep in mind in light of the fact that government entities increasingly require certifications of compliance with applicable gift laws. For example, the New York City comptroller requires firms managing city pension fund money to certify they have not given anything of value to employees of the comptroller’s office.

Conflicts of Interest

Dual-Hatted Situations

To the extent employees also hold positions with a government entity (such as serving on an unpaid government board), government conflict-of-interest restrictions may apply. Conflict rules frequently prohibit a government official from participating in a decision (such as that to award a contract) involving his or her private employer. In some rare cases, prohibitions can apply to contracts with that government entity even if the official fully recuses. Although legal liability for violations of these laws is typically limited to the official or former official, contracts that are entered into in violation of these conflict laws may be void or voidable by the government entity.

Post-Employment Rules

State and local laws typically restrict former public officials from appearing before their former agency for a period of time (often one or two years) after leaving government office and permanently restrict someone from working on a particular matter (such as a contract or procurement) that he or she personally worked on while in government. Thus, when vetting a prospective or new hire who is a former government official, a firm may want to consider whether the firm does or may seek to do government business in the jurisdiction where the official serves or served.

Takeaways

In addition to the ever-increasing risk of an enforcement action, potential legal violations can bring negative media attention. As such, broker-dealers and RIAs must continue to develop and refine compliance programs to address laws regulating government procurement activities. Common elements among these programs include implementing tailored policies, preclearing certain activities, providing protocols to ensure that registration and ongoing reporting requirements are met, offering training programs for certain officers and employees, and establishing procedures for keeping abreast of the latest developments in this area of law.

by Ki Hong and Tyler Rosen

January 23, 2019

Skadden, Arps, Slate, Meagher & Flom LLP

WASHINGTON — The organizers of The Municipal Finance Conference are seeking research papers on a broad variety of topics related to state and local fiscal policy and finance in advance of the conference this summer, they announced Wednesday.

The 8th annual Municipal Finance Conference is slated to take place July 15-16 at the Brookings Institution in the nation’s capital. It is a joint venture of Brookings, Brandeis University, Washington University in St. Louis, and The University of Chicago. The conference “aims to bring together academics, practitioners, and state and local government officials to discuss recent research on municipal finance,” and frequently draws prominent members of the muni research community.

The deadline for proposals is March 1, and papers that have been presented elsewhere are eligible. Last year’s conference featured, among many works, a paper examining municipal advisors in the wake of the Dodd-Frank Act by Brandeis Professor Dan Bergstresser and another examining life without advance refundings by Andrew Kalotay of Kalotay Analytics.

Papers will be chosen for inclusion by April 5, and drafts of the selected papers will be due by June 7, the organizers announced.

The conference agenda has not been announced. Registration will open in April.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 01/24/19 07:02 PM EST

WASHINGTON — The Municipal Securities Rulemaking Board will begin preliminary conversations to address Securities and Exchange Commission Chair Jay Clayton’s comments about improving the timeliness of issuer disclosures at the board’s quarterly meeting next week.

The MSRB announced the meeting’s agenda Thursday in advance of the meeting, which will be held Jan. 29-31 at the board’s Washington headquarters.

The impetus for the discussion comes at least in part from Clayton’s statement at a December 2018 SEC conference that the SEC may be interested in taking additional regulatory action to improve municipal market disclosure.

Clayton said in prepared remarks that he has asked the commission’s Office of Municipal Securities to work with the MSRB to improve transparency and improve the timeliness of the filing of issuer financial information under continuing disclosure agreements.

The SEC does not have the authority to force issuers to file annual financial information or other continuing disclosure documents more quickly, but Clayton has said he believes there are steps the SEC can take to at least make investors aware that information filed on EMMA might be stale.

“The first step in improving it is to make sure that investors understand that the financial statements they are looking at in some cases are 18 months old,” Clayton told a Senate panel last month.

The quarterly meeting will be the first time the board will have met with the SEC since December.

“There’s a lot of conversation around the best way to bring more transparency to this issue,” said Lynnette Kelly, MSRB CEO and president. “There’s certainly a lot of very interested constituencies in the municipal market who care a lot about this issue, so very preliminary discussions at this point.”

At the meeting, Kelly said MSRB staff will present data to the board illustrating the difference between when issuers promise to file their financial statements on EMMA to when they’re actually filed.

The board will also discuss next steps on the issue of pennying. Pennying occurs when a dealer places a retail client’s bid-wanted out to the market and determines the winning bid, but rather than executing the trade with the winning bidder marginally outbids the high bid and buys the bonds for its own account.

The board has expressed concern that widespread pennying could disincentive participating in the bid-wanted process, discourage bidders from giving their best price in a bid-wanted and “may impact the efficiency of the market.” The board last year requested comment on interpretive guidance that stated that using the bid-wanted process solely for the purposes of price discovery, whether via a brokers’ broker or an alternative trading system, could be a violation of the board’s Rule G-17 on fair dealing.

The board could decide not to take next steps or could direct staff to get more information, do more economic analysis or decide to move and issue guidance, Kelly said.

As for Rule G-17, the board will address comment letters received earlier this month regarding proposed amendments to the 2012 interpretive guidance of the rule.

That 2012 guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

The MSRB has proposed amending the guidance to among other things require dealers to disclose only actual rather than potential conflicts of interest. Dealers said in comment letters to the board that they supported that idea. But the MSRB hasn’t had much time to mull all the comments, as market groups submitted them fewer than two weeks ago.

“We’ve not had the sufficient time to do an in-depth analysis of the comment letters, we’ve had no time to go back to the commentators so that we really understand what their concerns are,” Kelly said.

She added more outreach needs to happen and afterwards expects to go back to the board in the next three to four months with a firmer recommendation on next steps.

At the meeting, the board will meet with members of the Securities Industry and Financial Markets Association, National Association of Municipal Advisors and Government Finance Officers Association to discuss engagement and future outreach events in 2019. This is part of a new initiative to expand the board’s stakeholder engagement efforts.

Other items on the agenda include the board’s ongoing retrospective review of its existing rules, an update on the MSRB’s data plan, and a discussion of the MSRB’s financial management.

Also this week, the board released its Series 54 Examination Guide for municipal advisor principals, who must eventually pass the exam to be qualified. The 13-page guide has sample multiple choice questions and a “road map” with links to rules and concepts.

The permanent exam will be available in the fall, and at that time municipal advisor principals will have a one-year grace period to become qualified. Municipal advisor principals can take a voluntary Series 54 pilot, offered from March to July 2019.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/24/19 07:02 PM EST

Learn more.

In the first month following the end of a unified Republican Congress and presidency, the federal government continues in what is now the longest shutdown in U.S. history. A new Democratic majority in the House is trying to gain traction on major issues like infrastructure, GSE reform, healthcare and technical corrections to the 2017 tax reform bill, but as the shutdown grows longer, will hopes of bipartisan legislation dwindle?

Below is the BDA’s 116th Congressional outlook, including information on committee leadership and new members of the committees of jurisdiction to BDA’s interests – as well as a policy outlook.

You can find a combined House and Senate calendar for 2019 here.

Continue reading.

Bond Dealers of America

January 23, 2019

In the past few years of massive regulatory change, the BDA has remained focused on the highest priority issues impacting the U.S. fixed income markets and provided its members with valuable opportunities to engage directly with regulators. The BDA also provides its members with in-person access to key Capitol Hill policymakers on the Senate Finance Committee, the Senate Banking Committee, the House Financial Services Committee and the House Ways and Means Committee. The legislation developed by these committees directly impacts the fixed income markets.

Through a truly engaging partnership with hundreds of industry leaders at BDA member firms, below are the 2018 regulatory and legislative accomplishments of the BDA.
Thank you for your ongoing support.

Continue reading.

Bond Dealers of America

January 24, 2019

Listen to what a current regulated representative enjoys about his tenure and how to apply.

SUMMARY

SIFMA sent comments to the MSRB responding to Notice 2018-29 in which the MSRB seeks comment on draft amendments to the Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters of Municipal Securities. SIFMA supports the MSRB’s retrospective review of the 2012 Guidance, and their comments seek to ensure that the purpose of the review is fully realized.

They appreciate that the MSRB has proposed adopting some of the suggestions made to the MSRB’s Initial Request for Comment, including: 1) incorporating the practical considerations of MSRB Notice 2012-38 (July 18, 2012) (the “Implementation Guidance”) and MSRB Notice 2013-08 (Mar. 25, 2013) (the “FAQs”) into the Amended Guidance; 2) clarifying the applicability of MSRB Rule G-42’s two-prong analysis to a recommendation for complex municipal financings; and 3) allowing for an automatic email return receipt as a means to evidence receipt of the underwriter disclosures.

Read the Comment Letter.

After consultation with various Committees and members, the BDA drafted and submitted a comment letter on the MSRB’s request for public comment on draft amendments to the interpretive guidance it issued in 2012 on the application of MSRB Rule G-17 on conduct of municipal securities and municipal advisory activities, to underwriters of municipal securities.

The comment letter can be viewed here.

Key issues highlighted in the comment letter are as follows:

• The BDA believes that the Draft Amendments contain several unnecessary inclusions, which can make compliance with the Draft Amendments more burdensome; and
• The BDA believes that the MSRB should re-phrase some new language; and
• The BDA does not believe that the MSRB’s approach to disclosures by comanager will materially reduce the number of disclosures; and
• The BDA believes that the MSRB should clarify the timing of a syndicate manager’s delivery of disclosures.

Bond Dealers of America

January 15, 2019

Trying to understand the new SEC Rule 15c2-12 requirements?

The MSRB today published a new educational resource to help issuers prepare for upcoming changes.

Read the Update.

Bond Dealers of America

January 9, 2019

The NFMA is pleased to announce the new officers for 2019. Congratulations to Scott Andreson, 2019 NFMA Chair!

To read the press release, click here.

Future GFOA Conference Locations

To help you plan ahead, upcoming conferences will be held as follows:

• New Orleans, Louisiana, May 17-20, 2020
  Ernest N. Morial Convention Center
• Chicago, Illinois, June 27 – 30, 2021
  Hyatt Regency & Swiss Hotel Chicago
• Austin, Texas, June 5-8, 2022
  Neal Kocurek Memorial Austin Convention Center

Questions? E-mail Future Conference Location Inquiries.

Submit a Bid to Host a Future GFOA Conference

GFOA is accepting bids from cities interested in hosting GFOA’s 2023, 2024, and 2025 annual conferences.

If your city is interested in bidding to host GFOA’s annual conference, your can submit an application. Please review the minimum requirements listed in the application.

If you have any questions, please e-mail Future Conference Location Inquiries.

Norwalk, CT, January 3, 2019 — The Governmental Accounting Standards Board (GASB) has issued a proposed Implementation Guide that contains questions and answers about the GASB’s new standards on accounting and financial reporting for fiduciary activities.

The Exposure Draft proposes answers to dozens of questions about GASB Statement No. 84, Fiduciary Activities. GASB Implementation Guides are intended to clarify, explain, or elaborate on the requirements of Board pronouncements.

This Exposure Draft of a proposed Implementation Guide, Fiduciary Activities, is available for download at no charge on the GASB website, www.gasb.org. Stakeholders are encouraged to review and provide comments by February 28, 2019.

On December 6, 2018, the Securities and Exchange Commission hosted an inaugural one-day conference on municipal securities disclosure. The conference, which the SEC intends to host annually, featured various panels comprising SEC staff as well as a broad array of industry participants. Topics included discussion of developments and current trends in disclosure, the amendments to Rule 15c2-12 of the Securities Exchange Act of 1934 that become effective on February 27, 2019, and potential opportunities for regulatory and industry improvement.

The conference comes just months after the SEC adopted amendments (the Amendments) to Rule 15c2-12 of the Securities Exchange Act of 1934 (the Rule), which is the SEC’s principal regime governing periodic disclosure by issuers and obligated persons with respect to municipal securities (including securities issued for the benefit of tax-exempt hospitals and healthcare organizations). The Rule requires that notice filings be provided to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system within 10 business days after the occurrence of certain triggering events. The Amendments add the following two new triggering events:

• Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
• Default, event of acceleration, termination event, modification of terms or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

In anticipation of the February 27, 2019, compliance date of the Amendments, the conference provided an opportunity for market participants to discuss areas of concern around disclosure, both under the current version of the Rule as well as in light of the Amendments. One such area of concern is the tension between timely reporting and uniformity of information. The Amendments reflect the SEC’s view that there may be events that are material to bond owners but that may not be reported through EMMA until annual audited financial statements are filed for the periods in which the events took place. The SEC has noted that as borrowers increasingly incur debt in private-placement transactions where no official statement is issued, EMMA disclosure of new indebtedness may be delayed. Industry panelists emphasized the quality and uniformity of financial information disclosed through an audit, and hence the concerns issuers and obligated persons may have in providing unaudited information.

When the Amendments become effective, issuers and obligated persons will need to determine how to comply with the requirement to provide disclosure with respect to material terms of newly incurred indebtedness. On the one hand, issuers and obligated persons may be tempted to file full debt documents to avoid claims of under-disclosure. On the other hand, investors may prefer a clear and concise summary of material terms rather than voluminous disclosure of actual debt documents.

Industry panelists drew attention to certain areas related to disclosure enforcement where further guidance from the SEC would provide clarification of the disclosure requirements under the Rule:

• Disclosure of interim financial information — Many issuers have some form of this information available to the public, and there would be value if issuers were provided with comfort that sharing this type of information would not potentially create a risk of liability.
• Underwriter due diligence — It is unclear to what extent municipal underwriters are expected to perform diligence on unaudited figures. Further SEC guidance concerning the required due diligence under the Amendments would be helpful to underwriters.
• Liability exposure of municipal advisors — Municipal advisors continue to play a central role in advising issuers on municipal offerings, and guidance on their antifraud liability exposure would be helpful to the industry.

The following emerging issues in disclosure were also discussed:

• Issuers should consider providing specific disclosure in risk factors on emerging issues such as cybersecurity and climate change risk, especially if issuers have commissioned studies that help analyze the costs of addressing these issues. While there is uncertainty about the costs that issuers and obligated persons will incur in addressing cybersecurity and climate change, it is important to note that thoughtful disclosure on these challenges does provide benefit to the market—describing how an issuer will respond to these challenges can demonstrate the quality of management and its planning effort.
• In light of the gradual phasing out of LIBOR, issuers will need to consider how to provide disclosure on the phase-out when it occurs in 2021. Investors will want to see volatility analyses of the new rate alternatives. For transactions still using LIBOR, issuers should expressly state how the phase-out of LIBOR will be addressed.

The SEC emphasized the value of disclosure in the market, while also acknowledging that it is important to strike a balance between providing disclosure that is material to investor decisions and recognizing that it is inefficient and costly for issuers to provide extraneous disclosure.

The role of technology in municipal securities disclosure was also discussed. While technology increases access to information, it is important to consider all impacts of adopting new technology. For instance, while most participants in the municipal market are supportive of concepts like eXtensive Business Reporting Language (XBRL), which improves data aggregation and data analytics, unique external dynamics, such as regulatory factors, that affect issuers must not be forgotten. Further, there is also a concern that technology can create an uneven playing field in the market, with issuers who have the funds to implement technology solutions having an upper hand as compared with issuers who do not readily have the capital needed to implement certain technology.

January 3, 2019

Manatt, Phelps & Phillips, LLP

Read the report.

The MSRB has published its compliance resource regarding the application of content standards under Rule G-40, on advertising by municipal advisors.

The compliance resource notice can be viewed here.

The compliance resource was developed through the MSRB’s notice-and-comment process, to which the BDA submitted comments in October and November 2018. The revised compliance resource reflects some recommendations and clarifications requested by the BDA.

MSRB Rule G-40 will become effective on February 7, 2019.

Bond Dealers of America

December 20, 2018

A new report from the Data Foundation and Workiva makes a case for Comprehensive Annual Financial Reports (CAFR) as the preferred method of publicizing state and local government financial info.

As an increasing number of state and local governments across the country make more of their financial data available to the public online, a new report makes a case for the best way to do that.

The report, dubbed Transparent State and Local Financial Reporting: The Case for an Open Data CAFR, suggests that public agencies should embrace Comprehensive Annual Financial Reports (CAFR), a method that has already been put into place in Florida. Florida has gone as far as to enact legislation that requires the conversion of all local and state government financial reporting to CAFR.

CAFR, for the unfamiliar, is essentially all financial reporting for a state, local or other governmental entity. It’s not exactly a budget, which is essentially a plan for what a state will spend in a fiscal year and how its tax revenue will be allocated. It’s more of a summation of financial activities over some years. As the report notes in its introduction, these days, roughly 30,000 state and local government agencies now publish audited financial statements annual, but not all of them use the “extensive and highly detailed” CAFR format.

Dean Ritz, the senior director for digital reporting at the enterprise software company Workiva, co-authored the report with Jim Harper, former senior fellow and director of information policy studies at the Cato Institute, a libertarian think tank located in Washington, D.C. Ritz said the report was in part an effort to provide guidance to the public sector as efforts to be transparent about funding accelerate. There has been, in recent years, a rise in expectations when it comes to the quality of data that government agencies are publishing, and the authors hope their report can help organizations meet that.

The expectations among residents, businesses, activists and even many public servants themselves is that the public should be able to not only access governmental finances, but also access it in a format that allows for easy searching, unlike basic methods such as PDF.

“We sort of jokingly say PDF is where data goes to die,” Ritz said. “PDF describes the layout of the page, not the information.”

Another benefit of all state and local governments working to embrace CAFR is that it would lead to one standardized format for such finances. If everyone used the same format, the content would then become format neutral, so that a person accessing one town or state’s data would not be at a disadvantage when compared to a person accessing the data of another. Other benefits cited by the authors of the report include a reduced cost of financing; a reduction in reporting burden; increased accountability; and a greater capacity for evidence-based decision-making in government.

Ritz noted that the report does address potential obstacles, including the difficult change processes inherent to government and, as always, initial cost of setting up a new system. Although, Ritz also said that the latter may be changing.

“It’s different than it has been historically, but we think the benefits of this have now been realized on the private side,” Ritz said, “and there’s enough of them that there’s now a wide number of technology and solution providers, as well as service providers, that can provide modernization.”

There has certainly been an increased commitment to financial transparency in state and local government, if not yet to CAFR itself. Ohio, for example, has launched a website called OhioCheckbook.com, which doesn’t adhere to the exact parameters of the CAFR format but does make the state’s spending public down to the actual penny. In some cases, users can not only see line items for purchases, but also the actual check that public organizations used to make a purchase with taxpayer money.

Josh Mandel, outgoing Ohio treasurer, led the creation of the site, which launched in 2014 and was at the forefront of state financial transparency efforts.

“We took everything from two bucks for a pack of pencils to millions of dollars for contracts to everything in between,” Mandel said, “and gave that information to the taxpayer. One of the best ways to hold politicians feet to the fire is to arm them with financial information.”

Mandel said analytics for the site at first were slow. Over time, however, word spread and it has now welcomed more than 1 million searches.

Greg Jordan-Detamore, the Open Cities product lead with the government transparency advocacy group Sunlight Foundation, praised Ohiocheckbook.com and other efforts to bolster the type of financial data released to the public. Jordan-Detamore said that an ideal format for doing this is one like CAFR that enables easy searches and machine reading, unlike PDFs.

The main idea behind the CAFR report is that more governments should emulate Florida’s adoption of the format. Indeed, government is without question a sector that shares ideas. Baton Rouge, La., for example, has created its own version of OhioCheckbook.com with Open Checkbook BR, which essentially does the same thing. Time, of course, will tell if the same spread starts to happen with CAFR formatting.

GOVTECH.COM

BY ZACK QUAINTANCE / DECEMBER 21, 2018

Read about the MSRB’s commitment to supporting regulatory compliance, a recent enforcement action related to MSRB Rule G-27, an upcoming Series 54 pilot exam and more in the latest Compliance Corner.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced it is establishing a formal Academic Program as part of its mission to support academic and other researchers. The program includes a new Visiting Scholar position and the ongoing provision of multiple municipal market data sets to universities and other research institutions looking to conduct research about the municipal securities market.

To expand municipal securities data research, the MSRB seeks a candidate to join the organization as a Visiting Scholar. The scholar will conduct in-depth analyses on municipal market data collected by the MSRB and from other sources. Learn more about the Visiting Scholar position.

“We are committed to supporting the academic community and its ability to explore municipal market data that may enhance the understanding of trading activity and market transparency,” said MSRB President and CEO Lynnette Kelly. “The work of the Visiting Scholar position will help influence additional insight about the municipal securities market.”

The MSRB recognizes that the research community is in a position to generate additional insights and conclusions about the municipal securities market. For several years, the MSRB has provided the academic and research community access to several data products from the MSRB, including historical sets of trade data, primary market and continuing disclosures, and information related to variable rate securities. Learn about data sets available from the MSRB and how to make data requests.

Access to municipal market trading data is also available through an agreement with WRDS, a service of the Wharton School of the University of Pennsylvania, which provides financial and economic data to various corporate, academic, government and nonprofit users. The addition of a Visiting Scholar to the MSRB’s academic program further enhances support for the academic community.

Date: December 17, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

Read the E-Newsletter.

Read the News Release.

A midwestern UBS Financial Services broker who helped customers pose as retail investors in order to receive new-issue muni bond allocations agreed to an industry bar and payment of $374,000 to regulators, the Securities and Exchange Commission said on Tuesday.

Chris D. Rosenthal, who worked at a UBS retail branch in Pepper Pike, Ohio for more than 17 years, helped the firm’s traders obtain new muni bonds when they were not in the distribution syndicate by participating in subterfuge and by establishing “parking” arrangements with the phony retail customers, the regulator said.

Rosenthal, 54, who began his brokerage career in 1990 at Lehman Brothers, did not immediately return a call for comment at his current trading firm, Municipal Portfolio Managers. His website lists him as president and a related video promotes his “amazing leadership skills and collaboration abilities.”

From the beginning of 2012 to May 2016, Rosenthal worked with two firms of unregistered brokers to commit the fraud, according to the SEC’s settlement order. They exploited order priority rules that give customers higher priority over broker-dealers in the allocation of new issue municipal bonds, and the firms then flipped the bonds in sales to broker-dealers and to UBS traders.

Rosenthal’s customers—Core Performance Management in Boca Raton, Florida and RMR Asset Management Co. in Chula Vista, California—maintained 41 accounts at UBS under fictitious business names, according to the settlement order. “Rosenthal knew that these parties were in the business of flipping new issue municipal bonds,” the order said.

In addition to placing more than 1,100 fraudulent retail orders for CPM and RMR with UBS’s syndicate desk, Rosenthal placed UBS muni traders’ indications of interest for new-issue bonds with the unregistered brokers who would then place retail or institutional customer orders with members of the underwriting group, who would then sell the bonds back to UBS based on Rosenthal’s orders, the SEC said.

The SEC in August barred or suspended five employees of CPM, which was dissolved in July 2016, and ordered them to pay disgorgement and/or civil penalties. It reached similar settlements with 11 out of 13 RMR employees.

As part of the fraud, Rosenthal often included incorrect zip codes for his customers to indicate that were residents of the bond issuers’ zip codes. He also helped UBS’s own traders refill their inventory by repurchasing bonds from CPM and RMR at $1-per-bond above the offering price immediately after they bought them, the SEC said in explaining the “parking” violations.

The SEC ordered the former broker to disgorge $284,080 plus $15,128 of interest to the government and to pay a $75,000 civil penalty, $15,000 of which will be paid to the Municipal Securities Rulemaking Board. The order said he can re-apply to work in the securities industry after five years.

Rosenthal voluntarily resigned from UBS in September 2016 as it was “investigating whether certain clients….obtained allotments during the retail order periods of negotiated new issue municipal offerings to which they may not have been entitled,” the firm reported to regulators. Rosenthal has no other disclosures on his BrokerCheck record.

by AdvisorHub Staff

December 18, 2018

The SEC finds that Rosenthal engaged in fraudulent trading practices that helped unregistered brokers, known in the industry as “flippers”.

The United States Securities and Exchange Commission (SEC) today announces that it instituted settled proceedings against Chris D. Rosenthal. From February 1999 to September 2016, Rosenthal, served as a financial adviser and Senior Vice President at UBS, buying and selling securities for his brokerage customers’ accounts.

The SEC’s order finds that Rosenthal engaged in fraudulent trading practices that helped unregistered brokers, known in the industry as “flippers,” deceptively posing as retail investors to obtain municipal bonds in primary offerings.

According to the SEC’s order, from 2012 to 2016, Rosenthal engaged in deceptive practices designed to circumvent the priority that is given to retail investors in new issue municipal bond offerings. For instance, the SEC’s order found that, when placing orders for unregistered brokers in new issue municipal bond offerings distributed by UBS, Rosenthal falsified zip codes associated with the brokers’ accounts. This made it appear as though the orders had been placed by retail clients.

Furthermore, the SEC’s order finds that Rosenthal helped UBS municipal bond traders obtain new issue municipal bonds by placing dealer stock orders – which would ordinarily get lower priority in a new issue allocation – through the unregistered brokers, giving the impression that the orders were for customers rather than for UBS’s trading inventory. Also, the SEC’s order finds that Rosenthal engaged in a parking scheme with the unregistered brokers by arranging for them to purchase new issue bonds in offerings distributed by UBS, with the agreement that they would sell them back to UBS at a prearranged price. The parking scheme made it more likely that UBS traders could obtain new issue bonds for UBS’s trading inventory.

Rosenthal has been found to have willfully violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, as well as disclosure and fair dealing provisions of Rules G-11(b), G-11(k) and G-17 of the Municipal Securities Rulemaking Board. The order also found that he caused the unregistered brokers’ violations of Section 15(a)(1) of the Exchange Act.

Rosenthal did not admit or deny the SEC’s findings. However, he consented to a cease-and-desist order barring him from association with various regulated entities with the right to apply for reentry after five years. The order also imposes payments of $284,080 in disgorgement, $15,128 in prejudgment interest, and a $75,000 civil penalty.

The merits of the SEC Enforcement program cannot be assessed by numbers and statistics chronicling events like how many cases were filed or the total amount of dollars ordered in judgments. At least that is the claim frequently repeated by the agency and the Division of Enforcement. Yet various sources publish numbers about Division of Enforcement ranging from the newly minted Annual Report (started last fiscal year) of the Division to various consulting firms and universities. Many who practice in the area, or closely follow the agency, discuss metrics and numbers tied to the work of the Enforcement Division. The question thus becomes “What, if anything, do SEC Enforcement statistics tell us?”

The New York University Pollack Center for Law and Business is one source of statistics about the work of SEC Enforcement that is outside the agency. The Center teams with Cornerstone Research to publish its data. The most recent compilation from this team is: Cornerstone Research, SEC Enforcement Activity: Public Companies and Subsidiaries (December 2018), available here (Cornerstone Report).

Number of Enforcement cases: Many of the metrics highlighted in the Report are familiar, echoing the earlier Enforcement Annual Report, published in October 2018 (here). The top line key metric is always the number of cases filed by the Division. Both reports agree that 490 standalone enforcement actions were filed FY 2018. The Division likes to add an asterisk to the number, noting that the MCDC (Municipalities Continuing Disclosure Cooperation initiative) skews the trend analysis over time. The Cornerstone Report faithfully footnotes the claim (here). The Division offers little explanation for this claim. The Cornerstone Report offers none. While there is no doubt that MCDC added a number of cases to the totals, the same might be said of the current Enforcement efforts regarding the share class selection initiative which is not mentioned.

Perhaps the most significant point about the 490 FY 2018 total is not whether an asterisk is added by but how the Division was able to file that many cases. In the first half of FY 2018 the Division only filed 159 standalone cases. In the second half of the year over twice as many cases were brought – 331. The tables included in the Cornerstone Report demonstrate that this is the largest number of actions brought in any six-month period in the last several years with or without the asterisk. While it is typical to see the numbers go up in the waning months of the fiscal year as the Division empties its pipeline and looks to enhance its year end statistics for the fall Congressional budget hearings, more than doubling the first half output is a significant achievement. That number becomes even more remarkable in view of the Cornerstone Report’s statement that 44% of the FY 2018 independent SEC actions were filed in the fourth quarter. Unfortunately there is no discussion regarding these achievements in the Cornerstone Report or the Division’s Annual Report.

Public company cases:  The focus of Cornerstone Report is cases involving public companies and/or their subsidiaries. Here the numbers can be difficult to square with those from the Enforcement Annual Report. For example, according to the Cornerstone Report the SEC filed 71 new enforcement actions against public companies and subsidiaries in FY 2018. The bulk of those cases – 46 – were filed in the last quarter of the fiscal year. That number represents a record for this decade.

Again, there is no discussion of the numbers revealing how the Division accomplished this feat. Perhaps more importantly, the numbers here do not precisely track those from the Enforcement Annual Report. The Division’s Annual Report says that 16% of its cases involved issuer reporting, accounting and auditing issues. That calculates to 78 cases (the number is not in the report). Whether the category described by the SEC is the same as that used by Cornerstone is unclear. Neither report offers definitions which could clarify the question.

Venue selection: Venue selection is another key question about SEC Enforcement as reflected in the series of cases that resulted in the Supreme Court’s decision in Lucia v. SEC, 138 U.S. 2044 (2018) which held that SEC ALJs are not properly appointed in accord with the Constitution’s Appointments Clause (which of course has nothing to do with the real question raised by the case which was venue selection – federal court or administrative proceeding). The statistics here are even murkier. The Cornerstone Report states that 85% of the public company and subsidiary actions were filed as administrative proceedings. A year by year chart that traces back to 2010 reflects this point. It also shows slightly fewer administrative proceedings being filed last year compared to the prior three years but far more that in any year from 2010 through 2014.

The meaning of the venue statistics is unclear. The Cornerstone Report does not disclose the percentage of those cases were settled. Most public companies and their subsidiaries settle actions at the time of filing, a fact not mentioned in the Cornerstone Report. If, for example, all or almost all of the cases filed as administrative proceeding have been settled by the time of filing the number could suggest that SEC Enforcement is no longer shifting its contested enforcement actions to the administrative forum rather than bringing them in federal district court – the trend that spawned Lucia.

Statistics presented at the December 5, 2018 Fifth Annual Dorsey Federal Enforcement Forum by Urska Velikorja, a professor at Georgetown Law School who specializes in SEC Enforcement (here), demonstrate that virtually all of those cases were settled. Indeed, Professor Velikorja noted that every SEC enforcement action filed as an administrative proceeding since May 2018 has been settled. Whether this is a new, but unannounced enforcement policy, or just the by-product of the glut of cases on the administrative docket following Lucia as the Commission sought to implement the Court’s mandate is unclear.

Monetary sanctions: Similar difficulties arise regarding two other key metrics – dollars in judgments and case selection. In FY 2018 a record setting $2.4 billion is reflected in the settlements from 89% of the actions according to the Cornerstone Report. This is another milestone number that traces back to the beginning of the decade.

The Cornerstone Report also notes that the percentage of firms cooperating with the staff investigations was about 61%, relatively consist with other years. Juxtaposing the two numbers, the question becomes what if anything the cooperators got for their efforts? Stated differently, did the large amount dollar amount result from giving less credit for cooperation? The Cornerstone Report does not specify if the dollars are disgorgement, prejudgment interest or penalties, which is important since SEC Enforcement tends to reward cooperation by discounting penalties but not disgorgement.

The only discussion of the monetary sanctions is a sentence stating that 74% of the total came from one huge, record setting settlement of $1.8 billion in an FCPA case. Since portions of those dollars go to other actions as the Cornerstone Report states, just how much cash the SEC garnered from enforcement is unclear. And, it cannot be determined how the total in the Cornerstone Report squares with that in the Division’s Annual Report which puts the total at $3.945 billion without touting the amount as a record.

Case type: Finally, the Cornerstone Report and the Enforcement Annual Report both present statistics regarding the types of cases brought in FY 2018. The Cornerstone Report claims the top category is issuer reporting at 34% followed by broker-dealers at 27%. In contrast the Enforcement Annual Report states that the largest category of cases was offerings at 25% while 22% involved investment advisers and investment companies. Issuer reporting and disclosure cases accounted for 16% of the total number of cases (or 78 cases compared to 122). As in other parts of the two reports there are no definitions to aid the user. There is little to no discussion to elucidate the statistics.

Some clarity is added by the numbers presented at the Dorsey Federal Enforcement program cited above. There it was noted that in the fourth quarter of FY 2018 over 50 actions were brought against investment advisers, a total which seems to support the statistics offered by the staff in its Annual Report.

Conclusion: One point which is clear from considering the Cornerstone Report and the Enforcement Annual Report: SEC Enforcement brought 490 standalone enforcement actions in F 2018, a significant number of cases. It is also clear that large sums of money were included in the settlements.

Finally, there is also a suggestion that the Enforcement Division may be moving away from the pre-Lucia days of bringing contested actions as administrative proceeds – at least for now. Perhaps in the future Cornerstone Research and the Division of Enforcement will shed additional sunlight these trends.

Dorsey & Whitney LLP

by Thomas Gorman

December 17, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced it will update its Electronic Municipal Market Access (EMMA®) website to accept and display two new required municipal securities disclosure types under amended U.S. Securities and Exchange Commission (SEC) Rule 15c2-12. As of February 27, 2019, municipal bond issuers will be able to use the EMMA website to comply with the additional obligation. These obligations will require issuers to disclose the incurrence of, or amendment to, financial obligations, if material and the occurrence of certain events reflecting financial difficulties related to an existing financial obligation. Read the SEC’s adopting release amending Rule 15c2-12.

“An effective municipal securities market is enhanced by robust and complete disclosure by municipal bond issuers,” said MSRB President and CEO Lynnette Kelly. “We are committed to supporting the issuer community and its ability to comply with ongoing disclosure requirements.” Read about submitting disclosures to EMMA.

To provide the issuer community with additional information about the upcoming amendments to Rule 15c2-12 and discuss related changes to the EMMA system, representatives of the MSRB, along with the SEC, National Association of Bond Lawyers (NABL) and Government Finance Officers Association (GFOA) will be hosting a free webinar on January 17, 2019, at 3:00 p.m. EST. The webinar will also be available on-demand. To submit questions in advance of the webinar, email [email protected] no later than January 7, 2019. Register to attend the webinar.

Currently most issuers of municipal securities are contractually obligated to make financial and other disclosures throughout the life of an issuance, including the bond issuer’s latest annual financial and operating information, as well as certain current financial events, including bond calls, rating changes or bankruptcy, among others. When amendments to Rule 15c2-12 take effect late February, issuers of new municipal bonds may be required to agree to disclose to investors significant information about the incurrence of bank loans and similar borrowings, as well as events reflecting financial difficulties related to its existing financial obligations. The new disclosure requirements will apply if a community issues a bond on or after February 27, 2019, for which it enters into a new continuing disclosure agreement.

Date: December 4, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

While at a public finance conference recently, a colleague from another firm gave me some good-natured chiding about my comments regarding the need for standardized digital disclosure for the municipal bond market.

She mentioned what many others have: the muni bond market is just too disorganized with too many distinct borrowers, sectors, unique terms and security structures to ever have anything about it standardized. I quipped back that if science can digitally map the human genome, I was fairly confident municipal bond financial disclosures could be digitally mapped as well.

In fact, there are other securities exchanges far more complex than the municipal bond market that transitioned to standardized digital reporting to assure more fair, efficient and transparent capital markets. In the U.S., from the New York Stock Exchange to Nasdaq, there are roughly 4,300 exchange-listed public companies—each tagged with one or more of the 1,057 North American Industry Classifications—with a total market capitalization of around $30 trillion. These companies file annual, quarterly and other disclosures using standardized digital templates.

Continue reading.

Forbes

by Barnet Sherman

Dec 4, 2018

Muni bond defaults are rare.

To the tune of less than one-tenth of one percent.

But you’re probably careful when you walk under scaffolding even though the risk of a construction worker falling on top of your head is slight too.

There are a number of things you and the Securities and Exchange Commission and muni bond issuers can do to protect yourself against the possibility of losing significant amounts of money on the municipal bonds you buy and hold.

The safeguards you can take, and dangers surfaced at an SEC roundtable on muni bond disclosures Thursday.

Municipal bond prospectuses can be too lengthy, ponderous and yes, boring, to read in full.

Like with any lengthy financial document, such as an SEC filing, there are nuggets you can find quickly by doing key word searches.

SEC Commissioner Robert Jackson suggested looking up “repayment,” which will tell you where the city, state or other local government is getting to repay the money you are lending it through a muni bond purchase and “unfunded liabilities,”—other demands on the governmental unit on the pot of money it is using to pay bondholders.

The biggest danger a retail investor who owns munis can avoid is to sell them immediately when bad news comes out because things inevitably get better, advised Jim Spiotto, managing partner of Chapman Strategic Partners.

One of the reasons problems with a muni bond issuer quickly improve, said Spiotto, is just as doctors bury their mistakes, finance officers finance theirs.

Spiotto’s firm is an outgrowth of Chapman and Cutler one of the top law firms in the municipal bond arena for over half of a century.

Speaking to the potential for a wave of new muni bonds hitting the market if Congress passes a major infrastructure bill, Spiotto acknowledged when anyone (including local governments) does anything fast, it is important short cuts aren’t taken.

“When muni bond issuers make multiple issues in a short period of time, they will have to make sure tax revenues to support the bonds are sustainable and affordable,” the consultant said.

At the same time, Spiotto said infrastructure improvements could ease the financial stress on muni bond issuers because they stimulate local economies.

The expert said if a muni bond issuer tells one investor about changes in their financial condition to tell all.

“Disclosure allows all to understand the situation including those who would constructively help if they knew the accurate situation,” said Spiotto.

He added issuers who expand disclosures can be better market credibility and better credit ratings.

When it comes to developments have put an issuer under financial distress, Spiotto said investor panic can be reduced or eliminated by full and prompt disclosure of the evolving situation.

Retail investors need better and faster information from muni bond government creators to help make better buy and hold decisions, SEC Chair Jay Clayton told the gathering.

“Without it, it is challenging to evaluate the condition of issuers,” said Clayton.

He complained some issuers don’t release their financial statements until significantly after the end of their fiscal years.

He noted mom and pop investors hold about $2.66 trillion in muni bonds directly or indirectly, two-thirds of the entire value of the market.

With the heavy reliance of retail investors on muni bonds and of society as a whole since they account for two-thirds of the infrastructure in the country, Clayton said there should be a close regulatory focus on the municipal bond market.

He said the SEC and the Municipal Securities Rulemaking Board are studying ideas to improve the speed and completeness of muni bond disclosures.

Timeliness needs to be improved, asserted SEC Investor Advocate Rick Fleming.

“Financials are stale by the time they are disclosed, that has been an investor issue for a long time,” said Fleming.

Democratic SEC Commissioner Kara Stein added her voice to the calls for better information for muni bond issuers to investors: “More work needs to be done on disclosures.”

She added there are no shortage of issues that need to be looked at for their potential impact on muni bonds including public pension shortages and interest rate changes.

Republican Hester Peirce said she is all in favor of clear English in muni bond disclosures because while retail investors might not read them, third parties that distill the highlights and feed them to individual investors do.

She explained the disclosures can be important in muni bond pricing.

In terms of what information the SEC should mandate from the issuers, Peirce said: “I don’t want to give people a sense there is a lower bar for materiality than there is.”

Fidelity Research Analyst Amy Johonnett protested disclosure is inconsistent everywhere in municipal securities.

With the calls for more disclosures, there are worries they could further strain the budgets of already financially strapped local governments, said SEC Office of Municipal Securities Attorney-Advisor Adam Windell.

During the session, S&P Global Ratings Managing Director Robin Prunty called the 2019 economic forecast for state and local governments “troubling.”

“There will be a much more strained budget climate,” she said.

She added, though, economists are not predicting a recession and many state and local governments are in good financial shape.

Forbes

by Ted Knutson

Dec 7, 2018

Ted Knutson is one of the most experienced financial regulatory reporters in Washington. For years, he has covered the SEC, CFTC, the bank regulators and the key Congressional committees.

Norwalk, CT, November 27, 2018 — The Governmental Accounting Standards Board (GASB) today proposed implementation guidance containing questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements.

The Exposure Draft, Implementation Guidance Update—2019, proposes new questions and answers to address application of the Board’s standards on cash flows reporting, postemployment benefits, derivative instruments, irrevocable split-interest agreements, tax abatement disclosures, and other topics. The Exposure Draft also proposes amendments to previously issued implementation guidance.

Stakeholders are encouraged to review the proposal and provide comments by January 31, 2019.

WASHINGTON — The transparency of some market benchmarks used to price new municipal bonds needs improvement, dealer groups told the Municipal Securities Rulemaking Board this week.

The Securities Industry and Financial Markets Association and the Bond Dealers of America made that point to the board in responses to a previous MSRB request for information on how market participants use curves and benchmarks.

“Some of the benchmarks used in our market are sufficiently transparent, but not all,” wrote Michael Decker, a managing director and co-head of munis at SIFMA.

“For the most widely used benchmark, the MMD scale, the market is missing some key information,” he said, referring to a curve produced by Municipal Market Data. “For example, while we know that MMD uses some third-party information in calculating their scale, we do not know how much data come from third parties, what is the nature of that information, who the third-party providers are, whether those providers may have conflicts of interest with respect to the scale, how those data are used in the calculation, and other key information. Greater transparency would help market participants better understand how MMD is calculated and how MMD behaves under different market conditions.”

BDA CEO Mike Nicholas told the MSRB that all member firms who responded reported that benchmarks were used for new issue pricing, and that a majority used them for block-size dealer bids and for institutional investor bids and offers in the secondary market. Retail use was less common, Nicholas said.

BDA members were in some disagreement about transparency, Nicholas told the board.

“Some members believe that the benchmarks currently available in the municipal market are sufficiently transparent,” he wrote. “One member noted that unique disclosures and credit ratings make it challenging for transparency benchmarks and can render them not viable for a one size fits all approach. Having better access to EMMA data could be a solution for better transparency.”

The MSRB has been studying the methodologies, mechanics and functions of market indices, yield curves and other benchmarks since 2012, and began making some available on its EMMA website for free in July 2017. Such indices provide information about muni bond interest rates, potentially allowing investors and issuers to make more informed decisions on investments and issuances. The MSRB said when it made the request for comment in August that it was primarily informational in nature.

Decker said that there may be an opportunity to provide input to providers of market benchmarks.

“Talking with some of our market’s benchmark sponsors, there may be interest in forming a diverse, market-wide advisory group of stakeholders to provide feedback and advice to municipal benchmark providers on their methodologies and processes,” Decker wrote.

The groups were mixed on the MSRB’s question regarding whether the International Organization of Securities Commissions’ Principles for Financial Benchmarks are appropriate for benchmarks in the municipal securities market. IOSCO describes itself as “the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector.”

Decker told the board that many of the IOSCO principles make sense for the muni market, such as the recommendation that benchmark administrators establish and publish guidelines regarding the sources of data and information they use.

“There were differing opinions across membership on whether IOSCO Principles are appropriate for benchmarks in the municipal securities market,” Nicholas wrote. “Some agreed that they are appropriate while others were unfamiliar and cautious of the efficacy of an international benchmark application to the US municipal securities market.”

While the MSRB has indicated that its request for information was more informational than a prelude to rulemaking, Decker told The Bond Buyer that it was appropriate for the MSRB to raise these questions and that the board doing so might hopefully spur additional transparency from benchmark providers.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 11/28/18 07:00 PM EST

As a member of the Alternative Reference Rates Committee of the Federal Reserve Bank of New York, GFOA has strong interest in ensuring that governmental issuers have comprehensive guidance as protocol as you are presented with choices as the market nears the end of LIBOR and transitions to SOFR. This exercise is especially important in the public markets where we promote transparency to ensure that investors have appropriate material information about municipal securities.

This week, GFOA filed comments in response to the ARRC consultation for fallback language for floating rate notes (“FRN”). GFOA supports efforts to ensure that robust fallback provisions are in place and are accessible to all issuers in preparation for the cessation of LIBOR in 2021. Our evaluation is based on the premise that the market will prefer as much clarity at the time of issuance of any new LIBOR based FRN as possible.

Download GFOA Response

November 28, 2018

A detailed summary of our conference is below. Please reach out with any questions or comments. We need your feedback to ensure we continue building a tangibly beneficial conference with the right topics and speakers — all focused on the U.S. fixed income markets.

On October 25th & 26th, the BDA held its 10th Annual National Fixed Income Conference at the Four Seasons Hotel in Washington, D.C.

Continue reading.

Bond Dealers of America

November 26, 2018

New rules adopted by federal banking regulators will affect many electric power, natural gas, and other contracts between banks or their affiliates and their utility counterparties, including public power, cooperative, and investor-owned utilities. While the regulations are complex and cover a variety of arrangements and scenarios, this Alert highlights those regulations that are likely relevant to most U.S. utilities.

Key regulations affecting bank-counterparty contracts include:

• Requiring contract amendments to incorporate Dodd-Frank legislation enacted in 2010, which blocked the exercise of contract termination and related rights if the bank or bank affiliate faces insolvency at a time when U.S. regulators deem it a global systemically important banking institution (G-SIB) and thus put the bank’s insolvency in a special bankruptcy proceeding.
• Extending regulations beyond Dodd-Frank to block a counterparty (e.g., a utility) from exercising certain cross-default rights when an affiliate of the contracting party (i.e., bank or bank affiliate) enters into ordinary bankruptcy proceedings.

Utility contracts affected include:

• Qualified Financial Contracts (QFCs) with a bank or an affiliate of a bank regulated by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), or the Comptroller of the Currency.
• QFCs as defined under Dodd-Frank, which includes but is not limited to forward contracts (e.g., ISDAs, EEIs, NAESBs power purchase agreements) and certain swaps, hedges, and commodity contracts that allow termination, liquidation, etc., upon insolvency.

Contract amendment deadlines and obligations include:

• Counterparties must amend contracts by January 1, 2019 (the first compliance date), if they want to enter into new transactions with the bank or bank affiliate after that date.
• Otherwise, affected banks and their affiliates are expected to contact nonfinancial counterparties, such as utilities, to obtain amendments prior to January 1, 2020 (the later compliance date).

Because it is possible that affected banks and their affiliates may inadvertently overlook some contracts or fail to persuade some counterparties to amend their QFCs, regulators have set up other provisions.

• If regulators determine after the compliance deadlines that the levels of noncompliant QFCs held by banks continue to pose a risk to the financial system, they have suggested that they may consider additional rules to address those remaining QFCs.

To amend contracts, regulators have set forth two methods: (1) Send $500 and a letter to ISDA acknowledging adherence to the ISDA Stay Protocol, which is capable of amending any type of QFC (whether it was an ISDA document or not), or (2) Bilaterally amend the actual QFC. The first method is easiest and may offer other advantages over amending bilaterally.

McCarter & English, LLP

November 28, 2018

WASHINGTON — The disclosures underwriters provide to issuers at the beginning of a deal could become shorter under a proposal to revise interpretive guidance on the Municipal Securities Rulemaking Board’s fair dealing rule.

The MSRB on Friday asked the market for comment on proposed amendments to interpretive guidance it issued in 2012 on the application of its Rule G-17.

The MSRB asked for comment on the guidance back in June, and market participants subsequently provided it. That 2012 guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

The MSRB’s proposal is part of an ongoing retrospective review of its rules and their interpretations, and in this case is aimed at making the so-called “G-17 letters” more useful to issuers and less burdensome for underwriters.

The proposal would make several key changes, both in what disclosures are provided and in who must provide them. The current interpretive guidance requires that underwriters provide disclosure of both actual and potential conflicts of interest, but under the new proposal they would need to disclose only actual conflicts. Potential conflicts would be disclosable only if the dealer believed it likely that they would become actual conflicts during the term of the transaction.

Another change would shift responsibility for providing disclosures on behalf of an underwriting syndicate onto the shoulders of the syndicate manager. Under the current guidance, a syndicate manager may provide the disclosures on behalf of the group. Under the new proposal, the syndicate manager would be responsible for providing both standard and transaction-specific disclosures on behalf of the syndicate.

The MSRB is also proposing to allow an alternate method for providing the standard disclosures that do not vary from transaction to transaction. Under the proposal, once the standard disclosures have been made in a transaction the syndicate manager could simply reference and reconfirm those prior standard disclosures for subsequent deals with that issuer.

This means that a firm that participated in the previous syndicate and is now manager on a new transaction would could benefit from the disclosures made by the manager on the previous issuance. Further, that syndicate manager could reference back to the disclosures on behalf of new members of the syndicate which did not participate in the prior one.

Issuers could choose, however, to require the standard disclosures be provided to them again. In either case, the transaction-specific disclosures would need to be made anew each time.

The MSRB’s proposal would also allow an email receipt to serve as confirmation that the disclosures had been provided to the issuer. Some underwriters have complained that obtaining confirmation of receipt as provided by the 2012 guidance is sometimes challenging because issuers are not responsive.

The MSRB chose not to touch some possibilities raised in comments, such as allowing issuers to opt out of receiving the disclosures or creating a system of disclosure “tiers” based on the size or other aspects of the issuer.

“The concepts covered in our G-17 interpretive guidance are fundamental to the underwriter/issuer relationship,” said MSRB Chair Gary Hall. “We think the proposed changes will enhance operational fairness and efficiency in the market, and our effort to solicit comments is connected with our retrospective rule review, which is a key focus for the MSRB this year.”

The board is asking for comments by Jan. 15.

After the comment period the board could choose to alter the proposal or could ask the Securities and Exchange Commission to approve it.

The Bond Buyer

By Kyle Glazier

November 16 2018, 4:31pm EST

On September 25, 2018, the Bond Dealers of America (BDA) announced the formation of a Fixed Income Market Structure Working Group. The group is co-chaired by Brad Winges, Head of Fixed Income Services at Piper Jaffray and Kevin Giddis, Head of Fixed Income Capital Markets at Raymond James, and will focus on all aspects of fixed income market structure with retail, institutional, taxable and muni-focused participants.

The BDA is convening this group to proactively address the challenges and opportunities that changing business practices, technology, regulation and market forces have on fixed income management. The working group brings together a seasoned and diverse group of industry professionals. As a ‘Main Street’ thought leader on fixed income market structure, the BDA’s new working group anticipates direct engagement with the SEC, Capitol Hill, federal regulators and other market participants.

“Underneath the cyclical gyrations in the fixed income marketplace, there are serious secular changes taking place. By virtue of its membership, this working group will provide a unique perspective about the critical issues faced by the fixed income industry. Our collective voice will play a critical role in helping policymakers ensure that tomorrow’s investors will be fairly served in the fixed income markets,” said co-chairs Brad Winges and Kevin Giddis.

Topics of interest to the working group include:

• Federal regulation and the impact on fixed income liquidity;
• Technology, execution and the impact on trading and sales;
• Electronic execution in the taxable primary markets; and
• Evolving buy-side capabilities and expectations

BDA’s Fixed Income Market Structure Working Group includes the following members:

Brad Winges (Co-chair)
Head of Fixed Income Services and Piper Jaffray Firm Investments and Trading
Piper Jaffray Companies

Kevin Giddis (Co-chair)
Executive Vice President and Head of Fixed Income Capital Markets
Raymond James Financial, Inc.

Matt Boardman
Managing Director and Head of US Wealth Management Fixed Income
RBC Wealth Management

Larry Bowden
Executive Vice President and Director of Fixed Income Sales and Trading
Stephens, Inc.

Brian Brennan
Head of Fixed Income
KeyBanc Capital Markets

Tom Dannenberg
President and CEO
Hutchinson, Shockey, Erley & Co.

Mark Evans
Executive Vice President, Director of Trading
Vining Sparks

Kenneth Friedrich
Senior Managing Director, Head of Fixed Income Capital Markets
Hilltop Securities, Inc.

Michael Haire
Vice President of Fixed Income
LPL Financial

Kelly Martin
Managing Director, Head of Leveraged Finance
William Blair & Company, LLC

Eric Needleman
Head of Fixed Income Capital Markets
Stifel Financial Corporation

Randy Nelson
Co-Founder, Executive Vice President and Managing Director
Wells Nelson & Associates

John Reilly
Managing Director, Capital Markets Trading Business and Strategy
Wells Fargo Advisors

Tim Romanow
Executive Vice President and Director of Trading
FTN Financial

Jack Schlifer
President of Debt Capital Markets
Duncan-Williams, Inc.

Pete Sirbu
Vice President, Head of Fixed Income Capital Markets Trading and Strategies
Ameriprise Financial

Tom Wammack
Managing Director, Fixed Income Capital Markets
Robert W. Baird & Co.

Don Winton
Chief Operating Officer
Crews & Associates

SUMMARY

SIFMA responded with comments to Notice 2018-22 issued by the Municipal Securities Rulemaking Board in which the MSRB requested comment on draft interpretive guidance related to pennying and draft amendments to existing guidance on best execution relating to the posting of bid-wanteds on multiple trading platforms.

Read the SIFMA Comment Letter.

The NFMA publishes its newsletter, the Municipal Analysts Bulletin, three times per year. The current issue, Vol. 28, No. 3, is now available. The newsletter provides members with the opportunity to hear from NFMA officers and committees, as well as constituent societies, with news about past and upcoming initiatives and events. You can find past newsletters under Resources on the navigation bar on the NFMA home page.

On October 23, NASACT, through the Uniform Guidance Workgroup, sent a letter to the U.S. Office of Management and Budget regarding an instance where the Uniform Guidance references generally accepted accounting principles and the GAAP is changing as a result of a recently issued standard from the Governmental Accounting Standards Board.

GASB recently issued Statement No. 87, Leases. This standard eliminated the distinction between operating and capital leases and adopted the classification referred to as a “lease asset,” which is defined as an intangible right-to-use asset. This change in GAAP has raised several questions about how federal awarding agencies will interpret and apply the UG as a result of the new lease standard. Read the full comment letter.

NASACT previously sent a letter to OMB on another outstanding issue pertaining to the interpretation of the UG because of its reference to GAAP for pension costs in section 200.432(g)(3).

The BDA has submitted a letter in response to the MSRB Report entitled, “Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline?”

The final letter can be viewed here.

Bond Dealers of America

November 9, 2018

Monthly, quarterly or annual trading volumes for the U.S. fixed income markets. Data Visualization Explore Bond Markets Trends An immersive experience on the bond markets, our interactive data visualization…

Download.

Nov. 8, 2018

In a review of a FINRA disciplinary proceeding, the Securities and Exchange Commission (the “Commission”) recently issued an opinion (the “Opinion”) that provides important guidance on liability standards relating to Chief Compliance Officers (“CCO”). Significantly, the Opinion also goes out of its way to state that CEOs of brokerage firms have a duty of “follow-up and review” with respect to the fulfillment by CCOs of their responsibilities and to advance the position that brokerage firms should be held responsible for regulatory failures by employees and other firm representatives in the absence of “effective staffing, sufficient resources and a system of follow-up and review.” See In the Matter of the Application of Thaddeus J. North for Review of Disciplinary Action Taken by FINRA, Release 34-84500 (Oct. 29, 2018) (available here). While the Opinion is focused on activity involving the CCO of a brokerage firm, the Opinion’s liability analysis would seem equally applicable to registered investment advisers and municipal advisors and their CCOs and, possibly, their CEOs.

The Opinion involved the Commission’s review of a FINRA disciplinary action against Thaddeus J. North (“Mr. North”), the CCO of brokerage firm Southridge Investment Group LLC (“Southridge”). FINRA had found that Mr. North violated a number of FINRA, NASD, and MSRB rules on account of his failure (i) to establish and maintain a reasonable supervisory system for the review of electronic correspondence and to reasonably review that correspondence and (ii) to report a representative’s ongoing business relationship with a statutorily disqualified individual. In reviewing and ultimately upholding FINRA’s findings, the Commission had an opportunity to discuss principles applicable to CCO liability determinations, the CEO’s duty to “follow-up and review” Mr. North’s exercise of his authority, and Southridge’s responsibilities.

The Opinion begins its discussion of the principles applicable to CCO liability by characterizing compliance officers as playing “a vital role” in the Commission’s regulatory framework while also acknowledging that the CCO role has “increased in complexity” and may present “difficult challenges.” The Opinion then referenced two principles as uppermost in the Commission’s CCO liability determinations. These principles consist of “the protection of investors and the public interests” together with the “principles of fairness and equity.”

The Opinion next referenced a number of Commission cases that provided guidance favorable to compliance officers and, presumably, served as examples of the principle of fairness and equity in this context. These include:

• the fact that legal and compliance personnel “do not become ‘supervisors’ . . . solely because they occupy those positions” – citing John H. Gutfruend, Release 34-31554, 1992 WL 362753, at *15 (Dec. 3, 1992);
• the fact that proceedings alleging supervisory failures by a compliance official have been dismissed where “the respondent conducted his own independent investigation in response to indications of wrongdoing and recommended responsive action” – citing James Arthur Huff, Release 34029017, 19091 WL 296561, at *4 (Mar. 28, 1991);
• similarly, the dismissal of proceedings against “an individual with compliance responsibilities” for causing a firm’s securities laws violations “where another official at the firm had responsibility for overseeing the relevant activities and the respondent was never asked to evaluate the relevant regulatory issues” – citing Scott G. Monson, IA-28323, 2008 WL 2574441, at *5 (June 30, 2008); and
• a finding that “a compliance director’s failure to respond to a regulator’s request for information was mitigated by the ‘extraordinary demands on the compliance group’ during the relevant time” – citing Richard J. Rouse, Exchange Act Release No. 32658, 1993 WL 276149, at *5 (July 19, 1993).

The Opinion characterized the forgoing decisions as reflecting “the principle that, in general, good faith judgements of CCOs made after reasonable inquiry and analysis should not be second guessed.” The Opinion also stated that “indicia of good faith or lack of good faith are important factors in assessing reasonableness, fairness and equity in the application of CCO liability.”

Next, the Opinion listed a number of “matter types” that generally made determinations of individual liability “straightforward.” Pointing towards liability, these included, “when a CCO engages in wrongdoing, attempts to cover up wrongdoing, crossing a clearly established line, or fails meaningfully to implement compliance programs, policies, and procedures for which he or she has direct responsibility.” Pointing away from liability, the Opinion stated that “disciplinary action against individuals generally should not be based on an isolated circumstance where a CCO, using good faith judgment makes a decision, after reasonable inquiry, that with hindsight, proves to be problematic.”

Turning to the facts at hand, the Opinion found that Mr. North’s failure to fulfill his own responsibilities was “egregious” and that he “ignored red flags and repeatedly failed to perform compliance functions for which he was directly responsible.” Under those facts and circumstances, the Opinion found that FINRA’s disciplinary action “was clearly appropriate.”

Having reached a finding upholding FINRA’s disciplinary action, the Opinion continued into a discussion of the duty of a CEO to oversee the compliance function and an inquiry into why FINRA did not bring charges against Southridge. Significantly, the Commission’s discussion of these points can be characterized as what is known in the legal profession as dicta, that is, text in an opinion that does not directly address the specifics of the case at hand, i.e., Mr. North’s possible liability, but rather serves some other purpose, which in this case would appear to be both a notice to CEOs as to the Commission’s expectations with respect to their oversight of the compliance function and a public “suggestion” to FINRA that it should, as a matter of course, also consider the firm’s liability where the firm’s agents have failed to perform their delegated functions.

In discussing the Commission’s expectations regarding CEOs, the Opinion begins by stating that the Commission has “held repeatedly” that the “chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm ‘unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know’ that a problem has arisen.” Citation omitted. While the foregoing standard may not appear to place any duty on the CEO to make inquiry or follow-up regarding a CCO’s fulfilment of his or her delegated responsibilities, allowing the CEO to rest in blissful ignorance until he or she actually “knows [or] has reason to know” that a problem has arisen, the Opinion makes it clear that, to the contrary, CEO’s have “the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised.” Citing Castle Sec. Corp., Release 34-39523, 1998 WL 3456, at *4 (Jan, 7, 1998). The Opinion then states that the record before the Commission did not indicate whether the CEO took steps to monitor the CCO’s compliance with the responsibilities that the CCO failed to perform and that the Commission was “troubled by the possibility that Mr. North could have abdicated his own responsibilities” without the CEO knowing.

The Commission’s discussion of the CEO’s duty to “follow-up and review” the CCO’s exercise of his or her delegated authority strongly suggests that brokerage firm CEOs can be held liable for failure to supervise where there are ongoing compliance failures that could have been identified by a reasonable system of follow-up and review. Moreover, and of perhaps of more significance, the inclusion of this discussion strongly suggests that the Commission expects its enforcement program, as well as those of FINRA and the other self-regulatory organizations, to inquire, in appropriate cases, as to whether the CEO fulfilled his or her duty and, if not, to bring failure to supervise charges against the CEO.

An increased focus on brokerage firm CEOs would be consistent with the Commission’s stated goal of prioritizing actions against “individuals” and, in particular, senior officers. As Steven Peikin, Co-Director of Enforcement, in his Keynote Address to the UJA Federation (May 15, 2018) (available here) stated, he viewed “individual accountability as perhaps the most effective general deterrent tool in [the Commission’s] arsenal, because it can have a broad effect on corporate culture in a way that immeasurably benefits individual investors, preventing misconduct before it starts.” Indeed, a “focus on individual accountability” was one of five core principles listed by the Co-Directors of Enforcement in their testimony before the United States House of Representatives, Committee on Financial Services, Subcommittee on Capital Markets, Securities and Investments (May 16, 2018) (available here).

The Opinion also stated that it was “not clear from the record why FINRA did not charge Southridge” and then emphasized the importance of holding firms responsible in order to make “it clear to firms . . . that it is in their interest to have effective, diligent compliance officers to help them remain in compliance with their obligations.” The Opinion also stated that broker-dealers must “provide effective staffing and sufficient resources and,” similar to what was said with respect to CEOs, must have “a system of follow up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised.” Citing Stuart K. Patrick, Release 34-32314, 1993 WL 172847, at *3 (May 17, 1993).

The Commission’s pointing to both the CEO and the firm as having a duty to “follow up and review” the CCO raises questions as to the necessary scope and frequency of any such follow-up and review. While the Opinion offers no guidance on this point, the answer in any particular case is likely to be highly dependent upon the relevant facts and circumstances. Expectations regarding the review and follow-up with regard to an established CCO is likely to be less than when the CCO is new and unproven. Similarly, the expected review and follow-up are likely to be less with respect to a program that has operated without problem for several years, as opposed to a program that seems to lurch from problem to problem. In any event, it is recommended that firms and their CEOs be able to document a “reasonable review” of compliance staffing needs and effectiveness and whether compliance responsibilities are being met. At a minimum, while such review should include any required compliance reviews and reports, e.g., in the case of a broker-dealer, the annual compliance reports required under FINRA Rules 3110, 3120, and 3130, it is suggested that firms and CEOs consider means of obtaining more frequent and detailed status reports, particularly as to problem areas, areas of high risk, or that raise other, significant concerns. Firms and CEOs may also consider use of internal or external resources to audit or test whether compliance is meeting its objectives.

While the Opinion’s analysis arises out of activities involving a brokerage firm, its analysis with respect to the liability of the CCO and the firm would seem to be equally applicable to investment advisers and municipal advisors as well as their CCOs. As to CEOs, an argument can be made that the Opinion’s reliance on a delegation theory for CEO liability means that the Opinion’s analysis as to CEO liability should not apply to CEOs of investment advisers on account of the fact that the designation required under Investment Adviser Act Rule 206(4)-7(c), which requires investment advisers to designate a CCO that is “responsible for administering” an adviser’s compliance policies and procedure, is, in substance, not a delegation by the CEO. Without addressing the merits of this view, at the very least, the Opinion’s analysis regarding CEO liability should be understood to reflect a heightened interest on the part of the Commission in holding CEOs of registered financial service companies to a higher standard than may previously have been the case.

by Glen P. Barrentine

November 6 2018

Winston & Strawn LLP

The MSRB has released third quarter trading stats. Read about the #muniland quarterly highlights, most actively traded securities and more.

Read about fiscal year 2019 priorities and new educational resources in the latest MSRB Update newsletter.

In August, the Securities and Exchange Commission approved new Amendments to Rule 15c2-12. This Rule governs disclosure requirements associated with municipal securities.

The new Amendments, effective February 27, 2019, are an effort to provide additional financial information to investors where an issuer may have material financial obligations that could impact bond holders. Governments will have to state in continuing disclosure agreements entered on or after the effective date that they will disclose to the market any new and material financial obligations and notify the market when an outstanding or new financial obligation reflects material financial difficulties.

Material financial obligations are related to debt and debt type products and not normal business operations. The types of financial obligations that are captured under the Amendments include: bank loans, capital leases, swaps, variable rate obligations, and other types of financial products that “operate as vehicles to borrow money.”

Issuers of municipal debt should start preparing now for the changes that will need to be in place by February 27. The most important first step would be to talk with bond and/or disclosure counsel about how these changes specifically relate to your debt program and future bond issuance and other financial transactions. Issuers should also review their debt management and disclosure policies and consider adding new provisions to address the Amendments, including:

• creating a master list of all current financial obligations including, but not limited to, bank loans, capital leases, derivatives, as well as any guarantees of these types of obligations,
• developing a system to track any financial difficulties related to these obligations,
• having a process in place to add new financial obligations, and
• working with counsel to determine materiality of your financial obligations and when financial difficulties may arise.

The GFOA will be developing additional resources to help issuers prepare for these new responsibilities. This includes a webinar about the new Amendments and what they mean for issuers that will be held on Wednesday, January 9 (additional details forthcoming). Also, the SEC will be hosting a conference on December 6, that will be available via webcast, on Municipal Securities Disclosure in an Evolving Market.

Governments should also review resources available from the GFOA, NABL, and law firms about issuer debt management programs and the new 15c2-12 Amendments.

On October 25 – 26, 2018, the BDA held its 10th Annual National Fixed Income Conference in Washington, D.C.

Key highlights from the event include:

• Over 220 attendees – fixed income leadership representing all aspects of the markets
• Over 75 firms represented from coast-to-coast
• Dozens of exhibitors and sponsors whose support helped to make this event possible
• View the recap here

Thank you to all attendees, sponsors, and exhibitors for helping to make our 10th Annual National Fixed Income Conference our strongest yet!

WASHINGTON – The financial crisis of 2007 and 2008 led to sweeping changes in the municipal securities market, many of which were prompted by new regulations and legislation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in part to address issues that arose during the financial crisis, subjected non-dealer municipal advisors to a first-time federal regulatory regime and imposed on all MAs a fiduciary duty to put clients’ interests first before their own. It expanded the definition of MAs and also set up a first-time regulatory regime for interest rate swaps and other derivatives.

Dodd-Frank expanded the Municipal Securities Rulemaking Board’s mission and resources as well as reoriented its board away from the entities it regulates. The act made dealers rather than issuers responsible for funding the Governmental Standards Accounting Board and it led to the restructuring of the tender option bond market.

Auction rate securities froze, then virtually disappeared. Bank liquidity facilities became unaffordable for variable rate demand obligations, diminishing that market. As a result, the MSRB created transparency systems for ARS and VRDOs to provide investors with more information about these markets. Also, money market funds underwent major regulatory reforms.

The Securities and Exchange Commission began playing a stronger enforcement hand, as evidenced by its Municipalities Continuing Disclosure Cooperation initiative, best known as MCDC.

The American Recovery and Reinvestment Act, designed to help stimulate the economy, eased tax requirements for munis and created taxable Build America Bonds, at least for a while.

Some market participants think the financial crisis and the aftermath had a positive effect on the municipal securities market.

“It had a pretty significant impact on the municipal market,” said Ernie Lanza, senior counsel at Clark Hill who was MSRB general counsel during that time. “But I think the market did ride it out better than people had expected,” and it led to more transparency and behavioral changes such as an increased focus on suitability of products and compliance, he said.

Others, especially those at banks and broker-dealers, say it led to too many costly and burdensome regulations and restrictions that caused small and regional firms to either drop out of the market or consolidate.

“There were various aspects of Dodd-Frank that fundamentally changed how the municipal market operates and how dealers interact with their clients,” said David Cohen, senior legal counsel at RBC Capital Markets who was executive director and regulatory compliance business manager at UBS Investment Bank in 2008 and SIFMA managing director and associate general counsel from June 2011 through September 2015.

“A lot of these new rules require expensive systems and the regulators also have a much higher expectation of what supervisory systems look like,” said Cohen.

“No one likes increased costs. The larger firms have a capacity to absorb it better …. Smaller firms closing results in less competition, which doesn’t necessarily benefit retail investors,” he said.

“The federal regulatory environment since the 2008 credit crisis has contributed to thousands of regional and small broker dealers merging, paring back lines of business or closing shop all together,” said Mike Nicholas, chief executive officer of Bond Dealers of America. “Since 2008, securities regulators have implemented the municipal advisor rule, a new best execution rule for municipal securities, and retail confirm disclosure rules for all of fixed income securities — to just name three — which have forced dealers to significantly ramp up their legal and compliance costs.”

Nicholas also said “the SEC essentially forced all municipal underwriters to self-report under MCDC, which imposed enormous costs on those dealers” and pointed to other rules.

“Cumulatively, these regulatory changes have had dramatically negative impacts on the US fixed income business impacting not only the dealers but their clients and overall market liquidity — which will most certainly be felt at the next market downturn. While BDA members stepped up to provide much needed liquidity during the darkest hours of the credit crisis, the reward since then has been an avalanche of regulation simply resulting in a consolidation of power among a handful of firms and thousands fewer firms to serve Main Street clients coast to coast.”

An MSRB report published on June 19 said that the number of registered dealers has fallen by almost 32% over the past nine years to 1,346 in 2017 from 1,967 in 2009.

AUCTION RATE SECURITIES

Auction rate securities, which were first developed in 1984 and had grown into a $330 billion market of which muni ARS were a major part, were one of the early casualties of the financial crisis.

Downgrades of muni bond insurers scared customers away from investing in ARS, long-term securities with short-term interest rates reset periodically through auctions run by dealers. The ARS market froze in mid-February 2008 after banks and dealers, grappling with subprime mortgages and the credit crisis, stopped propping up ARS auctions with their own capital. The largest ARS market participants at the time were Citigroup and UBS, according to the Securities and Exchange Commission.

In a report issued in December 2017, SIFMA found that outstanding ARS were $14.3 billion as of that month, compared to $95.7 billion in January 2009.

Variable rate demand obligations also ran into trouble after banks stopped providing affordable letters of credit, standby bond purchase agreements and other liquidity facilities.

The SIFMA report showed that outstanding VRDOs were $142.4 billion in June 2018, compared to almost $421 billion in July 2009.

These developments led the MSRB to create transparency programs for ARS and VRDO, under which it collects information about these securities from broker-dealers and makes it public for free through its Short-Term Obligation Rate Transparency (SHORT) System over its EMMA website.

The SEC and some state attorneys general investigated ARS after that market froze. They took enforcement action against banks and broker-dealers that underwrote offerings or managed the auctions for misrepresenting to investors that ARS were safe, highly liquid investments equivalent to cash or money market funds. They forced these firms to buy back billions of dollars of ARS, especially from retail investors.

MONEY MARKET FUNDS

On Sept. 16, 2008 the Reserve Primary Fund, a large money market fund that had a lot of exposure to Lehman corporate debt securities when Lehman fell into bankruptcy, “broke the buck,” when its net asset value fell below $1 per share. This led to a run on institutional prime MMFs.

Treasury Department officials scrambled to put together a program to stem the outflows from MMFs, but initially only focused on corporate debt. Muni market participants warned Treasury officials that if they didn’t include munis, investors would shift from muni to corporate MMFs. On Sept. 19, Treasury announced the creation of a program to temporarily guarantee muni and corporate MMF account balances.

After Mary Schapiro became chair of the Securities and Exchange Commission in January 2009, she made it a priority to adopt MMF reforms that would prevent or minimize the possibility of such runs in the future, which would threaten the day-to-day functioning of the financial system. The changes the SEC made to its Rule 2a-7 on money market funds through 2016 caused significant changes in the MMF industry.

Under these rule changes, only retail and government MMFs can have stable net asset values (NAVs) of $1 per share. Because of the fears that institutional investors can pull out of MMFs quickly, those investors can only invest in either MMFs with floating rate NAVs, where the per-share value fluctuates according to the current price of the securities, or MMFs of government or government-sponsored securities.

The rule changes also imposed fees and gates to discourage redemptions. They required increased diversification in both issuers and letter of credit providers of MMF securities. They also increased transparency for MMFs, including added disclosures of daily and weekly liquid asset levels and disclosures of material events such as portfolio security defaults.

The SEC also adopted rule changes to remove all references to credit ratings in Rule 2a-7, which had been used to determine if securities were eligible for MMFs. Lawmakers and regulators became skeptical of ratings because the rating agencies failed to adjust ratings downward to reflect troubled securities and financial institutions leading up to the financial crisis. Removal of ratings from 2a-7 meant MMF portfolio managers had to rely even more on their analyses of the creditworthiness of the securities in their portfolios.

BUILD AMERICA BONDS

In an effort to provide stimulus to the U.S. economy, President Barack Obama pushed for, and signed into law the ARRA on Feb. 17, 2009.

The act temporarily eased a number of tax law restrictions for munis and created Build America Bonds, a ground-breaking new municipal taxable product that created a stir in the muni market. Administration officials hoped BABs would expand demand for municipal securities and give issuers access to the market during a time of stress. In lieu of an issuer’s providing tax-free interest to bondholders, Treasury would provide subsidy payments to BAB issuers equal to 35% of their interest costs.

Muni issuers were at first suspicious that BABs were a ploy to get rid of tax-exempt bonds. But BABs took hold and more than $180 billion of them were issued in 2009 and 2010, the two years during which ARRA was effective.

The Hiring Incentives to Restore Employment (HIRE) Act, enacted on March 18, 2010 to provide incentives to businesses to hire unemployed, allowed most types of tax credit bonds to also temporarily be issued as direct-pay bonds, similar to BABs, but at different subsidy levels.

Republicans criticized BABs, which they viewed as a Democratic Party policy, for having too rich of a federal subsidy, creating huge profits for underwriters, and causing issuers with a lot of debt to issue even more.

Muni issuers, who had been repeatedly promised the federal government would never back away from agreement to make subsidy payments, became disillusioned about BABs and other direct-pay bonds when sequestration cut into those payments in 2012.

DODD-FRANK

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010 to address some of the causes and problems stemming from the financial crisis and it even went beyond that. The act was responsible for extensive changes in the municipal market.

Dodd-Frank brought non-dealer, non-bank municipal advisors under a federal regulatory regime for the first time and subjected all MAs, including those at banks and dealers, to a fiduciary duty under which they had to put clients’ interests first before their own. It also subjected them to new exams and professional standards.

Basically, dealers and non-dealers became subject to the same Securities and Exchange Commission and MRSB MA rules.

The legislation and the SEC’s MA registration rule included a broad definition of municipal advisor as anyone or entity that provides advice to, or on behalf of, a municipal issuer or borrower with respect to financial products or the issuance of munis. It also picked up anyone who undertakes a solicitation on behalf of an issuer. In addition, the MA definition includes financial advisors, guaranteed investment contract brokers, solicitors, finders, third party marketers and placement agents, as well as certain swap advisers.

Dodd-Frank also set up a regulatory regime for swaps, with most muni interest rate swaps falling under the purview of the Commodity Futures Trading Commission.

The act expanded the MSRB’s mission to protect state and local government issuers as well as investors. It authorized the MSRB to assist the SEC and Financial Industry Regulatory Authority with their exams and enforcement actions and permitted the board to obtain half the penalties they collected for muni rule violations. The MSRB writes muni rules, while the SEC and FINRA enforce them.

The act also mandated that the MSRB have a majority of public members on its board. Prior to the act, the self-regulator had a board of 15 members — five from broker-dealers, five from banks and five from the public. After Dodd-Frank was enacted, the board grew to 21 members — 11 from the public and 10 from regulated entities, including municipal advisory firms as well as banks and broker-dealers.

“There are different voices and views around the table and that impacted the nuances of the rules,” said Cohen.

TENDER OPTION BONDS

Dodd-Frank also led to the complete restructuring of tender option bond programs because of its so-called Volcker Rule, which prohibited banks from conducting certain investment activities with their own accounts and limiting their dealings with hedge funds and private equity funds, called “covered funds.”

In a traditional TOB program, the “sponsor” will deposit a fixed-rate bond or note into a trust, which will then issue two new certificates — a floating rate certificate sold to a money market fund and a residual certificate which may be sold to a mutual fund or closed-end fund or held by a bank. The floating rate certificate will have a tender option, supported by a liquidity facility to cover the purchase price of the tender receipts not remarketed. That shortens the maturity of the bond or note so it that it becomes eligible for purchase by a tax-exempt money market fund.

But the Volcker Rule prevented banks and their affiliates from sponsoring a TOB program, owning a residual certificate issued by a TOB trust, or providing credit enhancement, liquidity, or remarketing services to these programs.

“Tender option bond programs are a big consumer of municipal bonds and everyone had to redo their programs,” said Cohen.

HQLA

More traditional munis took a hit when bank regulators, as a result of the financial crisis, adopted liquidity coverage ratio rules that required banks with at least $250 billion of total assets or consolidated on-balance-sheet foreign exposures of at least $10 billion to have a high enough liquidity coverage ratio — the amount of high-quality liquid assets (HQLA) to total net cash outflows — to deal with periods of financial stress.

The rules did not count any munis as HQLA because bank regulators thought they were illiquid. The stance drew loud protests from muni market groups that claimed the rules would dampen demand for munis by banks. After a long debate, in May of this year Congress passed a bill with a provision directing investment-grade munis to be designated as Level 2B under the bank liquidity rules, the same level as for mortgage-backed securities.

But the tax law changes enacted last December and the drastic lowering of the corporate rate to 21% has already dampened bank demand for munis. Rising interest rates will compound that because as a bank’s cost of funding goes up, so will the tax penalty associated with holding munis.

The Bond Buyer

By Lynn Hume

October 22 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced the members of its new and continuing advisory groups that will advise the MSRB Board of Directors during the current fiscal year. The MSRB previously announced the addition of advisory groups focused on retail investors and municipal fund securities, and the second year of a regulatory compliance-focused advisory group, to provide the Board with focused, expert input on MSRB initiatives and to enhance stakeholder engagement.

“The MSRB is grateful for the commitment advisory group members are making to help enhance oversight of the municipal securities market,” said Gary Hall, Chair of the MSRB Board of Directors. “We value their perspective, and look forward to benefiting from their expertise in real-time.”

Twenty-nine market professionals representing diverse market perspectives and organizations are serving on the MSRB’s Compliance Advisory Group, Retail Investor Advisory Group and Municipal Fund Securities Advisory Group. The groups will meet periodically with Board member liaisons throughout fiscal year 2019 to facilitate Board-member access to additional market knowledge from a variety of professionals and other experts.

The Compliance Advisory Group will provide input to the Board to inform the MSRB’s long-term strategic goal to facilitate industry understanding of and compliance with MSRB rules. The Retail Investor Advisory Group will provide input to the Board on rules, market practices, transparency and education related to retail investor protection issues. The Municipal Fund Securities Advisory Group will provide input to the Board on municipal market rules, practices, transparency and education related to municipal fund securities, including 529 savings plans and ABLE programs. Advisory group members for the current fiscal year are listed below.

Compliance Advisory Group

Kathy Aho, President, Springsted Incorporated
Jonas Biery, Business Services Manager, Bureau of Environmental Services, City of Portland
Mark Borrelli, General Counsel, Hutchinson, Shockey, Erley & Co.
Joey Frebes, Senior Vice President, KeyBanc Capital Markets
George Hinchcliff, Director, FIC Compliance Advisory, RBC Capital Markets
Phil Jerome, Managing Director, Compliance, Charles Schwab & Co., Inc.
Ben Juergens, Executive Director, Morgan Stanley
Leo Karwejna, Managing Director and Chief Compliance Officer, PFM Financial Advisors
Jessica LeBlanc, Senior Compliance Manager, Edward Jones
Kathy Weatherholt, Vice President, Compliance, George K. Baum & Company
Mark Young, Managing Director, KNN Public Finance, LLC

Retail Investor Advisory Group

Jack Blumenthal
Matthew Boardman, Managing Director and Head, US Wealth Management Fixed Income, RBC Wealth Management
Joseph Brady, Executive Director, North American Securities Administrators Association
Chris Kendall, Vice President, Fixed Income Trading, Charles Schwab & Co., Inc.
Wesley Ringo, Senior Advisor, Legal and Regulatory, Capital Forensics, Inc.
Anne Ross, Muni Credit & Compliance Advisors LLC
Joseph Spivack, Angel Investor, Spivack & Company
Stephen Winterstein, Managing Director of Research and Head of Municipal Strategy, Wilmington Trust Investment Advisors, Inc.

Municipal Fund Securities Advisory Group

Mary Anne Busse, Managing Director, Great Disclosure LLC
James Canup, Partner, Hirschler Fleischer
Paul Curley, Director of College Savings Research, Strategic Insight
Andrea Feirstein, Managing Director, AKF Consulting Group
Nathan Groff, Owner and Senior Executive Officer, Intuition LLC
John Heywood
Mary Lehman, Senior Director, Tuition Financing, 529 College Savings Program Manager, TIAA
Sandy Madden, General Counsel, Ascensus Government Spending
Christopher T. McGee, General Counsel, Virginia 529 | ABLEnow
Jennifer Selliers, Director of Internal Compliance, State of Tennessee Department of Treasury

Date: October 30, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

Read the Notice.

10/30/18

Treasury Releases Proposed Regulations on Opportunity Zones Designed to Incentivize Investment in Distressed American Communities

The U.S. Department of the Treasury (Treasury) issued proposed guidance related to the new Opportunity Zone investment tax incentive created by the 2017 Tax Cuts and Jobs Act. The Opportunity Zone investment incentive offers capital gains tax relief to investors for new investment in designated distressed areas.

According to a press release from Treasury, the proposed regulations clarify what gains qualify for deferral, which taxpayers and investments are eligible, the parameters for Opportunity Funds, and other guidance. The Treasury Department plans on issuing additional guidance before the end of the year.

Comments are due 60 days after publication in the Federal Register and a public hearing has been scheduled for January 10, 2019 at 10:00AM EST.

You can view the guidance here.

MSRB Webinar on SEC Rule 15c2-12 Amendments

The Municipal Securities Rulemaking Board (MSRB) will host a webinar on amended SEC Rule 15c2-12 on Thursday, January 17, 2019 from 3:00 p.m. – 4:30 p.m. EST in coordination with the Securities and Exchange Commission (SEC), Government Finance Officers Association (GFOA), and the National Association of Bond Lawyers (NABL).

During this free webinar, panelists will discuss the amendments to SEC Rule 15c2-12 on municipal securities disclosure and related changes to the Electronic Municipal Market Access (EMMA®) website.

The compliance date for these changes to the SEC rule is Wednesday, February 27, 2019 and the MSRB’s EMMA® submission interface will be able to accept the additional disclosures on that date.

You may register for the webinar here.

WASHINGTON, DC – Market structure experts at the Municipal Securities Rulemaking Board (MSRB) today shared their analysis of pre-trade quote data for municipal securities available to market participants on alternative trading systems (ATSs), adding to the literature on pre-trade price transparency.

In recent years, financial economists, regulators and policymakers have been exploring whether pre-trade quote data contributes to price transparency in the municipal securities market. Pre-trade transparency typically refers to broad public dissemination of information, including quote data (bid- and offer-side) signaling trading interests available on electronic or proprietary trading systems, as well as new issue pricing information, yield curves, evaluated prices and other material information. However, unlike other pre-trade information, pre-trade quote data is normally available only to market participants. Today’s report, Analysis of Municipal Securities Pre-Trade Data from Alternative Trading Systems, suggests that posted quote information may be useful to a broader audience when it comes to price discovery purposes but that more study is necessary to make any definitive conclusions.

“Potentially, pre-trade information could provide investors and all other market participants with important information that is currently only accessible to select market participants,” said MSRB Chief Economist Simon Wu, one of the authors of the report. “This information could improve pricing efficiency, investor confidence and market liquidity in the municipal market, but additional analysis and feedback from stakeholders is needed.”

The MSRB obtained quote data from two ATSs predominant in the municipal securities market. Both platforms voluntarily provided pre- and post-trade data, including Request-for-Quote (RFQ) data (bids and offers wanted), live quotes and associated transaction data. Prices for executed customer trades, as well as inter-dealer trades on and off the platforms seemed to be correlated to the best offer quotes on the platform at the time of a trade, suggesting that posted offer quotes could provide a useful market indicator of municipal securities. According to the analysis, most live quotes, which are available to participants on an ATS, are offer quotes, as opposed to bid quotes. On the other hand, most of the RFQ data are for bid responses rather than offers. Further, RFQ data may only be viewable by participants involved in the request process, which presents possible pricing information discrepancies, depending on the level of participation.

Key findings in the report include:

• Almost 70% of the trades reported to the MSRB had a live offer quote on at least one of the two ATSs at the time of a trade execution;
• Over 90% of the quoted municipal bonds had only one or two offer quotes on each ATS at any given time;
• The median difference in price between customer buy trades and the best offer quote at the time of trade was 75 basis points ($7.50);
• The median difference in price between customer sell trades and the best offer quote at the time of trade was 73 basis points ($7.30);
• On average inter-dealer trades occurred at the best offer price;
• RFQs received a median of three responses;
• As the number of respondents to an RFQ rises, there is an increased likelihood that an RFQ will result in a trade.
• 75 percent of RFQs did not result in a trade.

Wu will present the findings of the report at the upcoming U.S. Securities and Exchange Commission’s (SEC) Fixed Income Market Structure Advisory Committee meeting on October 29, 2018.

The MSRB studies market structure issues related to municipal securities as part of its mission to promote a fair and efficient market. It welcomes input from stakeholders on additional research ideas that would contribute to a better understanding of municipal market dynamics. Access MSRB data reports and analysis.

Date: October 25, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
[email protected]

GFOA’s Executive Board recently approved 14 best practices and advisories in the areas of accounting, governmental budgeting, treasury and investment management, retirement and benefits, economic development, and municipal debt.

Click here for a presentation that summarizes the best practices.

Click here to watch the October 23 webinar.

WASHINGTON — A challenge to the constitutionality of the municipal advisor regulatory regime could be a last stand defense for MAs facing career-ending enforcement actions.

The theory of is the brainchild of Rick Weber, who is of counsel at Norton Rose Fulbright in Houston. The bond lawyer published a piece on the subject in the spring issue of The Bond Lawyer, the newsletter of the National Association of Bond Lawyers. In that piece and in a separate interview with The Bond Buyer, Weber explained that he believes that the Supreme Court’s May decision in Murphy v. National Collegiate Athletic Association could pave the way for an argument against the muni advisor rules.

Weber said most public finance lawyers are interested in constitutional law, though they typically encounter it in the context of state constitutions.

“I’ve always had an interest in constitutional issues,” Weber said.

The Murphy decision overturned a federal law, the Professional and Amateur Sports Protection Act, which banned states from sanctioning gambling on competitive sporting events. The court held that the law violated the “anti-commandeering” principle derived in part from the Tenth Amendment to the U.S. Constitution, which states that rights not given to the federal government in the Constitution are reserved to the states and to the people.

“The Court held that the act unconstitutionally `commandeered’ state governments to serve the federal government,” Weber wrote in his published piece. “Applying the same anti-commandeering principle, the Supreme Court had previously struck federal laws that compelled states to act, unless the laws applied to non-state actors as well. For the first time, Murphy v. NCAA applied the principle to strike a law that merely forbade the states to act. This extension of the anti-commandeering principle raises credible doubts about whether the federal government may lawfully regulate municipal advisors.”

Weber told The Bond Buyer that the implication of the NCAA decision is that the federal government could not, for example, stop a state from hiring a municipal financial advisor who was not licensed by the federal government, unless it applied the same restriction to nongovernmental corporate issuers.

“That now is absolutely clear,” he said.

Weber said the most likely avenue for a challenge along these lines would be in an enforcement context, probably raised by a muni advisor facing a bar from the industry unless he or she could convince the SEC or a court that the municipal advisor regulations are invalid.

The constitutionality of part of the muni advisor regime was previously challenged by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee. The groups claimed in a lawsuit that the Municipal Securities Rulemaking Board’s Rule G-37 on political contributions, amended in 2016 to apply to municipal advisors as well as broker-dealers, unconstitutionally forces MA and dealer employees to choose between doing their jobs and exercising their right to support political candidates.

A federal appeals court dismissed the challenge last year, saying the groups lacked standing to bring the case.

Jason Torchinsky, a partner at Holtzman Vogel Josefiak Torchinsky who represented the Republican groups, said Weber’s theory is an interesting consideration for members of the public finance community, though he said it touched upon areas beyond the scope of his practice. Torchinsky said it was not clear to him that a muni advisor would have standing to challenge the constitutionality of the MA regime on the anti-commandeering grounds because they are not state and local governments. Converesely, Torchinsky said, state and local governments might be hesitant to expend the resources needed to bring such a challenge on this issue.

“I could see someone facing an enforcement action raising it as a defense,” said Torchinsky.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 10/22/18 07:05 PM EDT

Tracking a specific municipal bond?

Check out the security details page for that bond on EMMA.

Summary

SIFMA provides comments to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) on the interaction between the Volcker Rule and municipal Tender Option Bonds (TOBs). The proposing release poses several questions about TOBs and Volcker addressed in our letter. SIFMA asks the agencies to exempt TOBs from the covered funds provisions of the Volcker Rule.

Read the Comment Letter.

Summary

SIFMA provides comments to the Municipal Securities Rulemaking Board (MSRB) on the application of the content standards under MSRB Rule G-40 on advertising by municipal advisors. SIFMA and its members appreciate the MSRB’s efforts to provide further guidance on the advertising rules. The mock advertisements generally are helpful and add to the understanding of Rule G-40.

Read the Comment Letter.

October 17, 2018, the BDA submitted a comment letter to the MSRB on a draft compliance resource regarding application of content standards under Rule G-40. The final comment letter can be viewed here.

The comment letter focuses on the following topics:

• The BDA believes that a number of the mock advertisement examples in the Notice are too general or simple to provide meaningful guidance;
• Following each mock advertisement, the BDA believes the MSRB should provide examples of acceptable content for each concern listed within the advertisement; and
• The BDA believes that Rule G-40 requires the municipal advisor to have a “sound basis” for the claim. But the MSRB’s interpretation goes beyond the requirements of Rule G-40.

The MSRB notice can be viewed here.

Bond Dealers of America

October 17, 2018

The MSRB proposal to amend Rule G-3 to establish additional qualification requirements for municipal advisor principals was published in the Federal Register. Comments on the proposal must be submitted by October 30, 2018.

As previously covered, the proposed amendments would (i) establish the Municipal Advisor Principal Qualification Examination (the “Series 54 examination”) and (ii) require those persons who meet the definition of a municipal advisor principal to pass the Series 54 examination prior to becoming municipal advisor principals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Cadwalader, Wickersham & Taft LLP

October 18 2018

Enforcement Forecast

Each September brings a flood of Securities and Exchange Commission announcements of enforcement actions as it approaches the September 30 end of its fiscal year. The announcements include Orders Instituting Administrative Proceedings (including Cease and Desist Proceedings and Notice of Hearing), settled Administrative Proceedings and accompanying Orders, and complaints filed in federal court, some announcing settlements, others initiating litigation in federal court. Looking back at such announcements over the past year, it is fair to say that the days of the “broken windows enforcement” policy of former Chair Mary Jo White are past. For the municipal securities market, this policy played out in the form of the Municipalities Continuing Disclosure Cooperation Initiative, or MCDC, in which the SEC filed and settled actions against 72 municipal underwriting firms and an equal number of issuers and obligated persons of municipal securities. So what can issuers, obligated persons, municipal advisors, underwriters and other municipal market participants expect from the SEC?

SEC Chairs set Commission priorities and under SEC Chairman Jay Clayton, SEC enforcement resources now have turned to “bad actors,” protection of retail investors (including the elderly and “Mr. and Mrs. 401K”), and cybersecurity as stated in his Senate nomination hearing and in a later speech by his appointed Co-Directors of the SEC’s Enforcement Division. In the new paradigm, the SEC continues to focus on individual officials as well as the municipalities, corporations, or firms releasing materially misleading disclosure. Likewise the Department of Justice continues the policy of holding individuals responsible for corporate wrongdoing. However, the focus appears to be less on putting numbers of enforcement actions up on the board and more upon the significance of cases brought with regard to Commission priorities. Along with policy direction, the SEC requires staff to carry out its mission, particularly in enforcement. Staff resources available to address Commission priorities have been limited by a hiring freeze in effect in place since mid-2016 and the SEC’s Division of Enforcement has replaced only of its 37 departures since 2017.5 In such a context, quality matters more than quantity, and efficient use of all available resources is necessary. For the SEC, this means increased coordination with FINRA, the Financial Industry Regulatory Authority, and its own Office of Compliance Inspections and Examinations, or OCIE. So how is this playing out?

What we are seeing in our Municipal Securities Regulatory Investigations and Enforcement Defense practice reflects these adjustments. For example, we are familiar with non-public ongoing enforcement matters in areas relating to issuer disclosure and potential corruption affecting financial reporting, interest in pricing and allocation matters by underwriters in offerings as well as interest in sales involving potential “flipping,” and municipal advisor conflict of interest and fiduciary duty breach, as well as basic record-keeping concerns. OCIE and FINRA are more active and aggressive on municipal securities related matters, resulting in some instances with referrals for enforcement to either the SEC’s Enforcement Division or FINRA Enforcement, with subsequent opening of an enforcement investigation. Municipal advisors, brokers, dealers, and municipal securities dealers are registered and subject to inspection and examination by OCIE, FINRA and certain banking regulators, while municipal issuers are only subject to investigation in the context of an antifraud investigation by the SEC’s Enforcement Division. As a result, investigations with a focus on municipal advisors or brokers, dealers and municipal securities dealers may likely exceed those focused on issuers. However, once an investigation begins, all parties involved in a transaction may be required to produce emails and other documents and may be required to provide testimony. What remains to be seen as a factor generating enforcement inquiries is whether the combination of extensive municipal advisor record keeping requirements and the periodic inspection of those records leads to inquiries of the conduct of a municipal advisor’s client as well as the municipal advisor.

Recently, we successfully concluded representation of a city in the Southwest in a post MCDC enforcement investigation of its offering disclosures and compliance with its continuing disclosure agreements, or CDAs, including purported amendment of its CDAs. While MCDC is now in the past, potentially misleading offering disclosure about continuing disclosure compliance may still attract the interest of the SEC and potentially lead to allegations of securities law violations by parties other than the issuer or underwriter.

Overall, under the new paradigm, we anticipate an increase in municipal market investigations and enforcement actions emanating from OCIE and FINRA examinations of municipal advisors and brokers, dealers, and municipal securities dealers, while investigations of municipal securities issuers and their officials arising from instances of alleged issuer official misconduct or corruption affecting issuer financial reporting and disclosure will continue. In some instances, such as described below, the investigations may be joint or parallel efforts by the SEC and the Department of Justice and FBI.

Recent Noteworthy Enforcement Activity

Issuers

The SEC and Department of Justice worked in tandem in a recent investigation, with the SEC bringing securities fraud charges against the Town of Oyster Bay, N.Y. and several of its officials while the DOJ brought charges including multiple counts of wire fraud related to securities offerings against the town supervisor. We previously published advisories on these actions.6 Likewise working in tandem with DOJ, the SEC recently brought antifraud charges against the former mayor of Markham, Illinois relating to an undisclosed pay-to-play scheme in which he allegedly solicited bribes from a construction contractor. Simultaneously, the mayor pleaded guilty to criminal charges for the pay-to-play scheme. We previously published an advisory on this matter as well.

In April, 2016, the DOJ unsealed an indictment of the Town Supervisor of Ramapo, N.Y. and the former Executive Director of the Ramapo Local Development Corporation (RLDC) with criminal charges alleging the officials had “lied about the Town’s and RLDC’s financial conditions in order to ensure successful sales of municipal bonds issued by the Town and the RLDC and to get better ratings on those bonds so that the Town and the RLDC would have to pay less interest on the bonds.”8 Prior to trial, the former Executive Director pleaded guilty to one count of conspiracy and one count of securities fraud. At trial, the jury found the former Town Supervisor guilty of 20 counts of conspiracy, securities fraud, and wire fraud. The SEC charged the Town, the RLDC, the Town Supervisor, the former RLDC Executive Director, the Town Attorney, and the town’s Deputy Finance Director with fraud charges involving the use of inflated general fund balances were used in offering materials for 16 municipal bond offerings by Ramapo or the RLDC to investors. All parties other than the Town Supervisor settled with the SEC. The SEC’s litigation against the Town Supervisor continues. The federal trial judge issued lifetime bars prohibiting the former RLDC Executive Director, the Town Attorney, and the Town’s Deputy Finance Director from participating in municipal bond offerings, permanent injunctions from violating the antifraud provisions of federal securities law, fined the Deputy Finance Director $10,000 and the Town Attorney $25,000 and required their resignations from the Town and barred future employment by the Town for five and seven years respectively.9 The accounting firm and a senior partner at the firm agreed to settle charges that they issued fraudulent audit reports in connection with the municipal bond offerings by the Town and the RLDC. Without admitting or denying the findings, under an SEC Order, the firm agreed to forfeit approximately $380,000 in audit fees and interest and, pay a $100,000 penalty and engage an independent consultant. The order finds the partner violated the scienter based antifraud provisions and the negligence based prohibitions of federal securities law. The partner agreed to pay a $75,000 penalty and suspension from practicing public company accounting, and is prohibited from acting as the engagement partner or engagement quality control reviewer on any municipal audit for five years.10 The Town and the RLDC were permanently enjoined from violating the antifraud provisions of federal securities law and required to retain an independent consultant, independent auditor, and independent disclosure counsel not unacceptable to the SEC staff and unaffiliated with bond counsel.

Municipal Advisors

Whatever grace period municipal advisors enjoyed has ended, particularly for unregistered advisors contacted by the SEC regarding their failure to register. That would be the clear message from In the Matter of Eric Hall & Associates, LLC and Eric Hall,12 a Cease and Desist Order issued in a settled administrative proceeding in which the respondents, without admitting or denying the findings, consented to the order finding the firm willfully violated Securities Exchange Act Section 15B(a)(1))(B) by failing to register as a municipal advisor and that Hall was a cause of that violation, and by failing to disclose unregistered status to a client school district, each willfully violated their fiduciary duty under Exchange Act Section 15B(c)(1) as well as that same section by not dealing fairly with their school district client in violation of Municipal Securities Rulemaking Board Rule G-17. As a consequence, the firm was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15B(a)(1)(B), 15B(c)(1) of the Exchange Act, and MSRB Rule G-17; censured; ordered to pay jointly and severally with Hall, disgorgement of $35,520 together with interest of $4,241.38; and ordered to pay, jointly and severally, a civil monetary penalty of $15,000. Hall was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15B(a)(1)(B), 15B(c)(1) of the Exchange Act, and MSRB Rule G-17; barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and ordered to pay, jointly with the firm, the amounts described above.

On June 13, 2016, the SEC accepted the settlement offers made by two firms and three executives charged with using deceptive business practices in dealing with five school districts. As part of their settlements, School Business Consulting, Inc. (SBCI), SBCI’s principal Terrance Bradley, Keygent LLC, and Keygent’s associated individuals Anthony Hsieh and Chet Wang agreed to cease and desist from any further commission or facilitation of violations of certain provisions of the Securities Exchange Act and MSRB Rule G-17, censure, issue notices of the order to all existing clients and prospective clients, and pay monetary penalties. Further, Bradley was barred from association with any SEC-regulated entity. All respondents settled without admitting or denying the SEC’s allegations.

SBCI is a consulting group for school districts on financial and budget matters, often providing them with guidance when they seek to hire municipal advisors. Keygent is a registered municipal advisor that focuses on advising school districts and community colleges that issue bonds. Keygent analyzes outstanding bond and debt information to identify prospective school district clients and traditionally submitted unsolicited proposals aiming to refinance school district debt in order to attract new business. At issue in the case were five contracts for municipal advisor services between Keygent and California school districts, which SBCI assisted Keygent in obtaining.

After investigation, the SEC accepted offers of settlement from the entities and associated individuals under the municipal advisor antifraud provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Section 15B(a)(5) of the Exchange Act. This action marks the first time the SEC has enforced that provision. The SEC also alleged violations of Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17. Further, the SEC alleged that SBCI violated Section 15B(a)(1)(B) by failing to register as a municipal advisor, and that Bradley caused SBCI’s violation.13

On June 29, 2018, judgments were entered in federal district court against Malachi Financial Products, Inc., and its president and sole shareholder, Porter B. Bingham, for alleged violations of the Exchange Act and MSRB Rule G-17. The judgments were entered in accordance with a consent agreement signed by the SEC, Bingham, and Malachi. Without confirming or denying the allegations, Bingham and Malachi agreed to being permanently enjoined from further violations of Sections 15B(a)(5) and 15B(c)(1) of the Exchange Act and MSRB Rule G-17; pay a joint and several disgorgement of $33,000 plus $2,858 of prejudgment interest; and pay civil penalties of $50,000 for Malachi and $25,000 for Bingham. On July 9, 2018 the SEC cited the final judgments in revoking Malachi’s registration as a municipal advisor and barring Bingham from association with any “broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization,” effectively prohibiting Malachi from engaging in municipal advisory activities and barring Bingham from engaging in activities that are regulated by the SEC.

On May 9, 2018, the SEC announced it charged a registered municipal advisor (the “MA Firm”) and its owner (the “MA Owner”) with defrauding their client, a Texas school district, in connection with multiple municipal bond offerings. This enforcement action brings attention to the obligations and duties that municipal advisors have to their clients.

The SEC’s Order states that in connection with three municipal bond offerings the MA Owner and his wholly-owned MA Firm misrepresented their municipal advisory experience and failed to disclose to the school district that the MA Owner was employed by the attorneys who served as bond counsel for all three bond offerings. Specifically, the SEC stated that, in an attempt to gain municipal advisory clients, the MA Owner drafted and circulated a brochure to the school district and municipalities to market the MA Firm’s municipal advisor experience. The SEC order states that the brochure created the misleading impression that the MA Owner and MA Firm had served as a municipal advisor on numerous municipal bond issuances and failed to disclose that the MA Owner had a financial interest in the school district’s offerings.

By misrepresenting their municipal finance experience and failing to disclose the conflict of interest, the SEC concluded that:

• The MA Firm violated and the MA Owner willfully violated Section 15B(a)(5) of the Securities Exchange Act of 1934, which prohibits any fraudulent, deceptive, or manipulative act or practice while providing advice to a municipal entity with respect to municipal financial products [or] the issuance of municipal securities;
• The MA Firm breached and the MA Owner willfully breached their respective fiduciary duty to the school district, as set forth in Section 15B(c)(1) of the Exchange Act; and
• The MA Firm and the MA Owner failed to deal fairly with the school district in violation of Municipal Securities Rulemaking Board Rule G-17.

The MA Firm and the MA Owner consented to the order and are jointly and severally liable for paying $362,606 in disgorgement and $19,514 in prejudgment interest. The MA Firm was also assessed a civil penalty of $160,000 while the MA Owner was assessed a civil penalty of $20,000. The MA Owner was also barred from association with various regulated entities, including municipal advisors.

On August 24, 2017, a municipal advisor, its president, and its vice-president were charged by the SEC with breach of their fiduciary duty to a client. According to the SEC’s administrative summary,16 Municipal Finance Services Inc. (“MFSOK”) served as municipal advisor to the client on a municipal bond offering in 2013, and as part of its advisory services, agreed to review legal documents related to the issuance of the bonds and to assist the client in complying with its continuing disclosure agreement requirements. According to the order, the continuing disclosure agreement for the 2013 offering contained an improper amendment to the client’s prior continuing disclosure agreements for bond offerings in 2005, 2008 and 2012, unilaterally extending the deadline by which the client was to provide annual reports to investors for those prior offerings. The order states that MFSOK president Rick A. Smith and vice-president Jon G. Wolff each had concerns about the amendment, which was drafted by a now-retired bond counsel, but took no action. According to the order, Smith and Wolff did not advise the client of their concerns, did not comment on the draft amendment provisions, did not conduct further investigation, and did not seek further information from bond counsel or otherwise attempt to determine whether the amendment complied with the terms of the client’s prior continuing disclosure agreements. The order found that Smith and Wolff also failed to advise the client of its obligation to notify prior bondholders of the amendment in a timely manner, as required by the client’s prior continuing disclosure agreements. As a result, some investors in the earlier bonds engaged in transactions without the benefit of the updated financial information contained in the annual reports that had been promised in the continuing disclosure agreements for those bonds.

The SEC’s order instituting settled cease-and-desist and administrative proceedings found that MFSOK willfully violated Section 15B(c)(1) of the Securities Exchange Act of 1934 and that Smith and Wolff caused MFSOK’s violation. Without admitting or denying the SEC’s findings, MFSOK agreed to a censure, to cease and desist from committing or causing further violations of Section 15B(c)(1) of the Exchange Act, and to pay a $50,000 penalty. Smith and Wolff agreed to cease and desist from committing or causing further violations of Section 15B(c)(1) of the Exchange Act and each agreed to pay an $8,000 penalty. Under the order, MFSOK is required to establish appropriate written policies and procedures and periodic training regarding the fiduciary duty owed by municipal advisors under the federal securities laws, including the provision of advice concerning an issuer’s continuing disclosure obligations.

To view all formatting for this article (eg, tables, footnotes), please access the original here.

Bracewell LLP

by Britt Cass Steckman, Paul S. Maco, Laura Prebeck Hang and Edward Fierro

October 16, 2018

SEC Office of Municipal Securities Director Rebecca Olsen discussed the importance of adequate disclosures in the municipal securities market for retail investors.

In a speech at the Municipal Finance Leadership Conference, Ms. Olsen stated that it is “essential” for regulators and market participants to ensure that investors are provided with “clear and understandable” information about the issuers of municipal securities in a timely manner. Ms. Olsen outlined, among other things:

• the role of the SEC Office of Municipal Securities;
• the importance of the municipal securities market for retail investors;
• the regulatory framework governing disclosure requirements in the municipal securities market;
• the responsibility of market participants to adopt best practices for municipal securities disclosures; and
• the importance of accessibility and clarity of information for retail investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Cadwalader, Wickersham & Taft LLP

October 17 2018

A recent report by Truth in Accounting (TIA), a nonprofit organization that monitors municipal finances, serves as a sober reminder that state governments need to take action now to address the rising cost of healthcare promises made to retirees — or risk credit downgrades.

While the U.S. economy and stock market have recovered dramatically since the Great Recession, the costs of paying for other post-employment benefits (OPEB) – primarily state obligations to pay for retiree healthcare coverage – have outstripped those gains and put pressure on state balance sheets. In its ninth annual “Financial State of the States” report, TIA says state unfunded OPEB obligations increased 7.8% to $663.1 billion for fiscal year 2017. (The most recent year data was available.) In comparison, unfunded pension costs were essentially flat (up a scant 0.6%) at $837.5 billion.

The main culprit for the continuing rise in OPEB obligations is that most states pay for retiree healthcare benefits on a pay-as-you-go basis, meaning they’re paying the minimum amount owed each year and not whittling down the balance. In other words, they’re kicking the can down the road.

Public reporting of those liabilities is about to become more transparent. Under Governmental Accounting Standards Board (GASB) Statement 75, state and local governments must report their entire unfunded OPEB liability on their financial statements for reporting periods beginning after June 15, 2017. While most state and local governments have been reporting OPEB liabilities on their financial statements, some haven’t and, per older GASB standards, reported the liability in the footnotes to the financials.

The credit ratings agencies will be watching closely when the fiscal year 2018 financial statements are released. “Our analysis of these OPEB liabilities is fundamentally unchanged solely due to accounting changes; however, we anticipate that the increased transparency the new statements provide could inform our evaluation of a government’s relative burden and management of these long-term liabilities,” said S&P Global in a March 14 report about the effect of GASB 74 and 75 on financial reporting.

For now, rising OPEB costs haven’t led to an increase in credit downgrades, although in April S&P Global Ratings did drop Connecticut’s general obligation debt rating to ‘A’ from ‘A-plus’. Nonetheless, ratings agencies are paying close attention to OPEB liabilities. In its annual survey of the country’s largest 15 cities, published on Sept. 5, S&P Global noted, “With retirees living longer and pay-as-you-go OPEB spending in many places ramping up in tandem with rapidly rising healthcare costs, fixed costs for pension and OPEB obligations appear poised to remain a front-and-center credit issue across the municipal sector for the foreseeable future.”

A growing number of state and local government finance officials say it’s time to take action. In a May 2 opinion editorial in the Houston Chronicle, Houston Controller Chris Brown summed up the feeling of many government finance officers, saying the city’s pay-as-you-go “approach to funding its OPEB obligation is unsustainable” and that “it’s clear something must be done.” Brown wrote that the city, based on a five-year average, “is adding more than $160 million per year to the unfunded OPEB liability.” In California, controller Betty Yee said the state has made “significant progress” in addressing OPEB liabilities, but that it “will be unpredictable and will remain a paramount fiscal challenge over the next three decades.”

To combat the OPEB challenge, many municipalities have turned to creating OPEB trusts to fund the liabilities. One of the primary benefits of an OPEB trust is that it provides greater flexibility in how the fund’s assets are managed. Funds in an OPEB trust can be invested more like a state pension plan, which allows for a more aggressive asset allocation strategy and a longer investment time horizon. Conversely, pay-as-you-go payments typically are made from government general funds, which usually have strict limits on investment options (such as only being able to purchase risk-free securities like U.S. Treasuries) and which generate minimal returns.

A second benefit of an OPEB trust is that states and local governments can use a higher discount rate when computing future OPEB payments. Higher discount rates, as everyone knows, can result in lower liabilities on the balance sheet.

Lastly, creating a trust to pay for OPEB costs will reassure the credit rating agencies that state and local governments are working to manage rising liabilities. Plus, OPEB trust assets are legally protected from outside creditors.

Creating a pre-funded OPEB trust isn’t without challenges. Government budgets are under pressure to fund everything from building new schools and hiring more police officers to fixing potholes and giving raises to employees. It will take a certain amount of political courage for legislators to approve a budget that reallocates funds from other projects to fund a trust. But government officials need to tackle the issue now — and an OPEB trust is the best option to help ensure funds will always be available to pay for the benefits promised to retirees.

The Bond Buyer

By Lucius McGeHee

October 18 2018, 11:19am EDT