Regulatory





S&P COVID-19 Activity In U.S. Public Finance - Updated as of 5/21/20

Read the Updated Activity.




COVID-19 Crisis Drives Spike in Transaction Costs for Municipal Securities.

Read the MSRB report.




NABL Issue Briefings for Congress.

NABL has released 8 issue briefs to supplement the April 9 letter we sent to Congress and the Treasury asking that they enact certain legislative and regulatory proposals to assist in getting our nation through these uncertain times. The briefings were sent to all offices on Capitol Hill.

We created these briefings, in part, because NABL’s Board of Directors did not take its annual trip to Washington, DC this year due to travel restrictions as a result of the COVID-19 pandemic. Had they been able to travel, they would have requested meetings with many offices on Capitol Hill to discuss these and other issues. In lieu of those in-person meetings, we prepared these short informational briefings to cover some of the issues we see affecting the municipal bond market.

The briefings are available on the NABL U Now page, here. They are generally less than 10 minutes and are accompanied by a PowerPoint presentation. They are also free and accessible by anyone who visits our website.

Briefings Topics Include:

Please Share with your Member of Congress: We encourage all NABL members to share these briefings and our April 9 letter with your member of Congress and their staff.




SEC Urges Disclosure of COVID-19 Impact in the Municipal Market: Orrick

On May 4, 2020, Securities and Exchange Commission Chairman Jay Clayton and Director of the Office of Municipal Securities Rebecca Olsen issued a statement encouraging municipal securities issuers and obligors (each referred to herein as “issuer(s)”) to provide robust, timely and accurate disclosures, in light of the effects of and uncertainties created by COVID-19. This statement echoes a statement issued on April 8 by the SEC Chairman and the Director of the Division of Corporation Finance regarding disclosures by public companies in light of the COVID-19 pandemic, and encourages a similar approach to the provision of current and, to the extent practicable, forward-looking disclosure as outlined in the corporate issuer disclosure statement.

WHAT DOES THIS MEAN FOR ISSUERS IN THE MUNICIPAL MARKET?
As most issuers in the municipal market only file annual reports and notice of specifically listed events, and COVID-19 on its own is not a listed event under Rule 15c2-12 1, the SEC has urged issuers to make additional, voluntary disclosures concerning both the current and projected impacts of COVID-19. Issuers that plan on being in the market or that are filing annual reports, quarterly reports or event notices (or the next time a required filing is due) should disclose the impact of COVID-19 on their financial and operating condition in offering documents or required filings. All other issuers should consider (i) providing voluntary disclosure on the current and reasonably anticipated future impact of COVID-19 on their financial condition and operating results and (ii) the risks associated with providing such voluntary disclosure. However, issuers should note that there is no requirement to make such a voluntary disclosure. The SEC does not have the power to require issuers to make this voluntary disclosure.

To date, issuers have made several thousand filings on EMMA concerning the effects of COVID-19. The MSRB publishes a list of these filings weekly, so issuers can review other filings and compare what other entities similar to themselves have done.

If an issuer decides to make a voluntary disclosure, the disclosure can either be posted on EMMA or posted on the issuer’s website. If the information is posted in both places, the same information should be posted in each place. Any information posted must be consistent with any other information in the public domain, such as reports made to public officials or public bodies.

SUMMARY OF SEC STATEMENT
The municipal disclosure statement requests issuers to provide investors with “as much information about their current financial and operating condition as is reasonably practicable” and encourages issuers to make “voluntary, unaudited and non-routine disclosures regarding current financial status and operating conditions.” The statement emphasizes the “need for timely financial information” and notes that due to the unpredictable nature of the health crisis and its impact in today’s markets, the practice of providing historical financial information in an annual information filing may not be enough for investors to make assessments of an issuer’s current and expected financial condition in order to make an informed investment decision. The statement also encourages issuers to provide forward-looking information on the potential impact of COVID-19 on their financial and operating condition. Regarding timing, the statement encourages issuers to include these disclosures in disclosure for bond offerings or required filings, and also to consider providing voluntary disclosure.

The statement acknowledges that the issue of liability for voluntary or expanded required disclosures is often raised, and lists some factors that weigh in favor of making those disclosures in light of the concern of potential liability:

CONSIDERATIONS WHEN DRAFTING COVID-19 DISCLOSURE
An issuer’s disclosure about the impacts of COVID-19 should not merely recite the history of COVID-19 related actions it has taken. Rather, its disclosure should address the myriad potential effects of COVID-19 on the operations and finances of the issuer as an entity and on the issuer’s securities.

In addition to any historical results that may be required for a particular reporting period, the disclosure should address the current condition of the issuer in light of the COVID-19 pandemic, and issuers should consider whether to include future projections regarding its financial and operating results as the SEC is urging.

Considerations for Disclosure of Current Conditions. Disclosing the current condition of the issuer is based on known and verifiable factual information and is important, especially if its current condition differs from historical results. Issuers should consult with legal counsel but some items to address are:

Considerations for Disclosure of Projections. In addition to disclosing the past and current state of the issuer, the SEC has encouraged issuers to assess the future impact that COVID-19 will have on their financial and operating condition by using forward-looking statements and projections. Unlike the corporate market, there is no safe harbor for municipal securities for forward-looking statements. Rule 10b-52 liability still applies to any forward-looking statements or projections.

The SEC points out in its municipal disclosure statement that forward-looking statements should be informed by the “bespeaks caution” doctrine which has been created by a series of federal Circuit Court decisions. This doctrine says that a forward-looking statement accompanied by sufficient cautionary language is not actionable because a reasonable investor could not have found the statement materially misleading. However, issuers should be aware of the enforcement and litigation risks associated with such statements, especially in this evolving and uncertain environment. For that reason it is important to internally vet all projections and assumptions with experts, legal counsel and other advisers, as well as include all assumptions and appropriate disclaimers in such disclosure. This will be critical in order to mitigate any litigation or enforcement risk should projections materially differ from actual results.

REMINDER
As with any communication by an issuer to the market, Rule 10b-5 liability applies to any issuer statements regarding the effects of COVID-19, whether it be in an offering document, annual or quarterly filing, event notice, voluntary event notice, public statement (for example statements made in connection with presenting budgets for upcoming fiscal years) or investor website. Issuers should consult with legal counsel and other advisors when making any disclosures or other public statements about the effects of COVID-19 on the issuer and its securities.

It is important to assess whether your disclosure is material and complete. And it is imperative that any forward-looking statements or projections contain the underlying assumptions and necessary disclaimers.

_________________________________________________

1 SEC Rule 15c2-12, 17 C.F.R. § 240.15c2-12 (2020).
2 SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (2020).

Public Finance Alert | May.13.2020




Hawkins Advisory: SEC Statement on Disclosure by Municipal Issuers regarding the Impact of COVID-19

This Advisory provides a summary and analysis of the SEC’s public statement directed to issuers of municipal securities regarding disclosures about the impact of COVID-19 on their financial and operating conditions.

Read the Hawkins Advisory.




MSRB Enhances Usability of Disclosure Summary Report about Impact of COVID-19.

State and Local Disclosures to Its EMMA System Referencing COVID-19 Are Now Sortable

Washington, DC – States, municipalities and other bond issuers continue to ramp up the pace of public disclosures describing the impact of the novel Coronavirus Disease (COVID-19) on their financial condition and operating status. The Municipal Securities Rulemaking Board (MSRB) today enhanced the format of its weekly report aggregating disclosures submitted to its free Electronic Municipal Market Access (EMMA®) system that reference COVID-19.

“At such a challenging time for the market, the MSRB is pleased that so many market participants found our report useful in monitoring, at a glance, the volume of disclosure filings coming into our EMMA system that speak to the effects of COVID-19 on state and local issuers’ revenues and ability to continue providing essential public services,” said MSRB Chief Operating Officer Mark Kim. “The number of filings captured in our report quickly rose from 630 on April 2 when we first released the report, to more than 4,500 this week. Today’s new sortable spreadsheet format will make it much easier for investors, issuers and other market participants to digest this ever-growing volume of information.”

The MSRB’s weekly disclosure report captures primary market disclosures, as well as all categories of continuing disclosures, including financial disclosures and event notices. The MSRB does not regulate municipal bond issuers or establish requirements for the content or categorization of disclosures submitted to the EMMA system. However, the MSRB strives to provide tools to make this issuer-provided information more user-friendly. The enhanced format of the MSRB’s weekly disclosure summary permits users to sort by category, issuer name, state and posted date.

The full text of the disclosures hyperlinked in the MSRB’s report are accessible to the public at no cost on the EMMA website. The MSRB has leveraged cloud-computing to search the approximately 65,000 disclosures the EMMA system received from January 1, 2020 to May 10, 2020 to identify those that referenced COVID-19 or related keywords.

“We are encouraged by this sign of the value to the market that we will be able to deliver once we complete our migration to the cloud and modernize our legacy market transparency systems,” Kim said. “In the future, we imagine it won’t take a team of MSRB data experts to produce this report. The EMMA website would be able to offer this high-powered keyword search functionality directly to the public.”

The MSRB recently formed a Market Transparency Advisory Group and selected a group of 13 individuals to represent the diversity of municipal market participants and help identify objectives for the modernization of the MSRB’s systems and provide input on potential data and technology tools for the market.

Date: May 12, 2020

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




SIFMA Updates MSRB Rule G-17 Model Disclosure Documents.

New York, N.Y., May 13, 2020 — SIFMA today announced updates to its set of G-17 model disclosure documents and related drafter’s guidance to help municipal securities underwriters comply with the newly amended requirements for disclosure to municipal issuers set forth by the revised interpretive guidance to Municipal Securities Rulemaking Board (MSRB) Rule G-17.

The MSRB established a compliance date of March 31, 2021 (extended as a result of the COVID-19 crisis) for its amended and restated guidance regarding the fair dealing obligations underwriters owe to issuers of municipal securities under MSRB Rule G-17, which covers the conduct of both municipal securities and municipal advisory activities.

“SIFMA created our G-17 model documents in 2012 to assist underwriters in their compliance with the Rule, and we offer the updated versions that take into account the changes the MSRB made to the guidance,” said Bernard Canepa, Vice President and Assistant General Counsel, SIFMA. “In the spirit of the revised guidance, the updated documents are designed to streamline the disclosures made to issuers to more narrowly focus on the risks and conflicts most relevant to a given transaction. The updated documents also incorporate new requirements of, and clarifications to, the revised guidance. We encourage underwriters to modify these documents as necessary.”

The updated documents now include two disclosure letters reflecting the revised fair dealing obligations of underwriters: one for the Sole or Senior Managing Underwriter to make the standard disclosures and disclose their own conflicts, and one for the co-managing underwriter to disclose their own conflicts as well.

SIFMA recommends that underwriters update their internal processes and continue to educate their public finance departments and issuer clients about the coming changes.

SIFMA plans to update its Model Risk Disclosures prior to the March 31, 2021 compliance date for the rule amendments posted currently on the website.




BDA Submits Comments on Draft Amendments to MSRB Rule A-3: Membership on the Board.

Today, following extensive work with BDA membership committees and leadership, the BDA submitted comments in response to the MSRB request for comment on Draft Amendments to Rule A-3.

The comment letter can be viewed here.

The BDA comments, among other points, requests that the MSRB consider:

Background

The proposed amendments to MSRB Rule A-3 include tightening the independence standard required of public representatives on the Board by requiring a minimum of five years of separation from a regulated entity before an individual would be eligible to serve as a public member.

The proposal also includes reducing the size of the Board to 15 members, with eight members representing the public and seven representing regulated entities. To facilitate the possible transition to the new Board size, the MSRB currently is not seeking applicants for new Board members for Fiscal Year 2021.

The MSRB’s proposal addresses many of the issues raised by Senator Kennedy (R-LA) and co-sponsors Senators Warren (D-MA) and Jones (D-AL) in their proposed legislation, S. 1236, the Municipal Securities Rulemaking Board Reform Act of 2019, as well as recommendations identified as a result of the Special Committee’s review and assessment of the Board’s governance practices. The MSRB is subject to oversight by both Congress and the Securities and Exchange Commission.

Bond Dealers of America

April 29, 2020




NFMA Submits Comment Letter to MSRB on COVID-19 Credit-Related Material Event Notices.

To review the letter, click here.




BDA Hosts Reg BI Conference Call with SEC, FINRA, and MSRB.

Today, the BDA along with Retail Committee leaders hosted a conference call with representatives from the SEC, FINRA, and the MSRB to discuss the implementation of the best interest standard known as Regulation Best Interest (Reg BI), which has a compliance date of June 30th. Following the SEC announcement stating that the Commission will continue to go forward with implementation of the Rule this summer, the BDA collected questions from membership to be answered by the regulators. The call worked through the questions and issues raised by BDA membership.

The discussion included:

Bond Dealers of America

April 29, 2020




MSRB Seeks to Amend Certain Rules to Align With Regulation Best Interest.

Today, the MSRB filed proposed amendments with the SEC to align MSRB rules with the requirements of SEC Regulation Best Interest. The MSRB’s proposal is designed to reduce complexity in financial regulation and facilitate compliance with Reg BI.  The proposed effective date is the compliance date for Reg BI, June 30, 2020.

The filing can be viewed here.

The proposed amendments would update MSRB Rule G-19 on suitability, Rules G-8 and G-9 on books and records, Rule G-20 on gifts and gratuities and Rule G-48 on transactions with sophisticated municipal market professionals (SMMPs).

The MSRB Board of Directors approved the proposed amendments to MSRB rules to be filed with the SEC, where they will be published for public comment and must be approved by the SEC before becoming effective.

The BDA will continue to provide updates and information regarding potential calls to draft a response to the filing.

Bond Dealers of America

May 1, 2020




GASB Postpones Effective Dates of Upcoming Pronouncements.

Norwalk, CT, May 8, 2020 — The Governmental Accounting Standards Board (GASB) today issued Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance. The Statement is intended to provide relief to governments and other stakeholders in light of the COVID-19 pandemic.

The guidance postpones by one year the effective dates of certain provisions in the following pronouncements:

The Statement postpones the effective dates of the following pronouncements by 18 months:

The provisions of Statement 95 are effective immediately. Statement 95 does not postpone the effective date of Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, because the pandemic was factored into Statement 94’s effective date.

The Board worked on this guidance under an expedited schedule. It would like to thank all stakeholders who responded under difficult circumstances.

The GASB provides other COVID-19-related resources for stakeholders, including an emergency toolbox, on its website at www.gasb.org/COVID19.




SEC: Investors Need Timely Information on Muni Bond Issues.

Disclosure is needed because of the financial and economic impacts of the COVID-19 pandemic.

The Securities and Exchange Commission is advising municipal bond issuers to disclose “as much information about their current financial and operating condition as is reasonably practicable” because of the economic and financial impact of the COVID-19 pandemic.

The SEC is also encouraging issuers to provide investors with information about the potential future impact of the pandemic on their financial and operating conditions, and it’s encouraging financial advisors to discuss the importance of those disclosures with their clients when providing recommendations and investment advice.
“The fluid and unpredictable nature of the public health crisis and its financial and economic impacts on municipal issuers has placed investor need for timely financial information into stark relief,” according to a statement from SEC Chairman Jay Clayton and Rebecca Olsen, the director of the agency’s Office of Municipal Securities.

The statement notes that disclosures from muni bond issuers should reflect:

The SEC would also like muni issuers to include in their disclosures their access to cash and reserves and liquidity facilities, including those they have used and may use in the future; the availability of federal, state and local aid they have sought or plan to seek, including the timing of such aid; and any reports issuers have prepared that may be “significant sources of current information.”

Such disclosures would be “voluntary, unaudited and non-routine” and “may be challenging … under the current circumstances,” according to the SEC.

The Economic and Fiscal Challenges of Muni Issuers

The agency’s request comes at a time when many states, counties, cities and towns have been hit with a big drop in revenues while also experiencing an increased demand for spending and services due to the COVID-19 pandemic.

They’re collecting fewer revenues from sales and other taxes while shelling out more funds to pay for unemployment — roughly 30 million people have lost jobs in the past six weeks — and emergency health care, for example.

On top of that, states must balance their budgets annually, forcing many to cut programs at a time when they’re needed most.

The Coronavirus Aid, Relief and Economic Security (CARES) Act provided about $150 billion in direct federal aid to states and cities, but $500 billion more is needed, according to the National Governors Association.

Federal aid has focused on coronavirus-related expenses rather than future revenue replacement, leading states “to balance their fiscal 2021 budgets on the back of local governments by reducing transfers,” according to a report from Moody’s Investors Service.

Congressional Democrats have been pushing for a fourth federal aid package that would include more funds for states and cities, but Republicans, led by Senate Majority Leader Mitch McConnell, R-Ky., and President Donald Trump, have opposed more funds for states and cities. McConnell even suggested that states file for bankruptcy if they can’t balance their budgets, which is not legal.

On Sunday, Trump’s chief economic advisor, Larry Kudlow, said the White House would like to pause before a fourth coronavirus aid program is developed, although he doesn’t rule it out.

On Tuesday, Moody’s downgraded its outlook for local government debt issuers from stable to negative, just three days after it did the same for state issuers — both because of the economic impact of the COVID-19 pandemic on issuers.

Matt Fabian, a partner at Municipal Market Analytics (MMA), welcomed the SEC’s push for more disclosure among muni issuers.

“Investors are rewarding issuers providing transparency, even if the news is bad,” he said. They are “more likely to shy away from or sell exposures about which they can’t get any fresh information.”

In the absence of “actual financial information, investors are forced to rely on the casual statements and social media posts made by government officials, which are subject to the same anti-fraud requirements of any other informational release,” added Fabian. “Governments do themselves a favor by putting real data into investors hands.”

Chris Brigati, head of municipal trading at Advisors Asset Management, said the SEC’s push for more disclosure will be a challenge for many muni issuers to satisfy. “Most issuers are not great at disclosure to begin with and now you’re asking them for something they have not historically done and to do forecasting on top of that. It’s a nice idea but it’s going to be hard to execute.”

But it’s understandable why the SEC would want investors to have the information. Retail investors dominate the muni bond market, owning about 72% of the bonds either directly or indirectly, or approximately $3 trillion of outstanding issues, according to the SEC.

Given that the muni market is complex and diverse — it includes 50,000 issuers and approximately 1 million securities, according to the SEC, and multiple types of bond structures — the SEC says both “issuer-specific and security-specific disclosures are material.”

ThinkAdvisor

By Bernice Napach | May 05, 2020 at 12:45 PM




SEC Leaders Ask Municipal Issuers for Voluntary COVID-19 Disclosure.

On May 4, Securities and Exchange Commission Chairman Jay Clayton and Rebecca Olsen, Director of the SEC’s Office of Municipal Securities, issued a statement entitled “The Importance of Disclosure for our Municipal Markets”1 stating that “in light of the potentially significant effects of COVID-19 on the finances and operations of many municipal issuers” municipal issuers should provide investors “as much information about their current financial and operating condition as is reasonably practicable,” noting “the fluid and unpredictable nature of the public health crisis and its financial and economic impacts on municipal issuers.” The May 4 Statement offers “observations and requests” to help municipal issuers provide such disclosures and intentionally parallels the Corporate Issuer Statement made in April by Chairman Clayton and William Hinman, Director of the Division of Corporation Finance.2 For municipal issuers experienced in making voluntary disclosure, little should be surprising and much reassuring.

The May 4 Statement lists certain disclosures which the authors believe are important to investors and market participants during the ongoing pandemic: (i) information regarding the impact of COVID-19 on operations and financial condition, (ii) sources of liquidity, such as cash on hand and access to various reserves or other funds, (iii) the availability of federal, state and local aid, and (iv) reports prepared for other governmental purposes “that may be significant sources of current information” in primary offering documents such as contractually required disclosure filings or voluntary public statements on EMMA, their investor relations webpage, or other “place or places at which they regularly make information available.”3 Acknowledging the liability risk associated with decisions to voluntarily disclose or expand required disclosure, the authors “believe there are various factors that generally weigh in favor of making [such] disclosures.” Key among them is that the authors “would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.” The Statement does not specifically discuss federal securities law antifraud provisions, which are omnipresent in the context of municipal disclosure, and so is best read together with the Staff Legal Bulletin No. 21 (OMS) of February 7, 2020 reviewing those provisions as applied to municipal issuer public statements.4

The May 4 Statement begins with a description in detail of the size, importance, complexity, and specialized nature of the municipal securities market and states that municipal issuers and investors should recognize the materiality of both issuer-specific and security-specific disclosure. Likewise, financial professionals should discuss the importance of both kinds of disclosure with their customers and also when providing recommendations and investment advice.

The May 4 Statement goes on to recognize that the COVID-19 pandemic requires an increased focus on the finances and operations of municipal issuers, and requests increased voluntary disclosure of such information. “The fluid and unpredictable nature of the public health crisis and its financial and economic impacts on municipal issuers has placed investor need for timely financial information into stark relief” and so “the typical practice of providing historic financial information in the form of an annual information filing or similar disclosure may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.” In other words, an issuer fully satisfying existing disclosure requirements required by law may not be providing investors all they need in today’s circumstances. The solution is voluntary disclosure, but even the authors acknowledge that there are risks accompanying such disclosure because “certain financial disclosure would be based on estimates and assumptions as well as projections regarding future circumstances.”

The authors recognize that consideration of voluntary disclosure or any expansion of required disclosure may include consideration by the issuer (with advice of counsel) of potential antifraud liability. They describe “various factors that generally weigh in favor of making these disclosures” including practices frequently employed by counsel in the preparation of forward-looking or non-routine disclosures:

(1) a description of relevant facts or assumptions affecting the reasonableness of reliance on, and the materiality of, the information provided;

(2) a description of how certain important information may be incomplete or unknown; and,

(3) the process or methodology (audited vs. unaudited) used by the municipal issuer to produce the information.

Issuers, counsel and other municipal market participants are familiar with the use of these techniques in preparing offering documents. The Statement notes that municipal issuers may be required to disclose similar information to other parties in connection with:

The May 4 Statement notes that it is “extremely important” to ensure that disclosure of this type is “consistent across all contexts, regardless of the purpose,” and “kept confidential until disclosed and, when disclosed, disclosed broadly.” This admonition may be understood as a reminder of the assertion in the February 7, 2020 Staff Legal Bulletin that such statements made by an issuer in public reports to other government bodies may be covered by the antifraud provisions.5

The authors of the May 4 Statement state that they “would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.” This assertion seems unusual and worth noting. The Statement from the outset cautions that it:

represents the views of the Chairman and the Director of the Office of Municipal Securities of the U.S. Securities and Exchange Commission … It is not a rule, regulation, or statement of the SEC. The Commission has neither approved nor disapproved its content. This statement does not alter or amend applicable law and has no legal force or effect.

While it may be unusual for SEC representatives to suggest that the SEC will not “second guess” disclosure that later proves to be inaccurate, this statement does not (and could not) change existing law. Aside from statements made in offering documents, municipal issuers would only be subject to antifraud liability for statements in voluntary disclosures and expansion of disclosures required by continuing disclosure agreements if they acted with scienter. Municipal issuers employing the steps identified in the Statement, following effective disclosure policies and procedures and the assistance of experienced disclosure counsel, would be unlikely to intentionally or recklessly misstate their financial or operating conditions, and therefore would be unlikely to act with scienter. Understood in that light, the statement, while rare, may not be surprising.

_____________________________________________________________________________

1 Available at: https://www.sec.gov/news/public-statement/statement-clayton-olsen-2020-05-04. Unless otherwise identified, matters in quotations in this update are text from the Statement.

2 Chairman Jay Clayton and William Hinman, the Director, Division of Corporation Finance, The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19 (Apr. 8, 2020), available at: https://www.sec.gov/news/public-statement/statement-clayton-hinman.

3 As provided in the May 4 Statement:

Information Regarding the Impact of COVID-19 on Operations and Financial Condition.
Disclosures should reflect the issuer’s assessment of this state of affairs and outlook and, in particular municipal issuers should provide information regarding: (1) their current operational and financial status, including decreases in revenues and delays in collection of revenues; (2) how their COVID-19 response including efforts to protect the health and well-being of residents and employees has impacted their operational and financial condition, including un-budgeted costs; and (3) how their operational and financial condition may change as efforts to fight COVID-19 evolve. In these circumstances, comparisons to historical information may be relatively less significant.

Information Regarding Sources of Liquidity.
A description of cash on hand, access to reserves or other funds (and to what extent such access is limited), access to liquidity facilities and whether current liquidity is expected to be adequate to fund essential services and make timely debt service payments. If not otherwise disclosed, we encourage municipal issuers to disclose the material terms of any liquidity facility the issuer has used or expects it may use.

Information Regarding Availability of Federal, State and Local Aid.
A description of available federal, state or local aid the issuer has sought or is planning to seek and the anticipated timing of such aid. In addition, if the municipal issuer has obtained any such aid, it should disclose the nature, amount, and other material terms of the aid if it materially affects or reasonably likely will materially affect its operational or financial condition.

Reports Prepared for Other Governmental Purposes.
Municipal issuers routinely prepare reports for governance purposes that may be significant sources of current information. As front-line responders, these reports could provide powerful insight into local, regional, and sector-specific strategies to fight and recover from COVID-19. Accordingly, municipal issuers should consider making these reports more readily accessible to investors. [As noted previously in the Statement, “For various legal and other reasons, ensuring that disclosure of this type is (1) consistent across all contexts, regardless of the purpose and (2) kept confidential until disclosed and, when disclosed, disclosed broadly, is extremely important.”

4 Application of Antifraud Provisions to Public Statements of Issuers and Obligated Persons of Municipal Securities in the Secondary Market: Staff Legal Bulletin No. 21 (OMS) (Feb. 7, 2020), available at: https://www.sec.gov/municipal/application-antifraud-provisions-staff-legal-bulletin-21.

5 Id.

Friday, May 8, 2020

© 2020 Bracewell LLP




SEC Chair and OMS Director Issue Joint Statement Encouraging COVID-19 Disclosure by Municipal Issuers.

On May 4, 2020, Securities and Exchange Commission (SEC) Chair Jay Clayton and Office of Municipal Securities Director Rebecca Olson issued a joint statement available here strongly encouraging robust and timely disclosure in the municipal market about the effects of the coronavirus disease 2019 (COVID-19) public health crisis. The joint statement follows a similar statement issued in early April for corporate issuers.

The joint statement specifically discusses the importance of municipal issuers providing investors with information regarding the impact of COVID-19 on their financial and operating conditions. This disclosure is encouraged (and likely necessary) in connection with disclosures made in official statements for current debt offerings, and perhaps filings made under continuing disclosure agreements, depending on the circumstances. In addition, the SEC Chairman and OMS Director encourage municipal issuers to make voluntary disclosure filings if they are not currently in the market or otherwise posting required information on EMMA. The joint statement suggests this disclosure would include:

The SEC Chairman and OMS Director recognize the challenge in providing specific information about potential effects of COVID-19 due to the evolving nature of the current public health crisis. However, the joint statement sets out a number of factors that they believe should be weighed heavily by municipal issuers in determining whether to provide meaningful disclosure on a voluntary basis.

Perhaps the most important matter discussed in the joint statement is how the SEC Chairman and OMS Director expect “forward-looking statements” in municipal disclosure to be viewed by the SEC. The SEC Chairman and OMS Director stated, “We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second guessed by the SEC.” This is important because there is no specific “safe-harbor” for “forward-looking statements” for municipal disclosure. Nevertheless, we have generally concluded that protection from liability for “forwardlooking statements” in municipal disclosure would be afforded in the municipal market by analogy and under the judicially acknowledged “bespeaks caution” doctrine, similar to that provided in the corporate market for reporting companies.

The information provided in the joint statement is consistent with and, to a certain extent, a confirmation of what we have said in prior alerts regarding dealing with disclosure issues during the COVID-19 public health crisis and generally. To the extent that you are making public statements about the impact of COVID-19 on your financial position or operations, whether those statements are specifically intended for your bond investors or not, you should follow your existing disclosure procedures to provide for consistent information for all interested stakeholders, including governing body members, citizens, other government agencies, lenders and investors in your publicly offered debt obligations. These statements should include appropriate explanatory information about the basis for the statements and precautionary language regarding the “forward-looking” nature of the information provided and the likelihood of the information changing, as the public health crisis continues to evolve.

There is no doubt these are challenging times. However, it is important to continue to follow your disclosure policies and procedures, even when challenged by a great national public health crisis. The joint statement by the SEC Chairman and OMS Director is a welcome response in the midst of the current pandemic and will help to facilitate the production of meaningful disclosure.

Squire Patton Boggs

May 8 2020




SEC Urges Municipal Issuers to Voluntarily Expand Disclosures: McGuireWoods

For many years, the U.S. Securities and Exchange Commission (SEC) has advocated for increased transparency for municipal securities investors. Given the absence of a statutory scheme for municipal securities reporting, the SEC sought to protect investors through the regulation of broker-dealers, municipal securities dealers and municipal advisors; SEC interpretive guidance and industry guidelines; and enforcement of the antifraud provisions of the federal securities laws. Disclosure practices in municipal securities offerings, too, have largely developed in this way, with the SEC consistently advocating for greater and timelier disclosures of issuer and conduit borrower financial and operating information in the primary offering and continuing disclosure contexts.

The SEC has now reinforced its focus on enhanced municipal market disclosures in light of COVID-19 and the pandemic’s potential effects on the financial status of state and local governments and special purpose entities. On May 4, 2020, SEC Chairman Jay Clayton and Office of Municipal Securities Director Rebecca Olsen released a public statement, “The Importance of Disclosure for Our Municipal Markets,” requesting municipal issuers to provide robust, accurate and timely disclosures to market participants. In their statement, Chairman Clayton and Director Olsen stressed the importance of high-quality marketplace disclosures and requested “municipal issuers to provide investors with as much information about their current financial and operating condition as reasonably practicable.”

They further observed that, in today’s markets, the typical practice of providing historic information in the form of an annual filing or similar disclosure may be insufficient for investors to make informed assessments of the municipal issuer’s current and expected future financial information. As a result, Chairman Clayton and Director Olsen encouraged municipal issuers voluntarily to provide investors with detailed current and forward-looking information regarding the impact of COVID-19 on their financial and operating conditions. Recognizing legitimate concerns of liability with respect to voluntary disclosure, including the provision of forward-looking financial information not historically provided by issuers, they expected that the SEC would not second-guess good faith attempts to provide appropriately framed current or forward-looking information. We believe this recognition should provide some comfort to issuers particularly as the SEC recently reminded them (and obligated persons) of the application of the anti-fraud provisions to public statements reasonably expected to reach investors and the trading markets. (For details, see a Feb. 7, 2020, OMS Staff Legal Bulletin, “Application of Antifraud Provisions to Public Statements of Issuers and Obligated Persons.”)

Other regulators likewise continue to evaluate the impact of COVID-19 on the markets and investors and provide guidance and relief to assist the industry in tackling the many new challenges brought about by the virus. Regulators at the same time have maintained a strong focus on identifying illicit activities that target the financial markets and prey on investor fears. (For details on regulators’ previous efforts, see McGuireWoods’ updates on April 28, April 21, April 15, April 6, March 26 and March 17.)

In announcing the formation of the North American Securities Administrators Association (NASAA) Enforcement Task Force (discussed below), Christopher W. Gerold, NASAA President and Chief of the New Jersey Bureau of Securities noted that “fraudsters are ramping up as a result of this crisis” and that state regulators will aim to “proactively identify COVID-19-related threats to investors, including but not limited to fraudulent offerings, investment frauds, and unregistered regulated activities, within the jurisdiction of NASAA member states and provinces, and to disrupt, discourage and deter those activities.”

These concerns are in line with messages from regulators as early as Feb. 4, 2020, when SEC issued its investor alert regarding COVID-19-related scams. On March 26, 2020, the Financial Industry Regulatory Authority (FINRA) issued a similar alert and, on March 30, 2020, NASAA issued an investor fraud alert. Finally, on May 4, 2020, the Financial Action Task Force — the international money laundering and terrorist financing watchdog — published a report highlighting fraud-related risks companies are facing in light of COVID-19, including the proliferation of investment scams, bank fraud targeting financial and account information, and cybercrime. The report advocated for increasing cooperation with regulators abroad and with the private sector.

U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)

Chairman Jay Clayton and Office of Municipal Securities Director Rebecca Olsen’s Statement on the Importance of Disclosure for Municipal Markets

As described above, Chairman Clayton and Director Olsen are encouraging municipal issuers voluntarily to provide investors with as much current issuer- and security-specific information as practicable, as well as forward-looking investor-oriented disclosures discussing the anticipated effects of COVID-19 on their financial and operating conditions. As examples, they suggested the following kinds of disclosures that they believe would be helpful to investors:

Finally, Chairman Clayton and Director Olsen encouraged financial professionals to discuss the importance of issuer-specific and security-specific disclosures with their investors who buy, sell and hold municipal securities, including in particular when providing recommendations and investment advice to Main Street investors.

Please refer to McGuireWoods’ April 17 legal alert regarding the similar statement by Chairman Clayton and the SEC Division of Corporate Finance with respect to corporate issuers.

Updates to SEC Investment Management Staff FAQs

On April 27, 2020, the Staff of the SEC Division of Investment Management updated its COVID-19 Response FAQs. Among other things, the Staff addressed advisers that receive Paycheck Protection Program (PPP) Loans.

FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

On April 28, 2020, FINRA released Episode 58 of its Unscripted Podcast, “Market Structure & COVID-19: Handling Increased Volatility and Volumes.”

STATE REGULATORS

On April 28, 2020, NASAA announced the formation of the COVID-19 Enforcement Task Force, consisting of state and provincial securities regulators, to identify and stop potential threats to investors stemming from the COVID-19 pandemic. NASAA has identified as many as 200,000 coronavirus-related domains as of April 20, 2020, and the task force will be using online investigative techniques to identify additional websites, as well as social media posts that may be offering or promoting fraudulent offerings, investment frauds and unregistered regulated activities. Individual jurisdictions working as part of the task force will be responsible for taking regulatory action to address identified threats.

by E. Andrew Southerling, Cheryl L. Haas, Emily P. Gordy, Aline McCullough, Nicole S. Giffin, Joy D. Llaguno, Steven W. Peretz, Piper A. Waldron and Patrick A. Wallace

May 7 2020

McGuireWoods LLP




NABL: SEC Issues Public Statement on Disclosure

SEC Issues Public Statement: The Importance of Disclosure for our Municipal Markets

The U.S. Securities and Exchange Commission (SEC) released a public statement from Chairman Jay Clayton and Rebecca Olsen, Director of the Office of Municipal Securities.

This statement is directed to issuers of municipal securities as well as investors and market participants more generally and is intended to parallel the Corporate Issuer Statement issued in light of the effects and uncertainties created by the COVID-19 pandemic.

The statement contains, among other things, the following information:




KBRA Releases Research – Coronavirus (COVID-19): Municipal Issuers’ Virus-Related Voluntary Disclosures Trend Up

Kroll Bond Rating Agency (KBRA) releases commentary on municipal issuers and coronavirus (COVID-19) voluntary disclosure through the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA) system.

While the pandemic’s impact on municipal finances has been the dominant focus of investors and rating agencies, only 343 unique municipal issuers or conduit borrowers (a tiny fraction of the market) had provided coronavirus-related voluntary disclosures through EMMA as of April 22.

Voluntary disclosure is distinct from the mandatory continuing disclosure requirements pertaining to material events under Securities Exchange Commission (SEC) Rule 15c2-12 and is supplemental to required annual and quarterly continuing disclosure filings. Issuers who decide to disclose pandemic-related information that is not, or is not yet, a material event may do so via the voluntary disclosure option.

Click here to view the report.

Business Wire

April 27, 2020




NFMA Comments to GASB on Postponement of the Effective Dates of Certain Authoritative Guidance.

To view the comment letter submitted to GASB, click here.




NFMA Submits Comment on Draft Amendments to MSRB Rule A-3.

On April 29, 2020, the NFMA submitted a comment letter to the MSRB on Draft Amendments to Rule A-3: Membership on the Board.

To view the comment letter, click here.




SIFMA: MSRB Request for Comment on Potential Changes to Board Governance Rule A-3

SUMMARY

SIFMA sent comments to the Municipal Securities Rulemaking Board’s (“MSRB”) regarding proposed amendments to MSRB Rule A-3 governing membership on the MSRB’s Board.

SIFMA welcomes the MSRB’s review of its governance with a view to better protecting investors, issuers, and the public interest. This goal can be achieved by a Board that is truly representative and knowledgeable of the municipal securities market.

Download SIFMA Comment Letter.




COVID-19’s Impact on Bond Issuers’ Finances and 15c2-12 Continuing Disclosure Obligations.

As state and local governments continue to take actions to protect the safety and well-being of their citizenry in response to the COVID-19 pandemic, it is important for issuers and other obligated persons of tax-exempt financings to understand the impact such actions and the economic slowdown may have on their finances and outstanding debt obligations. Each issuer or obligated person should analyze the current and potential effect on its finances and begin to plan for its response to decreased revenues, at least for the foreseeable future.

For example:

With uncertainty surrounding historically predictable revenue streams, issuers and obligated persons may need to take out loans or issue short term warrants to meet current payment obligations. Issuers and obligated persons should also keep their continuing disclosure obligations under Rule 15c2-12 and procedures for making event disclosures top of mind. Issuers and obligated persons should maintain consistent communications with their attorneys and other advisers to understand how secondary effects of COVID-19 impact their outstanding issues and operations, and how to stay prepared as the situation continues to evolve.

Frost Brown Todd LLC – Michael A. Brockman, Denise Y. Barkdull, Beau F. Zoeller, Laura H. Theilmann and Scott A. Krapf

April 29 2020




ARRC Proposes New York State Legislation to Facilitate LIBOR-to-SOFR Transition.

The Alternative Reference Rates Committee (the “ARRC”) recently proposed statutory language for consideration by the New York State legislature intended to minimize costly and disruptive litigation that could result from the discontinuation of LIBOR at the end of 2021. Because many of the financial products and agreements that reference LIBOR are governed by New York law, the ARRC is encouraging urgent legislative action to provide legal certainty to market participants and mitigate potential risks to the economic stability of the financial markets. The accompanying memo published by the ARRC presents a conceptual description of a legislative solution to address LIBOR cessation in financial contracts and outlines several case studies that detail how the proposed statutory language would interact with certain financial products, including floating rate notes, securitizations, consumer adjustable rate mortgages, derivatives, business loans, procurement agreements, and municipal bonds. The ARRC’s publication also includes draft statutory text that the New York State legislature could consider if it decided to adopt the ARRC’s proposal.

Overview of Proposed Legislation

  1. Prohibit a party to the relevant contract from refusing to perform its obligations under the agreement or declaring a breach of contract as a result of LIBOR cessation or the use of the statutory benchmark replacement;
  2. Establish that the statute’s recommended benchmark replacement (which includes a spread adjustment) is a commercially reasonable and economically equivalent substitute for LIBOR; and
  3. Provide market participants with a safe harbor from litigation when they use the statute’s recommended benchmark replacement.

Use of the statute’s recommended benchmark replacement, which is the benchmark rate recommended by the Federal Reserve Board, the Federal Reserve Bank of New York, or the ARRC, would be required for contracts that are silent with respect to what occurs when LIBOR ceases or where the existing fallback language resorts to a LIBOR-based rate (e.g., polling banks for LIBOR or the last quoted LIBOR), unless the parties mutually agree to opt out of the proposed legislation’s mandatory application. For contracts with fallbacks that provide a party with discretion to select a replacement rate, the proposed statute provides a safe harbor if the party with such discretionary power elects to use the statute’s recommended benchmark replacement. The ARRC’s proposed statute would not have any impact on contracts that contain fallback provisions to a non-LIBOR replacement rate (such as a Prime-based rate), however.

Conclusion

The ARRC’s proposed statute and accompanying memo can be found here. While the proposed statute aims to alleviate the potential burden on New York’s judicial resources resulting from LIBOR cessation-related disputes, market participants should not rely on a legislative solution alone. With approximately $200 trillion of financial products worldwide referencing the USD LIBOR benchmark, market participants are strongly encouraged to analyze their portfolios to identify contracts that lack provisions addressing LIBOR cessation or have provisions that could have significant economic impacts that were not previously anticipated, and to immediately begin amending the terms of those contracts where possible.

Paul Hastings LLP

April 27 2020




SEC: When Using the Word ‘Advisor’ Is a No-No.

As broker-dealers are busy preparing for the SEC’s Regulation Best Interest, which kicks in June 30, the agency is reminding them about the correct use of the term “advisor” or “adviser.”

So reports ThinkAdvisor, citing an update to frequently asked questions on the SEC’s website about the rule, which aims to boost broker-dealers’ standard of care.

Here’s the skinny: Broker-dealers generally can’t use the terms “advisor” or “adviser” in their names or titles if they are not also registered as investment advisors, according to the FAQs. The agency presumes that doing so “is a violation of the requirement to disclose the broker-dealer’s capacity” under Reg BI’s Disclosure Obligation.

There are exceptions. Broker-dealers “may use these terms when they are acting in a role specifically defined by federal statute that does not entail providing investment advisory services to retail customers, for example, as a municipal advisor, commodity trading advisor, or advisor to a special entity.”

In other words, don’t use the terms when it comes to providing advice to retail investors.

A couple of other points: Broker-dealers that are affiliated with RIAs are generally prohibited from using the terms. But broker-dealers who are registered as investment advisors with states are considered RIAs and thus are exempt from the prohibition.

Barron’s

April 29, 2020 2:34 pm ET




Financial Accounting Foundation Board of Trustees - Notice of Meeting.

Read the Notice of Meeting.

[04/27/20]




MSRB’s Weekly COVID-19-Related Disclosure Summary.

The MSRB’s weekly COVID-19-Related Disclosure Summary is now available. The report outlines 118 new primary market disclosures and 375 new continuing disclosures related to COVID-19 during the week ending April 12, 2020.

Read here.




GASB Proposes to Postpone Effective Dates of Certain Pronouncements.

Norwalk, CT, April 15, 2020 — The Governmental Accounting Standards Board (GASB) today proposed to postpone the effective dates of provisions in almost all Statements and Implementation Guides due to be implemented by state and local governments for fiscal years 2019 and later.

In light of the COVID-19 pandemic, the Exposure Draft, Postponement of the Effective Dates of Certain Authoritative Guidance, is intended to provide relief to governments. The proposal would postpone by one year the effective dates of provisions in the following pronouncements:

Statement No. 83, Certain Asset Retirement Obligations
Statement No. 84, Fiduciary Activities
Statement No. 87, Leases
Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements
Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period
Statement No. 90, Majority Equity Interests
Statement No. 91, Conduit Debt Obligations
Statement No. 92, Omnibus 2020, paragraphs 6–10 and 12
Statement No. 93, Replacement of Interbank Offered Rates, paragraphs 13 and 14
Implementation Guide No. 2017-3, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting), Questions 4.85, 4.103, 4.108, 4.109, 4.225, 4.239, 4.244, 4.245, 4.484, 4.491, and 5.1–5.4
Implementation Guide No. 2018-1, Implementation Guidance Update—2018
Implementation Guide No. 2019-1, Implementation Guidance Update—2019
Implementation Guide No. 2019-2, Fiduciary Activities
Implementation Guide No. 2019-3, Leases.

The GASB did not propose postponing the other provisions of Statement 93 or Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, because the pandemic was factored into the establishment of the effective dates for those pronouncements.

The GASB is working under an expedited schedule to issue this guidance as quickly as practicable. The Exposure Draft is available on the GASB website, www.gasb.org, with a comment deadline of April 30. The GASB invites stakeholders to review the proposal and provide comments. The Board is scheduled to review stakeholder feedback and consider a final Statement for issuance on May 8.

In response to the COVID-19 pandemic, the GASB provides a number of resources for stakeholders, including an emergency toolbox, on its website at www.gasb.org/COVID19.




BDA Submits Additional Comments to Fed on Municipal Liquidity Facility.

Today, following continued discussions with the Muni Exec Committee, the BDA submitted comments to the Federal Reserve in response to the announcement of the Municipal Liquidity Facility. The BDA comments follow prior communications with the Federal Reserve and Treasury, and focus on support of the new program, while providing additional recommendations for the Fed as they continue to build out key features and terms of the facility.

The letter can be viewed here.

The BDA comments focus on the following aspects of the Feds program:

The BDA will continue to provide updates as they become available

Bond Dealers of America

April 15, 2020




Implications Of COVID-19 Pandemic For Municipal Bond Transactions.

The COVID-19 pandemic is affecting municipal borrowers, including state and local governmental entities and conduit borrowers, as unexpected expenses grow and expected revenue declines as a result of stay-at-home and other similar mandates. Issuers and conduit borrowers likely will encounter in the coming months a number of legal issues relating to tax-exempt borrowings in light of these changing financial conditions. This Alert will address a few of these legal issues relating to continuing disclosure and tax (particularly cash flow deficits and debt restructuring). For more information about the topics discussed below, please contact any member of the Public Finance Group.

Continuing Disclosure

Pursuant to outstanding continuing disclosure agreements, issuers and obligated persons may be required to file notices related to late annual or quarterly filings and listed event notices related to a change in economic conditions because of the COVID-19 pandemic. Issuers and obligated persons should review their outstanding agreements and disclosure policies and procedures.

Under the U.S. Securities and Exchange Commission (the “SEC”) Rule 15c2-12 of the Securities Exchange Act (the “Rule”), issuers and obligated persons are required to file a notice regarding late annual or quarterly filings prior to the date listed in the applicable continuing disclosure agreement and listed event notices within 10 business days after the occurrence of the event. These notices must be filed on the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA) system. Issuers and obligated persons are not excused from making these filings if an office is closed or if employees are working remotely.

1. Required Filings

Some of the listed events that should be reviewed carefully include:

A. Principal and interest payment delinquencies: Did the issuer fail to make its principal or interest payment related to the bonds on time? Did the obligated person (i.e., the conduit borrower) fail to make its payment to the issuer that will be used to pay the principal or interest on the bonds on time?

B. Non-payment related defaults, if material: Did the change in its economic condition cause the issuer or the conduit borrower to fall below a financial covenant?

C. Rating changes: Did the rating on the bonds change – upgraded or downgraded? Did the rating on the credit enhancement (i.e., the rating of the issuer of municipal bond insurance or letter of credit) change? Typically, a change in “outlook” (such as stable, positive, or negative) is not considered a rating change for the purpose of the Rule.

D. Bankruptcy, insolvency, receivership, or similar event of the obligated person: Was a receiver appointed in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal laws?

2. Financial Obligations

Additionally, for bonds issued on or after February 27, 2019, issuers and obligated persons may be required to file notices related to the following two listed events:

A. 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.

Did the issuer or the obligated person obtain a loan from a bank, e.g., the U.S. Small Business Administration’s Paycheck Protection Program, or obtain a new line of credit?

B. 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.

Did the issuer or the obligated person fail to make a timely payment related to a bank loan or lease because of financial difficulties? Did that failure cause an acceleration of the bank loan or lease?

The term “financial obligation” means 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 MSRB consistent with the Rule.

3. Modifications

Issuers and obligated persons are required to file notices related to modifications to existing agreements related to the two new events related to Financial Obligations listed above and for modifications to rights of the bondholders, if material.

A modification occurs when the modified terms become enforceable against the issuer or the obligated person. A modification may be written or oral. Examples of modifications include a waiver of an interest rate change, changing or waiving a covenant in a bond document, deferring a payment, or entering into a temporary forbearance agreement. These modifications may or may not trigger a reissuance for tax purposes (see discussions in Tax section below).

4. Financial Difficulties

There are several listed events that require the issuer or the obligated person to file a notice if the event is caused by financial difficulties:

A. Unscheduled draws on debt service reserves reflecting financial difficulties: Did the issuer or the obligated person draw on a debt service reserve fund in order to make a payment related to the bonds?

B. Unscheduled draws on credit enhancements reflecting financial difficulties: Did the issuer or the obligated person draw on a letter of credit in order to make a payment related to the bonds?

C. For bonds issued on or after February 27, 2019: 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 (see above).

For these listed events, if the issuer or obligated person determines that the event would affect the liquidity or overall credit worthiness of the issuer or the obligated person, then the issuer or obligated person is required to file a notice on EMMA.

5. Voluntary Filings

In addition to the filings that are required under the Rule, issuers and obligated persons may decide to make a voluntary filing on EMMA related to a change in their economic condition, presumably upon the occurrence of an event under its disclosure obligation (without regard to the date of the February 27, 2019 update) or included in a regular filing to describe the impact of COVID-19 on operating and financial data. Prior to making these voluntary filings, the issuer and the obligated person should discuss them with bond counsel or disclosure counsel.

Tax

1. Reissuance as a Result of Restructuring

The effect on the bond market resulting from the liquidity crunch caused by the COVID-19 pandemic is proving to be similar to that resulting from the credit crunch caused by the financial crisis in 2008. In both instances, issuers and borrowers are finding the remarketing of their outstanding tax-exempt bonds to be extremely difficult. As a result, they have begun seeking a range of solutions, from debt payment deferrals, covenant waivers, and other debt modifications to purchases of debt obligations by issuers. Such proposed changes to the debt instruments touch on the various aspects of bond reissuance that are discussed below in more detail.

A. Treasury Regulation §1.1001-3
For all federal income tax purposes, Treas. Reg. §1.1001-3 (the “1001 Regulations”) generally provide that a modification of terms of a debt instrument that is significant enough will result in a deemed exchange of an old debt for a new debt, or a “reissuance,” which results in gain or loss to the holder of the debt instrument. The 1001 Regulations test reissuance in two parts: (i) modification and (ii) significance of the modification. For modification, the 1001 Regulations set forth rules (and exceptions) as to whether a change of a term in the debt instrument (whether addition or deletion) is a “modification.” If the change is a considered a modification, the 1001 Regulations set forth rules (and exceptions) to test whether the modification is significant enough to result in a reissuance. Below are highlights of the modification and significance tests that are relevant to changes to bonds:

(i) Modification
Generally, a modification is any change, including any addition or deletion, in a legal right or obligation of the issuer or holder of a debt. Also, a modification generally occurs at the time the parties agree upon the modification, not when it goes into effect.

An alteration of a legal right or obligation that occurs by operation of the terms of a debt instrument is generally not a modification. However, it still is a modification if the alteration (a) is a change in obligor or nature of the debt instrument (from recourse to nonrecourse or from nonrecourse to recourse), (b) converts the instrument into equity, or (c) results from an exercise of an option by either the issuer or the holder. However, an exercise of an option is not a modification if (x) the option is unilateral and (y) for an option exercisable by a holder, the exercise of the option does not result in a deferral of or a reduction in any scheduled payment of interest or principal.

Generally, an issuer’s failure to perform its obligations under a debt instrument is not a modification. In addition, a holder’s temporary forbearance to stay collection or waive acceleration clauses and default rights for up to two years, plus any additional period during which the parties conduct good faith negotiations or a bankruptcy case is pending, is not a modification.

(ii) Significance
Once there is a modification, the 1001 Regulations set forth a combination of five specific tests and a catch-all “economic significance” test to see whether the modification is significant. Below are the highlights of the six significance tests:

(a) Economic significance: A modification is a significant modification only if, based on all facts and circumstances, the legal rights or obligations that are altered and the degree to which they are altered are economically significant. All modifications to the debt instrument (other than modifications subject to the five specific tests) are considered collectively, so a series of such modifications may be significant when considered together although each modification would not be significant if considered alone.

(b) Change in yield: Generally, a modification that results in a change in yield of the modified debt instrument by more than 25 basis points is significant.

(c) Deferral of payments: A delay of payment of the amount due under a debt instrument (including a change in the amount of the payments) that results in a “material deferral” of scheduled payments is significant. The delay or deferral may result from an extension of the final maturity or a deferral of payments due prior to maturity. However, as a safe harbor, a delay or deferral of scheduled payments for a period equal to the lesser of five years or 50 percent of the original term of the instrument is not a material deferral. Any option to extend the original maturity and deferrals of de minimis payments are ignored. Keep in mind, though, that a delay or deferral within the safe harbor period may be limited by 120 percent of the weighted average economic life of the financed facilities.

(d) Change in obligor or security: For tax-exempt bond purposes, Notice 2008-41 has effectively streamlined this test such that any change in obligor, security, or credit enhancement is a significant modification if the modification results in a change in the payment expectations.

(e) Changes in the nature of a debt instrument: A change in the debt instrument from debt to equity is a significant modification. A change in the debt instrument from recourse to nonrecourse and vice versa is also a significant modification.

(f) Changes to the accounting or financial covenants: A modification that adds, deletes, or alters customary accounting or financial covenants is not a significant modification.

B. Notice 88-130
While the 1001 Regulations apply for all federal income tax purposes, they do not apply to “qualified tender bonds” for purposes of Sections 103 and 141 through 150. For 20 years, Notice 88-130 governed what constitutes a “qualified tender bond” (“QTB”) and whether there is a reissuance with respect to a QTB. Under Notice 88-130, a QTB is any tender bond with a final stated maturity date that is no later than the earlier of (a) the date that is 35 years after the date of issue or (b) the latest date reasonably expected (as of the date of issue) to be required to carry out the governmental purpose of the issue of which the bond is a part. The key aspect of Notice 88-130 was that a qualified tender change (such as a change in the interest rate mode provided for in the bond documents) with respect to the QTB was not treated as a reissuance that would otherwise have been under the 1001 Regulations. However, Notice 88-130 was generally regarded as being inflexible, with its “hair trigger” reissuance analysis for any changes not otherwise provided for in the bond documents, including and in particular changes to the length of the bonds from a long period (more than one year) to a short period (less than one year) and vice versa. The financial crisis in 2008 showed that Notice 88-130 was not helpful to issuers and borrowers who wanted to amend bond documents either to create or to preserve the opportunities to remarket their existing QTBs while not causing a reissuance at the same time.

C. Notice 2008-41
In response to the financial crisis of 2008 and the shortcomings of Notice 88-130, the Internal Revenue Service (“IRS”) issued Notice 2008-41, designed to relax the rules with respect to certain changes to qualified tender bonds and to avoid causing a reissuance. However, Notice 2008-41 did not supersede Notice 88-130, as issuers can elect to apply Notice 88-130. As a general matter, under Notice 2008-41, a tax-exempt bond is treated as reissued if (i) the terms of the bond were significantly modified or the bond was disposed of, (ii) the bond is purchased by or on behalf of the governmental issuer, or (iii) the bond is retired or redeemed.

(i) QTB
Under Notice 2008-41, a QTB is a tax-exempt bond that has all of the following features:
(a) for each interest rate mode that is provided for under the terms of the bond considered separately, the interest of the bond is either a fixed interest rate; a variable interest rate that reasonably can be expected to measure contemporaneous variations in the cost of newly borrowed funds, including interest rates determined by reference to eligible interest rate indexes (e.g., the SIFMA index); a tender option-based interest rate; a Dutch auction rate; or an eligible objective rate for a variable-rate instrument (e.g., a qualified inflation rate or a qualified inverse floating rate);

(b) interest on the bond must be unconditionally payable at least annually;

(c) the final maturity date of the bond is not longer than the lesser of (i) 40 years from the issue date of the bond or (ii) the latest date that is reasonably expected as of the issue date of the issue of which the bond is a part to be necessary to carry out the governmental purpose of the issue of which the bond is a part (with 120 percent of the weighted average economic life of the financed facilities being a safe harbor for this purpose); and

(d) the bond is subject to an optional tender right or a mandatory tender requirement which allows or requires a bondholder to tender the bond for purchase in one or more prescribed circumstances under the terms of the bond.

(ii) Qualified Interest Rate Mode Change and Qualified Tender Right
For a QTB that meets all of the features above, any qualified interest rate mode change or exercise of a qualified tender right is not treated as a modification under the 1001 Regulations and thus will not cause a reissuance of the QTB.

A “qualified interest rate mode change” is a change in the interest rate mode on a bond that is provided for under the bond documents. Furthermore, in order to be a qualified interest rate mode change, the terms of the bond must require that the bond be remarketed at par upon conversion to a new interest rate mode, unless the conversion is to a fixed interest rate mode for the remaining term of the bond to maturity, in which case the bond may be resold at a market premium or a market discount from the stated principal amount of that bond.

A “qualified tender right” is a tender right for the purchase of a bond (regardless of whether the purchase is by or on behalf of a governmental issuer) that is provided for under the bond documents. The tender right must involve either an optional tender right or a mandatory tender requirement which allows or requires the bondholder to tender the bond for purchase on at least one tender date before the final stated maturity date. The tender right must entitle a tendering bondholder to receive a purchase price equal to par (which may include any accrued interest). The terms of the tender right must require the issuer or its remarketing agent to use at least best efforts to remarket a bond upon a purchase pursuant to the tender right.

(iii) Purchase of Bonds by Issuers
A bond purchased by or on behalf of a governmental issuer pursuant to a qualified tender right is treated as not retired pursuant to and as a result of the qualified tender right for a 90-day period from the date of such purchase. After the 90-day period, the bond will be treated as retired if the governmental issuer continues to hold its own bond.

(iv) Purchase of Bonds by Conduit Borrowers or Third Parties
A bond purchased by third-party guarantors, third-party liquidity facility providers, and conduit borrowers (other than a conduit borrower that is a governmental issuer) is not treated as purchased by or on behalf of a governmental issuer. Therefore, any such person may hold a bond purchased pursuant to the exercise of a qualified tender right for an unlimited holding period without causing a retirement of such bond. Furthermore, a governmental issuer may purchase and hold its own bond for a period of 89 days while using best efforts under the terms of the bond to remarket the bond and then resell the bond to a third-party guarantor, a third-party liquidity facility provider, or another independent third party before the expiration of the 90-day period to avoid causing a retirement of the bond.

(v) Program Investment
Under Treasury Regulation § 1.148-1(b), for an issuer to avail itself of the benefits of the special arbitrage rule for “program investments” under which the issuer may set a loan yield that is 150 basis points (1.5 percent) in excess of the bond yield, the issuer must restrict a conduit borrower’s purchase of tax-exempt bonds for a governmental program in an amount “related” to the amount of its purpose investment (the loan) financed by the program. The permitted purchase by the conduit borrower of its tax-exempt auction rate bond (without causing a reissuance) that financed its loan to facilitate liquidity under adverse market conditions is treated as not being so related for this purpose. As a result, the issuer’s program investment benefits would not be jeopardized as a result of a purchase of the bonds by the conduit borrower.

(vi) Nonrecourse Debt
Solely for tax-exempt bond purposes, in determining whether a modification of the security or credit enhancement on a tax-exempt bond that is a nonrecourse debt instrument is a significant modification, the modification is treated as significant only if the modification results in a change in payment expectations, which is a significant modification test for recourse debt instruments.

D. Consequences of Reissuance
For tax-exempt bonds, a reissuance is treated as a refunding of the bond prior to being reissued, and the consequences of a refunding include a need for new bond counsel opinion, a filing of the proper variation of the 8038 form, and a final rebate calculation for the prior bond that had been reissued. But perhaps the most important consequence is the change in the law applicable to the reissued bonds at the time of the reissuance. For bonds that were issued under programs that have expired, a reissuance would be fatal in that the reissued bond would lose the benefits of the expired program and, in some cases, even tax-exemption unless the reissuance qualifies for a transitional refunding exception designed to grandfather the expired program.

E. Recent Developments
On December 31, 2018, the IRS released proposed Treasury Regulation §1.150-3 (the “Proposed Regulation”) to address the issue of reissuance. The Proposed Regulation generally followed Notice 2008-41 except for two points. The first is that the Proposed Regulation did not include the program investment fix about the related amount in the case of a purchase by the conduit borrower. The second is that the Proposed Regulation did not provide for the permissible remarketing of the qualified tender bond with market premium if the conversion of the bond is to the remaining term of the bond to maturity. Comments from the public finance legal community were submitted to the IRS to reinstate those two points in the final regulations.

On March 25, 2020, the National Association of Bond Lawyers submitted a letter to the United States Department of Treasury and the IRS seeking, among other things, (i) an expanded holding period beginning on March 1, 2020, and ending on the later of (a) December 31, 2021, or (b) 90 days after the date on which no United States jurisdiction remains covered by a state or federal declaration of emergency or disaster related to the COVID-19 pandemic for issuers to purchase their own bonds without causing reissuance; (ii) an extension of the general holding period from 90 to 180 days for issuers that might still need to hold their bonds at the end of the requested expanded holding period; and (iii) a suspension of the “best efforts” requirement discussed in the qualified tender right section above during the requested expanded holding period.

2. Cash Flow Deficit and Extraordinary Working Capital Financings
A loss of expected revenue, such as sales taxes and other taxes or assessments in the case of municipalities and other local governments, or operational revenue in the case of 501(c)(3) conduit borrowers, can result in shortfalls in budgets. Certain financing vehicles provide tools for issuers to address these shortfalls on a tax-exempt basis.

The federal tax law has long permitted these entities to issue tax-exempt tax or revenue anticipation notes, generally on a short-term basis, to finance a cumulative cash flow deficit. The obligations are sized taking into account on a monthly basis the available amounts of revenue, the anticipated expenses, and a permitted working capital reserve that results in a cumulative cash flow deficit. The term is typically limited to 13 months, and certain rebate accounting can be avoided by sizing the obligations to cover a deficit that occurs within six months of the date of issuance of the obligations.

The tax law also permits the financing of certain extraordinary working capital expenditures without regard to a cash flow deficit. These are expenditures for extraordinary, nonrecurring items that are not customarily payable from current revenue, such as casualty losses or extraordinary legal judgments in amounts in excess of reasonable insurance coverage. Prior to 2016, there was no stated term limit for these obligations; the term is now limited to 13 months. These extraordinary expenditures also can be the subject of a reimbursement borrowing, where proceeds of the obligations are used to reimburse the issuer for expenditures made before the date of issuance of the obligations. Generally, the issuer needs to adopt a reimbursement resolution within 60 days of the expenditure being made in order to have a valid reimbursement.

Beginning in 2016, the IRS permitted by regulations the issuance of long-term working capital obligations, including extraordinary working capital borrowings. The 2016 rules require the issuer on the issue date to determine the first fiscal year following the 13-month period after date of issue in which it reasonably expects to have surplus (the “first testing year”), which must be within five years of the date of issuance; determine the amount of surplus at the beginning of each testing year; and redeem bonds and/or purchase eligible tax-exempt bonds up to the amount of the outstanding working capital bonds.

April 14, 2020

McCarter & English, LLP




NABL Sends Suggestions for COVID-19 Relief to Congress & Treasury.

Today NABL sent a letter to Congress and the Treasury as they continue to develop additional legislative and regulatory initiatives to provide economic stimulus and fiscal relief as a result of the economic impact of the COVID-19 pandemic.

This letter follows up on our March 22, 2020 letter in which we identify proposals that will allow state and local governments to access much needed capital now, while also mitigating damages affecting our nation in the longer term.

Today’s letter provides a more robust explanation of how certain proposals will assist in getting our nation through these uncertain times.

You can find NABL’s letter here.

Please send this letter to your Representative and Senators: As Congress continues to work on the next stimulus package, it is imperative that they hear from you. Please forward this letter on NABL’s behalf to demonstrate strength in our advocacy efforts.

If you do not know who your representatives in Congress are, you can find your House representative here and Senator here.

For any questions, please contact Jessica Giroux, Director of Governmental Affairs at [email protected], (518) 469-1565.




The GASB Continues to Address Practice Issues Arising from COVID-19 Pandeminc.

Norwalk, CT, April 6, 2020 — The Governmental Accounting Standards Board (GASB) continues to share concerns about the stakeholder impact of the coronavirus (COVID-19) pandemic. The GASB is actively addressing and responding to the evolving situation. We are committed to supporting and assisting stakeholders during this uncertain period.

The GASB is working on several fronts to provide relief to governments and other stakeholders and to assist them in identifying accounting and financial reporting guidance that is particularly relevant at this time.

Postponement of Effective Dates

The Board is reviewing a proposed Statement that would postpone the effective dates of provisions in certain pronouncements and will consider releasing it for public comment during the April 14, 2020, teleconference meeting.

The proposal tentatively has identified provisions that became effective or will become effective for reporting periods beginning after June 15, 2018, through Statement No. 92, Omnibus 2020, and Implementation Guide No. 2019-3, Leases. Most notably, that includes Statement No. 84, Fiduciary Activities, and Statement No. 87, Leases, as well as their related Implementation Guides. In all, the draft would postpone the effective dates of provisions in eight Statements and five Implementation Guides. The Exposure Draft continues the encouragement of early implementation, which is important to governments that already have implemented some of those provisions or intend to proceed with implementation under the original effective dates.

In its active standards-setting activities, the GASB also has considered or is considering lengthening effective dates. During its March 2020 meeting, the GASB approved Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, which includes an extended effective date of reporting periods beginning after June 15, 2022, one year later than had been originally proposed. The GASB will consider similar changes as it reviews upcoming drafts of final Statements (such as for subscription-based information technology arrangements) and due process documents (most notably, an Exposure Draft from the Financial Reporting Model Reexamination project).

Impact on Other Standards-Setting Activities

The GASB has decided to extend to June 30, 2020, the comment deadline for the Exposure Draft of a Proposed Concepts Statement, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements. The GASB also will postpone the public hearing on the document. The hearing has been tentatively rescheduled to July 28, 2020.

The Board also has instituted a hiatus for planned stakeholder research activities, such as interviews and surveys, until at least June 1 (for pre-agenda research) and at least July 1 (for Post-Implementation Review).

“Toolbox” Coming Soon

The GASB soon will be posting a “toolbox” on its website to assist governments and other stakeholders to identify the guidance that they can draw on to address the issues they are facing during this difficult period.

In the meantime, the GASB encourages stakeholders to connect by using its web resources, including the GASB’s technical inquiry service, through which stakeholders can submit questions directly to the GASB staff regarding standards implementation or other issues.




BDA Hosts Call with MSRB on Unique Challenges Posed by COVID-19.

Today, a group of BDA Municipal Bond Division and Legal & Compliance leadership hosted a call with the MSRB to discuss the unique challenges dealers are encountering because of the volatility in the market and the move to work from home for many market participants.

The MSRB shared its focus during these challenges, which primarily focuses on collecting data from the municipal securities market which it makes available to other regulators and the market as a whole.

On the call, dealers shared a variety of concerns, such as:

The MSRB is encouraging market participants to share concerns they are experiencing so that the MSRB can consider whether any regulatory response is needed to address those concerns.

Bond Dealers of America

April 7, 2020




Disclosing COVID-19 Risks and Impacts in Connection with Municipal Securities.

Given the far-reaching consequences of the COVID-19 pandemic, including unprecedented financial and operational impacts, volatile municipal market conditions and the potential for a significant economic contraction, many issuers and other obligated persons in the municipal market are faced with the challenge of not only managing their financial health, operations and the safety of their employees, residents, customers, patients, students, clients and other personnel, but also complying with federal antifraud securities laws in both the primary market and secondary market and avoiding potential securities law liability.

Due to the rapidly evolving facts and circumstances relating to COVID-19, obligated persons often struggle to determine what COVID-19 related disclosures—whether in offering documents for primary offerings or in secondary market disclosures—may be appropriate and informative to the market.

Am I required to post notices to EMMA about COVID-19?

Obligated persons must comply with their undertakings as written, including the timely filing of annual disclosures of operating and financial data and financial statements, as well as any interim disclosures covered thereby. While the material event categories enumerated under SEC Rule 15c2-12 do not include pandemics, the impact COVID-19 may have on an obligated person’s financial health or operations may eventually give rise to a material event required to be disclosed. Recently, when asked about how the COVID-19 pandemic would impact obligated persons’ undertakings to provide secondary market disclosures under continuing disclosure agreements, staff from the Office of Municipal Securities (OMS) of the Securities and Exchange Commission (SEC) demurred, noting that the SEC lacks the regulatory authority to provide relief with respect to continuing disclosure undertakings, as these agreements are private contracts and the SEC has no authority over obligated persons in connection with contractual undertakings.

COVID-19 impacts may result in delays in an obligated person’s ability to timely file annual reports or financial statements. Any delay in filing annual disclosures or audited financial statements due to COVID-19 should be treated in the same way as any other delay—if there is a failure to file annual disclosure by the required date, an obligated person must file a “failure to file” notice, and may include an explanation of the relevant facts and circumstances causing the delay. When an obligated person eventually files its annual financial and operating data, that filing may also include a similar explanation. Upon determining that a late filing is material, the obligated person should also include disclosure of the late filing in its offering documents for the next five years as required by Rule 15c2-12.

What should I say in my Offering Documents about COVID-19?

Obligated persons entering the primary market, as well as those who remain committed to providing the secondary market with current information on a voluntary basis, can apply a consistent analysis to their disclosure decisions concerning COVID-19. As the market can fairly be presumed to be aware of COVID-19 generally, general information about the pandemic and risks applicable to any obligated person, regardless of its particular facts and circumstances, are not necessary, nor particularly probative. Risk factors should be as specific to the obligated person as possible; and general risk factors should be discouraged. An obligated person who simply parrots general risk factors used by others in its industry, without evaluating its own unique situation and market and risk profile, is not providing the market with material information. Rather, obligated persons should disclose (i) how COVID-19 is directly and indirectly impacting their current business and operations, (ii) how they currently assess the near-term and long-term impacts on their financial condition, results of operation, and business prospects as a result of COVID-19, and (iii) how they are managing or mitigating the impacts from COVID-19 on their business and operations.

On March 25, 2020, the SEC’s Division of Corporate Finance provided disclosure guidance to corporate registrants concerning the COVID-19 disclosures. While not directly applicable to municipal securities obligated persons, this guidance provides valuable insight into the level of diligence the SEC believes an obligated person should undertake with respect to COVID-19. All obligated persons in the municipal market should consider the following inquiries carefully in preparing their own primary and secondary market disclosures.

How has COVID-19 impacted your financial condition and results of operations?

In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?

How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?

Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?

Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?

Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?

Do you expect COVID-19 to materially affect the demand for your products or services?

Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services?

Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?

Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?

Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

In preparing its disclosure, an obligated person should consider not just its particular facts and circumstances, but also assess the potential magnitude and likelihood of future COVID-19 impacts. The level of disclosure should be directly proportional to magnitude and probability of such impacts. Information concerning the efforts an obligated persons is undertaking to manage—and mitigate—the magnitude and probability of COVID-19 impacts is particularly well suited for inclusion under a “Management Discussion and Analysis” section in the offering document.

What about COVID 19 information in other forms of communications?

Obligated persons must also consider that antifraud liability may attach not only to their public statements, whether specifically incorporated into offering documents, posted on EMMA or an obligated person’s website, but may also arise in connection with any communication of information. Compliance with effective (and updated) policies and procedures regarding municipal securities disclosures should be the starting point, as noted in this recent White Paper analyzing a recent staff legal bulletin from OMS regarding the application of antifraud rules to all communications by obligated persons that may reasonably be expected to reach the market, even if not intended for that purpose.

While the impacts from COVID-19 remain uncertain, is it better to remain silent?

Obligated persons must also recognize that liability under the federal securities law can attach for the omission of material information. An omitted fact is considered material if there is a substantial likelihood that the missing information would have been viewed by a reasonable investor as having significantly altered the total mix of information available. In the case of municipal issuers, the “total mix” analysis, which is a facts and circumstances test, can differ greatly among the enormous number—and variety—of issuers in the municipal market. Following the guidance set forth above, however, should assist obligated persons in developing effective disclosures of all material information, including risks and impacts of COVID-19.

www.ballardspahr.com

by Teri M. Guarnaccia, William C. Rhodes, and Kimberly D. Magrini

April 8, 2020

Copyright © 2020 by Ballard Spahr LLP.

(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.




MSRB Provides Temporary Regulatory Relief to Market Participants Affected by COVID-19.

Washington DC — In light of the disruptions to normal business operations as a result of the coronavirus disease (COVID-19) pandemic, today the Municipal Securities Rulemaking Board (MSRB) sought immediate authorization from the Securities and Exchange Commission (SEC) to provide temporary regulatory relief to market participants by extending certain MSRB compliance and testing deadlines.

The actions announced today provide for an extension of time to implement certain amended rules and interpretive guidance, and additional time to complete certain professional qualification and supervisory requirements. MSRB-regulated firms will now have additional time to:

“The MSRB appreciates the unusual circumstances that municipal market professionals find themselves in today,” said Chief Compliance Officer Gail Marshall. “Targeted regulatory relief allows dealers and municipal advisors to more effectively allocate resources to meeting the needs of their employees and clients while continuing to focus on investor protection and market transparency goals.”

Additionally, the MSRB sought SEC approval to temporarily waive late fees for any registration, annual and market activity-based fees billed for the period of March 1, 2020 to July 31, 2020 under MSRB Rules A-11, A-12 and A-13.

Previous regulatory action taken by the MSRB in response to the COVID-19 outbreak include suspending price variance alerts for dealers, extending the comment deadline on request for comment on proposed governance enhancements and reminding regulated entities of application of supervisory requirements in light of coronavirus.

The MSRB has created a dedicated COVID-19 information page and has begun publishing a daily Municipal Securities Market Trading Summary and weekly Municipal Securities Market COVID-19-Related Disclosure Summary based on filings made to the MSRB’s Electronic Municipal Market Access (EMMA®) website.

Read the notice.

__________________________________________________________

Date: April 9, 2020

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

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.




MSRB Publishes Summary of State and Local Disclosures to Its EMMA System about Impact of COVID-19.

Washington, DC – Disclosures submitted to the Municipal Securities Rulemaking Board’s (MSRB) free Electronic Municipal Market Access (EMMA®) system provide a window into how states and municipalities are grappling with the impact of the novel Coronavirus Disease (COVID-19) on their revenues and ability to finance essential public services. The MSRB today began publishing a weekly summary to assist market participants, policymakers and the general public with identifying disclosures submitted to the EMMA system by issuers of municipal securities that reference COVID-19.

The disclosures in the MSRB’s summary are accessible to the public at no cost on the EMMA website. The MSRB searched the approximately 40,000 disclosures the EMMA system received from January 2020 to March 2020 to identify those that referenced COVID-19 or related keywords.

“This disclosure summary is a great example of the kind of enhanced search capabilities and data analysis the MSRB hopes to offer EMMA users as a self-service tool in the future once we complete our enterprise-wide migration to the cloud,” said MSRB Board member Meredith Hathorn. “We see tremendous potential for the EMMA website to continue to evolve and deliver market insights that are never more valuable than at times of market disruption like we are experiencing now.”

MSRB data show that over the three-month period from January 1, 2020 through March 30, 2020, the EMMA system received 506 COVID-19-related continuing disclosures out of a total of 43,667 continuing disclosures, and 125 COVID-19-related primary market disclosures out of 2,548 total primary market disclosures. Issuers in the state of California submitted the highest number of disclosures across all states with a total of 97 COVID-19-related primary market and continuing disclosures. View the MSRB’s disclosure analysis here.

The MSRB also recently began publishing daily analysis of municipal market trade activity to assist market participants, policymakers and the general public with understanding the impact of the COVID-19 on the liquidity of the market following days of unprecedented volatility.

View the first COVID-19-related disclosure summary (January 2020 – March 2020).
View the MSRB’s dedicated webpage for COVID-19-related information and market analyses.

Date: April 2, 2020

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




GFOA Debt Committee Releases Urgent Member Guidance for COVID-19 Debt Service and Disclosures.

GOVERNMENT FINANCE OFFICERS ASSOCIATION

URGENT MEMBER GUIDANCE

IMPORTANT CONSIDERATIONS to Maintain Your Entity’s Debt Management Program and Disclosure Responsibilities During the COVID-19 Crisis

1. Confirm Debt Service Payments Are Made. Governments should confirm that debt service payments are made on time. Considering many state and local finance offices are operating in unconventional ways (due to work in place/work from home orders), GFOA encourages governments to pay particular attention to payment processes and staff to fulfill this obligation. In addition, one reaction to the current COVID-19 crisis is to adopt laws and ordinances that delay deadlines and delays payments. Governments should be aware that debt service payments cannot be subject to such laws and ordinances. Questions on relief from debt service payments should be discussed with your bond team.

2. Disclosures Related to COVID-19 Crisis Should Be Factual. Governments may be facing various fiscal challenges due to the crisis. Further, some public sectors may be affected more immediately than others. While urgency is important, governments should take special care to put into context what these challenges are when choosing to disclose the various problems caused by COVID-19. In addition, disclosure should be factual and governments should be hesitant to disclosure any estimates or projections of revenues and budgets just for the sake of providing such estimates or projections.

3. Communicating with Outside Professionals. Governments should keep in contact with their bond counsel and other outside professionals. As governments address various disclosure matters, and managing their debt portfolio, they should initiate and maintain communications with their bond team.

4. Interim/Voluntary Disclosures. Voluntary and interim disclosures are a helpful way to keep investors apprised of the government’s fiscal conditions. Be sure to make filings and/or place information on your entity’s investor relations web page and consider making the filings available in the EMMA system, based on facts and information that are already developed by your entity. It may also be useful to discuss these disclosures with bond counsel and/or other bond team professionals. Issuers should be mindful when they provide specific information as of certain date, which may change soon thereafter, there should be a note in the voluntary filing that they are not obligated to prepare and file updates in relation to that filing.

5. Selective Disclosure. When discussing impacts on the government of COVID-19 with investors, governments should be careful about making “selective disclosures”. Material information should be available to everyone on an equal basis. Governments should be careful about providing information that has not yet been disclosed on their website for investors or filed on EMMA. Similar care should be taken with Rating Agencies – governments should let them know when giving them non-public information.

6. Disclosures Needed for Primary Offerings. In primary offering documents, Governments may need to provide COVID-19 related disclosures for debt being issued. Governments may be requested to provide supplemental disclosures to address any material changes between the date of the disclosure document and the closing date.

7. Know Your Annual Disclosure Filing Dates. Governments should always be aware of the dates in their continuing disclosure agreements (CDA) when annual disclosures are due to EMMA, and make those filings accordingly. If a government is unable to make a filing, due to current circumstances (e.g., financial statements and/or audits not available), follow the requirements contained in your CDA, which may require a filing with EMMA with explanation as to why the submission is late. If annual disclosure submissions did not occur as noted in your CDA, that information will need to disclosed in future issuance documents. Again, it is important to note the reasons why the submission(s) was late – due to the inability to complete financials and/or audits or other reasons related the COVID-19 crisis – underwriters of future issuances will need to understand these reasons.

8. Material Event Filings. Governments are reminded that when a credit is downgraded by a credit rating agency that a material event filing must be made within 10 days in the EMMA system. Other events resulting from the COVID-19 crisis may also require a material event filing. Governments are encouraged to speak with their bond counsel prior to making material event filings about the need to make and information to provide in the filing. Importantly, the SEC Rule 15c2-12 10-day reporting requirement for listed material events is NOT relaxed during this time. Please be mindful of material events and track the time that has lapsed to ensure timely reporting within the 10-day reporting requirement. Governments should be aware of all material events identified in their CDA and SEC Rule 15c2-12, as noted here:

9. EMMA Filings. Governments should make sure that when making annual, continuing, or voluntary disclosure filings within the EMMA system that they are filed correctly. The MSRB makes the following resources available to assist issuers with submitting disclosures to the EMMA system:

10. Know Your State Laws, Local Ordinances and Policies and Procedures Related to Debt Products in Current Market Conditions. As the financial markets are very fluid, it is important for governments, especially those who have planned issuances in 2020, to monitor the debt market, and speak with their municipal advisor or other professionals about the market’s impact on your entity. Financial institutions have many options to assist governments with both short and long term borrowing needs. Additionally, new financial products may be considered and implemented by the federal government to help state and local governments through the crisis with conditions such as access to loans for operating and other purposes related to an entity’s needs to provide for their citizens during the COVID-19 crisis. Knowing what types of financings are legal and allowable for your entity, along with risks related to these types of financings, is important when considering to use these financing vehicles.

11. Post Issuance Compliance for Federal Tax Purposes/Arbitrage. The IRS has NOT suspended the responsibilities that entities have to calculate federal arbitrage, yield restrictions, and adhere to private use regulations related to tax-exempt bond issuances.




COVID-19 and Secondary Market Disclosure: Butler Snow

Our thoughts are with you, your loved ones and organizations as we all navigate this public health crisis together. We are providing this alert to our public finance clients and other professionals regarding COVID-19 and its potential impact on secondary market disclosure.

A Continuing Disclosure Review.

Before discussing some of the secondary market disclosure issues, a brief review is in order. The Securities and Exchange Commission (the “SEC”) has promulgated Rule 15c2-12 (the “Rule”) that prohibits underwriters from purchasing or selling most municipal securities unless an issuer or conduit borrowers (collectively, an “Obligated Person”) has agreed in writing to provide specific information to the market on an ongoing basis, i.e. continuing disclosure. The written agreement can be a certificate or an agreement and is often referred to as an “Undertaking.” Pursuant to the Rule, the continuing disclosure to be provided to the market consists of: (i) annual financial information and operating data as specified in each Undertaking, (ii) annual audited financial statements; and (iii) timely notice of the occurrence of certain events specified in each Undertaking (known as Event Notices). These filings must be made on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system (“EMMA”). The EMMA website is: www.emma.msrb.org.

Listed Events.

Event Notices must be filed in a timely manner not in excess of ten business days after the occurrence of any of the events listed in an Undertaking for a specific series of bonds. A list of all events currently required follows; however, this list has expanded over time and your Undertakings may not include all of them.

  1. Principal and interest payment delinquencies;
  2. Non-payment 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 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 a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material;
  14. Appointment of a successor or additional trustee or the change of name of a trustee, if material;
  15. 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; and
  16. 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.

Some Issues to Consider.

The following are some of the issues that our public finance clients are now confronting or asking about.

Is it necessary to file any disclosure about the impacts COVID-19 is having on an Obligated Person? An Obligated Person is only required to file notices of events specified in an Undertaking. No filing is required unless one of those events has occurred (see above for the current list of events; but be aware that some Undertakings have fewer events and some may contain additional events requiring disclosure). It is important for Obligated Persons to consult each Undertaking to determine whether there is some required disclosure. Some of the 16 events may occur as a result of this crisis and Obligated Persons need to be prepared to file an Event Notice. For example, rating changes must be disclosed and Obligated Persons are responsible for filing an Event Notice if a rating change occurs.

What should Obligated Persons consider in making a voluntary filing on EMMA or on its website? Some Obligated Persons may want to make a voluntary filing on EMMA or its website regarding the impacts of COVID-19 on their operations and finances. If such a filing is made, it is subject to the antifraud provisions of the federal securities laws; the information that is provided must not be materially inaccurate or misleading in the context in which it is provided.

What considerations apply if the staff of the Obligated Person prepares revised financial projections for the governing body or if the chief elected official of an Obligated Person makes a speech about the impacts of COVID-19 on the Obligated Person? In a 1994 interpretive release, the SEC advised as follows: “A municipal issuer . . . when it releases information to the public that is reasonably expected to reach investors and the trading markets, those disclosures are subject to the antifraud provisions. The fact that they are not published for purposes of informing the securities markets does not alter the mandate that they not violate antifraud proscriptions.”

Information on an Obligated Person’s website, press releases regarding the financial health of the Obligated Person, certain public statements by its officials, and responses by its officials to inquiries from the public, all may be considered to be reasonably expected to reach the investing public. The information that is provided must not be materially inaccurate or misleading in the context in which it is provided.

May the staff of an Obligated Person respond to requests from credit analysts for information about the impacts of COVID-19 on the Obligated Person? The staff may respond to such requests, but again the information provided must not be materially inaccurate or misleading in the context in which it is provided. Ideally, the staff should provide only publicly available information to requestors. No provisions of the federal securities laws apply to municipal issuers providing information to investors requesting it. However, the Municipal Securities Rulemaking Board (the “MSRB”) and other market participants have expressed concern about Obligated Persons providing new, nonpublic information to select investors or analysts. In a market advisory, the MSRB said:

The MSRB encourages issuers and their financial professionals to implement practices to ensure that all investors and stakeholders have equal access to the same information in a timely manner. For example, an issuer may choose to voluntarily disclose the information to the broader marketplace by a method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public. Although issuers could choose to utilize other means, such a dissemination could be accomplished by posting the relevant information on EMMA. Based on the type of information, there are multiple options for how an issuer may choose to make such a voluntary disclosure.

What should be done if the audit of the Obligated Person will not be completed in time to meet the filing deadline set forth in the Undertaking? Pursuant to the Rule, the Obligated Person should file a notice on EMMA that the audited financials are not yet ready and that they will be filed late. Check the individual Undertakings to determine whether unaudited financials are required to be filed if the audit isn’t complete; should you determine that unaudited financials will not be available either, indicate that in the notice.

If the Obligated Person is late in making filings required by an Undertaking, how will that impact the Obligated Person when it next wants to sell bonds? An underwriter must have a reasonable basis to conclude that an Obligated Person will comply with future Undertakings. Filing a notice as described above satisfies the Undertaking, so an underwriter should be able to review the circumstances and reach the conclusion that the Obligated Person will be able to comply with its future Undertaking.

March 30, 2020

Butler Snow LLP




MSRB Publishes Summary of State and Local Disclosures to Its EMMA System about Impact of COVID-19.

Washington, DC – Disclosures submitted to the Municipal Securities Rulemaking Board’s (MSRB) free Electronic Municipal Market Access (EMMA®) system provide a window into how states and municipalities are grappling with the impact of the novel Coronavirus Disease (COVID-19) on their revenues and ability to finance essential public services. The MSRB today began publishing a weekly summary to assist market participants, policymakers and the general public with identifying disclosures submitted to the EMMA system by issuers of municipal securities that reference COVID-19.

The disclosures in the MSRB’s summary are accessible to the public at no cost on the EMMA website. The MSRB searched the approximately 40,000 disclosures the EMMA system received from January 2020 to March 2020 to identify those that referenced COVID-19 or related keywords.

“This disclosure summary is a great example of the kind of enhanced search capabilities and data analysis the MSRB hopes to offer EMMA users as a self-service tool in the future once we complete our enterprise-wide migration to the cloud,” said MSRB Board member Meredith Hathorn. “We see tremendous potential for the EMMA website to continue to evolve and deliver market insights that are never more valuable than at times of market disruption like we are experiencing now.”

MSRB data show that over the three-month period from January 1, 2020 through March 30, 2020, the EMMA system received 506 COVID-19-related continuing disclosures out of a total of 43,667 continuing disclosures, and 125 COVID-19-related primary market disclosures out of 2,548 total primary market disclosures. Issuers in the state of California submitted the highest number of disclosures across all states with a total of 97 COVID-19-related primary market and continuing disclosures. View the MSRB’s disclosure analysis here.

The MSRB also recently began publishing daily analysis of municipal market trade activity to assist market participants, policymakers and the general public with understanding the impact of the COVID-19 on the liquidity of the market following days of unprecedented volatility.

Date: April 2, 2020

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




GASB Issues Guidance for Transition from Interbank Offered Rates.

Norwalk, CT, April 2, 2020—The Governmental Accounting Standards Board (GASB) today issued new accounting and financial reporting guidance in Statement No. 93, Replacement of Interbank Offered Rates, to assist state and local governments in the transition away from existing interbank offered rates (IBORs) to other reference rates.

Some governments have entered into agreements in which variable payments made or received from either derivative counterparties or parties associated with lease agreements depend on an IBOR, most notably the London Interbank Offered Rate (LIBOR). As a result of global reference rate reform, LIBOR is expected to cease to exist in its current form at the end of 2021, prompting governments to amend or replace financial instruments tied to LIBOR.

Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, previously required a government to terminate hedge accounting when it changes the reference rate of a hedging derivative instrument’s variable payment. In addition, Statement No. 87, Leases, previously required a government that replaced the rate on which variable payments depend in a lease contract to apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable.

The objective of Statement 93 is to address those and other accounting and financial reporting implications of the replacement of an IBOR by:

The removal of LIBOR as an appropriate benchmark interest rate is effective for reporting periods ending after December 31, 2021. All other requirements of Statement 93 are effective for reporting periods beginning after June 15, 2020. Earlier application is encouraged.




Orrick: Waivers, Deferrals and Changes to Tax-Exempt Bonds During COVID-19

Given the economic impact of COVID-19 and the ongoing uncertainty of how long it will last, borrowers of tax-exempt bond proceeds may find themselves in the position of requesting their lenders to temporarily waive certain financial covenants contained in tax-exempt financing documents or to defer debt service payments on the related tax-exempt bonds.

Tax-exempt borrowers and banks need to be aware that the deferral or other modifications of debt service payments on tax-exempt bonds could have an adverse impact on the tax-exempt status of such bonds. Certain waivers, deferrals and changes to bonds or bond documents need to be reviewed by bond counsel to determine whether such actions will result in a “tax reissuance” of the related bonds. A tax reissuance is treated as a new debt issuance for tax purposes and a refinancing of the original bond issue. In the event a tax reissuance occurs, the tax exemption on the bonds will be lost absent appropriate legal steps. In addition, the waiver of financial covenants by a lender may not adversely affect the tax-exempt status of the related bonds, however, certain obligations may be triggered, such as notice or other provisions under the bond documents. Certain waivers, deferrals and changes to bonds or bond documents (including continuing disclosure agreements) need to be reviewed by bond counsel to determine whether such actions will result in a “tax reissuance” of the related bonds.

Please note, this does not mean that such waivers, deferrals and/or changes cannot be undertaken. However, such waivers, deferrals and changes should be reviewed by bond counsel prior to taking such actions.

Public Finance Alert | April.02.2020

Orrick Herrington & Sutcliffe LLP




COVID-19 and Municipal Securities Disclosure.

COVID-19 is creating more questions than answers in every sector of American life recent days, and the municipal bond market is no exception. Issuers and obligated persons for municipal bonds (collectively, “Obligated Parties”) have asked about their disclosure obligations pursuant to Rule 15c2-12 (the “Rule”) relating to both their outstanding bonds and bonds for which they are in the process of conducting a primary offering. Obligated Parties should consider the following questions as they navigate challenges presented by COVID-19 as they relate to municipal securities disclosure, and consult with legal counsel to assess any needed action.

What should I do if I cannot meet my deadline for filing my annual financial information required by the Rule due to delays or closures relating to COVID-19? If I am able to make my filing deadline, should I say anything about COVID-19?

The Rule requires Obligated Parties to file certain annual financial information and to provide, in a timely manner, a notice of failure of such Obligated Party to file such annual financial information. The deadline for filing annual financial information is governed specifically by the continuing disclosure agreement (the “CDA”) relating to such bonds which are typically six (6) months from the end of the fiscal year. During these hectic times, these deadlines may not be top of mind, but Obligated Parties should take care to provide a notice to the market pursuant to the Rule if they are unable to file. Further, the SEC has publicly stated that because CDAs are private contracts, it has no authority to provide relief from these deadlines.

If an Obligated Party is able to file annual financial information or interim financial information, it may be advisable to include cautionary language in the filing that is similar to that included in primary offering documents to the effect that:

Should I file a material event notice relating to COVID-19 for my outstanding bonds?

COVID-19 itself is not a material event provided for under the Rule. However, if the effects of COVID-19 are such that they trigger a material event such as a payment delinquency, an unscheduled draw on reserve funds, or a ratings change, an Obligated Party should file a notice of such material event. Similarly, if an Obligated Party has entered into a CDA after February 28, 2019 and the Obligated Party enters into a material “financial obligation” or experiences COVID-19 related effects that cause financial difficulties or trigger events of default, events of acceleration, termination events, modification of terms, or other similar events under the terms of a “financial obligation” of the Obligated Party, a material event notice should be filed.

Should I file voluntary disclosure relating to COVID-19 for my outstanding bonds?

An Obligated Party need not file voluntary disclosure. If an Obligated Party chooses to provide voluntary disclosure, the Obligated Party should take care to determine whether the information provided is truly “material” to the market. Materiality, in this context means “if there is a substantial likelihood that a reasonable investor would determine that the disclosed information significantly altered the “total mix” of information already available in the marketplace.” Put another way, is the information the Obligated Party is disclosing likely to be so critical that it would influence an investor’s decision to invest in the Obligated Person’s bonds, given other currently publicly available information? If so, the Obligated Party might consider posting a voluntary disclosure. The Obligated Party must balance this with an additional calculus of whether the voluntary disclosure would need ongoing updates.

What should I disclose regarding COVID-19 if I am in a primary offering?

Obligated Parties should consider what impacts COVID-19 is having on the Obligated Party in the short-term, as well as any potential long-term impacts on the Obligated Party and the revenue source supporting the bonds. Given the high level of uncertainty regarding these matters, many Obligated Parties have opted for generalized disclosure. Nevertheless, it will be important for Obligated Parties to work with Bond Counsel, Financial Advisors, the Underwriter and its counsel, and staff of the Obligated Party to determine the content of any risk or other financial disclosure in the offering document.

What about public statements by officials of an Obligated Party regarding COVID-19?

Obligated Parties should bear in mind that the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder apply to all statements providing information that is reasonably expected to reach investors and the trading markets. The Secondary Market Staff of the SEC Office of Municipal Securities previously issued a bulletin alerting issuers that these antifraud provisions apply to public statements and continuing disclosures under CDA. Obligated Parties should take care with any statements that are made with an eye towards, or can be reasonably expected to reach, the investing public.

Winstead PC

April 3, 2020




SEC’s Office of Municipal Securities Offers Guidance Regarding COVID-19’s Impact on Rule 15c2-12 Continuing Disclosure Undertaking Requirements: Miller Canfield

Every continuing disclosure undertaking entered into under Section (b)(5)(i) of Rule 15c2-12 (the “Rule”) of the Securities and Exchange Commission (“SEC”) requires the issuer or obligated person (as defined in the Rule) under such undertaking to report notice of certain events electronically to the Municipal Securities Rulemaking Board (“MSRB”) no later than 10 business days of their occurrence. The COVID-19 pandemic and the resulting array of federal, state and local measures designed to contain its spread are not among such events.

Nevertheless, the pandemic and resulting government actions have raised a number of questions regarding compliance with ongoing disclosure requirements under the Rule. On a March 19, 2020, MSRB webinar, Ahmed Abonamah, deputy director of the SEC’s Office of Municipal Securities, and David Hodapp, assistant general counsel of the MSRB, gave some insight as to some of the scenarios issuers and obligated persons may come across.

During the course of the webinar, Abonamah and Hodapp were asked to respond to the following specific questions:

From the reported discussion of these questions on the webinar, we can glean the following principles.

The SEC Cannot Absolve Issuers for Late Filings

The Terms of the Undertaking Control

“Ratings Changes” and “Negative Watch”

Another scenario (not discussed on the webinar) that may arise is actions by rating agencies putting many categories of bonds on “negative watch” for a potential downgrade as a result of the pandemic. The SEC has previously indicated in adopting statements for amendments to the Rule that this does not constitute a “ratings change” for purposes of the Rule, and does not require filing a notice with the MSRB.

April 2, 2020

Miller Canfield




MSRB Suspends Price Variance Alerts for Dealers.

Board Also Extends Comment Date for Proposed Governance Enhancements

Today (March 23, 2020) in response to the significant impact that the spread of the Coronavirus Disease (COVID-19) is having on regulated entities, the MSRB is temporarily suspending the transmission of the price variance alerts for trades reported to MSRB’s Real-Time Transaction Reporting System (RTRS) effective immediately.

As background, as of March 2019, the MSRB sends a price variance alert via email to a dealer when a transaction reported to RTRS by the dealer is at a price that is notably different (i.e., notably lower or higher) than the price reported to RTRS by other dealers in the same security within a specified time period. The price variance alert was designed as a tool to assist dealers in identifying transactions that may warrant review to ensure the information reported to RTRS reflects the trade price as intended. While dealers remain obligated under MSRB Rule G-14 to ensure that the information being disseminated by RTRS is accurate, the price variance alert tool does not, in these current market conditions, serve its intended purpose of assisting firms in their efforts to comply with Rule G-14. Accordingly, the MSRB is temporarily suspending reporting on price variance alerts.

A-3 Deadline Extended

The MSRB has extended the comment deadline on amendments to MSRB Rule A-3 for an additional 30 days to April 29, 2020. MSRB Notice 2020-02 requests comment on draft amendments to MSRB Rule A-3, on membership on the Board, designed to improve Board governance.

The BDA continues to draft comments and will provide to membership for review in the coming weeks.

The notice can be viewed here.

Bond Dealers of America

March 24, 2020




MSRB Publishes Daily Data Showing Municipal Market Impact of Coronavirus.

Washington, DC – Historic volatility is straining the predominantly retail investor market that enables state and local governments to finance essential public services, newly published data show. The Municipal Securities Rulemaking Board (MSRB) today began publishing daily analysis of trade activity to assist market participants, policymakers and the general public with understanding the impact of the Coronavirus Disease (COVID-19) on the liquidity of the $4 trillion municipal securities market.

MSRB data show trading in the secondary market for municipal securities is at all-time highs, as institutional investors sell off large positions. Meanwhile, in the fixed-rate market, customer buying in smaller pieces of $100,000 or less, indicative of retail investors, jumped to a daily average of approximately 11,700 trades in March 2020, compared to about 8,500 trades per day in January and February. View the MSRB’s analysis, which will be updated daily, here. The MSRB also plans to analyze and publish additional variable rate data.

“The municipal market touches the lives of every single American because it finances over two-thirds of the state and local infrastructure that is bearing the brunt of the Coronavirus crisis,” said MSRB Board Chair Ed Sisk. “Dislocation in this critical capital market damages investor confidence and has an outsize effect on the financial health of communities around the country.”

As the primary regulator for the municipal securities market, the MSRB’s mission is to protect municipal securities investors and issuers. The MSRB is governed by a Board of Directors representing investors, issuers, dealers, municipal advisors and others with first-hand understanding of the municipal securities market. The MSRB’s market transparency systems collect municipal market trade data and disclosure documents and make them available to the public for free on the Electronic Municipal Market Access (EMMA®) website.

“The MSRB actively monitors trade data and will continue to release the results of our analysis to help market participants and policymakers make informed decisions in the best interests of the country,” Sisk said. “We stand ready to provide our data and expertise to help advance effective policy solutions that will provide emergency relief to the municipal securities market.”

View the MSRB’s dedicated webpage for COVID-19-related information and market analyses.

Date: March 25, 2020

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




MSRB Suspends Price Variance Alerts for Dealers.

Municipal Securities Rulemaking Board sent this bulletin at 03/23/2020 05:13 PM EDT

The Municipal Securities Rulemaking Board (MSRB) recognizes the significant impact that the spread of the Coronavirus Disease (COVID-19) is having on regulated entities. The MSRB is committed to providing updates and other information as we address questions raised by market participants during this pandemic.

Given the current market volatility, the MSRB is temporarily suspending the transmission of the price variance alerts for trades reported to MSRB’s Real-Time Transaction Reporting System (RTRS) effective immediately.

As background, as of March 2019, the MSRB sends a price variance alert via email to a dealer when a transaction reported to RTRS by the dealer is at a price that is notably different (i.e., notably lower or higher) than the price reported to RTRS by other dealers in the same security within a specified time period. The price variance alert was designed as a tool to assist dealers in identifying transactions that may warrant review to ensure the information reported to RTRS reflects the trade price as intended. While dealers remain obligated under MSRB Rule G-14 to ensure that the information being disseminated by RTRS is accurate, the price variance alert tool does not, in these current market conditions, serve its intended purpose of assisting firms in their efforts to comply with Rule G-14. Accordingly, the MSRB is temporarily suspending reporting on price variance alerts.




GASB to Consider Postponing Effective Dates of Certain Statements and Implementation Guides.

Norwalk, CT, March 26, 2020—The Governmental Accounting Standards Board (GASB) today announced that it has added a project to its current technical agenda to consider postponing all Statement and Implementation Guide provisions with an effective date that begins on or after reporting periods beginning after June 15, 2018.

As a result of the closure of many state and local government offices due to the Covid-19 pandemic, many government officials do not have access to the information necessary for implementing new GASB pronouncements. The GASB has received numerous requests from state and local government officials and public accounting firms regarding postponing the upcoming effective dates of pronouncements. Most notably, those pronouncements include Statement No. 84, Fiduciary Activities, and Statement No. 87, Leases, as well as their related Implementation Guides.

The Board plans to consider an Exposure Draft for issuance in April and finalize the guidance in May 2020.




MSRB Responds to COVID-19 Rocking the Market.

The Municipal Securities Rulemaking Board will be publishing daily data summaries, pushing back comment deadlines and suspending a price alert in response to market volatility and COVID-19 concerns.

The MSRB published its first data summary Wednesday morning and plans to publish them every morning. Since the spread of the virus, the municipal market has tumbled through high “unprecedented” trade volume and large outflows.

“The municipal market touches the lives of every single American because it finances over two-thirds of the state and local infrastructure that is bearing the brunt of the coronavirus crisis,” said MSRB Board Chair Ed Sisk. “Dislocation in this critical capital market damages investor confidence and has an outsize effect on the financial health of communities around the country.”

At the beginning of March, the MSRB began seeing a significant change in volatility, said John Bagley, MSRB chief market structure officer.

“We saw significantly different trading patterns and we were closely watching this data and it was really helpful for us to see what was happening,” Bagley said.

In the MSRB’s first report showing data from March 24, trades topped 87,215, which is likely a record, said Marcelo Vieira, MSRB director of research.

“It’s pretty much unprecedented volume for any time period that we’ve looked at,” Vieira said.

The MSRB is also continuing to see retail buying and more institutional selling, which as been a pattern over the last month as mutual funds look for liquidity amidst an increase in redemptions.

Earlier this week the MSRB also decided to temporarily suspend price variance alerts for dealers because of the current market volatility.

The MSRB sends the alert via email to a dealer when a transaction is reported to its Real-Time Transaction Reporting System by the dealer and is at a price that is notably different than the price reported by other dealers for the same security within a specified time period.

It’s a welcome change given the volatility dealers are facing right now, said Michael Decker, Bond Dealer of America’s senior vice president of policy and research.

“In a market where trade volume has risen significantly and there’s a lot more price volatility, it’s my understanding that dealers are getting these price variance alerts more frequently even in cases where all the reports are correct,” Decker said.

Dealers still have to abide by MSRB Rule G-14, on reports of sales or purchases, to ensure that information being disseminated by RTRS is accurate. The MSRB said the price variance tool does not, under current market conditions, serve its intended purpose.

Earlier this week, the MSRB also extended the request for comment deadline for muni market participants to respond to changes to its Rule A-3 on membership of the board. Among those proposed changes was reducing the size of its 21-member board, how it selects those board members and imposing limits on how many years a board member may serve.

Comments were originally due on March 30 and have been extended to April 29.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 03/25/20 02:18 PM EDT




SEC Provides Additional Temporary Regulatory Relief and Assistance to Market Participants Affected by Covid-19.

On March 26, the SEC issued a press release announcing an order and a temporary final rule providing temporary relief and assistance to market participants affected by Covid-19. The statement notes that the SEC is providing (i) temporary relief from notarization requirements from March 26 through July 1 to filers in the EDGAR system, subject to certain conditions; (ii) for Regulation A and Regulation Crowdfunding issuers, a temporary extension of 45 additional days to file certain disclosure reports that would otherwise have been due between March 26 and May 31, subject to certain conditions; and (iii) a temporary conditional exemptive order that provides affected municipal advisors with an additional 45 days to file annual updates to Form MA that would have otherwise been due between March 26 and June 30, subject to certain conditions.

Buckley LLP

March 27 2020




NABL Sends Letter to Treasury on COVID-19 Issues.

In response to the COVID-19 pandemic, NABL sent a letter to the U.S. Treasury asking it to addresses certain tax issues that may affect the functioning of the tax-exempt bond markets during the current outbreak of the novel coronavirus disease.

In the letter, NABL asks Treasury to (1) clarify that, at least for a temporary period, TEFRA hearings are not required to be held in person and (2) to provide relief as it relates to refunding and remarketing issues.

You can find the full letter here.




Lumesis Makes Available a Free Service for COVID-19 Related Filings.

Lumesis, home of the DIVER platform, is launching a free service making available a consolidated list of all continuing disclosure filings made to the MSRB that relate to the COVID-19 pandemic, along with a link to each filing. The free service is available on the Lumesis website and will be updated three times daily during each business day (9am, 2pm and 7pm EST).

We are offering this service to assist all market participants to efficiently identify and access COVID-19 related filings made to EMMA. We know that identifying these important filings can be time-consuming. By leveraging our obligor-based database, technological know-how and outstanding team, we are able to provide the market a service that efficiently aggregates and presents important information shared by issuers for use in client communication, research or other needs.
To access the service, simply visit www.lumesis.com and click on the link below the heading “COVID-19 Disclosure Filings.”

If you have any questions, [email protected]

——————————
Gregg Bienstock
CEO
Lumesis, Inc.
Stamford CT
(203) 276-6501

Mar 25, 2020




The SEC’s Fixed Income Market Structure Advisory Committee Approves Two New Recommendations.

The Securities and Exchange Commission’s (SEC) Fixed Income Market Structure Advisory Committee (FIMSAC) held its latest meeting on February 10, 2020.1 The SEC formed FIMSAC to provide advice to the SEC on the efficiency and resiliency of the fixed income markets and identify opportunities for regulatory improvement. During the February meeting, FIMSAC considered and voted to approve:

FIMSAC also convened a panel to consider internal fund crosses.2

On November 13, 2019, the SEC renewed the charter for FIMSAC for another year.3 With its newly renewed charter, FIMSAC will continue discussions regarding potential enhancements to the fixed income markets during the coming year. FIMSAC’s next meetings for this year are currently scheduled for April 27, 2020 and August 3, 2020 (although the dates are subject to change). In addition to considering issues discussed in the February meeting, FIMSAC is considering a request from SEC Chairman Jay Clayton to analyze and comment on various structural and macroeconomic factors in the fixed income markets, including, without limitation:

Introductory Remarks

In his introductory remarks for the February meeting, FIMSAC Chairman Michael Heaney summarized the work performed by FIMSAC over the past two years, including having provided the SEC with 10 recommendations on nine topics.4 Chairman Heaney also described the progress to date in implementing two of the recommendations. On April 9, 2018, FIMSAC introduced a recommendation for a pilot program to study the market implications of changing the reporting regime for block-size trades in corporate bonds.5 To implement this recommendation, FINRA requested comment on a proposed pilot program to study the recommended changes to corporate bond block trade dissemination.6 FINRA received over 30 comment letters, which expressed divided views on the proposal. FINRA continues to evaluate next steps for such a pilot program.

In addition, on October 29, 2018, FIMSAC recommended that the SEC, in conjunction with FINRA, establish a reference data service for corporate bonds which would contain specified data elements on TRACE-eligible corporate bond new issues.7 On December 4, 2019, the SEC, pursuant to delegated authority, approved FINRA’s proposal to establish a central depository for public dissemination of new-issue corporate bond reference data that was in line with FIMSAC’s recommendation.8 On December 12, 2019, however, the SEC stayed approval of the service in response to a petition to review the delegated approval, until it orders otherwise.9

Recommendation to Enhance Data Reported to TRACE for Corporate Bond Trades

One panel of the FIMSAC meeting discussed the Technology and Electronic Trading Subcommittee’s preliminary recommendation to improve price transparency for certain types of fixed income transactions reported to TRACE. The recommendation addressed two particular types of trades for which the TRACE reported price may not be reflective of the current market price, namely completed spread trades awaiting a Treasury spot and portfolio trades. After discussing issues raised by the proposal, FIMSAC voted to approve the subcommittee’s recommendation, with 17 votes in favor and no votes in opposition or abstentions.10

Completed spread trades awaiting a Treasury spot11 are reported to TRACE following the completion of the spotting process, even if the parties agreed to the spread much earlier in the day. As corporate bond spreads and Treasury prices can move throughout a day, the delayed spot process allows for a potential mismatch between the assumed value of the trade when the spread is agreed on and the price reported to TRACE following the Treasury spot later in the day. To address this issue, FIMSAC recommends that the SEC, in conjunction with FINRA, require that reporting parties include a flag or modifier for delayed spot trades that will alert market participants that the spread-based economics of the trade had been agreed on earlier in the day, and that the reporting party on a delayed spot trade be required to report the time at which the spread was agreed on.

In addition, with respect to portfolio trades, FIMSAC recommends that the SEC, in conjunction with FINRA, require that reporting firms use a TRACE modifier to identify whether a particular trade was executed as part of a portfolio trade. For purposes of this recommendation, a “portfolio trade” is defined to mean a trade that is executed between only two parties involving a basket of securities of at least 30 unique issuers for a single agreed price for the entire basket and that was executed on an all-or-none or most-or-none basis. FIMSAC believes that requiring a modifier for the TRACE report of a bond that is part of a portfolio trade would allow market participants to know with certainty that the price was agreed on as part of a portfolio and therefore may not reflect the independent market price for the particular bond.

FIMSAC also believes that market participants would benefit from a complete and accurate picture of the number and volume of fixed income trades that are executed electronically in order to track e-trading trends and to better inform transaction cost analysis. FIMSAC, however, did not provide a recommendation that FINRA and the Municipal Securities Rulemaking Board (MSRB) incorporate an “electronic trade” modifier for the fixed income markets due to the issues raised by the varying regulatory treatment afforded electronic trading platforms (i.e., regulated as broker-dealers, alternative trading systems or not at all). Once there is a unifying regulatory framework for all fixed income electronic trading platforms, FIMSAC believes that FINRA and MSRB should establish an appropriate definition of an “electronic trade” that could form the basis for a comprehensive electronic trading flag.

Recommendation Regarding Timeliness of Municipal Issuer Disclosure

Another panel discussed the Municipal Securities Transparency Subcommittee’s preliminary recommendation regarding timeliness of municipal issuer disclosure. After discussion of the proposal, FIMSAC voted in favor of the recommendation, with 14 votes in favor, two votes in opposition and no abstentions.12

FIMSAC recommends that the SEC be given additional statutory authority to (1) provide a mechanism for the SEC to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders, and (2) provide a safe harbor from private liability for forward-looking statements for municipal issuers that satisfy certain conditions, including, but not limited to, appropriate risk disclosure relating to such forward-looking statements, and if projections are provided, disclosure of significant assumptions underlying such projections and that the financials are provided in good faith.

FIMSAC also recommends that the SEC explore ways in which it could make disclosure deadlines for annual financial information and audited financial statements more certain and predictable. This recommendation is intended to give investors more certainty regarding when a municipal issuer has agreed to provide annual financials. FIMSAC further recommends that the SEC seek wide-ranging public comment about the concerns raised by market participants about disclosures in the municipal markets and the potential need for the SEC to establish a disclosure framework, including time frame obligations for municipal issuers. After reviewing comments, the SEC can determine whether it would be appropriate for the SEC to seek legislation to give the SEC additional (but still limited) authority over municipal disclosures. Finally, FIMSAC recommends that the SEC explore ways in which it can raise municipal issuers’ awareness of the potential consequences of providing less timely and less robust disclosure information, such as the potential for the market to demand higher yields from such municipal issuers.

Internal Fund Crosses Panel

The final panel of the FIMSAC meeting discussed the risks and benefits of internal fund crosses, and the potential advantages and disadvantages of providing relief from certain regulatory requirements related to such crosses. Certain panelists noted that such crosses can be beneficial to both the buyer and seller, and may assist funds with liquidity risk management. Certain panelists also noted the practical difficulty of obtaining and using bids and quotes for purposes of complying with Rule 17a-7 under the Investment Company Act of 1940, and the improved coverage and quality of pricing services that are now available. The discussion also recognized the need to prevent inappropriate self-dealing in cross trades.

To view all formatting for this article (eg, tables, footnotes), please access the original here.

Wilmer Cutler Pickering Hale and Dorr LLP – Andre E. Owens, Cherie Weldon and Mahlet Ayalew

March 17 2020




NFMA Volunteers Needed – GASB Exposure Draft on Notes to Financial Statements

GASB recently released an Exposure Draft on Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements.

The NFMA would like to form a working group of members to: 1) review the document; 2) propose comments to the GASB from the NFMA to the Board of Governors; and 3) draft the comment letter based on feedback received from the Board.

The proposal describes who the intended users of note disclosures are (more sophisticated users), and what constitutes essential information (used for decision-making and assessing accountability. Since note disclosures are of high importance to analysts, I think it is important that we provide the NFMA’s feedback.

Comments are due by April 17, 2020. Ideally, there will be a volunteer for the project leader role who will coordinate the efforts of the group, as well others who volunteer to serve as working group members. Please contact Lisa Good at [email protected] and Lisa Washburn at [email protected] if you are interested.

Lisa Washburn
NFMA Industry & Media Liaison




COVID-19 Outbreak Creates Disclosure and Due Diligence Challenges: Ballard Sphar

Disclosure to municipal bond investors of material risks stemming from the coronavirus outbreak presents a serious concern in the municipal securities industry. This is particularly true in certain sectors, including bonds for:

Ballard Spahr LLP

March 12, 2020




GASB Issues Proposal Addressing Certain Component Unit Criteria and Section 457 Deferred Compensation Plans.

Norwalk, CT, March 9, 2020 — The Governmental Accounting Standards Board (GASB) today issued a proposed Statement that would increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which the organization does not have a governing board and the primary government performs the duties that a governing board typically performs.

The Exposure Draft, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, is designed to mitigate financial reporting costs associated with certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and other employee benefit plans.

The proposed Statement also would enhance the relevance, consistency, and comparability of accounting and financial reporting for Section 457 deferred compensation plans that meet the definition of a pension plan and for benefits provided through those plans. In addition, it would supersede the remaining provisions of Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, as amended, for all Section 457 plans.

The Exposure Draft is available on the GASB website, www.gasb.org. The GASB invites stakeholders to review the proposal and provide comments by April 10, 2020.




MSRB Reminds Regulated Entities of Application of Supervisory Requirements in Light of Coronavirus.

Read the MSRB Regulatory Notice.




MSRB Addresses Supervisory Requirements in Light of Coronavirus: Cadwalader

The MSRB addressed the application of supervisory requirements in light of operational challenges and business disruptions posed by the coronavirus outbreak.

In a new Notice, MSRB reminded municipal market participants that MSRB Rule G-27 (“Supervision”) and Rule G-44 (“Supervisory and Compliance Obligations of Municipal Advisors”) require broker-dealers and municipal advisors to implement a system to supervise municipal advisory activities. The MSRB stated that neither rule mandates that supervision be conducted in person. Instead, the respective systems may incorporate remote supervision using technological resources.

Cadwalader Wickersham & Taft LLP

March 10 2020




The Bond Lawyer - Winter 2020

The Winter 2020 issue of The Bond Lawyer® is now available. Download the document here.

The Bond Lawyer®: The Journal of the National Association of Bond Lawyers is published quarterly, for distribution to members and associate members of the Association. Article submissions and comments should be submitted to Linda Wyman, (202) 503-3300.




MSRB Publishes Annual Fact Book of Municipal Securities Data.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual Fact Book that highlights 2019 municipal market trends and statistics on trading and disclosures. Among the findings is a marked decline in the total number of municipal securities trades in 2019, which dropped 14% to 8.75 million, the lowest level since 2006. The par amount of municipal securities traded in 2019 decreased 2.5% from the prior year.

“The main driver of the decrease in municipal securities trading activity in 2019 was a decline in small trades consistent with a reduction of retail trading activity,” said MSRB Director of Research Marcelo Vieira. “Considering that institutional trading actually increased, we will continue to look into municipal investor behavior to see if we uncover any meaningful trends.”

Retail trades—typically defined as trades of $100,000 or less—were down 16.5% in 2019, while institutional trades—trades of $1 million or more—increased 3.9%. Customer trades decreased 14.5% and interdealer trades were down 13.2%.

The MSRB also found an increase in transactions and par amount traded of taxable municipal securities. Trades of taxable securities were up 4.8% in 2019 to 615,982 trades and accounted for 7% of all municipal securities trades, the highest since 2012. “What is particularly notable, though not surprising due to the recent supply of taxable securities, is the increase in the par amount of taxable securities traded,” Vieira said. The par amount of taxable securities traded increased nearly 45 percent to $289 billion in 2019, the highest since 2011.

Continuing disclosures submitted to the MSRB increased to 150,585 in 2019, up 2.2% from the 147,280 submissions in 2018. Bond calls, audited financial statements and annual financial information accounted for about two-thirds of all continuing disclosures. The new event disclosures mandated by the Securities and Exchange Commission Rule 15c2-12 as of February 2019 also contributed to the increase in continuing disclosures.

The 2019 Fact Book includes monthly, quarterly and yearly aggregate market information from 2015 to 2019, and covers different types of municipal issues, trades and interest rate resets. The Fact Book provides municipal market participants, policymakers, regulators, academics and others with historical statistics that can be further analyzed to identify market trends and activity.

The MSRB supports market transparency and access to real-time data and disclosures through its free Electronic Municipal Market Access (EMMA®) website. Explore EMMA’s Market Statistics section for daily and historical trading, issuance and continuing disclosure data.

Download the 2019 Fact Book.

Date: March 3, 2020

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




GASB Requests Proposals for Crain Research Grants.

Read the Request for Proposals.

 




SEC Issues Staff Legal Bulletin On Applying Antifraud Liabilities to Public Statements of Municipal Issuers in the Secondary Market: Hunton Andrews Kurth

Introduction

On February 7, 2020, the staff of the SEC’s Office of Municipal Securities (“OMS”) issued a Staff Legal Bulletin (“Bulletin” or “Staff Guidance”) regarding the application of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder to statements by municipal issuers and obligated persons (each, a “municipal issuer”) in the secondary market. Here is a link to the Bulletin. The Bulletin summarizes and confirms prior SEC guidance that the antifraud provisions apply to any statement of a municipal issuer that is reasonably expected to reach investors and the trading markets. The Staff Guidance provides new insights into the views of SEC Staff regarding continuing disclosure practices in municipal securities issues. The Staff Guidance is summarized below.

Background

The Staff Guidance emphasizes that, though much improved since the creation and implementation of the Electronic Municipal Market Access (“EMMA”) system, investor and market access to current and reliable information about municipal issuers remains uneven and inefficient. The Staff Guidance notes the variety of ways that municipal issuers disclose information about themselves, including EMMA disclosures, public announcements, press releases, media interviews and discussions with various interest groups. In addition, information about municipal issuers is collected and disseminated publicly by state and local governments. In the Staff’s view, these diverse types of statements provide significant, current information about a municipal issuer and can reasonably be expected to reach investors and trading markets, even if they are not published or conducted for purposes of informing the securities markets. Noting questions raised by market participants about the application of the antifraud provisions to issuer statements, including annual and continuing disclosures, the Staff Guidance outlines previous Commission statements regarding the scope and application of the antifraud provisions to municipal issuer statements, primarily the 1994 Interpretive Release1 and the City of Harrisburg, PA enforcement action (and accompanying report) discussed below. The Staff Guidance provides a broad and current formulation of how the antifraud provisions apply to municipal issuer statements.

The Current Staff Guidance Formulation and the Importance of a Staff Legal Bulletin

The Staff Guidance emphasizes that the antifraud provisions apply to all municipal issuer statements that provide information that is reasonably expected to reach investors and the trading markets, whoever the intended primary audience and whatever the medium of delivery. “Statement” or “Statements” is broadly defined to include any publicly available written or oral communication of a municipal issuer, regardless of the intended audience or medium of delivery. The Staff Guidance refers to this as a “standard” and stresses that the antifraud provisions apply to all statements by a municipal issuer whether on EMMA or elsewhere, whether written or oral, regardless of the extent to which the municipal issuer has fulfilled its continuing disclosure undertakings and notwithstanding changes of municipal issuer disclosure practices technology, investor expectations, and regulatory framework. In outlining previous Commission statements, the Staff Guidance offers a broad, current formulation of how the antifraud provisions apply to municipal issuers.

A Staff legal bulletin is not an SEC rule, regulation or Commission statement. However, while a Staff legal bulletin has no legal force or effect, and may not be formally recognized in administrative or court proceedings, a bulletin does represent the current views of the SEC Staff presumably the staff of the Office of Municipal Securities and the staff of the Public Finance Abuse Unit of the SEC’s Enforcement Division that is regularly applying SEC rules, regulations and laws to municipal issuers and municipal securities continuing disclosure. For example, Staff Legal Bulletins are regarded as important, practical guidance for SEC-reporting companies when complying with SEC rules and regulations, from disclosing shareholder proposals to corporate disclosures in registered offerings and ongoing reporting. In short, an issuer and its counsel are well advised to be familiar with applicable SEC legal bulletins when engaged in primary offerings and ongoing disclosures.

It is worth noting that the framework or approach of OMS Staff in the Staff Guidance is grounded in corporate disclosure concepts. Much like the corporate framework used to introduce the financial obligation reporting amendments to Rule 15c2-12 in 2019, the Staff states it views regarding disclosure obligations of municipal issuers in the context of “entities whose securities are publicly traded” and suggests that municipal issuers disclose current information in a variety of ways “like public companies”. As discussed below, the Staff Guidance takes into account many of the unique aspects of the municipal market, but the guidance is not unlike Staff legal bulletins that are issued and followed in the reporting company context.

SEC-OMS Views on Antifraud Provisions

The Staff Guidance presents OMS’s views on (a) certain elements of Section 10(b) and Rule 10b-5, including intent, scienter and materiality, (b) the scope of coverage of the antifraud provisions with respect to statements made by municipal issuers in the secondary market that are reasonably expected to reach investors and the trading markets, including examples of various, current modes of municipal issuer statements and (c) the importance of disclosure policies and procedures in complying with antifraud provisions.

Elements of Antifraud Provisions Relevant to Municipal Issuer Statements to Secondary Market

Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 are referred to as the “antifraud provisions” and generally prohibit misstatements or omissions of material facts in connection with the purchase and sale of municipal securities. The antifraud provisions apply to municipal issuer continuing disclosures and to municipal issuer statements to the secondary market.

Scienter Standard. The Staff Guidance reminds issuers that “scienter” a mental state of intent is required to find a violation of the antifraud provisions. Specifically, scienter is demonstrated by finding “recklessness”, an extreme departure from the standard of ordinary care. However, it is important to remember, as is referenced in a footnote in the Staff Guidance, that the SEC does and can proceed against municipal issuers for disclosure violations under Section 17(a) of the Securities Act of 1933. Different than requiring intent like Rule 10b-5, Section 17(a) only requires a finding of negligence or gross negligence to determine that an antifraud violation has occurred. While Section 10(b) and Rule 10b-5 would be the typical standard applied to secondary market disclosures, recent, other enforcement actions regarding disclosure violations by municipal issuers have been based on Section 17(a) negligence, a lesser standard than Section 10(b) scienter. Nonetheless, the Staff Guidance is helpful in reminding municipal issuers that recklessness and extreme departure from ordinary care is the standard typically applied in evaluating municipal issuer liability for secondary market statements to investors and the trading markets.

Materiality and “Total Mix” of Information. In helpful analysis for municipal issuers, the Staff Guidance reminds issuers that a fact or factual statement is material if there is a substantial likelihood that the information would have been viewed by a reasonable investor as significantly altering the “total mix” of information available. The Staff Guidance emphasizes that “total mix” analysis is a fact and circumstance assessment for an issuer and could differ among municipal issuers. Importantly, “total mix” of information assessment may differ depending on whether issuer information is “uneven or inefficient” in the secondary market or is regularly available through EMMA or other investor relations website. To illustrate this “total mix” analysis for municipal issuers, the Staff Guidance relies on the SEC’s 2013 Harrisburg Report that accompanied the SEC’s Enforcement action against the City of Harrisburg, Pennsylvania.2 In that case, the city administration recurrently released information that omitted or misstated material information about the City’s financial condition, while during the same time period failing to submit annual financial information, audited financial statements, notices of failure to provide annual financial information and material event notices.

Information Reasonably Expected to Reach Investors. The Staff Guidance emphasizes that a municipal issuer’s failure to fulfill its continuing disclosure undertakings, as was the case with Harrisburg, is not necessary for a municipal issuer to be subject to antifraud liability. Rather, according to Staff, “all statements of a municipal issuer that are reasonably expected to reach investors and the trading markets are subject to the antifraud provisions, regardless of the municipal issuer’s compliance with its continuing disclosure obligations”. While this guidance is consistent with a compilation of past statements from the SEC on antifraud liability for municipal issuer statements, this new formulation offers a broad, expansive view of the applicability of antifraud provisions to municipal issuers. According to Staff, whether an issuer’s statements to the market have been uneven or consistent may increase or decrease the risk that the statements significantly alter the total mix of information and create antifraud liability.

In addition, SEC Staff takes a broad view of information reasonably expected to reach investors: in addition to EMMA disclosures, public announcements, press releases, interviews with media representatives, discussions with interest groups and municipal issuer information disseminated by other state and local governmental bodies are sources of information that reasonably can be expected to reach investors and the trading markets. These statements are part of the “total mix” and can lead to exposure to antifraud liability, depending on the level of issuer information otherwise available in the market. Even if not published for purposes of informing the securities markets, such oral or written statements may not violate the antifraud provisions

Examples of Statements (Other than EMMA Disclosures) Covered by Antifraud Provisions

To emphasize that the antifraud provisions apply to all issuer statements reasonably expected to reach investors and trading markets, regardless of the intended primary audience or medium of delivery, the Staff Guidance provides examples of issuer statements other than EMMA disclosures that could be subject to antifraud liability:

Information on Municipal Issuer Websites. To avoid misleading investors, information previously posted on an issuer’s website should be separately identified as historical and located in a separate section of the website. The Staff Guidance encourages municipal issuers to follow public reporting company guidance regarding hyperlinked information, including disclosing the reason for the hyperlink, using disclaimers and use of exit screens or intermediate screens to minimize antifraud liability. Summary information posted on issuer websites should be displayed in a manner designed to avoid confusing or misleading investors. On each of the foregoing areas of website disclosure concerns, the Staff Guidance directs municipal issuers to follow Commission guidance regarding how antifraud provisions apply to public reporting companies.

Municipal Issuer Reports Delivered to Other Governmental Bodies. The Staff Guidance states that CAFRs, budgets and mid-year financial reports are information reasonably expected to reach investors and trading market even if not posted on EMMA, and are subject to the antifraud provisions. The Staff Guidance states that additional types of reports may be covered by the antifraud provisions, depending on facts and circumstances, including reports submitted by a municipality to a state agency, reports by a state or local official to a city council or state legislature and other publicly available reports. Again, while this Staff Guidance is consistent with past SEC principle-based guidance, it is expansive in its present detail of what sources may be viewed as significant, current information reasonably expected to reach investors and markets.

Statements Made By Municipal Issuer Officials. The Staff Guidance re-emphasizes past SEC guidance that statements by municipal issuer officials reasonably expected to reach investors or securities markets are subject to the antifraud provisions. The current Staff Guidance broadly defines the term “municipal issuer official” to include elected officials, appointed officials and employees or their functional equivalents. In addition, the current Staff Guidance broadly describes the types of statements, depending on facts and circumstances, that may be actionable under the antifraud provisions: verbal statements, speeches, public announcements, interviews with media as well as other avenues such as social media. The Staff Guidance, in bringing past guidance current, is expansive in its views of municipal issuer statements subject to antifraud provisions.

Key Importance of Disclosure Policies and Procedures

The Staff Guidance emphasizes that “reasonably designed” and “consistently implemented” disclosure policies and procedures will help a municipal issuer comply with the antifraud provisions. Given the current, broad views of Staff on what constitutes actionable statements and what public information is reasonably expected to reach investors and trading markets, the Staff’s renewed emphasis on adopting and implementing disclosure policies and procedures is of key importance for municipal issuers. The Staff Guidance recommends that municipal issuers “follow and further develop initiatives to enhance disclosure policies and procedures for both primary offering and ongoing disclosures”, including adoption of disclosure committees and training programs. Specifically, the Staff Guidance recommends that disclosure policies and procedures:

Conclusions and Recommendations

The new Staff Guidance provides views consistent with past SEC guidance on municipal issuer secondary market disclosure and states that it does not create new or additional obligations for municipal issuers. At the same time, in offering its current views on how the antifraud provisions apply to secondary market disclosures, the Staff Guidance offers broad, even expansive, views of current municipal issuer obligations: the antifraud provisions apply to all statements, broadly defined from EMMA disclosures to social media, that are reasonably expected to reach investors and the trading markets, whoever the intended primary audience, whatever the medium of delivery and regardless of the extent to which an issuer has fulfilled its continuing disclosure undertakings. The scope of application of the antifraud provisions is broad, notwithstanding changes or improvements in municipal issuer disclosure practices, changes in technology, investor expectations and changes in regulatory framework. While the Staff Legal Bulletin addresses municipal issuers who have outstanding issues in the public market subject to the continuing disclosure rules, the Staff views on application of the antifraud provisions to issuer statements are also relevant to primary offerings and issuer statements made in an offering process before an issue is closed.

According to the Staff Guidance, the broad potential for antifraud liability of municipal issuers and their officials for secondary market disclosures and public statements underscores the need for adopting, and regularly carrying out, thorough disclosure policies and procedures. Municipal issuers can expect to see continued focus by their counsel on adequacy and regular implementation of disclosure policies and procedures. Specifically, municipal issuers will want to ensure that their disclosure policies and procedures appropriately identify the financial and operating information that will regularly be made available to investors and the trading markets by EMMA filings or through other means such as an issuer website, and consider separating and/or disclaiming information not intended for investors or the market. Issuers may look to disclosure counsel increasingly to advise not just on primary disclosure in connection with initial bond issuances, but on ongoing EMMA disclosures and other publicly available issuer statements. The Staff Guidance makes clear that OMS and SEC Staff, including Enforcement, view the application of the antifraud provisions broadly with respect to municipal issuer statements. Disclosure policies and procedures are a critical line of defense against fraud claims and Enforcement review.

Hunton Andrews Kurth LLP

by Douglass P. Selby, Yeshake ‘Isaac’ Yilma, Benjamin Vernon, Caryl Greenberg Smith, Darren C. McHugh, William H. McBride, Thomas A. Sage , Mark B. Arnold, Clayton T. Holland, Ryan M. Bates, Audra L. Herrera, Samantha Gilley Rachlin, Christopher G. Kulp, Brendan M. Staley, Martha A. Warthen, Andrew R. Kintzinger and Scott H. Kimpel

February 24 2020




SEC to Municipal Issuers and Obligated Persons: What You Say Can and Will Be Held Against You: Squire Patton Boggs

SEC Staff Releases Staff Legal Bulletin No. 21 on Application of Antifraud Provisions to Public Statements in Secondary Municipal Market and Misses Opportunity to Develop a Real-World Approach

In response to a July 2019 direction from Securities and Exchange Commission (SEC) Chairman Jay Clayton, the SEC Office of Municipal Securities (OMS) staff issued a Staff Legal Bulletin No. 21 (OMS) that discusses the application of antifraud provisions to public statements of municipal issuers and obligated persons in the municipal secondary market.1 The purpose of the OMS bulletin, according to the OMS staff, is to “outline previous Commission statements relevant to understanding the application of the antifraud provisions to any statement of a municipal issuer that is reasonably expected to reach investors and the trading markets, and, thereby, promote more informed disclosure practices by municipal issuers in the secondary market; facilitate investor access to accurate, timely and comprehensive information; and improve investor protection.”2 Relying heavily on the 1994 Interpretive Release3 and the City of Harrisburg Section 21(a) Report4, the OMS staff puts forth the proposition that virtually every statement made by a municipal issuer, including staff and elected officials, in any medium (e.g., websites, social media, speeches, governmental meetings and reports to other governmental agencies), for any purpose, is reasonably expected to reach investors and the trading market, and is, therefore, subject to the federal securities antifraud provisions.

In order to appreciate the gravity of that proposition, a review of the elements of the antifraud provisions might be informative.

As referred to in the bulletin, SEC Rule 10b-5 essentially prohibits making an untrue statement of a material fact or omitting 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, all in connection with the purchase or sale of any security. The bulletin describes how the federal courts and the SEC interpret the phrase “material fact”5. However, the bulletin omits any discussion about when statements will be viewed as being made “in connection with” a purchase or sale of a security or how the phrase “in light of the circumstances under which they were made” might aid the legal analysis.

The discussion of what constitutes a “material fact” revolves around the concept that a fact is material, and its omission from a statement is material, if the inclusion or exclusion, as the case may be, of that fact would alter the total mix of information available. Usually, this analysis of materiality involves a disclosure document (e.g., an official statement). In the case of secondary market disclosure, however, it is not clear from the bulletin what the “total mix of information” would include. The OMS staff suggests that the relative importance of any particular fact (and its materiality) might be affected by whether investors otherwise have regular access to accurate, timely and comprehensive information as opposed to “uneven and inefficient” access to information about the issuer. The staff specifically identifies the MSRB’s EMMA system “or some other investor relations-focused medium (e.g., investor website)” as potential means to provide regular access to information, but does not delve into what should be considered “regular” or “comprehensive.”

While the bulletin did not discuss the phrase “in connection with the purchase or sale of a security” in the context of the antifraud rules, this concept bears touching on, particularly with respect to municipal issuers. There does not appear to be one uniform interpretation of the meaning of this phrase, although several judicial interpretations have been made with respect to the corporate market. One interpretation is that all publicly disseminated statements are deemed to be made in connection with a securities transaction if they are “reasonably calculated to influence the investing public.”6 Case law also refers to a “transactional nexus” requirement, meaning there must be a connection between the alleged fraud and the purchase or sale of securities.7 Courts have found sufficient “connection” in SEC filings, press releases, public statements, letters published in the financial press, news articles, investment research reports and product advertisements.8 Whether this same standard should be applied with respect to municipal issuers is a question that should be given serious consideration in light of the differences in the flow of information in the public and private sectors. Private entities (e.g., corporations, partnerships, etc.), to a large extent, are able to control the release and dissemination of their information and, thus, may keep private all information other than what they choose to divulge or what applicable law requires. State and local government entities, on the other hand, generally are subject to public records laws and are prohibited from keeping any information private unless a law specifically provides an exclusion. Additionally, many jurisdictions have transparency laws that make it compulsory for state and local governments to post specific documents on their websites (or otherwise provide for public access) for the benefit of the entities’ constituents. These public records and transparency laws were not developed for the benefit of potential debt investors and so the question is whether complying with these laws should automatically result in federal antifraud scrutiny. When a city clerk posts on the city’s website the agenda materials for the next city commission public meeting, should the assumption be that the posting was made to influence the investing public? Is it reasonable to assume an investor might rely on the meeting agenda materials in making an investment decision and, thus, those materials should be “vetted” for antifraud liability? What if the agenda package includes the audited financial statements for acceptance by the city commission? Contrast that to the city finance director posting the final accepted audited financial statements on a webpage designated as the city’s “investor relations page.” There is an obvious distinction to be made.

The most unfortunate and confusing part of the bulletin, however, is the OMS staff’s discussion of policies and procedures. Quoting the Harrisburg report, the staff cited the SEC’s recommendation that municipal issuers, among other things, evaluate public statements “prior to public dissemination” for accuracy and completeness.9 The staff suggests that the development and consistent application of policies and procedures such as described in the Harrisburg Report “can help a municipal issuer regularly provide more accurate, timely, and comprehensive information to investors, better manage communications with their investors; and comply with the antifraud provisions.”10 After five pages of analysis and the expansive conclusion that all public statements are subject to antifraud provisions, the staff encourages municipal issuers to “identify the place” where the issuer will make pertinent financial information regularly available, “which may include a central repository, such as the EMMA system, or an investor-relations website.”11 Yet the bulletin does not otherwise distinguish liability by whether information is posted to a central or investor-focused location. The only sense to be made of this statement in the context of the rest of the bulletin is that the staff is suggesting municipal issuers need to bulk up the information intentionally made available to investors and the trading market so that the public dissemination of other information is less likely to alter the total mix of information available. But, if all public statements (which, from a public records perspective, essentially include all public information) are subject to the antifraud rules regardless of the purpose of the disclosure, why would it matter whether information is posted on EMMA or on a non-investor-focused website? Can we conclude by this recommendation that OMS staff believes that information disseminated to a designated investor location (e.g., EMMA or an investor relations page) would result in a greater weight being given to such information?

The OMS staff could have discussed, but did not, whether the phrases “in connection with” or “under the circumstances under which the statement is made” could be applied to distinguish information routinely posted on an issuer’s website for the information and convenience of its citizenry or statements made in a political setting from statements made during an annual investor call, posted to EMMA or to an “investor relations page.” OMS staff could have stated, but did not, that municipal issuers and obligated persons would benefit from the use of reasonable precautionary language that could, if properly used, successfully communicate to the reader of the public statements the nature and purpose of the statements, thereby promoting investor understanding and providing a small level of comfort to the municipal issuer or obligated person regarding potential securities liability for intentionally (but understandably so) incomplete information (e.g., unaudited financial statements with no financial notes) or un-vetted information dissemination (e.g., public records responses).

By omitting any discussion of these important elements of the legal analysis, the OMS staff has missed the opportunity to provide meaningful guidance to the municipal market that would have been far more likely to facilitate investors’ regular access to accurate, timely and comprehensive information than what is contained in the bulletin. In fact, the bulletin’s proposition that all public statements are subject to antifraud rules could lead municipal issuers to provide less information by means of informal media (such as a website). A similar result occurred in response to the MSRB’s market analysis that insider trading liability could result from one-on-one investor communications.12

Perhaps the best guidance to be gained from the staff bulletin might be derived from the omitted analysis. We have long provided clients with advice regarding the dissemination of information to the secondary market and specifically about the use of websites to communicate with bondholders. The National Association of Bond Lawyers (NABL) has also provided a very useful publication for its members setting out considerations in the drafting of disclosure policies and procedures similar to what is encouraged in the staff bulletin.13 The staff bulletin can be construed to support the approach set out by NABL, which is to establish (and follow) written procedures for a formal process of vetting information before it is posted to EMMA or to an investors relations webpage and to clearly delineate which information is (and is not) intended for investor consumption. Regardless of the legal arguments that can be made to limit the reach of federal antifraud provisions to public information of governmental entities clearly not intended for investors or the trading market, it behooves governmental entities and other obligated persons to review the type of information available on its websites and in other media, review (and strengthen, if necessary) the current procedures for posting new information and otherwise releasing public statements, and consider voluntary postings to EMMA (or an investor relations page) of relevant vetted financial information (with appropriate precautionary language) that is otherwise routinely prepared and reviewed internally.

Squire Patton Boggs

February 28 2020




SEC Probes Owner of Chicago Apartments After Bond Default.

The U.S. Securities and Exchange Commission is investigating a non-profit that defaulted on $170 million of municipal bonds issued to finance the acquisition of about 1,800 low-income apartments in Chicago and its suburbs.

The disclosure of the investigation came in a court filing earlier this month by attorneys for the Better Housing Foundation. Lindran Properties LLC, a subsidiary of the foundation, filed for Chapter 11 protection from creditors on Jan. 31.

Clark Hill Plc, a law firm representing BHF in the bankruptcy, said the non-profit received a subpoena from the SEC “seeking records related to the events that preceded current ownership’s involvement in BHF and its affiliates.”

BHF was incorporated in 2015 by Meredith Rosenbeck, an attorney in a Columbus, Ohio, suburb, just one-year before it started borrowing through the Illinois Finance Authority to acquire the apartments in Chicago. The non-profit paid Chicago-based real estate investor L. Mark DeAngelis more than $4 million to acquire and manage three of the five portfolios of apartments, known as Shoreline, Icarus and Ernst, according to a lawsuit filed by BHF in October 2018.

The apartments managed by DeAngelis suffered from scores of building code violations and overdue property taxes, according to bond filings by BHF. The foundation accused DeAngelis of providing deeply flawed reports on the properties, which needed extensive repairs, and alleged DeAngelis grossly mismanaged the apartments and failed to collect rent.

As a result, the Chicago Housing Authority terminated tenants’ housing vouchers and BHF defaulted on the debt. The non-profit later defaulted on the two remaining bond issues and some of the securities traded this month for 2 cents on the dollar.

Andrew Belew, a Palm Beach, Florida-based real-estate investor who took over Better Housing Foundation in late 2018, said he’s cooperating with the SEC investigation. Rosenbeck couldn’t immediately be reached to comment, nor could DeAngelis.

On one $52 million bond sale in 2017 to acquire the 500-unit Icarus portfolio, a consultant hired by BHF estimated the apartments, some built in the 1890s, needed less than $500,000 in repairs, according to the bond offering document.

A report commissioned by Belew in 2019 after the bonds defaulted found the properties needed more than $7 million in critical repairs and almost $8 million to fix code violations. Making recommended repairs and curing potential code violations would cost another $34 million

Stifel Financial Corp. managed the Better Housing Foundation’s bonds sales. Neil Shapiro, a Stifel spokesperson, didn’t immediately return a call seeking comment.

Bloomberg Markets

By Martin Z Braun

February 24, 2020, 12:47 PM PST Updated on February 24, 2020, 1:45 PM PST




John W. Auchincloss Named Executive Director, Financial Accounting Foundation.

Norwalk, CT—February 27, 2020 — The Board of Trustees of the Financial Accounting Foundation (FAF) today announced that it has appointed John W. Auchincloss as the executive director of the Foundation. The FAF is the organization that oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

Mr. Auchincloss joined the FAF as vice president and general counsel in May 2016. In 2019, following the departure of then-president Terri Polley, he was appointed acting president while a national search was conducted for an executive director of the Foundation. His appointment as executive director is effective immediately.

“John has long impressed the FAF trustees with his intelligence, thoughtful strategic counsel, and commitment to the FASB and the GASB and their important mission,” said FAF Chair Kathleen L. Casey. “I am very pleased that we will continue to benefit from his strong leadership.”

“I am grateful to the FAF trustees and the entire organization for this opportunity to serve,” said Mr. Auchincloss. “The standard-setting boards have a unique role serving investors and other stakeholders across our capital markets. The entire FAF organization is committed to supporting the integrity of the independent standard-setting process and ensuring the boards have what they need to succeed.”

Before joining the FAF, Mr. Auchincloss developed deep professional experience with nonprofit governance, tax, and regulatory issues. His last position before coming to the FAF was general counsel and secretary for Commonfund, a private, nonprofit asset management firm.

Previously, Mr. Auchincloss served as an assistant U.S. attorney in the Southern District of New York. He began his career at Davis Polk & Wardwell in Washington, D.C. and New York City. Mr. Auchincloss received a bachelor’s degree in history from Yale University, a J.D. degree from the University of Virginia School of Law, and an LL.M. degree from Cambridge University.




MSRB Seeks Volunteers for New Market Transparency Advisory Group.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced that it is establishing a new Market Transparency Advisory Group (MTAG) to advise its Board of Directors on strategic initiatives to modernize and enhance the free Electronic Municipal Market Access (EMMA®) website and related systems in support of market transparency. The MSRB is now seeking volunteers for the FY 2020 MTAG, which will convene in April 2020 and continue through September 2020.

“As we migrate our market transparency systems to the cloud, the MSRB sees tremendous potential for the EMMA website to deliver even greater value to our market stakeholders by enabling dynamic comparison, regulatory compliance and big data analytics,” said Ron Dieckman, Chair of the Board’s Technology Committee.

Jerry Ford, Chair of the Board’s Stakeholder Engagement Committee, said, “This new advisory group will provide a forum for stakeholders to partner with the MSRB in identifying and prioritizing data and technology initiatives that advance transparency in our market, ultimately contributing to a fairer and more efficient market for all participants.”

The MSRB seeks volunteers representing regulated entities, issuers, investors, and other market participants with knowledge of the EMMA website and the MSRB’s market data to serve on the MTAG. The MSRB will accept applications through March 13, 2020, and review and assess candidates based on their individual knowledge and experience as well as other factors such as diversity in geographic location and size and type of firm. The selection process and announcement of MTAG members is expected to occur in March.

Read more information on volunteering for MTAG.

Date: February 25, 2020

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




SEC Probes Owner of Chicago Apartments After Bond Default.

The agency is investigating a nonprofit that defaulted on $170 million of municipal bonds issued to finance the acquisition of about 1,800 low-income apartments in Chicago and its suburbs.

The U.S. Securities and Exchange Commission is investigating a non-profit that defaulted on $170 million of municipal bonds issued to finance the acquisition of about 1,800 low-income apartments in Chicago and its suburbs.

The disclosure of the investigation came in a court filing earlier this month by attorneys for the Better Housing Foundation. Lindran Properties LLC, a subsidiary of the foundation, filed for Chapter 11 protection from creditors on Jan. 31.

Clark Hill Plc, a law firm representing BHF in the bankruptcy, said the non-profit received a subpoena from the SEC “seeking records related to the events that preceded current ownership’s involvement in BHF and its affiliates.”

BHF was incorporated in 2015 by Meredith Rosenbeck, an attorney in a Columbus, Ohio, suburb, just one-year before it started borrowing through the Illinois Finance Authority to acquire the apartments in Chicago. The non-profit paid Chicago-based real estate investor L. Mark DeAngelis more than $4 million to acquire and manage three of the five portfolios of apartments, known as Shoreline, Icarus and Ernst, according to a lawsuit filed by BHF in October 2018.

The apartments managed by DeAngelis suffered from scores of building code violations and overdue property taxes, according to bond filings by BHF. The foundation accused DeAngelis of providing deeply flawed reports on the properties, which needed extensive repairs, and alleged DeAngelis grossly mismanaged the apartments and failed to collect rent.

As a result, the Chicago Housing Authority terminated tenants’ housing vouchers and BHF defaulted on the debt. The non-profit later defaulted on the two remaining bond issues and some of the securities traded this month for 2 cents on the dollar.

Andrew Belew, a Palm Beach, Florida-based real-estate investor who took over Better Housing Foundation in late 2018, said he’s cooperating with the SEC investigation. Rosenbeck couldn’t immediately be reached to comment, nor could DeAngelis.

On one $52 million bond sale in 2017 to acquire the 500-unit Icarus portfolio, a consultant hired by BHF estimated the apartments, some built in the 1890s, needed less than $500,000 in repairs, according to the bond offering document.

A report commissioned by Belew in 2019 after the bonds defaulted found the properties needed more than $7 million in critical repairs and almost $8 million to fix code violations. Making recommended repairs and curing potential code violations would cost another $34 million.

Stifel Financial Corp. managed the Better Housing Foundation’s bonds sales. Neil Shapiro, a Stifel spokesperson, didn’t immediately return a call seeking comment.

Crain’s Chicago Business

February 24, 2020 04:09 PM




MSRB to Enhance Transparency of Timing of Issuer's Annual Disclosures on the EMMA Website.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) received approval from the U.S. Securities and Exchange Commission (SEC) of a proposal to more prominently display existing information on the timing of issuers’ annual and audited financial disclosures on the MSRB’s free Electronic Municipal Market Access (EMMA®) website. The EMMA “Submission Calculator,” proposed in November 2019, would become visible on the EMMA website by July 2020 to allow time for stakeholders to preview the new display and provide feedback on educational tools.

“Improving the timeliness of financial disclosures in the municipal securities market has been an ongoing concern of the MSRB, the SEC, investors and other market participants,” said MSRB Chief Compliance Officer Gail Marshall. “The EMMA Submission Calculator supports greater transparency around the timing of issuers’ annual financial disclosures, and the MSRB looks forward to continued dialogue with market participants as they develop consensus solutions that would complement the increased transparency.”

The MSRB’s EMMA website serves as the official source for municipal securities data and disclosure documents, providing free public access to information that enables investors to make informed decisions.

In approving the MSRB’s proposal, the SEC noted its belief that the Submission Calculator “would enable investors and others to more readily locate and access the financial information available on the EMMA Portal and provide investors and others with additional tools to evaluate an issuer’s disclosure practices.” Read the SEC’s approval order.

The MSRB will host a free educational webinar on March 19, 2020 from 3 p.m. to 4 p.m. Eastern Time to discuss the Submission Calculator and demonstrate other upcoming EMMA enhancements that will provide a “modification history” to clearly indicate how a continuing disclosure filing has been amended over time. Register for the webinar.




GASB Issues Proposal to Enhance Concepts for Notes to Financial Statements.

Norwalk, CT, February 21, 2020 — The Governmental Accounting Standards Board (GASB) has issued a proposed Concepts Statement that would provide enhanced guidance to the Board when it establishes note disclosure requirements for state and local governments.

When finalized, these concepts may be used by preparers and auditors when applying the generally accepted accounting principles hierarchy in assessing specific information items in certain circumstances for which the GASB does not provide authoritative guidance. These concepts also may help stakeholders to better understand the fundamental concepts underlying future GASB standards.

The Exposure Draft, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements, describes the purpose of notes to financial statements and the intended users of notes. The proposals set forth in the Exposure Draft would replace the existing criteria for disclosing information in notes to financial statements.

The proposals elaborate on the types of information that should be disclosed in notes and the types of information that are not appropriate for note disclosures. Of particular importance, the Board is proposing the characteristics that distinguish information that is essential to users in making economic, social, or political decisions or assessing accountability. Those proposed characteristics are that (1) the information is currently being utilized in users’ analyses for making decisions or assessing accountability or (2) would be utilized if it became available.

The Exposure Draft is available for download at no charge on the GASB website, www.gasb.org. Stakeholders are encouraged to review and provide comments by April 17, 2020.

The Board has scheduled a public hearing on May 17, 2020 in New Orleans, in conjunction with the annual conference of the Government Finance Officers Association. Additional information is available in the Exposure Draft. The deadline for providing written notice of intent to participate is April 17, 2020.




A Bid to Shame Muni-Disclosure Derelicts Draws Industry’s Fire.

What seems like a tiny tally is causing a big controversy in the world of municipal finance.

State and local government officials are pushing back against a proposal from the Municipal Securities Rulemaking Board that would reveal to their bondholders a potentially embarrassing fact: how long it takes them to post their audited financial statements.

That count of the days between the end of the fiscal year and the appearance of annual reports, to be disclosed on the MSRB website where securities filings are posted, is an effort to give the $3.8 trillion municipal-bond market some of the transparency that’s long been demanded from publicly traded corporations, whose annual reports have to be filed with the Securities and Exchange Commission as soon as two months after their years end.

Continue reading.

Bloomberg Markets

By Mallika Mitra

February 18, 2020, 6:02 AM PST




MSRB Compliance Corner.

Read about the LIBOR transition, recent enforcement actions and more in the latest MSRB Compliance Corner newsletter.




Hawkins Advisory: SEC Staff Bulletin

This Advisory provides a summary and analysis of the recent Staff Legal Bulletin from the SEC’s Office of Municipal Securities.

Read the Advisory.




SIFMA Follow Up Letter to SEC in Response to Proposed Exemptive Order.

SUMMARY

SIFMA submitted comments to the SEC on December 9, 2019 in response to the Proposed Exemptive Order. Subsequent to such submission, on December 12, 2019, representatives of SIFMA and its member firms met with staff from the Division of Trading and Markets and the Office of Municipal Securities, and met separately with Commissioner Lee and Commissioner Roisman and members of their respective staffs to discuss SIFMA’s comments and concerns about the Proposed Exemptive Order.

SIFMA and member firm representatives also met separately with Commissioner Jackson and Commissioner Peirce and their respective staffs on December 17, 2019, and with Chairman Clayton and his staff on January 9, 2020, to further discuss those concerns.

Read the SIFMA Comment Letter.




Virtually All Issuer Statements and Information Subject to SEC Rule 10b-5 (Anti-Fraud) Liability.

The Securities and Exchange Commission (SEC) announced in September 2019 that it would release a staff bulletin to provide more certainty on the SEC’s position regarding the application of certain antifraud laws to municipal issuers, particularly Rule 10b-5 of the Securities Exchange Act of 1934 (the Act). The concern was raised as issuers and other obligated persons have been called upon to provide more material event disclosures, interim financials, and other disclosures pursuant to continuing disclosure obligations under Rule 15c2-12 of the Act. The SEC fulfilled the promise by releasing on Feb. 7, 2020, its “Application of Antifraud Provisions to Public Statements of Issuers and Obligated Persons of Municipal Securities in the Secondary Market: Staff Legal Bulletin No. 21 (OMS)” (the SEC Bulletin), which can be found here:

Rule 10b-5 prohibits, in connection with the purchase or sale of any security (including publicly offered bonds), the making of any untrue statement of material fact or omitting 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. See 17 C.F.R. Section 240.10b-5(b) (2019).

There are several questions to consider, as provided in the SEC Bulletin, when determining whether someone has violated Rule 10b-5:

The SEC staff provided that Rule 10b-5 applies to all issuer statements that are reasonably expected to reach investors, regardless of who the intended audience is and the method of delivery. Even though a statement was not made for the purpose of informing an investor it does not prevent liability or the application of Rule 10b-5. Such statements could include information on the issuer’s website, information in public reports to other governmental entities, and information made in speeches, interviews or press releases. This is a very broad list and could include any statements made or information provided by an issuer, including board members, staff and elected officials, that is then promulgated on the internet or social media. For that reason, the SEC staff encourages issuers to adopt policies and procedures, which establish information dissemination principles, designate a compliance individual, and establish training requirements for staff among other things.

It is important for issuers to speak with an attorney about adopting such policies and procedures, providing appropriate disclaimer language in provided information, and ensuring compliance with Rule 10b-5.

Frost Brown Todd LLC – Beau F. Zoeller, Denise Y. Barkdull, David A. Rogers and Laura H. Theilmann




SEC Legal Bulletin: Antifraud Provisions Apply to Public Statements by Public Officials - Day Pitney Alert

On February 7, the Securities and Exchange Commission (SEC) provided a legal bulletin setting forth the views of the Office of Municipal Securities (the Office) regarding the application of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (collectively, the antifraud provisions) with respect to public statements made by issuers of municipal securities.[1] The Office indicated it issued the bulletin in response to questions raised about the application of antifraud provisions to statements of municipal securities issuers.

Antifraud Provisions

The antifraud provisions apply to the purchase and sale of municipal securities in the primary and secondary markets. They prohibit an issuer from making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. The primary elements in determining whether there has been a violation of these provisions are scienter and materiality.

Scienter

Scienter involves the intent to deceive, manipulate or defraud. However, the courts and the SEC have stated that scienter may be satisfied by a showing of recklessness. Recklessness is an extreme departure from the standards of ordinary care and involves the danger of misleading market participants known to the person making the statement, or so obvious that the official must have been aware of the possibility of misleading the market participants

Materiality

Under the antifraud provisions, a fact is material if there is a substantial likelihood that the information would have been viewed by the reasonable investor as having significantly altered the total mix of information available to an investor. Determining whether a statement is material is based on an analysis of facts and circumstances (a total mix analysis). The Office noted that it believes all statements of a municipal securities issuer that are reasonably expected to reach investors and trading markets are subject to the antifraud provisions even if the issuer is in compliance with its continuing disclosure undertakings. However, the total mix analysis may affect the materiality of a public statement made by an issuer and may depend on whether access to accurate, timely and comprehensive information about an issuer is “uneven and inefficient” rather than regularly available to investors through the MSRB’s EMMA system or another investor-based communication vehicle such as an investor website.

Information Reasonably Expected to Reach Investors

The Office further noted that “information reasonably expected to reach investors” may be in the form of public announcements, press releases, interviews with media representatives and discussions with groups. The fact that the information is not published for purposes of informing the securities markets does not alter the mandate that it not violate the antifraud provisions. Information reasonably expected to reach investors includes the following:

Information on Websites

Public Reports Delivered to Other Governmental Bodies

Statements Made by Issuer Officials

“Officials” include those who may be viewed as having knowledge regarding the financial condition and operation of the issuer, and statements may include:

Finally, the Office noted that proper disclosure policies and procedures, when consistently implemented, can benefit an issuer in its compliance with the antifraud provisions, and it encouraged issuers to adopt appropriate policies.

The attorneys in Day Pitney’s Municipal Finance group routinely counsel clients on addressing compliance with the antifraud provisions and drafting disclosure policies and procedures. Please feel free to contact any of the attorneys listed to the right of this alert if you would like to discuss this alert, compliance with the antifraud provisions or drafting a disclosure policy.

_______________________

[1] The Bulletin can be found here. Note that the statements in the bulletin represent the views of the Office and the bulletin is not a rule, regulation or statement of the SEC and has no legal force or effect.

Publisher: Day Pitney Alert

Day Pitney Author(s) Namita Tripathi Shah

February 11, 2020




Financial Accounting Foundation Board of Trustees Notice of Meeting.

Notice of Meeting.

[02/10/20]




BDA Responds with Narrowly Tailored Parameters to Any Potential Exemptive Relief for Municipal Advisors.

After multiple meetings at the SEC including with the Chair, all Commissioners, and staff leadership at the Office of Municipal Securities and Trading and Markets, today (1/28/20) the BDA submitted comments to the SEC that would narrowly tailor the proposed exemptive order. Following extensive work with the BDA working group and outside counsel Davis Polk and Nixon Peabody, comments were developed that create distinct parameters, limiting instances where non-dealer MA’s can place securities.

The comments can be viewed here.

While the BDA remains in opposition to the SEC issuing any form of the requested relief, the BDA is taking proactive steps in response to requests in order to ensure municipal market structure is not altered by the misguided proposed action.

The BDA is currently assessing next steps and continuing to monitor actions taken at the SEC. The BDA will provide updates when they become available.

Bond Dealers of America

February 4, 2020




SEC Signals Heightened Scrutiny of Cybersecurity Practices.

On January 7, 2020, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) announced its 2020 Examination Priorities that included cybersecurity practices. Soon after the publication of the OCIE Examination Priorities, on January 27, 2020, OCIE followed-up with a report entitled Cybersecurity and Resiliency Observations.  These two OCIE releases, along with prior SEC alerts and actions, provide strong indications that the SEC, in 2020, will be ramping up its focus on cybersecurity practices in the financial services industry. We expect increased examination and enforcement activities concerning cybersecurity practices, including vendor management and controls.

2020 Examination Priorities: Information Security

OCIE’s 2020 Examination Priorities include information security practices for investment advisers, broker dealers, municipal advisers, and other registered entities that fall within the scope of OCIE’s programs. As in previous years, OCIE is prioritizing information security practices in the industry to bolster investor and financial market confidence given the potential risk if massive data breaches were to occur. Information security examinations for 2020 will, therefore, include the following:

OCIE also encourages market participants to engage with regulators and law enforcement to identify and address security risks like cyber-related attacks.

OCIE Cybersecurity and Resiliency Observations

This OCIE report, issued within the same month as the OCIE Priorities, discussed industry practices to manage and combat cybersecurity risk and to maintain operational resiliency that OCIE has observed through “thousands of examinations of broker-dealers, investment advisers, clearing agencies, national securities exchanges and other SEC registrants…” Here’s our take:

Recommended action

Given the prominence of information security in OCIE’s 2020 Examination Priorities, registered firms should ensure that their policies and procedures appropriately account for risks to customer records and to IT systems in accordance with Regulation S-P Rule 30. With regard to broker-dealers specifically, FINRA will play an important part in this trend toward greater regulatory oversight. Indeed, FINRA expects all firms to implement policies and procedures related to cybersecurity, but expects that firms will approach these challenges in accordance with their scale and model.

Finally, in light of OCIE’s report on industry practices, registered firms also should review their current procedures and processes to determine whether they are equivalent to or reasonably meet the goals of the practices described in the Report, and whether further enhancements are appropriate or necessary.

Baker McKenzie – Bernard (Brian) L. Hengesbaugh, Harry Valetk, Amy J. Greer, Jennifer L. Klass, A. Valerie Mirko, Peter K.M. Chan and Jerome Tomas

February 4 2020




GASB Issues Omnibus Statement Addressing Wide Range of Practice Issues.

Norwalk, CT, February 5, 2020 — The Governmental Accounting Standards Board (GASB) today issued guidance addressing various accounting and financial reporting issues identified during the implementation and application of certain GASB pronouncements.

The issues covered by GASB Statement No. 92, Omnibus 2020, include:

The requirements of Statement 92 that relate to the effective date of Statement 87 and its associated implementation guidance are effective upon issuance. Provisions related to the application of Statement 84 are effective for periods beginning after June 15, 2020. Provisions related to intra-entity transfers of assets and applicability of Statements 73 and 74 are effective for fiscal years beginning after June 15, 2020. The remaining requirements related to asset retirement obligations are effective for government acquisitions occurring in reporting periods beginning after June 15, 2020. Earlier application is encouraged and is permitted by topic.




GASB Outlook E-Newsletter Winter 2020.

Read the Newsletter.

02/04/20




MSRB Sets Date for Compliance with Interpretive Guidance on Underwriting Activities.

The MSRB set November 30, 2020 as the date for compliance with revised interpretive guidance concerning the conduct of municipal securities underwriting activities.

As previously covered, the MSRB updated the interpretive notice on MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”) to codify underwriters’ disclosures and focus on the risks and conflicts associated with their transactions. The MSRB stated that the interpretive notice is intended to reduce disclosure burdens on underwriters, as well as the burden on issuers to acknowledge and review disclosures of risks that are (i) unlikely to materialize, (ii) not unique to a particular transaction or underwriter where a syndicate is formed, or (iii) otherwise duplicative.

Cadwalader Wickersham & Taft LLP

February 3 2020




Issuers Oppose Broad Interim Disclosure.

Issuers are pushing back against analysts and regulators seeking more frequent financial disclosures and say they want to know what specifically investors and analysts are looking for in their finances.

At a Government Finance Officers Association debt committee meeting Monday, issuers aired concerns about being asked to provide financial documents on a more frequent basis. Some said groups like the National Federation of Municipal Analysts are asking for too much. The NFMA wants interim financials from municipalities in order to get a good idea of their fiscal direction.

“NFMA has asked for the moon with quarterly filings,” said Richard Li, a public debt specialist for the city of Milwaukee. “That’s a nonstarter for the industry as a whole.”

Securities and Exchange Commission Chair Jay Clayton has said he is focused on both more timely annual financial reporting and interim unaudited financial information to improve municipal disclosure. Some analysts also say issuers take too long to get out their audited financial information and want information on a more frequent basis.

Li believes the municipal market needs to start interim disclosure with “low hanging fruit” such as certain parts of an issuer’s budget that have volatile revenues such as sales tax and toll revenues.

“We need to have that discussion on how can we report it in a way that’s meaningful, which is why I’m thinking if you just isolate the volatile revenues or volatile expenditures, maybe that gives analysts most of what they need to know,” Li said.

If NFMA can agree that volatile revenue is something to report on a regular basis, then that would be helpful, Li said.

“Then I think we’re getting to the place where they’re getting useful information that the issuer should be tracking, but then you’re not requiring all issuers to be tracking those numbers for the sake of producing numbers,” Li said.

For some issuers that don’t enter into the market often, they wonder if they will have to construct their interim financials, meaning more staff to help them do that.

“If you are an infrequent issuer, you’re likely to have a smaller staff,” said LaShea Lofton, finance director for Dayton, Ohio. “So you’re trying to figure out, how do you balance the provision of additional information in existing staff capacities as well?”

The city posts on its website its budgeted to actual statements for its general fund on a monthly basis. Lofton stressed even with that disclosure that investors would need to look at overall trends to get the bigger picture of the city’s financials.

Finding a solution to interim disclosures cannot be one size fits all, issuers said at the GFOA meeting.

Some issuers believe that quarterly financial statements are not going to address what analysts or investors are looking for.

“Quarterly financial statements are thrown out there generically,” said Dave Erdman, capital finance director for the state of Wisconsin. “What’s needed is everyone stepping back and identifying what is needed.”

Quarterly financial statements take “significant time” for issuers to prepare, Erdman added and disclosure should be narrowed to specific information. Erdman is also concerned that audited financial statements will now take longer to produce if issuers also have to do interim financials.

“As it’s often said, governments hire police officers and firefighters,” Erdman said. “Governments don’t employ an army of accountants.”

GFOA formed a disclosure working group last year to explore solutions around the subject of timely disclosure. The group has a variety of muni market participants including NFMA, municipal advisors and bond lawyers among others.

Erdman hopes that in discussions stemming from the disclosure working group market participants can come to a solution without regulatory interaction. That could be through best practices and guidance from the working group and the SEC.

“I don’t think we have a broken problem here,” Erdman said. “It’s just a matter of polishing what we do have.”

The Bond Buyer

By Sarah Wynn

January 28 2020, 1:27pm EST




SEC Proposes Amendments to the Advertising and Solicitation Rules: Dechert

View pdf.

Dechert LLP – Mark D. Perlow, Russel G. Perkins, Michael L. Sherman, David A. Vaughan, Christine Ayako Schleppegrell, Aaron D. Withrow, Ashley N. Rodriguez and Teresa Jung

January 31 2020




SIFMA Makes Late Push to Limit SEC's Muni Advisor Order.

The Securities Industry and Financial Markets Association is making its own last push to limit or kill a Securities and Exchange Commission order that would grant non-dealer municipal advisors more latitude to facilitate private placements for their issuer clients.

SIFMA made its case in a letter to the commission dated Jan. 31 and provided to The Bond Buyer on Monday. It follows close behind a similar Bond Dealers of America letter, as dealers seek to restrict or potentially even completely kill the SEC’s proposal to allow non-dealer MAs to facilitate at least some private placements of municipal bonds. Dealers view such activity as properly performed by a registered broker-dealer acting as a placement agent, while MAs view it as consistent with their fiduciary duty under federal law.

“We believe the law is pretty clear on this issue,” Leslie Norwood, SIFMA’s head of municipals, said in an interview.

To qualify for an exemption from dealer registration under the SEC proposal, the MA would have to make written disclosures to an investor saying that it represents the interests of the issuer, not the investor. In return, the MA would have to get written acknowledgment of that disclosure from the investor.

The SEC opened a comment period on the proposal in October 2019. To qualify for an exemption from dealer registration under that proposal, the MA would also need to get written representation from the investor that they are capable of independently evaluating the investment risks of the transaction. Also the entire issuance would have to be placed with a single investor and the MA would have to continue to comply with regulations governing municipal advisors.

SIFMA’s nine-page letter is consistent with SIFMA’s previous comments, arguing that allowing muni advisors with a fiduciary duty to issuers but no duty to investors to sell securities on behalf of their clients would negatively impact market transparency and put investors at risk.

“If approved in its current form, the proposed exemptive order would allow municipal advisors to place municipal securities with a broad audience of purchasers, including state-registered investment advisers,” SIFMA told the SEC. “As discussed above, these placements could be made without the municipal advisors making even minimal disclosures or engaging in basic due diligence regarding the municipal securities being sold. A municipal advisor’s fiduciary duty to its issuer client would not undo or somehow cure these lapses in municipal securities market transparency and information disclosure.”

Norwood said she believes the SEC is looking for ways to narrow the proposal, and while SIFMA believes the order is not appropriate it provided several suggestions along those lines in an effort to be productive in its discussions with the commission.

The suggestions, made in an appendix, include among other things a requirement that the bonds be investment-grade or are on parity with outstanding bonds of the issuer that are investment grade. They would need to be subject to continuing disclosure requirements and be sold in one tranche to one investor.

SIFMA also wants the offerings to be capped at $1 million, made only to certain “qualified providers” such as a bank, and for the municipal advisor to have to receive a statement from the buyer that the investor intends to hold the bonds until maturity or redemption.

SIFMA further believes that all applicable Municipal Securities Rulemaking Board rules be appropriately amended prior to the effective date of any exemptive order. Such an undertaking would almost certainly take years.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 02/03/20 01:14 PM EST




Dealer Groups Want the SEC to Approve FIMSAC Recommendation.

Both major securities dealer groups have asked the Securities and Exchange Commission to approve a recommendation to allow investment advisers affiliated with broker-dealers to offer and sell negotiated new issue muni bonds during the order period that the dealer also participates in as a syndicate manager or syndicate member.

The Fixed Income Market Structure Advisory Committee’s Municipal Securities Transparency Subcommittee recommended last year to change its rule under section 206(3) of the Investment Advisers Act of 1940, amid what broker-dealers say is a sustained trend toward an increase in advisory accounts.

“The effect of these changed circumstances will be an increased demand for relief from Section 206(3)’s disclosure and consent requirements, particularly during times of market stress,” said the Securities Industry and Financial Markets Association in its letter released on Thursday.

FIMSAC is recommending the SEC consider a rule that permits a broker-dealer that negotiates and underwrites a new-issue muni bond or is a co-manager or member of a syndicate to meet the requirements under section 206(3) of the Advisers Act when acting in a principal capacity to sell new-issue muni bonds during the negotiated order period.

Under current rules, a broker-dealer that negotiates and underwrites a new issue muni bond or is a co-manager or member of a selling group can’t sell bonds in the offering to its advisory clients without meeting the disclosure and consent requirements of the Advisers Act.

Dealer groups say advisers have to make certain written disclosures and obtain consent from a client each time the adviser and client want to engage in a principal transaction.

“The process of making disclosures and obtaining consent for each covered principal transaction is cumbersome and impractical,” Mike Nicholas, Bond Dealers of America CEO, said in his June 2019 letter. “Consequently, many RIAs (registered investment advisers) simply refrain from engaging in covered principal transactions with advisory clients.”

Current rules are causing clients to lack access to the bonds that meet their investment criteria or only have access to the bonds in the secondary market at potentially higher prices, FIMSAC said.

According to FIMSAC, this has resulted in few or none of the underwriting dealer’s advisory clients buying bonds in initial offerings.

“Advisory clients that wish to buy these bonds will buy them after the deal is closed and the bonds are free to trade — typically at a price higher than the original offer price,” FIMSAC wrote.

“The goal here is to provide retail investors with access to as broad a swath of the municipal new issue market as possible,” said Michael Decker, consultant to BDA.

Decker said there has been a shortage of bonds available to retail, without much tax-exempt inventory and a portion of the market moving to private placements.

The SEC did have a temporary rule in 2007, Rule 206(3)-3T, that permitted advisers who were also registered as broker-dealers and who offered non-discretionary advisory accounts to engage in certain principal transactions with their advisory customers without requiring transaction-by-transaction, written disclosure and consent.

Clients make trading decisions in a non-discretionary account, while discretionary accounts give dealers freedom to make decisions for their clients.

Rule 206(3)-3T was extended several times before it sunsetted in December 2016.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/10/20 11:28 AM EST




MSRB Seeks Comment on Potential Changes to Board Governance Rule.

Washington, DC – Following a comprehensive review by its Governance Review Special Committee, the Municipal Securities Rulemaking Board (MSRB) today published a request for comment on potential amendments to its rule establishing the parameters for composition and selection of its Board of Directors.

The proposed amendments to MSRB Rule A-3 include tightening the independence standard required of public representatives on the Board by requiring a minimum of five years of separation from a regulated entity before an individual would be eligible to serve as a public member.

The proposal also includes reducing the size of the Board to 15 members, with eight members representing the public and seven representing regulated entities. To facilitate the possible transition to the new Board size, the MSRB currently is not seeking applicants for new Board members for Fiscal Year 2021.

“The MSRB is uniquely positioned as a self-regulatory organization to bring together expertise from across the market to effectively and efficiently safeguard the integrity of the $4 trillion municipal securities market, which is responsible for the bulk of our nation’s infrastructure,” said MSRB Board Chair Ed Sisk.

MSRB Governance Review Special Committee Chair Bob Brown said, “As an independent, majority-public Board, we must continue to hold ourselves to the highest standards of integrity to maintain the confidence of municipal securities investors and issuers.”

The MSRB’s proposal addresses many of the issues raised by Senator Kennedy (R-LA) and co-sponsors Senators Warren (D-MA) and Jones (D-AL) in their proposed legislation, S. 1236, the Municipal Securities Rulemaking Board Reform Act of 2019, as well as recommendations identified as a result of the Special Committee’s review and assessment of the Board’s governance practices. The MSRB is subject to oversight by both Congress and the Securities and Exchange Commission.

The MSRB established a 60-day comment period for the proposal, with comments due by March 30, 2020. After considering comments on the proposal, the MSRB would file any proposed changes to its rules with the SEC for approval.

Date: January 28, 2020

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




Municipal Securities Regulation Enforcement: Year in Review 2019 and Look Ahead 2020

Read the report.

Ballard Spahr LLP | Jan. 22




MSRB Advances Governance Proposal at Quarterly Board Meeting.

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met on January 22-23, 2020 for its quarterly in-person meeting, where it voted to seek public comment on recommendations from its Governance Review Special Committee.

The Board established a special committee at the start of Fiscal Year 2020 to conduct a comprehensive review of the MSRB’s governance practices, including potential improvements to the Board’s structure and composition.

“The structure of the MSRB’s Board of Directors leverages the expertise of diverse municipal market participants to effectively and efficiently protect investors and issuers,” said MSRB Board Chair Ed Sisk. “We know there is room for continuous improvement, and we set out this fiscal year to carefully scrutinize our governance practices and consider input from policymakers and other stakeholders.”

The potential amendments to MSRB Rule A-3, which will be released for a 60-day comment period, include tightening the independence standard required of public representatives on the Board and reducing the size of the Board.

Market Regulation

The Board also plans to seek public comment on a retrospective rule review of MSRB Rule G-27, on supervision, to align the rule with the Financial Industry Regulatory Authority’s (FINRA) supervision rules. Rule G-27 was one of the rules prioritized for review by the Board at its meeting in July 2019.

In another action to promote regulatory consistency, the Board voted to file proposed amendments to its rules concerning suitability, gifts and gratuities, and books and records to facilitate implementation of the Securities and Exchange Commission’s (SEC) Regulation Best Interest (“Reg BI”). The MSRB has coordinated closely with the SEC and FINRA to mitigate any potential confusion over which standards will apply with respect to recommendations to retail customers.

The Board discussed public comments submitted to the SEC on a proposed order to grant conditional exemptive relief, which would, if granted by the SEC, permit municipal advisors to engage in certain limited activities in connection with the direct placement of municipal securities without registering as a broker. The Board submitted a comment letter on the proposal.

Market Transparency

The Board continued its review of comments received on its proposal, filed with the SEC in November 2019, to enhance the Electronic Municipal Market Access (EMMA®) website with a “submission calculator” to more prominently display existing information on the timing of issuers’ annual and audited financial disclosures. The MSRB will continue to review input from commenters and will publish a letter responding to comments in advance of SEC action on the proposal.

The Board received an update on the enterprise-scale migration of MSRB market transparency systems and data to the cloud, which aims to position the MSRB to evolve its EMMA system to facilitate the use of municipal market data for dynamic comparison, regulatory compliance and deeper market analysis.

“Our long-term strategic goal is to optimize the utility of market data for our stakeholders and enhance our own capabilities to effectively oversee the market,” Sisk said. “The Board’s investment in cloud technology and system modernization brings us much closer to that goal.”

Other Business

During its meeting, the Board met with SEC Chairman Jay Clayton and FINRA CEO Robert Cook to discuss regulatory coordination and oversight of the municipal securities market.

As part of its stewardship of financial resources, the Board reviewed its reserves in accordance with the organization’s funding policy.

Date: January 24, 2020

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




Nacha Takes Position of “No Enforcement” With Respect to Government Entities on "Supplementing Data Security Requirements"

NASACT, in conjunction with the Government Finance Officers Association and the National Association of State Treasurers, recently responded to Nacha’s upcoming rule, Supplementing Data Security Requirements.

Although NASACT, NAST and GFOA are supportive of the enhanced security provisions outlined in the rule, state and local governments expressed concerns about the implementation deadline of June 30, 2020, for account information used in states’ Origination of ACH entries to be rendered unreadable when it is stored electronically. The government groups requested a one-year extension to the implementation date. Read the full letter.

On January 21, Nacha responded and will be taking a position of “no enforcement” of the new data security rule through June 30, 2021, with respect to government entities that are working in good faith toward implementation and compliance, but that require additional time. With this position of no enforcement, Nacha thinks that government entities can continue to work towards compliance without interruption to their existing ACH payment processes.




Financial Accounting Foundation Announces Search for New Member of Governmental Accounting Standards Board.

Press Release.

[01/23/20]




MSRB Outlines 2019 Regulatory and Strategic Initiatives.

The MSRB outlined significant regulatory and strategic initiatives undertaken in 2019.

In its 2019 Annual Report, the MSRB, among other things:

January 10 2020

Cadwalader Wickersham & Taft LLP




SEC Announces 2020 Exam Priorities of the Office of Compliance Inspections and Examinations.

On January 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced the release of its 2020 Examination Priorities. The annual release of exam priorities provides transparency into the risk-based examination process and lists areas that pose current and potential risks to investors. OCIE’s 2020 examination priorities include:

January 15 2020

Buckley LLP




OCIE Announces Examination Priorities for 2020, Emphasizing Emerging Trends, Technologies, and Compliance with New Regulation Best Interest.

On Monday, January 7, 2020, the Office of Compliance Inspections and Examinations (OCIE), the audit and examination arm of the U.S. Securities and Exchange Commission (SEC), announced its examination priorities for 2020, which include an emphasis on evolving financial technologies and innovative investment instruments. OCIE will also work with registrants to help them comply with new Regulation Best Interest (Reg BI), click here to read more. The announced priorities are summarized below.

Protection of Retail Investors

OCIE’s number one priority, as it has been in past years, is to protect retail investors. Broker-dealers trading in microcap securities (companies with a market capitalization less than $250 million) in particular will continue to face intense scrutiny of their compliance and supervision practices, including compliance with Section 5, Reg SHO “locate” requirement, and Rule 15c-211; registered representative hiring practices; and implementation of proper procedures and follow-through for required SAR filings. In 2020, OCIE has indicated interest in a few new areas:

Information Security

For 2020, OCIE will specifically inspect network storage devices, third-party vendors, and cloud-based storage and review the firm’s internal policies and governance practices respecting information and data security.

Financial Technology

The OCIE acknowledges the rapid innovation in financial technology in 2020 and its intention to stay apprised of new developments and their impact on investors. OCIE continues to be concerned with digital assets like Bitcoin and other digital- or blockchain-based assets. OCIE will observe RIA policies and practices surrounding “robo-advisers,” or automated tools used to recommend investments to clients. OCIE will examine the configuration of, and internal procedures and practices related to, algorithmic trading by broker-dealers.

Anti-Money Laundering

While AML compliance has always been a significant component of OCIE examinations, examiners will place particular importance on a firm’s compliance with the AML programming requirements of the Bank Secrecy Act, specifically including how it identifies customers, monitors for suspicious activity, performs due diligence, and conducts independent tests of its own AML programs. In addition, OCIE will continue to examine whether broker-dealers and other registrants are filing suspicious activity reports (SARs) when required.

Market Infrastructure, FINRA, and MSRB

As in past years, OCIE will conduct examinations of registrants that are critical to market infrastructure, including SEC SIFMU clearing agencies, FINRA, and MSRB, and will review their respective policies, procedures, and controls.

Contact the experts on Michael Best’s Securities and Capital Markets team for more information about broker-dealer and registered investment adviser compliance with securities laws, preparation for OCIE examinations, and understanding and compliance with new Reg BI.

by Betsy T. Voter, Kevin C. Timken, James R. Kruse and Sam C. Johnston

January 14 2020

Michael Best & Friedrich LLP




Dealer Groups Want the SEC to Approve FIMSAC Recommendation.

Both major securities dealer groups have asked the Securities and Exchange Commission to approve a recommendation to allow investment advisers affiliated with broker-dealers to offer and sell negotiated new issue muni bonds during the order period that the dealer also participates in as a syndicate manager or syndicate member.

The Fixed Income Market Structure Advisory Committee’s Municipal Securities Transparency Subcommittee recommended last year to change its rule under section 206(3) of the Investment Advisers Act of 1940, amid what broker-dealers say is a sustained trend toward an increase in advisory accounts.

“The effect of these changed circumstances will be an increased demand for relief from Section 206(3)’s disclosure and consent requirements, particularly during times of market stress,” said the Securities Industry and Financial Markets Association in its letter released on Thursday.

FIMSAC is recommending the SEC consider a rule that permits a broker-dealer that negotiates and underwrites a new-issue muni bond or is a co-manager or member of a syndicate to meet the requirements under section 206(3) of the Advisers Act when acting in a principal capacity to sell new-issue muni bonds during the negotiated order period.

Under current rules, a broker-dealer that negotiates and underwrites a new issue muni bond or is a co-manager or member of a selling group can’t sell bonds in the offering to its advisory clients without meeting the disclosure and consent requirements of the Advisers Act.

Dealer groups say advisers have to make certain written disclosures and obtain consent from a client each time the adviser and client want to engage in a principal transaction.

“The process of making disclosures and obtaining consent for each covered principal transaction is cumbersome and impractical,” Mike Nicholas, Bond Dealers of America CEO, said in his June 2019 letter. “Consequently, many RIAs (registered investment advisers) simply refrain from engaging in covered principal transactions with advisory clients.”

Current rules are causing clients to lack access to the bonds that meet their investment criteria or only have access to the bonds in the secondary market at potentially higher prices, FIMSAC said.

According to FIMSAC, this has resulted in few or none of the underwriting dealer’s advisory clients buying bonds in initial offerings.

“Advisory clients that wish to buy these bonds will buy them after the deal is closed and the bonds are free to trade — typically at a price higher than the original offer price,” FIMSAC wrote.

“The goal here is to provide retail investors with access to as broad a swath of the municipal new issue market as possible,” said Michael Decker, consultant to BDA.

Decker said there has been a shortage of bonds available to retail, without much tax-exempt inventory and a portion of the market moving to private placements.

The SEC did have a temporary rule in 2007, Rule 206(3)-3T, that permitted advisers who were also registered as broker-dealers and who offered non-discretionary advisory accounts to engage in certain principal transactions with their advisory customers without requiring transaction-by-transaction, written disclosure and consent.

Clients make trading decisions in a non-discretionary account, while discretionary accounts give dealers freedom to make decisions for their clients.

Rule 206(3)-3T was extended several times before it sunsetted in December 2016.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/10/20 11:28 AM EST




Where SEC Examinations Will Focus in 2020.

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations plans to home in on municipal advisor requirements and broker-dealers’ obligations while keeping an eye on self-regulatory organizations in 2020.

OCIE laid out its 2020 examination priorities on Tuesday with an on-trend emphasis of protecting retail investors. The report touched on a few muni market issues of focus for the new year amid a larger focus on other fixed-income markets.

SEC Chair Jay Clayton’s focus has been on retail investor protection and he has taken considerable interest in municipal securities.

“OCIE’s 2020 examination priorities identify key areas of risk, both existing and emerging, that we expect self-regulatory organizations (SROs), clearing firms, investment advisers and other market participants to identify and mitigate,” Clayton said.

OCIE’s examinations will focus on the conduct of MAs when faced with conflicts of interest and also compliance with Municipal Securities Rulemaking Board Rule G-40 on advertisements, which went into effect in August 2019. Rule G-40 is a milestone because it formally regulates MA advertising for the first time.

Examinations will also focus on whether MAs have registered, as required by law.

The National Association of Municipal Advisors has requested that OCIE to focus on non-registered MAs previously.

“In the past, we have also asked OCIE to focus on non-registered MAs, as we believe this is still a problem in the marketplace,” said Susan Gaffney, NAMA executive director. “We hope that OCIE will continue to address this important issue as part of their work plan.”

As for broker-dealers, OCIE plans to examine issues relating to the preparation and implementation of recent rulemaking, such as Regulation Best Interest and other rules. RegBI will strengthen the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail investor. The rule becomes effective in June 2020.

“OCIE recognizes that these new rules will require various market participants to make changes to their operations, including to required disclosures, marketing materials and compliance programs,” OCIE wrote in its report.

OCIE will also examine broker-dealer activity in municipal and corporate bonds for compliance with best execution obligations, including fair pricing, markups and markdowns and commissions. Examiners will look at retail disclosures relating to markups and markdowns as well.

MSRB rules require dealers to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers.

Some muni market groups hope OCIE will aim for fairness in examinations between broker-dealers and MAs.

The Securities Industry and Financial Markets Association asked OCIE to examine both groups equally.

“We have been actively engaged in many of the areas OCIE highlights as priorities, and we continue to advocate for a level playing field for municipal securities broker-dealers and the non-dealer municipal advisor community,” said Leslie Norwood, managing director, associate general counsel and head of municipals at SIFMA. “We would encourage OCIE to examine both groups equally.”

OCIE also said it will focus on high-risk products such as private placements, an area of controversy between dealers and non-dealer muni advisors. The SEC proposed an MA exemptive order in late 2019, which would allow for MAs to be involved in some private placement activities without registering as a broker-dealer, a move strongly opposed by dealer firms.

The Bond Dealers of America’s highest priority at the SEC is the MA exemptive order.

“The proposal is misguided and goes against decades of established regulatory treatment of private placements,” said Mike Nicholas, BDA CEO. “Soliciting investors is a broker-dealer activity, clearly and specifically.”

OCIE will continue to examine self-regulatory organizations like the MSRB and evaluate the effectiveness of its operations and internal policies, procedures and controls.

The MSRB declined to comment.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/08/20 01:11 PM EST




Joel M. Black Appointed Chair of the Governmental Accounting Standards Board.

Read the Press Release.

Business Wire | January 7, 2020




States Respond to GASB Chair Appointment: NASACT

The National Association of State Auditors, Comptrollers and Treasurers (NASACT), the National Association of State Treasurers (NAST), and the Government Finance Officers Association (GFOA) understand that on Friday, December 27, the Financial Accounting Foundation (FAF) appointed an individual from the private sector to serve as the next chair of the Governmental Accounting Standards Board (GASB). We wish to congratulate Mr. Joel Black and recognize that he is highly qualified to serve as a representative of the public accounting profession (CPA firms).

Nonetheless, we are duly concerned by this historic and unprecedented decision by FAF. For the first time in GASB’s 35-year history, the chair of the GASB will not be a representative from state or local government. All previous GASB chairs have been state auditors. Importantly, state auditors will now be left without any representation on the GASB. This fundamentally compromises the diversity of the GASB. GASB sets generally accepted accounting principles (GAAP) for state and local governments. However, states themselves – often state auditors – have the sole responsibility to determine accounting and financial reporting standards for their state and local jurisdictions. Thus, state support of GAAP is essential for its continued and increased widespread use.

NASACT, together with its affiliate the National State Auditors Association (NSAA), NAST, and GFOA will consult with other government organizations to develop a response to the FAF on its unilateral change to the long-standing composition of the GASB and determine an appropriate path forward.




MSRB Publishes 2019 Annual Report and Audited Financial Statements.

Washington, DC – As the self-regulatory organization (SRO) responsible for safeguarding the integrity of the approximately $4 trillion municipal securities market, the Municipal Securities Rulemaking Board (MSRB) each year publishes an annual report highlighting the previous fiscal year’s initiatives in support of a fair and efficient market.

The MSRB’s 2019 annual report details the organization’s commitment to engaging with stakeholders to advance regulatory and strategic initiatives last year. Highlights included reviewing prior rules to ensure their continued effectiveness, making meaningful enhancements to the usability of its free Electronic Municipal Market Access (EMMA®) website, and broadening access to educational resources for all municipal market participants.

“We have long recognized that engaging with stakeholders outside the boardroom can inform our priorities and shed light on the impact of MSRB’s rules, resources and activities on market participants,” said Ed Sisk, Chair of the MSRB Board of Directors. “Stakeholder feedback made each of the MSRB’s 2019 initiatives more effective, efficient and impactful.”

Among its 2019 regulatory activities, the MSRB formalized its approach for reviewing and seeking comment on potential updates to its existing rules. The MSRB also completed the pilot period for a new professional qualification examination for municipal advisor principals and published 10 new compliance resources for municipal advisors and municipal securities dealers.

The MSRB last year made notable enhancements to its EMMA website, including an improved keyword search function and streamlined continuing disclosure submission process, which were informed by user feedback and focus groups.

In addition, the MSRB increased availability of market education by making available free of charge all courses on MuniEdPro® and launching MSRB Podcast.

The annual report includes audited annual financial statements for the fiscal year that ended September 30, 2019, which help ensure transparency around how the organization manages its resources and financial reserves.

“The Board in 2019 conducted an extensive review of the level of financial reserves needed by the MSRB to operate under all market conditions,” Sisk said. “The review resulted in a new construct for establishing reserve levels and several other steps that brought us closer to our goal of a more equitable and responsible allocation of fees among regulated entities.”




Member Alert: GFOA Priorities See Action on Capitol Hill

In the final days of the first session of the 116th Congress, two GFOA legislative priorities saw action as party leaders attempted to navigate a narrow timeframe in which they could advance bills before adjourning for the holidays. The first priority, full repeal of the 40 percent excise tax on employer-sponsored health care (also known as the Cadillac Tax) managed to find itself on one of the last legislative vehicles moving in 2019. The second, repealing the cap on the deduction for state and local taxes (SALT), will potentially see a floor vote in the House before the end of the week.

Cadillac Tax
On the first priority, GFOA supports full repeal of the Cadillac Tax and has called on Congress to take action since it hinders one of the primary tools to attract and retain public employees – health benefits. Congress has delayed implementation of the tax twice before. But GFOA and other stakeholders have pushed for full repeal of the tax because it is flawed in design and does not actually address rising health care costs. Instead, it penalizes the very initiatives implemented by employers to ensure adequate health care benefits to employees while also attempting to mitigate health care costs. GFOA recently joined a nationwide letter signed by more than 1,000 stakeholders calling on Congress to act.

Momentum to repeal the Cadillac Tax received a major boost in July when the House of Representatives passed a stand-alone bill by a strong bipartisan vote of 419-6. As the final legislative days of 2019 wound down, repeal champions on both sides of the aisle made the case for its inclusion among the select policy riders to the final spending deal that set federal funding levels for the remainder of FY 2020. Language to repeal the Cadillac Tax was ultimately added in the proposed spending package (see page 1481) released on December 16. Both chambers will be voting on the omnibus bill in the coming days, therefore GFOA members are encouraged to reach out to their delegation members and express support for repealing the tax.

SALT Deduction
Regarding the second priority, a bill addressing limits on the amount of state and local taxes an individual can deduct from their federal income taxes could be ready for a floor vote this week. As of 2018, the Tax Cut and Jobs Act of 2017 (TCJA) placed a $10,000 cap on the SALT deduction for taxes paid by individuals who itemize their taxes. This provision of the TCJA was opposed by representatives of state and local government, and a conversation over raising or eliminating the cap started shortly after the new law was enacted.

For well over a century, there was no limit to the amounts available for the SALT deduction under the federal tax code. The deduction is a key component of our system of federalism and preserves the ability of state and local governments to raise revenues and to invest in services for their communities. By capping the SALT deduction, some state and local governments have been compelled to reduce services or rely more heavily on other tax revenue sources.

The Restoring Tax Fairness for States and Localities Act (H.R. 5377) doubles the SALT deduction to $20,000 for 2019 and removes the cap for 2020 and 2021 while bringing back the top 39.6% income tax bracket.

GFOA has long opposed the elimination, in whole or in part, of the deductibility provision of the federal income tax code. GFOA members are encouraged to reach out to their delegation members and express support to suspend the cap on the SALT deduction. For the GFOA SALT Resource Center, click here.




SEC to Focus on Issuer Disclosure, Municipal Advisors in 2020.

Enforcers will have a strong focus on municipal advisor rules and timely issuer financial disclosure in 2020.

Securities lawyers and muni market participants told The Bond Buyer where the Securities and Exchange Commission could be headed in the next year. One thing is for sure, sources agreed — the SEC will continue being active in the municipal advisor space.

“Speaking generally about enforcement, I think you will continue to see us being very active in the MA space,” LeeAnn Gaunt, chief of the SEC’s Public Finance Abuse Unit, said in an email. “We’re primarily focused on situations involving breach of fiduciary duty, but we are also prepared to enforce the MA registration and professional qualification requirements because they are so important to the overall MA regulatory regime.”

The past year saw a few cases involving MAs, including one involving troubled Harvey, Illinois. The SEC alleged that Mississippi-based municipal advisor Comer Capital Group LLC and its managing partner, Brandon L. Comer, 37, failed to protect its client in a January 2015, $6 million bond offering for the Harvey Public Library District. Comer has denied wrongdoing.

The SEC also plans to focus on issuer disclosure — a topic SEC Chair Jay Clayton has spoken publicly about several times.

“From an enforcement perspective, issuers who violate the anti-fraud provisions in connection with their disclosures are a very serious concern and we’ll continue to focus on those kinds of violations,” Gaunt said.

The SEC plans to also continue its focus on broker-dealer abuses, including abuses of the retail order period in new offerings, Gaunt said. The SEC considers abusive practices in the retail order period to be serious because of the direct effect on retail investors, whom the SEC prioritizes protecting.

Most of the SEC’s muni securities cases involve conduct that poses a risk of harm to Main Street investors, such as issuer disclosure and broker-dealer cases as well as misconduct by MAs, Gaunt said.

Conflicts of interest will continue to be a focus for the SEC, said Peter Chan, a partner at Baker McKenzie and former SEC enforcement lawyer.

“I think a unifying theme is that any time the staff sees an underlying narrative — conflicts of interest where appropriate benefits or interest affecting people’s decisions — that will continue to drive the staff to focus more on those areas,” Chan said.

Chan referenced the SEC vs Comer Capital and Brandon Comer case. The situation arose from market contamination caused by a cash-strapped Chicago suburb, Harvey, that defaulted on millions of dollars of bonds and was the subject of a 2014 SEC enforcement action.

The SEC alleged that Comer Capital and Comer’s actions led to the district receiving a price for its bonds that was not fair and reasonable, causing the borrowing costs to be substantially higher than they should have been.

In the SEC’s complaint against Comer, the staff spent a good amount of time discussing the conflict of interest between the municipal advisor and the underwriter, Chan said.

Comer and Comer Capital allegedly did not give advice on selecting an experienced underwriter and did not find appropriate pricing for the bonds. IFS Securities, the underwriter, allegedly did not act with reasonable care and sold the bonds to another broker-dealer at a price that was not fair and reasonable, the SEC said. IFS recommended Comer as an MA and the district hired them without conducting other MA interviews.

The SEC staff could have just focused on Comer’s alleged failure to do its job, Chan said, but they spent quite a bit of time explaining the narrative as to how Comer got selected.

“As the staff described it, because the municipal advisor had allegedly asked the underwriter to intervene and get them higher fees, that created a conflict of interest to the point where the MA owed the underwriter,” Chan said. “I think that’s a big part of the staff’s ongoing focus.”

Chan also predicts an uptick in municipal advisor cases in 2020 due to the continuance of MA examinations. Those examinations can lead to referrals for enforcement, Chan said.

“Now that there has been a passage of time for the examiners to have examined a number of municipal advisors, my suspicion is that that will also naturally lead to more data that results in referrals of enforcement,” Chan said.

The SEC has also shown concern about transparency in the pricing of bonds, which Chan said will continue into 2020.

Some MA firms have not been examined at all yet, said Michael Decker, consultant to Bond Dealers of America.

“We’ve got this robust regulatory scheme in place for municipal advisors, so let’s make sure that the MA community is in compliance,” Decker said.

MAs now have an increased awareness in the formality of working in a regulatory and regulated environment and what that means for them, said Leo Karwejna, managing director and chief compliance officer at PFM.

The market is now seeing more well-developed enforcement actions, so it’s not cases like an MA forgot to register, but is now focused on fiduciary duties, Karwejna said.

In the time since the MA regulatory groundwork in 2014, the SEC and the Financial Industry Regulatory Authority have become more conversant when examining MAs.

“This isn’t just about having them color in between the lines, it’s more focused on now, did you use the right punctuation and pronunciation,” Karwejna said.

An upcoming election could change the SEC’s dynamic on enforcement cases. The SEC has been criticized in the past for bringing many cases against small issuers and there was a political concern that a new MA regime would cause the SEC to beat up on “small enough to jail parties because so many MAs are so small,” said Dave Sanchez, senior counsel at Norton Rose Fulbright US LLP.

Next year could bring political pressure to end this practice.

“Depending on what happens in the next election, you may see political pressure on the SEC to stop bringing these kinds of enforcement cases that make up the majority of their playbook that are just against small issuers and small entities,” Sanchez said.

If there is a Democratic president or a Democratic Congress, more pressure could be applied.

“(Democrats) want to see the SEC use their resources in a way that is more meaningful to the market versus again, beating up on small players,” Sanchez said.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/02/20 09:31 AM EST




FINRA Hits Merrill Over Muni Sales.

The firm made 105 customer transactions in a municipal security at amount lower than the minimum denomination, FINRA says.

The Financial Industry Regulatory Authority fined and censured Merrill Lynch over alleged violations of two Municipal Securities Rulemaking Board Rules concerning municipal security minimum denominations, according to FINRA.

FINRA claimed Merrill violated MSRBG-15(f), which prohibits a broker, dealer or municipal securities dealer from effecting a customer transaction in municipal securities in an amount lower than the issue’s minimum denomination, and MSRB Rule G-47, which requires customers to be informed when that happens.

Without admitting or denying the findings, Merrill Lynch signed a FINRA letter of acceptance, waiver and consent Dec. 17 in which the firm agreed to the censure and a $150,000 fine that included $130,000 for violating Rule G-15(f) and $20,000 for violating Rule G-47. FINRA accepted the letter Friday.

From July 1, 2015 through June 30, 2018, Merrill “executed 105 customer transactions in a municipal security in an amount lower than the issue’s minimum denomination in violation of” Rule G-15(f), according to the FINRA AWC letter.

In 20 of those instances, Merrill “failed to inform its customer at the time of trade that the municipal securities transaction was in an amount below the issue’s minimum denomination,” violating Rule G-47, according to the letter.

Merrill declined to comment Monday. However, according the letter, the firm “provided evidence that it offered to rescind the transactions to all the firm’s customers that continued to hold the position.”

Municipal securities issuers establish minimum denominations for bonds at issuance to “help target the sale to an appropriate category of investors or reduce administrative costs, among other reasons,” MSRB points out at its website.

“In some cases, the use of minimum denominations is set by state or local law,” it notes, adding it “has no rulemaking authority over issuers, including with respect to the use of minimum denominations.”

However, “to help to ensure that municipal securities dealers observe minimum denominations in the official statement of a bond issue, the MSRB in 2002 established a rule that generally prohibits dealers from effecting a municipal securities transaction with a customer in an amount below the minimum denomination of the issue,” it says.

ThinkAdvisor

By Jeff Berman | January 06, 2020 at 03:03 PM




Muni Industry Awaits Final Reg on Libor Transition in 2020.

Municipal bond market leaders say their top wish for tax regulation in 2020 is for Treasury and the Internal Revenue Service to finalize their proposed transition rules for replacing Libor.

“Our organization has been in general support of the regulations,” said Emily Brock, director of the federal liaison center for the Government Finance Officers Association, noting her group’s comment letter to Treasury emphasized that issuers should be allowed to choose their new benchmark and make a safe transition.

In GFOA’s official comment letter, the group is seeking an additional safe harbor to the substantial equivalence test.

“That’s generally our top regulatory issue,” Brock said.

It’s also the top regulatory issue for the National Association of Bond Lawyers, according to NABL President Richard Moore, a tax partner at Orrick Herrington & Sutcliffe in San Francisco.

NABL submitted a 22-page comment letter to Treasury to ensure that the tax-exempt bond market receives consideration.

Libor, an acronym for the London Inter Bank Offered Rate, is being phased out at the recommendation of the Alternative Reference Rates Committee created by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York.

The new alternative reference rates cited by Treasury and the IRS include the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and the Federal Funds Rate.

Treasury is including all other interbank offered rates, or IBORs in other countries, including Switzerland, Japan and the European Union.

All other tax-related regulatory initiatives are expected to remain on hold until a successor is hired to replace John Cross as the Treasury Department official involved in tax exempt bonds. His former position as associate tax legislative counsel at the Office of Tax Policy is not a political appointment, but there’s no public word yet on when it will be filled.

Once a successor to Cross is appointed, NABL is hoping Treasury and the IRS can finalize a reissuance regulation.

NABL also has submitted comments on Revenue Procedure 2018-26 to clarify and simplify the remedial action rules.

Another item on NABL’s wishlist is tweaks to Treasury Regulation 1.141-6 on allocation in accounting which was adopted in 2015. NABL submitted a comment letter to make it easier for issuers to navigate that framework.

And NABL is hoping the IRS responds to its letter seeking a reduction in the fees charged for private letter rulings. The number of PLRs has dropped as the fees have climbed. There were only four of the rulings in 2018 when the fee rose to $28,300 from 16 in 2008 when it was only $11,500.

“We haven’t gotten any feedback on that yet,” said Moore. “We would be supportive of anything that would lessen the cost of giving state and local issuers to the private letter ruling process.”

On the enforcement front, the Internal Revenue Service has announced its 2020 fiscal year compliance strategy will focus on three areas.

One will be jail bonds in respect to whether federal government use of locally built facilities or management contracts with localities cause excessive private business use.

The second is whether sinking fund over-funding causes the tax credit bonds to be arbitrage bonds.

And last area is whether variable rate bonds comply with the rebate and yield restriction rules under Internal Revenue Code Section 148.

NABL’s president said, “We appreciate the targeted nature of their audit initiatives and hope that when they audit bonds, they keep the audits focused on those points as possible in order to minimize the issuer’s burden and expense.”

The Oct. 16 IRS announcement of its audit priorities marked the second consecutive year it has published its compliance strategy online early in the fiscal year.

This has allowed bond attorneys to advise their clients whether a new audit notice is part of a wider initiative.

The IRS planned to close 500 audits in its Tax Exempt Bonds office 2019 fiscal year that ended Sept. 30 and is expected to conduct roughly that number in the current fiscal year.

In November, longtime IRS employee Allyson Belsome began serving as senior manager overseeing the Office of Tax Exempt Bonds after it was separated from the Office of Indian Tribal Government. The two offices had been combined in 2017.

Belsome, who is based in the suburbs of Chicago, most recently served as senior manager of ITG/TEB Technical which generates computer-driven guidance for selecting priorities for field audits.

Belsome already oversaw the Voluntary Closing Agreement Program, compliance reviews, technical assistance to agents, direct pay bonds and an internal computer system known as K-Net.

The VCAP program could be the subject of an overhaul in the coming year. The IRS priority guidance for 2019-2020 includes making improvements in the self-correction program for tax advantaged bonds and the IRS Advisory Council released a report in November suggesting an expansion of VCAP to provide two simpler options.

The VCAP program has seen a dramatic drop in filings over the last several years falling to 27 cases in fiscal 2018 from 44 in 2017, 67 in 2016 and 122 in 2015.

“The written VCAP program can necessitate an issuer spending between $20,000 and $60,000 or more on attorney’s fees,” the IRS Advisory Council said in its report. “Over 49% of VCAP cases over the last five years took longer than 180 days to resolve and over 75% of cases took 90 days or more for resolution.”

The new level 1 self-correction suggested in the report wouldn’t require IRS approval for certain insubstantial and unintentional violations provided a written notice is provided.

“The notice should be simple, briefly identifying the applicable bond issue, the error type, the remediation taken, and the existence of issuer corrective actions to monitor and prevent reoccurrence of the error,” the report said. “We strongly suggest that the IRS provide the form to be filed for the notice.”

A level 1 response would be made by the IRS within two weeks.

The council gave as an example of a level 1 filing the failure by an issuer to invest in zero interest State and Local Government Securities known as SLGS to reduce the yield on an escrow investment. The council said the remediation “might be the appropriate yield reduction payment.”

A level 2 self-correction also would involve a streamlined process with a “normally automatic IRS confirmation letter, without necessarily an IRS review, that the violation is considered corrected if the issuer has satisfied specified criteria,” the report said.

“We recommend that the submission for level 2 be simple, utilizing a form that is, although streamlined, more lengthy than the level 1 postcard-type notice suggested,” said the report.

If there is a level 2 review, the council recommends it be conducted by a Tax Exempt Bonds specialist without other layers of review under normal circumstances.

Confirmation letters should ordinarily be received within two weeks, but it should not be considered a voluntary closing agreement.

“We recommend that level 3 self-correction be through the negotiated VCAP to address less common fact patterns or more egregious situations,” the report said. “Because an issuer might want or require a binding closing agreement, we suggest that issuers have the option to utilize level 3 despite potential applicability of levels 1 or 2.”

The council recommended that all three levels should encourage issuers to identify and correct violations early.

Moore, the NABL president, thinks the IRS will give an overhaul of the VCAP program serious consideration “largely because it’s a sound idea on the policy side and I think the IRS is motivated to consider ideas that will free up resources.”

By Brian Tumulty

BY SOURCEMEDIA | ECONOMIC | 12/27/19 08:35 AM EST




Compliance Date Set for More Data From Underwriters.

The Municipal Securities Rulemaking Board set a compliance date of Nov. 30, 2020, for an amendment requiring additional data from underwriters in the primary market.

Starting then, underwriters will be required to provide more information about new offerings of bonds. The change is in association with Rule G-32 on disclosures in connection with primary offerings, which was amended to require additional data about new issue bonds to be included on Form G-32.

The new amendment will ultimately increase transparency and equal access to information, the MSRB has said.

The Securities and Exchange Commission approved the amendments to Rule G-32 along with changes to Rule G-11 on primary offering practices in June.

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.

Most of the data would be auto-populated from the New Issuer Information Dissemination Service (NIIDS) onto Form G-32.

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.

Nine data fields would be manually completed by underwriters such as identifying syndicate managers, identifying municipal advisors and more.

The MSRB also asked 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, which Bond Dealers of America supported.

However, BDA has opposed identifying the MA, and said the information was obtainable from the final official statement.

The MSRB plans to make the amended Form G-32 available by early summer.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 12/20/19 01:04 PM EST




SEC Proposes Conditional Exemption for Certain Activities of Registered Municipal Advisors.

Section 15 (a)(1) of the Securities Exchange Act of 1934 (Exchange Act) generally prohibits a broker or dealer from effecting “any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless such broker or dealer is registered with the Securities and Exchange Commission (SEC).

However, as is often the case in U.S. securities laws, the requirements of Section 15(a)(1) are subject to exceptions. On Oct. 2, 2019, the SEC proposed an exemptive order under Section 15(a)(2) of the Exchange Act (Release No. 34-87204) that would permit a registered municipal advisor who is not also a registered broker-dealer to solicit a single Qualified Provider (as defined below) in connection with the direct placement of an entire issuance of municipal securities without registering as a broker-dealer.

The SEC proposes to define Qualified Provider as any of:

i. a bank, savings and loan association, insurance company, or registered investment company;

ii. an investment adviser registered with the Commission or with a state; or

iii. another institution with total assets of at least $50 million.

Thus, the proposed exemption would not be available in transactions involving retail investors, including public offerings of municipal securities.

Furthermore, as noted in the release, a registered municipal advisor wishing to rely on the proposed exemption would be subject to two conditions:

Condition 1: Make written disclosures to the Qualified Provider stating that the registered municipal advisor represents solely the interests of the municipal issuer and not the Qualified Provider, and obtain from the Qualified Provider written acknowledgment of receipt of those disclosures.

Condition 2: Obtain a written representation from the Qualified Provider that the Qualified Provider is capable of independently evaluating the investment risks of the transaction.

Overall, the proposed exemption summarized above would ease the burden for municipal advisors in that they would not have to separately register with the SEC as broker-dealers. In contrast, however, broker-dealers generally object to the proposed exemption. They contend that the relief is unfair because the broker-dealers would still have regulatory burdens that result from their compliance with registration requirements, while the municipal advisors relying on the exemption will not be subject to those same burdens. The Securities Industry and Financial Markets Association (SIFMA) and Bond Dealers of America have also commented that the proposed exemption would be harmful to the municipal market and investors. For example, Leslie Norwood, a managing director of SIFMA, claimed that the proposed exemption would release municipal advisors from “due diligence obligations” that a registered broker-dealer is required to abide by. It remains to be seen whether the SEC will pull back or modify the proposal in any way at the end of the comment period, which closed on Dec. 9, 2019.

Greenberg Traurig LLP – Elaine C. Greenberg, Vincent Lewis and William B. Mack




Bar Assoc Lawyers Say Laywers Can Hide Knowledge of Serious Crime.

According to the Massachusetts Bar Association Lawyers Have Special Rights to Hide Knowledge of Serious Crimes

I recently filed a complaint with the Massachusetts Bar Association against Sue Curtin, a trial attorney for the Securities and Exchange Commission. I claimed that Sue Curtin engaged in unethical and illegal behavior by withholding knowledge of serious crimes from the Department of Justice.

During the investigation of a whistleblower complaint, Sue Curtin found out that the three credit rating agencies, Moodys, Fitch and S&P issued fraudulent credit ratings on seventy billion dollars in municipal bonds. This resulted in the theft of almost fifty billion dollars from tens of millions of Americans. The SEC has no power to prosecute crimes, it only regulates the financial industry.

According to the President of the Massachusetts Bar Association, Mr. Luke, it may be illegal for U.S. citizens to do this but it is okay for lawyers. It is not unethical; it is within Sue Curtin’s discretion. Let’s play this out. Another lawyer for the FDIC finds out during a bank audit that the President of the bank stole twenty million dollars from the bank. The FDIC lawyer fails to report the crime. According to Mr. Luke, that is not unethical because lawyers have special rights?

Does this feel right to anyone? Or, is it just one unethical group of attorneys covering for another unethical group of attorneys?

patch.com

By Richard Lawless

Dec 23, 2019 3:19 pm PT | Updated Dec 24, 2019 9:12 am PT

Richard Lawless is an investigative journalist that covers financial crimes and government corruption




NFMA Responds to SR-MSRB-2019-13.

On Friday, December 13, the NFMA issued its response to the SEC Notice of Filing of a Proposed Rule Change to Amend the Information Facility of the MSRB’s Electronic Municipal Market Access (EMMA®) System. Comments are due by December 18.

To read the NFMA’s letter, click here.




BDA Delivers Strong Message to SEC: Reject the Exemptive Order Outright.

Both the BDA and C-Suite Leaders Submit Comments with the SEC

Today, following extensive work with the BDA working group, BDA policy committees, and outside counsel Nixon Peabody and Davis Polk, the BDA submitted two letters in opposition to the SEC request for comment.

The BDA comments, which can be viewed here, argue that the Commission should dismiss this request in full, and not grant any form of relief as requested by PFM and NAMA.

In addition to the formal comments, the BDA also submitted a C-Suite Letter with the SEC, signed by leadership of 19 BDA full member firms. The letter strongly reiterates the BDA position of collective opposition to the request and the need to swiftly dismiss the exemptive order.

It has been clear from the beginning that the SEC intends to move forward with some form of exemptive relief. While we outright oppose this request it is very important the BDA is “at the table” to ensure any potential relief is a narrow as possible.

Next Steps

The BDA continues to meet with leaders on Capitol Hill to educate on the issue, and is working to get House and Senate legislators involved in pushing back against the SEC request both on and off the record. These meetings are on-going, and the BDA will provide updates going forward.

The BDA is also planning meeting with Commissioners in the coming weeks. While details are still coming together, these meetings will include BDA members and will help further the organizations arguments against SEC action on the exemptive order.

Prior BDA Actions

The BDA has continued to lead the industry response to the PFM and NAMA requests. 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.

Following prior fall 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.

While 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.

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.

Bond Dealers of America

December 10, 2019




Broker-Dealers Participating in Primary Offerings of Municipal Securities: Prepare for Implementation of New Rules - Jones Day

The Situation: The Municipal Securities Rulemaking Board (“MSRB”) amended its rules regarding primary offering practices and disclosures in connection with primary offerings to enhance regulatory transparency, ensure equal dissemination of information in primary offerings, and include selling group members in certain obligations in a primary offering of municipal securities.

The Result: The rule amendments become effective January 13, 2020, and broker-dealers engaged in underwritings of municipal securities, including those participating as selling group members, will be expected to understand and be in compliance with the changes by that date.

Looking Ahead: Underwriters and firms that participate in primary offerings of municipal securities should be familiar with the impending changes. Firms should review and, as necessary, revise their policies and procedures to ensure compliance with the new requirements.

Overview

On January 13, 2020, amendments to MSRB Rule G-11, on primary offering practices, and Rule G-32, on disclosures in connection with primary offerings, will become effective. In June 2019, the U.S. Securities and Exchange Commission (“SEC”) approved the amendments, which are meant to enhance transparency, equalize information dissemination to market participants, and ensure selling group members comply with issuer conditions, priority provisions, and order period requirements that apply to syndicate members.

In short, MSRB Rule G-11 will now:

Amendments to Rule G-32 will:

Syndicate and selling group members should be aware of their obligations pursuant to the amended rules and update compliance policies and procedures accordingly.

Three Key Takeaways

Jones Day – Laura S. Pruitt and Margaret R. Blake (Peggy)

December 12, 2019




SEC Issues FY2019 Enforcement Report – Highlights and Key Takeaways

The Division of Enforcement (Division) of the Securities and Exchange Commission (SEC or Commission) published its fiscal year 2019 (FY2019) enforcement report (the Report) on November 6, 2019. As in previous years, the Report addresses the matters that touch on the Division’s five core guiding principles: (1) focusing on retail investors; (2) focusing on individual accountability; (3) keeping up with technological change; (4) imposing remedies that best further enforcement goals; and (5) constantly assessing resource allocation. The Division also continued to focus resources on two key priority areas in FY2019: (1) retail investor protection and (2) combating cyberthreats. Report highlights and our key takeaways follow.

The numbers − briefly

In FY2019, the SEC brought 862 enforcement actions, the highest level since 2016. Through these actions, the SEC obtained judgments and orders totaling more than $1.1 billion in penalties and $3.2 billion in disgorgement, with $1.2 billion returned to harmed investors. While the amount of penalties was among the lowest in the last five years, disgorgement and money returned to investors was the highest level for the same period. The increase is due largely to settlement of Ponzi allegations filed against a Florida-based investment company.

As in FY2018, the majority of the SEC’s 526 standalone cases in FY2019 concerned investment advisory and investment company issues (36 percent of cases, up from 22 percent last year), followed by securities offerings (21 percent, down slightly from 25 percent last year), and issuer reporting/accounting and auditing (17 percent, compared to 16 percent last year). Actions against broker-dealers accounted for just 7 percent compared to 13 percent last year; SEC broker-dealer actions have declined as the Commission continues its focus on investment advisers in light of FINRA’s mandate to enforce the securities laws and its rules regarding broker-dealers. Other areas included insider trading (6 percent compared to 10 percent last year), market manipulation (6 percent), Foreign Corrupt Practices Act (3 percent), and public finance (3 percent).

The Division’s FY2019 initiatives and areas of focus

Retail – or Main Street – investors

The Division continued to view protection of retail investors, who are often particularly vulnerable to the conduct of bad actors, as a top priority in FY2019. One particular area of focus was misconduct that occurred in the interactions between investment professionals and retail investors.

The Report highlighted the successes of the Division’s Share Class Selection Disclosure Initiative, which it launched in February 2018. Under the Initiative, 95 investment advisory firms self-reported failures to disclose conflicts associated with the selection of fee-paying mutual fund share classes when a lower- or no-cost share class of the same mutual fund was available. The Division agreed to recommend standardized settlement terms, and the majority of the actions were brought in March or September 2019. Over $135 million was returned to affected mutual fund investors, the vast majority of whom were retail investors.

The Division also noted that its Retail Strategy Task Force has undertaken a number of lead-generating initiatives – often using data analytics – and stated that these initiatives have led to swift enforcement actions. The Task Force’s work with the Teachers’ Initiative and the Military Service Members’ Initiative − which focus enforcement and investor education resources on investment fraud issues impacting teachers, veterans, and active duty military personnel −was also highlighted.

Individual accountability

Holding individuals accountable is a “central pillar” in the Division’s program because it allows the Commission to achieve multiple goals: specific and general deterrence, and, where injunctive and other non-monetary remedies are imposed, protection of markets and investors from future misconduct by those same bad actors. The Report highlights four cases in which directors and officers were charged with securities law violations. In each of those cases, the company was also charged.

Cyber-related misconduct

In FY2019, members of the Cyber Unit and other Division staff investigated and recommended to the Commission numerous cases involving initial coin offerings (ICOs) and digital assets, and cybersecurity threats to public companies and regulated entities.

According to the Report, the Division’s digital asset activities have “matured and expanded.” The Commission filed its first charges for unlawful promotion of ICOs in FY2019 and settled an action against a digital asset trading platform for operating as an unregistered national securities exchange. The Report also noted that the SEC reached settlements with three issuers of digital assets; the settlements included tailored undertakings providing a path to compliance with registration requirements and rescission for investors. The Commission’s first litigated action against a digital asset issuer solely for violating registration provisions is pending. These actions are intended to reiterate a clear message that, regardless of labeling, if a product is a security, then issuers, promoters, and transaction platforms must comply with the federal securities laws.

The Commission also brought actions against regulated entities for violations of Regulation Systems Compliance and Integrity. Regulation SCI is designed to monitor the security and capabilities of the technological infrastructure of the US securities markets.

While the Commission did not bring any enforcement actions against issuers or other market participants related to “business email compromises” in FY2019, the Commission issued a Report of Investigation regarding the risks associated with cyber-related threats of spoofed or manipulated electronic communications and mandated that such risks should be considered when devising and maintaining a system of internal accounting controls. See DLA Piper’s prior alert on the report. In issuing the report, the Commission seemingly put issuers and other market participants on notice that it may pursue actions in the future against those who fail to appropriately consider the risk of cyber intrusions in designing their controls.

Detecting, remedying, and punishing misconduct by issuers and financial institutions

The Report highlighted a number of cases against issuers to demonstrate the focus of Division and the Commission on financial statement integrity, the accuracy of issuer disclosures, and the willingness to punish significant corporate wrongdoing. The cases noted had penalties ranging from $16 million to $100 million, although, in one case, no monetary penalty was imposed due to the issuer’s extensive cooperation, including self-reporting and remediation.

With respect to financial institutions and intermediaries, the Division cited its charges against certain large financial institutions for conduct that undermined market integrity in connection with the pre-release of American Depository Receipts (ADRs). The Commission alleged that the ADRs were improperly provided to brokers in thousands of pre-release transactions when neither the broker nor its customers had possession of the foreign shares needed to support the newly issued ADRs, thereby artificially inflating the total number of a foreign issuer’s tradeable securities. Over the last two fiscal years, the Commission has brought actions against 13 firms and 4 individuals concerning these practices.

Finally, the critical role of gatekeepers continues to be a focus. The Division noted two significant cases against auditors and audit firms as well as an investigation that led to settled actions against both the issuer and the senior auditors on the engagement.

In addition, the Division touted its growing “complex analytic tools and capabilities,” including proprietary technology that allows staff to analyze large quantities of trading and communications data and identify suspicious activity. For example, in one highlighted case involving an alleged hack into the SEC’s EDGAR system to obtain non-public data, the Division notes that it brought charges based on a statistical analysis as to the odds of making certain trades, which was then combined with an analysis of IP addresses involved in various communications.

Continuing areas of focus

The Division continues to coordinate with law enforcement where civil sanctions may be inadequate to deter certain types of violations, particularly those cases involving recidivists, microcap fraudsters, insider traders, Ponzi schemers, and others who act with a high degree of scienter. The Report notes that in more than 400 SEC investigations, law enforcement offices and other regulators requested and obtained access to materials in SEC investigative files.

The Division also has focused on accelerating the pace of investigations because it views cases as having the greatest impact when they are filed close in time to the conduct. In FY2019, it took about 24 months on average after a case was opened for an enforcement action to be filed, a slight improvement over prior years. Financial fraud and issuer disclosure cases took longer (37 months), and the Division is taking steps (not specified) to improve that metric. A respondent’s extensive cooperation of course improves the speed. The Report notes that the Division recognizes the value in providing greater transparency into how the Commission considers and weighs cooperation credit and to that end has included such information in public orders. The Division anticipates that the Commission will continue to do so going forward, indicating a willingness to reward cooperation where appropriate.

The Report also notes the great success of the whistleblower program; since its 2011 inception, the Commission has ordered more than $2 billion in financial remedies as a result of whistleblower cases and awarded those whistleblowers about $387 million. In FY2019, the SEC received thousands of whistleblower tips and a record number of whistleblower claims. The Report notes that the Division is working to streamline and substantially accelerate the evaluation of claims for whistleblower awards and expects that these improvements will lead to an even greater number of whistleblower claims in the coming year.

Continuing impact of the Kokesh decision

In Kokesh v. Securities and Exchange Commission, the Supreme Court concluded that the longstanding disgorgement remedy of the SEC was a penalty subject to the five-year statute of limitations under 28 U.S.C. §2462, as covered in a previous DLA Piper client alert. The Division estimated that the Kokesh ruling has prohibited the Commission from seeking approximately $1.1 billion in disgorgement, although the Report does not state whether that applies to just FY2019 or the sum total of disgorgement the Commission has forgone since Kokesh was decided in June 2017.

The Division also notes that Kokesh has forced it to allocate its resources to cases which hold the most promise for returning funds to investors. In light of this, it seems likely that the Division will continue to push those under investigation to come to resolution quickly in order to obtain the maximum disgorgement allowable under Kokesh.

Looking forward to FY2020

In addition to the Division’s usual investigations related to insider trading, regulated entity and associated person misconduct, FCPA violations, and financial statement issues, we expect that FY2020 will include the following developments:

Kokesh, or more broadly disgorgement, will continue to impact the Division: With the Supreme Court’s grant of certiorari in Liu v. SEC (see DLA Piper’s client alert on the topic here), the Division faces continued uncertainty regarding whether disgorgement is a viable remedy in District Court actions. Even in administrative actions where disgorgement is expressly permitted by statute, we anticipate that those subject to disgorgement claims will continue to push for limits on disgorgement based on more precise measures of the actual amount of ill-gotten gains as opposed to broad brush estimates that have often been the norm.

Protection of retail investors will remain a prime Division objective: We anticipate that the Division will continue to devote significant resources to protecting retail investors. The Division will continue to focus on undisclosed conflicts of interest, inadequately disclosed or improperly charged fees, protection of the personal information of investors, and Ponzi schemes among the many areas where retail investors are at risk.

Broker-dealers, investment advisers and public companies will face increased Division scrutiny of their compliance with laws and regulations designed to protect against cyber-threats: In addition to the Division’s Report of Investigation on cyber-related frauds against public companies, FY2019 saw two alerts from the Office of Compliance, Inspections and Examinations related to potential cyber-threats and related regulatory requirements for broker-dealers and investment advisers. We anticipate that the Division will pursue enforcement actions against entities who have not paid attention to these messages.

The Division will continue to expand its use of technological tools to respond rapidly to potential securities law violations: FY2019 saw the Division’s use of technological tools to respond rapidly to potential insider trading leading to the initiation of enforcement actions in a matter of months rather than a matter of years. We anticipate that the Division’s use of these tools will continue to expand in FY2020 in cases involving potential insider trading and market manipulation.

The Division will bring more cases: With the agency’s hiring freeze lifted (see p. 22 of the Report), the Division has been able to hire more staff. With more staff, we expect more cases.

To find out more regarding the Division’s likely priorities in FY2020 or the matters highlighted within the report, contact any of the authors.

DLA Piper

By: Mary M. Dunbar Deborah R. Meshulam George G. Demos John M. Hillebrecht Jeffrey D. Rotenberg Katrina A. Hausfeld Michael Boardman

19 November 2019




GASB Proposes New Implementation Guidance to Assist Stakeholders with Application of its Pronouncements.

Norwalk, CT, December 4, 2019 — 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—2020, contains proposed new questions and answers that address application of the Board’s standards on the financial reporting entity, fiduciary activities, leases, external investment pools, asset retirement obligations, and conduit debt obligations. The Exposure Draft also includes proposed amendments to previously issued implementation guidance.

The GASB annually issues new and updated guidance to assist state and local governments in applying generally accepted accounting principles (GAAP) to specific facts and circumstances that they encounter. The GASB develops the guidance based on (1) application issues that are raised during due process on GASB Statements, (2) questions it receives throughout the year primarily from governments and auditors, and (3) concerns identified by members of the Governmental Accounting Standards Advisory Council and other stakeholders. The guidance in Implementation Guides is authoritative and constitutes Category B GAAP.

The Exposure Draft is available on the GASB website, www.gasb.org. The GASB encourages stakeholders to review the proposal and provide comments by January 31, 2020. Information about how to comment can be found at the front of the Exposure Draft.




SIFMA Says SEC Is On 'Wrong Path' With Advisor Exemptive Order.

The Securities and Exchange Commission is making a mistake by considering an exemption from broker-dealer registration for municipal advisors working on private placement deals, a top muni lobbyist said Thursday.

Securities Industry and Financial Markets Association President and CEO Kenneth E. Bentsen Jr. raised that warning among other topics of importance to the muni market during SIFMA’s State of the Industry briefing at the group’s New York office.

“We have strong concerns,” Bentsen said. “We think that the SEC is going down the wrong path with that.”

The proposed exemptive order, on which the SEC opened a comment period in early October, would allow registered municipal advisors to perform some roles in the private placement of bonds that dealer firms view as properly their role.

SIFMA has previously sent letters to the commission warning against the concept, and Bentsen said it is among SIFMA’s regulatory priorities. Under the proposal, MAs could play a role facilitating private placements without being a registered dealer so long as it complies with certain conditions.

To qualify for an exemption, the MA would have to make written disclosures to an investor saying that it represents the interests of the issuer, not the investor. In return, the MA would have to get written acknowledgment of that disclosure from the investor.

The MA would also need to get written representation from the investor that it is capable of independently evaluating the investment risks of the transaction. The entire issuance would have to be placed with a single investor, and the MA would have to continue to comply with regulations governing municipal advisors.

Dealers have pointed out that muni advisors owe a fiduciary duty to their municipal entity clients, but do not have the regulatory duties to protect investors that dealers have. Dealers have raised concerns that privately placed bonds could make their way into the secondary market without ever having been subject to the due diligence that broker-dealers are required to perform.

The proposed exemption has received a generally favorable reception outside the broker-dealer community, and comment is due to the SEC Dec. 9.

Bentsen also discussed the search for the Municipal Securities Rulemaking Board’s next president and CEO. The role has been filled on an interim basis by its CFO Nanette Lawson since longtime leader Lynnette Kelly stepped down at the start of October. The board announced last month that it had hired executive search firm Spencer Stuart to aid the search.

“I think it’s very important,” Bentsen said, declining to comment on the MSRB’s process. “But it’s an important job,” he added, noting that the post entails a range of responsibilities and the ability to interact with market participants. “You need to engage with the community that you regulate,” Bentsen said.

“They’re going to have their work cut out to fill that,” he said.

Bentsen touched on the need to reinstate tax-exempt advance refundings, and said he was encouraged by the work done by House muni finance caucus co-chairs Steve Stivers, R-Ohio, and Dutch Ruppersberger, D-Md., to introduce a bill that would do so.

“We’re eager to see the Senate take this up,” Bentsen said.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 12/05/19 12:06 PM EST




SIFMA: Proposed Exemptive Order Related to Muni Advisors

SUMMARY

SIFMA submitted comments in response to the U.S. Securities and Exchange Commission’s Proposed Exemptive Order. The Proposed Exemptive Order would allow a registered municipal advisor, acting on behalf of a municipal issuer client, to solicit and engage in the direct placement of municipal securities with certain institutional investors, and receive transaction-based compensation for such activities, without registering as a broker-dealer under Section 15 of the Securities Exchange Act of 1934.

SIFMA strongly opposes the Proposed Exemptive Order and, for the reasons articulated below, believes that if a municipal advisor acts as a placement agent (i.e., underwriter) with respect to direct placements of municipal securities, it should be subject to all of the requirements that would apply to a broker-dealer when acting in that same capacity.

Read the SIFMA Comment Letter.

December 9, 2019




MSRB RFC: Proposed Enhancement to the EMMA Website to More Prominently Display the Timing of Annual Financial Disclosures.

The comment period is now open on the MSRB’s proposed enhancement to the EMMA website to more prominently display the timing of annual financial disclosures. Comments are due by December 18, 2019.

Read the Notice.

Submit Comments on SR-MSRB-2019-13.




Federal Register: MSRB Proposes Enhancements to EMMA Website

The MSRB proposal to more prominently display certain financial disclosures and related information on the organization’s Electronic Municipal Market Access (“EMMA”) system was published in the Federal Register. Comments on the proposal must be submitted by December 18, 2019.

As previously covered, the Security Details pages of EMMA would – under the proposal – provide:

In an FAQ, the MSRB also provided information on how the information as to the timing of disclosure will be presented.

November 27 2019

Cadwalader Wickersham & Taft LLP




NFMA Newsletter.

The NFMA publishes newsletters for its membership. Officers of NFMA and constituent societies report on activities, and committee chairs report on the status of their initiatives.

To view the current newsletter, click here.




Ex-Morgan Stanley Rep Suspended Over Unsuitable Muni Bond Sales.

The broker incurred unnecessary fees by buying the funds in brokerage accounts and transferring them, FINRA said.

The Financial Industry Regulatory Authority suspended a former Morgan Stanley broker for three months over a series of unsuitable investment transactions, including 28 municipal bonds, that were made by him in eight of his customers’ accounts in violation of FINRA rules, according to the regulator.

John A. Borsellino signed a letter of acceptance, waiver and consent on Oct. 25 in which, without admitting or denying FINRA’s findings, he agreed to the suspension, to pay a $5,000 fine and to disgorge commissions he made from the 43 unsuitable purchases in the amount of $23,931, plus interest. FINRA accepted the letter Wednesday.

Morgan Stanley declined to comment Thursday. Borsellino’s attorney, Marc Dobin of Dobin Law Group in Jupiter, Florida, didn’t immediately respond to a request for comment.

The broker recommended that the eight clients buy 28 muni bonds and 15 non-municipal securities in their brokerage accounts, which “caused the customers to incur upfront sales charges,” according to the FINRA letter. In each instance, Borsellino transferred the security to the customer’s existing fee-based account shortly after buying it despite the fact that, in each case, he could have bought the security in the fee-based account without any upfront sales charges, the letter said.

The upfront sales charges associated with the 43 unsuitable purchases made in the customers’ brokerage accounts totaled about $58,000, all of which Morgan Stanley went on to reimburse to Borsellino’s clients, FINRA said.

The transactions were made by Borsellino despite the fact that he “lacked a reasonable basis to believe that the recommended securities purchases made in the customers’ brokerage accounts were suitable because he failed to exercise reasonable diligence and failed to consider the costs associated with the transactions,” according to FINRA.

Borsellino first registered with a FINRA member firm in 1990, when he became associated with Merrill Lynch, according to FINRA’s BrokerCheck website. He registered as a general securities representative through Morgan Stanley Dean Witter in 2006, Morgan Stanley & Co. in 2007 and Morgan Stanley in 2009.

The broker remained with Morgan Stanley until Dec. 19, 2017, when he was discharged from the company due to “concerns about asset movements between, and the timing of trades in, accounts for the same clients with different fee characteristics and whether the representative spoke with the clients before taking these actions,” according to a disclosure on his BrokerCheck profile.

Between January 2014 and December 2016, Borsellino “recommended and then made unsuitable securities transactions in eight customers’ accounts,” violating FINRA Rules 2111 and 2010 and Municipal Securities Rulemaking Board Rules G-19 and G-17, according to the FINRA letter.

The incidents didn’t represent the first investments he made on behalf of his clients that were later alleged to be unsuitable. There are eight disclosures on Borsellino’s BrokerCheck profile, including the 2017 employment separation agreement with Morgan Stanley.

In 2001, a client claimed he made an unauthorized purchase and sued him for $14,550. He denied the claim and there was no settlement, according to BrokerCheck. Then a client claimed he didn’t provide any notice of a deferred sales charge on Class B mutual fund shares. That client requested $5,000 in damages, but the settlement in 2002 wound up being for an even larger amount: $11,000. That same year, there was a $20,109 settlement in a case where a client claimed a mutual fund was bought without authorization.

Then came three customer disputes settled between 2003 and 2006 in which there were claims of unsuitable investments being made by Borsellino. The first was closed with no action. However, he settled for $85,000 and $135,000 in the next two disputes, both in 2006.

The first disclosure on his profile actually involved an incident long before his securities career started. He was arrested and charged with shoplifting about $20 worth of merchandise in Poughkeepsie, New York, but the charge was dismissed, according to BrokerCheck.

Think Advisor

By Jeff Berman | December 06, 2019 at 09:50 AM




Municipal Securities Dealer Settles FINRA Charges for Providing Inaccurate Information in Issue Price Certificates.

A municipal securities dealer settled FINRA charges for providing inaccurate information in the issue price certificates of 22 municipal offerings.

According to FINRA, the issue price certificates incorrectly stated the percentage of each offering sold to public investors (as opposed to other broker-dealers). FINRA claimed that the municipal securities dealer failed to implement appropriate supervisory procedures to ensure that information in the issue price certificates was accurate.

To settle the charges, the municipal securities dealer agreed to (i) a censure, (ii) a $85,000 fine, and (iii) undertake remedial measures to identify and notify issuers of inaccuracies in issue price certificates.

December 3 2019

Cadwalader Wickersham & Taft LLP




Regulatory Comments Stress Safe Harbors in Libor Transition.

The establishment of safe harbors is one of the key issues raised by public finance industry groups in their comments to the U.S. Treasury, Internal Revenue Service and the Governmental Accounting Standards Board on their proposed guidance for making the transition away from Libor.

In formal comments filed with the federal government and separately to GASB ahead of filing deadlines this week, municipal finance groups have given the regulators generally high marks while noting the transition to other reference rates is not of their own choosing.

Libor is being phased out at the recommendation of the Alternative Reference Rates Committee created by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York.

National Association of Bond Lawyers President Rich Moore characterized his organization’s 22-page submission to Treasury and the IRS as an effort to ensure that the tax-exempt bond market receives consideration.

“This transition from Libor is big in the general tax market,” Moore said. “All sorts of folks are going to be commenting on this proposed regulation and NABL wanted to focus on the areas that are unique to tax-exempt bonds because if we don’t comment on those, who will?”

NABL, for instance, suggested tweaks to the arm’s-length safe harbor to ensure it works for the issuer and more clarity that any one-time payment that goes to or from the issuer not be treated as proceeds of the bonds.

NABL also wants clarity that if the new index uses a multiplier that would otherwise cause that bond to be a contingent debt instrument, that it not be treated as a contingent payment debt instrument.

“We have some background in the appendixes on all these things as to why we care,” said Moore, noting that the committee of NABL lawyers who composed the document was chaired by Matthias Edrich.

NABL’s comments are longer and more detailed than they might have been because of the recent departure from Treasury of John Cross, the department’s most experienced public finance tax expert.

The Government Finance Officers Association, which also filed comments with Treasury and the IRS, requested “an additional safe harbor to the substantial equivalence test.”

“This safe harbor may further assist the GASB in their proposed exposure draft addressing replacement rates on current effective hedges,” said GFOA.

The new alternative reference rates cited by Treasury and the IRS include the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York and the Federal Funds Rate.

Both the Treasury and GASB proposals include all other IBORs offered in other countries, including Switzerland, Japan and the European Union.

“We are pleased to see the IRS and Treasury’s preemptive approach in the proposed regulations, especially as they address issuer’s legacy contracts,” GFOA said in its comments. “We are especially pleased to assist in the efforts of the industry, official sector and regulatory agencies moving forward to build a framework that allows for a comprehensive approach for issuers and their counterparties in the context of a cessation of Libor.”

The GASB proposal, Replacement of Interbank Offered Rates, offers new accounting and financial reporting guidance to assist state and local governments that use GAAP accounting in the transition away from Libor for reporting periods beginning after Dec. 15, 2020.

GASB received more than a dozen comments from groups such as the National Federation of Municipal Analysts and the National Association of State Auditors, Comptrollers and Treasurers.

NFMA’s letter noted, “a few of the organization’s members questioned whether the GASB should consider allowing other rates/indices as appropriate benchmark rates and broadening the exception to account for the potential discontinuation of other rates or indices.”

GASB’s proposal clarifies the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item and that the uncertainty associated with reference rate reform does not, by itself, affect the probability that an expected transaction will occur.

GASB would allow an amendment to replace the reference rate that would not constitute a termination within certain guardrails that prevent changing the terms of the swap. It also clarifies the definition of reference rate, and provides an exception to the lease modifications guidance in Statement 87 for certain IBOR-related lease contract amendments.

By Brian Tumulty

BY SOURCEMEDIA | ECONOMIC | 11/27/19 12:08 PM EST




Lessons from FINRA’s 2019 Report on Examination Findings and Observations.

The Financial Industry Regulatory Authority published its 2019 Report on Examination Findings and Observations (2019 Report) on October 16, 2019. This marks the third annual report of FINRA findings, but in a departure from the prior reports, the 2019 Report distinguishes “findings” (determinations that a firm or registered person has violated SEC, FINRA or other relevant rules) from “observations” (suggestions as to how a firm might improve its control environment, communicated separately from a formal examination report).

The 2019 Report focuses on a number of findings and observations, involving: sales practice and supervision; firm operations; market integrity; and financial management. In addition, the 2019 Report provides examples of effective practices, which can help firms improve their supervision, compliance and risk management programs. This OnPoint discusses key findings from the 2019 Report, as well as FINRA’s observations regarding how firms might have avoided related weaknesses and risks.1

Sales Practice and Supervision

The 2019 Report focuses on a variety of supervision issues, as well as: suitability; digital communication; anti-money laundering (AML); and Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) accounts. Noteworthy examination findings and observations include:

Continue reading.

Dechert LLP

by K. Susan Grafton, Elliott R. Curzon and Jennifer O’Brien

November 18, 2019




SEC Enforcement Annual Report: Retail Focus Raises Regulatory Risk for Investment Advisers

The US Securities and Exchange Commission (SEC) Division of Enforcement recently issued its 2019 Annual Report (ENF Annual Report), which you can read in full here. Of course, the headline is always how many cases did the Enforcement Staff bring and how much money did they collect and distribute and, for fiscal year 2019,1 the Staff was likely relieved to announce that on each score they had, well, scored.

The Baker McKenzie Financial Regulation and Enforcement team will provide a deeper dive in the Enforcement Division’s fiscal year 2019, the cases of note and a look ahead to 2020, but we wanted to offer some initial takes on our review of ENF Annual Report.

Fiscal year 2019 represented the best year that the Enforcement Division has had since 2016, as the chart below demonstrates.

Continue reading.

Baker McKenzie

by Jennifer L. Klass, Amy J. Greer, Peter K.M. Chan, Jerome Tomas and Kristal Petrovich

November 20 2019




Electronic Disclosure, RIN 1210-AB90: SIFMA Comment Letter

SUMMARY

SIFMA provides comments to the Department of Labor in response to their proposal for a new, additional safe harbor for the use of electronic media by employee benefit plans. SIFMA strongly supports the Department moving forward with finalizing this proposal.

Read the Comment Letter.




SEC Approves Changes to MSRB Guidance on Underwriters' Disclosure Obligations.

The SEC approved changes to an MSRB interpretive notice concerning the conduct of municipal securities underwriting activities. The MSRB indicated that the changes are to codify underwriters’ disclosures and focus on the risks and conflicts associated with their transactions.

As previously covered, the amendments to the interpretive notice concerning MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”) are intended by MSRB to reduce disclosure burdens on underwriters, as well as the burden on issuers to acknowledge and review disclosures of risks that are (i) unlikely to materialize, (ii) not unique to a particular transaction or underwriter where a syndicate is formed, or (iii) otherwise duplicative.

The MSRB will provide a compliance date within 90 days of publishing the revised guidance in the Federal Register.

November 12 2019

Cadwalader Wickersham & Taft LLP




Why Is It So Hard to Access Performance and Financial Data in Munis?

Issuers look to the municipal bond market to refresh our nation’s infrastructure, but who will update the municipal bond market’s obsolete data infrastructure? Almost 20 years into the new century, the functional systems for identifying issuers and their performance are still being served up with 20th century technologies. To move the market forward, we believe that market participants, including regulators, adopt the best of breed technologies from other markets. The first step forward is to build a consortium of private, nonprofit, and academic interests who have been promoting alternative systems for identifying, indexing and analyzing capital market data.

The “who’s who” is important

Associating securities with standard issuer identifiers makes it easier for investors to track exactly who owes what. In the municipal market, we often rely on the first six positions of the CUSIP number to identify issuers — but this 1960s-vintage technology is no longer fit for purpose.

CUSIPs have a total of nine positions, but the last position is a so-called check digit used to verify that there are eight characters do not contain a typo. So, for any given issuer, only the seventh and eighth positions can be used to uniquely identify a given bond. Since those positions can be filled with either letters or numbers, there is a theoretical maximum of 36*36=1296 CUSIPs per issuer . Since municipal bond issues often contain a dozen or more serial bonds and since CUSIPs are not reused after maturity, bigger issuers can easily exceed this limit.

Continue reading.

By Mark Campbell

BY SOURCEMEDIA | MUNICIPAL | 11/13/19 12:25 PM EST




MSRB Proposes Enhancements to EMMA Website.

The MSRB proposed amending the organization’s Electronic Municipal Market Access (“EMMA”) system to more prominently display certain financial disclosures and related information.

Under the proposal, the Security Details pages of EMMA would provide, among other things:

In an FAQ, the MSRB also provided information on how the information as to the timing of disclosure will be presented.

Cadwalader Wickersham & Taft LLP




WEBINAR – Are State and Local Governments Prepared for the Next Recession?

Wednesday, Jan 29, 2020 . | 2:00 PM – 3:30 PM EST

Online only

Click here to learn more and to register.

The Brookings Institution




FINRA Files for 4210 Effective Date Extension to March 2021.

FINRA has filed with the SEC a proposed rule change to extend (to March 25, 2021) the implementation date of the amendments to FINRA Rule 4210 (margin requirements).

This delay, as well as certain changes to the amendments, are in line with BDA’s advocacy efforts and we appreciate all BDA members who helped drive those efforts.

The full notice and text are available here.

Bond Dealers of America

November 6, 2019




Federal Register: MSRB Proposes Changes to Content Outline for Muni Principal Exam

An MSRB proposal to amend the content outline for the Series 54 examination and selection specification was published in the Federal Register. Comments must be submitted by November 26, 2019.

The MSRB stated that it intends to make the Series 54 examination permanent beginning on November 12, 2019. The proposed amendments were filed with the SEC and are now effective.

As previously covered, municipal advisor principals must pass the Series 54 examination in order to qualify for engagement in the management, direction or supervision of municipal advisory activities. The changes will, among other things:

Cadwalader Wickersham & Taft LLP

November 5 2019




BDA Continues to Lead Industry Pushback on the PFM and NAMA Requests to Avoid Broker-Dealer Regulation.

Since learning of the October 2018 request from advisory firm PFM in late spring, the BDA has lead industry efforts to push back against the initial request and subsequent efforts from NAMA. Below, is a recap of all BDA advocacy activity, including meeting recaps and an overview of the 3 letters submitted to the SEC.

SEC Request
Currently, the BDA is in the process of drafting an outline response with Committee Leadership to the SEC request for comment on a proposed exemptive order that would grant, in limited circumstances, a conditional exemption from the broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Registered Municipal Advisors.

The proposal, which is broad in scope, would permit non-dealer MAs to solicit financial institutions, Registered Investment Advisors and institutional SMMPs in private placement transactions where the entire issue is placed with one account.

After the outline is finalized, the BDA will host a conference call with full Committees to further draft a response.

BDA Advocacy
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.

Following prior fall 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.

While 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.

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

November 5, 2019




Dealers Ask SEC Not to Approve Fair Dealing Guidance Changes.

Broker-dealers don’t want the Securities and Exchange Commission to approve changes to fair-dealing guidance, saying that a proposed amendment adds complexity and uncertainty to the rule.

Bond Dealers of America made that case to the SEC in a letter dated Oct. 29, asking them not to approve the Municipal Securities Rulemaking Board’s amendment to Rule G-17’s interpretive guidance.

“Rather than simplify and streamline Rule G-17 compliance, the lengthy amendment would add significant complexity and uncertainty to the G-17 regime,” wrote Michael Nicholas, BDA CEO.

BDA is continually opposed to the MSRB’s use of a “reasonably foreseeable” standard, saying it would result in inconsistent compliance standards. The standard would provide that an underwriter’s potential material conflicts of interest must be disclosed to an issuer only if that potential conflict is reasonably likely to mature into an actual material conflict of interest during the course of that specific transaction.

BDA said that standard is vague and would provide little useful information for issuers as well as inconsistent compliance.

The Securities Industry and Financial Markets Association reiterated that it wants the MSRB to require only disclosures of actual conflicts of interest.

“The MSRB has chosen a standard of ‘reasonably forseeable’ conflicts, which we feel is not addressing the industry’s concerns about a clear standard,” said Leslie Norwood, a managing director, associate general counsel and head of municipals at SIFMA. “This is an undefined standard at this point.”

BDA also argued that new language in the proposed amended guidance would introduce new disclosures around complex municipal securities financial structures, creating a “compliance gray area.”

“The amendment would create a vague and imprecise standard for determining what is a CMSF and what kinds of information related to the transaction would need to be disclosed and under what conditions,” Nicholas wrote.

SIFMA wants clarification from the MSRB regarding complex municipal securities disclosures, and confirmation that standardized underwriters’ disclosures will still comply with the rule.

In the MSRB’s proposed amended interpretive guidance, they ask that transaction-specific disclosures address complex features or products rather than being general in nature.

Underwriters have to adopt policies and procedures that can be implemented in a consistent manner to satisfy regulatory requirements and examiners, Norwood wrote.

“There have been some small changes in the interpretive guidance that led us to have some concerns regarding the tailoring of complex securities disclosures,” Norwood said. “Specifically, SIFMA wants to ensure that the MSRB, FINRA examiners and underwriters implementing this amended guidance all have the same understanding.”

SIFMA wants to confirm that the way the industry has been complying with the rule through standardized disclosures where appropriate is still a valid way to comply with the rule, given the proposed changes.

SIFMA believes it is reasonable to give any issuer that has been recommended a common complex structure a standard written disclosure that describes the nature and risks, with the understanding that the disclosures would be more tailored if the transaction deviated from the standard, Norwood wrote.

SIFMA also wants to clarify wording in the guidance such as “individualized,” to mean that standard disclosures are designed to be clear, concise and tailored to a specific type of financing such as variable rate demand obligations, not a book of all types of product disclosures.

“Confirmation from the MSRB that this interpretation is reasonable would clear up this confusion from the proposed revised interpretive guidance,” Norwood wrote.

If the SEC approves the MSRB’s proposed changes, SIFMA will review and update its G-17 model documents, Norwood said.

The MSRB’s proposed guidance said that a sole underwriter or lead manager would need to “disclose” to an issuer client that the “issuer may choose to engage the services of an MA with a fiduciary obligation to represent the issuer’s interests in the transaction.”

BDA is opposed to the provision, saying there are no statutory or regulatory requirements that issuers hire an MA and that underwriters should not be required to promote the services of other market participants.

The National Association of Municipal Advisors supports the changes to the interpretive guidance, restating their support on adding underwriter disclosures that issuers may engage the services of MAs who have a fiduciary duty to the issuer, unlike the underwriter.

“Further, we support expanding the language of the interpretative guidance to disallow underwriters from deterring the use of municipal advisors by issuers,” wrote Susan Gaffney, NAMA executive director.

BDA also believes the MSRB missed out on an opportunity to provide compliance on combining and integrating underwriter disclosures required under Rule G-17 and Rule G-23 on activities of financial advisors.

The MSRB is currently reviewing Rule G-23. Some issuers have been concerned that an underwriter firm serving as an issuer’s MA 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.

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

The SEC has the final say. They could choose to require changes suggested in comments or by its own staff. The SEC could also choose to approve the proposal as is.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 10/30/19 02:24 PM EDT




Proposed Rule Change to Amend & Restate MSRB Rule G-17: SIFMA Comment Letter.

SUMMARY

SIFMA provided input to the Securities and Exchange Commission on Amendment No. 1 to 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.

SIFMA thanks the MSRB for: (1) adopting our proposal that the underwriter recommending the complex municipal securities transaction should be the one to make the requisite disclosure; (2) clarifying that placement agents may disclaim a fiduciary duty to the issuer if that is consistent with the nature of their arrangement; (3) clarifying the application of scope of the interpretation related to municipal fund securities; and (4) adopting changes regarding acknowledgement of receipt.

Read the Comment Letter.




Tax Relief for Replacing LIBOR in Tax-Exempt Debt and Swaps: Orrick

Many tax-exempt bonds and related hedges, such as interest rate swaps (“Exempt Instruments”), use a LIBOR-based interest rate. LIBOR is going away, and existing Exempt Instruments are going to have to be modified to replace the LIBOR index as a result. These changes can result in potentially serious tax consequences relating to a reissuance of the bonds or a deemed termination of the hedge, in addition to the business issues and document requirements that will arise.

On October 8, 2019, the IRS issued proposed regulations (the “Proposed Regulations”) that propose broad relief from these tax consequences. The discussion below focuses on Exempt Instruments, but the Proposed Regulations address replacing any interbank offering rates (IBORs) in any debt instrument or non-debt contract. With some minor limitations, the Proposed Regulations can be applied to IBOR replacements before the final regulations are published.

Potential Tax Consequences of Replacing LIBOR

Prior to the publication of the Proposed Regulations, parties were hesitant to amend existing Exempt Instruments to replace LIBOR-based interest rates, because it was possible that the amendment might trigger a reissuance of tax-exempt bonds or a deemed termination of a related hedge, such as a swap.

If tax-exempt bonds are reissued, the tax treatment is as if the bonds are refunded by new bonds on the date of the reissuance. The new bonds must meet all the requirements for tax-exemption on the reissuance date or the new bonds are not tax-exempt. So long as the law has not changed and certain requirements are satisfied, a reissuance does not usually cause a loss of tax exemption, but that is not the case for other tax-advantaged bonds. For example, the authorization to issue build America bonds (BABs) has expired, and a reissuance of BABs would result in a loss of the subsidy payments to the issuer.

Likewise, if a swap is modified to replace LIBOR with a new index, the swap could cease to meet the requirements for a qualified hedge or could result in a deemed termination of the swap.

The Proposed Regulations provide safe harbors that allow parties to avoid these tax consequences.

In General

The Proposed Regulations provide that amending the terms of an Exempt Instrument to replace LIBOR with a “qualified rate” will not result in a reissuance of the debt instrument or a deemed termination of the hedging contract if the fair market value of the altered Exempt Instrument is substantially equal to the fair market value of the Exempt Instrument prior to being altered. Likewise, any alteration made in association with the replacement (an “associated alteration”) will not trigger a reissuance or deemed termination if a fair market value test is satisfied.

In other words, the actual interest rate (and therefore the arbitrage yield) may change due to the substitution of the new index, but the bonds are still the same tax-exempt issue and the swap or cap is still a qualified hedge. This will be true regardless of whether the amendments are made through an amendment of the original instrument or by an exchange of a new instrument for the original instrument.

Qualified Rates

The following rates are considered “qualified rates”[1] under the general rule:

(i) The Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (SOFR);

(ii) Any qualified floating rate, as defined in §1.1275-5(b) (but without regard to the limitations on multiples), and

(iii) Any rate that is determined by reference to one of the rates listed above, including a rate determined by adding or subtracting a specified number of basis points to or from the rate or by multiplying the rate by a specified number.

This is a very broad definition of a qualified rate and, subject to the fair market value test, should accommodate almost all desired substitute rate.

Fair Market Value Test

In addition to using a qualified rate, the fair market value of the amended Exempt Instrument must be substantially equivalent to the fair market value before such amendment. The Proposed Regulations provide that the fair market value of an Exempt Instrument may be determined by any reasonable valuation method, as long as that reasonable valuation method is applied consistently and takes into account any one-time payment made in lieu of an adjustment to the index, such as adding basis points. Recognizing that fair market values tests often are difficult to implement, the IRS provided two safe harbors for determining the fair market value.

First Fair Market Value Safe Harbor

Under the first safe harbor, the fair market value test is met if at the time of the alteration the historic average of the LIBOR rate on the Exempt Instrument is within 25 basis points of the historic average of the rate that replaces it. The parties may use any reasonable method to compute a historic average if

Although this lookback test is relatively straight-forward, it too may be difficult to implement at times. For example, the Proposed Regulations are silent regarding the minimum length of the lookback period and the minimum number of data points that is acceptable, which raises the question if a lookback period designed to provide one data point would be sufficient. In addition, the Federal Reserve only began publishing SOFR in April 2018, and SOFR is calculated using data from overnight Treasury repo activity, whereas Exempt Instruments often use 30-day LIBOR.

On the other hand, the Proposed Regulations also provide that, for this purpose, an historic average may be determined by using an industry-wide standard, such as a method of determining an historic average recommended by the International Swaps and Derivatives Association (ISDA) for the purpose of computing the spread adjustment on a rate included as a fallback to an IBOR-referencing rate on a derivative or a method of determining an historic average recommended by the Alternative Reference Rates Committee (ARRC) for the purpose of computing the spread adjustment for a rate that replaces an IBOR-referencing rate on a debt instrument. We understand that ISDA and ARRC are working on guidance to assist in determining these historic averages for SOFR.

Second Fair Market Value Safe Harbor

Under the second safe harbor, the fair market value test is met if the parties to the Exempt Instrument are not related, and the parties determine that the fair market value of the amended Exempt Instrument is substantially equivalent to the fair market value of the Exempt Instrument before the amendment. In determining the fair market value of an amended Exempt Instrument, the parties must take into account the value of any one-time payment made in lieu of a spread adjustment (described below). This safe harbor should be satisfied in almost any arms-length rate substitution, but counsel will require certifications to support any opinion. This safe harbor may be the only one that applies if there is a substantial one-time payment.

Associated Alterations

“Associated alterations” are alterations that are both associated with the replacement of the LIBOR-based rate and are reasonably necessary to adopt or implement that replacement. This is also a broad concept. One example of an associated alteration is the requirement for one party to make a one-time payment to the other in connection with the replacement of the LIBOR-based rate to offset the change in value that occurs as a result of the replacement.

Importantly, the Proposed Regulations provide that any such payments have the tax character of the associated instrument. For example such a payment by an issuer to a holder of a tax-exempt bond should be tax-exempt interest. Likewise, a payment from a bondholder to an issuer should be considered additional bond proceeds. It is unlikely that any payments made as a result of associated alterations would be able to be financed on a tax-exempt basis.

Multiple Alterations or Modifications

The Proposed Regulations provide that when alterations or modifications go beyond replacing an IBOR rate and making qualified associated alterations, the excessive portion of the alteration is tested under the normal reissuance rules. The portion of the alteration that is a qualified associated alteration is treated as part of the existing terms of the instrument when the reissuance test is applied. As a result, the qualified associated alteration becomes part of the baseline against which the excess portion of the alteration or modification is tested.

The Proposed Regulations do not address the simultaneous alteration of multiple instruments between the same parties. In such situations, parties may be inclined to maximize a payment made with respect to an Exempt Instrument and to minimize a payment made with respect to other instruments. These circumstances will require careful consideration to make sure that the simultaneous alterations do not result in problems that undermine the tax relief provided by the Proposed Regulations.

Proposed Effective Dates

The IRS has proposed that generally the final regulations ultimately adopted would apply to an alteration of the terms of an Exempt Instrument that occurs on or after the date of publication of the final regulations in the Federal Register. However, a taxpayer may choose to apply certain portions of the Proposed Regulations to alterations that occur before that date, provided that the taxpayer and its related parties consistently apply the Proposed Regulations.

____________________________________________

[1] Note that a rate is not a qualified rate if it is in a different currency than the rate being replaced or if the rate is not reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds in the same currency. This should not matter much for Exempt Instruments, because all such instruments should be US dollar-based. Accordingly, this alert does not discuss qualified rates in other currencies.

Orrick Public Finance Alert | October.28.2019




NASACT: Treasury/IRS Seek Comment on Potential Tax Consequences of LIBOR Transition

In the summer of 2017, the United Kingdom Financial Conduct Authority announced that all currency and term variants of the London Interbank Offered Rate (LIBOR), including U.S.-dollar LIBOR (USD LIBOR), may be phased out after the end of 2021. LIBOR is used globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including floating rate mortgages, corporate and municipal bonds, asset-backed securities, consumer loans, swaps and other derivatives.

As a result of this announcement, several work groups were formed to recommend an alternative rate to LIBOR. In the U.S., the Alternative Reference Rates Committee (ARRC) was formed and identified the Secured Overnight Financing Rate (SOFR) as the alternative rate for USD LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight and collateralized by Treasury securities.

Earlier this year, the ARRC submitted to the Treasury Department and the Internal Revenue Service documents identifying various potential tax issues associated with the elimination of Interbank Offered Rates (IBOR). ARRC further requested that tax guidance be issued to address potential tax consequences so that an orderly transition may occur. The ARRC stated that existing debt instruments and derivatives providing for IBOR-based payments must be amended to address the transition.

The Treasury Department and the IRS have issued guidance to minimize potential market disruption and to facilitate an orderly transition. Specifically, the guidance would address concerns about whether the replacement rate in a debt instrument or non-debt contract would result in a taxable exchange of the debt instrument or contract.

Generally, the proposed regulations provide that alteration of the terms of existing financial instruments that switch from LIBOR to another alternative rate will not be treated as a modification resulting in the realization of income, deduction, gain, or loss for purposes of section 1001 of the Tax Code. However, the proposed regulations provide more fully the circumstances in which the modification could result in a taxable exchange.

The Treasury and IRS are specifically seeking comment on any complications under any section of the Code or existing regulations that may arise from the replacement of an IBOR with a qualified rate and that are not resolved in the proposed regulations.

NASACT members are urged to provide comments, which may be sent to Cornelia Chebinou no later than COB on Friday, November 15. Should enough comments be received, NASACT will prepare an association response. You may also comment directly to Treasury and IRS no later than November 25, 2019.




Hawkins Advisory: Guidance from Treasury Regarding USD LIBOR Phase-Out

The attached Hawkins Advisory discusses recently published Proposed Treasury Regulations that provide guidance as to the ability of parties to variable rate debt and other contracts that currently rely on LIBOR as an interest rate benchmark to alter the documents for these transactions for the purpose of incorporating interest rates reflective of other reference rates. The Advisory also reviews the status of other regulatory efforts to prepare the capital markets to transition from broad reliance upon LIBOR.

The Proposed Treasury Regulations generally provide that such changes will not be treated as “substantial” modifications of existing transactions that might otherwise result in a variety of federal tax consequences, including termination, if the new reference rate is a “qualified rate” and certain other requirements are met. This would create an exception from the current rules governing alterations.

This proposed exception may extend to changes to “fallback rates” and to “associated alterations” that are reasonably necessary to implement the underlying reference rate changes.

The Proposed Regulation comment period expires on Saturday November 23, 2019. Taxpayers may rely upon the Proposed Regulations for permitted changes that occur prior to the Final Regulation publication date, provided that the taxpayer and its related parties consistently apply the proposed regulations prior to such date.

Read the Advisory.




Moving on from LIBOR: Squire Patton Boggs

The IRS has issued proposed regulations that allow issuers to replace LIBOR rates associated with their bonds and swaps without triggering a reissuance of the bonds or a deemed termination of the swaps. The replacement rate must be a “qualified rate,” which includes the Secured Overnight Financing Rate (“SOFR”). A rate isn’t a “qualified rate” unless the fair market value of the bond or swap is the same before and after the replacement, taking into account any one-time payment made in connection with the switch. Although they’re only proposed regulations, issuers can apply them immediately.

Background – Once again, let us dazzle you with the most boring part of a very interesting topic.

Countless municipal bonds and countless derivatives[1] that relate to those bonds depend on the continued existence of one or more of the London Interbank Offered Rates, which are referred to generically as “LIBOR.”[2] In particular, many variable rate bond documents contain rates that are based on LIBOR, and many derivatives contain a variable stream of payments or receipts that is based on LIBOR. For municipal bonds that bear interest at a rate that is based on LIBOR, if LIBOR can’t be determined, then in most cases the bond documents will move the interest rate on the bonds into a “fallback” rate that could be very financially unattractive for the issuer. The same could be true for an interest rate swap with a stream of payments or receipts that is based on LIBOR.

Continue reading.

The Public Finance Tax Blog

By Johnny Hutchinson on October 22, 2019

Squire Patton Boggs




Financial Accounting Foundation Opens Search for New Executive Director.

Read the News Release.

10/24/19




GASB Outlook E-Newsletter Fall 2019.

Read the Newsletter.

10/24/19




MSRB Holds First Quarterly Board Meeting of FY 2020.

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met on October 23-24, 2019 for its first in-person meeting of Fiscal Year 2020. The Board’s standing committees and special committees met to set their priorities for the year and begin work, and the full Board discussed regulatory coordination and the organization’s cloud migration, among other topics.

“Much of the Board’s important oversight work and strategic thinking happens at the committee level,” said Board Chair Ed Sisk. “With two special committees leading the MSRB’s governance review and CEO search, and the creation of our new standing committee on stakeholder engagement, I look forward to an especially productive year.”

Read more about the MSRB’s FY 2020 priorities.

The Board’s CEO Search Special Committee interviewed executive search firms to facilitate the broad-based nationwide search for a new president and CEO. The Governance Review Special Committee discussed priority areas for its wide-ranging review of MSRB governance practices, including the size of the Board and selection of public and regulated members, which are established under MSRB Rule A-3.

Regulatory Coordination

The Board approved acting on the recommendation of the U.S. Securities and Exchange Commission (SEC)’s Fixed Income Market Structure Advisory Committee that the MSRB coordinate with the Financial Industry Regulatory Authority (FINRA) on further analysis of a practice in the corporate and municipal bond auction process referred to as “pennying.”

“The MSRB seeks to coordinate with FINRA on any matters that cut across the corporate and municipal bond markets to ensure our regulatory approaches are harmonized to the extent possible,” Sisk said.

The Board also directed staff to analyze the potential regulatory and market impacts of the SEC’s proposed order to grant conditional exemptive relief, which would, if granted by the SEC, permit municipal advisors to engage in certain limited activities in connection with the direct placement of municipal securities without registering as a broker.

As previously announced, the MSRB plans to coordinate closely with the SEC and FINRA to consider the impact of SEC Regulation Best Interest on MSRB rules.

Market Transparency

The Board received an update on the enterprise-scale migration of MSRB market transparency systems and data to the cloud.

“The Technology Committee and the full Board will closely monitor the MSRB’s journey to the cloud,” Sisk said. “We are committing the largest investment of resources since the launch of our Electronic Municipal Market Access (EMMA®) website to enhance the long-term reliability, data quality and security of our market transparency systems.”

Date: October 25, 2019

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




SEC Proposes Exemption From Broker Registration for Certain Municipal Advisors.

The U.S. Securities and Exchange Commission seeks comment on proposed exemption from broker registration for certain activities by municipal advisors.

The U.S. Securities and Exchange Commission (“SEC”) is seeking comments on a proposed exemptive order granting a conditional exemption from broker registration requirements for certain activities of municipal advisors.

The SEC adopted municipal advisor registration rules in 2013 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created “municipal advisors” as a new class of regulated persons. The SEC defined “municipal advisor” and “municipal advisory activities” in the Exchange Act rules, and the Municipal Securities Rulemaking Board developed a regulatory framework applicable to municipal advisors engaged in such activity.

Despite the parameters and framework provided, the industry has continued to express confusion about the limits of municipal advisor activity. In particular, questions continue to focus on whether certain activity could cause a municipal advisor to be acting as a broker and thus be subject to registration as such.

On October 2, 2019, the SEC published a request for comment on a proposed exemptive order. It would allow registered municipal advisors acting on behalf of a municipal entity or obligated person client (collectively, a “Municipal Issuer”) to solicit certain institutional investors (“Qualified Providers”) in connection with the direct placement of an entire issuance of municipal securities with a single Qualified Provider without being required to register as a broker. A registered municipal advisor relying on the proposed exemption would be required to:

The proposed exemption would apply solely with respect to the limited activities and the requirements noted above. According to the SEC, a municipal advisor complying with the conditions of the exemption could solicit Qualified Providers on behalf of Municipal Issuer clients and receive transaction-based compensation related to the direct placement of the municipal securities without being required to register as a broker.

The proposal contains a number of pointed questions and asks commenters to explain their reasoning for each comment provided. Comments are due 60 days following the SEC’s publication of the proposed exemption in the federal register.

by Laura S. Pruitt, Michael R. Butowsky, Sergio Alvarez-Mena and Margaret R. Blake (Peggy)

USA October 9 2019

Jones Day




Proposed Rules Addressing LIBOR Phase-out Help Ease Reissuance Concerns.

Since the 2017 announcement that the London interbank offered rate (“LIBOR”) may be phased out after the end of 2021, the municipal finance industry has been concerned that changes to debt obligations and related financial products necessary to address the phase out could cause an unexpected “reissuance” of the debt for federal tax purposes, which could result in negative consequences for issuers and debtholders. In response to these concerns, on October 9, 2019, the Department of the Treasury released Proposed Regulations addressing, among other things, whether changes arising out of the end of LIBOR will result in a reissuance for federal tax purposes (the “Proposed Regulations”).

In general, the Proposed Regulations provide favorable guidance that should help avoid a reissuance in most instances. In particular, the Proposed Regulations provide that, if the terms of a debt instrument or non-debt contract (e.g., a swap) are changed to reference a “qualified rate” in lieu of (or as a fallback to) LIBOR and the change does not change the fair market value of the debt instrument or non-debt contract or the currency of the reference rate, then such change will not result in a reissuance for federal tax purposes. For example, if the terms of a variable rate bond that has an interest rate based on USD-LIBOR are changed to provide an interest rate based on the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (commonly referred to as “SOFR”), such change typically will not trigger a reissuance of the bond, so long as the fair market value of the bond remains the same.

The Proposed Regulations name certain existing rates that are “qualified rates,” but also provide for flexibility to accommodate other rates. Further, to assist in addressing the fair market value requirement, the Proposed Regulations provide two safe harbors – one based on historic average of rates and the other on arm’s length negotiations – that, if met, will result in the requirements to be deemed satisfied.

It is expected that, in some instances, changes to address the LIBOR phase out will include “associated alterations” that are reasonably necessary to implement the change. For example, a party may be required to make a one-time payment to offset the change in value of the debt-instrument that results from the replacement of LIBOR with a qualified rate. The Proposed Regulations provide that changes that fall within the definition of “associated alterations” will not result in a reissuance. However, other contemporaneous changes (e.g., an increase in the rate to address deterioration of an issuer’s credit) must be analyzed separately and may trigger a reissuance.

The final version of Regulation will likely see changes as Treasury responds to comments on the Proposed Regulations, but the Proposed Regulations evidence a willingness to provide guidance setting a path forward that does not involve widespread reissuances and should help ease some of the concerns caused by the phase out of LIBOR. A taxpayer may choose to apply the Proposed Regulations to changes occurring on or after October 9, 2019, as long as the taxpayer and its related parties do so consistently.

© 2019 Bracewell LLP

Friday, October 18, 2019




Background on LIBOR and SOFR.

LIBOR is a global benchmark interest rate calculated daily. With $200 trillion in U.S. dollar exposures linked to it, LIBOR is the most widely used benchmark and has been called “the world’s most important number.” Financial products based on LIBOR include loans, corporate bonds, interest rate swaps, mortgages, student loans, and deposits. They also include municipal bonds and loans.

While ubiquitous, LIBOR became less suitable as a benchmark because it is meant to represent the cost of short-term unsecured borrowing by banks, and banks have substantially reduced their use of this type of borrowing. The LIBOR panel banks typically must submit rates based on their judgment rather than actual transactions, and many are understandably reluctant to continue doing so. Regulators and market participants are concerned that this “most important number” is no longer robust. The transition away from LIBOR became urgent in July 2017 when Andrew Bailey, head of the United Kingdom Financial Conduct Authority (FCA) and regulator of LIBOR, announced they would not require panel banks to submit quotes underlying LIBOR after 2021.1 In light of these statements, the future existence of LIBOR is uncertain.

In 2014, the Federal Reserve formed the Alternative Reference Rates Committee (the “ARRC”), a group including private-sector market participants, to select a rate to replace USD LIBOR and guide the transition. After much analysis of many potential alternatives, the ARRC announced in June 2017 that it had selected a new rate, the Secured Overnight Financing Rate (“SOFR”), as the recommended replacement for USD LIBOR. The Federal Reserve began publishing SOFR in April 2018. The ARRC selected SOFR for the following reasons:

To guide the transition, the ARRC was reconstituted in April 2018 with broad representation from official government entities, banks, asset managers, insurers, consumer groups, and industry trade associations. It is now tasked with (i) developing options for implementing SOFR across loans, bonds, and securities referencing U.S. dollar LIBOR (“cash products”) (ii) transitioning derivatives transactions to SOFR;
(iii) minimizing potential disruptions associated with either voluntary transition to SOFR or to an end of LIBOR; and (iv) communicating the rationale behind the change to SOFR and the status of implementation.

Transition to SOFR for Municipal Issuers

Taking inventories of existing products and processes that use LIBOR should be a first step for any municipal issuer. Some common uses of LIBOR among state and local government generally include:

Because many of these contracts referencing LIBOR do not (adequately) plan for the risk that LIBOR will be discontinued, such an event could have serious consequences for a wide range of market participants and investors. Strategies on how to handle LIBOR cessation in legacy contracts have not yet been worked out and municipal issuers together with their counsel and advisors should work with ARRC to seek ways to address these issues.

Developing mechanisms through which market participants can transition remaining legacy LIBOR-based products to SOFR, and launching new contracts referencing SOFR or other rates should be two core programs for municipal issuers in the coming years. In addition, addressing potential problems, like tax and accounting issues, as well as continuing education about the available resources and the transition timeline will facilitate the transition.

Legacy Contracts

The long duration of existing municipal bonds and loans implies that a considerable part of the outstanding stock will not have matured or rolled over by any likely end date for LIBOR. Securities and products with long duration need to be managed through “fallback” provisions set forth in contracts describing what happens if LIBOR is no longer produced.Open questions include who can legally change contract language to include fallback provisions (i.e. unanimous consent vs calculation agent), what the exact triggers to move to an alternative rate would be, and whether a spread should be included (or adjusted).

New Contracts

Issuers should also start thinking about and planning for new language and terms that would reference SOFR or other rates rather than LIBOR. As soon as they are comfortable with the new language they should start using it in new contracts.

Tax and Accounting Issues

There are a number of potential tax and accounting issues that will need to be addressed, including whether a move from LIBOR would cause a bond to lose its tax-exempt status. The ARRC is working on these questions.

Education and Resources

All market participants should prepare themselves for a world with SOFR, and potentially one without LIBOR. The ARRC maintains a website accessible to all where it will be releasing guidance and steps on transitioning as well as updates on market progress in this transition.

1 Recently, Andrew Bailey has also noted that the FCA could find that LIBOR was not representative, which would preclude supervised entities within the EU from trading new LIBOR contracts and would likely diminish LIBOR’s liquidity and usefulness to many participants.

Government Finance Officers of America

Thursday, October 17, 2019




Local Governments Lobby for Stable NAV Bill; BlackRock $​500B in Cash

As we mentioned in our October 3 Link of the Day, “Stable NAV Bill Filed in House Again,” efforts are again underway to roll back the last round of money market fund reforms and to return the $​1.​00 NAV for all money funds. Bills have again been filed in the House and Senate, and the lobbying has begun. A new letter from the Government Finance Officers Association, National Association of Counties, U.​S. Conference of Mayors, National League of Cities, International City/​County Management Association, National Association of Health and Educational Facilities Finance Authorities, National Council of State Housing Agencies, American Public Power Association and Large Public Power Council, tells us, “The organizations listed above, representing state and local governments, authorities, and other public entities, wish to express their support for S. 733 and H.​R. 4492, the bipartisan Consumer Financial Choice and Capital Markets Protection Act, which was recently introduced in the House by Representatives Gwen Moore Moore (​D-​WI) and Steve Stivers (​R-​OH), and in the Senate by Senators Pat Toomey (​R-​PA), Bob Menendez (​D-​NJ) and Gary Peters (​D-​MI).”

It states, “Our organizations have long opposed the Securities and Exchange Commission (​SEC) modifications to SEC Rule 2a-​7 of the Investment Company Act of 1940, which have created an unnecessary disruption to the public funding markets by changing the net-​asset-​value (​NAV) accounting methodology for institutional prime and municipal money market mutual funds (​MMMF) from stable to floating. Our members rely on the hallmark stable NAV feature in a variety of ways. First, many governments have specific state or local statutes and policies that require them to invest in financial products with a stable NAV. This is done to ensure that public funds are appropriately safeguarded to best serve the entity.”

The letter continues, “Second, MMMFs with a stable NAV are the most commonly used investment by state and local governments. Forcing governments to find alternative investments to prime and municipal MMMFs creates additional risk for public funds by driving them to lower yielding government funds or potentially less suitable products. Such options may not meet liquidity standards required by their governments to meet cash management policies and statutes. H.​R. 4492 and S. 733 would restore the ability of state and local governments to use prime and municipal stable NAV funds for their essential and critical investment needs.”

It also says, “In addition to the appropriate and historical use of MMMFs as state and local government investments, it is important to note that MMMFs are the largest purchasers of short-​term municipal securities. Due to the SEC’​s floating NAV rule, municipal money market funds have significantly curbed their appetite for these securities, thus decreasing demand and increasing costs to state and local governments that issue this type to fund state and local government operations and finance transportation projects, utilities, affordable housing, public schools and hospitals, and pollution mitigation, among other purposes.”

The GFOA, et. al. comment, “In fact, as a result of implementation of the floating NAV rule in October 2016, municipal MMMFs assets fell by nearly 50 percent, thereby shrinking the funding pool available to municipal borrowers. Municipalities fortunate enough to continue selling their debt to tax-​exempt funds saw their borrowing costs increase by nearly double the Federal Reserve’​s rate increases since implementation of the rule. Those short-​term costs have increased even more for state and local governments that can no longer sell their debt to MMMFs and must borrow from other investors or replace the debt with bank loans.”

Finally, they adds, “​State and local governments and other public entities have utilized prime and municipal MMMFs safely and effectively for more than 40 years to both manage liquidity and provide a reliable source of working capital to fund public services and finance continued infrastructure investment and economic development throughout all economic conditions. We ask that you support S. 733 and H.​R. 4492 so that state and local governments can continue to have unrestricted access to these safe and highly liquid capital markets tools.”

We obtained the letter from the GFOA, and learned about it from the Bond Buyer, who published the piece, “Finance officers renew push for stable net asset value.” They wrote, “​Finance officers say a change in net asset value requirements put in place by the Securities and Exchange Commission years ago has ‘​significantly’ curbed money market mutual funds’ appetite for short-​term municipal securities, negatively impacting issuers. In a letter sent to the House Financial Services Committee and the Senate Banking Committee this week, the Government Finance Officers Association renewed its call for money market funds to go back to a fixed net asset value after the SEC flipped the switch to floating NAVs in institutional MMMFs.”

In other news, a number of financial firms are releasing their latest Q3 earnings and hosting conference calls. On one of the few to discuss “​cash”, BlackRock CFO Gary Shedlin says, “In the recent market environment, clients’ preference has favored lower risk assets and approximately 85% of our organic growth over the last year has been in fixed income and cash, which have relatively lower fees compared to other asset classes…. BlackRock’​s cash management platform saw $​32 billion of net inflows, a post-​financial crisis record and crossed the $​500 billion AUM threshold as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions through Cachematrix and Aladdin. Cash is a strategic asset class and BlackRock’​s diverse cash management offering, including prime, ESG, government and munis, position us well to serve our clients’ cash needs and continue to grow our market share.”

CEO Larry Fink comments, “​For the first time since the financial market, the Fed announced that they would add liquidity into the system after a brief spike in short-​term repo rates signaled liquidity constraints, or maybe supply issues…. I’​ve spoken in the past about using technology to drive more of BlackRock’​s revenues. Technology is a priority and a strategic differentiator for BlackRock. In addition to generating direct technology revenues, we’​re increasingly using technology to enhance our results in our asset management business. For example, we’​re transforming our cash management business by integrating technology into our business model. We are delivering Cachematrix technology to help clients streamline their operations and quickly and efficiently make more informed decisions.”

He continues, “​Five years ago, cash management was a $​281 billion business. Through technology, organic growth and acquisition, we crossed $​500 billion in AUM in July. This represents over a 200 basis point global market share increase from five years ago and is an important milestone as scale is a key value proposition for clients in the asset class. Increasingly, more and more BlackRock holistic client relations are starting through a cash management assignment.”

Finally, Fink adds, “We are also seeing clients increasingly adapting shorter duration fixed-​income ETFs as a substitute for cash in their portfolios…. Having commission-​free for low duration makes ETFs a great alternative to bank deposits, a really good solution [​in place of] money market funds. And so, a commission free in the fixed-​income realm, cash and fixed-​income, is a real opener for so many more participants.”

cranedata.com

Oct 2019




MSRB Seeks Input and Volunteers for Advisory Groups.

Read the MSRB Notice.




FINRA Fines UBS Financial Services Inc. $2 Million for Continued Failures Relating to Short Positions in Municipal Securities.

Firm Inaccurately Represented the Tax Status of Thousands of Interest Payments to Customers; Restitution Ordered

WASHINGTON—FINRA today announced it has censured and fined UBS Financial Services Inc. (UBS) $2 million for the firm’s repeated failures in timely addressing municipal short positions and in inaccurately representing the tax status of thousands of interest payments to customers. FINRA also required UBS to pay restitution to customers who may have incurred any increased state tax liabilities, to pay the IRS to relieve customers of any additional federal income tax owed, and to certify within 90 days that the firm has taken appropriate corrective measures. FINRA previously sanctioned UBS for its failures in this area in 2015 (AWC No. 2014041645601, August 12, 2015).

Investors often purchase municipal securities because of the tax-exempt interest earned on those investments. However, when a FINRA member firm is short municipal securities purchased by customers, the firm – not the issuing municipality – is the source of the interest payments. That interest, commonly known as “substitute interest,” is subject to applicable taxes.

FINRA found that from August 2015, when FINRA previously sanctioned UBS for similar violations, through the end of 2017, UBS continued to fail to timely identify and properly address certain short positions in municipal securities. As a result, UBS inaccurately represented on customer account statements and Forms 1099 that interest payments for 2,853 positions in municipal securities were tax-exempt when, in fact, they were taxable, and inaccurately represented on approximately 950 additional customer account statements and Forms 1099 that interest payments were taxable, when they were tax-exempt. FINRA found that these failures were the result of the firm’s continued failure to establish reasonably designed supervisory systems and written supervisory procedures to timely identify short positions in municipal securities and its failure to provide reasonable guidance to its registered representatives instructing them how to address the short positions.

Jessica Hopper, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, said, “FINRA member firms must be attentive to municipal short positions that impact customer accounts, and it is critical that member firms convey accurate information to customers regarding their account holdings. In addition, member firms are expected to take prompt corrective action after being sanctioned and avoid repeat violations.”

In settling this matter, UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA allocated $1.75 million of the $2 million fine to the MSRB violations.

News Release | October 02, 2019

Michelle Ong (202) 728-8464
Mike Rote (202) 728-6912




UBS Fined for Repeated Client-Reporting Inaccuracies on Munis.

The Financial Industry Regulatory Authority on Wednesday fined UBS Financial Services $2 million for inaccurately representing to customers the tax status of municipal bond interest payments, and ordered it to pay any additional taxes they may owe because of the errors.

Regulators four years ago censured and fined UBS $750,000 for similar supervisory violations.

In an acceptance, waiver and consent letter the broker-dealer signed, Finra said it considered UBS’s “recidivism” in determining the fine.

The issue centered on “substitute interest” that UBS paid muni bond investors when it was short the actual muni bonds it sold. Such interest is taxable, unlike interest paid directly by muni issuers, but UBS on account statements and 1099 forms represented it as tax-exempt, the consent letter said.

It attributed the problem to UBS’s repeated failures to have supervisory systems and written procedures to identify and manage reporting of the short positions, and to reasonably guide brokers in addressing them.

“[I]t is critical that member firms convey accurate information to customers regarding their account holdings,” Jessica Hopper, Finra’s acting head of enforcement said in a prepared statement. “In addition, member firms are expected to take prompt corrective action after being sanctioned and avoid repeat violations.”

UBS agreed to the sanctions without admitting or denying Finra’s findings.

“We are pleased to have resolved the matter,” a UBS spokesman said.

The firm mischaracterized as non-taxable about $567,812 of interest on 4,689 muni positions in at least 3,800 customer accounts from January 2014 through the end of 2017, according to the consent letter. (The errors occurred, in part, because UBS recharacterized the short substitute interest in corrective statements as taxable only if a position were still open on the record date for the semi-annual bond coupon payment.)

In addition to the $2 million fine, UBS agreed to directly pay the IRS any additional tax customers may owe for tax years 2014-2017, relieving the customers of “the burden of filing amended federal tax returns and paying additional federal income tax,” the consent letter said.

UBS also agreed to compensate customers for any increased state tax liabilities incurred because of characterizing actual tax-exempt interest in some customer statements as substitute interest, the consent letter said.

Finra said that it is allocating $1.75 million of the $2.0 million fine to the Municipal Securities Rulemaking Board.

AdvisorHub

by AdvisorHub Staff

October 2, 2019




Muni Market Divides Over Disclosure.

Nearly a year after Securities and Exchange Commission Chairman Jay Clayton raised concerns about muni investors relying on stale disclosure, a fundamental disagreement has emerged about whether issuers are doing enough to provide fresh information.

While investor analysts seek more frequent continuing disclosure, underwriters and issuers maintain that the data they provide in accordance with the agreements they enter into when they sell their bonds is adequate. That impasse has been a subject of increased contention in recent months, and reared its head again Tuesday during a panel discussion at The Bond Buyer’s California Public Finance Conference.

“When they are in compliance, it’s still not enough,” said William Oliver, a panelist who is industry and media liaison for the National Federation of Municipal Analysts.

The panel’s discussion on the subject of regulation focused on the question of disclosure of interim financial information, something that has been a hot topic especially since Clayton’s initial December, 2018, pronouncement that he is concerned that investors in the muni market are relying on information that is many months old.

Clayton has returned to the topic in other public statements, and NFMA earlier this year acted on his interest to ask for the SEC to provide guidance about the types of information it would consider valuable to improving disclosure. Issuers have said that producing audited financials necessarily takes time, and have raised concerns that they might expose themselves to liability if they were to post interim unaudited financial information that turned out to be inaccurate.

“Maybe we should focus in on compliance with the continuing disclosure requirements as written,” said Leslie Norwood, a managing director and head of munis at the Securities Industry and Financial Markets Association. Norwood said she wanted to make sure to draw a distinction between issuers who are not living up to their continuing disclosure agreements and those who are in compliance.

She noted that in sectors where the market has demanded interim data, such as healthcare, it has become the standard practice for issuers to release that information much more regularly. But most investors are able to sell their bonds without doing so, she said, adding that it may be unwarranted to impose additional responsibilities on issuers. She wondered whether this is what investors really want.

“It is what investors want,” Oliver said. “It’s what they’ve wanted for the last 25 years.”

Heidi Schrader, the debt and treasury manager for the City of Riverside, California, pushed back on the ideas that issuers could reasonably provide this information and that investors are demanding it.

“We don’t operate on a profit like a corporation, and we have limited resources,” she said. “We’re not having any problems selling to the market because they do think we have sufficient disclosure.”

Daniel Kurz, a vice president at Morgan Stanley (MS), said he doesn’t think issuers are being penalized in the primary market due to any perception of sluggish disclosure.

“In today’s market, we’re not seeing a pricing penalty,” he said.

“I do think it can impact the secondary market,” he added, explaining that some investors might choose to hold off on a purchase until fresh financial information comes out. But in the primary market, with such strong demand and moderate supply, issuers aren’t suffering due to their disclosure agreements.

Kurz said underwriters can be hesitant to ask issuers to agree to more regular disclosure in a continuing disclosure agreement because issuers often say they can’t provide accurate information more quickly.

“We’d rather have the information be late than inaccurate,” Kurz said.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 09/25/19 01:03 PM EDT




BDA 3Q Update – Advocacy & Representation of Member Firms

Read the Update.

Bond Dealers of America

September 26, 2019




BDA Continues Aggressive Advocacy on Non-Dealer MA Request of SEC.

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




MSRB to Begin FY 2020 with Focus on Governance.

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]




GASB Tackles Phaseout of Libor, Growth of P3s.

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




SEC Charges Los Angeles County School District and Two Officials with Defrauding Investors in $100 Million Bond Offering.

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.




Opinion: Why It Is Time To Break Up The insiders Club That Regulates The $4 Trillion Muni-Bond Market

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.




Bond Buyer Podcast: SIFMA’s Bentsen and Norwood on SIFMA’s Muni Priorities, Policy and Regulations

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




Muni Market Awaits 2 Treasury Regulations.

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




Dealers Double Down on Opposition to Muni Advisors Running Private Placements.

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




BDA Urges SEC to Reject the PFM and NAMA Requests to Avoid Broker-Dealer Regulation

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]




MSRB Update Newsletter.

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




Deutsche Bank Emerges as Whistle-Blower in Bond-Rig Probe.

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




MSRB Proposed Rule Change to Amend and Restate the Application of Rule G-17: SIFMA Comment Letter

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.




BDA Releases a GSE Reform “White Paper” as the Debate on a Housing Finance Overhaul Heats Up.

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:

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

Bond Dealers of America

September 4, 2019




FINRA Issues Guidance on Member Firms’ Supervisory Obligations When Participating in Investment-Related Activities With Municipal Clients.

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




FAF Trustees Appoint Fiona Ma to the Governmental Accounting Standards Advisory Council.

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.




NFMA Seeks Comments on Draft Recommended Best Practices in Disclosure for Dedicated Tax Bonds.

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.




SEC Chairman Calls for Legal Bulletin on EMMA Disclosures: King & Spalding

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 (FIMSAC) Meeting.

SEC Fixed Income Market Structure Advisory Committee Meeting

Discussion Panels

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

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

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

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

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 Discusses Regulation Best Interest.

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.




MSRB Update Newsletter.

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




Muni OS Boilerplate Headscratcher: Price Is ‘Priced To The Call Date’?

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




SIFMA Comment Letter: Request for Comment on MSRB Rule G-23 on Activities of Dealers Acting as Financial Advisors

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 Groups Disagree on Role-Switching Prohibition.

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




FINRA Notice Highlights Confusion.

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




FINRA Regulatory Notice 19-28: Guidance Regarding Member Firms’ Supervisory Obligations when Participating in Investment-Related Activities with Municipal Clients.

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:

View Full Notice




FINRA Reminds Firms Of Potential Municipal Advisor Registration Obligations.

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




The View from Washington: A Conversation with the MSRB

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




MSRB Announces New Officers and Board Members for FY 2020; Lynnette Kelly Retiring from MSRB.

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]




One of the Most Lucrative Regulatory Jobs in Washington Is Now Open.

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




It’s Time for Truth in State and Local Government Finances.

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




Everything You Need to Know About the Municipal Securities Rulemaking Board.

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




New EMMA Newsletter.

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




BQ Bill Introduced in Time for August Recess – What You Need to Know

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




Lawyers, Issuers Say SEC’s Concern On Muni Disclosure Is Mostly Unfounded.

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




SEC Chair Clayton Raises New Concern About Muni Disclosure.

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




MSRB Opts to Chuck Year-Old Rule Amendment in Unusual Step.

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




New MSRB Report Examines Impact of Mark-Up Disclosure Rule.

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]




Coal's Dimming Future Spotlights Public Finance Disclosure Shortcomings.

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




SEC Charges Municipal Advisor with Breach of Fiduciary Duty.

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 Hearing on Environmental, Social, and Governance Disclosure (ESG) Proposals.

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

Continue reading.

Wednesday, July 10, 2019




GFOA's Federal Liaison Center Releases New Advocacy Resources.

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:

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




MSRB Course on Order Periods and Syndicate Practices.

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.




MSRB Rule G-37: Balancing Market Integrity with First Amendment Rights

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




BDA Submits Response to SEC Regarding Recent PFM Request for Interpretative Relief.

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:

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




BDA Submits Letter in Support of Recent FIMSAC Proposal.

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




SEC Approves Amendments Aimed At New Issue Transparency.

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




In Major Blow To Its Opponents, SEC Pay-to-Play Rule Survives D.C. Circuit Challenge.

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




MSRB Podcast: Municipal Advisor Considerations in Preparing for Examination

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




GASB Issues Implementation Guide on Fiduciary Activities.

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.




BDA Submits Comment Letter on TRACE Pilot/Corporate Bond Block Trade Dissemination.

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:

Bond Dealers of America

June 12, 2019




MBFA’s 2019 Mid-Year Advocacy Report.

Read the report.

JUNE 6, 2019




NFMA Newsletter.

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.




MSRB Podcast: Dealer Concentration and Participation

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

Listen to learn more.




GFOA's New Code of Ethics.

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.




GASB Invites Governments to Participate in New Process for Collecting Information About Implementation.

Read More.

06/03/19




Muni Market Torn On Revisiting Municipal Advisor CUSIP Requirements.

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






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