The 2023 SEC Municipal Securities Disclosure conference took place on May 10, 2023, the first in nearly three years. Hunton Andrews Kurth LLP’s municipal disclosure lawyer Andrew Kintzinger participated as a speaker in the first panel discussion, “Voluntary Disclosure,” moderated by Adam Wendell, Deputy Director of the SEC Office of Municipal Securities (“OMS”). Mr. Kintzinger, along with other panelists, discussed current trends with voluntary disclosure and the value of voluntary disclosure generally to rating agencies, investors, and municipal analysts. In addition, the panelists deliberated ways to encourage additional voluntary disclosure with guidance from the SEC while mitigating exposure to antifraud liability. Key takeaways from the panel included a reminder that, although Regulation FD1 does not apply to municipal securities issuers, selective disclosure by municipal issuers should still be avoided. We recommend that issuer clients ensure that proper disclosure policies and procedures are in place to avoid selective disclosure. In addition, most municipal issuers still struggle to define what is “material” in the absence of clear guidance from the SEC. The panel echoed what we are seeing in our practice as a trend among issuers to avoid materiality determinations altogether by simply erring on the side of disclosure. It remains to be seen whether too much information ends up eroding the benefits of good disclosure, particularly for retail investors of municipal bonds.

The second panel discussion, the “Financial Data Transparency Act (“FDTA”),” moderated by Mary Simpkins, Senior Special Counsel of OMS, discussed the FDTA’s requirements that the SEC adopt structured data standards for information submitted to the MSRB. The potential scope of the requirement is remarkably broad – the FDTA mandate is not limited to specific information (e.g., financial statements alone), particular submissions (e.g., primary or secondary market disclosures alone), or particular categories of municipal market participants (i.e., broker dealers’ trade reports) could also be included. The “covered data” will need to be fully searchable and machine readable on a far greater level than simply a searchable PDF, meaning that every piece of data will need to be given a commonly agreed-upon “tag.” Given the diversity of issuers and credits in the municipal securities market (compare, for example, the Official Statement for a large hospital system versus a water and sewer system), establishing a common taxonomy for all municipal securities market data could be a challenge. Based on the timeline set out in the FDTA mandate, we expect the SEC and other federal financial regulators to issue proposed rules by mid-2024, and final rules by December 2024 to establish data standards that are to be effective no later than December 2026. Until the proposed rules are issued, we can only surmise that implementation of the structured data standards will generally track the implementation of XBRL standards for financial statements that publicly reporting companies were required to undertake beginning in 2009. Based on our experience, if the burden to adopt data standards is left up to each individual municipal securities data reporter, then any affected municipal securities issuer will likely end up working closely with its auditor and internal accountants over a year or more to understand the requirements, select an appropriate electronic platform and convert its financial statements and disclosures into the required ‘tagged’ format. An interesting proposal from the FDTA panel was more centralization of the tagging work to ease the burden on individual issuers (especially smaller or new issuers) – such as the SEC building the platform itself, or that all issuers in a state send their information to one entity who does the work for them. Of course, there are pros and cons to that centralization idea. Any initial taxonomy will undoubtedly undergo revisions as the market provides the SEC with feedback on applying the tags and utilizing the structured data. Transitioning to structured data is no simple undertaking, and we will be following the proposals closely.

The conference continued with two afternoon panels: “Broad Risks,” moderated by Mark Elion, Senior Counsel of OMS, discussed the current trends in Environmental, Social and Governance (“ESG”) risks, and “Hot Topics and Cold Cases,” moderated by Dave Sanchez, Director of OMS, discussed recent enforcement actions for the SEC in the municipal securities market and their applications regarding responsibilities for municipal advisors and the use of the “Limited Offering” exemption under SEC Rule 15c2-12.

During the conference, SEC Chair Gary Gensler provided opening remarks, SEC Commissioner Jaime Lizárraga provided remarks prior to the ESG panel, SEC Commissioner Hester Peirce provided remarks prior to the last panel, and OMS Director Dave Sanchez provided closing remarks.
_______________________

1 See 17 C.F. R. § 243.100-.103 (2022).

Hunton Andrews Kurth LLP – Shaney B. Lokken, Andrew R. Kintzinger and Justin K. Hicks

May 22 2023

Norwalk, CT, May 25, 2023 — The Governmental Accounting Standards Board (GASB) recently added a major project on accounting and financial reporting issues for Infrastructure Assets to the Board’s Current Technical Agenda.

The project will evaluate standards-setting options designed to make related information about infrastructure assets:

1. More useful for making decisions and assessing government accountability
2. More comparable across governments and more consistent over time
3. More relevant to assessments of a government’s economic condition, and
4. Better reflect the capacity of those assets to provide service and how that capacity may change over time.

The project will consider how infrastructure assets should be recognized and measured in financial statements and whether the optional use of the modified approach should continue to be allowed to report infrastructure assets. It will also evaluate whether additional information related to the maintenance and preservation of infrastructure assets should be presented in financial statements, and, if so, what information and where in the financial report that information should be provided.

Research conducted by the GASB over the last several years on financial reporting information about capital assets, including infrastructure assets, has looked broadly at these areas. Many stakeholders shared their perspective on the value of information about capital assets in financial statements, difficulties in providing that information, and what additional information about capital assets is needed.

The Board decided to add a project to the agenda focusing on infrastructure assets after carefully evaluating the staff’s research findings this spring and taking into account the high level of interest from the Governmental Accounting Standards Advisory Council, the GASB’s advisory council, which ranked the project highly during its annual project prioritization.

Washington, D.C. — The Municipal Securities Rulemaking Board (MSRB) today published a new report on trading patterns in the primary and secondary markets for municipal bonds, finding notable differences in the buying behavior of individual and institutional investors in each of these markets.

The report reveals that individual investors are more prevalent in the secondary markets but have limited participation in the primary market. More specifically, while individual investors may access the new issue market through separately managed accounts, mutual funds and ETFs, individual investors buying bonds in non-managed accounts do not participate much at all. Institutional investors, on the other hand, dominate the primary market.

“There are a number of reasons individual investors may not be able to participate in the primary market,” said John Bagley, MSRB Chief Market Structure Officer. “On negotiated deals, where institutional investors have priority, individual investors would likely have difficulty getting access to bonds. Similarly, on competitive deals, prices and yields can change frequently, making it hard for individual investors to participate prior to the bid time.”

The findings in the report show that individual investors, defined as trade sizes of $100,000 or less, purchased only 1.2% of the par amount traded in the primary market and 13.4% of the par amount traded in the secondary market. Conversely, institutional investors, those making trades of $1 million or more, clearly dominated both the primary and the secondary markets in terms of par amount traded. They purchased 85.4% of the par amount traded in the primary market and 68.2% of the par amount traded in the secondary market.

In terms of number of trades, individual investors accounted for over 83% of the trades in the secondary market but only 30% of the trades in the primary market, whereas institutional investors accounted for 27% of trades in the primary market and only 4% of trades in the secondary market.

“While individual investors may have valid reasons not to access the primary market, we believe that more balanced participation between the primary and secondary markets could bring benefits to individual investors, including access to bonds not available in the secondary market, as well as potentially better yields in some cases,” said Bagley.

Read the report.

Date: May 24, 2023

Contact: Leah Szarek, Chief External Relations Officer
202-838-1500
[email protected]

View the MSRB notice.

May 15, 2023

Statistical report on trading, interest rate and other characteristics of the municipal variable rate securities market.

View the MSRB publication.

May 15, 2023

A broker-dealer settled FINRA charges for failing to monitor conflicts of interest related to the sale of bonds to a bank affiliate (“Affiliate”).

In a Letter of Acceptance, Waiver and Consent (“AWC”), FINRA said that bank regulations forbade the Affiliate from purchasing municipal bonds entailing a markup from the broker-dealer.

FINRA determined that the broker-dealer failed to implement a reasonable supervisory system to ensure that the Affiliate was not charged such a markup. FINRA found that the broker-dealer’s actions violated MSRB Rule G-27 (“Supervision”).

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $50,000 fine and (iii) comply with the undertakings set forth in the AWC.

Fried Frank Harris Shriver & Jacobson LLP

May 18 2023

The SEC approved an MSRB proposal to amend Rule G-40 (“Advertising by Municipal Advisors”) which will allow for the use of testimonial statements in municipal advisor advertisements. The MSRB set a compliance deadline of July 3, 2023.

As previously covered, the rulemaking will (i) establish supervisory obligations specific to testimonial use, (ii) modify the definition of “municipal advisory client” with regard to soliciting municipal securities businesses to align with MSRB Rule G-38 (“Solicitation of Municipal Securities Business”) and (iii) create a conforming obligation under MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to keep any records relating to testimonial advertising, including any record of payment for testimonials.

In response to comments received during the initial comment period, the MSRB amended its proposal to include (i) clarifying language to “enhance readability and understanding” and (ii) social media guidance consistent with the proposed changes to Rule G-40.

May 17 2023

Fried Frank Harris Shriver & Jacobson LLP

With advance refunding currently dead in the water, muni leaders see a change in the regulation of bank-qualified bonds as low-hanging fruit that could help attract more Republicans to get involved in public finance issues.

The Government Finance Officers Association federal advocates advanced this position during the meeting of the group’s Committee on Governmental Debt Management before the opening of the group’s annual conference in Portland, Oregon. The Bank-qualified cap is one of the core issues for muni advocates, particularly those representing smaller issuers and regional banks and broker- dealers.

“If we get a standalone bill. I would say we’re at least 65% of the way there,” said Jarron Brady, federal policy analyst, GFOA. The legislative change sought by GFOA and other muni groups would raise to $30 million from $10 million the cap on how much an issuer could issue in a calendar year and maintain the ability to sell debt directly to banks as bank-qualified.

The direct sale of BQ debt to banks greatly simplifies the process for smaller issuers. The GFOA believes the qualification lowers debt issuance costs by an estimated 25 to 40 basis points. The Tax Reform Law of 1986 set the bank-qualified limit at $10 million for a calendar year and allows banks to deduct most of the carrying cost of that debt as a business cost. The American Recovery and Reinvestment Act raised the cap to $30 million a year in an effort the help pull the economy out of the global financial crisis. ARRA also applied the limitation to individual borrowers rather than conduit issuers.

The effort has a familiar champion in the form of Rep. Terri Sewell, D-Ala., who unsuccessfully introduced similar legislation in 2019.

The National League of Cities, the National Association of Counties, Securities Industry and Financial Markets Association, and the Bond Dealers of America are all pulling on the same rope, as are other groups representing specific groups of issuers such as healthcare and education finance authorities.

“The current bank-qualified bond limits were established in 1986,” said Michael Decker, SVP, Research and Public Policy, BDA. “As a result of inflation, they’re sorely undervalued relative to where they were decades ago, worth less than half in real dollar terms of what they were then.”

GFOA touts a sizable uptick in issuance during the years the cap was lifted. “The data shows that when the cap was lifted to $30 million during the Obama administration, municipalities all across the country were issuing debt at a much higher rate,” said Brady. You see the data go from this flat line to a jump. We’re hoping to get back to that jump.”

A budget reconciliation bill that surfaced in the fall of 2021 contained provisions to raise the cap back to $30 million but failed to reach the finish line.

Efforts in Congress to put advance funding back into play are currently hamstrung by efforts to repeal the Tax Cuts and Jobs Act, the legislative cornerstone of the Trump presidency and viewed as untouchable by House and Senate Republicans.

The appeal of raising the BQ limit spreads across party lines. “Most members of Congress have a small town in their district somewhere,” said Decker. “It applies equally to red and blue states so it’s popular, it’s beneficial, and It’s long overdue.”

By Scott Sowers

BY SOURCEMEDIA | MUNICIPAL | 09:06 AM EDT

Limited offering exemptions, once a common exemption from the official statement requirements under the federal securities laws, may soon be rarely utilized by underwriters for fear that compliance risks are too high.

That’s according to representatives from dealer groups speaking at the 2023 GFOA Annual Conference, who bemoaned the speed and volume with which the Securities and Exchange Commission is producing rule proposals and recapped much of what was said at last week’s SEC Municipal Disclosure Conference.

Michael Decker, senior vice president for research and public policy at the Bond Dealers of America, addressing the room full of issuers, attempted to reassure them that there is no direct risk to themselves associated with the limited offering exemption.

“Nobody is going to come after the issuer,” Decker said. “The effect you’re likely to see is that some underwriters are likely to say we don’t want to use this exemption anymore, because the compliance risks are too high. I would just say be prepared.”

The limited offering exemption allows underwriters to underwrite deals for which the issuer has not produced an official statement, if the bonds are being sold to 35 or fewer sophisticated investors and the underwriter has a “reasonable basis” to believe that those investors will not sell the bonds on the secondary market.

The Commission has urged those concerned they’re in violation of the exemption to reach out and contact the SEC at [email protected], similar to the self-reporting encouragement offered when the SEC sought industry-wide settlements in the Municipalities Continuing Disclosure Cooperation Initiative, which was introduced in 2014 to address potentially widespread violations of federal securities laws.

But many regard this new initiative as forcing certain requirements on the market in a particularly aggressive fashion and with it, changing how broker-dealers and underwriters handle compliance.

“MCDC, as well as prior statements from the SEC and enforcement actions from the SEC, really changed the compliance role of the broker-dealer firms in the muni space,” said Leslie Norwood, managing director and associate general counsel of the Securities Industry and Financial Markets Association. “A record retention requirement is being imputed for (Rule) 15c2-12, where one is not specifically written into 15c2-12 but regulators have created one out of enforcement.”

“Here again, we see the SEC imputing a record retention requirement with regards to the limited offering exception, where nothing is written specifically into the rule,” Norwood said, referring to the idea that broker-dealers needed to document their reasonable basis for belief that the bonds would not end up trading. “Regulation by enforcement.”

LeeAnn Gaunt, chief of the SEC enforcement division’s Public Finance Abuse Unit, said around the time that MCDC was concluding in 2016 that MCDC both raised the level of awareness of continuing disclosure problems and led to improvements in the market. But how far they’ll take this enforcement of the limited offering exemption remains uncertain.

But the fact that the Commission seems to pick up a niche issue (Gaunt said at last week’s SEC Municipal Disclosure Conference that she’d only recently heard of the exemption) and enforce it en masse does cause concern for other areas, such as green bonds.

For the muni market, there are two major concerns when it comes to ESG so far. The first is climate risk disclosure which, has to do with climate risks which could impact issuers’ ability to repay debt and what issuers are doing to mitigate those risks. The other is labeled bonds, which simply means designating bonds as ESG. It’s this latter which is causing some concern for BDA’s members, Decker said.

“There’s not really a standard for what constitutes a green bond,” Decker said. “There are third party evaluating organizations that will tell you to meet their standard for what is a green bond but it’s not clear that, 10 years from now or 20 years from now when the SEC really starts to dig into this in an MCDC like way, are they going to accept those standards.”

Norwood and Decker agreed that the Commission continues to stack rulemaking proposals on top of each other that have caused a dizzying effect but it also gives the muni market a good opportunity to express its thoughts on the many proposals, and express individual concerns.

“This SEC administration has been very aggressive in their regulatory agenda across markets,” Decker said. “On the other hand, staff went out of their way to say they really welcome feedback.” He views this as an opportunity to take them up on it.

By Connor Hussey

BY SOURCEMEDIA | MUNICIPAL | 09:04 AM EDT

In a rebuke to company policies deemed pro-environmental, social and governance or “woke,” several states have introduced or passed so-called “anti-boycott” laws.

These laws are intended to ban companies, such as commercial banks and investment banks, from doing business in the state if they are perceived as boycotting or otherwise discriminating against: (i) certain industries, such as fossil fuels, firearms, timber, mining, or agriculture, or (ii) other companies that do not support their particular ESG, DEI (diversity, equity and inclusion) or other social, political, or ideological interests.

As a practical matter, anti-boycott laws may reduce competition among underwriters, resulting in increased borrowing costs. Ultimately, the staying power of these laws will depend on a number of factors, including the willingness of states to accept increased borrowing costs or whether to utilize the laws’ existing exceptions to obtain a more economically advantageous deal.

Such laws generally target contracts with state and local governments for goods and services valued at $100,000 or more. To ensure compliance, companies are typically required to certify that they do not and will not boycott such companies.

Many of these laws include exceptions, however, where the requirements: (i) are inconsistent with legal duties related to the issuance or incurrence of debt obligations or the management of the funds or (ii) interfere with the ability to obtain particular goods or services in an economically practicable manner.

Florida’s new anti-boycott law, “An Act Relating to Government and Corporate Activism” (HB-3), goes a step further, effectively banning all state and local issuers in Florida from issuing ESG bonds. Under the law, ESG is defined simply as “environmental, social, and governance” and “ESG Bonds” is defined broadly as “any bonds that have been designated or labeled as bonds that will be used to finance a project with an ESG purpose.”

The definition of issuer is equally broad, including all state and local bond issuers, including the State’s Division of Bond Finance, municipalities and quasi-public corporations, from issuing ESG bonds. Significantly, the Florida Higher Education Facilities Financing Authority (FHEFFA), the issuer of tax-exempt bonds benefitting private colleges and universities in the state, is identified as an issuer in this definition. Effectuating HB-3, as further discussed below, will therefore determine the extent to which private colleges and universities may obtain tax-exempt financing through FHEFFA for ESG-related projects.

Arguably, HB-3 is intended to ban bonds branded in some manner as ESG. Some of the examples of bonds designated or labeled as having an ESG purpose that are included within the definition of ESG bonds are green bonds, Certified Climate Bonds and GreenStar designated bonds. Thus, an issuance of bonds named (i.e., “designated or labeled,” two concepts that are often conflated) “Green Bonds,” “Sustainability Bonds,” or “Social Bonds,” or with similar identifiers, would be banned by HB-3, as such naming choice tags the bond issue as financing a project with an ESG purpose.

If this is the end of the story, then the impact of HB-3’s ban on the issuance of ESG bonds is a fairly simple determination.

The situation become less clear, however, when considering bonds issued for the purpose of financing a project with an arguably ESG purpose, where the name of the bond issue lacks a specific ESG identifier.

Practically speaking, the proceeds of most municipal bonds have some ESG purpose, regardless of the bond issue’s name. Additionally, the official statement and the investor roadshow, which are used in marketing the bonds to investors, typically include a description of the project to be financed with the bonds proceeds.

As such, the wording of HB-3, particularly the definition of ESG bonds, raises a potential validity question due to the following additional examples included in the definition of ESG bonds of bonds designated or labeled as having an ESG purpose: (i) environmental bonds marketed as promoting a generalized or global environmental objective; (ii) social bonds marketed as promoting a social objective; and (iii) sustainability bonds marketed as promoting an environmental and social objective.

Arguably, any bond-financed project marketed through the official statement or investor roadshow as beneficial to the Florida environment, state or local government, or society at large, could fit within these categories, including, wind turbines, solar panels, hurricane preparedness equipment, affordable housing, public schools, libraries, elderly or youth centers, public safety facilities, or a city or town hall.

Complicating matters are bond-financed projects that not only support a particular Florida environmental objective, but also positively impact the environment generally or globally. Since the language of HB-3 alone does not clarify the matter, the extent to which such bond-financed projects would be banned by HB-3 ultimately depends on Florida’s interpretation of ESG bonds specifically and enforcement of HB-3 generally.

In any event, it is unlikely that HB-3 would affect the inclusion of general climate-related disclosure in an official statement for Florida bonds. Florida issuers should proceed with caution, however, in their approach to disclosure in a post-HB-3 world. To avoid potential liability under Section 17(a) of the Securities Act or Rule 10b-5 under the Securities Exchange Act, Florida issuers must avoid making any untrue statement of a material fact, or omitting any such material fact, including those related to environmental, social or governance matters, in their official statements.

Such legal considerations aside, if less information is available to investors to evaluate an issuer’s credit quality, the result may be higher interest rates or the inclusion of more onerous covenants to mitigate any perceived (albeit potentially nonexistent) risks.

HB-3 also bans Florida issuers from entering into contracts with rating agencies whose ESG scores will have a direct, negative impact on the issuer’s bond ratings. Ultimately, it may prove impracticable for a rating agency to either: (i) extract environmental, social and governance considerations from the total mix of information available to a rating agency in its general credit review of an issuer, particularly compared to other states, or (ii) declare, at the time it enters into a contract with a Florida issuer, but prior to commencing and completing its credit review, that such ESG considerations, isolated from further relevant context, would not directly affect the issuer’s bond rating in a negative way.

Significantly, unlike other so-called anti-boycott laws, HB-3 permits financial institutions (including federal or state banks) to circumvent its anti-boycott provisions in connection with the purchase or underwriting of bonds (other than ESG Bonds) issued by governmental entities in the State.

Therefore, commercial banks and investment banks may participate in Florida bond transactions notwithstanding any perceived boycott of particular industries. This exemption may reduce the risk of increased borrowing costs resulting from less competition among underwriters. However, the benefit may be offset by a potentially smaller investor pool, as ESG funds and other impact investors look to other states for ESG-related investment opportunities.

HB-3’s ban on issuing ESG Bonds could be narrowly tailored to minimize disruption or broadly interpreted for a far-reaching impact, depending particularly on the meaning of ESG bonds. The latter scenario may result in a number of unintended consequences, including validation questions, ratings disruptions and disclosure issues. HB-3 could also have a precedent-setting effect beyond Florida.

It will be interesting to observe Florida’s approach to effectuating, interpreting and enforcing HB-3, and the degree to which other states take notice.

By Neal Pandozzi

BY SOURCEMEDIA | MUNICIPAL | 05/17/23 01:22 PM EDT

Neal Pandozzi is a partner with the law firm Bowditch & Dewey, LLP in Boston, Massachusetts. He has over two decades of public finance experience. He is licensed to practice law in Massachusetts and Rhode Island.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization (SRO) established by Congress to safeguard the $4 trillion municipal securities market, is soliciting applications to serve as a municipal advisor representative on the Board of Directors. The selected candidate would fill a vacancy that will be created when Jill Jaworski leaves the Board to assume the role of Chief Financial Officer for the City of Chicago.

“The MSRB congratulates Jill on her appointment to serve as the CFO of the City of Chicago,” said MSRB Chair Meredith Hathorn. “Jill’s new role creates an opportunity for qualified individuals to consider applying to serve on the Board and work with us to advance the organization’s long-term strategic goals to continually modernize the market’s rules, technological infrastructure and data.”

Applications from non-dealer municipal advisors will be accepted from May 15, 2023 through June 16, 2023, via the MSRB’s Board of Directors Application Portal. At least one letter of recommendation must be submitted with the application. The selected candidate is expected to join the Board on October 1, 2023, and serve the remaining three years of Jaworski’s term. Separately, the Board is continuing its current nominating process to elect two public and two regulated representatives to join the Board on October 1, 2023 to serve a four-year term.

“We welcome interested municipal advisors to reach out to us with questions about Board service,” said Thalia Meehan, Chair of the MSRB Nominating Committee, which leads the process of nominating new Board members. “The Nominating Committee is seeking candidates who will best represent the diversity of perspectives within the municipal advisory profession.” Hear Meehan and other Board members share their reflections on what it means to serve on the Board.

The Board of Directors of the MSRB is charged with setting regulatory policy, authorizing rulemaking, enhancing market transparency systems and overseeing operations for the organization. The Board is currently overseeing the execution of the MSRB’s long-term strategic goals of modernizing the MSRB rule book, enhancing market transparency through investments in technology, fueling innovation through data, and upholding the public trust.

The Board is composed of 15 total members. Eight members are representatives of the public, including investors, municipal entities and other individuals not regulated by the MSRB, and seven members are from firms that are regulated by the MSRB, including representatives of broker-dealers, banks, and non-dealer municipal advisors.

Additional details on the Board application process, information about Board service requirements and FAQs are available on the MSRB’s website. Questions regarding the application and selection process should be directed to Jake Lesser, General Counsel, at 202-838-1395 or [email protected].

Date: May 15, 2023

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

The SEC set a comment deadline of May 30, 2023 for an MSRB rule proposal to (i) extend remote office inspection relief until June 30, 2024 and (ii) remove references to expired pandemic-related relief for brokers-dealers and municipal securities dealers.

The MSRB initially provided the relief during the pandemic to allow dealers to conduct remote inspections of municipal offices of supervisory jurisdiction, branch offices or non-branch locations under MSRB Rule G-27 (“Supervision”) Supplementary Material .01 (“Temporary Relief for Completing Office Inspections”). Under this MSRB proposal, dealers must make and maintain the required records for all offices or locations remotely inspected, including any offices or locations for which the dealer imposed additional supervisory procedures or more frequent monitoring. The proposal also removes outdated references to relief provided by the MSRB during the pandemic under MSRB Rule G-16 (“Periodic Compliance Examination”).

The proposed rule change is scheduled to become operative on July 1, 2023.

Fried Frank Harris Shriver & Jacobson LLP

May 8 2023

Thank you, Adam [Allogramento], for that kind introduction. I would also like to thank Dave Sanchez, director of the Office of Municipal Securities, and SEC Chair Gensler for convening today’s conference. To OMS staff and all of today’s panelists, thank you for contributing your time and expertise.

The market for municipal securities plays a critical role in U.S. capital markets and in our economy. State, city, local, tribal, and territorial governments and other jurisdictions depend on the securities they issue to finance their priorities – hospitals, roads, schools, affordable housing, and other infrastructure. A well-functioning municipal market benefits issuers through lower borrowing costs. The public also benefits through lower project costs and fees.

The municipal securities market is primarily a retail market. Of the $4 trillion in outstanding municipal bonds at the end of 2022, 40 percent were held by individual investors. An additional 26 percent were held by mutual funds. Protecting these retail investors and ensuring full and effective disclosure in a market as large, diverse, important, and complex as the municipal securities market is an important goal.

As you covered in this morning’s panel, President Biden signed into law the Financial Data Transparency Act, or FDTA, included in the National Defense Authorization Act of 2022. The FDTA was designed to update the standards for data collection and dissemination by financial regulators. The goal was to make financial data more accessible and uniform, and more useful to investors and other market participants. It also requires the federal financial regulators to pursue interoperability across agencies to streamline compliance. This congressional mandate requires financial regulators to engage in a joint rulemaking to achieve these goals.

The FDTA requires the SEC to consult market participants in establishing data standards for the municipal market. Constructive, consistent and extensive engagement between the Commission, issuing jurisdictions, investors, and advocates can yield effective standards that provide more accessible and useful information to investors.

Congress gave the SEC, and the other federal financial regulators, two years to develop and publish data standards through a joint rulemaking. After those standards are finalized, the SEC will have up to two more years to issue rules for municipal securities. This means that municipal issuers and other market participants may have up to four years to prepare before any data standards adopted under FDTA are issued. Moreover, any SEC structured data rule will be subject to notice and comment rulemaking. I encourage all stakeholders in the municipal market, including investors, advocates and issuers, to participate meaningfully and constructively in the rulemaking process.

The FDTA allows for scaling of disclosure for smaller issuers – state, local, tribal, and territorial governments and other relevant authorities. This flexibility may address some of the concerns about costs for smaller municipal issuers.

In addition to your discussions on FDTA, it is encouraging that you have panels focused on meaningful and effective voluntary disclosures related to ESG and cybersecurity.

We have seen strong demand from investors for ESG disclosures that incorporate comparability and robust metrics. In the absence of these effective disclosures, the result is inconsistency and lack of comparability. Aiming for the highest-quality, most investor-useful information regarding ESG risk disclosures is good for investors and for the municipal securities markets.

Your perspectives on best practices for cybersecurity disclosures for municipal issuers are also important. The SEC has proposed a set of cybersecurity rules. Similar to our ESG rules, these proposed rules will not apply to municipal issuers. But there is significant overlap between the emerging cyber risks these rules are designed to address and the risks facing municipal issuers, who operate in an environment where cyber incidents are growing in frequency and sophistication.

Cyberattacks and data breaches can cause irreparable and irreversible damage to individuals whose personal information is compromised and/or stolen. They may also impose significant costs on municipalities. In light of this, effective disclosures regarding cybersecurity practices protect investors, ensure that an issuer’s critical systems are secure, and instill confidence that issuers have taken steps to mitigate identified cyber risks. Timely disclosures to the public regarding significant cybersecurity incidents and to individuals if their personal information is compromised are also critical.

Thank you again for your participation in today’s conference, and for your contributions to this important market.

May 10, 2023

Good morning. It’s a pleasure to welcome you to the Securities and Exchange Commission’s Municipal Securities Disclosure Conference—our first in nearly three years.

I’d like to start with a disclosure of my own: My views are my own as Chair of the SEC, and I am not speaking on behalf of my fellow Commissioners or the staff.

On May 27, we will mark the 90th anniversary of the Securities Act of 1933, the first of the federal securities laws.

When President Franklin Roosevelt signed that law, he understood that our capital markets work best if investors get to decide which risks to take as long as issuers raising money make what Roosevelt called “complete and truthful disclosure.”

Our capital markets depend, ultimately, on the trust that full, fair, and truthful disclosure helps to build. As Roosevelt put it: “Those who seek to draw upon other people’s money must be wholly candid regarding the facts on which the investor’s judgment is asked.”[1]

When crafting the federal securities laws, Congress and Roosevelt also understood the importance of the bond markets. Among the many terms they included within the definition of a security were “bond,” “note,” and “debenture.”[2]

With a focus on protecting investors in the bond markets, Congress later passed the Trust Indenture Act of 1939. One might say it’s like the Rodney Dangerfield of the securities laws: important, and discussed not often enough.

Initially, municipal securities were exempt from many of the federal securities laws except with respect to antifraud protections.

Things changed, however, in 1975, after New York City nearly went bankrupt. Congress acted by establishing a regulatory scheme for intermediaries in the municipal securities markets, requiring broker-dealers in these markets to register, and creating the Municipal Securities Rulemaking Board (MSRB).

Based on these authorities, in 1989 the Commission adopted—and as recently as in 2018 amended—Rule 15c2-12.[3] The rule ensures that those acting as underwriters of municipal securities confirm that issuers agree to make continuous disclosures to investors, and that the disclosures are available in a manner designated by the SEC.

Further, under the rules, brokers must confirm that issuers agree to make disclosures with respect to official statements, annual financial information, and 16 relevant material events. These important disclosure rules both help protect investors and facilitate capital formation by municipal issuers.

We also have a role as a cop on the beat. We recently charged four underwriters for disclosure-related violations while offering municipal bonds.[4]

Given that markets, technology, and business models continue to evolve, it’s helpful to hear from this conference today about ways to enhance disclosure in this part of the markets.

I look forward to hearing from the panel talking about voluntary disclosures. Such disclosures can help build greater trust in the marketplace. That can benefit investors as well as lower the cost of capital for issuers.

I am also pleased you will have the opportunity to discuss the Financial Data Transparency Act, which became law late last year.

Overseen by the SEC, the MSRB maintains an important data repository for the municipal markets. I think, though, that it could benefit investors, issuers, and markets alike when we consider ways to enhance the efficient submission and processing of data in these markets. Further, it helps ensure that the public has ready access to that data.

Before I close, I’d like to note how critical this $4 trillion market is. It provides access to the markets for local governments to provide basic services for their communities—building roads, schools, parks, bridges, hospitals, and more.

While the SEC oversees more than 7,000 public company issuers, there are around 50,000 municipal securities issuers.[5] Strikingly, there are approximately one million different outstanding municipal securities—more than 30 times the number of outstanding corporate bonds.[6]

We at the SEC benefit from your participation today, and your continued engagement with our Office of Municipal Securities.

Thank you.

_______________________________________________

[1] See Franklin D. Roosevelt, “Statement on Signing the Securities Bill” (May 27, 1933),available at https://www.presidency.ucsb.edu/documents/statement-signing-the-securities-bill.

[2] See “Securities Act of 1933,”available at https://govtrackus.s3.amazonaws.com/legislink/pdf/stat/48/STATUTE-48-Pg74.pdf.

[3] See Securities and Exchange Commission, “SEC Adopts Rule Amendments to Improve Municipal Securities Disclosure” (Aug. 20, 2018), available at https://www.sec.gov/news/press-release/2018-158.

[4] See Securities and Exchange Commission, “SEC Charges Four Underwriters in First Actions Enforcing Municipal Bond Disclosure Law” (Sept. 13, 2022), available at https://www.sec.gov/news/press-release/2022-161.

[5]See MSRB, “Self-Regulation and the Municipal Securities Market” (Jan. 2018),available at https://www.msrb.org/sites/default/files/MSRB-Self-Regulation-and-the-Municipal-Securities-Market.pdf

[6] See MSRB, “Muni Facts: Municipal Market by the Numbers” (Sept. 2022), available at https://msrb.org/sites/default/files/2022-09/MSRB-Muni-Facts.pdf.

May 10, 2023

SUMMARY

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB) filing.

View the SIFMA comments.

The April issue of Government Finance Review highlights public engagement in budgeting with in-depth articles. Other topics inside the magazine include engaging diverse communities, cryptocurrency, reducing inequities of fines and fees, and much more.

READ ONLINE

A “Must-Have” For Publication Every Government

Accounting for Capital Assets: A Guide for State and Local Governments (2nd edition) offers clear and straight-forward guidance to public-sector accounting professionals who must confront the practical challenges of accounting for capital assets and similar items on a daily basis.

Capital assets typically constitute the largest single item on a state or local government’s statement of net position. Not only do capital assets need to be reported in the financial statements, but governments must track and maintain control over them. Accounting for Capital Assets offers clear and straight-forward guidance to public-sector accounting professionals who must confront the practical challenges of accounting for capital assets and similar items on a daily basis.

The book’s eleven chapters cover the gamut of capital asset-related issues. Each comes with a handy “chapter in brief” summary and multiple-choice questions. The book also offers an extensive set of sample journal entries, a detailed index, and a full glossary.

PURCHASE

View the MSRB Notice.

Notice 2023-04 – Informational Notice

Publication date: 04/27/2023

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) met on April 26-27, 2023, for its third quarterly Board of Directors meeting of Fiscal Year 2023. The Board discussed regulatory initiatives in support of the organization’s long-term strategic goal to review and identify opportunities to modernize the rules established to protect municipal bond investors and the state and local governments that rely on the municipal market to raise capital.

“In a healthy and dynamic municipal market, practices evolve over time, requiring regulators to continually review the rules and associated guidance to ensure they continue to meet their intended objectives effectively and efficiently,” said MSRB Chair Meredith Hathorn. “The MSRB is advancing a series of regulatory proposals that will streamline and modernize the rule book, ensuring that our rules appropriately achieve their issuer and investor protection goals without placing undue compliance burdens on regulated entities. We are making significant progress toward this goal, while recognizing that we have a perpetual responsibility to assess our rules and adapt them as needed to advance our mission to promote a fair and efficient market and facilitate capital formation.”

The MSRB’s rule book modernization includes two distinct but related efforts: ongoing retrospective reviews of MSRB rules and a long-term comprehensive review of the MSRB’s entire body of interpretive guidance. The Board discussed next steps for several related initiatives described below. The Board also discussed the Securities and Exchange Commission’s (SEC) rule proposals to address cybersecurity risks, which, if adopted, would establish new requirements for municipal market participants, including the MSRB.

One-Minute Trade Reporting

The Board received an update on staff’s ongoing coordination with the SEC and Financial Industry Regulatory Authority (FINRA) on the MSRB’s one-minute trade reporting proposal. The MSRB sought comment in August 2022 on proposed amendments to MSRB Rule G-14 that would generally require that transactions in municipal securities are reported as soon as practicable, but no later than within one minute of the time of trade, down from the current 15-minute reporting requirement.

“The MSRB continues to analyze trade data and discuss stakeholder feedback to inform the development of rule amendments that would enhance price transparency in the municipal market for investors,” said MSRB CEO Mark Kim. “We appreciate the coordination with fellow regulators and input from market participants to work toward a one-minute standard while remaining mindful of important considerations, such as the relationship between a shortened reporting timeframe and a firm’s best execution obligations, potential impacts on smaller firms and operational considerations associated with manual trades.”

Interpretive Guidance Review

As a next step in the MSRB’s efforts to review the entire body of interpretive guidance, the Board approved seeking comment to codify or retire nearly 40 pieces of interpretive guidance related to Rule G-12(c) pertaining to inter-dealer confirmations.

“Through conversations with market participants, the MSRB sees a real opportunity to reduce substantially the volume of guidance in the rule book and facilitate compliance by distilling the relevant investor and issuer protection concepts into clear rule text,” Kim said. “We anticipate broad market agreement that this provision of our rule book does not merit preserving 40 pieces of interpretive guidance dating back as far as the 1970s.”

Professional Qualification

The Board authorized staff to seek SEC approval of amendments on Rule G-3 to create an exemption for municipal advisor representatives from requalification by examination in certain circumstances that the Board believes would not reduce the protection for issuers who expect their municipal advisory professionals to have met established professional qualification standards. This initiative aims to provide greater regulatory flexibility and promote diversity, equity and inclusion in the municipal market for professionals who temporarily leave the municipal advisory business. The MSRB’s rule filing will provide clarity around considerations raised by commenters.

Time of Trade Disclosure

The Board received an update on staff’s ongoing review of comments received in response to the recently closed request for comment on proposed amendments to Rules G-47, on time of trade disclosure and D-15, defining the term “sophisticated municipal market professional.

Date: April 28, 2023

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

The House Committee on Financial Services passed the Improving Disclosure for Investors Bill of 2023 on April 26, 2023 with bipartisan support. If passed by Congress and signed into law, the bill could alter the regulatory landscape for electronic delivery (e-delivery) by US Securities and Exchange Commission (SEC) registrants by eliminating the requirement to obtain an investor’s affirmative consent for e-delivery and allowing firms to implement a notice and optout approach to implementing e-delivery.

E-delivery of required regulatory documents to investors has been permitted for decades under SEC guidance from 1995 and the Electronic Signatures in Global and National Commerce Act (E-SIGN) enacted in 2000. However, the requirement in the SEC’s guidance and E-SIGN to obtain a person’s consent to e-delivery, combined with practical difficulties in obtaining such consent, has greatly limited how broadly SEC registrants have been able to implement e-delivery across their businesses. (The SEC’s e-delivery guidance does not require consent to e-delivery if the SEC registrant has a reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws. The SEC’s guidance states that obtaining an investor’s informed consent to e-delivery through a particular medium would constitute satisfactory evidence of delivery.)

Key Features

• Scope. The bill would apply to “covered entities,” including registered investment advisers, broker-dealers, investment companies, municipal securities dealers, transfer agents, and funding portals, and business development companies that elect to be regulated as registered investment companies, and their delivery of “regulatory documents” that are required to be delivered under the US federal securities law (including prospectuses, shareholder reports, confirmations, customer account statements, Form CRS, Form ADV Part 2, and privacy notices, among others).
• Affirmative consent not required. The bill would preempt existing requirements under E-SIGN to obtain a person’s affirmative consent to e-delivery (as well as other procedural aspects of E‑SIGN) and allow covered entities to, subject to certain requirements, use e-delivery as their default method of delivering regulatory documents, unless an investor opts out.
• Notice and optout process. The bill requires the SEC to adopt rules setting forth a process that would permit covered entities to transition investors to e-delivery of all regulatory documents by (1) delivering an initial communication, in paper form, about e-delivery, (2) observing a transition period (not to exceed 180 days), and (3) delivering an annual notice (for a period not to exceed two years) in paper form reminding investors of their right to opt out of e-delivery. Investors would have a right to opt out of e-delivery at any time.
• Permitted means of e-delivery. Permitted means of e-delivery would include (1) direct delivery to an investor’s electronic address, (2) posting the regulatory document to a website in conjunction with the direct e-delivery to the investor of a notice of the availability of the regulatory document, and (3) other electronic methods reasonably designed to ensure the investor’s receipt of the regulatory document.
• SEC rulemaking. The SEC would be required to propose rules covering the above (as well as requirements around remediation of failed e-delivery and certain other details) within 180 days of enactment of the bill and finalize such rules within one year of the enactment of the bill. If the SEC fails to adopt rules by this deadline, the provisions of the bill would become automatically effective.

Commentary

While the fate of the bill remains to be seen, if signed into law, it could dramatically expand the use of e-delivery by SEC registrants. We would expect many firms to take advantage of the bill, and the notice and optout process set forth in the bill would likely yield much higher adoption of e-delivery by investors.

While the bill would represent a significant modernization of the e-delivery requirements under the US federal securities laws, it would not solve all practical and interpretive challenges of e-delivery. Notably, it is not clear what direct delivery to an “electronic address” might encompass, and the definition of e-delivery in the bill likely would not extend to delivery of regulatory documents to investors by posting them on a website without some form of direct notice to the investor. What would satisfy these standards could be open to interpretation, and different types of investors obtaining services from different types of financial institutions may reasonably have different expectations (e.g., would an in-app popup notification constitute good delivery?).

In addition, many firms may not have email addresses (or equivalent means of direct electronic communication) for certain legacy customers and may have difficulty obtaining them from others. As such, it may be advisable for firms to undertake broader efforts to obtain email addresses from investors now, even if they are unsure whether they would rely on e-delivery with those investors at this time.

Some lawmakers and investor advocacy groups have raised concerns about the bill, particularly its impact on seniors, and the SEC may share some of those concerns. While the SEC could potentially use its rulemaking authority to address some of those concerns if the bill is signed into law, the bill limits the extent of the SEC’s rulemaking authority.

Morgan, Lewis & Bockius LLP – Steven W. Stone, James E. Doench, Nicole M. Alkire and Kyle D. Whitehead

April 28 2023

View the Meeting Notice.

[04/26/23]

View the News Release.

[04/26/23]

BDA today filed a comment letter with the MSRB on their proposal to amend Rules G-47 and D-15. BDA did not oppose the G-47 changes and we supported the D-15 proposed amendments.

Rule G-47 is the MSRB’s time of trade disclosure rule. It requires dealers to obtain and provide to customers certain material information about an issue at the time they buy or sell the bond. The MSRB’s proposal, part of their ongoing retrospective rule review, would make mostly organizational changes to Rule G-47 and related guidance including incorporating guidance into rule text and consolidating or retiring some guidance. The most significant substantive change is a proposal to include three new data items among those that may be material and require customer disclosure: when there is no Official Statement or the OS is available only from the underwriter; whether the issuer has committed to ongoing financial disclosures; and the yield to worst.

Proposed amendments to Rule D-15, the MSRB’s rule defining Sophisticated Municipal Market Professional (SMMP), would remove the requirement with respect to a SEC-Registered Investment Advisor (RIA) for a dealer to obtain an attestation from the customer as a condition of that investor having the status of SMMP.

On the G-47 proposed changes, BDA told the MSRB we are “generally not opposed to the Proposal.” “Many of the proposed changes reflect codification or reorganization of existing guidance or practices and would not impose significant new burdens,” we said. We also told the MSRB “BDA supports the proposed changes to MSRB Rule D-15. We agree with the Proposal that SEC-registered RIAs ‘are typically very sophisticated’ and ‘the burdens associated with obtaining an attestation from these professionals’ are not supported ‘by the protections afforded to them.’”

Bond Dealers of America

April 17, 2023

SUMMARY

SIFMA provided comments to the Municipal Securities Rulemaking Board MSRB) on their Request for Comment Regarding a Retrospective Review of the MSRB’s Time of Trade Disclosure Rule and Draft Amendments to MSRB Rule D-15, On Sophisticated Municipal Market Professionals.

Read the Comment Letter.

April 17, 2023

Meeting Notice.

[04/17/23]

Washington, D.C. — The Municipal Securities Rulemaking Board (MSRB) today announced that it is seeking candidates to be the organization’s next Visiting Scholar. The MSRB’s Visiting Scholar Program, introduced in 2018, provides academics with an opportunity to conduct research, with support from MSRB staff, in order to generate insights that may advance the understanding of municipal securities market structure and efficiency. Applications will be accepted through June 20, 2023.

The MSRB’s most recent visiting scholar, Lourdes Germán, J.D. of the Harvard University Graduate School of Design, leveraged MSRB data to research Environmental, Social and Governance (ESG) trends in official statement disclosures and now is working on a second part of the study focused on pricing trends visible across ESG issuances in public finance. “Having access to the MSRB’s data sets and the expertise of MSRB staff has been invaluable to my research and to helping me refine my methodology,” said Germán. “I look forward to sharing my working paper in the coming months with stakeholders outside of the MSRB and to contributing to the understanding of the evolving impact of ESG considerations in the municipal bond market.”

The MSRB collects and disseminates municipal market trade data and disclosure documents through its free Electronic Municipal Market Access (EMMA®) website. To support external research, the MSRB provides data sets to universities and other research institutions at no or reduced cost. For years, the MSRB has provided the academic and research community with access to historical sets of trade data, primary market and continuing disclosures, and information related to variable rate securities. Access to municipal market trading data is also available through an agreement with WRDS, a service of the Wharton School of the University of Pennsylvania, which provides financial and economic data to various corporate, academic, government and nonprofit users.

“The MSRB has seen an increase in requests for our data sets from academics in recent years, and we are pleased to have provided data sets to 66 academic institutions since 2020, including 15 so far in 2023,” said MSRB Senior Director of Research and Market Transparency Marcelo Vieira. “The market benefits from the enhanced attention of researchers exploring thoughtful questions about municipal bond issuance, trade patterns, disclosure trends and much more. We encourage academics who have worked with MSRB data before as well as those who would bring a new perspective to our data to consider applying for the Visiting Scholar role.”

Applicants interested in the Visiting Scholar position are required to submit a brief cover letter outlining their desired area or topic of study, as well as relevant experience or past research in the municipal market to [email protected].

• Learn more about the Visiting Scholar program.
• Learn more about data sets available to academics from the MSRB.

Date: April 18, 2023

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

Comments on the MSRB proposal to amend MSRB Rule G-12 (“Uniform Practice”) and MSRB Rule G-15 (“Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers”) must be submitted by May 3, 2023. The proposal was published in the Federal Register.

As previously covered, the proposed amendments would “define regular-way settlement for municipal securities transactions as occurring one business day after the trade date” and (ii) align with recent SEC rule amendments to shorten the settlement cycle.

Under amended SEA Rule 15c6-1 (“Settlement Cycle”) the regular settlement cycle for most broker-dealer transactions was shortened from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). The MSRB stated that the regular-way settlement cycles for municipal securities should be consistent with those for equity and corporate bond transactions, and said that shortening this period is consistent with its strategic goal of modernizing the MSRB rulebook.

Fried Frank Harris Shriver & Jacobson LLP

April 12 2023

SEC Commissioner Hester M. Peirce offered guiding principles to address concerns about the implementation of the structured data requirements in the Financial Data Transparency Act (“FDTA”)

In her remarks before the RegTech 2023 Data Summit, Commissioner Peirce expressed concern about structured data requirements under the FDTA (i.e., “data that is divided into standardized pieces that are identifiable and accessible to both humans and computers”). These concerns include (i) compliance costs for smaller entities, (ii) the utility of structured data for the public, (iii) the possibility for technologically embedded rules to become outdated and (iv) the increasing demands by government to collect further data. To address these concerns, she outlined guiding principles for the SEC and regulators to follow in their implementation of the FDTA:

• Strategic Planning. Ms. Peirce advised regulators to have a “strategic vision” for structured data usage that identifies where structured data requirements would be most beneficial. She stated that a strategic approach should incorporate initiatives that improve structured data’s utility and relevance for investors. Ms. Peirce also suggested that agencies avoid insisting on standardized tags if they would diminish the accuracy of the reported data.
• Cost. Ms. Peirce emphasized the importance of cost considerations before enacting new structured data requirements, especially for small firms and municipal issuers. Ms. Peirce said that she was “hopeful” that the costs of implementation will not be a significant concern based on the (i) FDTA’s preservation of regulators’ “tailoring” authority to scale data reporting requirements and “minimize disruption” for firms affected by new requirements, (ii) decrease in structured data costs and (iii) reduction in long-run compliance costs for firms that integrate Inline XBRL into their operations.
• Data Collection. Ms. Peirce maintained that regulators must “constrain their appetite for data,” notwithstanding that data has become “cheaper and easier to collect, store, and analyze.” ​​​​​Ms. Peirce said that regulators should only collect data with the purpose to perform their limited statutory missions.
• Changing Technologies. Ms. Peirce urged regulators to specify standards that allow for flexibility to keep pace with “rapidly changing technology.” To the extent that regulators are not afforded such flexibility in their implementation of the FDTA, Ms. Peirce recommended (i) notice-and-comment rulemakings to consider cost reductions on market participants and/or (ii) providing reporting standards in a free-standing section of rulemakings to allow for updates as technologies evolve.

Ms. Peirce said that future regulatory initiatives could help entities follow structured data requirements. She said that potential machine-readable rules and machine-executable rules could assist in automating compliance for firms.

Fried Frank Harris Shriver & Jacobson LLP

April 11 2023

Comments on an MSRB proposed amendment to Rule G-40 (“Advertising by Municipal Advisors”) that would allow for the use of testimonial statements in municipal advisor advertisements are due by April 26, 2023. The Notice was published in the Federal Register.

As previously covered, the proposal would also (i) establish supervisory obligations specific to testimonial use, (ii) modify the definition of “municipal advisory client” with regard to soliciting municipal securities businesses to align with MSRB Rule G-38 (“Solicitation of Municipal Securities Business,”) and (iii) create a conforming obligation under MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to keep any records relating to testimonial advertising, including any record of payment for testimonials.

In response to comments received during the initial comment period, the MSRB filed an amendment to its proposal that would include (i) clarifying language to “enhance readability and understanding” and (ii) social media guidance consistent with the proposed changes to Rule G-40.

Fried Frank Harris Shriver & Jacobson LLP

April 11 2023

I have previously written about the peculiar structure of disclosure obligations with respect to municipal securities in my Sept. 22, 2020 Blog “SEC Focus on Municipal Securities Disclosure and Enforcement.” As I detailed there:

When the two key Federal Securities Laws (the Securities Act of 1933 [the “33 Act”] and the Securities Exchange Act of 1934 [the “34 Act”]) were enacted, municipal securities (the bonds, notes, etc., issued by states, counties, municipalities, and municipal authorities) were exempt, both from the registration requirement of the 33 Act and from the oversight under the 34 Act of the professionals who underwrote and dealt in the purchase and sale of these securities. These exemptions resulted from policy (municipal securities were generally seen as more secure than those issued by corporations and other private sector entities) and political considerations. More individual investors sought to buy municipals by the early 1970s, to reduce federal and state tax liabilities at a time of ever-increasing inflation. This in turn led to an extraordinary proliferation of municipal security products. Then Congress passed the Securities Act Amendments of 1975, creating the Municipal Securities Rule Making Board (“MSRB”) as a self-regulatory body subject to the oversight of the U.S. Securities and Exchange Commission (“SEC”).

In 1989, the SEC adopted Rule 15c2-12 under the 34 Act, which requires an underwriter of municipal securities to obtain a written agreement from the issuer requiring the issuer (and any related obligor, as in the case of conduit issuers), to deliver an OS within seven days of issuance. Under the Rule, underwriters are also required to review the POS and the OS for the adequacy and completeness of the disclosures. In 1994 the SEC amended Rule 15c2-12 to also require the underwriter to obtain a written agreement (a Continuing Disclosure Agreement [“CDA”]) from an issuer of a municipal security, under which the issuer (and any related obligor) commits to provide annual updates on the issuer’s financial condition. In addition, both the Rule and the CDA require the issuer to file “timely reporting of material events” affecting the issuer (or any related obligor). Originally both the OS and disclosures under the CDA were filed with designated depositories. In 2002 the MSRB required that these filings be done electronically. In 2008, the MSRB launched the Electronic Municipal Market Access (“EMMA”) website. All OS’s and CDA disclosures are now filed on EMMA. Any market professional dealing in municipal securities is required to review those filings prior to effecting transactions.

This is the so-called “back door” to securities registration for municipal securities, and the CDA system does work, although it is a tad cumbersome. However, there is an exemption from the CDA requirement in Rule 15c2-12 for limited offerings of municipal securities placed with a small number of sophisticated investors who intend to hold the purchased securities for their own accounts. The exemption is rather similar to the exemptions from registration for private placements by non-governmental issuers before the adoption of Regulation D. The private placement of municipal securities does not require a CDA IF:

1. the securities are sold in denominations of $1 million or more;
2. there are no more than 35 purchasers; and
3. the underwriter has a reasonable belief that each purchaser…

• has the knowledge and experience in financial and business matters to be able to evaluate the risks and merits of the investment, and
• is buying the securities for its own account and not for anyone else or to distribute the securities to others. BUT the exemption does REQUIRE diligence by the underwriter.

On Tuesday, March 7, 2023, the U.S. Securities Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-And-Desist Proceedings (the “Order”) against Keybanc Capital Markets Inc., an Ohio corporation (“KBCM”). KBCM, headquartered in Cleveland, Ohio, and a wholly owned subsidiary of KeyCorp, is the 20th largest U.S. banking institution based on assets. KBCM provides a wide range of capital market functions and is registered with the SEC as both a broker-dealer and a municipal advisor. According to the Order, from September 2017 to December 2021, KBCM served as the sole underwriter in at least 47 limited offerings. The exemption requirements are hardly complex, but they do require attention. First, an underwriter of a limited offering of municipal securities must have “policies and procedures reasonably designed to determine if purchasers” of the underwritten securities meet the exemption requirements. Second, the underwriter must follow those policies and procedures in the course of conducting a limited offering. That typically means obtaining written representations from a purchaser covering the following:

1. the purchaser’s experience in financial and business matters, especially any relevant to the particular municipal security involved;
2. confirmation that the purchaser is buying the security for their own account and not on behalf of others; and
3. an undertaking that the purchaser will not resell the security to third parties, unless a substantial period of time has elapsed. Third, the underwriter must have written supervisory procedures in place to ensure compliance with these requirements.

As the Order reports, KBCM simply sold the municipal securities in the 47 limited offerings “to broker-dealers and/or investment advisers with separately managed accounts.” The Order asserts that “KBCM did not have a reasonable belief that the broker-dealers and investment advisers were purchasing the securities for investment.” Moreover, KBCM “did not inquire, or otherwise determine, if the broker-dealers and investment advisers were purchasing the securities for more than one account or for distribution.” Indeed, it does not appear that KBCM made any analysis of whether the purchasers or any ultimate purchaser had the knowledge and experience “to evaluate the merits and risks of the investment[s].” Accordingly, the exemption was not available for any of these 47 offerings. Furthermore, KBCM had no adequate supervisory procedures to ensure compliance.

The SEC concluded that “[a]s a result of the conduct…” KCBM “willfully violated Exchange Act Rule 15c2-12 and MSRB Rule G-27,” namely G-27, of the Municipal Securities Rule Making Board. As a result of violating Rule G-27, KBCM also violated Section 15B(c)(1) of the Securities Exchange Act of 1934, as amended. Pursuant to the Order to which KBCM agreed, KBCM must pay disgorgement of the $267,607.66 it earned as fees for underwriting the securities in the 47 offerings and prejudgment interest of $33,528.55. KBCM was also censured and ordered to pay a civil penalty of $100,000 and to cease-and-desist from further violations of the cited rules and statutes.

How does a large, sophisticated institution like KeyCorp and its capital market subsidiary give so little attention to a rather simple and obvious rule requirement? And what other shortcomings in compliance might it portend on the shores of Lake Erie, a divisional branch far away from the chaotic events in Silicon Valley?

by Peter D. Hutcheon

April 3, 2023

Norris McLaughlin P.A.

BDA today filed a comment letter with the SEC in opposition to their proposed Regulation Best Execution. In the letter we ask the SEC to abandon the initiative because it is unnecessary, overly restrictive, and needlessly expensive. If the SEC moves forward with the proposal, we asked that it be amended to make it more workable with the following changes:

• Remove riskless principal trades from the definition of conflicted trade.
• Define institutional investor to encompass existing definitions in FINRA and MSRB rules and clarify the scope and focus of the institutional investor exemption in the context of fixed income.
• Make it clear that last look and internalizing fixed income trades to the benefit of customers would not violate Regulation Best Execution or cause a trade to be treated as “conflicted.”
• For conflicted trades, eliminate the requirement to survey a broader range of markets beyond material potential liquidity sources and to separately document the best execution analysis for every trade.
• Eliminate the requirement to provide annual best execution reports to firms’ boards of directors.
• Permit dealers to use the introducing broker partial exemption when its executing broker is affiliated.

The SEC’s proposal would impose a new best execution rule across the capital markets, including the fixed income markets. The new rule would be in addition to, not instead of, existing FINRA and MSRB best execution rules. The proposed rule would impose significant new requirements on broker-dealers especially for “conflicted trades,” which would include all principal trades, including riskless principal.

BDA’s comment letter is available here. The SEC proposal is available here. Please call or write if you have any questions.

Bond Dealers of America

March 31, 2023

As GFOA members continue to have questions related to GASB 87 and GASB 96, we’ve compiled a list of resources in one place on GFOA’s website. The GASB Resource Center includes recent articles and do-it-yourself tools and templates to help in the learning and implementation process. As we develop new resources and future educational opportunities covering these topics, we’ll add them to this page.

LEARN MORE

View the Request for Research.

03/10/23

SUMMARY

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the SEC’s Proposed Regulation Best Execution in the context of fixed income trading.

View the SIFMA Comment Letter.

March 31, 2023

The MSRB proposed to amend MSRB Rule G-12 (“Uniform Practice”) and MSRB Rule G-15 (“Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers”) “to define regular-way settlement for municipal securities transactions as occurring one business day after the trade date”. The proposed MSRB amendments would align with recent SEC rule amendments to shorten the settlement cycle (see previous coverage).

Under amended SEC Rule 15c6-1 (“Settlement Cycle,”) the regular settlement cycle for most broker-dealer transactions was shortened from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). The MSRB believes that the regular-way settlement cycles for municipal securities should be consistent with those for equity and corporate bond transactions and said that shortening this period is consistent with its strategic goal of modernizing the MSRB Rule Book.

The MSRB is requesting the proposed rule change be approved with an effective date of May 28, 2024, to align with the effective date of amended Rule 15c6-1.

Fried Frank Harris Shriver & Jacobson LLP

March 29 2023

The SEC approved the MSRB rule amendments to establish core standards of conduct and duties for “solicitor municipal advisors.”

As previously covered, the rule amendments establish new MSRB Rule G-46 (“Duties of Solicitor Municipal Advisors”) to provide standards of conduct for solicitor municipal advisors when “engaging in solicitation activities that would require them to register with the SEC and the MSRB.”

MSRB Notice 2023-03 states that Rule G-46 requires solicitor municipal advisors to (i) provide full and fair written disclosure regarding any material conflicts of interest and material legal or disciplinary events to solicitor clients and (ii) disclose material facts related to the solicitation including the advisor’s role and compensation and material conflicts of interest. The new rule also prohibits such advisors from (i) publishing any materially false or misleading information regarding the capacity, resources or knowledge of the solicitor client and (ii) delivering inaccurate invoices or making payments for the purpose of retaining a municipal advisory activity engagement.

The adopted rule amendments also codify previously issued interpretive guidance concerning the requirements applicable to solicitor municipal advisors under MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”), MSRB Rule G-42 (“Duties of Non-Solicitor Municipal Advisors”) and IAA Rule 206(4)-1 (“Investment Adviser Marketing”). Further, it adds specific recordkeeping obligations for solicitor municipal advisors under MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) with respect to solicitation of advisory services.

The compliance date for Rule G-46 and the related amendments to Rule G-8 will be March 1, 2024.

Fried Frank Harris Shriver & Jacobson LLP

March 31 2023

Read the MSRB Notice.

On March 15, 2023, the SEC issued proposed amendments and a proposed rule addressing cybersecurity. Specifically, the SEC proposed Rule 10, which addresses cybersecurity risks, and proposed to amend Regulation SCI and Regulation S-P.

Affected entities and institutions may submit comments until 60 days after the date of publication of the proposed release in the Federal Register. Affected entities should continue to monitor the SEC’s increased regulation of cybersecurity to determine whether their current policies and procedures comply with the SEC’s latest proposals.

The proposed rule and both sets of proposed amendments each apply to a different set of entities. We have outlined the various requirements for each below—

SEC Proposed Rule 10

The SEC’s proposed Rule 10 would include various requirements for addressing cybersecurity risks.

The proposed rule would apply to “Market Entities,” which include broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board (MSRB), national securities associations, national securities exchanges, security-based swap data repositories (SBSDRs), security-based swap entities, and transfer agents. A subgroup of these Market Entities are referred to as “Covered Entities,” which include the MSRB, certain broker-dealers, all clearing agencies, national securities associations, national securities exchanges, SBSDRs, security-based swap entities, and transfer agents. Under proposed Rule 10, these Covered Entities would have certain additional requirements. The proposed rule would require the following:

• Policies and Procedures. Market Entities would be required to implement written policies and procedures that address cybersecurity risks. Covered Entities would need to implement policies and procedures that specifically address user security, information protection, vulnerability management, and incident response. All Market Entities would be required to annually review and “assess their policies and procedures.” Additionally, Covered Entities would be required to prepare a report, while Non-Covered Entities would be required to prepare a record of their review.
• Notification and Reporting of Significant Cybersecurity Incidents. Market Entities would need to provide the SEC “immediate written electronic notice” of a “significant cybersecurity incident upon having a reasonable basis to conclude that the incident has occurred or is occurring.” Covered Entities would also need to file, on a confidential basis, the proposed Form SCIR within 48 hours and provide any significant updates thereafter
• Disclosure of Cybersecurity Risks and Incidents. The proposed rule would also require a Covered Entity to make public disclosures on the proposed Form SCIR. Specifically, Covered Entities would need to summarize their cybersecurity risks and provide summaries for any significant cybersecurity incidents experienced during the current or previous calendar year.
• Recordkeeping. The proposed rule would set forth preservation and maintenance requirements for Market Entities, such as retaining certain records for three years.

Amendments to Regulation SCI

The SEC also proposes to update Regulation Systems Compliance and Integrity (“Regulation SCI”) to address intensified cybersecurity risks in the U.S. securities market. Some of the core amendments include:

• Expanded Definition of SCI Entity. The SEC proposes to expand the definition of “SCI entity” to include SBSDRs, certain registered broker-dealers (i.e., SCI broker-dealers), and additional clearing agencies exempted from registration.
• Strengthening Obligations of SCI Entities. The SEC also proposes a number of amendments to enhance the cybersecurity provisions of Regulation SCI, such as updating the requirements for penetration testing and SCI reviews, expanding the definition of “system intrusions” and notification requirements, and requiring the implementation of a program to prevent unauthorized access of SCI systems.

Amendments to Regulation S-P

Finally, the SEC proposes to amend Regulation S-P to require broker-dealers, investment companies, and investment advisers registered with the SEC to have incident response programs and notify individuals in the event of a data breach. Key updates include:

• Incident Response. Covered institutions would be required to implement incident response programs “reasonably designed to detect, respond to, and recover from” unauthorized access to and unauthorized use of customer information. Additionally, covered institutions would be required to “assess the nature and scope of any incidents involving unauthorized access” and implement procedures for containing and controlling an incident.
• Customer Notification. Covered institutions would be required to notify affected individuals whose sensitive customer information was reasonably likely to have been accessed or used without authorization, as soon as practicable, but no later than 30 days, after becoming aware that sensitive customer information was accessed/used or is reasonably likely to have been accessed/used.
• Scope of Information under Safeguards Rule and Disposal Rule. The SEC proposes broadening the scope of information covered to include “customer information.”
• Recordkeeping. Covered institutions would be required to “make and maintain written records documenting compliance” with the requirements of Regulation S-P’s safeguards and disposal rules.

The SEC’s public comment period for all of these updates will remain open until 60 days after the date of publication of the proposed release in the Federal Register, and interested entities may submit comments.

These recent SEC updates would require covered institutions and entities to enhance and update their cybersecurity policies and procedures. The Paul Hastings Privacy and Cybersecurity practice will be closely monitoring these updates and, as always, is available to assist clients.

Paul Hastings LLP – Aaron Charfoos and Jacqueline Cooney

March 27 2023

Today, the Investing in Our Communities Act was introduced in the House, legislation that would reinstate tax-exempt advance refundings . The bill was sponsored by House Ways and Means Republican David Kustoff (TN), and House Municipal Finance Democratic Chair Dutch Ruppersberger (MD). The introduction of the long-standing BDA priority comes after extensive advocacy from the BDA and the Public Finance Network to recruit bill sponsors and a bipartisan list of co-sponsors.

The press release can be viewed here.

The legislative text can be viewed here.

Original Co-sponsors:

Rep. Andy Barr (R-KY),
Rep. Brian Fitzpatrick (R-PA),
Rep. Andrew Garbarino (R-NY)
Rep. Dan Kildee (D-MI),
Rep. Derek Kilmer (D-WA), and
Rep. Gwen Moore (D-WI).

**Companion legislation is expected to be introduced in the Senate in the coming weeks.

While the bill faces strong political and legislative headwinds this Congress, it can not be understated how important the addition of a Ways and Means Republican as a sponsor is to the trajectory of the provision.

The BDA along with the broader Public Finance Network is planning additional outreach to the Hill in an effort to gain support of additional co-sponsors, as well work to identify a legislative vehicle that AR could be added onto for passage.

The BDA will continue to provide updates as they become available.

Bond Dealers of America

March 28, 2023

Washington D.C., March 20, 2023 — The U.S. Securities and Exchange Commission’s Office of Municipal Securities today announced that it updated its Registration of Municipal Advisors Frequently Asked Questions webpage to add a section, entitled Completion of Form MA, Form MA-I, and Form MA-NR, which provides additional staff guidance on the required information and timelines regarding:

• Form MA, for an application for municipal advisor registration, annual update of municipal advisor registration, and an amendment of a prior application for registration;
• Form MA-I, for information regarding natural persons who engage in municipal advisor activities; and
• Form MA-NR, for designation of U.S. agent for service of process for non-residents.

“In our efforts to make the municipal advisor registration process as transparent and efficient as possible, the Office of Municipal Securities published new staff guidance to address common questions regarding Forms MA, MA-I, and MA-NR,” said Dave A. Sanchez, Director of the Office of Municipal Securities. “This update will offer more clarity to registrants and help streamline the process.”

State and local governments frequently use advisors to help them decide how and when to issue municipal securities and how to invest proceeds from the sale of such securities. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required these advisors to register with the SEC like other market intermediaries. On September 20, 2013, the Commission adopted final rules for municipal advisor registration and municipal advisor registration forms, including Form-MA, Form MA-I, and Form MA-NR.

Regulatory Obligations and Related Considerations

Regulatory Obligations

As detailed in Regulatory Notice 15-27 (Guidance Relating to Firm Short Positions and Fails-to-Receive in Municipal Securities), customers may receive taxable, substitute interest instead of the tax-exempt interest they were expecting when a member firm effects sales to customers of municipal securities that are not under the firm’s possession or control.1 This can occur when firm trading activity inadvertently results in a short position or a firm fails to receive municipal securities it purchases to fulfill a customer’s order.

Member firms must develop and implement adequate controls and procedures for detecting, resolving and preventing these adverse tax consequences to customers. Such procedures must include closing out fails-to-receive within the time frame prescribed within Municipal Securities Rulemaking Board (MSRB) Rule G-12(h); taking prompt steps to obtain physical possession or control of municipal securities that are short more than 30 calendar days in accordance with Exchange Act Rule 15c3-3(d)(4);2 and confirming that their communications with customers regarding the tax status of paid or accrued interest for municipal securities are neither false nor misleading, in accordance with MSRB Rule G-17.

Related Considerations

• Does your firm use exception reports to monitor its municipal securities’ short positions, fails-to-receive and fails-to-deliver? If so, how does your firm use such reports, and which departments are responsible for monitoring and responding to them?
• When municipal securities short positions are identified, does your firm start the process of covering the shorts, or does your firm wait until the trades have settled?
• What is your firm’s process to close out fails-to-receive and fails-to-deliver in accordance with the methods and time frame prescribed under MSRB G-12(h)?
• How does your firm detect instances that would require them to pay customers substitute interest? In those circumstances, what is your firm’s process for notifying impacted customers and paying them substitute interest in a timely manner? If a customer does not want to receive substitute interest, what alternatives does your firm offer (e.g., offering to cancel the transaction and purchase a comparable security that would provide tax-exempt interest)?
• How does your firm handle inbound or outbound account transfers sent through ACATS that are delivered with no corresponding municipal bonds in possession or control?

Findings and Effective Practices

Findings

• Inadequate Supervisory Controls and Procedures: Not maintaining procedures and controls reasonably designed to prevent, identify and resolve short positions in municipal securities and the potential adverse consequences to customers when a firm does not maintain possession or control of municipal securities that a customer owns.
• Inadequate Lottery Systems: Opting to use a random lottery system as its primary means for addressing the consequences of existing short positions, given that these systems may not fairly or reasonably account for or allocate the associated and accrued substitute interest, or may result in the random allocation of the substitute interest to customer accounts that may not have contributed to the short position.
• Not Complying with the Prescribed Close-Out Timing: Failing to follow the close-out timeline under MSRB Rule G-12(h)—including the initial 10 days, the 10-day extension and the maximum close-out period of 20 days—and under Exchange Act Rule 15c3-3(d)(4), which requires a firm to take possession and control of such instruments within 30 days.
• Excluding Institutional Customers: Operating under the erroneous assumption that firms are not required to provide institutional (i.e., Delivery-versus-Payment or DVP) customers with the same level of care in preventing, detecting and resolving adverse tax consequences when the firm does not have possession and control of a tax-exempt municipal security (e.g., not addressing these customers in firm controls, procedures, WSPs or exception reports).

Effective Practices

• • Preventative Controls: Maintaining processes to prevent or timely remediate municipal positions from settling short (e.g., covering these positions, finding a suitable alternative, cancelling the customer’s purchase) and reviewing or auditing the effectiveness of the processes.
  • Review of Fail Reports: Municipal securities principals performing regular, periodic reviews of Fail Reports as part of firms’ efforts to comply with the close-out requirements of MSRB Rule G-12(h).

Additional Resources

• Regulatory Notice 15-27 (Guidance Relating to Firm Short Positions and Fails-to-Receive in Municipal Securities)

___________________________________

1 These regulatory obligations stem from Exchange Act Rule 15c3-3(d)(4) and MSRB Rules G-17 and G-27 (for firm shorts), and MSRB Rule G-12(h) (for fails-to-receive).

2 Regulatory Notice 15-27 reminds firms that “[w]hile the 30-calendar-day period begins upon allocating the security in deficit to a short position, firms should not view this 30-calendar-day period as a ‘safe harbor’ for resolving firm short positions in municipal securities.” If it were, the payment of taxable substitute interest would be unavoidable.

Fraudulent La. Bond Offering to Improve a City Sewer System

One of the consequences of the collapse of various portions of the financial markets in the Great Recession of 2007-2009 was the passage of the Wall Street Reform and Consumer Protection Act of 2010, better known as the Dodd-Frank Act. Among the Act’s other innumerable provisions was a requirement that persons (with certain exceptions for professionals such as attorneys and accountants) register with the Municipal Securities Rulemaking Board (“MSRB”) as “municipal advisors.” The MSRB itself is both created and supervised by the U.S. Securities and Exchange Commission (“SEC”) under Section 15 B of the Securities Exchange Act of 1934, as amended (the “34 Act”). Section 975(a)(5) of the Dodd-Frank Act forbids a “municipal advisor” from engaging in any fraudulent, deceptive, and/or manipulative practice, because Congress found that they had. I have previously discussed these developments at length in my Sept. 29, 2020 blog “What if the Adviser is Suspect? Municipal Securities Advisor Registration and Dereliction.” That blog also reports on a series of SEC and MSRB enforcement actions where “municipal advisors” failed to register as required and/or engaged in fraudulent, deceptive, and/or manipulative practices.

In 2017 and 2018, the small city of Sterlington, Louisiana, a town of some 2,600 residents, sold two issues of revenue bonds “to finance the development of a water system and improvements to its existing sewer system,” according to a Sept. 19, 2022 SEC Press Release. As spelled out at length in my June 27, 2022 blog “Serving the Public? SEC Charges Two Municipalities and Their Leaders with Bond Fraud,” bond issuances in Louisiana require prior presentation to, and approval by, the Louisiana State Bond Commission. That process is an effort to prevent fiscally unwise and even unsustainable borrowings. In the end, though, the process is dependent upon the quality of financial information, including projections submitted to the Bond Commission. In the case of Sterlington, the historical and projected number of sewer customers was “substantially overstated” in order to support the bond issues when, in fact, the actual sewer system revenues would not be sufficient to cover the debt service on the bonds. The Public Finance Abuse Unit of the SEC, created in 2010 to deal with the ever-growing instances of inadequate disclosure and fraud involving municipal securities, took the lead in investigating the Sterlington sewer financings.

As reported in my “Serving the Public?” blog, after the SEC sued Sterlington, its former mayor, and its unregistered municipal advisor, the town consented to the entry of a judgment against it while the former mayor continued to litigate the matter. Now comes news that the unregistered municipal advisor, Twin Spires Financial, LLC, and its principal, Aaron B. Fletcher, consented to the entry of a judgement against them, which was entered by the Court on Aug. 2, 2022. Although Twin Spires Financial, LLC, is headquartered in Frisco, Texas, Fletcher is a graduate of the University of Kentucky, hence the reference in his company’s name to the “Twin Spires” of Churchill Downs, the Louisville home of the Kentucky Derby. The Sept. 19, 2022 SEC Press Release in this matter reports that after the defendants consented to the entry of a judgment enjoining them from future violations of the anti-fraud and municipal advisor registration, ordering disgorgement of their ill-gotten gains plus prejudgment interest, and imposing a civil money penalty, the Court ordered that they (jointly and severally) pay disgorgement of $26,303 plus interest of $6,642.88, and pay a penalty of $200,000. A poor return (even in pure economic, let alone reputational, damage) from activity that generated only $26,303 of gain.

By Peter D. Hutcheon

Monday, March 20, 2023

Norris McLaughlin P.A.

As GFOA members continue to have questions related to GASB 87 and GASB 96, we’ve compiled a list of resources in one place on GFOA’s website. The GASB Resource Center includes recent articles and do-it-yourself tools and templates to help in the learning and implementation process. As we develop new resources and future educational opportunities covering these topics, we’ll add them to this page.

LEARN MORE

View Publication.

SUMMARY

SIFMA provided comments to the Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB’s) Filing of a Proposed Rule Change Consisting of Amendments to MSRB Rule G-40, on Advertising by Municipal Advisors, and MSRB Rule G-8, on Books and Records.

Read the SIFMA Comment Letter.

SUMMARY

SIFMA provided comments to the Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB’s) Proposed Rule Change to Create New MSRB Rule G-46, on Duties of Solicitor Municipal Advisors, and to Amend MSRB Rule G-8, on Books and Records.

View the SIFMA Comment Letter.

The NFMA’s Municipal Analysts Bulletin, Vol. 33, No. 1, is available here.

Included in this issue is the platform of 2023 NFMA Chair, Mark Capell, a call for applicants to the New Member Advancement Committee’s 2023 Mentorship Program, and reports from committees and societies.

The MSRB proposed new MSRB Rule G-46 (“Duties of Solicitor Municipal Advisors”) that would “establish the core standards of conduct and duties of ‘solicitor municipal advisors’ when engaging in solicitation activities that would require them to register with the SEC and the MSRB as municipal advisors.”

The proposal would:

• require such solicitors to provide full and fair written disclosure regarding any material conflicts of interest and material legal or disciplinary events to solicitor clients;
• prohibit solicitor municipal advisors from publishing any materially false or misleading information regarding the capacity, resources or knowledge of the solicitor client. Solicitors must also have a reasonable basis for making any material representations;
• require solicitors to disclose material facts related to the solicitation including (i) the advisor’s role and compensation and (ii) material conflicts of interest; and
• prohibit solicitor municipal advisors from delivering inaccurate invoices or making payments for the purpose of retaining a municipal advisory activity engagement.

In addition, the proposal would codify previously issued interpretive guidance concerning the requirements applicable to solicitor municipal advisors under MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”), MSRB Rule G-42 (“Duties of Non-Solicitor Municipal Advisors”) and IAA Rule 206(4)-1 (“Investment Adviser Marketing”). The proposal would also amend MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to add specific recordkeeping obligations relating to a solicitor municipal advisor’s solicitation of advisory services.

Fried Frank Harris Shriver & Jacobson LLP

February 1 2023

The proposal would codify for the first time the federal-level best execution standard for brokers and related obligations. New Regulation Best Execution would result in a pivot from what has been a principles-based approach to achieving and regulating best execution, to a prescriptive, rules-based regime that heavily emphasizes brokers’ policies and procedures. If adopted, the regulation will reshape the landscape for order routing, execution, and broker economics. Despite that, the Commission seems to rely on significant conjecture to support the proposal, often referring to “may,” “could,” and “might” when describing concerns with existing practices and potential ameliorative effects of the proposed requirements. This could prove pivotal to the outcome of inevitable judicial challenges after likely adoption in late 2023.

On December 14, 2022, the SEC proposed new Regulation Best Execution, encompassing new Exchange Act Rules 1100, 1101, and 1102. Regulation Best Execution would codify a federal best execution standard pursuant to which broker-dealers must achieve the “most favorable price” for customers. This means that broker-dealers would be required to use reasonable diligence to ascertain the best market for the security, and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Regulation Best Execution would also require broker-dealers to establish related robust policies and procedures, particularly for firms engaging in “conflicted transactions” with or for retail customers, including principal trading, routing customer orders to affiliates, and receiving payment for order flow (PFOF).

The operative words in the proposed best execution standard are identical to those in FINRA Rule 5310. Nevertheless, and as the SEC acknowledges, key aspects depart from the current best execution regulatory regime and will require significant industry adjustments. Introducing brokers, brokers with PFOF arrangements, and executing brokers accustomed to internalizing retail order flow or executing retail trades for affiliates will feel particularly affected by this proposal.

Public comments are due by March 31, 2023.

Regulation Best Execution at a Glance

Regulation Best Execution would apply to transactions in “securities” products (including equities, options, corporate and municipal bonds, government securities, and “crypto asset securities”) and would, among other things:

1. Codify a federal rules-based best execution standard for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (proposed Rule 1100 series) and establish exceptions similar to those available today.
2. Require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the best execution standard (proposed Rule 1101) while providing a limited exemption for introducing brokers (proposed Rule 1101(d)).
3. Require enhanced policies and procedures for broker-dealers that engage in certain “conflicted transactions” for or with retail customers (proposed Rule 1101(b)).
4. Require broker-dealers to review the execution quality of their customer transactions at least quarterly (proposed Rule 1101(c)).
5. Require broker-dealers to review their best execution policies and procedures at least annually and present a report detailing the results of such review to their boards of directors or equivalent governing bodies (proposed Rule 1102).

The term “market” is interpreted broadly for purposes of existing requirements and would be broadly defined under Regulation Best Execution as well, including other broker-dealers, exchanges, alternative trading systems (ATSs), and other venues that become known. The scope may also include a variety of mechanisms operated by markets used by broker-dealers to transact for or with customers (including auction mechanics and other execution protocols).

Continue reading.

Goodwin Procter LLP

By Nicholas J. Losurdo, Peter W. LaVigne, David G. Adams. Lauren A. Schwartz & Christopher Grobbel

MARCH 3, 2023

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual Fact Book, the definitive compilation of the most recent five years of statistics on municipal market trading, interest rate resets and disclosures. The data in the 2022 Fact Book can be further analyzed to identify market trends.

“The MSRB is issuing the 15th edition of its Fact Book as part of its longstanding commitment to equip municipal market participants, policymakers, regulators, academics and others with information to understand long-term and emerging trends in our market,” said MSRB Director of Research and Market Transparency Marcelo Vieira. “The year 2022 in the municipal bond market was extraordinary on many levels, most notably the surge in trading volume and the return of individual investors to the market following many years of historically low yields.”

The MSRB collects real-time municipal securities trade data, as well as primary market and secondary market disclosures. In addition to making the data and disclosures available for free on its Electronic Municipal Market Access (EMMA®) website and compiling quarterly and annual statistics, the MSRB conducts independent research and analysis to support understanding of market trends. Recent MSRB research reviews the developments in the municipal market in 2022, examines the impact of the COVID-19 crisis on competitive and negotiated offerings, analyzes customer trading using alternative trading systems, and more.

Highlights from the 2022 Fact Book corroborate findings from the MSRB’s 2022 Municipal Market Year in Review published in January:

• Trading volume in municipal bonds reached record levels, increasing 66% from 2021 and surpassing the previous record set in 2008.
• As interest rates rose during the year, individual investor-purchases of municipal bonds soared, contributing to the record trading volume.

The 2022 Fact Book includes monthly, quarterly and yearly aggregate market information from 2018 to 2022, and covers different types of municipal issues, trades and interest rate resets.

Download the 2022 Fact Book.

Date: March 01, 2023

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

Norwalk, CT, February 27, 2023 — The Financial Accounting Foundation (FAF) has launched its free, enhanced online access to the Accounting Standards Codification® and the Governmental Accounting Research System™, implementing a change announced to stakeholders last month.

The Accounting Standards Codification® (“the Codification”) is the complete and official version of Generally Accepted Accounting Standards (GAAP) published by the Financial Accounting Standards Board (FASB) and used by public companies, private companies, nonprofit organizations, and employee benefit plans in the United States. The Governmental Accounting Research System™ (“GARS”) is the complete and official version of GAAP published by the Governmental Accounting Standards Board (GASB) and used by states, cities, and other governmental entities in the United States.

While free versions of both the Codification and GARS have been available online for years, the new system provides enhanced features compared to the former free offering. These include enhancements to navigation, search, printing, and copy/paste.

As a result of this change, the former “Professional View” paid subscription service has been eliminated. Current Professional View subscribers have been transitioned off the system and pro-rated refunds will be issued for those subscribers whose paid terms extend beyond today’s cutover date.

The URLs to access the updated websites are:

• Accounting Standards Codification®: https://asc.fasb.org
• Governmental Accounting Research System™: https://gars.gasb.org

Norwalk, CT, February 28, 2023 — The Board of Trustees of the Financial Accounting Foundation (FAF) today announced it will begin to livestream portions of its Oversight Committee meetings with the chairs of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

The first livestream of an Oversight Committee meeting will take place May 9, 2023.

“We seek continually to enhance confidence in the oversight of the FASB and GASB,” said FAF Trustee Timothy Ryan, co-chair of the Oversight Committee. “Increasing stakeholder opportunities to observe the oversight process is a natural evolution of this important journey we are on.”

Details about the Oversight Committee meeting time and a link to the livestream will be posted on the FAF website the week before the meeting.

Fixed income markets are an integral component to economic growth, providing efficient, long term and cost effective funding.

The U.S. fixed income markets are the largest in the world, comprising 41.3% of the $123 trillion securities outstanding across the globe, or $51 trillion (as of 2Q22). This is 2.2x the next largest market, the EU. U.S. market share has averaged 38.9% over the last 10 years, troughing at 37.5% in 2013 and peaking at 40.4% in 2016.

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The call center, which fielded 300 calls and about 2,000 emails a week before it was shut down, provided governments with assistance on the handling of various pandemic-related programs.

States and cities are once again able to get the support they need when it comes to following the complex rules set by Congress for Covid recovery money.

The Department of the Treasury on Tuesday reopened a popular call center that provided assistance to state and local governments on the handling of various pandemic-related programs after being forced to shut it down in October when the agency ran out of money.

“This is a huge win for all cities, towns and villages. The process for filing an annual report, required of more than 26,000 [Coronavirus State and Local Fiscal Recovery Funds] grantees, can be complicated and overwhelming to municipal staff unfamiliar with federal filings,” the National League of Cities said in a recent blog post.

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ROUTE FIFTY

by KERY MURAKAMI

FEBRUARY 22, 2023

On February 7, 2023, the Securities and Exchange Commission’s (SEC) Division of Examinations (EXAMs) announced its 2023 Examination Priorities (the “Priorities”), which highlight areas it expects to target in 2023 examinations. The Priorities reinforce many of the same areas of interest from the 2022 Priorities, including investment advisers to private funds, Regulation Best Interest (“Reg BI”) compliance, ESG‑related investments and strategies, and crypto assets and identify additional areas of focus based on SEC rules which recently went into effect. Registered investment advisers (RIAs), registered investment companies (“funds”), and broker-dealers should carefully review the Priorities to ensure that their compliance systems and policies are up to date, monitored, and enforced. Indeed, given the SEC’s history of pursuing enforcement actions in areas highlighted in prior years as Examination Priorities, appropriate attention to these Priorities today can save regulated entities considerable resources down the road.

Key Takeaways

• The Priorities highlight three recently adopted rules as new risk areas for 2023: (1) Rule 206(4)-1 (the “Marketing Rule”)[1] under the Investment Advisers Act of 1940 (the “Advisers Act”); (2) Rule 18f-4 (the “Derivatives Rule”) under the Investment Company Act of 1940 (the “1940 Act”); and Rule 2a-5 (“Fair Valuation Rule”) under the 1940 Act. RIAs and funds should prepare for the EXAMs staff to closely assess the effectiveness of their practices and compliance programs under these new rules, as applicable.
• Registrants should be vigilant about identifying, mitigating, and disclosing inter-affiliate conflicts of interest that can impact clients and customers. Throughout the Priorities, EXAMs stresses conflicts of interest among affiliates as presenting significant risks, especially related to the use of affiliated service providers, recommendations of proprietary products and services, and revenue sharing arrangements. The Staff notes EXAMs’ interest in continuing to leverage data provided to the SEC in various regulatory filings, including fund registration statements, Form ADV, Form PF, Form CRS, and other reports. Given the SEC’s focus on using technology to analyze and assess data across these various filings, registrants should continue to ensure that they include accurate and consistent information across their filings or risk flagging attention from SEC examiners.
• The Priorities state that RIAs and funds that have not been examined previously or have not been examined in a number of years will be a focus area for 2023. Such firms should consider conducting a self-audit of their compliance program and regulatory filings to ensure they are prepared for any forthcoming examination.

Continue reading.

Morrison & Foerster LLP – Kelley A. Howes, Derek N. Steingarten, Aaron J. Russ, Jina Choi and Michael D. Birnbaum

February 21 2023

Public Finance Journal (PFJ) is a biannual journal publishing peer-reviewed research that examines and analyzes contemporary issues in budgeting and finance and explores the applicability of solution sets. The journal will serve as a forum for discussion on significant issues related to the advancement of our scientific understanding. Articles are chosen for publication based on their originality, importance, interdisciplinary interest, timeliness, and accessibility.

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Dear Secretary Yellen and Chairman Gensler:

The organizations listed below, collectively the Public Finance Network, represent state and local governments, governmental entities, authorities, and issuers of municipal securities. We are deeply interested in the law signed by President Biden last December – P.L. 117-263, TITLE LVIII—FINANCIAL DATA TRANSPARENCY ACT of 2022– that requires federal Departments and regulators to develop machine readable data standards for our members in the public sector. Both Subtitle A and Subtitle B, Section 5823 of the Law (Data Transparency Relating to Municipal Securities) will affect the way governments, entities, authorities and all municipal securities issuers prepare their own financial statements and submit information to the Municipal Securities Rulemaking Board.

VIEW FULL LETTER

Publication date: February 2023

Initiative Part of the MSRB’s Rule Book Modernization Efforts

Washington, D.C. – The Municipal Securities Rulemaking Board (MSRB) issued a Request for Comment (RFC) today, opening a 60-day comment period on draft amendments to two MSRB rules to assess whether the rules are meeting their intended investor protection objectives and to assist brokers, dealers and municipal securities dealers in understanding and complying with MSRB rules relating to information that must be disclosed to an investor at or prior to the time of trade.

The RFC will seek input on draft amendments to Rule G-47, on time of trade disclosure, designed to:

• Codify certain existing guidance;
• Add new supplementary material to identify disclosures that could be material in certain scenarios;
• Retire and consolidate certain pieces of interpretive guidance; and
• Make certain other clarifying changes to the rule, among other changes.

The RFC also includes questions specific to 529 savings plans to further the MSRB’s thinking on other areas related to the MSRB’s rule book modernization efforts.

Additionally, the RFC will seek input on draft amendments to Rule D-15, defining the term sophisticated municipal market professional (SMMP), to exempt investment advisers registered with the Securities and Exchange Commission from having to make certain affirmations in order to qualify for status as an SMMP under MSRB rules.

“As part of the MSRB’s rule book modernization efforts, we are finding opportunities to modernize certain rules in light of evolving market dynamics and to streamline our rule book by codifying certain guidance into the relevant rule and retiring guidance that no longer reflects market practices,” said Saliha Olgun, Interim Chief Regulatory Officer. “We believe that today’s draft amendments are reflective of our commitment to issuer and investor protection while being mindful of compliance burdens on regulated entities. We look forward to input from market participants.”

Comments should be submitted no later than April 17, 2023.

Read the request for comment.

Date: February 16, 2023

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

On February 7, 2023, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) released its annual Priorities Report1 for upcoming examinations of registered investment advisers (“Advisers”) and broker-dealers (“BDs” and, together with Advisers, “Firms”). To help ensure compliance with federal securities laws, the Division uses a risk-based approach that accounts for market growth, technological advancements, and new forms of risk to investors. By identifying these priorities, the Division strives to achieve its four goals of promoting compliance, preventing fraud, monitoring risk, and informing policy. The Division identified the following specific areas of focus for Advisers and BDs.

Mutual Areas of Focus for Advisers and BDs

Standards of Conduct

The Division is continuing to prioritize the examination of Firms for compliance with applicable standards of conduct, including fiduciary duties for Advisers and Regulation Best Interest2 for BDs. Both standards of conduct obligate Firms to put the interests of investors ahead of their own personal, financial, and professional interests. In relation, the Division will be focusing on investment advice and recommendations in connection with specific products, investment strategies, and account types. The Division is concerned with products that are complex, high cost, illiquid, proprietary, or unconventional. Such products may include derivatives, leveraged exchange-traded funds, exchange-traded notes, variable annuities, non-traded real estate investment trusts, and microcap securities. The Division may also focus on recommendations and advice provided to certain investors, such as senior investors and those saving for retirement. Moreover, the Division noted it may prioritize review of specific account recommendations, including retirement account rollovers and 529 college savings plans.

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by Scott H. Moss, Ethan L. Silver, William Brannan and Vincent R. Scala

February 16 2023

Lowenstein Sandler LLP

SIFMA requested an extension of the comment period for four rule proposals targeting equity market reform. SIFMA’s comment letter concerns proposals on (i) a best execution regulatory framework, (ii) variable minimum pricing increments for quoting and trading NMS stocks, (iii) enhanced order competition and (iv) disclosure requirements regarding order execution information. SIFMA also submitted a FOIA request calling on the SEC to supply certain data relied upon and referenced in the proposed rulemakings.

Rule Proposals

As previously covered, in December 2022, the SEC issued four rule proposals aimed at reforming the structure of U.S. capital markets:

1. “Regulation Best Execution” (i) providing a best execution regulatory framework for broker-dealers, government securities broker-dealers and municipal securities dealers, and (ii) enforcing written policies and procedures designed to comply with the best execution standard;
2. amendments to Regulation NMS adopting minimum pricing increments (i.e., “tick sizes”) for the quoting and trading of NMS stocks;
3. new Regulation NMS Rule 615 (the “Order Competition Rule”) establishing regulations to “promote a more competitive, transparent, and efficient market structure for NMS stocks”; and
4. amendments to Regulation NMS Rule 605 (“Disclosure of Order Execution Information”) updating the disclosures required for order executions in NMS stocks.

The comments for each proposal are due by March 31, 2023.

FOIA Request

SIFMA submitted to the SEC a FOIA request concerning the following two types of data referenced in the proposals: (i) certain subsets of Consolidated Audit Trail (“CAT”) data not publicly available and (ii) publicly available data where the precise source of the data is unclear. SIFMA stated that the use of non-public CAT data in rule proposals is “highly problematic” because the public is then unable to evaluate and “meaningfully comment” on SEC economic analyses and conclusions. SIFMA stated, however, that unattributable CAT data used could help “facilitate the public’s review and validation of the [SEC’s] economic analyses.”

Extension Request

SIFMA requested the comment period be extended to at least 90 days following the SEC’s release of the data as requested in the FOIA request. SIFMA stated an extension is appropriate due to the public’s inability to fully evaluate the “purported costs, benefits, effects, and economic baselines” of the proposals because of its reliance on undisclosed CAT data. SIFMA added that an extension is also in order in light of the proposals’ “breadth and depth of the [] impact on today’s markets and market participants” and the lack of analysis as to the collective impact of the rulemakings.

Commentary

From a policy standpoint, the SEC should provide the requested information for transparency and public comment purposes. The SEC may face difficulty in presenting a convincing cost-benefit analysis, however, due to the complexity of the proposals and the assumed costs and benefits.

Hanging out there is a potential legal challenge to these proposals under the Administrative Procedures Act. The requested data would play a crucial role in such a challenge.

Fried Frank Harris Shriver & Jacobson LLP – Steven Lofchie

February 9 2023

Norwalk, CT, February 6, 2023 — The Governmental Accounting Standards Board (GASB) has issued proposed implementation guidance that is intended to clarify, explain, or elaborate on existing guidance on subscription-based information technology arrangements (SBITAs).

The Exposure Draft, Additional Proposal for Implementation Guidance Update—2023, addresses the single issue of whether a cloud computing arrangement meets the definition of a SBITA as defined in GASB Statement No. 96, Subscription-Based Information Technology Arrangements.

If cleared as final implementation guidance, the question and answer in this supplemental Exposure Draft will be added to previously exposed questions and answers to result in a final Implementation Guide, Implementation Guidance Update—2023.

The guidance in Implementation Guides is cleared by the Board and constitutes Category B GAAP.

Stakeholders are asked to review the proposal and provide input to the GASB by March 10, 2023. Comments may either be submitted in writing or through an electronic input form.

Changes to federal law will require state and local governments to do what they should have done years ago for the benefit of investors and other stakeholders.

By way of a few paragraphs inserted into the recently enacted 4,000-page 2023 National Defense Authorization Act, Congress mandated that state and local governments prepare their annual financial statements in a standardized format that is electronically searchable. The provision effectively drags state and local governments kicking and screaming into the 20th century, if not the 21st.

As worthy an accomplishment as this appears to be, it was resisted mightily by the state and local government financial community. Most prominently, they argue, the measure can potentially result in a major transfer of accounting and reporting regulatory authority from states to the federal government, thereby undercutting what many consider a fundamental principle of federalism. Moreover, state and local officials see it as one more costly unfunded mandate imposed upon their governments.

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Route Fifty

By Michael Granof and Martin J. Luby

FEBRUARY 8, 2023

A broker-dealer settled FINRA charges for (i) conducting a municipal securities business without becoming a member of the MSRB and (ii) failing to amend its FINRA membership application prior to conducting private placement offerings.

According to FINRA, the firm offered customers tax-advantaged state-sponsored securities plans (“529 plans”), which are municipal securities, and collected commissions and fees without first joining the MSRB or employing a qualified municipal principal to supervise the municipal securities business. Additionally, FINRA found that the firm sold several private placements, although its membership agreement did not permit the sale of private placements without obtaining FINRA approval pursuant to FINRA Rule 1017 (“Application for Approval of Change in Ownership, Control, or Business Operations”).

FINRA determined that the firm violated MSRB Rule G-2 (“Standards of Professional Qualification”), Rule G-3 (“Professional Qualification Requirements”), Rule G-27 (“Supervision”) and Rule A-12 (“Registration”). The firm also violated FINRA Rule 1017 and Rule 3110 (“Supervision”).

To settle the charges, the firm agreed to (i) a censure, (ii) a civil monetary penalty of $45,000 and (iii) to certify within 180 days that it either registered with the MSRB or ceased its offering of municipal securities.

February 7 2023

Fried Frank Harris Shriver & Jacobson LLP

SUMMARY

SIFMA provided comments to the Municipal Securities Rulemaking Board (MSRB) on their Request for Comment on Draft Amendment to MSRB Rule G-32 to Streamline the Deadlines for Submitting the Information on Form G-32 (the Notice).

View the SIFMA Comment Letter.

The MSRB proposed new MSRB Rule G-46 (“Duties of Solicitor Municipal Advisors”) that would “establish the core standards of conduct and duties of ‘solicitor municipal advisors’ when engaging in solicitation activities that would require them to register with the SEC and the MSRB as municipal advisors.”

The proposal would:

• require such solicitors to provide full and fair written disclosure regarding any material conflicts of interest and material legal or disciplinary events to solicitor clients;
• prohibit solicitor municipal advisors from publishing any materially false or misleading information regarding the capacity, resources or knowledge of the solicitor client. Solicitors must also have a reasonable basis for making any material representations;
• require solicitors to disclose material facts related to the solicitation including (i) the advisor’s role and compensation and (ii) material conflicts of interest; and
• prohibit solicitor municipal advisors from delivering inaccurate invoices or making payments for the purpose of retaining a municipal advisory activity engagement.

In addition, the proposal would codify previously issued interpretive guidance concerning the requirements applicable to solicitor municipal advisors under MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”), MSRB Rule G-42 (“Duties of Non-Solicitor Municipal Advisors”) and IAA Rule 206(4)-1 (“Investment Adviser Marketing”). The proposal would also amend MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to add specific recordkeeping obligations relating to a solicitor municipal advisor’s solicitation of advisory services.

February 1 2023

Fried Frank Harris Shriver & Jacobson LLP

The MSRB proposed to amend MSRB Rule G-40 (“Advertising by Municipal Advisors”) to allow for the use of testimonial statements in municipal advisor advertisements.

In addition to allowing the use of testimonials, the proposal would (i) establish supervisory obligations specific to testimonial use, (ii) modify the definition of municipal advisory client with regard to soliciting municipal securities business to align with MSRB Rule G-38 (“Solicitation of Municipal Securities Business”) and (iii) create a conforming obligation under MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to keep any records relating to testimonial advertising, including any record of payment for testimonials.

Fried Frank Harris Shriver & Jacobson LLP

January 31 2023

SIFMA asked the MSRB to broaden a proposed exemption to allow individuals who have been out of the securities industry for a limited time to requalify as municipal advisors without having to retake examinations. SIFMA urged the MSRB to harmonize the exemption with requirements for muni dealers and broker dealers.

In its comments, SIFMA said that such harmonization is important because many firms and individuals are dually registered with FINRA and the MSRB. SIFMA also requested that the MSRB’s relief be extended to municipal advisor principals.

Fried Frank Harris Shriver & Jacobson LLP

January 31 2023

In a Comment Letter on the MSRB’s proposal to standardize deadlines on Form G-32 requirements in connection with primary offerings, SIFMA urged the MSRB to extend the window for underwriters to file official statements.

SIFMA recommended that the MSRB extend the deadline for underwriters to file official statements through the Electronic Municipal Market Access Dataport system (“EMMA”) to ensure that the finalized statements are accurate. SIFMA said that the current requirement to file the official statement “within one business day after receipt of the official statement from the issuer or its designee, but by no later than the closing date” does not consider that certain information may not be available until after the security is sold, nor does it account for statements received outside of normal business hours.

SIFMA recommended that the MSRB establish a single deadline no later than the closing date of an offering for underwriters to submit all applicable information to EMMA for both NIIDS-eligible and ineligible primary offerings. For transactions where no placement agent or underwriter is involved, SIFMA said that the municipal advisor involved should be required to submit a Form G-32 filing.

Fried Frank Harris Shriver & Jacobson LLP

January 30 2023

Norwalk, CT, January 30, 2023 — The Financial Accounting Foundation (FAF) today announced it will provide free, enhanced online access to the Accounting Standards Codification® and the Governmental Accounting Research System™ in an effort to make financial accounting standards even more widely accessible to stakeholders and the public.

The FAF has not yet determined the firm date for this change to online access to the accounting standards, but it is expected to occur this spring.

The Accounting Standards Codification® (“the Codification”) is the complete and official version of Generally Accepted Accounting Standards (GAAP) published by the Financial Accounting Standards Board (FASB) and used by public companies, private companies, nonprofit organizations, and employee benefit plans in the United States. The Governmental Accounting Research System™ (“GARS”) is the complete and official version of GAAP published by the Governmental Accounting Standards Board (GASB) and used by states, cities, and other governmental entities in the United States.

While free versions of both the Codification and GARS have been available online for years, the new system will provide enhanced features compared to the current free offering (known as “Basic View”). These include enhancements to navigation, search, printing, copy/paste, and the ability to provide feedback.

As a result of this move, the “Professional View” paid subscription service will be eliminated and users who previously accessed Professional View can instead use the enhanced free versions of the Codification and GARS. Current Professional View subscribers will be transitioned off the current system. Pro-rated refunds will be issued for those subscribers whose paid terms extend beyond the cutover date.

“We believe this move, which is consistent with a recent recommendation from the Investor Advisory Committee of the U.S. Securities and Exchange Commission, will increase our stakeholders’ access to these important resources, and thereby improve the understanding and implementation of financial accounting standards in the United States,” said FAF Executive Director John Auchincloss.

Meeting Notice.

02/01/23

Publicly traded corporations that fail to file audited financial statements as prescribed by the SEC risk their stock tanking and being delisted from the exchange. Grave consequences to be sure. Yet there is no consequence to those municipal bond issuers for the same failure to file. Until now.

Moody’s rating agency has finally had enough of dealing with municipal bad citizens. We count 861 CUSIPs on which they have withdrawn their ratings. Many issuers have multiple CUSIPs owned by investors just like you. In the Muniverse, 861 CUSIPs is not huge. But it’s a beginning. Sure, the issuer may have decided to dump Moody’s, causing the rating agency to withdraw their rating. Still, it’s an impressive number and something to my knowledge that hasn’t been done on this scale before.

How do we investors assess a bond issuer’s ability to continue paying the coupons when due without timely financials or a credit rating report from a rating agency? The answer is, we can’t.

Perhaps Moody’s ratings withdrawal is a wakeup call that municipal bond issuers must file their financials or risk the consequences.

Actions To Take

What if your bond issuer fails to file its financial statements and/or their ratings agencies withdraw their ratings. Suddenly you are flying blind. Often financials aren’t filed for an entire year after close of the fiscal year on which they’re reporting. A lot can change during that time. For example, on June 4, 2021, S&P Global withdrew ratings on various local government and utility debt. Here’s what they said:

…the withdrawal is due to insufficient information. Specifically, the withdrawals reflect our failure to receive adequate and timely financial information necessary to maintain surveillance of the ratings in accordance with our applicable criteria and policies. Such financial information includes, for example, audited financial statements or similar financial information.

There are many money managers and municipal bond funds that cannot hold non-rated bonds. Withdrawn ratings may force them to sell. As you may have experienced, selling begets lots more selling in Muniland. Bond prices plummet.

If you self-manage your municipal bonds, use the Electronic Municipal Market Access (EMMA) website (emma.msrb.org) that publishes municipal annual reports and audited financial statements. You’ll find disclosure documents, trade activity and ratings. If you use the Schwab retail trading platform, you have access to Moody’s reports when you click the name of the issuer before buying or selling a bond. Both the MSRB and Schwab information are free. Perhaps your bond platform offers free rating reports too.

Using free information systems such as the MSRB makes sense for all municipal bond investors. Checking on the issuers whose bonds you own that are not following the rules by filing timely financials can save you thousands in losses should the bond tank.

As the economy slows, tax receipts will decline. Certain municipalities may not wish to disclose what is happening to them. So they just miss the filing date of their financials. If you see this happen and your bond is not insured, sell.

Forbes

by Marilyn Cohen

Feb 3, 2023

As the SEC staff picks up the pace of cyber investigations, Chair Gensler continues the push to beef up the Enforcement Division’s already meaty toolkit.

TAKEAWAYS

• The SEC has nearly doubled the size of its Crypto Assets and Cyber Unit and has aggressively pursued cyber-related enforcement actions against public companies and regulated entities.
• In a few months the SEC will finalize new rules governing firms’ cybersecurity obligations, ushering in an unprecedented wave of oversight.
• Companies must proactively prepare for changes to the cyber-regulatory regime by assessing the adequacy of their security protocols, disclosure controls and procedures, and disclosures to investors regarding cyber matters.

Continue reading.

By Brian E. Finch, David Oliwenstein, Sarah M. Madigan

Feb 2, 2023

Pillsbury Winthrop Shaw Pittman LLP

This Hawkins Advisory describes the Federal Reserve’s recently published regulation, which clarifies the federal law treatment of United States dollar-denominated LIBOR contracts that do not adequately provide for interest rate-setting that can function independent of USD LIBOR or other inquiry-based determination of interbank lending or deposit rates. The Regulation establishes the substitute interest rate benchmarks that will be automatically substituted for USD LIBOR upon the expected June 30, 2023 end of USD LIBOR rate publication in the absence of prior action by contracting parties and clarifies related operational details.

View the Hawkins Advisory.

On January 10, FINRA published its “2023 Report on FINRA’s Examination and Risk Management Program” (Report) — FINRA’s third annual compendium of guidance, covering key topics and emerging risks for member firms to consider when evaluating the efficacy of their compliance programs and operations procedures. Among other things, the Report identifies relevant rules, summarizes noteworthy findings, outlines effective practices, and provides additional resources that may be helpful to member firms when assessing their compliance obligations.

This year, the Report is organized into five sections: (1) Financial Crimes, (2) Firm Operations, (3) Communications and Sales, (4) Market Integrity, and (5) Financial Management. The Financial Crimes section is a new addition for this year, whereas each of the other four sections were included in last years’ report. In addition to adding the Financial Crimes section, this year’s Report also builds on the structure and content of the 2021 Report and 2022 Reports by adding: (i) new material (findings and effective practices) to existing sections; and (ii) new topics to the Market Integrity section. The Financial Crimes section (its topics and emerging risks) is summarized below, followed by a summary of the regulatory obligations and related considerations for each of the new Market Integrity topics.

I. Financial Crimes

This new section of FINRA’s annual report is a deliberate effort by FINRA to focus on areas where member firms face potential criminal exposure. It includes one new topic (Manipulative Trading) and two topics that were previously included in the Firm Operations section (Cybersecurity and Technology Governance and Anti-Money Laundering, Fraud, and Sanction).

Manipulative Trading (new): Certain FINRA rules prohibit member firms from engaging in impermissible trading practices, including manipulative trading, including, among others: Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive, or Other Fraudulent Devices), 5210 (Publication of Transactions and Quotations), 5220 (Offers at Stated Prices). Additionally, under Rule 3110 (Supervision), member firms are required to supervise their associated persons’ trading activities, and a firm’s supervisory procedures must include a process for the review of securities transactions.

Cybersecurity and Technological Governance: Rule 30 of SEC Regulation S-P requires member firms to have written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information. In addition to member firms’ compliance with SEC regulations, FINRA reminds firms that cybersecurity remains one of the principal operational risks facing broker-dealers and expects firms to develop and maintain reasonably designed cybersecurity programs and controls that are consistent with their risk profile, business model, and scale of operations.

Anti-Money Laundering, Fraud, and Sanction: FINRA Rule 3310 (Anti-Money Laundering Compliance Program) requires that each member firm develop and implement a written AML program that is approved in writing by senior management and is reasonably designed to achieve and monitor the firm’s compliance with the Bank Secrecy Act (BSA) and its implementing regulations.

Notably, each of the “emerging risks” identified in this year’s Report fall within the ambit of Financial Crimes:

Manipulative Trading in Small Cap IPOs: FINRA, NASDAQ, and NYSE have recently observed that initial public offerings (IPOs) for certain small cap, exchange-listed issuers may be the subject of market manipulation schemes, similar to so-called “ramp and dump” schemes. FINRA has also observed significant unexplained price increases on the day of or shortly after the IPO of certain small cap issuers.

Sanctions Evasion: Since February 2022, OFAC has taken several significant sanctions actions related to the Russian financial services sector in response to Russia’s actions in Ukraine. In response, on February 25, 2022, FINRA issued Regulatory Notice 22-06 (U.S. Imposes Sanctions on Russian Entities and Individuals) to provide firms with information about these actions, and to encourage firms to continue to monitor the OFAC website for relevant information.

ACATS Fraud: FINRA has observed an increased number of fraudulent transfers of customer accounts through ACATS in which a bad actor will use the stolen identity of a legitimate customer to open an online brokerage account.

Senior Investors: Senior investors can be vulnerable to fraud, theft, scams, and exploitation. When firms are assessing how they monitor customer account activity for red flags of financial crimes to which senior investors may be vulnerable, they should consider whether they maintain specialized senior investor-focused or other exception reporting or surveillance that is reasonably designed to detect and report suspicious activity related to financial crimes. Member firms should also consider whether their monitoring program incorporates red flags of elder financial exploitation.

II. Market Integrity

Each of this year’s remaining new topics sits within the Report’s Market Integrity category.

Fixed Income: The fair pricing obligations under FINRA Rule 2121 (Fair Prices and Commissions) apply to transactions in all securities — including fixed income securities — and MSRB Rule G-30 imposes similar obligations for transactions in municipal securities. In addition, FINRA Rule 2121 and MSRB Rule G-30 also include specific requirements for transactions in debt securities. These rules generally require a dealer that acts in a principal capacity in a debt security transaction with a customer, and who charges a markup or markdown to mark up or mark down the transaction from the prevailing market price (PMP).

Fractional Shares: FINRA’s trade reporting rules generally require member firms to transmit last sale reports of transactions in equity securities to a FINRA trade reporting facility (TRF) or FINRA’s over-the-counter trade reporting facility (ORF) as applicable. Although the TRF and the ORF do not currently support the entry of fractional share quantities, such trades are required to be reported subject to FINRA guidance.

Regulation SHO: Rules 203(b) (Short Sales) and 204 (Close-Out Requirement) of Regulation SHO provide exceptions for bona fide market making activity. Member firms must confirm and demonstrate that any transaction for which they rely on a Regulation SHO bona fide market making exception qualifies for the exception, consistent with Regulation SHO and guidance.

The Report also highlights several topics that FINRA has identified as ongoing key areas of risk to investors and the markets, including: (1) Regulation Best Interest and Form CRS; (2) best execution obligations and conflicts of interest; (3) the increasing prevalence and sophistication of cybersecurity attacks; and (4) securities trading via mobile applications. The Report also is of interest for what it does not include. Notably, although special purpose acquisition companies (SPACs) were considered a key topic for the 2021 Report — and have seen focused attention from other regulatory bodies, such as the SEC — they are not referenced in this year’s issue at all.

The findings and best practices outlined in the Report can serve as a guide for member firms to identify possible deficiencies or gaps in their compliance programs and operations procedures that could result in the types of exam findings highlighted therein. FINRA member firms are encouraged to thoroughly review the Report. In particular, member firms should identify the findings, observations, and effective practices relevant to their business models. The Report also may serve as a road map to prepare for an examination. If concerns arise before an examination, member firms would be well served by including counsel familiar with these issues in their preparation for the examination.

If you have any questions regarding the 2023 Report, FINRA’s Examination and Risk Management Program, your company’s policies and procedures, or questions otherwise relating to the above alert, please contact any of the Troutman Pepper attorneys listed on this advisory.

Troutman Pepper – Jay A. Dubow, Ghillaine A. Reid, Casselle Smith and John S. West

January 24 2023

As is widely known, the new issue market slowed down in 2022 due to a variety of factors, including rising interest rates, reduced institutional demand resulting from municipal bond fund outflows, inflation and recession fears, international tensions, and overall market volatility.

View the Ballard Spahr publication.

by M. Norman Goldberger, John Grugan, Teri Guarnaccia, Ernesto Lanza, Kimberly Magrini, William Rhodes, Tesia Stanley

January 25, 2023

Ballard Spahr LLP

Washington D.C., Jan. 23, 2023 — The Securities and Exchange Commission today announced settled charges against Bloomberg Finance L.P. (Bloomberg) for misleading disclosures relating to its paid subscription service, BVAL, which provides daily price valuations for fixed-income securities to financial services entities.

The SEC’s order finds that from at least 2016 through October 2022, Bloomberg failed to disclose to its BVAL customers that the valuations for certain fixed-income securities could be based on a single data input, such as a broker quote, which did not adhere to methodologies it had previously disclosed. The order finds that Bloomberg was aware that its customers, including mutual funds, may utilize BVAL prices to determine fund asset valuations, including for valuing fund investments in government, supranational, agency, and corporate bonds, municipal bonds and securitized products, and that BVAL prices, therefore, can have an impact on the price at which securities are offered or traded.

“Bloomberg has assumed a critical role as a pricing service to participants in the fixed-income markets and it is incumbent on Bloomberg, as well as on other pricing services, to provide accurate information to their customers about their valuation processes,” said Osman Nawaz, Chief of the Division of Enforcement’s Complex Financial Instruments Unit. “This matter underscores that we will hold service providers, such as Bloomberg, accountable for misrepresentations that impact investors.”

The SEC’s order finds that Bloomberg violated section 17(a)(2) of the Securities Act. Without admitting or denying the findings, Bloomberg agreed to cease and desist from future violations and to pay a $5 million penalty. The SEC’s order notes that Bloomberg voluntarily engaged in remedial efforts to make improvements to its BVAL line of business.

The SEC’s investigation was conducted by Gregory Smolar of the Complex Financial Instruments Unit and Emily Rothblatt of the Chicago Regional Office under the supervision of Natalie Brunson, Ana Petrovic, and Osman Nawaz of the Complex Financial Instruments Unit, with assistance from trial counsel Robert Gordon and Howard Kaplan of the Enforcement Division’s office of Investigative and Market Analytics.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) met on January 25-26, 2023 for its second quarterly Board of Directors meeting of Fiscal Year 2023, where it discussed regulatory initiatives to improve municipal market transparency. The Board also discussed other initiatives to advance the four pillars of the self-regulatory organization’s long-term strategic plan.

Market Regulation

“The MSRB continues to focus on regulatory initiatives to make meaningful improvements in the transparency in our market throughout the lifecycle of a bond transaction,” said MSRB Chair Meredith Hathorn. “The Board’s discussions are deeply informed by dialogue with market stakeholders and data analysis.”

The Board discussed the various perspectives raised by market participants in response to the MSRB’s request for comment on its proposed amendments to MSRB Rule G-14 to shorten the timeframe for trades to be reported. The Board intends to continue stakeholder outreach and data analysis to inform potential next steps in coordination with fellow regulators.

The Board also discussed the forthcoming publication of a previously authorized request for comment on proposed amendments to MSRB Rule G-47, which would codify certain interpretive guidance and specify certain additional information that may be material and require time-of-trade disclosures to customers. This request for comment also seeks stakeholder input on proposed amendments to Rule D-15, defining the term “sophisticated municipal market professional.”

In support of regulatory coordination and communication, the Board regularly meets with fellow regulators. At this meeting, the Board met with Securities and Exchange Commission Chair Gary Gensler and Financial Industry Regulatory Authority (FINRA) President and CEO Robert Cook.

Market Transparency and Technology

The Board received an update on the ongoing systems modernization effort, including work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems. To help keep stakeholders informed of upcoming and longer-term EMMA enhancements, the MSRB publishes a forward roadmap of its transparency and technology initiatives on its website.

Market Structure and Data

The Board discussed market structure topics, including a potential pre-trade data collection initiative for the municipal securities market in coordination with fellow regulators. The Board also discussed the recently enacted Financial Data Transparency Act and its potential impact on the municipal securities market.

Public Trust

At each meeting, the Board conducts essential oversight of MSRB governance, finances and operations to uphold the public’s trust. The Board received an update from its Nominating Committee on efforts to seek a diverse pool of applicants to join the Board in FY 2024, with a particular focus on soliciting applicants with compliance, technology and data proficiency, and applicants from all regions of the United States. Interested candidates must submit their applications by February 6, 2023.

In addition to prioritizing diversity and inclusion in the composition of the Board itself, the MSRB seeks to broaden its accessibility and engagement with diverse market participants so that all perspectives, concerns and expertise are heard. The Board received an update on the final roundtable in a series of roundtable discussions with minority-, women- and veteran-owned firms that the MSRB hosted in collaboration with FINRA to identify opportunities to foster greater diversity, equity and inclusion in the municipal securities market.

“Through these roundtables, the MSRB and FINRA have gained greater insight into the particular business models, challenges and pain points of diverse firms operating in the municipal market,” said MSRB CEO Mark Kim. “We are very grateful for the industry’s engagement to date, and we look forward to continuing to broaden and deepen our touchpoints with stakeholders.”

Date: January 27, 2023

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

BDA today provided comments to the MSRB on its proposal to amend MSRB Rule G-32 related to information reporting for municipal new issues. BDA generally supports the proposal.

The MSRB has proposed to amend Rule G-32 to streamline the submission of new issue data on Form G-32. Under the proposal, underwriters would be required to submit certain information by the end of the first trading day for new issues and the remainder of the information by the closing date. The proposal would not amend the scope of type of information underwriters must report. It would streamline timing only.

We told the MSRB that “BDA generally supports the amendments in the Notice. We believe these changes would provide additional compliance flexibility for underwriters without threatening investor or issuer protections.” We also asked the MSRB to formally acknowledge that underwriters could of they choose continue to make G-32 information submissions according to the standards in the current rule and still be in compliance with the proposed amendments.

Thanks to all who contributed to this project. Our comment letter is available here. Please call or write with any questions.

Bond Dealers of America

January 17, 2023

The U.S. Securities and Exchange Commission (SEC) appears to have big plans for cybersecurity regulation in 2023.

The SEC’s rulemaking agenda, which was recently published by the Office of Management and Budget’s Office of Information and Regulatory Affairs, includes finalizing two sets of cybersecurity rules proposed last year and issuing a new notice of proposed rulemaking (NPRM) on cybersecurity risk disclosures and cybersecurity measures. The new NPRM will include requirements for SEC-regulated public companies, broker-dealers, funds, investment advisors, self-regulatory organizations (SROs), and others.

The SEC has been one of the most active federal agencies in the cybersecurity space over the last several years. The Commission proposed new cybersecurity regulations for registered investment advisors (RIAs) and funds in February 2022 (see our blog post here) and new cyber disclosure, governance and risk management rules for public companies in March 2022 (see our blog post here). According to the recently published rulemaking agenda, final action on both of these proposed rules is expected in April 2023 (see here and here). If these rules are finalized:

• RIAs and funds will need to adopt cybersecurity policies and procedures, conduct documented risk assessments, implement access controls, monitor and remediate vulnerabilities, and detect, respond to, and report cybersecurity incidents. Covered RIAs and funds will be required to report cybersecurity incidents with 36 hours.
• Public companies will be required to include in mandatory disclosures information about the board of directors’ oversight of cybersecurity risk, individual board members’ cybersecurity expertise, and the role of management in addressing cybersecurity risk, among other aspects of companies’ cybersecurity risk management programs. Public companies will be required to report material cybersecurity incidents within four business days.

According to the recently published rulemaking agenda, the SEC also intends to release a new NPRM to “address registrant cybersecurity risk and related disclosures, amendments to Regulation S-P and Regulation SCI, and other enhancements related to the cybersecurity and resiliency of certain Commission registrants.” While the description of this NPRM indicates that its subject matter may overlap with the existing proposed rules, it is clear that the new NPRM will tread some new ground such as in amending Regulations S-P and SCI.

Regulation S-P, which was promulgated under section 504 of the Gramm-Leach-Bliley Act (GLBA), contains numerous data privacy and security-related requires for registered broker-dealers, funds, and investment advisers. Section 30(a) of Regulation S-P, commonly known as the Safeguards Rule, requires registered broker-dealers and investment advisers to “adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information.” The SEC may intend to follow the example of the Federal Trade Commission (FTC), which recently amended its own Safeguards Rule for non-bank financial institutions by adding numerous specific cybersecurity requirements, including risk assessments, continuous monitoring, encryption and multifactor authentication (we discussed the FTC’s amendments to its Safeguards Rule in a prior blog post and webinar). The SEC’s February 2022 RIA and funds cybersecurity proposal acknowledged that Regulation S-P (which applies to RIAs and funds) also addresses cybersecurity but did not seek to amend that rule.

Regulation Systems Compliance and Integrity, or Regulation SCI, applies to computer systems that support key securities market functions and covers SROs—including stock and options exchanges, registered clearing agencies, the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB)—and other “SCI Entities,” including certain alternative trading systems, disseminators of consolidated market data, and certain exempt clearing agencies.

Davis Wright Tremaine LLP – Michael T. Borgia and Alexander Sisto

January 19 2023

On Dec. 14, 2022, Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC), released a statement announcing a proposal to establish an SEC rule setting forth a best execution standard for broker-dealers. Chair Gensler expressed his support of the new rule, stating it would help ensure brokers have policies and procedures in place to seek best execution for investors.

Currently, the SEC does not have its own best execution rule. It does, however, enforce best execution duties under antifraud statutes, the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB) execution rules. Chair Gensler stated that a best execution standard was “too important, too central to the SEC’s mandate to protect investors, not to have on the books as [SEC] rule text.” The Chair noted that the proposed SEC rule would enhance investor protection by providing for additional enforcement capabilities, and he further noted that FINRA’s best execution rule hadn’t been updated since 2014, and that markets had changed vastly since then.

The SEC’s proposal aims to make enhancements to brokers’ duty to investors. Chair Gensler highlighted three such enhancements in his statement:

• Heightened requirements for transactions that involve conflicts of interest with retail investors: brokers would be subject to additional policies and procedures and documentation requirements if the broker has a conflict of interest with respect to a transaction. Additional policies and procedures include enhanced diligence in seeking best execution and documentation showing the basis for determining that conflicted transactions comply with the best execution standard.
• Narrowing best execution requirement exemptions for introducing brokers: for example, broker-dealers using wholesalers for execution would no longer be able to solely rely on the wholesaler’s quality reviews.
• More detailed policies and procedure requirements: policies and procedures would need to include specific considerations that the broker would need to address, such as market evaluation and specified price/non-price considerations, to comply with the new best execution standard.

The proposed rule is open for public comment, and the public comment period will remain open until March 31, 2023, or 60 days after the proposal’s publication date in the Federal Register, whichever is later.

Greenberg Traurig LLP – William B. Mack and Mark D. Shaffer

January 20 2023

In Brief

On 14 December 2022, the Securities and Exchange Commission (SEC) proposed four separate rulemakings under the Securities Exchange Act of 1934 (“Exchange Act“) that would create a federally defined best execution standard for broker-dealers and overhaul the US equities market structure (collectively, “Market Structure Proposals“).

If adopted in their current form, these proposals would meaningfully impact market participants and practices. Given the nearly 1,700 pages of combined rules proposals, firms may need to devote significant resources just to digest their potential impact on particular business models.

In a series of Client Alerts, we will attempt to dissect each of these Market Structure Proposals. In this Client Alert, we provide an overview, insights, and key takeaways for the Regulation Best Execution (Reg Best Ex) Proposal.

Continue reading.

Baker McKenzie – Amy J. Greer, Jennifer L. Klass and Gavin Meyers

January 18 2023

In December of 2022, Congress enacted the Financial Data Transparency Act (the “FDTA”), legislation intended to modernize and improve the organization, readability and availability of financial information collected by certain federal agencies from regulated organizations. Focusing on the public finance industry, the FDTA directs the Securities and Exchange Commission (the “SEC”) to adopt new uniform data reporting standards for financial disclosures filed by municipal issuers and obligors with the Municipal Securities Rulemaking Board (the “MSRB”). It is important to note that the FDTA does not add any new disclosure requirements. Rather, it is intended to change the way in which financial information is presented in disclosure filings, facilitating a better understanding of the context behind the data. Theoretically, these new standards will enhance the accessibility, transparency and comparability of the data included in the financial disclosures, resulting in a more user-friendly product for investors and other municipal market participants. Nevertheless, the practical impact on issuers and obligors of implementing these new data reporting standards, in terms of time, expense and resources, remains to be seen.

Broad in its scope, the FDTA mandates across-the-board improvements in the quality and transparency of private sector and public sector financial disclosures. As such, the FDTA applies to a number of other federal financial regulatory agencies in addition to the SEC, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency and the National Credit Union Administration.

The rulemaking process to effectuate the FDTA relative to municipal securities will occur in two stages. First, the SEC and the other federal agencies are required to jointly publish proposed rules establishing the data standards to be applied to financial disclosures under their jurisdictions. The proposed rules must be published for public comment by June of 2024, with the final rules published by December of 2024. The data standards established in the final rules are to take effect no later than December of 2026.

These jointly-issued data standards are intended to provide the SEC with the framework to then develop uniform municipal securities data standards and rules for the financial disclosures submitted by issuers and obligors to the MSRB. However, these specific municipal securities data standards must be compatible with the jointly-issued data standards (to the extent feasible and applicable). Under the FDTA, the SEC must publish final rules adopting these uniform data standards by December of 2026, the expectation being that proposed rules would be published earlier in 2026 to allow for public comment. Although the FDTA does not mandate a specific effective date for the municipal securities data standards established in the final rules, they could become effective as early as 2027.

Under these new uniform data standards, financial disclosures by municipal issuers and obligors would be presented in a fully machine-readable and searchable structured format, tagged with identifier codes allowing for greater data analysis and comparability. By way of example, since 2009, the SEC has required that private companies use a similar structured data format, the eXtendable Business Reporting Language (XBRL), in making their financial disclosures. Although not mentioned in the FDTA, the SEC could use XBRL as a model for implementing the FDTA’s requirements.

Notably, the FDTA’s requirements are not limited in scope to a particular type of financial information (i.e., an issuer’s or obligor’s financial statements). Such ambiguity raising questions as to whether the SEC might extend the reach of the new data standards to other types of disclosures, such as particular portion(s) of an official statement (beyond any attached financial statements) or the sixteen event notices included in an issuer’s or obligor’s continuing disclosure undertaking. Additionally, the new data standards could impact the format in which financial information is submitted under current MSRB rules, such as Rule 15c2-12, Rule G-32 or Rule G-34. Other open questions include the establishment of an enforcement mechanism to ensure compliance and the impact on ongoing disclosure relative to outstanding bond issues.

In the end, the manner in which the SEC effectuates the FDTA will determine the impact on issuers and obligors specifically and the public finance industry overall. Significantly, the FDTA requires the SEC to consult with municipal market participants in developing the new data standards. Furthermore, the FDTA permits the SEC to adjust the data standards to reduce any unjustified burden on certain reporting entities and minimize disruptive changes overall. These mitigating factors, coupled with the approximately four-year window until adoption of the final rules, allow for meaningful participation in the rulemaking process and some time to prepare for the eventual outcome. At a minimum, issuers and obligors should consult their various advisors, counsel and professional associations to develop: (1) effective strategies for commenting on the proposed rules and (2) best practices to modify their disclosure processes, update software or other technology, and train appropriate staff members in anticipation of the effective date of the final rules.

Bowditch & Dewey LLP – Neal R. Pandozzi

January 18 2023

View the article.

Morgan, Lewis & Bockius LLP

January 17 2023

A new federal law will eventually make some data searches and comparisons easier, but implementation will be a challenge. Software vendors will be staking their claims, but public-sector finance associations should take the lead.

In its lame duck session last month, Congress tucked a sleeper section into its 4,000-page omnibus spending bill. The controversial Financial Data Transparency Act (FDTA) swiftly came out of nowhere to become federal law over the vocal but powerless objections of the state and local government finance community. Its impact on thousands of cities, counties and school districts will be a buzzy topic at conferences all this year and beyond. Meanwhile, software companies will be staking claims in a digital land rush.

The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.

The primary rationale for this initiative has been transparency of data in the municipal bond marketplace, but a broader vision lies beyond the letter of this law. The last thing that the public finance world needs is yet another walled garden in which data structures are built to benefit a narrow group of industry analysts, muni bond fund managers and regulators. The ultimate benefits of data transparency should be far broader, at little or no cost to taxpayers, students and public agencies. Therein lies an opportunity for the nonprofit associations focused on public finance to take the lead rather than letting software vendors call the shots.

Continue reading.

governing.com

by Girard Miller

Jan. 17, 2023

The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet in Washington, D.C. on January 25-26, 2023, where it will discuss the following topics:

Market Regulation

The Board will discuss comments received in response to its request for comment on its proposed amendments to MSRB Rule G-14 to shorten the timeframe for trades to be reported and receive an update on additional MSRB data analysis and stakeholder outreach.

Market Transparency

The Board will receive an update on ongoing work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems.

Market Structure and Data

The Board will discuss market structure topics, including a potential pre-trade data collection initiative for the municipal securities market in coordination with fellow regulators. The Board also will discuss the recently enacted Financial Data Transparency Act (FDTA) and its potential impact on the municipal securities market.

Public Trust

In furtherance of its mission to create a more fair and efficient market, the Board will receive an update on the final roundtable in a series of roundtable discussions with minority-, women- and veteran-owned firms the MSRB hosted in collaboration with the Financial Industry Regulatory Authority to identify opportunities to foster greater diversity, equity and inclusion in the municipal securities market.

An influential good government group is calling for tighter standards and is out with new recommendations for how Congress and regulators can begin taking action.

Hundreds of billions of dollars for pandemic recovery, infrastructure projects, economic development and climate programs that Congress and President Biden have approved for states, cities and counties during the past two years has drawn a great deal of attention.

But even before the Covid-era spending boom, the federal government was directing more than a $1 trillion annually in grants and tax incentives toward states and localities, as a new report from the nonprofit Volcker Alliance points out. Despite that degree of financial aid, the authors of the report argue that Congress and presidential administrations have “demanded surprisingly little in continuing, high-level oversight” of state and local budgeting and borrowing.

The report goes on to make a case for why it’s time for lawmakers and regulators to tighten up standards around state and local government finance, and it offers recommendations for how they can go about it.

Continue reading.

Route Fifty

By Bill Lucia

JAN 9, 2023

Detailed analysis of the municipal market detailing significantly higher interest rates, record outflows from tax-exempt mutual funds and a record number of trades.

View the MSRB report.

Publication date: 01/12/2023

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual report for the 2022 fiscal year. The report highlights progress on the goals outlined in the MSRB’s four-year Strategic Plan, which was developed with extensive public input.

“Our mission to protect investors and issuers in this market has never been more important as financial markets continue to evolve at an ever-increasing pace,” said MSRB Chair Meredith Hathorn and MSRB CEO Mark Kim in their letter to stakeholders. Commenting on the MSRB’s Congressional mandate to establish rules that ensure a transparent, efficient and fair market, Hathorn and Kim added: “Strong markets function best when regulations keep pace with evolving market practices and technologies.”

The report demonstrates how the MSRB works to uphold the public’s trust in the $4 trillion municipal securities market and give America the confidence to invest in its communities.

Progress on the MSRB’s four Strategic Plan goals:

Market Regulation: The MSRB worked closely with fellow financial regulators to undertake a comprehensive examination of fixed income market structure looking at post-trade, time of trade and pre-trade transparency, starting with the issuance of a request for comment on proposed amendments to post-trade reporting requirements. In addition, as part of the organization’s ongoing retrospective rule review, the MSRB furthered its multi-year initiative to review the MSRB’s entire library of interpretive guidance and update, codify or retire guidance, as appropriate.

Market Transparency: The MSRB continued to work on enhancing its Electronic Municipal Market Access (EMMA®) website to facilitate regulatory compliance and make EMMA easier to use, and completely redesigned the MSRB.org website to improve navigation and make information easier to find.

Market Data: As the central repository of data for the municipal securities market, the MSRB leveraged its investment in cloud computing and data analytics to enhance the quality, accessibility, security and value of this data for market participants. This included the launch of EMMA Labs, the MSRB’s innovation sandbox, where municipal market participants can collaborate to test and provide feedback on prototypes of new tools for their potential release on EMMA.

Public Trust: Recognizing that the MSRB’s duty to uphold the public trust in the municipal securities market and in the MSRB as the market’s self-regulatory organization requires a commitment to fiscal transparency and accountability, the MSRB instituted a new fee-setting process that better manages the organizations reserves and ensures the MSRB has sufficient revenues to fund its operations as it delivers on its multi-year strategic plan. The MSRB also took important steps to advance its diversity, equity and inclusion action plan by co-hosting with the Financial Industry Regulatory Authority a series of roundtable discussions with women-, minority- and veteran-owned businesses on key issues impacting these firms in the municipal securities market.

The annual report includes audited annual financial statements for the fiscal year that ended September 30, 2022, which help ensure transparency around how the organization manages its resources and financial reserves.

Read the report.

Date: January 13, 2023

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

As we welcome 2023, and the final six months of certain London Interbank Offering Rates (“LIBOR”), issuers and borrowers of LIBOR-based tax-exempt bonds should evaluate whether changes to their financing documents are necessary to implement a replacement rate, while avoiding changes that could negatively affect the tax-exempt status of those bonds.

As many are aware, the Intercontinental (ICE) Benchmark Administrator plans to cease publishing the overnight, one-month, three-month, six-month and twelve-month U.S.-dollar LIBOR after June 30, 2023. As a result, existing debt instruments that use LIBOR as the reference rate for determining their interest rates may need to be modified.

In general, modification of a tax-exempt municipal bond may be treated as a significant modification that constitutes a “reissuance,” and a reissuance could call into question whether interest on the modified bond continues to qualify for tax exemption. The Treasury Department and Internal Revenue Service (“IRS”) have adopted a new regulation (Treas. Reg. §1.1001-6) designed to support an orderly transition of LIBOR-based instruments to new reference rates. If a modification of a LIBOR-based instrument made between March 7, 2022 and June 30, 2024, is structured to qualify as a “covered modification” under Treas. Reg. §1.1001-6, the modification will not result in a reissuance. Issuers and borrowers should consult with bond counsel before finalizing changes to the terms of a tax-exempt financing instrument.

Treasury Regulation Facilitates Transition From LIBOR

LIBOR as Reference Rate Discontinued After June 30, 2023. The Intercontinental (ICE) Benchmark Administrator, as administrator of the London Interbank Offering Rate (“LIBOR”), has announced that its publication of overnight, one-month, three-month, six-month and twelve-month U.S.-dollar LIBOR will cease following June 30, 2023. As a result, various types of existing debt instruments, including loan contracts and municipal bonds, that contain provisions requiring the use of LIBOR as the reference rate for determining the interest rate on the debt instrument may need to be modified.

These modifications may raise federal tax issues. For example, the modification of a loan contract may be treated as a taxable exchange of property for other property differing materially in kind or extent for purposes of §1001-1(a) that gives rise to gain or loss, and the modification of a tax-exempt municipal bond may be treated as a significant modification that constitutes a “reissuance” under §1.1001-3 that would raise a question whether the interest on the modified bond continues to qualify for tax exemption.

For such a modification to transition from LIBOR to be treated as a “covered modification” (described below) that will not result in a taxable exchange or “reissuance” of the debt instrument, the modification must be made not later than one year after the discontinuance of LIBOR, i.e., by June 30, 2024.

Treasury Regulation §1.1001-6 Facilitates “Covered Modifications” Made to Transition From LIBOR. In an effort to minimize potential market disruption and facilitate an orderly transition from LIBOR to other reference rates, the Treasury Department and Internal Revenue Service (“IRS”) adopted Treas. Reg. §1.1001-6. The basic purpose of §1.1001-6 is to facilitate modifications to contracts that are made to transition from LIBOR to new reference rates, while preserving the same business and economic terms.

Treas. Reg. §1.1001-6 applies to a modification of the terms of a contract that occurs on or after March 7, 2022. In general, the operative rules of §1.1001-6 provide that certain “covered modifications” of a contract made to transition from LIBOR to a “qualified rate” will not result in a taxable exchange of property under §1.1001-1(a) or a reissuance of a debt instrument under §1.1001-3. A “covered modification” is a modification made to transition from a discontinued interbank offered rate such as LIBOR to a “qualified rate” and to make “associated modifications,” if any, of technical, administrative, or operational terms of the contract reasonably necessary to implement the covered modification. The operative rules also permit certain “qualified one-time payments” to be made to compensate a party for all or part of the basis difference between the discontinued interbank offering rate and the interest rate benchmark used for the new qualified rate.

“Modification” of Contract Broadly Defined. For the purposes of §1.1001-6, a “modification” of a contract, including a debt instrument such as a tax-exempt municipal bond, is defined broadly to include any modification of the terms of the contract, regardless of the form of the modification. For example, a modification could include an exchange of one contract for another, an amendment to an existing contract, or a modification accomplished indirectly through one or more transactions with third parties, regardless of whether the modification is evidenced by an express agreement, conduct of the parties, or otherwise. Therefore, when considering modifications to a tax-exempt bond to transition from LIBOR to another reference rate, the issuer of a tax-exempt bond should evaluate, in advance of any agreement with the bondholder and in consultation with bond counsel, whether the modification would be treated as a “covered modification” under §1.1001-6.

“Qualified Rates.” The question whether a modification of a debt instrument will be treated as a covered modification depends on whether the new reference rate is a “qualified rate.” Under §1.1001-6(h)(3)(ii), a qualified rate is any of the following rates having a benchmark that is reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds:

(A) A “qualified floating rate” as defined in §1.1275-5(b), but without the requirement that any fixed multiple applied to the qualified floating rate must be greater than .65 but not more than 1.35. Such a qualified rate includes “SOFR,” which is the Secured Overnight Floating Rate developed by the Alternative Reference Rates Committee (“ARRC”) and published each business day on the website of the Federal Reserve Bank of New York (the “New York Fed”);

(B) An alternative, substitute or successor rate selected, endorsed or recommended by the central bank, reserve bank or monetary authority as a replacement for LIBOR in that governmental jurisdiction;

(C) A rate selected, endorsed or recommended by ARRC as a replacement for LIBOR, so long as the New York Fed is then an ex officio member of ARRC—e., SOFR, as noted above, as well as CME Group’s forward-looking one-month, three-month, six-month and twelve-month Term SOFR Reference Rates (“Term SOFR”) recommended by ARRC on July 29, 2021, and also published each business day on the website of the New York Fed;

(D) A rate determined by reference to one of the rates described in (A), (B) or (C) above by adding or subtracting a specified number of basis points to or from the rate or by multiplying the rate by a specified number; and

(E) A rate identified for purposes of §1.1001-6 by the IRS and published in the Internal Revenue Bulletin.

“Waterfall” of “Fallback Rates” May Be Qualified Rate. A single qualified rate also may be comprised of one or more “fallback” rates. A “fallback” rate is a rate, such as 30-day Term SOFR, which the parties to a contract agree will become operative following the discontinuance of LIBOR. For example, a “waterfall” or series of “fallback” rates specified in a contract may constitute a qualified rate, but only if each individual fallback rate in the waterfall separately meets the requirements of a qualified rate. If it is not possible to determine at the time that a modification is being tested as a covered modification whether a fallback rate will satisfy the requirement that it must be reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds, then that fallback rate, and any waterfall of fallback rates that includes that fallback rate, will not be treated as a qualified rate. If, however, the likelihood that any value will ever be determined under the contract by reference to a particular fallback rate that would not be a qualified rate is “remote,” then it is treated as a qualified rate.

Depending on the manner in which a fallback rate becomes operative, it may need to be tested as a covered modification both at the time the debt instrument is modified and at the time the fallback rate becomes effective. For example, if the fallback rate becomes effective by operation of the terms of the debt instrument or as the result of the exercise of a unilateral option by the holder of the debt instrument, the fallback rate would not need to be retested as an additional modification, whereas a fallback rate that becomes effective only by mutual agreement of the parties would need to be retested as an additional modification. In addition, a fallback rate may need to be retested at the time it becomes effective in order to confirm that it continues to be a qualified rate.

“Noncovered Modifications.” Certain modifications of contracts are excluded from being treated as “covered modifications.” These noncovered modifications are viewed as being beyond the scope of facilitating the transition from LIBOR to another qualified rate while preserving the same business and economic terms of the unmodified contract. Under §1.1001-6(j), each of the following modifications that change the amount or timing of cash flows under the contract is a noncovered modification:

1. The modification is intended to induce one or more parties to perform any act necessary to consent to the replacement of LIBOR with a qualified rate, make associated modifications, if any, and make a qualified one-time payment, if any—for example, an agreement by the issuer of a debt instrument to add an additional 10 basis points to the basis adjustment spread to induce the holder to consent to the LIBOR replacement modification;
2. The modification is intended to compensate one or more parties for a modification other than one that replaces LIBOR with a qualified rate, makes associated modifications, if any, and provides a qualified one-time payment, if any—for example, an agreement by the issuer of a debt instrument to add 30 basis points to the interest rate to compensate the holder for agreeing to modify a customary financial covenant for the issuer’s benefit;
3. The modification is a concession to a party experiencing financial difficulty or a concession obtained by one party to account for a deterioration in the credit of the other party—for example, an agreement by the holder of a debt instrument to reduce the interest rate by 50 basis points to assist an issuer that is experiencing financial difficulties;
4. The modification is intended to compensate one or more parties for changes in rights or obligations that are not derived from the contract being modified—for example, an agreement by the issuer to add 30 basis points to the interest rate on one debt instrument in order to induce the holder to agree to modify customary financial covenants made by the issuer in a different debt instrument that is also held by the holder; and
5. The modification is identified in future guidance by the IRS as having a principal purpose of achieving a result that is unreasonable in light of the purpose of §1.1001-6.

The federal tax consequences of each of the foregoing types of “noncovered modifications,” if made, would need to be analyzed separately from any covered modification under the general rule for a taxable exchange of property under §1.1001-1(a) and the rule for a significant modification of a debt instrument under §1.1001-3.

No Adverse Effect Opinions. In a situation where the issuer and holder of a debt instrument that consists of a tax-exempt bond are considering an agreement to modify the bond in order to transition from LIBOR to a new reference rate such as SOFR, the financing documents for the bond may require, or the holder of the bond may request, that the issuer provide an opinion of bond counsel to the effect that the modification of the bond will not adversely affect the tax-exempt status of interest on the bond (a “no adverse effect opinion”). In order to provide a no adverse effect opinion, bond counsel would need to conclude that the modification is a covered modification made to transition from a discontinued interbank offering rate, such as LIBOR, to a qualified rate. In order to reach that legal conclusion, bond counsel may require that the issuer and holder of the bond provide certifications to the effect that no facts and circumstances exist that would show that the proposed modification is a noncovered modification of the type described above.

Alternative Analysis of Noncovered Modifications. Even if all or part of the modification is determined to be a noncovered modification, bond counsel could conclude that the noncovered modification is not a significant modification of the terms of the bond that would cause the bond to be treated as “reissued” under the general rule set forth in §1.1001-3. Further, even in the event that the noncovered modification of the bond would cause it to be treated as “reissued,” bond counsel nonetheless may be able to provide a no adverse effect opinion if the issuer takes the steps needed to qualify the reissued bond as a newly issued tax-exempt current refunding bond used to refund the prior bond. Depending on whether the reissued bond is a tax-exempt governmental bond or a tax-exempt private activity bond, these steps could include, for example, testing whether the reissued bond remains eligible to be treated as a governmental bond or a qualified 501(c)(3) bond under the applicable private activity bond regulations, filing a new Form 8038-G or Form 8038 Information Return for the reissued bond, holding a TEFRA hearing and obtaining a public approval for the issuance of the reissued bond, and obtaining volume cap for the reissued bond.

The issuer also would need to comply with the arbitrage rebate requirement, if otherwise applicable, with respect to the prior bond deemed to be currently refunded and retired by the reissued bond. The date on which the prior bond is treated as retired would be the final computation date for any rebate amount due with respect to gross proceeds of the prior bond. Any such rebate amount would be payable to the United States with Form 8038-T filed with the IRS not later than 60 days after that final computation date.

Certain Economic or Financial Considerations. An issuer that modifies a tax-exempt bond to transition from LIBOR to SOFR, for example, may wish to consider whether certain other adjustments should be made to SOFR as the new qualified rate on the bond, regardless of the tenor of the SOFR rate. For example, because SOFR is a taxable rate, it may be appropriate that the applicable SOFR rate on a tax-exempt bond held by a corporation be multiplied by 79% (0.79) to take account of the federal corporate tax rate of 21% that would otherwise apply to interest received on the bond if it were taxable. Also, because SOFR rates reflect essentially risk-free interest rates, whereas LIBOR was not considered a risk-free rate, there is an understanding that SOFR rates, regardless of the tenor, may be lower than what otherwise would be a LIBOR rate.

by Allison Schwartzman & William Tonkin

January 5, 2023

Foster Garvey PC

On December 23, 2022, President Biden signed into law the Financial Data Transparency Act of 2022 (Act). The Act requires the Securities and Exchange Commission (SEC) to develop and implement new standards for municipal issuers and obligors to use when reporting financial and operating information on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website (EMMA). Specifically, the Act provides that the SEC’s new standards will require municipal issuers and obligors to submit information on EMMA in a machine-readable, structured format. The new standards are expected to be similar to the reporting standards currently used by publicly traded companies when making disclosures on the SEC’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR).

Notably, neither the Act nor the standards to be proposed and implemented by the SEC will change the substance of what municipal issuers and obligors are required to report on EMMA; only the format in which the information is uploaded to EMMA will be affected.

The new reporting standards will require that financial and operating data submitted by municipal issuers and obligors be both structured and open. Currently, many issuers and obligors submit their financial and operating information to EMMA in PDF or HTML formats, which can be considered unstructured formats. While these formats have the benefit of being easily readable to humans, they are not conducive to data analysis on a large scale—the type of analysis often carried out by regulatory entities. In contrast, structured data uses identifier codes to classify financial data, allowing for aggregation and comparison among reporting entities.

The new reporting standards are expected to become effective in approximately four years or by the start of 2027. The SEC will be required to consult with market participants (including municipal issuers) in formulating the new standards. Over the next 18 months the SEC will be required to issue proposed rules regarding the new reporting standards, which will then be subject to public comments. The public comment period will allow interested parties, including municipal issuers and obligors, to submit feedback to the SEC regarding the proposed rules. After the SEC finalizes the new rules (expected within two years), municipal issuers and obligors will have two years to bring their financial reporting into compliance with such rules (the new rules are expected to be effective at the start of 2027).

Municipal issuers and obligors and other municipal market participants should be aware of the Act and consider reviewing the SEC’s proposed rules when such rules are made available to the public. Municipal issuers and obligors are encouraged to participate in the public comment process to ensure the SEC is made aware of undue burdens or unintended consequences, and whether exceptions or accommodations should be incorporated into the rules. Issuers and obligors should consider the format in which they have routinely submitted data to EMMA and confer with their technology personnel on the feasibility of transitioning to a structured and open data format. If preferred, issuers and obligors may want to confer with third-party technology consultants to determine whether and to what extent technology upgrades will be required to comply with the new standards.

Kutak Rock will continue to monitor the implementation of the Act and update our clients on its progress through the SEC. If you have any questions about the new reporting standards, or how they may impact your organization, please contact your Kutak Rock attorney or a member of the firm’s Public Finance Practice Group.

Client Alert | January 4, 2023

Kutak Rock LLP

Despite opposition from various municipal bond market experts and interest groups, Congress has now instructed the Securities and Exchange Commission to develop machine-readable standards for EMMA filings.

As implementation of the Financial Data Transparency Act (FDTA) begins, it is important to clear up some misunderstandings about this legislation.

Opponents of FDTA expressed concern that a single template would be imposed on a wide range of municipal issuers around the country. If true, this would be a very serious issue because the financial statements of cities differ greatly from those produced by school districts, water districts, road districts, etc.

There is also substantial variation across states, including some that have not implemented Governmental Accounting Standards Board standards for local government financial reporting.

But this concern is easily addressed during implementation.

First, there is no hard and fast requirement that all entities must use a single reporting taxonomy (i.e., a dictionary of financial statement concepts). There could be one or more specialized taxonomies for New Jersey cities, Washington state school districts and other non-GASB compliant issuers.

More importantly, a taxonomy does not straitjacket issuers into a fixed set of concepts.

General purpose governments and special districts use overlapping categories of revenues and expenditures. But there is no limit to the number of categories that can be included in an eXtensible Business Reporting Language (XBRL) taxonomy and no requirement to use all the categories provided.

When my colleagues at XBRL US partnered with University of Michigan’s Center for Local, State and Urban Policy (CLOSUP) to develop an XBRL taxonomy for Michigan local governments, we reviewed a large number of Annual Comprehensive Financial Reports (ACFRs) to determine which financial statement captions appeared most frequently.

We included all of these in the taxonomy. Also, we provided a mechanism for financial statement filers to include concepts that were not specifically listed in the taxonomy.

Filers can use a feature of XBRL to add custom line items they need to report that are not explicitly included in the taxonomy. An entity-specific line item can be created that rolls up into assets or revenues, for example. Issuers can report what they need, and data can still be compared across issuers at the asset or revenue level.

The CLOSUP project was XBRL US’s fourth version of an ACFR taxonomy in four years, which brings me to another point about the opposition critique of FDTA.

Contrary to critics’ assertions, two years is plenty of time to develop machine-readable reporting standards. In fact, if the SEC chooses to base its taxonomy on XBRL US’s work products, the development time could be significantly shorter.

Another contention was that the compliance costs would be very high: perhaps $1.5 billion over two years as public agencies replace accounting systems and/or hire expensive consultants. But neither of these options is necessary.

The XBRL community includes firms that offer document production solutions, which can take the form of Software-as-a-Service (SaaS) web sites, desktop software, or Excel add-ins, as well as companies that can prepare an XBRL version of a financial statement from the filer’s PDF.

Open-source tools, which are free to use, are also available.

During the runup to implementation, the community will be updating their products to support ACFRs and other municipal market disclosure.

Open data standards foster competition among tool and service providers which keeps costs low and encourages innovation. Reporting packages and applications in use today by government entities can be adapted to work with the open standard, minimizing potential disruption to issuers.

Municipal market participants who want to learn more about machine-readable disclosure are welcome to join a free webinar hosted by XBRL US and University of Michigan CLOSUP on Jan. 24.

Even if concerns over implementation time and cost are overblown, some industry observers still question the need for machine-readable municipal disclosure. After all, market participants have been investing in bonds based on paper disclosures, PDFs, or perhaps not even consulting disclosures at all, so why bother?

But since research shows that certain financial ratios are associated with heightened default probabilities, ignoring the data in municipal disclosures is a recipe for making suboptimal investment decisions.

The inability to quickly access free fundamental issuer data sets the municipal bond market apart from the U.S. corporate securities markets and is one reason why our market is so inefficient. Corporate securities investors can quickly find issuer data on SEC EDGAR or one of a dozen free web sites.

Machine-readable disclosures will lead to the commoditization of municipal finance fundamentals because it will become extremely inexpensive to create municipal databases from XBRL filings. While data commoditization may be an adverse development for today’s data vendors, it is a prerequisite for an efficient municipal securities market, which will benefit issuers and investors alike.

By Marc Joffe

BY SOURCEMEDIA | MUNICIPAL | 01/04/23 09:13 AM EST

The Financial Data Transparency Act of 2022 (FDTA), enacted by Congress as Title LVIII of the National Defense Authorization Act for Fiscal Year 2023, was signed into law by President Biden on December 23, 2022. The FDTA is likely to usher in significant changes in how information is prepared, disseminated, and consumed by municipal securities market participants.

Please see Publication below for more information.

by Teri Guarnaccia, Ernesto Lanza, Kimberly Magrini

January 6, 2023

Ballard Spahr LLP

View the MSRB Informational Notice.

Notice 2023-01 – Informational Notice

Publication date: 01/05/2023

On December 14, 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules that would establish SEC best execution rules and impose related obligations on firms subject to the standard (the Proposal).1 The Proposal would generally require brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (collectively, broker-dealers) to have detailed policies and procedures addressing how they achieve best execution for their customer orders, with heightened obligations for broker-dealers subject to certain conflicts of interest.2

Specifically, the SEC is proposing three rules — Proposed Rules 1100, 1101, and 1102 under the Securities Exchange Act of 1934, as amended (Exchange Act) — to implement its best execution framework for broker-dealers. The Proposal is broad in scope and would apply to customer transactions in all securities.3

The comment deadline is March 31, 2023, or 60 days after publication of the Proposal in the Federal Register, whichever is later. The Proposal was made concurrently with three other SEC proposals that are interrelated and could significantly change practices related to securities order handling and execution.4 The proposals collectively appear to advance the SEC’s view that better prices for investors may result through encouraging competition among trading venues and increasing trading through certain exchanges or alternative trading systems (ATSs) that disseminate quotations rather than over-the-counter (OTC) market makers.5 The Proposal is unique among the four proposals in that it would apply to all securities transactions (e.g., equities, fixed income, private securities, digital assets), while the other three proposals apply only to national market system (NMS) stock.

Key Takeaways

If the Proposal is adopted, broker-dealers would need to undergo a thorough compliance review of their practices for handling customer orders to determine whether they have policies and procedures sufficiently detailed to satisfy the specified criteria. While broker-dealers may already have policies and procedures designed to comply with the Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5310 and the Municipal Securities Rulemaking Board (MSRB) Rule G-18, many aspects of the Proposal extend beyond FINRA and MSRB requirements, such as provisions for conflicted transactions (as described in more detail below). Broker-dealers would also need to have an established process to conduct the required execution quality reviews and comparisons.

Broker-dealers, particularly those that engage in conflicted transactions, may also have to consider changes to their business models or current practices if necessary to satisfy the new obligations under the Proposal. For example, broker-dealers may need to incur the expense of incorporating access to additional markets into the broker-dealer’s order handling practices. The SEC claims the policies- and procedures-based nature of the Proposal would provide broker-dealers “flexibility to exercise [their] expertise and judgment when executing customer orders”;6 however, the prescriptive criteria established by the Proposal would effectively require broker-dealers to assess and potentially modify existing practices to satisfy the policies and procedures they would be required to adopt.7

The Proposal would provide an alternative compliance mechanism for introducing brokers that meet certain conditions (as described in more detail below). Broker-dealers that seek to qualify as introducing brokers may similarly need to modify their business practices to satisfy the qualifying criteria under the Proposal, such as by no longer accepting payment for order flow. Even if a broker-dealer meets the introducing broker criteria, such broker-dealer would have to develop a process by which it can compare the execution quality of its executing brokers to other executing brokers.

In many ways, the Proposal would extend beyond the current FINRA and MSRB best execution rules. Key examples include that the Proposal

• explicitly requires a more detailed assessment of specified factors relevant to a best execution analysis to be included in a broker-dealer’s policies and procedures
• imposes additional policies and procedures obligations and documentation requirements for conflicted transactions
• applies its execution quality review requirements to a broader range of broker-dealers
• requires a comparative analysis as part of its execution quality reviews (which is consistent with FINRA but broader than the MSRB)
• provides a narrower exception for introducing brokers with more strict qualification requirements

The SEC states that the Proposal would not alter broker-dealers’ existing obligations to comply with the FINRA and MSRB Rules and that broker-dealers should comply with any additional or more specific requirements in each rule, as applicable. Nevertheless, it remains unclear whether FINRA or the MSRB would amend their best execution rules if the Proposal is adopted.

Overall, many questions remain about whether the proposal is necessary and how, if at all, it may be reasonably justified to address regulatory gaps. Much of what the SEC proposes, excepting its not-so-subtle attempt to eliminate payment for order flow practices, is not new and would be consistent with the guidance, examination, and enforcement activity conducted by FINRA in this area.8

Background

The duty of best execution, which predates the federal securities laws, generally requires that a broker-dealer execute a customer’s trades at the most favorable terms reasonably available under the circumstances. Today, FINRA has a rule detailing the best execution obligations of its member broker-dealers and has, through enforcement actions and regulatory notices, issued guidance to its members on those obligations.9 The MSRB has a comparable best execution rule applicable to municipal securities dealers for transactions in municipal securities.10 However, there is currently no SEC rule or standard governing best execution for broker-dealers’ customer orders.

According to the SEC, the impetus for the Proposal is its belief that the existing regulatory framework can be made more effective. The SEC is concerned that current best execution policies and procedures may vary and alleges that customers would benefit from “consistently robust best execution practices” with “heightened attention” by broker-dealers that have certain order handling conflicts of interest.11 The SEC also states that the Proposal would enable it to exercise additional enforcement capabilities.

Regulation Best Execution

Best Execution Standard

The Proposal would establish a best execution standard for broker-dealers, requiring a broker-dealer to use reasonable diligence to ascertain the best market for a security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions (referred to as the “most favorable price”).12

Policies and Procedures

The Proposal would require broker-dealers to establish, maintain, and enforce written policies and procedures addressing how the broker-dealer will comply with the best execution standard and make routing or execution decisions for customer orders, including by

• obtaining and assessing reasonably accessible price, volume, and execution quality information concerning markets trading the relevant securities
• identifying markets reasonably likely to provide the most favorable prices
• incorporating those markets into the broker-dealer’s order handling practices and ensuring it can efficiently access each of them
• assessing reasonably accessible and timely information with respect to displayed prices, price improvement opportunities, and order exposure opportunities
• assessing customer order attributes and securities trading characteristics
• balancing the likelihood of obtaining better prices in assessing additional markets with the risk that a delay in executing a customer order could result in a worse price

Conflicted Transactions

A broker-dealer transacting with a retail customer13 that engages in a principal trade or routes to or from an affiliate or provides or receives payment for order flow14 (each a “conflicted transaction”) would be subject to additional obligations under the Proposal. In particular, these broker-dealers’ best execution policies and procedures must address how the broker-dealer will obtain and assess additional information and evaluate a broader range of markets beyond what is required for nonconflicted transactions. In addition, these broker-dealers would have to document the details of any payment for order flow arrangement and their compliance with the best execution standard for conflicted transactions, including their efforts to enforce their policies and procedures and the basis and information relied on for their determination that the conflicted transaction was consistent with the best execution standard.

Other than a questionable requirement for the broker-dealer to assess and consider immaterial market centers, the Proposal is largely consistent with current FINRA guidance and application. Moreover, the SEC admits that compliance with this aspect of the Proposal would be more expensive than what is received through payment for order flow so that a significant number of broker-dealers would elect to stop receiving payment for order flow.15

Regular Review of Execution Quality

The Proposal would require broker-dealers to, at least quarterly, review the execution quality of their customer transactions, compare such execution quality with the execution quality that might have been obtained from other markets, and revise their best execution policies and procedures and order handling practices accordingly.16

Introducing Brokers

The Proposal would provide an alternative compliance mechanism for a broker-dealer that routes its customer orders to another broker-dealer for execution and meets certain conditions17 (referred to as an “introducing broker”). Rather than comply with the policies and procedures and execution quality review requirements described above, an introducing broker would need to have policies and procedures that require it to regularly review the execution quality obtained from its executing broker, compare such execution quality with what it might have obtained from other executing brokers, and revise its order handling practices accordingly. This aspect of the Proposal regarding introducing brokers takes aim at the use of payment for order flow. Many introducing brokers route order flow to wholesalers that pay for order flow and execute orders in a principal capacity. Such arrangements may effectively be eliminated by the Proposal.

Annual Report

The Proposal would require broker-dealers (including introducing brokers) to, at least annually, conduct a review of their best execution policies and procedures and order handling practices and prepare a written report presented to the broker-dealer’s board of directors.

_____________________________________________________

1 Exchange Act Release No. 96496 (December 14, 2022), https://www.sec.gov/rules/proposed/2022/34-96496.pdf.

2 While the proposed rules apply to broker-dealers, investment advisers should pay close attention to the Proposal.
The SEC was careful to note in the Proposal that investment advisers have a similar duty to seek best execution of a client’s transactions where the adviser has responsibility to select broker-dealers to execute client trades. See Proposal at 11 n.11.

3 The SEC specifically emphasized that the Proposal would also apply to any digital asset that is a security. Proposal at 37 (referring to a “digital asset” as “an asset that is issued and/or transferred using distributed ledger or blockchain technology …, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens’ ”).

4 See Sidley updates: SEC Proposes Rule to Enhance Competition for Certain Individual Investor Orders; SEC Proposed Amendments to Modernize Disclosure of Order Execution Information; and SEC Proposes Rules Related to Minimum Pricing Increments, Access Fee Caps, and Transparency of Better Priced Orders.

5 See Chair Gary Gensler, Competition and the Two SECs, address before the SIFMA Annual Meeting (October 24, 2022), https://www.sec.gov/news/speech/gensler-sifma-speech-102422.

6 Proposal at 9.

7 For example, because broker-dealers engaging in conflicted transactions would be required to have policies and procedures that address how the broker-dealer will obtain and assess additional information and evaluate a broader range of markets beyond those identified as material potential liquidity sources, they may ultimately need to seek additional market information or connect to new trading venues.

8 “The release is thinner when it comes to assessing how the rule alone, or in combination with the other rules on today’s dockets, will change markets and affect investors.” Commissioner Hester M. Peirce, Is This the Best Execution We Can Get? (December 14, 2022), https://www.sec.gov/news/statement/peirce-best-execution-20221214.

9 See FINRA Rule 5310. See also, for example, FINRA Regulatory Notice 15-46, Best Execution: Guidance on Best Execution Obligations in Equity, Options, and Fixed Income Markets (November 2015),
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf.

10 See MSRB Rule G-18. See also MSRB Implementation Guidance on MSRB Rule G-18, on Best Execution (last updated February 7, 2019), https://msrb.org/Implementation-Guidance-MSRB-Rule-G-18-Best-Execution.

11 Proposal at 7.

12 The Proposal sets forth certain exemptions for a broker-dealer where (i) another broker-dealer is executing a customer order against the broker-dealer’s quote, (ii) an institutional customer exercising independent judgment executes an order against the broker-dealer’s quote, or (iii) the broker-dealer receives an unsolicited instruction from a customer to route its order to a particular market. This is consistent with existing FINRA guidance and application. The Proposal would not include an exemption for transactions with a “Sophisticated Municipal Market Professional” that is currently in place under MSRB Rules. See MSRB Rules G-48(e) and D-15.

13 A “transaction for or with a retail customer” would be defined as “any transaction for or with the account of a natural person or held in legal form on behalf of a natural person or group of related family members.” Proposed Rule 1101(b)(4)(i).

14 See 17 CFR 240.10b-10(d)(8) (defining “payment for order flow”).

15 See Proposal at 344-45, 357-58.

16 The SEC states that while comparable to existing FINRA and MSRB requirements this review obligation would apply to more broker-dealers than FINRA Rule 5310 and be more frequent than under MSRB Rule G-18. See Proposal at 134-37.

17 These conditions include that the broker-dealer (i) does not carry customer accounts or hold customer funds or securities, (ii) has entered into an arrangement with an unaffiliated broker-dealer to handle and execute all of its customer orders on an agency basis, and (iii) has not accepted any payment for order flow from the executing broker. Proposed Rule 1101(d)(1)-(3).

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Sidley Austin LLP – Andrew P. Blake, James Brigagliano, W. Hardy Callcott, Kevin J. Campion, John I. Sakhleh, Lara C. Thyagarajan, Michael D. Wolk and Timothy B. Nagy

December 29, 2022

The Financial Data Transparency Act of 2022 (the “Act”), which was included as part of the National Defense Authorization Act, was signed into law on December 23, 2022. The Act requires that various federal regulatory agencies jointly issue proposed rules within eighteen (18) months, which establish data standards for financial disclosure. Final rules must then be enacted no later than two (2) years from passage of the Act after public comment is received.

Within two (2) years after promulgation of these final rules, the Securities and Exchange Commission (the “SEC”) must then issue compatible rules that apply to information submitted to the Municipal Securities Rulemaking Board by issuers and obligors of municipal securities. With this two-step process for promulgation of rules, the final rules that will govern disclosure for municipal securities may not become effective for four (4) years.

The Act requires that the SEC consult with market participants in establishing these data standards. The SEC “may scale those data standards in order to reduce any unjustified burden on smaller regulated entities.” The Act also mandates that the SEC “seek to minimize disruptive changes to the persons affected by those rules.”

The Act sets forth certain requirements for the data standards adopted by the SEC such that the rules must, to the extent practicable:

1. render data fully searchable and machine-readable;
2. enable high quality data through schemas, with accompanying metadata documented in machine-readable taxonomy or ontology models, which clearly define the semantic meaning of the data;
3. ensure that a data element or data asset be consistently identified in associated machine-readable metadata;
4. be nonproprietary or made available under an open license;
5. incorporate standards developed and maintained by voluntary consensus standards bodies; and
6. use, be consistent with, and implement applicable accounting and reporting principles.

It is anticipated that the rules will adopt a structured data format similar to extendable business reporting language (XBRL), which is currently required by the SEC for private companies.

The new data standards will likely increase the costs of municipal disclosure for issuers and obligors who may need outside services or software to ensure compliance. A full assessment of any additional costs and burdens will not be possible until the rules, and any exceptions, are promulgated and finalized by the SEC, though the Act makes clear that some new mandates will be imposed in the coming years.

Partridge Snow & Hahn LLP

by Eugene Bernardo II, David DiSegna

December 30, 2022

A new data tool offers a window into how investors are responding to changes affecting the financial outlook of individual governments, including trends like the rise of remote work.

Welcome back to Route Fifty’s Public Finance Update! I’m Liz Farmer and this week, we’re looking at a new way to gather data on how municipal bond market investors view changes in government finances.

While the muni market is still viewed as a sort of black hole by onlookers due to slow or inconsistent financial disclosure practices compared with the corporate world, the last decade or so has seen a lot of progress when it comes to analyzing bond issuance data. In particular, the Municipal Securities Rulemaking Board’s EMMA database has made issuance information much more accessible. MSRB is now even experimenting with a data analytics component.

Still, getting comprehensive information about the secondary market—how muni bonds are traded—has required a lot of individual legwork. But now thanks to a new dashboard developed by the University of Chicago’s Center for Municipal Finance, our window into what investors are doing and thinking just became a lot clearer. It’s similar to the S&P CoreLogic Case-Shiller Home Price Index, but for muni bonds. In the same way that real estate agents, buyers and sellers use the home price index to inform their decisions, market participants can use the Center for Municipal Finance Muni Index to get a more contextualized picture of the fiscal health of cities, counties and school districts. The Index goes up when investors are willing to pay higher prices for an issuer’s bonds, and vice versa.

Continue reading.

Route Fifty

By Liz Farmer | DEC 20, 2022

A brokerage firm settled SEC charges for failing to comply with the disclosure requirements under Exchange Act Rule 15c2-12 (“Municipal securities disclosure”) when acting as an underwriter in connection with multiple limited offerings of municipal securities.

According to the Order, the SEC found that the firm offered municipal securities in reliance on the limited offering exemption under Rule 15c2-12. The exemption would have permitted the firm to make the offerings without Rule 15c2-12’s “continuing disclosure undertaking.” The SEC said that to qualify under the limited offering exemption, a firm is required to limit the distribution to (i) no more than 35 persons, (ii) persons who hold the requisite financial experience and knowledge and (iii) persons who are not purchasing for multiple accounts or intending to distribute. The SEC found that for 36 limited offerings, the broker-dealer sold these securities without first forming a reasonable belief that these requirements were met.

The SEC determined that the firm violated Exchange Act Rule 15c2-12, Exchange Act Section 15B(c)(1) (“Municipal securities”) and MSRB Rule G-27 (“Supervision”). To settle the charges, the firm agreed to (i) cease and desist, (ii) a censure, (iii) a civil monetary penalty of $100,000 and (iv) disgorgement of $81,362 with an additional $16,961 in prejudgment interest.

Fried Frank Harris Shriver & Jacobson LLP

December 23 2022

The Financial Data Transparency Act of 2022 (Act) will change the way issuers and obligors of municipal securities report required disclosure information on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website (EMMA). In short, the Act requires the Securities and Exchange Commission (SEC)[1] to create organizational standards for information reported by issuers and obligors on EMMA. The goal of the Act is to provide users with an easier way to view, access, and explore the contextual information of the underlying data.

Here’s what you need to know:

What Happened?

The Act was passed into law on December 23, 2022. The Act directs certain regulatory agencies (including the SEC) to jointly issue proposed rules for public comment that establish new data reporting standards within 18 months of enactment of the Act. These new SEC rules will impact entities that post on EMMA. Proponents of the Act believe it will make the information collected and made publicly available by regulatory agencies easier to access, analyze and compare by requiring data to be posted in a machine-readable format, similar to the requirements for the information posted to the Electronic Data Gathering, Analysis and Retrieval system (EDGAR) by publicly traded companies, mutual funds and other regulated entities. The Act only changes how information is submitted; it does not contain any new disclosure requirements.

What Will the Law Change for Affected Issuers and Obligors?

The Act will require that information posted on EMMA be structured so that it is fully searchable and consistently identifiable by machine-readable technologies through the use of identifier codes or tags (i.e., structured data). Structured data allows the reader to access more granular information about the data presented, such as the accounting codifications and guidance associated with the information.[2] Additionally, the Act requires information to be made available in an open data format that allows for digital access and bulk downloads with no restrictions.

It is anticipated that the SEC will require data collection in a structured format such as the extendible business reporting language (or XBRL) format, with each piece of data being tagged/barcoded to enable simpler comparisons between sets of data. XBRL is an open standard, commercially available software language that is nonproprietary and royalty free. Benefits of XBRL are that it can identify what is and is not reported and any data quality errors.[3] XBRL can also compare results across data sets and generate time series charting and benchmarking.[4] The SEC first implemented structured data requirements in 2009, and currently, both the SEC and the Federal Energy Regulatory Commission require information reported by their regulated entities to be in the Inline XBRL format, which allows readers to download information directly into spreadsheets for comparison and analysis purposes.

To implement the structured data standard, the SEC must develop taxonomies or classifications to create standard tags for the reporting of information. Each reporting entity must translate data from its accounting system into a format consistent with the classifications developed by the SEC. Once the initial translation is complete, if an entity’s financial statements include unique line items, it may create an “extension” to a standard tag to modify the nomenclature so that it corresponds to its existing unique line items.[5] For example, if an entity refers to “net revenues” as “operating revenues,” it may extend the “net revenues” tag to refer instead to “operating revenues.”[6] Although extensions provide entity-specific information that may facilitate meaningful analysis, extensions diminish the comparability of data across entities, which is one of the main purposes of structured data.

Who Does the Law Most Affect?

The Act, once implemented after the rules are finalized, may significantly alter the way issuers and obligors format the information posted to EMMA. Specifically, the translation of financial information into a format consistent with the classifications developed by the SEC may be different from the format currently required by the Government Accounting Standards Board (GASB), Financial Accounting Standards Board (FASB) and Generally Accounting Standards Board (GAAP). The National League of Cities[7] and the Government Finance Officers Association[8] (GFOA) recently raised concerns about the new reporting requirements, including cost concerns and concerns that information unique to a specific type of issuer such as a state, city, public utility provider or hospital will be lost in the standardization of information.

Inherent with the new standards will be the increased costs of preparing, reviewing and validating that the information presented in the new form is an accurate representation of the underlying data. The GFOA predicted that the transition to standardized reporting categories will be costly, and the “unfunded mandate [will] require extensive staff time along with the need for consulting resources and potentially risky updates to governmental financial systems.”[9] In 2017, the CFA Institute conducted a study of companies required to report in a structured data format and found that although implementation of structured data was initially costly, over time larger companies reduced the number of outsourcing services used to create their XBRL filings as they became more confident in preparing and reviewing their reports in-house.[10] However, smaller companies found the costs of the structured data reporting requirement as a consistent burden given their limited resources.[11]

To minimize the burden of implementation of the structured data standards, the Act directs the SEC to consult with market participants, scale the data standards in order to reduce any unjustified burden on smaller entities and minimize disruptive changes to the affected entities. These requirements were added to the final version of the Act to address concerns from municipal market participants about the increased costs of implementing the structured data format, including increased capital costs for the purchase of software, increased operating expenses for entities that contract with a third-party vendor to perform data tagging services and increased personnel costs for the preparation and review of the data. In the municipal securities market, the Act applies only to issuers and obligors that are required to file continuing disclosure reports on EMMA. As such, it remains to be seen whether the increased costs associated with implementing the new rules will create a barrier to entry in the municipal market for smaller governmental issuers and nonprofit organizations who may choose to avoid the new requirements by opting for private placement offerings that are exempt from such continuing disclosure obligations.

What Happens Next?

The SEC will work with the other regulating entities named in the Act to draft rules for public comment within the next 18 months. The Act does not mandate a specific time period for public comments to be received and reviewed by the regulated entities. Once the public comment period ends and the final rules are issued, issuers and obligors that are required to post on EMMA will have two years before they must comply. This means that the earliest possible date for when affected entities will need to transform their EMMA filings is over 3 ½ years away (and likely much longer given that time will be needed for public comments and the release of the final rules). It remains to be seen what consequences might apply to municipal issuers and obligors that fail to report in the new machine-readable, structured data format when required, although it is expected that the new rules will likely explain the effect of non-compliance with the reporting requirements. In the corporate world, for public companies already subject to structured data requirements, non-compliance means the subject company is non-compliant with statutory reporting requirements and is deemed to not have adequate public information available for purposes of Rule 144 of the Securities Act of 1933.

Affected entities should get involved in the design of the data standards by participating in the public comment process with the SEC. To minimize implementation costs, aligning the new standards with current reporting requirements under GASB, FASB or GAAP is crucial. Additionally, as the national data standards are promulgated, local issuers should contact state agencies to work towards synchronizing any state reporting requirements with the new national reporting requirements. Issuers and obligors of municipal securities may also consider earmarking resources to implement the requirements of the Act as the implementation date approaches.

_______________________________________________

[1] The Act as first passed by the House of Representative originally provided for the MSRB to set and implement the new rules. However, municipal bond issuers expressed their concerns about expanding the MSRB’s current authority over state and local governments as bond issuers in contravention of the Tower Amendment. Under the Act as passed, the SEC, which is subject to congressional oversight, will design and implement the new rules for the municipal market.

[2] Caroline A. Crenshaw, Commissioner, U.S. Sec. and Exch. Comm’n, The Lessons of Structured Data, November 10, 2021, located at https://www.sec.gov/news/speech/crenshaw-lessons-structured-data-111021.

[3] Id.

[4] Id.

[5] U.S. Sec. and Exch. Comm’n, Interactive Data for Financial Reporting, https://www.sec.gov/corpfin/infosmallbussecginteractivedata-secg (last visited Dec. 16, 2022).

[6] Id.

[7] Michael Gleeson, Proposed Legislation Includes Costly Unfunded Mandates for Local Governments, National League of Cities, https://www.nlc.org/article/2022/12/15/what-you-need-to-know-about-the-financial-data-transparency-act/, (last updated Dec. 15, 2022).

[8] New Financial Reporting Requirements for Governments Proposed in U.S. Senate: A Costly and Burdensome Unfunded Mandate, Government Finance Officers Association, https://www.gfoa.org/new-financial-reporting-requirements-proposed (last visited Dec. 19, 2022).

[9] Id.

[10] Mohini Singh, ACA, The Cost of Structured Data: Myth vs. Reality, CFA Institute, https://us.aicpa.org/content/dam/aicpa

/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/cfa-institute-the-cost-of-structured-data.pdf, (last visited Dec. 16, 2022).

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by James Hernandez, Jenna Magan, Donna McIntosh, Hoang Vu

December 27, 2022

Orrick, Herrington & Sutcliffe LLP

PNC Capital Markets (PNC) has been added to the newly-formed list of underwriters who failed to meet the exemption requirements in connection with 36 limited offerings in violation of Securities and Exchange Commission Rule 15c2-12 and Municipal Securities Rulemaking Board Rule G-27 on supervision.

Without admitting or denying the findings, PNC agreed to be censured and pay disgorgement of $81,362, prejudgment interest of $16,961 as well as a civil money penalty of $100,000. The administrative action comes just over three months after the SEC filed litigation against Oppenheimer & Co., in addition to three separate administrative settlements against BNY Mellon Capital Markets, TD Securities and Jefferies for failing to comply with municipal bond offering disclosure requirements in connection with limited offerings.

Those actions were the first time the Commission had ever charged underwriters in such fashion, and the swift follow-up suggests this has been an area of focus for the SEC’s public finance enforcement team. All underwriters charged for failing to comply with the limited offering exemption allegedly violated SEC Rule 15c2-12, which generally requires underwriters to obtain disclosure documents from issuers and to reasonably determine that the issuer is able to provide certain information on a continuing basis to the MSRB.

But the rule contains an exemption from those requirements for municipal securities issuances in denominations of $100,000 or more sold to no more than 35 persons if the underwriter reasonably believes the purchaser is capable of evaluating the merits of the investment as well as if the purchaser is not doing so for more than one account with a view to distribute.

“From at least March 2018 through November 2021, PNC acted as sole underwriter for at least 36 offerings of municipal securities where it sought to rely on the exemption provided in Exchange Act 15c2-12(d)(1)(i), but where the offerings did not actually satisfy the exemption’s requirements,” the complaint said. “PNC did not provide investors in these securities with copies of any preliminary official statement or final official statement for the securities, or determine that a continuing disclosure undertaking has been entered into by the issuer, or an obligated person, as required by Exchange Act Rule 15c2-12(b).”

With these 36 limited offerings, PNC sold the bonds to broker-dealers and/or investment advisors with separately managed accounts and when the sale occurred, PNC did not have a reasonable belief that the broker-dealers and investment advisors were purchasing the bonds for investments as required under Exchange Act Rule 15c2-12(d)(1)(i).

PNC did not inquire further as to whether the brokers were purchasing the securities for more than one account or for distribution and failed to ascertain for whom the bonds were purchased.

“PNC was therefore unable to form a reasonable belief that the broker-dealers and investment advisors were purchasing the securities for investors who possessed the necessary knowledge and experience to evaluate the investments,” the complaint said. “As a result, these 36 limited offerings did not qualify for the exemption under Exchange Act Rule 15c2-12(d)(1)(i).”

The SEC also found that the firm failed to consistently follow or enforce its own policies, which required that each municipal primary offering be evaluated to determine whether it was exempt from the rule, and maintain documentation and evidence that the exemption was met. The failure to do was a violation of the MSRB’s supervisory rule, which requires that firms “adopt, maintain, and enforce” procedures “reasonably designed” to ensure compliance with all applicable laws and rules, the SEC found.

PNC did not immediately respond to a request for comment.

By Connor Hussey

BY SOURCEMEDIA | MUNICIPAL | 12/22/22 09:43 AM EST

The MSRB proposed a rule change to extend the time period to January 31 to annually affirm the information on Form A-12, the MSRB’s consolidated electronic registration form. The operative date for the proposed rule is January 1, 2023. The MSRB will accept comments on the proposal until January 12, 2023. The Notice was published in the Federal Register.

The rule change applies to brokers, dealers and municipal securities dealers and municipal advisors.

As previously covered, the proposal would also remove the requirement for firms to provide a separate notice to regulators in Form A-12 prior to engaging in municipal securities or municipal advisory activities. Instead, each firm would be required to provide (i) its principal regulator (which will be a banking agency for banks that are registered as muni dealers) and (ii) contact information for the firm’s contact at that regulator. The primary regulatory contact at a municipal advisor firm would also be required to register as a municipal advisor principal after passing the Series 54 Municipal Advisor Principal Qualification Examination.

Fried Frank Harris Shriver & Jacobson LLP

December 22 2022

Norwalk, CT, November 15, 2022 — The Governmental Accounting Standards Board today issued proposed implementation guidance in the form of questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements.

The Exposure Draft, Implementation Guidance Update—2023, contains proposed new questions and answers that address application of GASB standards on leases, subscription-based information technology arrangements, and accounting changes. The proposal also includes amendments to previously issued implementation guidance on leases.

The GASB periodically 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:

• Application issues raised during due process on GASB pronouncements,
• Application issues identified during the first stage of the GASB’s post-implementation reviews of the leases standards,
• Questions it receives throughout the year, and
• Topics identified by members of the Governmental Accounting Standards Advisory Council and other stakeholders.

The guidance in Implementation Guides is cleared by the Board and constitutes Category B GAAP.

Stakeholders are asked to review the proposal and provide input to the GASB by January 20, 2023. Comments may either be submitted in writing or through an electronic input form.

More information about commenting on the Exposure Draft can be found in the front of the document, which is available on the GASB website, www.gasb.org.

View the MSRB notice.

12/13/2022

The MSRB proposed extending the deadline for muni brokers, dealers, municipal securities dealers and municipal advisors to annually affirm the information on Form A-12, the MSRB’s consolidated electronic registration form (see MSRB Rule A-12.)

The proposal would extend the deadline to affirm Form A-12 information from 17 business days after January 1 to January 31. The proposal would also remove the requirement for firms to provide a separate notice to regulators in Form A-12 prior to engaging in municipal securities or municipal advisory activities. Instead, each firm will be required to provide (i) its principal regulator (which will be a banking agency for banks that are registered as muni dealers) and (ii) contact information for the firm’s contact at that regulator. The primary regulatory contact at a municipal advisor firm would also be required to register as a municipal advisor principal after passing the Series 54 Municipal Advisor Principal Qualification Examination.

The MSRB filed the rule change for immediate effectiveness, and it will go into effect beginning on January 1, 2023.

December 14 2022

Fried Frank Harris Shriver & Jacobson LLP

State and local advocates opposed the provisions, which were attached to a massive defense bill and call for financial data to be standardized, searchable and machine-readable.

The U.S. Senate on Thursday sent legislation to President Biden’s desk that includes new financial reporting requirements for states and local governments that critics say will be difficult and expensive for them to comply with.

Government organizations, including the National League of Cities, the U.S. Conference of Mayors, the National Association of Counties and the Government Finance Officers Association, told Senate leaders in a letter that it would cost governments and charities “well over $1.5 billion” to meet the new standards, including a requirement for financial data to be in a standardized, machine-readable and searchable format.

Despite those concerns, the provisions were embedded into an $858 billion defense bill the Senate passed in on an 83-11 vote. The House passed the National Defense Authorization Act last week, meaning it now just needs Biden’s signature to become law.

Continue reading.

Route Fifty

By Kery Murakami

DECEMBER 15, 2022

Norwalk, CT, November 15, 2022 — The Board of Trustees of the Financial Accounting Foundation (FAF) announced today the reappointment of Elizabeth Pearce as chair and Robert Hamilton as vice chair of the Governmental Accounting Standards Advisory Council (GASAC) respectively. Both will serve their terms starting January 1, 2023 and concluding on December 31, 2024, at which time they will be eligible for reappointment for one additional term.

The GASAC advises the Governmental Accounting Standards Board (GASB) on strategic and technical issues, project priorities, and other matters that affect standards setting. Members of the GASAC are responsible for consulting with the GASB on technical issues on the Board’s agenda, project priorities, matters likely to require the attention of the GASB, and such other matters as may be requested by the GASB or its chair.

“The FAF and the GASB are pleased to have both Elizabeth and Robert serve in these essential roles. As members of the GASAC, and during their first terms as chair and vice chair, they have shown a genuine interest in listening to all perspectives while also sharing their own. They are both thoughtful when giving their opinions and are well received by other GASAC members,” said Kathleen L. Casey, chair of the Financial Accounting Foundation. “We are excited for them to continue in these leadership roles and in their continuing encouragement of all GASAC members to share their views to enhance the standards-setting process,” added Ms. Casey.

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

Washington, D.C. – The Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization (SRO) established by Congress to safeguard the $4 trillion municipal securities market, is soliciting applications for four positions on its Board of Directors for the 2024 fiscal year. Selected candidates will be elected to four-year terms beginning October 1, 2023, where they will have the opportunity to oversee the advancement of the organization’s Strategic Plan to deploy the tools of regulation, technology and data in impactful ways that strengthen the municipal market and serve the public interest.

“In order to uphold the public’s trust in the municipal market’s SRO, we must ensure our governing Board is diverse and inclusive and reflects the wide variety of perspectives that contribute to the field of public finance across our nation,” said Thalia Meehan, MSRB Board member and Chair of the Board’s Nominating Committee, which leads the process of identifying new Board members. “While we are particularly interested in applicants with compliance, technology and data proficiency, we encourage individuals with municipal securities experience from all regions of the United States to apply for membership on the Board.”

The Board is charged with setting regulatory policy, authorizing rulemaking, enhancing market transparency systems and overseeing operations for the organization. The Board is currently overseeing the execution of the MSRB’s long-term strategic goals of modernizing the MSRB rule book, enhancing market transparency through investments in technology, fueling innovation through data, and upholding the public trust through a commitment to social responsibility, diversity, equity and inclusion. Board members are compensated for their service.

Board Composition

The Board is composed of 15 total members. During the current nominating process, the Board will elect two public and two regulated representatives to join a Board that will consist of eight members who are representatives of the public, including investors, municipal entities and other individuals not regulated by the MSRB, and seven members from firms that are regulated by the MSRB, including representatives of broker-dealers, banks and non-dealer municipal advisors. With respect to the two public member positions, the MSRB is interested in including an investor in municipal securities, either institutional or retail. All applicants must be knowledgeable of matters related to the municipal securities market.

Application Details

Applications are available on the MSRB Board of Directors Application Portal and will be accepted from December 14, 2022 through February 6, 2023. At least one letter of recommendation must be submitted with the application. Additional details on the Board application process, information about Board service requirements and FAQs are available on the MSRB’s website. Questions regarding the application and selection process should be directed to Jake Lesser, General Counsel, at 202-838-1395 or [email protected].

Date: December 14, 2022

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

The Municipal Securities Rulemaking Board (MSRB) protects and strengthens the municipal bond market, enabling access to capital, economic growth, and societal progress in tens of thousands of communities across the country. The MSRB fulfills this mission by creating trust in our market through informed regulation of dealers and municipal advisors that protects investors, issuers and the public interest; building technology systems that power our market and provide transparency for issuers, institutions, and the investing public; and serving as the steward of market data that empowers better decisions and fuels innovation for the future. 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.

View the MSRB press release.

December 12, 2022

The Securities and Exchange Commission (“SEC”) released an annual summary, on November 15, 2022, of actions brought by the Division of Enforcement (“Division”) over fiscal year 2022 (“Enforcement Summary”), providing an overview of its results and priorities over fiscal year 2022, Gurbir Grewal’s first full year as the Division’s Director.1 While these summaries, by their nature, always include a focus on the amounts obtained in penalties and disgorgement, and, in recent years the continuing importance of the whistleblower program to the Division’s work, the overriding theme of this past year’s report is the “breadth of issues” covered by the Division and the expectation of more proactive enforcement sweeps to come.

Overview

In fiscal year 2022, the SEC filed a total of 760 enforcement actions, which represents a nine percent increase over fiscal year 2021. Over the past year, the SEC has generally sought large monetary results, as well as bespoke undertakings depending on the particular allegations in an action. In 2022, the SEC obtained a record $6.436 billion in disgorgement, civil penalties, and prejudgment interest. The increase of almost 70 percent compared to 2021 is largely attributable to the increase in civil penalties, which nearly tripled from $1.456 billion to $4.194 billion. The SEC also returned $937 million to affected investors, compared to $521 million in fiscal year 2021.

The Enforcement Summary emphasized that “individual accountability is a pillar of the SEC’s enforcement program.” To support this point, the SEC cited cases it had brought against public company senior executives and senior portfolio managers in the financial industry. The SEC also noted enforcement actions brought to compel clawbacks of public company executive compensation under Sarbanes-Oxley Section 304, which Director Grewal addressed in a speech given on the same day that the Enforcement Summary was released.2

The SEC has also been more willing to litigate than in past years, which the Enforcement Summary highlighted by noting that the Division litigated a record 15 trials in 2022, the most conducted in a single year over the past decade. The SEC has also been willing to bring actions against market participants notwithstanding potential collateral consequences, such as potential waivers, particularly when cases may send a “message” to the market concerning the Division’s priorities. Director Grewal’s November 15 speech noted in particular that, “proactive enforcement sweeps that specifically target recurring issues … not only demonstrate[] accountability, but also [have] a more pronounced deterrent effect than if the [SEC] filed separate standalone cases.”

The Enforcement Summary drew particular attention to the Division’s actions against 17 market participants for what the SEC described as “failures to maintain and preserve work-related text message communications conducted on employees’ personal devices.” These “off-channel communications” have been a focus of the Division over the past year and have led to $1.235 billion in civil penalties (or almost 30% of the $4.194 billion in total civil penalties for 2022), as well as tailored undertakings, such as the retention of compliance consultants to ensure compliance going forward.

The SEC also identified other areas of focus for the Division, including financial fraud and issuer disclosures, gatekeepers, crypto assets, cybersecurity, ESG, private funds, insider trading and other market abuses, and complex investment products among others.

Substantive Areas of Focus

The Enforcement Summary highlighted the breadth and depth of the Division’s enforcement actions over the past year, specifically naming certain industries and types of violations that the SEC found particularly noteworthy. For example, the SEC routinely brings a significant number of actions against market participants for inadequate or inaccurate disclosures. The Division continued that emphasis this year, with the SEC noting that it “places a high priority on pursuing issuers or their employees who make materially inaccurate disclosures, as well as auditors and their professionals who violate appliable laws and rules in connection with such disclosures.” More broadly in this year’s summary, the SEC made explicit the Division’s focus on bringing actions against gatekeepers, including auditors, lawyers, and transfer agents, when the SEC believes that they “fail[] to live up to their heightened trust and responsibility.”

With the continued expansion of the Division’s Crypto Assets and Cyber Unit—it is set to nearly double in size—the SEC continues its focus on enforcement in the crypto asset space, as well as on cybersecurity violations broadly. For example, the SEC brought actions against crypto lending platforms, individuals in an alleged “crypto pyramid and Ponzi scheme,” and those involved in insider trading related to a crypto asset trading platform. The SEC also brought actions regarding failures to comply with record-keeping and customer data requirements.

The Division continues to address “concerns” by investors regarding environmental, social, and governance (“ESG”) issues. The Enforcement Summary noted that the Division will focus on principles of materiality, accuracy of disclosures, and fiduciary duty when evaluating potential enforcement actions against public companies and with regard to investment products and strategies.

The Division has increased its attention to the private funds industry, which it has signaled repeatedly over the past year. The SEC expressed its likely emphasis on the risks associated with the “unique features” of private investment, including “undisclosed conflicts of interest, fees and expenses, valuation, custody, and controls around material nonpublic information.” The Division has brought several actions against private fund advisers and associated individuals over the past year, which have included fraud charges in some instances.

The Enforcement Summary also described actions over the past year addressing regulated entities, including broker-dealers and investment advisers,3 as well as associated individuals, including actions concerning trading restrictions placed on “meme stocks,” failures to disclose conflicts of interest regarding SPACs, and the first action enforcing Regulation Best Interest.

As in prior years, the Division highlighted its market abuse actions involving violations such as insider trading, market manipulation, and cherry-picking, as well as actions involving complex products and strategies, and violations of the Foreign Corrupt Practices Act. Last, the Division summarized its activity in bringing actions involving public finance abuse, including actions in the municipal bond sector

Other Areas of Emphasis

In addition to the substantive areas highlighted as part of the Division’s work during fiscal year 2022, the Enforcement Summary also highlighted the Division’s process and areas of emphasis as it considers, investigates, and adjudicates potential enforcement actions. The SEC places an emphasis on the deterrent effect of its enforcement actions on future misconduct. For example, the Division “recalibrated penalties for certain violations,” including using undertakings to require retention of compliance consultants, requiring admissions as part of settlements, and continuing to focus on individual accountability, with more than two-thirds of the SEC’s stand-alone actions involving at least one individual defendant or respondent.

The Enforcement Summary also described the Division’s continued use of sophisticated data analytics in assisting its work, noting a wide range of types of cases resulting from data analytics, including insider trading, market manipulation and “cherry picking.” The Enforcement Summary discussed the SEC’s continued support for its whistleblower program, noting its receipt of over 12,300 whistleblower tips that led to 103 awards totaling $229 million. The Enforcement Summary also noted the SEC’s reliance on both parallel criminal proceedings and “[t]angible cooperation,” including “significant remedial measures” by firms under investigation.

Looking Ahead to 2023

Fiscal year 2023 will likely continue to see an active enforcement climate. Chairman Gary Gensler, as well as Director Grewal and the enforcement staff, have made clear their desire to pursue alleged violations of the securities laws vigorously, including by “push[ing] the pace of investigations” and ensuring that the Division operates with “tremendous breadth.” While the SEC is expected to face increased Congressional oversight with a new, Republican-controlled House of Representatives in 2023, we expect enforcement to continue apace, particularly in priority areas such as ESG, private funds, crypto and cybersecurity, and “high-impact” actions.

Conclusion

Fiscal year 2022 brought a significant rise in the number of actions filed by the SEC, as well as a new record in total money ordered to be paid by respondents. The familiar emphasis on actions involving regulated firms, financial fraud and inadequate disclosures was coupled with an increasing number of actions brought as a result of investigations by specialized teams, including the Crypto Assets and Cyber Unit and the Climate and ESG Task Force. Those trends can be expected to continue and, more likely than not, accelerate in the coming year.

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

Dechert LLP – David P. Bartels , Catherine Botticelli , Anthony S. Kelly, Mark D. Perlow, Dennis Lawson and Eric Auslander

December 12 2022

In September of 2022, the Securities and Exchange Commission (SEC) took enforcement actions against four municipal security underwriting firms for failing to comply with Rule 15c2-12 disclosure requirements. The firms believed that they were exempt from such requirements under the “limited offering exemption,” yet they allegedly failed to satisfy the “reasonable belief” requirements necessary for the disclosure exemption.

Three of the firms have since elected to settle with the SEC, agreeing to disgorgement, ranging from $40,000 to $656,000, and financial penalties, ranging from $100,000 to $300,000, while the fourth firm is proceeding with litigation. These enforcement measures are noteworthy as this is the first time that the SEC has taken action against an underwriter for failing to meet the legal requirements of Rule 15c2-12’s disclosure exemption.

What You Need to Know About SEC Enforcement

These recent, unprecedented actions and statements made by the SEC regarding the use of the limited offering exemption by municipal underwriters indicate that compliance with the requirements of the exemption, specifically the reasonable belief component, has become an enforcement priority. The SEC appears to be setting the tone, with four major underwriting firms facing penalties and SEC staff having already begun investigations into other firms’ reliance on the limited offering exemption. Gurbir S. Grewal, the director of the SEC’s Division of Enforcement, has encouraged underwriters to examine their practices and self-report any failures “before we identify them ourselves.”

Accordingly, now is the time for underwriters that utilize the limited offering exemption to strengthen or establish measures, whether through revised investment letters or written supervisory procedures, that ensure compliance with any Rule 15c2-12 exemptions they utilize.

Rule 15c-12’s Disclosure Requirements and Exemption

In primary offerings of municipal securities, Rule 15c2-12 requires that an underwriter provide certain disclosures to investors in an effort to prevent fraudulent, deceptive, or manipulative acts or practices. However, Rule 15c2-12 also provides a limited offering exemption which discharges underwriters from their typical disclosure obligation in qualified transactions. To qualify for the limited offering exemption, the offering must be sold in denominations of $100,000 or more and sold to no more than 35 investors that the underwriter reasonably believes (1) have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and the risks of the prospective investment, and (2) are not purchasing for more than one account or with a view to distributing the securities.

According to the SEC, the four underwriting firms sold newly issued municipal bonds without providing the required Rule 15c2-12 disclosures, citing the limited offering exemption as their justification. The issue arises from the SEC alleging that the underwriting firms failed to demonstrate compliance with the previously mentioned reasonable belief requirements to qualify for the exemption. Specifically, in the SEC’s view, the firms allegedly sold securities intending to meet the limited offering exemption without a reasonable belief that the purchasers were buying for their own account. The SEC observed that some of the broker-dealers who purchased the primary offering from one of the underwriters resold the securities to multiple customers. The SEC reasoned that therefore the underwriter in question “did not reasonably believe the broker-dealers were buying for their own accounts because the broker-dealers were in the business of servicing brokerage customer accounts.” Further, since the firms failed to determine if the securities were being purchased for more than one account or for distribution, the SEC then reasoned that the firms were therefore also unable to have a reasonable belief whether the ultimate purchasers of the security had the requisite financial knowledge and experience to evaluate the investment.

SEC Comments and Guidance

The SEC’s complaint against the firm that did not settle provides additional information as to the nature of the alleged violations, as well as guidance as to what the SEC views as the proper diligence required of an underwriter claiming the limited offering exemption. First, the SEC claims that in violation of Rule 15c2-12, the underwriting firms allegedly “made no inquiry to determine if those entities were buying on behalf of their customers and/or clients and, if so, whether such investors met the exemption criteria.” The complaint provides a list of information that, at a minimum, an underwriter asserting the limited offering exemption must obtain about potential investors: (1) the size of each investor’s investment, (2) the number of investors, (3) whether each investor is buying the securities for a single account, and (4) each investor’s level of financial experience and/or sophistication.

Notably, however, the SEC does not provide guidance or suggestions as to the proper way this information should be obtained by underwriting firms from potential investors. One suggestion currently circulating the municipal securities industry is the modification of traditional investment letters to better and more specifically obtain the information that the SEC has outlined. Investment letters, sometimes referred to as “big boy letters,” are an SEC-approved method often used by underwriters to confirm the investment intent of potential investors—the thought being that such letters could be modified going forward and used to confirm whether the securities being purchased are for a single account or, if for multiple accounts, the number of investors and the size of their investments. Similarly, revised letters could more thoroughly address the investor’s level of financial experience and sophistication. Unfortunately, the SEC has neither confirmed nor denied whether an investment letter used in this manner is sufficient for the purpose of the limited offering exemption.

MSRB Rule Violations

In addition to Rule 15c2-12 violations, the SEC alleges that all four underwriting firms also violated the Municipal Securities Rulemaking Board (MSRB) Rule G-27, and that the firm that opted not to settle violated MSRB Rule G-17. MSRB Rule G-27 requires that municipal underwriters have written supervisory procedures (WSPs) in place to ensure compliance with federal security laws. MSRB Rule G-17 prohibits deceptive, dishonest, or unfair practices by an underwriter, and as the SEC contends, this rule was violated by making assurances to issuers that, as the underwriter, the limited offering would be conducted in accordance with federal law.

If the SEC is indeed ramping up enforcement activities for Rule 15c2-12 violations in the municipal securities market, underwriters would be advised to review their existing procedures or establish new measures before claiming the limited offering exemption. It also might be wise to create or modify investment letters to solicit the kind of information cited in the SEC complaint.

Frost Brown Todd LLP – Ben Hadden , Emmett M. Kelly and Beau F. Zoeller

December 9 2022

Federal legislation requiring machine-readable reporting has its critics, but it would go a long way toward modernizing how data is collected, used and shared. It also could lower borrowing costs for states and localities.

Congress may soon pass the Financial Data Transparency Act (FDTA), which would require certain regulatory agencies to adopt data standards that would increase transparency and make financial information more easily accessible. In effect, the legislation would require data reported on behalf of municipal bond issuers to the Municipal Securities Rulemaking Board to be in a machine-readable format instead of the current PDF document format.

The FDTA is part of a larger trend already underway to modernize how governments at all levels collect, use and share data with the public. We believe the long-term upsides of streamlined reporting and increased transparency far outweigh any short-term transition costs.

Some groups associated with municipal governments and public finance are arguing that the FDTA would create an unfunded burden for them to change how they report financial data. They also object to standards being imposed from the top down without giving municipal stakeholders a seat at the table. We agree that local governments will need resources to implement the act and that they should be involved in designing the data standards. In fact, we’ve already gotten a significant head start in tackling these challenges.

Continue reading.

governing.com

by Stephanie Leiser and Robert J.F. Widigan

Dec. 7, 2022

Congress unveiled a final version of the 2023 defense bill Tuesday night that includes, as feared by municipal market issuers, a closely watched and controversial financial disclosure mandate.

The mandate is slightly altered from the original version, which the House passed in July, in that it shifts rulemaking and enforcement to the Securities and Exchange Commission and away from the Municipal Securities Rulemaking Board.

That opens a path to more direct communication through Congressional oversight, said Emily Brock, federal liaison for the Government Finance Officers Association.

“We certainly didn’t hope for this to happen, but this is a new opportunity to work with the SEC to help them better understand our financial reporting requirements and to have a sequence of events that allows for Congressional oversight,” Brock said.

Muni issuer groups like the GFOA pushed hard against the disclosure standard provision, which would move municipal issuers and other financial entities toward a financial reporting standard like eXtensible Business Reporting Language, or XBRL. Issuers argue it’s a costly unfunded mandate that fails to recognize the wide variety of governments that make up the market.

The House is expected to take up the 2023 National Defense Authorization Act as soon as today. The Senate could vote on it next week.

The disclosure provision requires that no later than two years after the bill’s enactment, the SEC must issue rules to adopt the new data standards.

The provision assigns to the SEC the responsibility to “scale” the standards “to reduce any unjustified burden on smaller regulated entities” and “to minimize disruptive changes to the persons affected by those rules,” which could include small issuers or other types of issuers, Brock said.

The provision also requires the SEC to “consult market participants in establishing data standards.”

It also features expanded language that prohibits any new disclosure information requirements beyond what is already required.

Muni issuers have always been free of direct regulatory requirements on the presentation and delivery of their financial disclosure, though the SEC since 2009 has required private companies to use XBRL on their financial statements.

Shifting the data standards rulemaking and oversight away from the MSRB is a “key distinction,” Brock said.

“With the SEC, we at least know there are administrative procedures that have to be followed, and we can stay in touch with Congressional delegates and they can communicate with the SEC,” she said.

Negotiations over the bill were briefly hung up on whether it would include various non-defense related amendments, including Sen. Joe Manchin’s permitting provision for energy infrastructure projects, which ultimately was not included in the final version.

By Caitlin Devitt

BY SOURCEMEDIA | MUNICIPAL | 12/07/22 11:27 AM EST

Concerning proposals imposing strict financial reporting on governments may, in an amended form, be part of late-term congressional considerations on omnibus legislation.

The National Association of Counties (NACo) has offered a late-year update on the progress of newly proposed financial reporting rules that may prove burdensome and difficult for many local governments. The assessment is below – indicating that the proposal appears on target to become part of a large omnibus legislative package in December, but that some of the concerning specifics have been altered for the better.

From NACo:

On December 6, House and Senate Armed Services Committee leadership unveiled a bicameral, bipartisan Fiscal Year (FY) 2023 National Defense Authorization Act (NDAA). The NDAA is annual, must-pass legislation that, in recent history, serves as a legislative vehicle for additional bipartisan, bicameral bills (or policy riders) so they can be enacted without receiving a standalone vote.

The FY 2023 NDAA agreement includes the Financial Data Transparency Act (FDTA), led by Reps. Carolyn Maloney (D-N.Y.) and Patrick McHenry (R-N.C.) in the U.S. House and Sens. Mark Warner (D-Va.) and Mike Crapo (R-Idaho) in the U.S. Senate. This bill was included as an amendment to the House Armed Services Committee’s version of the NDAA that passed the U.S. House in July 2022. The bill would generally establish new financial data reporting standards for municipal securities market participants separate from the standards established by the Government Accounting Standards Board (GASB).

NACo opposes federally imposed standards for county financial accounting and reporting and supports those principles put forth by the GASB. As such, counties had several concerns with the bill as it was initially written. On September 29, NACo and the Public Finance Network (PFN), a coalition of municipal bond issuers, sent a letter to U.S. Senate leadership outlining these concerns, and NACo provided counties with a template letter to send to their members of Congress.

Additionally, we worked closely with our State Association partners to express these concerns to the bill sponsors in both the U.S. House and U.S. Senate and coordinated our efforts with a coalition of municipal advisors, counsel and underwriters to suggest alternate language. Suggested changes included moving the rulemaking away from MSRB, lengthening the rulemaking timeline to allow for input from issuers and market participants and/or creating a pilot program or study to better determine the impact these new standards would have on the municipal industry.

We are pleased to report that several of these suggestions were incorporated into the final NDAA agreement.

The new language directs the Securities and Exchange Commission (SEC) to set and implement these new data standards instead of the MSRB. This language is more favorable since SEC already has regulatory authority and procedures and the commission is subject to congressional oversight. Further, this move doesn’t expand MSRB’s current authority to oversee state and local governments as bond issuers.

The section also includes new language specifically directing SEC to consult with market participants (such as counties) when drafting these standards and requires the SEC to scale these reporting standards for smaller regulated entities and work to ensure these rules cause minimum disruption.

Lastly, the new language does not prescribe a timeline for SEC to issue a proposed rule but does retain the requirement that there be two years to implement the rule. Not setting a definitive timeline for the rule to be drafted will allow the SEC to conduct meaningful consultation with counties and other municipal market participants and understand the impact these new data reporting standards will have on the municipal industry once implemented.

The bottom line: While the provision included in the NDAA still represents a potential unfunded mandate and a federally imposed reporting standard, the changes made to the text will allow counties to work with SEC to address these concerns during the rulemaking process.

National Association of Counties

by Michael Sanderson

December 8, 2022

The NFMA is conducting important research on diversity, equity, and inclusion experiences within the public finance industry. Along with our partners at Anavi Strategies and PFM’s Center for Budget Equity and Innovation, the NFMA is excited to launch a new survey initiative to study these critical issues and share learnings that can help enhance the experience of all municipal market participants.

We are asking you to share your experience, feedback, and opinions on the current and future state of DE&I, both within your organization and within the industry at large. We estimate that thoughtful respondents will need 15-20 minutes to complete the survey.

You can access your survey by clicking this link: Take our survey

Because this time of year is busy for everyone – but seems to be especially busy for our colleagues – we know your time is valuable. The survey will remain open until January 9th, 2023.

Theory in Practice? GASB’s New Concepts Statement on Note Disclosures … and a Proposal for More Notes!

In June 2022, the Governmental Accounting Standards Board (GASB) issued its latest expansion of the conceptual framework for governmental generally accepted accounting principles (GAAP), Concepts Statement No. 7, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements (CS7).

Concepts statements are not themselves GAAP standards, of course; instead, they provide current and future board members with a framework that should help to set standards that are consistent with each other and logically function together.

Also in June, GASB issued an exposure draft of a statement, Certain Risk Disclosures (ED), that, if adopted in final form, would require new note disclosures.

Let’s look at both and then consider how closely the ED seems to follow CS7.

Download.

Effort to improve transparency by requiring machine-readable financial disclosures raises hackles

A pitched battle over data is under way in the $4 trillion market that finances roads and sewers. At issue is a little noticed measure in proposed federal legislation that would mandate how state and local governments across the country present their financial results to investors.

The municipal-bond market in some ways remains stuck in the last century. Municipalities file reports erratically according to different standards, and the files aren’t machine-readable by investors attempting to study city or state finances before they buy or sell. That marks a contrast to corporate disclosures, where standardized data can be extracted by computers.

Lawmakers sponsoring the measure—and companies that sell financial reporting software—say it will aid investors and the public by improving transparency. But Congress’s proposed fix hasn’t gotten much of a welcome in the muni market. Bankers, investors and local officials all warn of problems from increased costs to accounting headaches if Congress passes the measure.

Continue reading.

The Wall Street Journal

By Heather Gillers

Nov. 26, 2022

In September, GFOA’s Executive Board approved updates to several accounting best practices recommended by the Accounting, Auditing, and Financial Reporting Committee including a prevalent and timely suite of best practices focused on federal grants reporting.

As part of the best practice review, the AAFRC created two groupings or “suites” of related best practices: one for the best practices pertaining to grants and another for those pertaining to internal controls.

The new SEFA Preparation best practice helps guide governments in completeness and accuracy when preparing a Schedule of Expenditures of Federal Awards. In the best practice Internal Control for Grants, GFOA recommends that governments adhere a comprehensive framework of internal control that includes a control environment, risk assessment, control activities, information and communication, and monitoring. In addition to changing the recommended actions from “consider” to “should,” the best practice Grants Administration now includes a recommendation for governments to establish a post-implementation review process for grant programs.

Stay tuned: these new best practices will inform a new training to be released in January, “Undergoing a Federal Funds Single Audit.” The training will provide an overview of the Single Audit and Uniform Guidance as well as how to prepare a SEFA.

All Updated Best Practices

• Departmental Reports and Supplementary Information  –  VIEW
• Fund Accounting Applications – VIEW
• Grants Administration – VIEW
• Indirect Cost Allocation – VIEW
• Internal Control Deficiencies in Audits – VIEW
• Internal Control for Grants – VIEW
• Internal Control Environment – VIEW
• Internal Control and Management Involvement – VIEW
• Periodic Disclosure and the Annual Comprehensive Financial Report – VIEW
• SEFA Preparation – VIEW

View the MSRB Proposed Rule Change.

SEC Filing SR-MSRB-2022-09

11/16/2022

View the MSRB Proposed Rule Change.

SEC Filing SR-MSRB-2022-08

11/16/2022

View the MSRB notice.

Notice 2022-12 – Informational Notice

11/16/2022

Norwalk, CT, November 15, 2022 — The Governmental Accounting Standards Board today issued proposed implementation guidance in the form of questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements.

The Exposure Draft, Implementation Guidance Update—2023, contains proposed new questions and answers that address application of GASB standards on leases, subscription-based information technology arrangements, and accounting changes. The proposal also includes amendments to previously issued implementation guidance on leases.

The GASB periodically 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:

• Application issues raised during due process on GASB pronouncements,
• Application issues identified during the first stage of the GASB’s post-implementation reviews of the leases standards,
• Questions it receives throughout the year, and
• Topics identified by members of the Governmental Accounting Standards Advisory Council and other stakeholders.

The guidance in Implementation Guides is cleared by the Board and constitutes Category B GAAP.

Stakeholders are asked to review the proposal and provide input to the GASB by January 20, 2023. Comments may either be submitted in writing or through an electronic input form.

Norwalk, CT, November 15, 2022 — The Board of Trustees of the Financial Accounting Foundation (FAF) announced today the reappointment of Elizabeth Pearce as chair and Robert Hamilton as vice chair of the Governmental Accounting Standards Advisory Council (GASAC) respectively. Both will serve their terms starting January 1, 2023 and concluding on December 31, 2024, at which time they will be eligible for reappointment for one additional term.

The GASAC advises the Governmental Accounting Standards Board (GASB) on strategic and technical issues, project priorities, and other matters that affect standards setting. Members of the GASAC are responsible for consulting with the GASB on technical issues on the Board’s agenda, project priorities, matters likely to require the attention of the GASB, and such other matters as may be requested by the GASB or its chair.

“The FAF and the GASB are pleased to have both Elizabeth and Robert serve in these essential roles. As members of the GASAC, and during their first terms as chair and vice chair, they have shown a genuine interest in listening to all perspectives while also sharing their own. They are both thoughtful when giving their opinions and are well received by other GASAC members,” said Kathleen L. Casey, chair of the Financial Accounting Foundation. “We are excited for them to continue in these leadership roles and in their continuing encouragement of all GASAC members to share their views to enhance the standards-setting process,” added Ms. Casey.

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

About the Financial Accounting Foundation

Established in 1972, the Financial Accounting Foundation (FAF) is an independent, private-sector, not-for-profit organization based in Norwalk, Connecticut. Its Board of Trustees is responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

The FASB and GASB (collectively, “the Boards”) establish and improve financial accounting and reporting standards—known as Generally Accepted Accounting Principles, or GAAP—for public and private companies, not-for-profit organizations, and state and local governments in the United States. Both Boards set high-quality standards through a process that is robust, comprehensive, and inclusive. The FASB is responsible for standards for public and private companies and not-for-profit organizations, whereas the GASB is responsible for standards for state and local governments.

The Foundation’s Board of Trustees comprises 14–18 members from varied backgrounds—users, preparers, and auditors of financial reports; state and local government officials; academics; and regulators. The Trustees direct the effective, efficient, and appropriate stewardship of the FASB and GASB in carrying out their complementary missions, select and appoint FASB and GASB members and their advisory councils, oversee the Boards’ activities and due process, and promote and protect the independence of the Boards. For more information, visit www.accountingfoundation.org.

About the Governmental Accounting Standards Board

Established in 1984, the GASB is the independent, private-sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles (GAAP). These standards are recognized as authoritative by state and local governments, state Boards of Accountancy, and the American Institute of CPAs (AICPA). The GASB develops and issues accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to taxpayers, public officials, investors, and others who use financial reports. The Financial Accounting Foundation (FAF) supports and oversees the GASB. For more information, visit www.gasb.org.

The MSRB proposed amendments to MSRB Rule G-32 (“Disclosures In Connection With Primary Offerings”) to standardize deadlines for underwriters to submit information on Form G-32 for all types of offerings.

The amendments would require underwriters to populate certain data on the form in the Electronic Municipal Market Access Dataport system by the close of business on the first execution date. Certain other information would not be required until the close on the settlement date. The MSRB said that the proposal does not alter what data needs to be submitted and would standardize the deadline for data submission, which would streamline the submission process and mitigate the burden placed on underwriters.

The MSRB requested feedback on specific areas of the proposal, but said that it will accept all comments until January 17, 2023.

Fried Frank Harris Shriver & Jacobson LLP

November 11 2022

View the MSRB Underwriter Considerations.

Publication date: 11/07/2022

View the MSRB Considerations.

Publication date: 11/07/2022

View the MSRB Request for Comment.

Publication date: 11/09/2022 | Comment due: 01/17/2023

A broker-dealer settled FINRA charges for (i) failing to disclose that certain corporate and municipal bonds held by its customers were in default and (ii) failing to deliver a number of required disclosures to its customers.

In a Letter of Acceptance, Waiver, and Consent, FINRA said that the broker-dealer distributed account statements to certain customers showing that some of the held bonds were making payments when they were actually in default. FINRA determined that the broker-dealer had notice of the defaults, but the account statements did not reflect this information. In failing to maintain accurate records for these bonds, FINRA found that the broker-dealer violated FINRA Rule 4511 (“Books and Records Requirements — General Requirements”) and MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”).

FINRA concluded that the firm failed to deliver certain (i) privacy disclosures in violation of Regulation S-P (“Privacy of Consumer Financial Information and Safeguarding Personal Information”), (ii) order execution notices in violation of SEC Regulation NMS Rule 242.606 (“Disclosure of order routing information”), and (iii) margin disclosures in violation of FINRA Rule 2264 (“Margin Disclosure Statement”). FINRA found that the firm had inadequate supervisory systems, violating FINRA Rule 3110 (“Supervision”) and MSRB Rule G-27 (“Supervision”).

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a civil monetary penalty of $850,000 ($300,000 pertaining to the MSRB rule violations) and (iii) undertake improvements to its notice and disclosure processes.

Fried Frank Harris Shriver & Jacobson LLP

November 4 2022

Like a bug trapped in amber, crucial financial information on thousands of bonds in multi-billion-dollar municipal bond mutual fund portfolios held by millions of shareholders is in a similar fossilized state, embedded in decades-old technology.

The municipal bond market is a $3.9 trillion capital market without digital financial data.

Financial Reporting: Digitized and Machine-Readable

The Financial Data Transparency Act (S. 4295 – “FDTA”), pending before the Senate, offers a readily available solution to free that information, making it widely available and usable. In doing so, FDTA expands the adoption of machine-readable, digitized financial reporting. Wholly based on existing information that is already required, collected, and making it available to anyone for free, this legislation is potentially transformative for the $3.9 trillion municipal bond market. It ushers in access to and transparency in government financial reporting that, while standard for public companies in the U.S. and the rest of the world, is unprecedented in the public sector.

All of these are why the co-sponsors of the legislation, U.S. Senators Mark R. Warner (D-VA) and Mike Crapo (R-ID) introduced the bill. FTDA provides “greater transparency and usability for investors and consumers, along with streamlined data submissions and compliance for our regulated institutions,” offered Senator Warner. Senator Crapo noted the bill would be an important step forward in “making financial data used by federal regulators more accessible and accessible to the American public” as well as “improving government transparency and accountability.”

Machine-readable, digitized, standardized, transparency, accountability. All very technical and aspirational, but what does this mean practically for investors and regulators?

It means all the financial information available from cities and towns and authorities—assets, debts, tax and fee revenues, cash flows, and so forth—can be easily downloaded or uploaded into a spreadsheet and treated just like any other bunch of numbers. It means it can be readily categorized, analyzed, tracked, charted, graphed, and the dozens of other things you do with financial information to better understand what it means. That’s just for starters.

Just as an individual investor, investment advisor, or portfolio manager cannot effectively make prudent investment decisions without this essential data in a readily accessible structured format, neither can regulators perform their Congressionally mandated roles to ensure fair and efficient markets without consistent, standardized financial data.

How much is at stake for investors as well as capital markets regulators?

Start with this number. Six hundred thirty-one eight hundred fifty-nine million. Sounds like one of those made-up numbers used for exaggeration, right? Floating somewhere between a bazillion and a gazillion? It’s kind of hard to take seriously.

Yet $631,859,490,332 is exactly the total amount of assets under management held in the open-end funds of the top 10 municipal bond mutual fund managers as of July 2022, according to Morningstar direct.

Now here’s another number: $908.9 billion. That’s the total assets in all open-end municipal bond mutual funds as calculated by the Federal Reserve as of the end of Q2-2022.

(For the intrepid, data on municipal bond holdings of the entire market is in the Municipal Securities section of the Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1 Financial Accounts of the United States, Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts).

Align the time frames and compare the Fed number to the prior AUM number. You’ll quickly find that close to 70% of all municipal bond mutual fund holdings are held by these top 10 fund managers.

It is a uniquely stunning concentration of assets in this sector of the financial markets, raising a host of concerns for investors and regulators alike. Not the least of these are liquidity risk in general, liquidity during market dislocations, increased volatility, interest-rate commodification, a redefinition of systemic risk, and fair market pricing.

Keeping It Together

For the mutual fund managers overseeing these vast amounts of other people’s money at that size, it becomes less of an investment strategy and more of an operations and logistics challenge.

Give this some thought. A multibillion-dollar mutual fund has thousands upon thousands of holdings in its portfolio. Vanguard Tax-Exempt Index Fund is an example, but any one of the funds in the Top 10 will do. It has $19.2 billion invested in 6,330 bonds (as of 9/30/22). Now expand that by the billions held in all the other funds making up the Top 10. In those portfolios, there are tens of thousands of bonds.

There is no way to manage portfolios of these sizes without very carefully established and coordinated structures to keep track of all the various facets of managing billions of dollars, from trading to accounting to valuation to surveillance to analysis to compliance…the list goes on.

What holds all of these pieces together is standardized, machine-readable, digitized data. Data capturing information on the bond, its coupon, maturity, purchase price, premium, discount, rating, and call features. Data on interest accruals, capital gains, capital losses, dividends, shares bought, and shares sold. Data on valuations, variance, and spread relationships. Data on compliance parameters, shareholder fees and expenses.

All these data fields and a myriad more track each and every component of managing thousands of bonds and billions of dollars.

Every day.

Except for one series of data.

A $3.9 Trillion Capital Market with No Digital Financial Data

There is no readily publicly available, comprehensive, digitized, downloadable, structured financial data source on the underlying issuers of the bonds. None. Not from the Securities and Exchange Commission, not from the Department of the Treasury, not from the Federal Reserve Board, and not from other the four capital markets regulators noted in the FTDA.

Not even the Municipal Securities Rulemaking Board, the regulatory agency with the Congressional mandate to “protect municipal securities investors, municipal entities, obligated persons and the public interest.” Not even the MSRB’s central disclosure repository for the municipal bond market, EMMA, where nearly every financial report by municipal bond issuers has to be filed. From states to cities to towns to authorities, all their financial disclosures filed in EMMA are in an unstructured format: the PDF.

A PDF is not digitized data. The numbers aren’t even really numbers, just pictures of numbers, images comprised of pixels, like a picture you take with your camera. It is not directly convertible into digital data. As research has shown, even the best attempts to scrape the PDF to digitize the data have serious shortcomings. Most of the time, to convert the information on the PDF pages to digital data, it has to be entered into a spreadsheet by hand.

Like a bug trapped in amber, crucial financial information on tens of thousands of bonds held in multi-billion-dollar investment portfolios, information essential to assessing, surveilling, accounting, and valuing these investments held by millions of mutual fund shareholders, sits locked like a Lucite-entombed relic.

A Simple Fix

It is a simple fix. By and large, this financial information is already collected as data and organized to match the widely followed rules established by the Government Accounting Standards Board as generally accepted accounting principles. It requires only a modest effort to digitally tag this data, linking it to the already well-defined GAAP categories.

Which is all this legislation gives regulators the ability to request. No new disclosures. No new authority. No changes in data governance. Just more information available, for free, to any investor with a computer can use—from multi-billion-dollar mutual fund managers or individual investors—in the $3.9 trillion municipal bond market.

Transparency at a click.

Forbes

by Barnet Sherman

Nov 7, 2022

On September 13, 2022 the Securities and Exchange Commission filed litigation against four separate municipal securities underwriters for failing to comply with municipal bond offering disclosure requirements. The four firms at issue (three of which have settled with the Commission) sold new issue bonds without first obtaining required disclosures for investors. Each firm attempted to rely on an exemption to Rule 15c2-12 known as a limited offering. In each case, however, the participating underwriter failed to satisfy the requirements of the limited offering exemption for continuing disclosure. Among other things, the underwriters failed to establish a reasonable belief that the broker-dealers who were purchasing the securities were doing so for investment purposes, as opposed to resale. The SEC has begun further investigations of firms relying on limited offering exemptions and has opened a communication line for self-reporting and additional information. These recent enforcement actions highlight the need for underwriters to fully understand their obligations relating to continuing disclosure, including Rule 15c2-12 and its relevant exemptions.

by Richard Spoor

November 1, 2022

Keating Muething & Klekamp PLL

Meeting Notice

11/01/22

Eligibility for scholarships range from full- to part-time, undergraduate to graduate, and first-time to returning students. Any student interested in state, local, and provincial government finance, public service, governmental accounting, or public administration is strongly encouraged to apply. GFOA awards over $100,000 in scholarships annually. The deadline to apply is December 30, 2022.

Learn More.

Currently pending before the Senate, the Financial Data Transparency Act (S. 4295 – “FDTA”) is legislation taking financial reporting by companies and municipalities to the next level. It ushers in the implementation of machine-readable, digitized financial reporting, wholly based on existing information that is already collected and required, and making it available to anyone for free.

For the municipal bond market, where disclosure has always been and remains a struggle, this legislation is potentially transformative. It creates access to and transparency in government financial reporting that, while the standard for public companies, is unprecedented in the public sector.

A Boon For Small Municipalities

It is also potentially a boon for small municipal bond issuers. The Financial Data Transparency Act has the potential to generate a 620% return on investment for small municipal bond issuers. Hard to believe? Read on.

Continue reading.

Forbes

by Barnet Sherman

Oct 27, 2022

View Publication.

Publication date: 10/24/2022

View the MSRB notice.

Notice 2022-10 – Informational Notice

Publication date: 10/31/2022

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) met on October 26-27, 2022 for its first quarterly Board of Directors meeting of Fiscal Year 2023, where it approved a number of rulemaking initiatives and discussed other efforts to advance the four pillars of the self-regulatory organization’s long-term strategic plan.

“The MSRB’s self-regulatory focus is squarely on modernizing rules and increasing transparency to protect and strengthen the municipal securities market,” said MSRB Chair Meredith Hathorn. “As part of our commitment to upholding the public trust, we are continuously engaging in open dialogue with our stakeholders as we work to deliver on our strategic objectives and give America the confidence to invest in its communities.”

Market Regulation

The Board discussed the status of its ongoing retrospective rule reviews and rule modernization efforts to holistically consider its rules and interpretive guidance and identify opportunities to streamline, update and, where appropriate, promote consistency with rules of other regulators.

As part of this discussion, the Board discussed public comments received in response to the MSRB’s proposal to amend MSRB Rule G-14 to require that, absent an exception, transactions be reported to the MSRB as soon as practicable, but no later than within one minute of the time of trade. The Board also received an update regarding a potential pre-trade data collection initiative for the municipal securities market.

“Strong markets function best when regulations keep pace with evolving technologies and market practices for increasing transparency, efficiency and fairness,” said MSRB CEO Mark Kim. “We are actively engaging with stakeholders and fellow regulators on effective solutions to strengthen the structure of the municipal securities market.”

In addition, the Board authorized a request for comment on a proposal to amend Rule G-3, on professional qualifications, to add an exemption from municipal advisor representatives having to requalify by examination in cases of a lapse in qualification, thereby replacing the waiver provision under the rule. The exemption would extend the time a municipal advisor representative can be disassociated from a municipal advisor firm (i.e., not actively engaging in municipal advisory activities on behalf of a municipal advisor) without having to requalify by examination from two years to three years, subject to certain conditions.

Additionally, the Board:

• Authorized a filing with the SEC regarding COVID-19 regulatory relief under Rule G-27, on supervision of dealers, to permit dealers an additional six months (until June 30, 2023) to conduct office inspections remotely; and
• Determined to pause collecting, on a voluntary basis, information from regulated entities pertaining to their certification as a minority- and woman-owned business enterprise (MWBE) or veteran-owned small business (VOSB) on Form A-12.

Market Transparency and Technology

The Board received an update on ongoing work to modernize the Electronic Municipal Market Access (EMMA®) website and further enhancements to its redesigned MSRB.org website.

Market Structure and Data

The Board discussed a number of market structure topics, as well as ongoing efforts to improve the quality of the municipal market data the MSRB collects.

Public Trust

The Board received an update on ongoing efforts to create a more fair and efficient market, including roundtable discussions with MWBE and VOSB firms the MSRB is hosting in collaboration with FINRA. “We believe this joint effort is important for identifying opportunities to foster greater diversity, equity and inclusion in this large and diverse market,” said Hathorn.

Date: October 28, 2022

Contact: Bruce Hall, Senior Manager, Communications
202-838-1300
[email protected]

Congress is weighing a plan that calls for overhauling how state and local government financial data is made public, stirring worries about new costs for software and staff. But supporters of the revamp say it’s long overdue.

State and local governments are raising alarm over a proposal in Congress that would impose significant new requirements on how they share information about their finances with the public.

Those pushing for the changes say they are needed to make it easier for investors and residents to search and analyze governments’ fiscal data. But state and local governments are rejecting the proposal as an “unfunded mandate” and claim it would cost them over $1.5 billion to buy the software and hire the consultants needed to comply.

Though it has nothing to do with the military, the plan to impose the new reporting requirements on governments and nonprofits was included in the House’s version of the National Defense Authorization Act, an annual defense spending bill, which could be taken up as soon as next month. Senate lawmakers have put forward a similar plan.

Continue reading.

Route Fifty

By Kery Murakami

OCT 17, 2022

GASB Chair Joel Black recently announced the appointment of a task force to assist with the Board’s project addressing going concern uncertainties and severe financial stress disclosures. Members of the task force, by stakeholder group type, are:

Users

• Lisa Washburn, Managing Director, Municipal Market Analytics, Inc.
• Shripad Joshi, Senior Director & Accounting Officer, Corporate and Government Ratings, S&P Global
• Stephen Spencer, Managing Director, Houlihan Lokey
• Sharon Edmundson, Director, North Carolina Department of State Treasurer
• Amanda Beck, Assistant Professor of Accounting, Georgia State University
• Mary Murphy, Senior Director, The Pew Charitable Trusts
• Angus Maciver, Legislative Auditor, Montana Legislative Audit Division.

Preparers

• Kristine Brock, Assistant City Administrator/Chief Financial Officer, City of Franklin, Tennessee
• Linda Short, Deputy Director of Finance, City of Fort Lauderdale, Florida
• Chad Greenwell, Associate Controller, University of Michigan
• Mark Merry, Assistant Director, Florida Department of Financial Services
• Kathy Ketchum, Manager, Accounting and Assistant Controller, Sacramento Municipal Utility District
• Elizabeth Hill, Deputy Comptroller, Nassau County, New York.

Auditors

• Jodi Dobson, Partner, Baker Tilly US, LLP
• Tim Lyons, Partner, Mauldin & Jenkins, LLP
• Chris Pembrook, Partner, Crawford & Associates, P.C.
• Robert Hinkle, Deputy Auditor of State, State of Ohio.

WHAT DO TASK FORCES DO?

The GASB assembles task forces for most major current projects and certain research activities. Task forces serve as a sounding board, providing suggestions and feedback to the GASB as a project or research progresses. Task force members also review the papers the GASB staff prepares for Board meetings and monitor the Board’s deliberations, commenting as appropriate.

HOW ARE PARTICIPANTS SELECTED?

Task forces are officially appointed by the GASB chairman after consultation with the other GASB members, the Governmental Accounting Standards Advisory Council (GASAC) chairman, and GASB staff.

Task force members typically have a particular expertise or experience with the issue being addressed in the project or research and also are capable of articulating the views of other, similar constituents. They can identify possible implementation difficulties, assess the potential cost of proposed standards, or opine on the usefulness of the information that will result from those standards.

Potential participants are primarily identified from the GASB’s constituent database, from the GASAC, and from the lists of persons submitting comment letters in response to proposed standards. The GASB attempts to maintain an appropriate balance of financial statement preparers, auditors, and users on each task force. In addition to identifying persons that possess relevant knowledge and experience and that are representative of various types of constituents, the GASB tries to select persons it believes will actively participate by reviewing papers and proposed standards prepared for the Board and by providing regular feedback to the project staff.

SEC risk alert highlights areas of continuing deficiencies and future focus of examinations

On August 22, 2022, the Division of Examinations (the “Division”) of the U.S. Securities and Exchange Commission (“SEC”) published a risk alert (the “2022 Risk Alert”) to raise awareness of the most frequently cited deficiencies and weaknesses observed in recent municipal advisor examinations.1 Topics include municipal advisor registration and filings, recordkeeping, supervision and disclosure of conflicts of interest. The Division previously highlighted many of these topics in a 2017 risk alert (the “2017 Risk Alert”) with respect to newly registered municipal advisors.2 The Division has included examinations of municipal advisors as an examination priority each year since 2019.3 The 2022 Risk Alert, together with two SEC enforcement actions against municipal advisors in June of this year,4 may signal an increase in scrutiny from SEC examination and enforcement staff regarding municipal advisor practices, policies and procedures relating to the topics highlighted in the risk alert. As such, firms should consider reviewing and assessing their compliance with each of the topics. In this regard, we note that the Division indicated that it intends for future examinations “to include a more prominent focus on the core standards of conduct and duties applicable to municipal advisors.”5 The following is a brief summary of the Division’s key observations in the 2022 Risk Alert.

Registration and Filings

Municipal advisors filed SEC Forms MA and MA-I with inaccurate or incomplete information, including information regarding their associated persons’ other business and other required disclosures (e.g., customer complaints, tax liens). Additionally, municipal advisors did not amend, or did not amend timely, SEC Forms MA and MA-I and Municipal Securities Rulemaking Board (“MSRB”) Form A-12, such as to reflect changes in ownership of the firm or disciplinary actions involving the firm or its associated persons (e.g., disclosure of judicial actions or judgments/liens, change in employment or other business).

Recordkeeping

Municipal advisors did not make or keep true, accurate and current copies of certain required books and records, or did not preserve such records, including with respect to:

• Written communications relating to municipal advisory activities, particularly electronic communications, such as business-related email sent from a personal email address, text messages on mobile devices and instant messages. We note that this topic has been a focus of the SEC with respect to brokerdealers.
• Financial and account documents, including cash reconciliations and general ledgers.
• Written agreements entered into by the municipal advisor with municipal entities and their employees, obligated persons or otherwise relating to the firm’s business.

Supervision

Municipal advisors either did not have any written supervisory procedures (“WSPs”) or the WSPs were not sufficient, not implemented and/or not enforced. For example, deficiencies related to gifts, gratuities and expenses, and, as noted above, the preservation of electronic communications and/or the filing and updating of required forms. Moreover, some firms failed to promptly amend their WSPs to reflect the adoption of MSRB Rule G-42 (Duties of Non-Solicitor Municipal Advisors),6 which became effective in 2016, or MSRB Rule G-40 (Advertising by Municipal Advisors),7 which became effective in 2019. Firms also failed to conduct annual reviews of their WSPs pursuant to MSRB Rule G-44(b) and/or their Chief Executive Officers failed to certify annually, in writing, that the firm had in place processes to establish, maintain, review, test and modify WSPs, pursuant to MSRB Rule G-44(d).

Disclosure to Clients

Municipal advisors failed to disclose in writing to clients, or did not disclose timely, their material conflicts of interest, including with respect to the firms’ relationships with other parties (e.g., underwriters or other parties providing services to or on behalf of a municipal entity client) or between the municipal advisor and the municipal entity client itself. Other deficiencies involved disclosures relating to fee-splitting arrangements and contingent compensation arrangements. Finally, firms failed to document, or did not document adequately or timely, their municipal advisory relationships.

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

Mayer Brown – Steffen Hemmerich, Anna T. Pinedo, Leslie S. Cruz and Stephen Vogt

August 25 2022

BDA is happy to release the Fall issue of our quarterly magazine, Fixed Income Insights.

Please click here for full access to our Fall issue.

Welcome to football seasons and the national mid-term elections! And to Fall issue of Fixed Income Insights – the BDA’s quarterly magazine on the U.S. fixed income markets, Federal policy and the BDA’s advocacy.

In this issue we’re really pleased to feature Q&As with two members of congress – U.S. Senator John Boozman of Arkansas and U.S. Congresswoman Terri Sewell of Alabama. Both continue to be staunch advocates for the municipal bond market and provisions on Capitol Hill which BDA continues to aggressively advance.

Our featured profile this quarter is of SouthState | DuncanWilliams, a founding BDA member firm independent for 53 years and now part of a regional bank. The impact, the benefits and look forward provided through Q&A between SJ Guzzo, MD and Head of Debt Capital Markets and Mike Nicholas of the BDA.

We also have sections on the Muni Market, the Taxable Market, Technology and Market Structure, Regulation, Market Trends, and BDA Federal Advocacy and Industry Events.

This quarterly magazine is an extension of BDA advocacy for and representation of securities firms and banks active in the U.S. bond markets. We hope you find it of value – but please offer feedback when you can.

Thank you to our many content contributos and advertisers. For more informtion on Fixed Income Insights including opportunities to add content and to advertise please contact Mike Nicholas at [email protected].

SUMMARY

SIFMA, SIFMA AMG, and the Institute of International Bankers (the IIB) provided comments to the Commodity Futures Trading Commission (CFTC) regarding climate-related financial risk (RFI).

View the SIFMA Comment Letter.

FINRA proposed amendments to Rule 0150 (“Application of Rules to Exempted Securities Except Municipal Securities”) to expand the application of certain FINRA rules to business transactions in U.S. government securities. The proposed rule change also amends the Capital Acquisition Broker Rule 015 (Application of Rules to Municipal Securities) “for consistency with the revisions to FINRA Rule 0150 made pursuant to this rule filing.”

The amendment goes through an extensive list of FINRA rules and explains how they will apply to transactions in government securities. The proposed rule change is considered “non-controversial,” was published in the Federal Register for comments, and is immediately effective.

Comments are due by November 3, 2022.

Commentary

Notwithstanding the number of FINRA rules that may be expanded in scope, as a practical matter the effect on firms should be limited. That said, firms should review carefully both the rules and their business practices, as there will be some impact. For example, firms should consider whether there are new employee registration requirements applicable to employees engaged in distribution activities with respect to government-sponsored enterprise securities.

Fried Frank Harris Shriver & Jacobson LLP – Steven Lofchie

October 13 2022

In September 2022, the US Securities and Exchange Commission (SEC) announced that it had filed suit against one broker-dealer underwriter and entered into settlements with three other broker-dealer underwriters in cases alleging that the underwriters repeatedly violated the limited offering exemption rules applicable to municipal bond offerings.

Alleged Limited Offering Exemption Violations
In general, the limited offering exemption applies to primary offerings that are made to a limited number of sophisticated investors who are capable of evaluating the risks of the investment without aid of the disclosures that are normally required. In instances where an exemption does not apply, disclosures are made through public offering materials, Preliminary Official Statements in the municipal securities area, which, as is the case with corporate securities, are subject to SEC Rule 10b-5 disclosure standards.

Default Disclosure Requirements and the Limited Offering Exemption
The point of public disclosure in both corporate and municipal securities offerings is to ensure that investors can make informed investment decisions after full disclosure so that investors are protected from potential material misrepresentations and omissions.

This is particularly critical in the municipal area, where 45% of municipal securities are held directly by retail investors or indirectly by retail investors through mutual funds.[1] Many of these retail investors may not be sophisticated in complex financial products, hence the default requirement for comprehensive disclosure and the restricted scope of the limited offering exemption.

In a typical private placement of municipal or corporate securities to sophisticated investors, the broker-dealer obtains a certification that the purchaser is purchasing for its own account and not with the intent to resell, and that it understands the merits and risks of the investment. This certification is colloquially known as a “big boy” letter. It is then up to the sophisticated investor to determine whether it needs some disclosure, such as through a private placement memorandum.

The limited offering exemption to the default disclosure rules with respect to municipal securities is contained in SEC Rule 15c2-12(d), which was promulgated in consultation with the Municipal Securities Rulemaking Board (MSRB), which is a self-regulatory organization subject to SEC oversight. The rule provides an exemption from the public disclosure requirements applicable to underwriters offering municipal securities if the securities are offered in denominations of $100,000 or more and sold to no more than 35 persons. Rule 15c2-12(d) is parallel to SEC Rule 506(b) in the corporate securities context.

With respect to purchasers in limited offerings, Rule 15c2-12(d)(1)(i) also requires that the underwriter have a reasonable belief that each purchaser has “such knowledge or experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment” and “is not purchasing for more than one account or with a view to distributing the securities.” It should be noted that, unlike with corporate securities, the SEC does not directly regulate municipal issuers due to concerns with respect to the Tenth Amendment of the United States Constitution. Instead, the SEC regulates the underwriters who offer municipal securities.

The Actions

Background
In each case brought by the Commission, the underwriters allegedly relied on the limited offering exemption in situations where the exemption requirements were not satisfied. In particular, the Commission alleged that the underwriters sold the securities to other broker-dealers and investment advisors without the requisite reasonable belief that those entities were purchasing the securities for their own investment, rather than purchasing the securities for resale to others. In addition, because the underwriters purportedly did not make any inquiries as to the identities of the customers for whom the broker-dealers and investment advisors were purchasing the securities, the Commission also asserted that the underwriters were unable to form the requisite reasonable belief that the purchasing broker-dealers or investment advisors were purchasing the securities for investors who possessed the requisite knowledge and experience to evaluate the investments—a factor the Commission asserts requires that a subjective determination be made with respect to each ultimate purchaser.

Finally, the Commission alleged that the underwriters violated MSRB Rule G-27(c) because they failed to have written supervisory procedures reasonably designed to ensure compliance with the limited offering exemption rules.

Underwriter Settlements; SEC Complaint
Three firms entered into cease and desist settlements with the Commission, where each agreed to disgorge the profits they made from the offerings that purportedly did not qualify for the exemption, along with the payment of prejudgment interest and civil monetary penalties. Those firms also agreed to cease and desist from future violations of the rules at issue and were censured. In each of the settlements, the Commission noted that the firms promptly took remedial action and cooperated with the Commission.

The remaining firm, Oppenheimer & Co., apparently was unable to reach a settlement with the Commission and the Commission filed suit in the U.S. District Court for the Southern District of New York. The complaint alleges Oppenheimer violated the exemption rules more often than the settling firms – in at least 354 municipal offerings – while also making deceptive statements to governmental issuers that it would comply with the limited offering exemption, in contravention of MSRB Rule G-17 (which prohibits deceptive practices). The Commission requests permanent relief enjoining Oppenheimer from future violations of the federal securities laws and MSRB rules, disgorgement of profits, prejudgment interest, and the imposition of a civil penalty. Although Oppenheimer will presumably assert that it acted reasonably and complied with the rules, the nature of Oppenheimer’s factual and legal arguments is not yet known.

Although Oppenheimer is a mid-sized broker-dealer, its mutual fund affiliate is one of the largest institutional holders of municipal bonds in the country.

Takeaways

Although the Commission’s litigation release noted that the four actions are the first time that it has pursued underwriters for failing to comply with the municipal bond offering disclosure requirements, the Commission also stated that it is actively investigating whether other underwriters complied with the exemption and it urged firms who believe they might have violated those rules to self-report to the Commission. As a result, underwriters who are, or who have in the past, relied on the exemption should work with counsel to carefully evaluate both their conduct and their supervisory procedures to ensure that those procedures were sufficient for prior transactions and are adequate to avoid future violations. Depending on the results of such an evaluation, the prudent course might be to self-report any possible violations as a way of attempting to reduce the penalties that the Commission might later seek if it uncovers violations during the course of an investigation and institutes enforcement proceedings or files a civil action.

_________________________________

[1] See ‘How 2022 Volatility is Shifting Muni Ownership’, The Bond Buyer (Jessica Lerner), September 23, 2022 (referencing Federal Reserve statistics).

[2] See also Client Alert entitled ‘Intriguing FINRA Enforcement Action in the Bond Market: More to Come?’, September 22, 2021, available here.

_________________________________

Tuesday, October 11, 2022

© 2022 ArentFox Schiff LLP

In an unprecedented move, the Securities and Exchange Commission (the “SEC”) recently filed litigation against one underwriter of municipal securities and announced settlements with three others. The litigation and settlements concern transactions treated by the underwriters as exempted from the requirements of Rule 15c2-12 under the so called “Limited Offering Exemption.” The SEC alleges that the underwriters did not take the steps necessary to satisfy the exemption’s criteria. According to the SEC, these are the first actions the agency has taken addressing underwriters who fail to meet the legal requirements that would exempt them from Rule 15c2-12’s requirements to obtain disclosures for investors.

Rule 15c2-12: What’s Typically Required and Related Exemptions

Generally speaking, Rule 15c2-12 requires underwriters (as defined in Rule 15c2-12) in most primary offerings of municipal securities to obtain disclosure documents from issuers and to reasonably determine that there is an appropriate undertaking to provide certain continuing disclosures. Rule 15c2-12, however, provides two complete exemptions from its requirements: (1) a short-term security exemption, and (2) the “Limited Offering Exemption.” Each of these exemptions require that the security be in large denominations of $100,000 or more.

For the Limited Offering Exemption to apply, the securities must also be sold to no more than 35 persons each of whom the “Participating Underwriter” reasonably believes: (A) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment; and (B) is not purchasing for more than one account or with a view to distributing the securities. The Limited Offering Exemption can be the more difficult exemption to establish in that it imposes “reasonable belief” requirements on underwriters. The SEC’s recent actions focus on these requirements and the alleged deficiencies of the underwriters in forming the requisite reasonable beliefs.

The Scope of an “Underwriter” in Rule 15c2-12: Broader Than Expected

It is important to note that the term “underwriter” within Rule 15c2-12 is broader than it suggests at face value. Within Rule 15c2-12, the term “underwriter” includes not only those purchasing securities with a view to reselling them to investors. Of particular importance to the Limited Offering Exemption, this term also includes those serving as placement agent in a limited offering.

What the SEC’s Actions Mean for Underwriters

Within the SEC’s Complaint in the litigated action (the “Complaint”) and the agreed orders in the settled actions (the “Settlement Orders”), the SEC sheds light upon its view of the Limited Offering Exemption and, in particular, the reasonable belief requirements of the exemption.

In addition to the actions alleging that the underwriters failed to comply with the Limited Offering Exemption, the SEC also alleges that the underwriters violated MSRB Rule G-27 in that they failed to adopt, maintain and enforce written supervisory procedures (“WSPs”). In the litigated action, the SEC also alleges that the underwriter violated MSRB Rule G-17 by breaching assurances made to issuers that the underwriter would conduct the limited offerings in compliance with federal law.

As an initial matter, the Complaint states that underwriters relying on the Limited Offering Exemption must obtain certain information about investors in the securities. This key information includes, at a minimum, the following:

• the size of each investor’s investment,
• the number of investors,
• each investor’s level of financial experience and/or sophistication, and
• whether each investor is buying the securities for a single account.

A recurring theme throughout the actions is that the underwriter must determine the identity of the actual investors when the underwriter knows or should know that the securities are being purchased for another’s account. If an underwriter fails to determine the identity of the actual investors, the underwriter obviously cannot obtain the key information concerning those investors.

Most or possibly all of this key information could presumably be obtained through statements of investors in a “big boy letter” or similar document. The SEC’s prior guidance indicates that an underwriter may confirm investment intent (i.e., whether securities are purchased for one’s own account and without a view to distributing the securities) through an investor’s statements. Underwriters could also use the same document to determine the total number of investors and the amount invested by each.

The final and perhaps the most difficult piece of key information to obtain relates to the investor’s sophistication. The SEC’s guidance is clear that the underwriter must make a subjective determination in this regard. In practice, many issuer agreements with placement agents or underwriters contain language confirming that each investor is an “accredited investor” or a “qualified institutional buyer.” These terms are undefined (and have no direct significance) in Rule 15c2-12. Still, industry practice has been to use these terms to refer to a readily identifiable investor group in order to confirm that an investor is sufficiently sophisticated and knowledgeable. Underwriters should, at a minimum, obtain these confirmations in limited offerings. If a “big boy letter” or similar document is unable to be obtained, underwriters could consider otherwise documenting through a memo to file the diligence process undertaken to support why it has a reasonable belief that the investor satisfies the requirements of the Limited Offering Exemption.

The recent actions make it clear that underwriters must adopt, maintain and enforce WSPs reasonably designed to enable them to comply with the Limited Offering Exemption. To align with the SEC’s positions, underwriters who do not currently have WSPs addressing the Limited Offering Exemption should consider adopting them as soon as is reasonably possible. WSPs should contain procedures regarding the exemption’s reasonable belief requirements and should instruct personnel on how to obtain the key investor information. WSPs should also contain guidance as to how the underwriter will comply with the Limited Offering Exemption when an entity may be or actually is purchasing securities on behalf of another party.

Looking Around the Corner: Additional Investigations Into Other Firms and Potential Actions Appear Likely
The SEC’s press release regarding these actions telegraphs that more actions regarding the Limited Offering Exemption may follow. The SEC indicates that its staff has begun investigations of other firms’ reliance on the Limited Offering Exemption. The press release also encourages firms that may have wrongfully relied upon the Limited Offering Exemption to email the SEC at [email protected]. Underwriters should consider whether self-reporting to the SEC is appropriate.

Public Finance Alert | September.20.2022

Orrick Herrington & Sutcliffe LLP

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual budget to report on the allocation of resources to advance its FY 2022-2025 Strategic Plan. The budget provides transparency on plans to support the Board’s goals for modernizing market regulation, enhancing the Electronic Municipal Market Access (EMMA®) website as the municipal bond market’s transparency system, improving the quality of market data, and upholding public trust in the market that enables economic and social progress and access to capital for tens of thousands of communities.

“As the self-regulatory organization (SRO) for the $4 trillion U.S. municipal securities market, we understand that fiscal transparency and accountability are critical to earning and maintaining public trust,” said MSRB Chair Meredith Hathorn and MSRB CEO Mark Kim in a letter to stakeholders. “The Board has approved the MSRB’s budget for the new fiscal year beginning on October 1, 2022 to advance our priorities in support of the Strategic Plan we adopted last year with extensive input from our diverse stakeholders.”

The MSRB’s FY 2023 Budget projects revenue of approximately $45 million balanced against $45 million of expenses. This year’s budget incorporates a new fee setting process, which became operative on October 1, 2022. It is intended to ensure that the MSRB establishes a sustainable financial model that more closely aligns revenue with expenses and better maintains organizational reserves at target levels. Last year, the MSRB operated at a substantial deficit in line with its stated objective to spend down excess reserves built up over prior years. For the FY 2023 budget, the Board has held expenses to a relatively modest 4.9% increase despite historically high inflation.

“Importantly, the budget reflects our continued efforts to manage reserves and expenses in a manner that responsibly funds the important work of the MSRB to protect and strengthen our market and uphold the public interest,” wrote Hathorn and Kim.

Modernizing Market Regulation

As market practices continually evolve, the MSRB is adapting and modernizing its rules to ensure they continue to promote fairness and efficiency in the municipal securities market. A major emphasis for the MSRB in FY 2023 will be a coordinated review with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) of fixed income market structure. This coordinated initiative includes the recently issued Request for Comment on MSRB Rule G-14 to shorten the time of trade reporting requirement to one minute, as well as ongoing efforts to examine the potential collection of pre-trade data in the fixed income markets. The MSRB will continue to identify opportunities to streamline and update its rules and interpretive guidance to best achieve their intended purpose to protect investors, issuers and the public interest.

Providing Transparency Through Technology

The MSRB continues to invest in its multi-year strategy with planned enhancements to its flagship EMMA website. The MSRB is focused on making the market’s transparency and disclosure system easier to navigate and more intuitive to use, while continuing to deliver new features users have requested, such as actionable alerts to help monitor portfolios of securities and tools for streamlining issuers’ continuing disclosures. The MSRB has also launched its redesigned website as a resource for issuers, investors, regulated entities and the general public.

Improving the Quality of Market Data

In the coming year, the MSRB plans to leverage its investments in technology to migrate market data into the cloud and to develop analytic tools and services to enhance the quality, accessibility and security of market data for all market participants. This includes exploring opportunities to support the market’s use of structured data by leveraging EMMA Labs, the MSRB’s innovation sandbox, to advance the transparency, quality and comparability of data in the municipal securities market.

Upholding the Public Trust

Hathorn and Kim noted the MSRB’s new approach to fee setting that will annually adjust fee rates to account for prior year results and thus ensure the organization has sufficient annual revenue to fund operations while allowing it to more effectively and efficiently manage reserve levels as it delivers on its multi-year strategic plan. “Our promise to uphold the public trust also means that we are committed to prudent stewardship of the revenue we receive principally from regulated entities,” they stated in their letter. The MSRB Chair and CEO also highlighted efforts with fellow regulators to engage with a wide range of stakeholders to understand evolving market trends, best practices and challenges in this large and diverse market. “We are expanding our touchpoints with minority-, women- and veteran-owned enterprises to understand their unique challenges and the opportunities to enhance the market’s efficiency, fairness and access to capital,” wrote Hathorn and Kim.

Board of Directors Update

Natasha A. Holiday, Managing Director, RBC Capital Markets, has joined the Board as bank representative, replacing Patrick O. Haskell, who withdrew from the incoming class of four new Board members for FY 2023.

As head of the New York City office and Operating Committee member for RBC Capital Markets’ public finance group, Holiday structures debt and sells bonds in the public markets to raise capital on behalf of large city and state governments. Previously, Holiday served as senior managing consultant for Public Financial Management (PFM) and Vice President for financial advisor Scott Balice Strategies (acquired by PFM), having begun her public finance career at Goldman Sachs & Co. Holiday earned her Master of Public Policy from Harvard Kennedy School of Government and a BA in History/BS in Political Science from Xavier University.

MSRB Leadership Update

Effective with the start of the new fiscal year on October 1, Chief Regulatory Officer Gail Marshall has transitioned to the role of Senior Advisor to the CEO and Saliha Olgun, Deputy Chief, Market Regulation, has been named Interim Chief Regulatory Officer.

Read the FY 2023 Budget.

Date: October 04, 2022

Contact: Bruce Hall, Senior Manager, Communications
202-838-1300
[email protected]

GFOA members should be aware of proposed legislation in the U.S. Senate that would mandate governments to report financial information using uniform reporting categories, or “data standards,” which may require costly updates to financial systems or extensive workarounds.

LEARN MORE

This week, the BDA hosted a DC advocacy fly-in, meeting with key senior Congressional staff to discuss BDA’s tax priorities. This is the first BDA IN PERSON FLY-IN since the onset of the COVID pandemic and we plan to host multiple similar events next year as the new Congress gets underway.

Educational efforts such as this are key to ensure Members and staff understand the importance of the tax exemption, as well provide opportunities for staff to hear how the market is performing-further guiding their decision making.
The BDA was represented by:

• Crews & Associates
• RBC Capital Markets, and
• HilltopSecurities

The focus of the event was the protection of the tax-exemption, as well gauge the probabilities that key BDA priorities such as the reinstatement of advance refundings could pass in a years end tax package this December.
The group met with both personal office and Committee staff in both the House and Senate including meetings with:

• Senior Tax Staff Covering Ways and Means, Office of Rep. David Kustoff (R-TN)
• Senior Staff Covering Ways and Means, Office of Rep. Terri Sewell (D-AL)
• Ways and Means Minority Staff
• Senate Finance Minority Staff Director, Office of Senator John Cornyn(R-TX),
• Senate Finance Tax Police Advisor, Office of Senator Tom Carper (D-DE)

Following these discussions, we feel confident that no matter the outcomes of the November elections, the tax-exemption has many friends on the Hill. While not a strong possibility, we do feel that House Ways and Means Chairman Richard Neal (D-MA) plans to make a strong push for a years end tax package, and would like to include key muni priorities that remain outstanding.

We will provide more updates as the situation develops, and please let us know if you would like to participate in future DC events.

Bond Dealers of America

October 4, 2022

SIFMA criticized two proposals to shorten the required reporting time for certain fixed income securities – one by FINRA and the other by the MSRB. (See FINRA Notice 22-17; MSRB Notice 2022-07.)

The proposed rule changes would amend FINRA Rule 6730 (“Transaction Reporting”) and MSRB Rule G-14 (“Reports of Sales or Purchases”) to require trades in covered fixed income securities to be reported to their respective trade reporting systems within one minute from the time of execution (see prior coverage here). The FINRA proposal would be relevant to corporate debt securities, securities of the government-sponsored enterprises and U.S. government securities; the MSRB proposal would be relevant to municipals.

In the Comment Letters, SIFMA said that the SROs failed to provide the industry with an adequately comprehensive study in support of the proposed rule changes. SIFMA noted that potential benefits derived from moving to a one-minute reporting standard for fixed income securities are unclear, while the costs are being underestimated and the impacts on the market are being ignored. SIFMA provided extensive detail as to how the rule change could negatively impact various stakeholders, including certain types of firms, nonelectronic trading strategies, smaller customers and trading and settlement systems.

October 5 2022

Fried Frank Harris Shriver & Jacobson LLP

The Securities and Exchange Commission (“SEC”) recently filed fraud charges against the City of Rochester, New York (“City”), former City executives, and the City’s municipal advisor, reminding us of the importance of up-to-date, accurate disclosures when it comes to the financial condition of political subdivisions, as well as the risks of issuing debt using outdated financial statements.

On June 14, 2022, the SEC charged the City, along with its former finance director Rosiland Brooks-Harris and former Rochester City School District (“District”) CFO Everton Sewell, with misleading investors in a $119 million note offering. The City’s municipal advisor Capital Markets Advisors, LLC (“CMA”) and two CMA principals, Richard Ganci and Richard Tortora, were also charged with misleading investors and breach of fiduciary duty to the City.

The offering document for the notes, prepared by the City and its municipal advisors, included financial statements more than a year old and failed to disclose a dramatic increase in spending on teacher salaries. This increase reportedly contributed to a financial decline of the District. However, this financial decline was not depicted in the note offering since it occurred after preparation of the District’s most recent financial statements.

A mere 42 days after the note offering, the District’s auditors discovered the magnitude of the District’s financial distress; the District’s budget was overspent by almost $30 million. This information was not disclosed to investors at the time of the offering. Ultimately, this over expenditure resulted in a downgrade of the City’s debt rating and required intervention by the State of New York in the form of a $35 million loan.

As a result, the SEC filed a complaint in the U.S. District Court for the Western District of New York. The complaint alleges that the City’s note offering documents were materially misleading to investors because of their reliance on outdated financial statements, which failed to reflect the true financial condition of the District at the time of the offering. Additionally, the SEC’s complaint alleges that the District’s “unusual financial distress” was omitted from the offering documents, further misleading investors.

The SEC also claims that Sewell misled a credit rating agency by downplaying the severity of the District’s financial condition, despite his knowledge that the District was facing a budget deficit of at least $25 million. Further, the SEC alleges that both Brooks-Harris and Ganci knew of the District’s extreme financial distress. However, prior to the note offering, neither party attempted to investigate the District’s financial condition, nor did they share their knowledge of the District’s overspending with investors.

The SEC is seeking injunctive relief and financial penalties against all parties as a result of one or more of the following allegations: (a) fraud, (i) in the offer or sale of securities and (ii) in the purchase or sale of securities, (b) deceptive, dishonest, and/or unfair practices, (c) breach of fiduciary duties, (d) supervisory breaches and (e) MSRB violations to name a few of the allegations. Although the matter is still pending in the Western District of New York, the fact that charges were filed demonstrates the significance in discovering, and disclosing to investors, the issuer’s most current financial condition prior to issuing municipal securities. It is essential that investors have all necessary, up-to-date information so they are able to make well informed decisions regarding municipal investments.

Dinsmore & Shohl LLP – Bradley N. Ruwe

October 3 2022

When it comes to the proper application of Blue Sky laws relating to the issuance of municipal securities, interpretations matter. And so does a sense of history, given evolutions in various related state and federal regulations.

Today we’re taking a look at one of the finer points in the analysis of the Blue Sky law in Arizona. You will recall that we previously wrote about Arizona and its approach to the municipal issuer exemption.

One ambiguity in Arizona concerns the proper definition of industrial development bonds, or IDBs.

The Arizona statute refers to IDBs as defined in the 1954 code, which has been superseded by the 1986 code. The 1986 Code no longer uses the definition of IDBs and instead uses the alternative term of “private activity bond” in place of industrial development bond.

Some practitioners take the position that 501(c)(3) Bonds, which were new to the 1986 Code, would have been IDBs under the 1954 code — and therefore, the exemption from registration does not apply.

Others argue that since 501(c)(3) Bonds were not IDBs under the 1954 Code, the exemption does apply because these bonds do not get captured by the express language of the statute.

In our view, short of further guidance from Arizona, a strict interpretation of the law means it is limited to just IDBs from the 1954 Code and 501(c)(3) bonds are not included and therefore exempt.

by Christopher Andreucci

October 4, 2022

Harris Beach PLLC

Secretary Yellen rightly celebrates the Inflation Reduction Act, John Kostyack says, but the law shines a light on an urgent problem that she and other regulators must address in the financial industry—undisclosed climate risk.

Treasury Secretary Janet Yellen recently celebrated the Inflation Reduction Act’s potential to drive down climate-damaging pollution, accelerate technology innovation, and reduce energy costs for businesses and consumers.

The economic opportunities created by this law are indeed worthy of celebration. But as chair of the Financial Stability Oversight Council, Yellen is also obliged to address economic risks associated with these dramatic changes.

Hidden Risks
Last year, the FSOC expressed concerns about the emerging threat of a climate-related financial crisis, including transition risks that arise when businesses and financial institutions aren’t prepared to shift to a clean energy economy.

Among the top FSOC recommendations was for a Securities and Exchange Commission mandate that public companies disclose these risks to their investors. A proposed mandate is pending and expected to be finalized this year.

Financial experts fear that lack of attention to hidden climate risk could lead to a “green swan” event, or a sudden and widespread asset deflation that devastates the global economy.

As increasingly ambitious climate laws like the IRA are put in place—and clean energy technologies become increasingly available, affordable, and reliable—greater proportions of fossil fuel reserves become uneconomic, leaving billions in assets valueless and stranded.

Individual savers in the US are uniquely threatened by this poorly disclosed climate risk. A recent study shows they hold $300 billion in high-risk fossil fuel assets, more than individuals in any other country. Even more worrisome, $681 billion of risky fossil fuel assets are on the balance sheets of financial institutions—far more than the subprime housing assets that triggered the 2008 crisis.

Transparency a Given
Expecting public companies to be transparent with their investor-owners is not controversial. In fact, the SEC has been addressing market failures and protecting investors with disclosure rules since the 1930s, with little fanfare.

Thus, the five-alarm response of the fossil fuel industry and its allies to the SEC’s climate risk disclosure proposal seems bizarre, perhaps leading a casual observer to believe the SEC, not Congress, limits the industry’s greenhouse gas emissions.

Just a month before the IRA’s enactment, oil industry leaders filed comments with the SEC vehemently opposing its proposal. Ignoring the enthusiastic support expressed by thousands of investors, the American Petroleum Institute argued that climate risk is not a serious investor concern.

Dismissing concerns about businesses’ lack of preparedness for the energy transition, it claimed, despite powerful evidence, that emerging climate laws can safely be ignored until they are implemented.

The Western Energy Alliance’s comments on the proposal symbolize the depth of denialism about climate risk in the marketplace and show why the SEC must act now to strengthen its regulations. The WEA falsely claims the SEC is “purposefully suppressing American oil and natural gas production” for the benefit of Russia, which is allegedly conspiring with US climate advocacy groups.

How Disclosures Should Look
In reality, the SEC is not proposing to regulate how or where energy is produced—but instead that public companies’ responses to changes in policy, technology, and customer preferences spurred by climate change be disclosed in a useful format for investors.

If there were ever doubts about whether these changes are meaningful enough to warrant investor concern, Congress’s enactment of the IRA has dispelled them—along with the launch of similarly ambitious policies this year by California, Australia, the UK, and the European Union. A clean energy revolution is now well underway.

The question facing the SEC is how to provide a disclosure format that enables investors to evaluate companies’ preparedness for these changes, and efficiently allocate capital to those that are truly prepared. The most important step will be to require standardized and comprehensive GHG emissions disclosures.

A particular component of these disclosures will be especially important for investors: Scope 3 emissions, or the emissions of customers and suppliers, are a critical measure of transition risk for many companies.

For example, Scope 3 emissions of oil companies and banks include auto emissions. Thus, disclosures would tell investors how exposed these companies are to collapsing demand for gasoline due to the IRA’s electric vehicle incentives and EV mandates recently enacted by California.

The good news for investors is that the SEC has demonstrated its understanding of these and other climate risks and has put forward a strong proposal, with only small adjustments needed to strengthen Scope 3 emissions disclosure requirements.

Once the rule is finalized and climate risks are fully disclosed, climate risk-aware investors will be empowered to allocate their dollars to businesses that are taking a thoughtful approach to the twin challenges of decarbonization and resilience to climate change impact.

The SEC has no role in promoting this reallocation of capital. Its statutory mandate is to protect investors by ensuring they receive consistent and reliable information about the risks that threaten the financial condition of public companies.

However, once climate risk information is properly disseminated, the fundamental weaknesses of businesses with no meaningful decarbonization strategies will emerge.

With properly functioning capital markets, investment in well-run, climate-smart businesses will flourish. This will be good news for investors, the stability of our financial system, and the habitability of our planet.

Bloomberg Law

by John Kostyack

Sept. 29, 2022

John Kostyack is an adviser to the Sierra Club and other nonprofits and foundations that promote sustainable investing. For nearly three decades, he served in leadership positions at leading advocacy organizations including the National Wildlife Federation, the Wind Solar Alliance, and the National Whistleblower Center. He previously worked as an attorney at a private law firm.

SIFMA and SIFMA AMG provided comments to the Municipal Securities Rulemaking Board (MSRB) and Financial Industry Regulatory Authority (FINRA) on Notice 2022-07 issued by the Municipal Securities Rulemaking Board and Regulatory Notice 22-174 issued by the Financial Industry Regulatory Authority.

View the SIFMA Comment Letter.

The American Public Power Association (APPA) has joined with 17 other members of the Public Finance Network in writing Senate leaders in opposition to data reporting requirements for state and local borrowers included in the Financial Data Transparency Act of 2022.

The Public Finance Network consists of state and local governments and other tax-exempt bond issuers, borrowers and municipal market professionals.

The bill would require the Municipal Securities Rulemaking Board (MSRB) to require state and local governments to report financial information using uniform reporting categories, or “data standards,” which may require costly updates to financial systems or extensive workarounds.

The changes would take effect no later than two years after final rules implementing the change are promulgated.

The concern is that the provisions of the Financial Data Transparency Act of 2022 (S. 4295) were added as an amendment to H.R. 7900, the National Defense Authorization Act for Fiscal Year 2023 (NDAA). The NDAA passed the House in July, and a companion bill (S. 4534) has passed the Senate Armed Services Committee.

State and local governments “do not oppose transparency and accessibility of information, and in fact, significant financial transparency standards are already in place,” the Sept. 29 letter noted.

“Most issuers of municipal securities (e.g., entities represented by the undersigned groups) adhere to governmental reporting standards established by the Governmental Accounting Standards Board (GASB), while others follow standards as determined under state law. In whole, issuers of municipal securities exhibit transparency to stakeholders through very established and standardized means.”

APPA and the other groups voiced concern about the impact of the Financial Data Transparency Act’s Section 203 on state, county, municipal, public utilities, hospital and education entities required to submit financial information to the MSRB for several reasons.

“Among others, a primary concern is that this provision would result in an unfunded mandate on state and local governments due to the increased costs to ensure systems are able to comply with future standards,” the letter said.

“Further, this provision represents a substantial federal overreach into the content and structure of issuer disclosures, and more broadly the accounting and reporting principles of government entities, contrary to the principles of federalism,” the groups argued.

Also, Section 203 “could create more confusion and ultimately reduce transparency by forcing vastly different kinds of governmental entities to report using a rigidly standardized schema or taxonomy.”

publicpower.org

by Paul Ciampoli

October 1, 2022

On Sept. 8 and 9, 2022, Securities and Exchange Commission Chairman Gary Gensler, Division of Enforcement Director Gurbir Grewal and senior officials from the Enforcement Division convened at the annual SEC Speaks conference. Enforcement Director Grewal opened the enforcement panel by discussing the Enforcement Division’s continued efforts to restore trust in government and the legal and regulatory processes.

For its part, Director Grewal stated, the Enforcement Division is focused on hiring, promoting and retaining a diverse and talented workforce to make it more efficient and effective. He explained that an Enforcement staff that broadly reflects the country’s diversity can foster trust and encourage victims to come forward, and it enables the Enforcement Division to protect all investors. Director Grewal also sought to dispel the notion that the SEC is “picking winners and losers and stifling innovation in the crypto space,” and conveyed unequivocally that crypto remains an enforcement priority and the crypto industry will not have immunity “from the application of well-established regulations and precedents.”

Building on Director Grewal’s theme of restoring trust, Deputy Director Sanjay Wadhwa emphasized the Enforcement Division’s commitment to deter misconduct, shape industry behavior and ensure accountability through enforcement actions. Deputy Director Wadhwa stressed the SEC’s expectation that market participants engage in proactive compliance, noting meaningful consequences for those who fall short, such as cases involving admissions of violations in settlements. To further shape behavior, Deputy Director Wadhwa highlighted efforts to provide greater transparency to market participants into how the Enforcement Division rewards firms that provide extraordinary cooperation to Enforcement staff in investigations. Deputy Director Wadhwa also discussed the Enforcement Division’s practice of empowering front-line Enforcement staff to make key decisions in the enforcement process, including limiting meetings with senior Enforcement officials in connection with the Wells process.

Deputy Director Wadhwa and other panelists rounded out the discussion by highlighting enforcement priorities, including regulation of crypto markets, the aggressive use of remedies, a willingness to litigate, disclosures and fiduciary obligations in the municipal securities space, broker-dealer gatekeeper responsibilities and protection of whistleblowers.

Reining in Crypto Markets

Chair Gensler focused his opening remarks on the SEC’s intent to continue applying existing rules and regulations to all aspects of the crypto industry — from tokens to stablecoins to intermediaries — explaining that new technologies do not diminish the need for investor protection. Rejecting requests for additional clarity, Chair Gensler noted that his predecessor, Chairman Jay Clayton, spoke frequently about the applicability of the federal securities laws to the crypto space, as has the SEC through Section 21(a) Reports of Investigation and enforcement actions. Although Chair Gensler’s remarks portend an aggressive enforcement posture, he also offered an olive branch, inviting crypto projects and intermediaries to work with the SEC to comply with existing regulations and stressing the benefits of true cooperation and meaningful engagement.

Director Grewal echoed Chair Gensler’s resolve to apply longstanding and well-established rules to the crypto markets, reiterating his belief that the “Howey and Reves tests remain vital and accurate means of identifying instruments that fall within the jurisdiction of the securities laws.” He dismissed the suggestion that the SEC is picking winners and losers in the digital asset space and preventing innovation by not giving crypto markets a free pass, asserting that doing so would require the Enforcement Division to abandon its responsibilities to capital markets and the investing public.

Crypto Assets and Cyber Unit Chief David Hirsch emphasized the importance of registration in primary and secondary crypto markets. He explained that requiring registration encourages the development of enhanced compliance functions and robust protocols to promote accountability and to prevent misconduct.

Aggressive Use of Remedies

Expanding the initiative publicized at SEC Speaks 2021 to aggressively seek stark remedies in enforcement actions and settlements, Deputy Director Wadhwa indicated that market participants who do not undertake proactive compliance measures could face vigorous enforcement to further the programmatic goals of deterring misconduct, shaping conduct and promoting accountability. (For highlights from SEC Speaks 2021, see McGuireWoods’ Oct. 25, 2021, alert.)

Illustrating this precept, Deputy Director Wadhwa pointed to the 2021 settlement with a registered broker-dealer and investment adviser for its failure to maintain and preserve written communications on personal devices, resulting in an admission and civil monetary penalties to the SEC and Commodity Futures Trading Commission totaling $200 million. Citing the number of law firm client mailings on the action, Deputy Director Wadhwa explained that significant remedies against a major financial institution garner widespread attention and help to repair trust by demonstrating a commitment to evenhanded enforcement.

Chief Counsel Samuel Waldon reiterated the approach to officer and director bars that Director Grewal announced at SEC Speaks 2021, which includes seeking an officer and director bar even against a person who was not serving as an officer or director at the time of the conduct, or was not even an employee of a public company, if there is egregious conduct and there is a chance the individual might have the opportunity to serve as an officer or director of a public company in the future. Chief Counsel Waldon also made it clear that Enforcement staff will seek bars in any settlement, not just those involving scienter-based violations, where the facts show a person is unfit to serve in an officer or director role.

In the realm of gatekeeper accountability, Deputy Director Wadhwa and Chief Counsel Waldon discussed the Enforcement Division’s increased use of Sarbanes-Oxley Act Section 304 orders, which permit the SEC to order the disgorgement of bonuses and incentive-based compensation earned by the CEO and CFO in the year following the filing of any financial statement that the issuer is required to restate because of misconduct. This remedy is available even where the CEO and/or CFO did not engage in misconduct, thus incentivizing implementation of robust internal controls and inducing companies to address matters of the tone at the top and corporate culture.

Importance of Proactive and Effective Cooperation

To help restore trust in the SEC and its legal and regulatory processes and to shape conduct, Deputy Director Wadhwa and other staff members described efforts to include in settlement documents details of the Enforcement Division’s evaluation and assessment of creditworthy cooperation. Common among firms benefiting from cooperation has been early self-reporting of violations and robust remediation efforts.

An example of this approach includes a recent settlement with an issuer in which the administrative order contained specific details regarding its cooperation that “substantially advanced the quality and efficiency of the staff’s investigation and conserved Commission resources” — such as “providing detailed explanations [of how certain transactions worked], summarizing witness interviews, and providing other relevant information to the staff[.]” The SEC’s press release also referred to these efforts as an important consideration in assessing sanctions.

A second example discussed was an administrative order that expressly cited the company’s cooperation as a basis for limiting the financial penalties imposed. The cooperation included voluntary disclosure of information not uncovered in the government’s investigation and providing detailed updates on the issuer’s internal investigation, as well as sharing key documents identified through the investigation.

In another matter identified by panelists, no penalty was imposed against an issuer in recognition of its extraordinary cooperation. This cooperation included, among other things, self-reporting of issues (including those giving rise to the settlement) uncovered during an unrelated internal investigation that did not reveal anything of substance, management and board personnel changes and reimbursement to the company of improper expense reimbursements.

Enforcement Leadership Declining Nonessential Wells Meetings

Deputy Director Wadhwa emphasized the Enforcement Division’s ongoing efforts to streamline the Wells process and empower front-line staff. Deputy Director Wadhwa confirmed that he and Director Grewal have been declining requests for Wells meetings in cases that did not involve novel legal issues or important policy questions (without providing insight into how they are making these determinations). He insisted the Wells process remains important, but that they are mindful of the investment of time and resources by the Enforcement staff and by respondents and their counsel. Respondents should treat their interaction with front-line staff as the primary method to achieve resolution of their cases; they should not expect a second bite at the apple with officials higher up the chain.

Enforcement Division Litigating More Cases

Chief Litigation Counsel Olivia Choe’s comments centered on how the Enforcement Division is not afraid to litigate. This year, the SEC has tried 15 cases in federal court — the most since 2015 and up from just five last year — involving the gamut of alleged violations, including insider trading, investment-adviser frauds, Ponzi and offering schemes and commission splitting. Chief Litigation Counsel Choe touted the SEC’s record of success in 2022, noting favorable jury verdicts in 13 cases and nine victories on summary judgment.

Enforcement staff members also offered a reminder that they are continuing to pursue insider trading cases and noted the increase in such litigated actions. Relatedly, Enforcement staff observed an uptick of activity around insiders’ family members and other close relations who — due to work-from-home conditions during the pandemic — may have been exposed to insider conversations that previously would have taken place in a company’s offices.

In addition to litigating alleged substantive violations, the SEC has also been busy litigating enforcement of subpoenas and other orders. Chief Litigation Counsel Choe discussed unsuccessful efforts by the founder of an electric car manufacturer to quash a subpoena the SEC served after he made Twitter posts that potentially violated a 2018 settlement agreement. She also cited a failed attempt by subpoena recipients to avoid compliance by arguing they had not been properly served through counsel, as an example of the SEC standing its ground to enforce its processes. Lastly, Chief Litigation Counsel Choe detailed the SEC’s willingness to pursue civil contempt orders when defendants attempt to evade penalties or hide assets, citing cases resulting in the seizure of a boat and incarceration of an evasive defendant.

Disgorgement Post-Liu

Chief Counsel Waldon described how the SEC has continued to seek broad disgorgement awards following the U.S. Supreme Court’s 2020 decision in Liu v. SEC, in which the Supreme Court held that the SEC has the statutory authority to seek a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for the benefit of victims. (For background, see McGuireWoods’ June 24, 2020, analysis of the case.) He stated that the Enforcement Division staff will pursue legal theories supporting disgorgement even where the funds would not be returned to investors and instead would flow to the Department of the Treasury. He noted that in insider trading cases, the SEC will continue seeking disgorgement of trading profits and losses avoided in addition to prejudgment interest and penalties. Further, in insider trading cases not involving disgorgement claims, the SEC will seek “two-times penalties” plus a penalty equal to the amount of prejudgment interest the SEC would have sought had it claimed disgorgement.

SEC Solicitor Michael Conley and Senior Appellate Counsel David Lisitza discussed courts’ support for the Enforcement Division’s efforts to impose joint-and-several disgorgement post-Liu. In Liu, the Supreme Court discussed the SEC’s practice of holding multiple defendants jointly and severally liable for disgorgement, a practice that was at odds with traditional equitable principles. The Supreme Court acknowledged a general rule against joint-and-several liability at equity but did not set a firm rule prohibiting an order disgorging from one defendant profits that accrued to another. Instead, recognizing the common law permitted liability among partners engaged in “concerted wrongdoing,” the Supreme Court left open the door for some flexibility to impose joint-and-several disgorgement. Without articulating a standard for concerted wrongdoing, the Supreme Court left it to lower courts to determine whether joint-and-several disgorgement was warranted on a case-by-case basis, given the “wide spectrum of relationships between participants and beneficiaries of unlawful schemes.”

Since the Supreme Court’s decision, the SEC has continued to pursue joint-and-several disgorgement and courts have granted it — relying on multiple defendants’ active participation in a scheme to satisfy the “concerted wrongdoing” requirement. In Liu following remand, the district court found concerted wrongdoing between two individual defendants, finding relevant that they were a married couple, had commingled finances and had both played active roles in the scheme — with one setting up fraudulent businesses and the other helping to secure investors for them and later accepting misappropriated investor funds.

In a 2022 decision, the U.S. Court of Appeals for the Fourth Circuit affirmed joint-and-several disgorgement from a company and its chief executive. Though the executive argued the district court based his joint-and-several liability solely on his status as a control person, the Fourth Circuit made clear that it was mindful of Liu and instead looked at his active participation in an illegal scheme with the company. For example, the court noted that he was the “mastermind and architect” of an investment program the company used to lure investors through fraudulent means; also, the executive and the company — together — were alleged to have made misrepresentations to investors, formed shell companies to deceive investors about the program’s success and created fake escrow accounts purportedly to hold stock as collateral for investments. Other recent district court rulings likewise have focused on active participation as a basis for finding concerted wrongdoing to support joint-and-several disgorgement.

Senior Counsel Kerry Dingle discussed post-Liu decisions from the U.S. Courts of Appeals for the Second, Fifth and Seventh Circuits that addressed the deduction of legitimate expenses when calculating disgorgeable net profits. In each case, the district court ordered disgorgement after finding the SEC met its burden of making a reasonable approximation of the disgorgeable profits. Although the respective defendants sought deductions — for example, arguing that diverted funds had been offset by contemporaneous transfers to the original destinations or disputing the SEC’s valuation of certain assets — the district courts found their arguments insufficient to show the SEC’s approximation was not reasonable; and in each case, the respective Circuit Courts affirmed.

Senior Counsel Dingle drew three general principles from these cases. First, these decisions maintained the pre-Liu practice of placing the initial burden on the SEC to propose a reasonable approximation of profits causally related to the fraud before shifting the burden to the defendant to show the SEC’s approximation was not reasonable. Second, to the extent there is uncertainty or ambiguity around making a reasonable approximation — such as how to value an unconventional asset or how to isolate disgorgeable profits within commingled funds — the wrongdoer bears the consequences of the uncertainty. Finally, to meet its burden of reasonable approximation, the SEC does not need to trace particular funds all the way from their source to the defendant’s personal accounts or personal expenses. Collectively, these cases speak to the wide latitude courts may be inclined to give the SEC in making a reasonable approximation of disgorgeable net profits, as well as the high bar a defendant must clear to challenge the SEC’s calculation.

Continued Focus on Municipal Securities

Public Finance Abuse Unit Deputy Chief Rebecca Olsen discussed the Enforcement Division’s continued focus on the municipal securities market, including on conduct by issuers, broker-dealers and municipal advisers.

The Enforcement Division’s spotlight on school district issuers persists, with three such actions involving alleged misrepresentations of financial information in bond offering documents. In one case, the district provided investors and the credit union agency with misleading budget projections. The SEC charged the district for its omission of payroll liabilities from its financial statements included in bond offering documents. In a currently litigated matter against a city, the SEC alleges that the issuer misled investors with outdated financial statements and a failure to disclose that the district was experiencing financial distress due to overspending. In discussing these actions, Olsen emphasized the importance of providing retail investors with accurate financial information in the bond offering documents and with a truthful picture of the financial risk of investments.

Olsen also highlighted several enforcement actions against broker-dealers for unfair dealing. One case involved a financial conflict of interest between a broker-dealer underwriting a municipal bond offering and its affiliate, which purchased nearly all the bonds in a municipal issuer’s tender offer. When recommending the purchase price between its affiliate and the issuer, the broker-dealer did not disclose its affiliate’s financial interest. This violated the underwriter’s obligation to deal fairly with its municipal clients. The SEC also brought a series of actions against broker-dealers for unfair dealing to retail investors. Specifically, in several bond offerings, broker-dealers allocated municipal bonds to “flippers,” who purchased bonds to sell to other broker-dealers or to the same firm for its own inventory, rather than the retail investors entitled to priority allocation.

Regarding municipal adviser misconduct, Olsen emphasized the SEC’s first-ever case enforcing MSRB Rule G-42 on the duties of non-solicitor municipal advisers. The SEC brought enforcement actions against an advisory firm and its two principals for a failure to disclose their fee-splitting arrangement with an underwriting firm. As a result of this conflict of interest, which was undisclosed to the firm’s charter school clients, the firm violated its duties of loyalty and care to its clients.

Focus on Broker-Dealers as Gatekeepers

Assistant Director Stacey Bogert focused her remarks on the gatekeeping function broker-dealers serve and their responsibility to maintain market integrity. She discussed the most significant areas of the Enforcement Division’s focus in the last year: Regulation BI and Form CRS, the filing of Suspicious Activity Reports (SARs) and cybersecurity.

In the first action of its kind, the SEC brought a case under Regulation BI regarding a broker-dealer’s standards of conduct in four areas: disclosure obligations, care, conflict of interest and compliance. The SEC charged a broker-dealer with a violation of Regulation BI’s duty of care obligations as it sold L Bonds, a high risk and illiquid investment, to customers on fixed incomes with moderate risk tolerances. According to the SEC, this was a failure to exercise reasonable diligence regarding the risks and rewards of the investment for its clients and it failed to establish a reasonable basis that the investment was in the clients’ best interest. Bogert was clear that with this action, as well as guidance including FAQs and compliance guides, the Enforcement Division is now initiating enforcement actions under Regulation BI.

Similarly, the Enforcement Division brought approximately 40 cases regarding compliance with Form CRS filing requirements. Such actions, which Assistant Director Bogert indicated will remain an enforcement priority, have involved both failure to file Form CRS on a timely basis and failure to include all required information.

Assistant Director Bogert also commented on two cases involving failures to timely file SARs. She emphasized the importance of this tool in detecting fraudulent behaviors; consequently, firms must continue to develop and implement effective policies and procedures reasonably designed to identify suspicious activity and file SARs with FinCEN.

Assistant Director Bogert further spoke about the Enforcement Division’s scrutiny of broker-dealers’ safeguarding of customer records and information through written supervisory procedures designed to mitigate identity theft, as required by Regulations S-P and S-ID. The Enforcement Division brought 11 cases against broker-dealers in the last year for failure to have reasonable policies and procedures, even though all had identity theft prevention programs. Assistant Director Bogert emphasized that it is insufficient for broker-dealers to merely include an identity theft policy; instead, policies and programs must be tailored to each broker-dealer’s specific business and regularly updated.

Enforcement Remains Committed to Whistleblowers

Office of the Whistleblower Chief Creola Kelly reported on the continuing importance of whistleblowers to Enforcement Division efforts, with $1.3 billion awarded to 281 individuals since the program’s inception in 2010 and $226 million to 78 individuals so far in 2022. Chief Kelly also reaffirmed the Enforcement Division’s commitment to protecting whistleblowers, including vigilant protection of whistleblowers’ identities and strong enforcement of violations of Rule 21F-17. Recent enforcement actions reveal the Enforcement Division’s expansive interpretation of Rule 21F-17, which prohibits “imped[ing] an individual from communicating directly with the [SEC] about a possible securities law violation.”

For example, a recent matter involved an employee of a nonpublic company who submitted a whistleblower tip to the SEC regarding the company’s financial data and 30 days later raised similar concerns internally to the company’s CIO. The SEC found that the CIO violated Rule 21F-17 by changing the employee’s network access rights and surreptitiously accessing and monitoring the employee’s personal email and social media accounts — even though the employee did not know about these actions, the CIO did not know about the whistleblower submission, and there was no evidence that the CIO took any steps to impede the employee from communicating with the SEC about a possible securities law violation.

What Lies Ahead

At the 2021 SEC Speaks conference, Director Grewal laid out a plan for a less respondent-friendly enforcement process, with the intent to improve perceptions of the SEC’s fairness and to enhance public confidence in financial markets. Remarks at SEC Speaks 2022 uniformly projected an unwavering, if not enhanced, commitment to that course, as well as an emboldened Enforcement staff.

Under Director Grewal, the Enforcement Division — particularly front-line staff — is likely to push aggressive timelines during investigations and not shy away from aggressive settlement and litigation postures armed with full support from senior enforcement officials. Market participants and their counsel should not expect a lengthy Wells process (if any at all) or access up the chain for further advocacy to the extent an impasse is reached with the investigative staff. Thus, ongoing proactive engagement with the Enforcement staff will be important at every stage of the enforcement process.

McGuireWoods LLP – E. Andrew Southerling, Louis D. Greenstein, Vinu G. Joseph, Jennifer E. LeMoyne and Timothy Whittle

September 28 2022

On September 13, 2022, the Securities and Exchange Commission (“SEC”) filed suit in the United States District Court for the Southern District of New York against an underwriter for allegedly failing to comply with the regulatory requirements of the Exchange Act’s Rule 15c2-12 (17 C.F.R. § 240.15c2-12), which provides a limited exception to certain disclosure requirements where underwriters have a reasonable belief that the municipal securities are being sold only to sophisticated investors that are each buying the securities for a single account. See SEC v. Oppenheimer & Co., Inc., S.D.N.Y. No. 1:22-cv-7801 (Sept. 13, 2022). The SEC also initiated settled enforcement actions with three other firms for similar alleged violations. This is the first time that the SEC has initiated municipal-bond disclosure cases.

Under the Exchange Act’s Rule 15c2-12, broker-dealers that are participating as underwriters in municipal securities offerings of $1 million or more are required to obtain certain disclosures from issuers and disseminate these disclosures to investors. However, the “Limited Offering Exemption” provides that a municipal issuer and their underwriters can be excused from the disclosure obligations if they meet certain requirements stated in Rule 15c2-12(1)(i). Specifically, the exemption applies to underwriters who sell securities in denominations of $100,000 or more and do not sell to more than 35 investors, in circumstances where the underwriter has a reasonable belief that the securities are being sold only to sophisticated investors that are each buying the securities for a single account without a plan to distribute them.

According to the SEC, from June 15, 2017, through April 27, 2022, the underwriter defendant sold securities in at least 354 municipal offerings in reliance on the Limited Offering Exemption when it in fact did not satisfy the exemption requirements. The SEC asserts that the underwriter sold securities to broker-dealers and investment advisers when it did not have any reasonable belief that such entities were buying the securities for their own account. To the contrary, the SEC claims that the underwriter knew or should have known that the entities may have bought securities on behalf of their client accounts. According to the SEC, the firm allegedly failed to make any inquiry to determine the nature of the securities bought by the entities and allegedly did not implement proper policies and procedures to ensure compliance with the exemption. The SEC alleges that the firm made $1.9 million from noncompliant bond sales over several years, and the SEC is seeking both disgorgement and a civil monetary penalty in relief.

Simultaneously, the SEC announced settlement agreements totaling $1.2 million in disgorgement and civil penalties with three other bond underwriters. Those firms allegedly sold securities without providing the necessary disclosures because they purportedly relied on the Limited Offering Exception while allegedly not meeting the criteria for its applicability.

September 30 2022

Shearman & Sterling LLP

On September 14, 2022, the SEC announced a settled administrative order, also dated September 14 (“Order”), imposing penalties, including a $100,000 fine, on a registered broker (the “Broker”) for failing to (1) register as a municipal advisor, in violation of Section 15B(a)(1)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), and (2) reasonably supervise its associated persons with respect to the laws and rules applicable to advising municipal entities, in violation of Rule G-27 of the Municipal Securities Rulemaking Board (“MSRB”), and consequently, Exchange Act Section 15B(c)(1). The Order is a reminder that persons that come into contact with municipal entities, including brokers and fund managers, should have written policies and procedures to ensure that they know what activities would cause them to be municipal advisors and whether they need to register or have an available exemption or exclusion.

SEC Findings
Broker provides institutional brokerage services to certain municipal entities, including a Midwest city described in the Order as “Municipal Entity.”[1] Broker was temporarily registered as a municipal advisor prior to July 1, 2014 but ceased to be registered as a municipal advisor thereafter.[2] Between 2017 and 2019, a registered representative (“Registered Representative”) of Broker provided advice to Municipal Entity regarding securities that were purchased with municipal bond proceeds (generally, proceeds of a municipal bond offering that have not yet been spent or applied to their intended use). The SEC found that Registered Representative recommended that Municipal Entity purchase specific financial products, which were ultimately acquired by the Municipal Entity with municipal bond proceeds. Furthermore, the SEC found that “the communications from [Broker] and Registered Representative included subjective opinions or views, conveying more than mere general information.” These communications were sufficient to make Broker a municipal advisor, required to register.

The SEC also found that Broker did not maintain a system to supervise the municipal securities activities of its associate persons that was reasonably designed to achieve compliance with applicable securities laws, regulations, and MSRB rules. During the relevant period, Broker had written supervisory procedures (“WSPs”) that required it to “conduct its public finance and municipal securities-related business in a manner so as to not subject the firm to registration and regulation as a Municipal Advisor.”[3] However, the SEC found that Broker’s supervisory system was inadequate to (1) enable registered representatives to know when communications could require registration as a municipal advisor, (2) train personnel with respect to the municipal advisor training requirements, and (3) conduct electronic communication surveillance to identify potential violations of the municipal advisor registration rules. As a result, Broker failed to reasonably detect or prevent unregistered municipal advisor activities.

Violations
The Order held that the failure to register as a municipal advisor was a violation of Section 15B(a)(1)(B) of the Exchange Act. In addition, it held that Broker’s failure to establish and maintain an adequate system to supervise the municipal securities activities of its associated persons reasonably designed to achieve compliance with applicable securities laws, regulations, and MSRB rules was a violation of MSRB Rule G-27(e), which requires appropriate supervisory procedures, and, therefore, of Section 15B(c)(1) of the Exchange Act. Section 15B(c)(1) provides, in part, that “no broker, dealer, municipal securities dealer or municipal advisor shall make use of the mails or any means or instrumentality of interstate commerce to provide advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products, the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, in contravention of any rule of the [MSRB].”

There was no finding that Broker was a member of the MSRB. The SEC found Broker to be in “willful” violation of MSRB Rule G-27 even though Broker was not a member and without regard to whether it realized that the rule applied to its activities.[4]

Who Needs to Have Supervisory Procedures Required by Rule G-27?
It may come as a surprise to some readers that they can be in violation with an MSRB rule even if they are not members of the MSRB. If you are a municipal advisor and not registered, you can be in violation not only of the registration requirement but of the MSRB rule requiring you to have adequate supervisory procedures to make sure you are registered. If you are not a municipal advisor, you are not in violation of either the registration requirement or the supervisory procedures rule.

Section 15B(c)(1) says that “brokers” that act as municipal advisors (or municipal securities brokers) are subject to MSRB rules and, therefore, must have supervisory procedures in place to, among other things, ensure that they are registered if they are required to be. However, Section 15B(c)(1) and Rule G-27 do not make it unlawful not to have supervisory procedures to make sure you are registered if you are not actually acting as a municipal advisor or municipal securities broker. If your municipal advisor supervisory procedures are inadequate or even non-existent, but, by good fortune, you never act as a municipal advisor or municipal securities broker, you won’t be in violation of G-27. But that’s no way to go through life if you do business with municipal entities.

Different exemptions and exclusions apply to different categories of persons, and the need to have procedures to test whether you are a municipal advisor will depend on the nature of your business and whether it could change in the future to include municipal advisory activities. Here are some examples:

• Brokers. A broker that executes transactions in securities for a municipal entity investing the proceeds of a municipal securities offering is not a municipal advisor if it does not provide advice or recommendations with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning financial products or issues. “Municipal financial product” is a defined term that includes investment strategies – plans or programs for the investment of the proceeds of municipal securities. Every broker that executes transactions in securities for municipal entities should have policies and procedures to educate associated persons about what activities will require registration as a municipal advisor and a system to test and monitor the communications of associated persons to ensure that they are not providing municipal advisory services.
• Placement agents. The definition of “municipal advisor” includes a person who “undertakes a solicitation of a municipal entity.” “Solicitation of a municipal entity” is defined, in substance, as communications with a municipal entity, for compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser with whom the solicitor is not affiliated, for the purpose of obtaining or retaining an engagement of such person. In the case of an investment adviser, the definition specifies that the engagement is to provide investment advisory services to or on behalf of a municipal entity [emphasis supplied]. In response to proposed rules interpreting, among other things, the phrase “solicitation of a municipal entity,” the SEC received comments that the phrase should not be interpreted to include a placement agent soliciting a municipal entity to invest in a collective fund, even if advised by an investment adviser. The SEC agreed, stating that a placement agent soliciting an investment by a municipal entity on behalf of a fund is not soliciting on behalf of the investment adviser in order for the municipal entity to retain the services of the investment adviser.[5] However, if a placement agent solicits a municipal entity to open a separate account with an investment adviser so that the investment adviser can advise the municipal entity on the investment of proceeds of a municipal offering (and the placement agent is not affiliated with the investment adviser), the placement agent could be required to register as a municipal adviser to engage in that type of solicitation. Placement agents should have policies and procedures to educate associated persons about the difference between the two types of solicitation and to monitor for and prevent direct solicitation on behalf of investment advisers if the placement agent is not registered as a municipal advisor.
• Investment advisers. Exchange Act Section 15B(e)(4)(C) excludes from the definition of municipal advisor “any investment adviser registered under the Investment Advisers Act of 1940, or persons associated with such investment advisers who are providing investment advice.” Mere registration as an investment adviser is not sufficient to qualify for the exemption. The investment adviser must be providing investment advice, and the SEC makes clear in Rule 15B1-1(d)(2)(ii) that, for purposes of the investment adviser exclusion, investment advice does not include “advice concerning whether and how to issue municipal securities, advice concerning the structure, timing, and terms of an issuance of municipal securities and other similar matters, advice concerning municipal derivatives, or a solicitation of a municipal entity or obligated person.”[6] An investment adviser that provides advice to municipal entities should have policies and procedures to educate associated persons about the difference between investment advice and the other kinds of advice and services that do not provide an exclusion from registration as a municipal advisor, and to test for and prevent the investment adviser from being compensated for providing the other kinds of advice and services without registration as a municipal advisor.
• Fund managers. In the Adopting Release, the SEC stated that it would interpret a pooled investment vehicle (e.g., a hedge fund, private equity fund, real estate fund, or commodity pool) “to be an investment strategy and an advisor to such a pool to be a municipal advisor, when the pooled investment vehicle contains proceeds of an issuance of municipal securities, regardless of whether all funds invested in the vehicle are funds of municipal entities.”[7] An advisor to a pooled investment vehicle that has at least one municipal entity participant that has invested the proceeds of an issuance of municipal securities must be registered as a municipal advisor, unless it is excluded as a registered investment adviser or registered commodity trading adviser. Some real estate fund advisors are not required to be registered as investment advisers because the funds own real property rather than real estate securities. Whether a real estate fund advisor is required to be registered as a municipal advisor may come down to whether municipal entity investors are investing the proceeds of an issuance of municipal securities or, instead, funds that either were not proceeds of an issuance of municipal securities or have been “spent,” i.e., put to the use for which the proceeds were intended.[8] An example of the latter would be proceeds of an issuance of municipal securities that have been used to fund an employee retirement system, and have become the property of the retirement system to use for its purposes. A fund manager may rely on representations in writing made by a knowledgeable official of the municipal entity or obligated person whose funds are to be invested regarding the nature of such funds, provided that the manager has a reasonable basis for such reliance.[9] A fund manager’s policies and procedures concerning municipal advisor registration should include, among other things, procedures for obtaining a representation by a knowledgeable official of the municipal entity with respect to the nature of the funds invested, which can be part of the subscription agreement or a separate document.

Having reasonably designed supervisory procedures with respect to activities with municipal entities can prevent a broker or advisor from inadvertently acting as an unregistered municipal advisor and, if a good faith mistake is still made, can reduce the level of sanctions the SEC may seek.

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[1] Merely providing brokerage services to municipal entities does not require a broker to register as a municipal advisor unless the broker otherwise provides services or advice that would make it a municipal advisor.

[2] Municipal advisors were permitted to register on the temporary form until the permanent rules applicable to registration as a municipal advisor went into effect on July 1, 2014. As a result of new exemptions and exclusions added by the SEC in the permanent rule and related FAQs, some persons temporarily registered as municipal advisors withdrew their registrations.

[3] Apparently verbatim quotation by the SEC from the text of the WSPs.

[4] The SEC cited case law in support of its interpretation of “willfully” in this context to mean “no more than that the person charged with the duty knows what he is doing.”

[5] SEC Release No. 34-70462 (Sept. 20, 2013)(“Adopting Release”), text preceding n. 461.

[6] This is discussed in the Adopting Release in the text preceding n. 655.

[7] Adopting Release, text preceding n. 398.

[8] Rule 15Ba1-1(m), definition of proceeds of municipal securities.

[9] Rule 15Ba1-1(m)(3); see also Adopting Release, text preceding n. 340.

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by Peter LaVigne

September 29, 2022

Goodwin

Summary

The Securities and Exchange Commission (SEC) recently announced enforcement proceedings against four municipal market underwriters for alleged violations of municipal bond disclosure requirements. Three of the four underwriters have settled with the SEC.

The Upshot

• The four underwriting firms allegedly sold new issue municipal securities in primary offerings intended to meet the limited offering exemption to broker-dealers and investment advisers without a reasonable belief that the entities were making purchases for their own accounts or without a view to distribute the securities.
• The underwriters allegedly failed to ascertain for whom the broker-dealers and investment advisers were purchasing the securities and were unable to form a reasonable belief that the purchases were for investors who possessed the necessary knowledge and experience to evaluate the investments.
• The three underwriters that settled with the SEC agreed to disgorgement and penalties ranging between $100,000 and $300,000. In pending charges against the fourth underwriter, the SEC alleges the underwriter “made no inquiry to determine if those entities were buying on behalf of their customers and/or clients and, if so, whether such investors met the exemption criteria.”

The Bottom Line

The pending complaint identifies certain matters that the SEC believes underwriters should consider in determining compliance with the limited offering exemption requirements. But the SEC provides no guidance on how such inquiries should be undertaken or whether investor letters can be used for this purpose. The SEC said it is investigating whether other firms are properly relying on the limited offering exemption and is encouraging firms that believe they may have not complied with the exemption requirements to self-report possible violations.

On September 13, 2022, the Securities and Exchange Commission (SEC) announced enforcement proceedings against four municipal market underwriters for alleged violations of municipal bond offering disclosure requirements under SEC Rule 15c2-12. The SEC rule establishes certain requirements in connection with primary market and continuing disclosures to be provided to investors, unless an exemption applies. Three of the underwriters settled with the SEC while charges are pending against the fourth underwriter.

Under federal securities law, a limited offering exemption is available for offerings sold in $100,000 authorized denominations if the securities are sold to no more than 35 persons who the underwriter reasonably believes (i) have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment (the “sophisticated investor clause”) and (ii) are not buying the securities for more than one account or with a view to distributing the securities (the “investment purpose clause”).

According to the SEC, the four underwriting firms sold new issue municipal securities in primary offerings intended to meet the limited offering exemption to broker-dealers and investment advisers without a reasonable belief that the entities were making purchases for their own accounts or without a view to distribute the securities, as required by the investment purpose clause. The SEC asserts that, because the underwriters failed to ascertain for whom the broker-dealers and investment advisers were purchasing the securities, the underwriters were unable to form a reasonable belief that the broker-dealers and investment advisers were purchasing the securities for investors who possessed the necessary knowledge and experience to evaluate the investments, as required by the sophisticated investor clause.

The SEC’s pending complaint against the underwriter that did not settle provides more details about the alleged violations. In that compliant, the SEC observes that some broker-dealers and investment advisers purchasing securities in the primary offerings from the underwriter shortly thereafter resold the securities to multiple brokerage customers or allocated the securities to multiple advisory clients. The SEC alleges that the underwriter “made no inquiry to determine if those entities were buying on behalf of their customers and/or clients and, if so, whether such investors met the exemption criteria.” The SEC argues that the underwriter “did not reasonably believe the broker-dealers were buying the securities for their own accounts because the broker-dealers that were buying the securities were in the business of servicing brokerage customer accounts” and also “did not reasonably believe the investment advisers were buying the securities for their own accounts because these investment advisers were in the business of managing accounts for their advisory clients.”

The SEC notes in the pending complaint that the underwriter did not inquire whether the broker-dealers or investment advisers were purchasing on behalf of their customers or clients. Further, in cases where the broker-dealers or investment advisers may have been purchasing on behalf of their customers or clients, the SEC states that the underwriter “neither requested nor received information from the broker-dealers [or investment advisers] about: how many customers [or clients] would receive the securities; how much each customer [or client] was investing; each customer’s [or client’s] level of financial experience; or whether each customer [or client] was buying for a single account.” The SEC concludes that, without this information, the underwriter could not have formed the requisite reasonable belief that the broker-dealers or investment advisers, or the customers or clients on whose behalf they may have been buying, were sufficiently sophisticated and buying for their own account, as the limited offering exemption requires. The SEC also alleges that the underwriter violated MSRB Rule G-17, which requires fair dealing, by deceptively representing to municipal market issuers that it complied with the limited offering exemption requirements.

While the pending complaint identifies certain matters that the SEC believes underwriters should consider in determining compliance with the limited offering exemption requirements, the SEC provides no guidance on how such inquiries should be undertaken or whether investor letters can be used for this purpose. As a matter of practice, investor letters are often used by municipal market underwriters to confirm the sophisticated status and investment intent of municipal securities purchasers.

The SEC further alleges that the four firms also violated Municipal Securities Rulemaking Board (MSRB) Rule G-27, which requires municipal market underwriters to put in place sufficient supervisory policies and procedures to ensure compliance with federal securities laws.

The three underwriters that settled with the SEC agreed to disgorgement and penalties ranging between $100,000 and $300,000. The case against the fourth underwriter is pending. The SEC stated in its news release that it has started investigating whether other firms are properly relying on the limited offering exemption. The SEC is encouraging firms that believe they may have not complied with the exemption requirements to self-report possible violations to the SEC at: [email protected]. The SEC did not provide a form for self-reporting or standard settlement terms.

by Teri Guarnaccia, Ernesto Lanza, Kimberly Magrini, William Rhodes, Tesia Stanley

September 22, 2022

Ballard Spahr LLP

Washington, DC – The Municipal Securities Rulemaking Board (MSRB or Board) met virtually on September 15 for the final Board meeting of the fiscal year. The Board voted to amend MSRB Rule G-40, on advertising by municipal advisors, to allow municipal advisors to use testimonials in advertisements, and MSRB Rule A-12, on registration, to make accompanying changes to Form A-12.

The proposed amendments to Rule G-40 would allow municipal advisors the use of testimonials, subject to limitations in alignment with analogous requirements under the Securities and Exchange Commission’s (SEC) new Rule 206(4)-1, on Investment Adviser Marketing, under the Investment Advisers Act of 1940. The proposed rule change is anticipated to be filed with the SEC before the end of the calendar year.

“When the MSRB established advertising standards for municipal advisors in 2018, it sought to enhance the MSRB’s fair-dealing provisions by promoting regulatory alignment with other financial regulators,” said Patrick Brett, MSRB Board Chair. “In the same spirit, following the SEC’s modernization of its advertising rule for investment advisors, which allows investment advisors use of testimonials in marketing materials, the MSRB is proposing to make conforming amendments to Rule G-40.”

The proposed amendments to Rule A-12 would include extending the annual affirmation period through January 31 of each calendar year and permitting regulated entities to update optional information on Form A-12 during the annual affirmation period rather than within 30 days of a change. In addition, regulated entities, on a voluntary basis, would be able to identify whether the firm has identified as a women and minority-owned business or veteran-owned small business. The proposed rule change and the enhancements to Form A-12 are anticipated to be operational on January 1, 2023, to coincide with the 2023 annual affirmation period.

At this final board meeting of the fiscal year, MSRB CEO Mark Kim stated, “On behalf of the staff of the MSRB, I would like to thank Board Chair Patrick Brett along with our other departing Board members, Caroline Cruise, Joseph Darcy and Seema Mohanty for their dedication and service.” The MSRB’s new fiscal year begins on October 1, 2022.

Date: September 16, 2022

Contact: Bruce Hall, Senior Manager, Communications
202-838-1300
[email protected]

Internal control checklists aren’t the most exciting topic to work on in a government. Frequently, they are left alone unless something goes wrong. If used correctly, however, a comprehensive, well-designed checklist can be the first line of defense to notify management that something is wrong. This article outlines the history of the State of Illinois internal control checklist and lessons learned for the future.

Publication date: August 2022

Author: Jack Rakers

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Norwalk, CT, September 19, 2022 — The Financial Accounting Foundation (FAF) today announced it is moving to a new location in Norwalk, CT, along with the staffs of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

The new offices are located at 801 Main Avenue, Norwalk, CT 06851.

The FAF is the parent organization of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

During a brief transition period, employees will work remotely, remaining fully available to stakeholders. All staff are expected to be working in the new office space by Monday, October 3, 2022.

During these last weeks of the 2022 election season, campaigns are ramping up urgent, last-minute fundraising efforts. Financial services professionals should not let their guard down amid this flurry. Recently published Securities Exchange Commission (SEC) fines are a reminder that a contribution by such individuals could have consequences for their employer and for them, according to the SEC’s Rule 206(4)-5, the so-called federal “pay-to-play rule.”[1] As seen in the SEC’s recently unveiled settlements with four investment advisers, the most common source of a pay-to-play violation stems from an associate contributing to a governor or other chief executive, such as a mayor. With 36 states and three territories electing governors in 2022 (not to mention countless municipal elections), the SEC is holding up the proverbial yield sign with its announcement of these settlements so close to the election. These cases are a reminder that financial services firms should remind their professionals of compliance checks before making political contributions.

The SEC’s Pay-to-Play Rule

SEC Rule 206(4)-5 places limits on political contributions made by certain “covered associates” of an investment adviser that has a contract with a government client. However, only contributions to candidates for an office that has the authority to influence the government’s award of an investment advisory contract will trigger the pay-to-play rule. If a “covered associate” makes such a contribution, the investment adviser is prohibited from providing investment advisory services for compensation to a government client for two years from the time of that contribution, and if it does engage in those services, it is subject to penalty. It may also need to disgorge previously earned fees.

There are limited ways by which a “covered associate” can make contributions. SEC Rule 206(4)-5 permits certain de minimis contributions by a “covered associate” of up to $350 to a candidate for whom the associate is entitled to vote and contributions of up to $150 for other candidates.

Recent Settlements

With less than 60 days before the November election, the SEC’s settlement of pay-to-play allegations with four investment advisers neither admitted nor denied the violation and contain a total of $300,000 in penalties, ranging from $45,000 to $90,000. Although these violations and fines appear in line with other SEC settlements, there are three key takeaways from a compliance perspective.

• Statewide and Citywide Offices Pose the Greatest Compliance Risk.

Notably, three out of the four settlements involved $1,000 contributions to three different 2018 candidates for governor, with the other being contributions to a candidate for Mayor of New York City for the 2021 election.

• The SEC Rule is one of Strict Liability.

As Commissioner Hester Pearce points out in her statement critiquing the settlements, the pay-to-play rule is a “blunt” instrument. As a matter of law, there is strict liability under the rule – the intent of the donor does not matter, only the fact that the contribution was made to a certain official above the de minimis threshold.

• There is Limited Opportunity for Remediation.

The contributor in the case of the $1,000 contribution to the Massachusetts candidate sought and obtained a refund of the contribution, but to no avail. A refund of the contribution will only negate the violation if (1) the contribution does not exceed $350; (2) the adviser discovered the contribution within four months of the date of the contribution; and (3) the contributor obtains a refund within 60 days after learning of the contribution.

Although the SEC’s pay-to-play rule applies throughout the year, the months heading into an election present a heightened risk of inadvertent violations, given the push from campaigns and the desire of donors to support the candidates and causes about which they care. As these settlements show, even a contribution as much as $50 over the de minimis limit can trigger a significant penalty, a reminder of the importance of proactive compliance and vetting.

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[1] The SEC pay-to-play rule covers investment advisers, but other financial service providers may be covered by similar rules issued by the Municipal Securities Rulemaking Board (MSRB), the Financial Industry Regulatory Authority (FINRA), and the Commodities Futures Trading Commission (CFTC).

Nossaman LLP – William A. Powers and Frederick T. Dombo, III

09.22.2022

A broker-dealer settled SEC charges for operating as an unregistered municipal advisory firm by providing advice to a municipality regarding securities that were purchased with the proceeds from an issuance of bonds. In a release, the SEC stated that “[t]he action marks the first time the SEC has charged a broker-dealer for violating the municipal advisor registration rule.”

The SEC found that a registered representative of the firm made recommendations for specific financial products that included subjective opinions, which the SEC determined constitutes as investment advice. The SEC said that the broker-dealer failed to adequately supervise registered representatives’ municipal securities activities. The broker-dealer maintained (i) improper procedures to enable its registered representatives to identify municipal bond proceeds accounts, (ii) inadequate training on the municipal advisor registration requirements and (iii) insufficient electronic communication monitoring to identify potential communications violations.

As a result, the SEC determined the broker-dealer violated Exchange Act Section 15B(a)(1)(B) and 15B(c)(1) (“Municipal securities”) as well as MSRB Rule G-27 (“Supervision”). To settle the charges, the broker-dealer agreed to (i) cease and desist, (ii) accept a censure, (iii) pay a civil monetary penalty of $100,000, plus additional disgorgement and prejudgment interest.

Commentary

Firms that provide services to municipalities should be mindful that the definition of “municipal advisor” does not correspond to the definition of “investment adviser,” and that it is not intuitive.

Fried Frank Harris Shriver & Jacobson LLP – Steven Lofchie

September 21 2022

The Financial Data Transparency Act of 2022 (S. 4295), sponsored by Senator Warner (D-VA) and Senator Crapo (R-ID), would mandate governments and nonprofits to report financial information using uniform reporting categories, or “data standards,” which would likely require costly updates or extensive workarounds for county finance systems.

Companion legislation (H.R. 2989), introduced by Reps. Carolyn Maloney (D-N.Y.) and Patrick McHenry (R-N.C.) passed the US House of Representatives on July 14, 2022, as an amendment to the House version of the fiscal 2023 National Defense Authorization Act (NDAA), which is annual must-pass legislation. Like the House, the Senate is actively considering attaching S. 4295 to its version of the fiscal 2023 NDAA.

Section 203 of this legislation would require the Municipal Securities Rulemaking Board (MSRB) to develop data standards for financial reporting related to the municipal bond market.

These data standards include universal reporting standards, and reporting entities would be required to the extent practicable to render fully searchable and machine-readable data with accompanying metadata that clearly defines the semantic meaning of the data. In addition, the legislation would require the MSRB to “scale” reporting requirements for “smaller regulated entities.”

If enacted, the legislation requires joint rulemaking for regulated entities that will take place two years after passage, and then it provides two years for implementation. Full implementation and compliance would begin in 2027.

Transitioning to a new uniform reporting system requires significant resources — consultants, software, and reconfiguring county financial systems to account for the new reporting standards. Moreover, this costly unfunded mandate would fall on the backs of local governments, with no financial support from the federal government.

According to the National Association of Counties (NACo):

Counties recognize the need for full disclosure of all relevant information concerning a county’s financial condition to potential investors, citizens, and other parties interested in municipal bonds. Counties also oppose federally imposed standards for county financial accounting and reporting and supports those principles put forth by the Governmental Accounting Standards Board (GASB). As such, NACo is concerned with the unfunded and federally mandated financial reporting standards included in this bill.

NACo is following this closely and will provide members with updates.

The Local Government Article, Section 16-306 of the Annotated Code of Maryland requires each county, incorporated city or town, and taxing district in Maryland to file audit reports annually or once every four years under specified conditions.

The Office of Legislative Audits, part of the Maryland Department of Legislative Services, reviews the financial statements. The financial statements must be prepared using generally accepted accounting principles and audited per generally accepted auditing standards.

There were 186 local government audit reports are included in OLA’s fiscal year 2021 review (23 counties and Baltimore City, 150 other incorporated cities and towns, and 12 taxing areas). The latest report is available here.

Maryland Association of Counties

by Kevin Kinnally

September 21, 2022

The BDA, working in concert with our partners in the Public Finance Network led by the GFOA, have been monitoring the progress of the Financial Data Transparency Act of 2022. A similar bill recently passed the House of Representatives as part of the National Defense Authorization Act.

The legislation can be viewed here.

Background

The Senate bill sponsored by Senator Warner (D-VA) and Senator Crapo (R-ID) requires the MSRB to “establish data standards.” It also needs to “scale” reporting requirements for “smaller regulated entities.”

The provisions in question are in Section 203 of the legislation. The Senate version requires joint rulemaking for regulated entities that will take place for two years after passage and then it provides two years for implementation.

The BDA has flagged concerns about a one-size fits all mandate to the Senate sponsors, as well concerns of the financial burdens this will have on issuers and on how this will be funded at the MSRB – recognizing that dealers pay the majority of the MSRB budget.

The legislation would require identical financial reporting taxonomies across all types of public entities. Given the wide variety of governments the market represents (e.g., states, cities, counties, water systems, public power, public gas, hospitals, etc.), combining all into a single standardized template has the potential to lose valuable information and to reduce transparency by eliminating detail specific to the unique functions or services that governments actually provide.

Full implementation and compliance would be required beginning 2027.

We will continue to provide updates as they become available.

Bond Dealers of America

by Brett Bolton

September 9, 2022

Summary

Two pending proposals could significantly affect how mutual and other funds approach their ESG investments in municipal bonds. If adopted by the Securities and Exchange Commission, the proposals could result in municipal issuers facing ESG-related expectations from mutual funds that are more stringent and less flexible as a precondition of accessing capital from segments of the fund industry that seek to serve the ESG-focused investor base.

The Upshot

• The Fund ESG Proposal would adopt specific disclosure requirements for funds regarding ESG strategies, including requiring some environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investments. Municipal ESG holdings may need to conform to these new requirements.
• The Fund Names Proposal would amend existing SEC rules to, among other things, expand the current requirement for certain funds to invest at least 80 percent of their assets in accordance with the investment focus the fund’s name suggests.  The proposal raises questions on whether municipal bonds may sometimes be limited to the residual portion of fund assets if the name suggests an ESG focus.
• Some ESG-Focused Funds would be required to disclose the carbon footprints and weighted average carbon intensities of their portfolios, including their municipal holdings.

The Bottom Line

These pending SEC proposals on mutual funds may be the first new ESG rules that have a significant impact on the municipal market. While municipal issuers may conform their ESG practices to the proposed criteria for ESG fund holdings in structuring new offerings, they may face considerable obstacles applying the newer ESG practices to outstanding bonds that may be held by funds. In addition, issuers may need to choose between meeting heightened expectations or bypassing some ESG-Focused Funds as potential investors.
The municipal bond market is grappling with how best to approach evolving investor demand for environmental, social, and governance (ESG) disclosures and ESG-designated bonds under existing federal anti-fraud and materiality standards and through voluntary industry best practices. These conversations are happening against the backdrop of the Securities and Exchange Commission’s (SEC) pending ESG regulatory proposals for the corporate securities1 and mutual fund2 markets. Many market participants look to these pending SEC proposals for clues to what regulators might have in store for the municipal market in the future.3

However, the pending Fund ESG Proposal and Fund Names Proposal could themselves result in significant and more immediate effects on how mutual and other funds – the second largest investor segment for municipal bonds4 – approach their ESG investments in municipal bonds. If adopted by the SEC, the proposals could result in municipal issuers facing a number of ESG-related expectations that are new, more stringent and/or less flexible than the current market as a precondition to continuing to access capital from the fund industry that seeks to serve the ESG-focused investor base. While municipal issuers may seek to conform their ESG practices to these criteria in structuring their new offerings going forward, they would face considerable obstacles in applying the newer ESG practices to outstanding bonds that may be held by funds.

Summary of Recent SEC Fund Proposals

In broad summary, the Fund ESG Proposal would apply to registered investment companies and business development companies (funds), as well as registered investment advisers and certain unregistered advisers (advisers). The Fund ESG Proposal would (i) require specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures; (ii) implement a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and (iii) generally require certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments. In addition, the Fund Names Proposal would amend the SEC’s existing fund names rule to (i) improve and expand the current requirement for certain funds to adopt a policy to invest at least 80 percent of their assets in accordance with the investment focus the fund’s name suggests; (ii) provide new enhanced disclosure and reporting requirements; and (iii) update the rule’s current notice requirements and establish recordkeeping requirements. The provisions of these proposals that are potentially relevant to municipal securities issuers are described below.

Potential Impact of SEC Fund Proposals on Municipal Securities Issuers

Some of the new ESG-related expectations incorporated into the Fund ESG Proposal and Fund Names Proposal, and their potential impacts on municipal issuers, include the following:5

• More Structured Criteria for Consideration of ESG Factors When Making Investment Decisions – For any funds that consider one or more ESG factors in their investment decisions – whether along with other non-ESG factors, with the ESG factors being no more significant than other non-ESG factors (Integration Funds), or as a significant or main consideration in selecting investments (ESG-Focused Funds) – the funds may need to establish more structured criteria than they currently use on how they incorporate ESG factors into the investment selection process, including what factors they consider.

• Municipal issuers may experience less flexibility from funds on how they apply ESG factors in assessing a potential investment in their bonds given funds’ need to comply with their publicly disclosed more structured investment criteria.

• Heightened ESG Investment Criteria for ESG-Focused Funds – In the case of ESG-Focused Funds, the fund proposals would require more detailed criteria for considering ESG factors in making investment decisions, including descriptions of any methods for including or excluding investments (such as any quantitative thresholds or qualitative factors used), any scoring methodologies, methods for evaluating the quality of third-party data used, and the use of any third-party ESG framework (including how funds determine that a portfolio holding is consistent with the framework).

• Municipal issuers may experience heightened expectations from ESG-Focused Funds with respect to the information (potentially including quantitative information) issuers would need to make available concerning applicable ESG factors so that such funds can maintain investment portfolios that are consistent with disclosed criteria. As a result, issuers may need to choose between meeting these expectations or bypassing some ESG-Focused Funds as potential investors.

• In addition, ESG-Focused Funds with names suggesting that investment decisions incorporate one or more ESG factors must meet an investment policy requirement that at least 80 percent of the value of assets in the funds’ portfolios consist of the type of investment suggested by their names. It is unclear if municipal bonds that have ESG characteristics but may not meet the formal criteria of a particular ESG-Focused Fund might still be considered within the 80 percent investment policy requirement or would otherwise be limited to the remaining more-flexible portion of the fund’s portfolio holdings. If so limited, the level of investor interest in such bonds may be significantly reduced.

• Additional Disclosures for Impact Funds – For ESG-Focused Funds that select investments that seek to achieve one or more specific ESG impacts (Impact Funds), in addition to the requirements described above for ESG-Focused Funds, such Impact Funds would be required to disclose the impacts they are seeking to achieve, how they seek to achieve such impacts, how they measure progress toward the specific impacts (including key performance indicators), the time horizons used to analyze progress, and the relationship between the impacts sought and financial return.

• Municipal issuers seeking investments from Impact Funds would in most cases need to be willing and able to provide ongoing qualitative and/or quantitative data on the achievement of specific goals or similar measures of progress toward the applicable impact. Municipal issuers may need to choose between providing this ongoing information or bypassing Impact Funds as potential investors.

• Methodology When Considering Greenhouse Gas (GHG) Emissions – For Integration Funds that consider GHG emissions of their holdings as one ESG factor in their investment selection process, the funds would be required to describe the methodology used for considering portfolio investment GHG emissions.

• Municipal issuers may need to consider what, if any, information they may be willing and able to generate and disclose with respect to their GHG emissions in light of the various methodologies different Integration Funds may develop. No particular methodology is mandated, nor would Integration Funds be required to use quantitative metrics; however, funds that consider GHG emissions likely would develop more structured criteria for doing so (which may include quantitative measures) and, as a result, may have less flexibility in how they assess GHG emissions tied to a particular investment in a municipal bond for their portfolio in light of these criteria. Municipal issuers may need to choose between meeting such methodologies or bypassing some Integration Funds requiring GHG emissions information as potential investors.

• Quantitative Disclosures of GHG Emissions for Some ESG-Focused Funds – Unless ESG-Focused Funds that consider environmental factors affirmatively disclose that they do not consider issuers’ GHG emissions as part of their investment strategy, these ESG-Focused Funds would be required to disclose the carbon footprints and weighted average carbon intensities (WACI) of their portfolios. Calculation at the fund-level of carbon footprint and WACI would require quantitative measurements of each portfolio security issuer’s enterprise value, total revenues and Scope 1 and Scope 2 GHG emissions.6 While such funds would be required to use GHG emission data produced by issuers of portfolio investments if available, they would be permitted to use good faith estimates based on publicly disclosed methods of estimation of the portfolio issuer’s Scope 1 and Scope 2 emissions if no such issuer-produced data were available.

• Municipal issuers seeking investments from ESG-Focused Funds that consider GHG emissions would in most cases need to be willing and able to provide significant quantitative data of the type required by the proposal. It is unclear whether such funds would be willing to make good faith estimates for issuers that do not produce the required GHG emissions data. Municipal issuers may need to choose between undertaking to provide requisite GHG emissions data or bypassing ESG-Focused Funds that consider GHG emissions.

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[1] “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” Securities Act Release No. 11061 (March 21, 2022).

[2] “Investment Company Names,” Securities Act Release No. 11067 (May 25, 2022) (the Fund Names Proposal), and “Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies,” Securities Act Release No. 11068 (May 25, 2022) (the Fund ESG Proposal).

[3] The Municipal Securities Rulemaking Board (MSRB) also published MSRB Notice 2021-17 (December 8, 2021) requesting information on ESG practices in the municipal securities market, which generated 52 letters from an array of market participants. Commenters on balance expressed the view that substantive ESG-related regulation with respect to municipal securities, if any, should most appropriately be undertaken by the SEC rather than the MSRB, with the MSRB potentially making certain enhancements to its Electronic Municipal Market Access (EMMA) system to support more efficient and effective dissemination of any ESG-related disclosures.

[4] As of the end of the second quarter of 2022, mutual funds (including money market and closed-end funds) held $1.02 trillion out of the outstanding $4.04 trillion of municipal securities, constituting approximately 25.3 percent of the municipal securities market. Board of Governors of the Federal Reserve, Z.1 Financial Accounts of the United States – Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts – Second Quarter 2022 (September 9, 2022), Table L.212. Only the household sector held more, with approximately $1.61 trillion.

[5] These proposals include a number of other provisions not described herein, and readers should refer to the applicable SEC releases for completes description of each proposal. In addition, the Fund ESG Proposal includes provisions applicable to advisers that may have an impact on their ESG-related investment decisions on behalf of their separately-managed accounts and other clients.

[6] Funds would only be required to disclose Scope 3 GHG emissions of any portfolio issuer that itself discloses Scope 3 emissions.

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September 19, 2022

by Ernesto Lanza, Kimberly Magrini, William Rhodes

Ballard Spahr LLP

Three municipal bond underwriters settled SEC charges for failing to provide sufficient disclosure to investors in connection with the sale of municipal securities (see, here, here and here). The SEC also filed a Complaint against a fourth municipal bond underwriter in the United States District Court for the Southern District of New York based on the same alleged violations. The SEC stated, “these are the first SEC actions addressing underwriters who fail to meet the legal requirements that would exempt them from obtaining disclosures for investors in certain offerings of municipal bonds.”

According to the separate Orders, the underwriters relied on a “limited offering” disclosure exemption in paragraph (d)(1)(i) of SEA Rule 15c2-12 (“Municipal securities disclosure”), which requires that the securities are sold to no more than 35 persons having “such knowledge and experience in financial and business matters” that they are able to understand the product, and were not purchasing for redistribution. The SEC found that the underwriters did not determine if the broker-dealer and investment advisers purchased the securities for investment purposes, nor did the underwriters know for whom the securities were purchased. As a result, the SEC found that the underwriters were unable to reasonably believe that the securities were purchased for investors that fully understood the product. Further, the SEC found that the underwriters failed to adopt supervisory policies.

As a result, the SEC determined that the underwriters violated SEA Rule 15c-12, SEA Section 15B(c)(1) (“Municipal securities”) and MSRB Rule G-27 (“Supervision”).

To settle the charges, the underwriters agreed to (i) cease and desist, (ii) accept a censure and (iii) pay civil monetary penalties plus disgorgement with prejudgment interest. Separately, the SEC charged a fourth municipal bond underwriter with similar violations, also alleging that the fourth underwriter also made materially deceptive statements to investors regarding the securities, in violation of MSRB Rule G-17 (“Conduct of Municipal Securities and Municipal Advisory Activities”).

The Complaint against the fourth underwriter also includes charges for deceptive statements to issuers in violation of Rule G-17 and “seeks permanent injunctions, disgorgement plus prejudgment interest, and a civil money penalty.”

September 14 2022

Fried Frank Harris Shriver & Jacobson LLP

Washington D.C., Sept. 14, 2022 — The Securities and Exchange Commission today charged Chicago-based Loop Capital Markets, LLC for providing advice to a municipal entity without registering as a municipal advisor. The action marks the first time the SEC has charged a broker-dealer for violating the municipal advisor registration rule.

According to the SEC’s order, between September 2017 and February 2019, Loop Capital advised a Midwestern city to purchase particular fixed income securities, which the city purchased using the proceeds of its own municipal bond issuances. In addition, the Commission’s order found that Loop Capital did not maintain a system reasonably designed to supervise its municipal securities activities and had inadequate procedures, including insufficient methods to identify potential violations of the municipal advisor registration rules.

“The municipal advisor registration rules apply to all market participants and are intended to protect municipal entities from abuse,” said LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Public Finance Abuse Unit. “Registered broker-dealers must either register as municipal advisors or refrain from engaging in municipal advisory activities.”

Loop Capital agreed to settle with the SEC and consented, without admitting or denying any findings, to the entry of an SEC order finding that it violated the rules regarding municipal advisor registration and supervision requirements, censuring it, and ordering it to pay disgorgement and prejudgment interest of $5,456.73 and a civil penalty of $100,000.

The SEC’s investigation was conducted by Sally Hewitt and Kristal P. Olson of the Public Finance Abuse Unit with assistance from Jonathan Wilcox and Eric Celauro. The investigation was supervised by Brian D. Fagel. The SEC examination that led to the investigation was conducted by Ben Kempton, Catherine Cotey, David Kinsella, Michael Wells, and John Brodersen of the Chicago Regional Office.

Washington D.C., Sept. 13, 2022 — The Securities and Exchange Commission today filed a litigated action against Oppenheimer & Co. Inc. and separately announced settlements with BNY Mellon Capital Markets LLC, TD Securities (USA) LLC, and Jefferies LLC, charging each of the four firms with failing to comply with municipal bond offering disclosure requirements. These are the first SEC actions addressing underwriters who fail to meet the legal requirements that would exempt them from obtaining disclosures for investors in certain offerings of municipal bonds.

According to the SEC’s complaint and the settled orders, during different periods since 2017, the four firms sold new issue municipal bonds without obtaining required disclosures for investors. Each of the firms purported to rely on an exemption to the typical disclosure requirements called the limited offering exemption, but they did not take the steps necessary to satisfy the exemption’s criteria.

“I applaud the excellent work of the Division’s Public Finance Abuse Unit in bringing these first-ever actions in the $4 trillion municipal bond space,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “We encourage underwriters to examine their practices and to self-report any failures to us before we identify them ourselves.”

“Disclosure helps protect investors from fraud,” said LeeAnn G. Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “Underwriters must take seriously their responsibility to ensure municipal bond investors get the information they are entitled to.”

The SEC’s orders find that BNY, TD, and Jefferies each violated Rule 15c2-12 under the Securities Exchange Act of 1934, which establishes disclosures that must be provided to investors, as well as Municipal Securities Rulemaking Board (MSRB) Rule G-27 and Section 15B(c)(1) of the Exchange Act. Without admitting or denying the SEC’s findings, these three firms agreed to settle the charges, cease and desist from future violations of those provisions, be censured, and pay the following monetary relief:

• BNY: $656,833.56 in disgorgement plus prejudgment interest and a $300,000 penalty;
• TD: $52,955.92 in disgorgement plus prejudgment interest and a $100,000 penalty; and
• Jefferies: $43,215.22 in disgorgement plus prejudgment interest and a $100,000 penalty

The SEC’s complaint against Oppenheimer, filed in federal district court in Manhattan, charges the same violations as above in connection with at least 354 offerings. The complaint also alleges that Oppenheimer made deceptive statements to issuers in violation of MSRB Rule G-17, which prohibits deceptive, dishonest, or unfair practices. The complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and a civil money penalty.

As a result of its findings in these investigations, the SEC staff has begun investigations of other firms’ reliance on the limited offering exemption. Firms that believe their practices do not comply with the securities laws are encouraged to contact the SEC at [email protected].

The SEC’s investigations were conducted by Laura Cunningham, Sue Curtin, Warren Greth, Brian Knight, Steve Varholik, Cori Shepherd Whitten, and Jonathan Wilcox of the Public Finance Abuse Unit, with assistance from Samir Badalov, and supervised by Kevin B. Currid, Jason H. Lee, Ivonia Slade, and Rebecca Olsen. The SEC’s litigation against Oppenheimer will be led by Devon Staren. The SEC appreciates the assistance of the Municipal Securities Rulemaking Board.

What You Need to Know

• Loop Capital Markets is the first broker-dealer to be charged for violating the municipal advisor registration rule.
• The SEC ordered the firm to pay disgorgement and prejudgment interest of $5,457 and a civil penalty of $100,000.
• The SEC also recently filed a litigated action against Oppenheimer & Co. and reached settlements with BNY Mellon Capital Markets, TD Securities and Jefferies for failing to comply with municipal bond offering disclosure requirements.

A Chicago-based broker-dealer has agreed to pay more than $105,000 for violating the municipal advisor registration rule, The Securities and Exchange Commission said Wednesday.

Loop Capital Markets earned the dubious distinction of being the first BD to be charged for violating that rule, according to the SEC.

According to an SEC order filed Wednesday, between September 2017 and February 2019, Loop Capital advised a Midwestern city to buy particular fixed income securities, which the city purchased using the proceeds of its own municipal bond issuances.

The firm has been registered with the SEC as a BD since 1997. Loop Capital was temporarily registered as a municipal advisor before July 1, 2014, but has not been registered with the SEC as a municipal advisor since then, according to the SEC order.

The SEC also found that Loop Capital didn’t maintain a system reasonably designed to supervise its municipal securities activities and had inadequate procedures that included insufficient methods to identify potential violations of the municipal advisor registration rules.

“The municipal advisor registration rules apply to all market participants and are intended to protect municipal entities from abuse,” according to LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit.

“Registered broker-dealers must either register as municipal advisors or refrain from engaging in municipal advisory activities,” she said in a statement.

Without admitting or denying the SEC’s findings, Loop Capital agreed to settle with the SEC and consented to the entry of an SEC order finding it violated the rules regarding municipal advisor registration and supervision requirements.

The SEC also ordered the firm to pay disgorgement and prejudgment interest of $5,457 and a civil penalty of $100,000. The firm also agreed to be censured.

Loop Capital didn’t immediately respond to a request for comment on Thursday.

The SEC said Tuesday it filed a litigated action against Oppenheimer & Co. Inc. and had reached settlements with BNY Mellon Capital Markets LLC, TD Securities LLC and Jefferies LLC for failing to comply with municipal bond offering disclosure requirements.

ThinkAdvisor

By Jeff Berman

September 16, 2022

Summary

The Security and Exchange Commission last month released a Risk Alert to notify municipal advisors of key compliance issues. The SEC’s Division of Examinations adds client disclosure concerns to the list of most frequently observed compliance failures. Additionally, the Division warns that it intends to have a sharper focus on core standards of conduct and duties required of municipal advisors.

The Upshot

• Municipal advisors are required to register with both the SEC and the Municipal Securities Rulemaking Board. The SEC requires municipal advisor firms to file Form MA as well as a Form MA-I for each natural person engaging in municipal advisory activities. The MSRB requires firms to file Form A-12 as well as to pay an initial and annual fee.
• Municipal advisors should ensure that policies and procedures are up to date and accurately reflect recordkeeping requirements for specific record types.
• Municipal advisors must establish a supervisory system reasonably designed to achieve compliance and, at a minimum, provide for the establishment, implementation, maintenance, and enforcement of written supervisory procedures.

The Bottom Line

The SEC’s patience, even with small entities, can decrease after it has issued multiple alerts about a particular area of concern. Municipal advisors should review policies and procedures to avoid negative findings in future examinations.

On August 22, 2022, the SEC’s Division of Examinations (the Division) released a Risk Alert to notify municipal advisors of key compliance issues. The alert follows the Division’s 2017 release and reiterates old concerns as well as raises new ones. While the 2017 release addressed deficiencies found in the areas of municipal advisor registration, recordkeeping, and supervision, this latest alert adds client disclosure concerns to the list of most frequently observed compliance failures. The Division warned that it intended to have a sharper focus on core standards of conduct and duties required of municipal advisors.

Filings and Fees

Prior to engaging in municipal advisory activities, municipal advisors are required to register with both the SEC and the Municipal Securities Rulemaking Board (MSRB). Registration with the SEC requires municipal advisor firms to file Form MA as well as a Form MA-I for each natural person associated with the municipal advisor who engages in municipal advisory activities. Registration with the MSRB requires firms to file Form A-12 as well as to pay an initial and annual fee. Forms MA and A-12 must be updated annually. In addition, all of the aforementioned registration forms must be updated promptly in the event of a material change to information previously provided, including filing new Forms MA-I for newly associated persons and updating existing Forms MA-I to reflect any departing associated persons. The Division exam staff found that registration forms often were incomplete, inaccurate, and not updated to reflect changes or disclosures as required. Staff also found that some municipal advisors failed to properly pay the initial and annual MSRB registration fees.

Municipal advisors should conduct annual reviews of their filings to ensure accuracy and require associated persons to certify that their personal information is current. Policies and procedures should be updated, as needed, to inform associated persons of their duty to timely provide information on material changes. This annual review should be documented and can be incorporated into the required annual review of the municipal advisor’s supervisory system under MSRB Rule G-44. Similarly, payment of filing fees and of the MSRB’s annual municipal advisor professional fee under MSRB Rule A-11 should be reviewed annually.

Recordkeeping

Exchange Act Rule 15Ba1-8 and MSRB Rules G-8 and G-9 impose various bookkeeping and record retention requirements with which municipal advisors’ compliance was found to be lacking. Failure to maintain the following types of records were specifically noted:

• originals or copies of written communications relating to municipal advisory activities, particularly electronic communications including messages transmitted via personal email, text, and instant messenger;
• financial and accounting documents;
• records concerning compliance with MSRB Rule G-44, discussed below;
• written consents to service of process from associated persons;
• copies of documents created by the municipal advisor that were material to making a recommendation to a municipal entity or obligated person; and
• written agreements entered into by the municipal advisor with municipal entities and their employees, obligated persons, or otherwise relating to the municipal advisor’s business.

Municipal advisors should ensure that policies and procedures are up to date and accurately reflect recordkeeping requirements for specific record types. Each item of required information should be easily located in a logical filing system and preserved in an appropriate manner in conformity with applicable MSRB and SEC record retention requirements. Testing and monitoring to ensure that records are correctly made, approved, and retained should be conducted, potentially as part of or in conjunction with the required annual review of the municipal advisor’s supervisory system under MSRB Rule G-44.

Supervision

MSRB Rule G-44 requires municipal advisors to establish a supervisory system reasonably designed to achieve compliance and, at a minimum, provides for:

• the establishment, implementation, maintenance, and enforcement of written supervisory procedures (WSPs) that are reasonably designed to achieve compliance with applicable rules; and
• the designation of one or more municipal advisory principals to be responsible for supervision.

Furthermore, municipal advisors must do the following:

• implement processes to establish, maintain, review, test and modify written compliance policies and WSPs and review such supervisory systems at least annually;
• designate a chief compliance officer; and
• have its chief executive officer (or equivalent) certify in writing annually to the presence of these supervisory requirements.

Division staff found that some municipal advisors did not have WSPs in place and, where they did exist, such written policies were ineffective to ensure compliance with applicable rules. The alert also noted that WSPs were often not amended to reflect rule changes, e.g., MSRB Rule G-42, which establishes duties of care and loyalty and governs conflicts of interest, and MSRB Rule G-40 regarding advertising, which became effective in 2019. Failures to test supervisory systems annually or perform chief executive officer certifications were also noted.

Municipal advisors should develop effective supervisory systems that include, among other things, principal supervision, systematic maintenance of approvals, and a process to monitor and implement regulatory change. That supervisory system should be specifically described in the firm’s WSPs. On an annual basis, the chief compliance officer should conduct or oversee testing and monitoring of WSPs and produce a report to the chief executive officer to support the required annual certification under Rule G-44(d).

Client Disclosure

MSRB Rule G-42 requires municipal advisors to provide their municipal entity or obligated person client with full and fair disclosure of all material conflicts of interest. Such disclosure must be made in writing and provide sufficient detail of the nature of the conflict, potential consequences, and how the municipal advisor will manage or mitigate each conflict. To the extent that a municipal advisor determines, following reasonable diligence, it has no known material conflicts, it must provide a written statement to that effect to the client. The municipal advisor must also maintain evidence of each municipal advisory relationship and update such documentation to reflect material changes.

Frequently cited deficiencies included a failure to disclose or to timely disclose conflicts of interest, for example, related to fee-splitting or contingent compensation arrangements. Municipal advisors also were cited for not providing a “no known material conflicts of interest” statement where applicable. Failures to adequately document client relationships also were found.

The client engagement process, which should encompass timely engagement documentation, including an accurate scope of services and any limitations thereto, as well as full and timely disclosure of conflicts, should also be covered in the municipal advisor’s WSPs and be part of the annual compliance review and testing reporting process.

Core Duties and Standards of Conduct

While the Risk Alert did not delineate which of the core standards of conduct and duties required of municipal advisors it intends to focus more sharply upon in future examinations, the SEC’s publicly announced enforcement activities and SEC staff statements at its annual outreach forums and in other venues can provide some sense of where staff priorities may lie. Substantive municipal advisor duties, beyond those described above, discussed during the three most recent joint SEC-MSRB-FINRA compliance outreach programs for municipal advisors included documenting and fulfilling the municipal advisor’s scope of services; potential municipal advisor duties during the new issue pricing process; role of municipal advisors in bank loans/direct placements; and the basis for the municipal advisor’s own recommendations or its review of third-party recommendations. Recently filed SEC enforcement actions alleging breach of a municipal advisor’s fiduciary duty involve duties with respect to the municipal advisor’s role in disclosures in the offering document and the municipal advisor’s participation in the preparation of allegedly fraudulent financial projections. Municipal advisors should consider how they address these or similar scenarios in their WSPs and compliance policies.

Key Takeaways

Municipal advisors should note that the SEC’s patience, even with small entities, can decrease when it has issued multiple alerts about a particular area of concern and should take this opportunity to review policies and procedures in order to avoid negative findings in future examinations. As a foundation, municipal advisors should focus on addressing the following questions for each area of concern:

• Who is responsible for compliance?
• How and where are supervisory systems documented?
• How is compliance with documented WSPs evidenced?
• How frequently is compliance tested and monitored?
• Have written supervisory procedures and compliance manual been updated to address these topics?

by Lisa Brice, Scott Diamond, Teri Guarnaccia, Ernesto Lanza, Kimberly Magrini

September 9, 2022

Ballard Spahr LLP

Individuals wishing to consider membership in the NFMA are invited to listen to NFMA 101.

Click here to view the Webinar.

Dive into the August edition of Government Finance Review to learn about bridging political divides, entrepreneurial thinking in local government, internal controls, legal financing, and much more.

READ ONLINE

SEC risk alert highlights areas of continuing deficiencies and future focus of examinations.

On August 22, 2022, the Division of Examinations (the “Division”) of the U.S. Securities and Exchange Commission (“SEC”) published a risk alert (the “2022 Risk Alert”) to raise awareness of the most frequently cited deficiencies and weaknesses observed in recent municipal advisor examinations.1 Topics include municipal advisor registration and filings, recordkeeping, supervision and disclosure of conflicts of interest. The Division previously highlighted many of these topics in a 2017 risk alert (the “2017 Risk Alert”) with respect to newly registered municipal advisors.2 The Division has included examinations of municipal advisors as an examination priority each year since 2019.3

The 2022 Risk Alert, together with two SEC enforcement actions against municipal advisors in June of this year,4 may signal an increase in scrutiny from SEC examination and enforcement staff regarding municipal advisor practices, policies and procedures relating to the topics highlighted in the risk alert. As such, firms should consider reviewing and assessing their compliance with each of the topics. In this regard, we note that the Division indicated that it intends for future examinations “to include a more prominent focus on the core standards of conduct and duties applicable to municipal advisors.”5

The following is a brief summary of the Division’s key observations in the 2022 Risk Alert.

Registration and Filings
Municipal advisors filed SEC Forms MA and MA-I with inaccurate or incomplete information, including information regarding their associated persons’ other business and other required disclosures (e.g., customer complaints, tax liens). Additionally, municipal advisors did not amend, or did not amend timely, SEC Forms MA and MA-I and Municipal Securities Rulemaking Board (“MSRB”) Form A-12, such as to reflect changes in ownership of the firm or disciplinary actions involving the firm or its associated persons (e.g., disclosure of judicial actions or judgments/liens, change in employment or other business).

Recordkeeping
Municipal advisors did not make or keep true, accurate and current copies of certain required books and records, or did not preserve such records, including with respect to:

• Written communications relating to municipal advisory activities, particularly electronic communications, such as business-related email sent from a personal email address, text messages on mobile devices and instant messages. We note that this topic has been a focus of the SEC with respect to broker-dealers.
• Financial and account documents, including cash reconciliations and general ledgers.
• Written agreements entered into by the municipal advisor with municipal entities and their employees, obligated persons or otherwise relating to the firm’s business.

Supervision
Municipal advisors either did not have any written supervisory procedures (“WSPs”) or the WSPs were not sufficient, not implemented and/or not enforced. For example, deficiencies related to gifts, gratuities and expenses, and, as noted above, the preservation of electronic communications and/or the filing and updating of required forms. Moreover, some firms failed to promptly amend their WSPs to reflect the adoption of MSRB Rule G-42 (Duties of Non-Solicitor Municipal Advisors),6 which became effective in 2016, or MSRB Rule G-40 (Advertising by Municipal Advisors),7 which became effective in 2019. Firms also failed to conduct annual reviews of their WSPs pursuant to MSRB Rule G-44(b) and/or their Chief Executive Officers failed to certify annually, in writing, that the firm had in place processes to establish, maintain, review, test and modify WSPs, pursuant to MSRB Rule G-44(d).

Disclosure to Clients
Municipal advisors failed to disclose in writing to clients, or did not disclose timely, their material conflicts of interest, including with respect to the firms’ relationships with other parties (e.g., underwriters or other parties providing services to or on behalf of a municipal entity client) or between the municipal advisor and the municipal entity client itself. Other deficiencies involved disclosures relating to fee-splitting arrangements and contingent compensation arrangements. Finally, firms failed to document, or did not document adequately or timely, their municipal advisory relationships.

Footnotes
1 See SEC Division of Examinations, Risk Alert: Observations from Municipal Advisor Examinations (Aug. 22, 2022).

2 See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Municipal Advisor Examinations (Nov. 7, 2017) (“In sum, the staff observed that [municipal advisors] were generally unfamiliar with many of their regulatory obligations.”). The 2017 Risk Alert noted that “[s]ome firms were referred to the [SEC’s] Division of Enforcement.” Id. at 2.

3 See Examination Priorities for 2019, 2020, 2021 and 2022.

4 These cases involve municipal advisors who, among other things, breached their fiduciary duties to their municipal clients and, in one case, failed to disclose to nearly 200 municipal clients that the firm had material conflicts of interest arising from its compensation arrangements.

5 Risk Alert at 1.

6 Among other things, MSRB Rule G-42 establishes core standards of conduct, including duties of care and loyalty, and provides for the disclosure of conflicts of interest for municipal advisors that engage in municipal advisory activities, other than municipal solicitation activities.

7 MSRB Rule G-40 establishes requirements for advertisements by municipal advisors, including a requirement that each advertisement be approved in writing by a municipal advisor principal prior to first use.

The SEC recently brought fraud charges against Sterlington, Louisiana and its former mayor and separately against Rochester, New York and its former executives and Rochester’s municipal advisors and principals/owners for misleading investors related to their respective bond offerings.

At a high level, the SEC alleged (collectively between the two matters):

1. Investors were misled because offering documents included false or outdated financials and city officials and municipal advisors failed to disclose material facts related to the offerings.
2. Claims against city officials for misleading a credit rating agency by failing to disclose a projected budget shortfall, failing to further inquire about financial conditions despite knowledge of financial distress, and failing to apprise investors of the associated risks.
3. Activity by an unregistered municipal advisor as well as substantive claims of misleading investors, breaching fiduciary duty, and failing to disclose material conflicts of interest.

These cases are only the latest in a string of SEC settlements with municipalities and their advisors, including those resulting from the agency’s 2016 “MCDC” Initiative against dozens of municipal issuers and underwriters related to their failure to satisfy continuing disclosure obligations under Exchange Act Rule 15c2-12. Unlike the MCDC actions, the Sterlington and Rochester cases did not implicate the underwriters of the bond offerings (at least not yet).

Lapses in disclosures in the municipal securities market has been, and will continue to be, an area of SEC focus. This should come as no surprise given that the Division of Examinations included municipal securities as an area of focus in its 2022 examination priorities. A recent risk alert from the Division of Examinations also summarized staff’s observations from municipal advisor examinations, including noting deficiencies in registration, conflicts disclosures, and recordkeeping.

Other noteworthy takeaways from the Sterlington and Rochester cases include:

• The SEC made its usual assertions of violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
• The SEC also alleged that Rochester’s municipal advisors and its principals violated MSRB Rules G-17, G-42, and G-44 and Exchange Act Section 15B(c)(1).
• The SEC settled with the town of Sterlington and, interestingly, imposed no fines or other penalties against the city. The SEC took into account Sterlington’s corrective measures to enhance its internal controls and financial oversight (establishing a committee to oversee and approve borrowing, applying, and disbursements of funds).
• Sterlington’s former mayor is contesting the charges against him, in which the SEC is seeking a fine and a ban from engaging in future municipal securities offerings.
• Sterlington’s municipal advisor and its owner settled with the SEC and agreed to pay ill-gotten gains, accrued interest, and fines, which are yet to be determined by the court (advisory fees for the bonds sold totaled $26,303).
• In the Rochester case, the city and its municipal advisors and owners are contesting the SEC’s allegations. The SEC is seeking fines and payment of ill-gotten gains and accrued interest by the municipal advisor based on the alleged violations.
• Rochester’s former CFO settled with the SEC and consented to a $25,000 fine and a ban from engaging in future municipal securities offerings.

Goodwin Procter LLP – Nick Losurdo and Lauren A. Schwartz

August 31 2022

The SEC approved an MSRB proposal to amend MSRB Rule G-34 (“CUSIP Numbers, New Issue, and Market Information Requirements”) to better align the requirements for applying for a CUSIP number with the actual process for obtaining one.

As previously covered, the MSRB proposed (i) requiring that CUSIP applications be submitted only to a board’s designee, (ii) allowing municipal advisors a more flexible timetable to apply for a CUSIP and (iii) authorizing the board’s designee to determine the necessary information required in a CUSIP application. The final rule was adopted with minimal changes and the SEC stated that the proposal does not pose a threat to the facilitation of capital formation.

Fried Frank Harris Shriver & Jacobson LLP

August 25 2022

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on FINRA’s proposed rule changes to the Code of Arbitration Procedure relating to requests to expunge customer dispute information from the Central Registration Depository (CRD) and FINRA BrokerCheck.

View the SIFMA Comment Letter.

SIFMA provided comments to the Federal Reserve Board on their proposed rule that would implement the Adjustable Interest Rate (LIBOR) Act.

Click here to view the SIFMA comment letter.

The usefulness of municipal bond issuers’ financial disclosures is a source of considerable debate. Our paper, “The Information Content of Municipal Financial Statements: Large-Sample Evidence,” provides evidence that disclosure matters to municipal bond investors, particularly the retail investors who dominate the market. Using the entire universe of annual financial disclosures from 2009 to 2020, collected by the Municipal Securities Rulemaking Board—412,947 in all—we find that trading activity in the secondary market for municipal bonds increases after disclosures are filed. We find that trading activity increases by 2 percent to 3 percent around filings of annual financial statements, a small but meaningful increase.

Both institutional and retail trades increase around disclosure filing, but the effect is pronounced for retail investors, for whom the reports are more likely to provide new information. Moreover, trading increases more after timelier disclosures, consistent with regulators’ views that untimely disclosures are less likely to provide new information. We also examine variation in investors’ responsiveness to disclosure, based on the content of the disclosures. In general, disclosures that indicate the bond is risky are associated with a pronounced response.

Our results contrast with earlier research and provide the first large-scale evidence that participants in the U.S. market for municipal bonds perceive financial disclosures to have informational value.

Download the full paper.

The Brookings Institution

by Christine Cuny, Ken Li, Anya Nakhmurina, and Edward Watts

August 23, 2022

Washington, DC – The municipal market’s self-regulatory organization (SRO) met July 27-28, 2022 for its final quarterly Board of Directors meeting of Fiscal Year 2022. The Municipal Securities Rulemaking Board (MSRB) elected new officers and announced four new members who will join the Board in FY 2023.

Also at its meeting, the Board discussed current and forthcoming initiatives to advance its mission of protecting and strengthening the $4 trillion market that enables access to capital, economic growth, and societal progress in tens of thousands of communities across the country.

“The work of an SRO is never more important than at a time of profound evolution and modernization of financial markets,” said MSRB Chair Patrick Brett. “I am proud and grateful to have served alongside a dedicated Board of experts steeped in the characteristics of our unique market, who have not shied from advancing an ambitious agenda. With engagement from a broad universe of market stakeholders, the MSRB has taken meaningful steps to enhance the efficiency and transparency of municipal market structure, to deepen our own and the broader market’s understanding of how market practices are evolving, and to create opportunities for collaboration that will yield powerful new technology platforms and data analytics capabilities.”

Board Leadership and New Members for FY 2023

Brett’s term as Chair and Board member ends September 30, 2022. The Board announced today that it has elected public member Meredith L. Hathorn, Managing Partner, Foley & Judell, L.L.P. in Baton Rouge, LA, to serve as FY 2023 Chair of the Board. Public member Carol Kostik, the retired former deputy comptroller for public finance for the City of New York, will serve as Vice Chair. Officer terms are one year. The Board also announced the incoming class of four new Board members whose terms will begin October 1, 2022.

Chair-elect Hathorn, the FY 2022 Vice Chair and head of the Board’s Nominating Committee said, “Each year, we cast a wide net to identify a new class of market experts to join us on the Board. We thank each applicant for their willingness to give back to our market, and we could not be more pleased to welcome four new members who each bring a distinct perspective, a wealth of experience and an outstanding commitment to overseeing the execution of the MSRB’s long-term strategic goals.”

New public members joining the MSRB Board in Fiscal Year 2023 are institutional investor representative David F. Belton, Director, American Family Insurance; and municipal issuer representative Horatio Porter, Chief Financial Officer, North Texas Tollway Authority. Joining the Board as regulated members are: bank representative Patrick O. Haskell, Managing Director and Head of Municipal Securities and Co-Head of Fixed Income Retail Capital Markets, Morgan Stanley; and municipal advisor representative Jill Jaworski, Managing Director and Partner, PFM Financial Advisors. The new Board members were selected from more than 70 applicants this year.

For FY 2023, the Board will have 15 members, including eight independent public members and seven members from MSRB-regulated broker-dealers, banks and municipal advisors. The size of the Board was reduced as part of a series of governance enhancements that also tightened standards of independence for public members and established a lifetime service limit for Board members. To implement the transition plan to a smaller Board, the terms of a current public member on the Board, Donna Simonetti, and one regulated member, Francis “Frank” Fairman, have been extended one year. Board member Daniel Kiley’s term also has been extended one year to complete the final year of a vacancy created by the 2021 resignation of a regulated representative on the Board.

Market Regulation

The Board discussed the status of the ongoing retrospective rule review to holistically consider its rules and interpretive guidance and identify opportunities to streamline, update and promote consistency with rules of other regulators. The Board authorized staff to prepare a new request for comment on MSRB Rule G-47 to seek feedback on a proposal to codify interpretive guidance and specify certain additional information that may be material and require time of trade disclosures to customers. The MSRB plans to engage with stakeholders prior to the release of the request for comment.

In coordination with the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the MSRB is preparing to issue a request for comment in the coming week on proposed amendments to shorten MSRB Rule G-14 ’s time of trade reporting requirements as part of an initiative to enhance post-trade transparency across fixed income markets.

Market Transparency

The Board received a demonstration of continued work to develop the future-state MSRB.org website. The MSRB website is being redesigned to make MSRB rules, compliance resources, educational materials and other information easier and more intuitive to find, and to complement the ongoing work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems.

Market Structure and Data

The Board continued its ongoing discussions about market structure, including the potential implications for the MSRB’s rules of the SEC’s proposal to bring more Alternative Trading Systems (ATSs) under the regulatory umbrella. Additionally, the Board discussed working with staff to develop coordinated proposals with fellow regulators on the collection of pre-trade data in the fixed income markets. The Board also discussed potential new opportunities to support the market’s use of structured data by leveraging EMMA Labs, the MSRB’s innovation sandbox, to advance transparency and the quality and comparability of data in the municipal securities market.

“A common theme in our long-term strategic plan is the objective of advancing market efficiency, improving price transparency, and enhancing overall market liquidity, especially in light of the opportunities presented by evolving technology and market practices across the fixed income markets,” said MSRB CEO Mark Kim.

Public Trust

The Board approved a $45 million operating budget to fund the operations of the MSRB for FY 2023, beginning October 1, 2022. A budget summary detailing the MSRB’s projected expenses, revenues and reserve levels will be published at the beginning of the fiscal year. The Board recently proposed amendments to its fee setting process to ensure the MSRB collects only the revenue needed to fund its operations without accumulating excess reserves. Based on comments received on its proposal, the MSRB has advanced a revised proposal for filing with the SEC. The proposed amendments will be available for further public comment and would become operative on October 1, 2022.

Additionally, the Board discussed releasing a summary report in the coming weeks on comments received in response to its request for information on environmental, social and governance (ESG) practices in the municipal securities market, published in December 2021.

About the New MSRB Board Members

David Belton is Director at American Family Insurance, where he provides credit research and portfolio management for the company’s municipal bond holdings, both tax-exempt and taxable. Prior to joining American Family, Mr. Belton was Senior Vice President and Head of Municipal Bond Research at Standish Mellon Asset Management, where he was also portfolio manager of several Dreyfus municipal bond funds. Mr. Belton began his career at Van Kampen Merritt and subsequently held positions at Stein Roe & Farnham and Federated Investors. He has been active in the National Federation of Municipal Analysts at both the local and national levels. Mr. Belton holds a bachelor’s degree in political science from Haverford College and an MBA from the University of Chicago. He is a Chartered Financial Analyst.

Patrick O. Haskell is Managing Director and Head of Municipal Securities and Co-Head of Fixed Income Retail Capital Markets at Morgan Stanley. Prior to this role, Mr. Haskell was Head of Credit Complex Trading, Americas, which included the Securitized Products Group, Corporate Credit and Municipal Securities. Prior to joining Morgan Stanley, Mr. Haskell was Chairman and CEO of diversified water technology company Ecosphere Technologies. Mr. Haskell began his career in municipal bond sales at Credit Suisse First Boston and went on to become Head of U.S. Government Bond Trading before joining HSBC as a Managing Director and Head of North American Rates Sales and Trading. He previously served as Board Chair of Tradeweb and as Chairman of the Primary Dealer Committee of SIFMA. He currently serves as the Board Chair for Boy’s Hope/Girl’s Hope NYC. Mr. Haskell earned a bachelor’s degree in economics from Union College.

Jill Jaworski is Managing Director and Partner at PFM Financial Advisors, where she manages the Chicago financial advisory practice, serving a range of clients in Chicago and the Midwest, as well as transit and transportation clients nationally with a focus on the South and Mid-Atlantic regions. Ms. Jaworski began her career as an analyst in public finance investment banking at First Albany Capital, eventually rising to Vice President. She also worked at Jefferies & Company prior to joining PFM Financial Advisors. Ms. Jaworski holds a bachelor’s degree in political science from the University of Chicago.

Horatio Porter is Chief Financial Officer and Assistant Executive Director of Finance at the North Texas Tollway Authority, where he is responsible for executing the company’s financial strategies. In this role, he leads the accounting, business diversity, procurement and treasury functions. Mr. Porter was previously Chief Financial Officer for the City of Fort Worth and an Assistant Vice President at AmeriCredit, Corp. (now GM Financial). He is a certified public accountant and holds a bachelor’s degree in accounting and a master’s of business administration in finance from Texas Christian University.

Date: July 29, 2022

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

The SEC Division of Examinations identified common compliance deficiencies found during examinations of municipal advisors.

In a Risk Alert, SEC staff listed deficiencies related to registration, recordkeeping, supervision and disclosures. Highlighted areas included:

• Registration: Incomplete, inaccurate filings; failure to amend promptly; failure to pay fees;
• Recordkeeping: Failure to keep electronic communications, including emails sent from personal email addresses and text messages; poor financial records; failure to certify compliance as required under MSRB Rule G-44 (“Supervisory and Compliance Obligations of Municipal Advisors”); failure to keep written agreements;
• Supervision: Failure to have adequate written supervisory procedures; failure to conduct annual reviews of compliance; and
• Disclosures: Inadequate disclosure of conflicts; poor documentation of advisory relationships.

SEC staff said the deficiencies in the report were similar to those identified in its 2017 Risk Alert, a reminder that those areas continue to be the most vulnerable (see previous coverage).

The SEC staff encouraged municipal advisors to review the deficiencies identified in the alert and consider implementing programs to improve compliance.

Fried Frank Harris Shriver & Jacobson LLP

August 23 2022

The MSRB discusses market perspectives on ESG, new board leadership and members plus more in the latest MSRB Update.

View the MSRB Update.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published a summary of comments received on its request for information (RFI) to solicit public input on environmental, social and governance (ESG) practices in the municipal securities market.

The MSRB issued the RFI in December 2021 to further understanding of how ESG practices are being integrated in the municipal securities market and to engage in information-gathering to fulfill its statutory mandate to protect investors, issuers and the public interest. The summary synthesizes the diversity of viewpoints expressed by the 52 commenters according to three broad themes:

• The evolving nature of ESG practices in the municipal securities market
• Challenges associated with ESG integration in the municipal securities market
• Opportunities to improve market transparency through the MSRB’s Electronic Municipal Market Access (EMMA®) website.

“The MSRB acknowledges and appreciates the robust level of stakeholder engagement from across the municipal market,” said MSRB CEO Mark Kim. “The 52 commenters provided a broad range of perspectives on ESG that achieved our goal of advancing our own and the broader market’s understanding of the current challenges and opportunities presented by two distinct and evolving market trends: disclosure of ESG-related information and the marketing of municipal securities with ESG designations.”

The MSRB will continue to monitor and engage with the broader market on understanding emerging ESG practices and their implications for market fairness, efficiency and transparency.

All comment letters are available to read in full on the MSRB’s website here.

Date: August 9, 2022

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

In 2024, the current trade settlement timeframe will be halved, moving from the current trade date plus two days (T+2) to trade date plus one day (T+1). Taking 24 hours out of the settlement cycle will require a myriad of significant changes. The list of impacted areas is long: global settlements, documentation, corporate actions, securities issuance, and coordination for mutual fund portfolio securities and investor shares. Some areas—allocations, affirmation and disaffirmation processes, clearinghouse process timelines, and securities lending—will require fundamental changes. Other areas that will require significant change include prime brokerage, delivery of investor documentation, foreign currency exchange (FX), global movement of securities and currency, batch cycle timing, and exchange-traded fund (ETF) creation and redemption. It will also be imperative to analyze current settlements to identify the reasons behind settlement errors and fails and ensure that the error and fail rates do not increase under a newly compressed timeline.

How will the industry prepare for such a significant change?

To assist market participants in the move to T+1, SIFMA, the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC), together with Deloitte LLP (Deloitte), have published The T+1 Securities Settlement Industry Implementation Playbook. This guide outlines a detailed approach to identifying the implementation activities, timelines, dependencies, and risk impacts that market participants should consider as they prepare for the transition to T+1 settlement.

SIFMA, DTCC and ICI are committed to leading the industry’s collaboration on accelerating the settlement cycle. We know from our work together on the move from T+3 to T+2 in 2017 that this undertaking pulls in each sector of the industry and spans multiple operations, functions, and regulations. Unlike the move to T+2, the move to T+1 is a wholesale change to the processes which take place between execution and settlement.

What is the Playbook designed to do?

The Playbook was developed as a guide for market participants to identify areas impacted by shortening the settlement cycle and considerations that should be addressed. Every firm has different infrastructure, businesses, and clients, as well as operational processes and geographies that need to be taken into account. It is important to note that, because the SEC’s proposal to shorten the settlement cycle is not yet final, the Playbook serves as a guide to assist with the many complex steps involved in the move to T+1. The Playbook assumes a third quarter 2024 transition date to a T+1 settlement cycle, subject to final regulatory approval, and it may be updated at a later time should regulators select a different transition date.

It consists of 14 sections. Two sections provide overviews of the previous move to a T+2 settlement cycle and the approach being taken with the move to T+1. Eight sections explore specific areas of the trade lifecycle, including Trade Processing, Asset Servicing, Documentation, Securities Lending, Prime Brokerage, and Funding and Liquidity Considerations. The remaining sections outline matters related to Regulatory Changes, Global Impacts, Primary Offerings, Buy-Side Considerations, Industry Testing and Migration Plans, as well as the associated resources needed for market participants to prepare for the transition to T+1.

What other considerations are there as we move to T+1?

The move to T+1 requires changes to securities regulations. The Securities and Exchange Commission (SEC) issued a proposal to adopt rules and rule amendments to shorten the standard settlement cycle earlier this year. In a comment letter on the proposal, SIFMA supported the SEC providing regulatory clarity on SEC Rule 15c6-1, the rule that covers T+1 settlement and outlined recommendations and comments with respect to the proposal which would foster the policy goals of the proposal while reducing potential adverse consequences. SIFMA also noted the proposal reflects many of the recommendations included in the report, “Accelerating the U.S. Securities Settlement Cycle to T+1,” which SIFMA drafted in partnership with DTCC, ICI, and Deloitte in December 2021.

To expedite delivery of required documentation to better align with T+1 settlement, SIFMA strongly believes e-Delivery should be the default mechanism for prospectus and confirmation delivery. In an E-delivery default world, retail investors will receive their trade confirmations on the trade date as opposed to the typical mail delivery of 3-5 days post settlement. This will allow retail investors the opportunity to review the terms of the trade before settlement and manage any discrepancies in the trade details before the trade is finalized. Overall, e-Delivery systems allow for improved methods of communication with investors and a more efficient process for delivering confirmations for broker-dealers in accordance with their obligations under Rule 10b-10. SIFMA recently sent a letter encouraging the SEC to modernize its rules to make e-delivery the default mechanism for transmitting investor communications and disclosures.

What’s next in the move to T+1?

We encourage all impacted market participants to start using the Playbook to put the foundations of their programs in place. The Playbook is a user-friendly, living document and users can expect updates throughout the process of shortening the settlement cycle, especially as it relates to the final SEC rule.

Tom Price is a managing director and head of technology, operations, and business continuity for SIFMA.

August 4, 2022

• Current reporting window for transactions is 15 minutes
• Reduction had been suggested by SEC Chair Gensler in April

US financial regulators are moving ahead with a plan that could slash the amount of time that traders have to report many bond transactions to just one minute.

The Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board sought comments on the possible reduction from the current time frame of 15 minutes. It’s an initial step in a lengthy rule-change process that also involves the Securities and Exchange Commission.

Finra, which oversees brokerages and dealers, said the plan would apply to trading in corporate bonds, asset-backed securities and certain mortgage-backed securities. The industry-backed regulator said it would create “a qualitative increase in market transparency.”

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Bloomberg Markets

By Lydia Beyoud and Jack Pitcher

August 2, 2022

SUMMARY

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the need to modernize its rules to make e-delivery the default mechanism for transmitting investor communications and disclosures in a T+1 environment.

View the comment letter.

Washington, D.C. – The Municipal Securities Rulemaking Board (MSRB) today opened a 60-day comment period to re-examine time of trade reporting requirements first established in 2005 and last considered in 2013. The MSRB’s request for comment, released in coordination with a parallel proposal by the Financial Industry Regulatory Authority (FINRA), is part of the MSRB’s broad retrospective review of the entire body of MSRB rules and interpretive guidance to identify opportunities to modernize the rule book in light of evolving market practices and to align its rules, as appropriate, with those of other regulators.

Specifically, the MSRB is seeking public comment on the potential benefits and challenges of a proposed amendment to MSRB Rule G-14 to generally require that transactions in municipal securities are reported as soon as practicable, but no later than within one minute of the time of trade, down from the long-standing 15-minute reporting requirement. Trades reported to the MSRB through its Real-Time Transaction Reporting System (RTRS) are made transparent to the public on the free Electronic Municipal Market Access (EMMA®) website, providing investors, dealers, municipal advisors and other market participants with the information they need to make informed decisions about the pricing of municipal securities.

“In the 17 years since the 15-minute trade reporting timeframe was first established, our market has seen significant advances in technology and an evolution of market structure that includes electronic trading venues,” said MSRB CEO Mark Kim. “Although the majority of trades are already being reported within one minute today, it is also clear from the data that certain types of trades are taking longer to be reported. The Board is requesting information from market participants to inform our thinking on the path forward to modernize Rule G-14.”

In developing the proposed amendments and framing the questions in the request for comment, MSRB staff analyzed current trade data to compare the time of trade execution to the time the trade was reported to the MSRB. This analysis is included in the request for comment.

“Although 77% of trades required to be reported in 15 minutes were reported within one minute, this only represented 44% of the par amount reported,” said MSRB Chief Market Structure Officer John Bagley. “Coupled with our analysis of same-day trade activity for individual securities, we believe a significant volume of trades could have had the benefit of additional information if trades were required to be reported within one minute.”

Comments should be submitted no later than October 3, 2022.

Read the request for comment.

Date: August 2, 2022

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

MSRB data shows a significant and relatively steady increase in customer transactions with ATSs since 2016, with a dramatic acceleration in the first half of 2022.

Read the paper.

Researchers find dealers mark up prices when customers are less likely notice

Municipal bond dealers set prices well above what they pay for the securities, reaping windfalls at the expense of individual investors despite recent regulation aimed at curbing so-called markups, according to an academic study of trading data released Thursday.

“Dealers appear to use their pricing discretion to charge higher markups to small customers when investors are less likely to notice,” wrote the study’s authors, John Griffin and Samuel Kruger of the University of Texas at Austin, and Nicholas Hirschey of the Universidade NOVA de Lisboa.

State and local governments sell bonds in the roughly $4 trillion municipal market to finance infrastructure such as roads, sewers and high schools. Most of the debt is held by households, either directly or through mutual or exchange-traded funds. The interest is typically exempt from federal and often state taxes, attracting high net worth individual investors.

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The Wall Street Journal

By Heather Gillers

Aug. 4, 2022

Washington, DC – The municipal market’s self-regulatory organization (SRO) met July 27-28, 2022 for its final quarterly Board of Directors meeting of Fiscal Year 2022. The Municipal Securities Rulemaking Board (MSRB) elected new officers and announced four new members who will join the Board in FY 2023.

Also at its meeting, the Board discussed current and forthcoming initiatives to advance its mission of protecting and strengthening the $4 trillion market that enables access to capital, economic growth, and societal progress in tens of thousands of communities across the country.

“The work of an SRO is never more important than at a time of profound evolution and modernization of financial markets,” said MSRB Chair Patrick Brett. “I am proud and grateful to have served alongside a dedicated Board of experts steeped in the characteristics of our unique market, who have not shied from advancing an ambitious agenda. With engagement from a broad universe of market stakeholders, the MSRB has taken meaningful steps to enhance the efficiency and transparency of municipal market structure, to deepen our own and the broader market’s understanding of how market practices are evolving, and to create opportunities for collaboration that will yield powerful new technology platforms and data analytics capabilities.”

Board Leadership and New Members for FY 2023

Brett’s term as Chair and Board member ends September 30, 2022. The Board announced today that it has elected public member Meredith L. Hathorn, Managing Partner, Foley & Judell, L.L.P. in Baton Rouge, LA, to serve as FY 2023 Chair of the Board. Public member Carol Kostik, the retired former deputy comptroller for public finance for the City of New York, will serve as Vice Chair. Officer terms are one year. The Board also announced the incoming class of four new Board members whose terms will begin October 1, 2022.

Chair-elect Hathorn, the FY 2022 Vice Chair and head of the Board’s Nominating Committee said, “Each year, we cast a wide net to identify a new class of market experts to join us on the Board. We thank each applicant for their willingness to give back to our market, and we could not be more pleased to welcome four new members who each bring a distinct perspective, a wealth of experience and an outstanding commitment to overseeing the execution of the MSRB’s long-term strategic goals.”

New public members joining the MSRB Board in Fiscal Year 2023 are institutional investor representative David F. Belton, Director, American Family Insurance; and municipal issuer representative Horatio Porter, Chief Financial Officer, North Texas Tollway Authority. Joining the Board as regulated members are: bank representative Patrick O. Haskell, Managing Director and Head of Municipal Securities and Co-Head of Fixed Income Retail Capital Markets, Morgan Stanley; and municipal advisor representative Jill Jaworski, Managing Director and Partner, PFM Financial Advisors. The new Board members were selected from more than 70 applicants this year.

For FY 2023, the Board will have 15 members, including eight independent public members and seven members from MSRB-regulated broker-dealers, banks and municipal advisors. The size of the Board was reduced as part of a series of governance enhancements that also tightened standards of independence for public members and established a lifetime service limit for Board members. To implement the transition plan to a smaller Board, the terms of a current public member on the Board, Donna Simonetti, and one regulated member, Francis “Frank” Fairman, have been extended one year. Board member Daniel Kiley’s term also has been extended one year to complete the final year of a vacancy created by the 2021 resignation of a regulated representative on the Board.

Market Regulation

The Board discussed the status of the ongoing retrospective rule review to holistically consider its rules and interpretive guidance and identify opportunities to streamline, update and promote consistency with rules of other regulators. The Board authorized staff to prepare a new request for comment on MSRB Rule G-47 to seek feedback on a proposal to codify interpretive guidance and specify certain additional information that may be material and require time of trade disclosures to customers. The MSRB plans to engage with stakeholders prior to the release of the request for comment.

In coordination with the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the MSRB is preparing to issue a request for comment in the coming week on proposed amendments to shorten MSRB Rule G-14 ’s time of trade reporting requirements as part of an initiative to enhance post-trade transparency across fixed income markets.

Market Transparency

The Board received a demonstration of continued work to develop the future-state MSRB.org website. The MSRB website is being redesigned to make MSRB rules, compliance resources, educational materials and other information easier and more intuitive to find, and to complement the ongoing work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems.

Market Structure and Data

The Board continued its ongoing discussions about market structure, including the potential implications for the MSRB’s rules of the SEC’s proposal to bring more Alternative Trading Systems (ATSs) under the regulatory umbrella. Additionally, the Board discussed working with staff to develop coordinated proposals with fellow regulators on the collection of pre-trade data in the fixed income markets. The Board also discussed potential new opportunities to support the market’s use of structured data by leveraging EMMA Labs, the MSRB’s innovation sandbox, to advance transparency and the quality and comparability of data in the municipal securities market.

“A common theme in our long-term strategic plan is the objective of advancing market efficiency, improving price transparency, and enhancing overall market liquidity, especially in light of the opportunities presented by evolving technology and market practices across the fixed income markets,” said MSRB CEO Mark Kim.

Public Trust

The Board approved a $45 million operating budget to fund the operations of the MSRB for FY 2023, beginning October 1, 2022. A budget summary detailing the MSRB’s projected expenses, revenues and reserve levels will be published at the beginning of the fiscal year. The Board recently proposed amendments to its fee setting process to ensure the MSRB collects only the revenue needed to fund its operations without accumulating excess reserves. Based on comments received on its proposal, the MSRB has advanced a revised proposal for filing with the SEC. The proposed amendments will be available for further public comment and would become operative on October 1, 2022.

Additionally, the Board discussed releasing a summary report in the coming weeks on comments received in response to its request for information on environmental, social and governance (ESG) practices in the municipal securities market, published in December 2021.

About the New MSRB Board Members

David Belton is Director at American Family Insurance, where he provides credit research and portfolio management for the company’s municipal bond holdings, both tax-exempt and taxable. Prior to joining American Family, Mr. Belton was Senior Vice President and Head of Municipal Bond Research at Standish Mellon Asset Management, where he was also portfolio manager of several Dreyfus municipal bond funds. Mr. Belton began his career at Van Kampen Merritt and subsequently held positions at Stein Roe & Farnham and Federated Investors. He has been active in the National Federation of Municipal Analysts at both the local and national levels. Mr. Belton holds a bachelor’s degree in political science from Haverford College and an MBA from the University of Chicago. He is a Chartered Financial Analyst.

Patrick O. Haskell is Managing Director and Head of Municipal Securities and Co-Head of Fixed Income Retail Capital Markets at Morgan Stanley. Prior to this role, Mr. Haskell was Head of Credit Complex Trading, Americas, which included the Securitized Products Group, Corporate Credit and Municipal Securities. Prior to joining Morgan Stanley, Mr. Haskell was Chairman and CEO of diversified water technology company Ecosphere Technologies. Mr. Haskell began his career in municipal bond sales at Credit Suisse First Boston and went on to become Head of U.S. Government Bond Trading before joining HSBC as a Managing Director and Head of North American Rates Sales and Trading. He previously served as Board Chair of Tradeweb and as Chairman of the Primary Dealer Committee of SIFMA. He currently serves as the Board Chair for Boy’s Hope/Girl’s Hope NYC. Mr. Haskell earned a bachelor’s degree in economics from Union College.

Jill Jaworski is Managing Director and Partner at PFM Financial Advisors, where she manages the Chicago financial advisory practice, serving a range of clients in Chicago and the Midwest, as well as transit and transportation clients nationally with a focus on the South and Mid-Atlantic regions. Ms. Jaworski began her career as an analyst in public finance investment banking at First Albany Capital, eventually rising to Vice President. She also worked at Jefferies & Company prior to joining PFM Financial Advisors. Ms. Jaworski holds a bachelor’s degree in political science from the University of Chicago.

Horatio Porter is Chief Financial Officer and Assistant Executive Director of Finance at the North Texas Tollway Authority, where he is responsible for executing the company’s financial strategies. In this role, he leads the accounting, business diversity, procurement and treasury functions. Mr. Porter was previously Chief Financial Officer for the City of Fort Worth and an Assistant Vice President at AmeriCredit, Corp. (now GM Financial). He is a certified public accountant and holds a bachelor’s degree in accounting and a master’s of business administration in finance from Texas Christian University.

Date: July 29, 2022

Contact: Leah Szarek, Chief External Relations Officer
202-838-1300
[email protected]

• Park View School issued $7.6 million of muni bonds in 2016
• SEC sued school in 2020 for misleading investors on bond sale

An Arizona charter school north of Phoenix, sued by the US Securities and Exchange Commission for allegedly misleading investors in an 2016 municipal bond offering, filed bankruptcy Tuesday.

Park View School Inc., a non profit, listed $9.4 million in liabilities, mostly due to bondholders, and $9.7 million in assets. Bondholders have a lien on the school, which had recurring losses, according to a June 2021 financial statement.

On July 15, $10,000 of Park View bonds with a 6% coupon and maturing in 2050 traded at about 21 cents on the dollar.

In 2020, the SEC alleged Park View and …

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Bloomberg Law

by Martin Z. Braun

July 20, 2022

The Public Finance Abuse Unit of the U.S. Securities and Exchange Commission (the “SEC”) had a busy first half of 2022, bringing forth four enforcement cases alleging substantial violations of federal securities laws. Unlike the previous two years, when most of the SEC’s enforcement activity focused largely on financial advisers and underwriters, all of these four actions directly involved municipal issuers, their employees and in most cases, their financial advisers as well.

While each case is unique, and though several cases are still pending, there are important takeaways that can be derived from the allegations set forth by the SEC, which can serve to inform municipal issuers and private obligors of watchouts regarding potential violations of securities laws. In addition to these key takeaways, summaries of each case are provided below.

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by Robert Feyer, James Hernandez, Jerry Kyle Jr., Alison Radecki, Christine Reynolds

July 19, 2022

Orrick, Herrington & Sutcliffe LLP

View the update.

The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet in Washington, D.C. on July 27-28, 2022, where it will discuss the following topics:

Market Regulation

The Board will discuss the status of its ongoing retrospective rule review and consider authorizing a new request for comment on MSRB Rule G-47 to codify interpretive guidance and reflect additional market practices.

Key retrospective reviews currently underway include: preparing to issue a request for comment to shorten MSRB Rule G-14’s time of trade reporting requirements, which were first established in 2005 and last considered in 2013; the filing of modernized MSRB Rule G-34, on obtaining CUSIP numbers, which has been published for comment; and the forthcoming filing of proposed new Rule G-46 that would establish and codify certain core standards of conduct and duties of “solicitor municipal advisors.”

The Board also previously authorized seeking comment on modernizing rules on dealer supervision and streamlining the timeframe for underwriters to provide primary market information through MSRB Form G-32.

Market Transparency

The Board will receive a demonstration of continued work to develop the future-state MSRB.org website. The MSRB website is being redesigned to make MSRB rules, compliance resources, educational materials and other information easier and more intuitive to find, and to complement the ongoing work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems.

Market Structure and Data

The Board will discuss market structure topics. The Board also will discuss potential new opportunities to collaborate with market participants in EMMA Labs, the MSRB’s innovation sandbox, to advance transparency and the quality and comparability of data in the municipal securities market.

Public Trust

As part of its essential oversight responsibilities of the organization’s governance and financial stewardship, the Board will consider the comments received on its proposed amendments to its fee setting process, adopt the FY 2023 budget and elect new leadership. The Board will announce the FY 2023 chair, vice chair and four new members of the Board following its meeting. Additionally, the Board will discuss a draft summary report on comments received in response to its request for information on environmental, social and governance (ESG) practices in the municipal securities market, published in December 2021.

When states boycott financial institutions over their ESG policies, it can have a chilling and costly effect on competition in the bond market, according to a new paper from Wharton’s Daniel Garrett.

Texas law that bans its municipalities from doing business with banks that have ESG policies against fossil fuels and firearms is driving down competition for borrowing and costing taxpayers millions in extra interest, according to a new study from Wharton.

In their paper, Wharton assistant finance professor Daniel Garrett and Ivan Ivanov, an economist with the Board of Governors of the Federal Reserve System, documented the financial impact of Senate Bills 13 and 19, which took effect Sept. 1, 2021. The legislation is aimed at protecting Texas’ reliance on the oil and gas and firearms industries by prohibiting local jurisdictions from contracting with banks that have adopted environmental, social, and corporate governance policies against those industries. That means cities can no longer use those banks as underwriters for municipal bonds, which are one of the main ways that cities raise money.

After Texas passed the law, five of the largest underwriters exited the market: JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Fidelity.

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Knowledge at Wharton

by Angie Basiouny

July 12, 2022

S&P last month withdrew ratings for 30 cities, counties and other municipalities because of filing delays

U.S. states, cities and counties are taking longer to file regular financial reports, leaving bondholders in the dark and adding to pressure on prices.

S&P Global Ratings last month withdrew its ratings for 30 cities, counties and other municipalities because they haven’t yet filed their 2020 financial statements. The ratings company also placed New Orleans on credit watch in April for late reporting, the largest city analysts can recall incurring that sanction in more than a decade.

S&P said it could lift New Orleans’ credit watch in the coming weeks after the city, with nearly 400,000 residents and more than half a billion dollars in outstanding bond debt, finally made its 2020 financial information publicly available on June 29, a year and a half after the fiscal year ended.

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The Wall Street Journal

By Heather Gillers

July 13, 2022

One of the primary purposes of the Securities and Exchange Commission (the “SEC”) is to ensure that the investing public obtains accurate, timely and comprehensive information with respect to publicly-traded securities. The SEC regulates the release of such information through the antifraud provisions of the federal securities laws, particularly Section 17(a) of the Securities Act of 1933 and SEC Rule 10b-5 (established under Section 10(b) of the Securities Exchange Act of 1934) (“Rule 10b-5”). Like public companies, governmental issuers of municipal bonds must comply with these antifraud provisions when making public statements that are reasonably expected to reach investors and the trading market. In recent years, the SEC has undertaken unprecedented enforcement activity relative to such disclosures, both in terms of the number of actions and the enforcement tools at its disposal. Significantly, recent SEC enforcement actions have involved not only governmental issuers, but also their individual officials.

As a result, issuers are taking a fresh look at their disclosure practices relative to their public finance transactions, paying particular attention to the individuals tasked with: (i) assuring that the issuer’s disclosure documents for a particular bond issue comply with federal securities law requirements and (ii) assisting the issuer with its post-issuance disclosure obligations. Often, the issuer’s bond counsel and financial advisor take the lead in overseeing these matters. Alternatively, in situations involving unique or complicated disclosure questions, separate disclosure counsel may be engaged to advise the issuer on its disclosure obligations.

The involvement of legal counsel notwithstanding, the issuer is ultimately responsible for complying with its disclosure obligations under the federal securities laws. This blog is intended to help issuers in navigating these considerations, focusing on: (i) the preparation of the issuer’s offering circular, commonly known as the official statement (the “Official Statement”), in connection with the public sale of its municipal bonds; (ii) the issuer’s ongoing disclosure requirements once the bonds are issued, including the effect of the issuer’s other financial obligations on these requirements; (iii) the impact of the issuer’s other public statements in relation to the antifraud provisions; (iv) guidelines for preparing effective disclosure policies and procedures to facilitate these requirements; and (v) a brief word on environmental, social and governance (“ESG”) matters as they relate to the issuer’s disclosure obligations.

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by Neal Pandozzi

July 15, 2022

Adler Pollock & Sheehan P.C.

Johnson City, Texas, is a city in the very middle of the Texas Hill Country, with a 2020 population of 1627. Johnson City was incorporated in 1879 and named after its founder, Sam E. Johnson, a Texas rancher. It lies amid the so-called “Texas-German” Belt, which originated due to the many German immigrants arriving from 1830 on. (1830 was a time of political unrest in the various German states due to instability in the Habsburg Empire.) German immigration grew especially after 1842 with the establishment of a recruiting and welcoming center for German immigrants in the Texas Hill Country. So, there are Texas towns with names like New Braunfels, and rather good German style beer, throughout the Texas Hill Country.

Johnson City, the County Seat of Bianco County, is located 12 miles west of the Lyndon B. Johnson National Historical Park. Texas Hill Country is, of course, where President Johnson began his career in politics. In 2013, a 27-year-old named Anthony M. Holland, who had worked for at least eight years in administrative positions for several Texas cities and one school district, landed the job of Chief Administrative Officer and City Secretary for Johnson City. In that position, according to the June 16, 2022, Complaint brought by the U.S. Securities and Exchange Commission (“SEC”) in the U.S. District Court for the Western District of Texas, Austin Division (the “Complaint”), Holland was “responsible for the administration and operation of all municipal departments, projects, and oversight of the City’s finances and records. Holland’s responsibilities included directing and maintaining the central accounting system, preparing financial statements, and preparation of information for annual audits and reviewing audit reports.”

The Complaint charged Holland with embezzling approximately $1.12 million from the city over the period of 2015 to 2020, including $107,137 during the 2016 fiscal year. Holland delayed the annual independent audit of the City’s 2016 financial statements. Finally, in 2018, under pressure to release the delayed 2016 financials, he “created the Falsified Documents [the SEC’s term] by changing dates on the City’s 2015 financial statements and audit report.” He then provided the Falsified Documents to the City’s mayor and its municipal advisor, “knowing that the material would be posted to the City’s public website and the EMMA system and made available to investors.”

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Norris McLaughlin P.A.

July 18, 2022

Read the latest Compliance Corner newsletter to learn why compliance professionals should check out the MSRB’s updated Investor’s Guide to 529 Plans and much more.

Norwalk, CT, June 30, 2022 — The Governmental Accounting Standards Board (GASB) issued a proposal today that would require governments to disclose information about certain risks they face that could affect the level of services they are able to provide or their ability to meet obligations as they come due.

Although governments are required to disclose information about their exposure to some risks, essential information about certain other risks that are prevalent among state and local governments is not routinely disclosed because it is not explicitly required. The proposed Statement would provide financial statement users with an early warning that governments are susceptible to the financial effects of those risks.

The Exposure Draft (ED), Certain Risk Disclosures, would require governments to disclose essential information about risks related to a government’s current vulnerabilities due to:

1. Certain concentrations, and
2. Certain constraints common in the governmental environment.

The proposed Statement defines a concentration as a lack of sufficient diversity related to an aspect of a significant revenue source or expense—for example, a small number of companies that represent a majority of employment in a government’s jurisdiction, or a government that relies on one revenue source for most of its revenue. It defines a constraint as a limitation imposed on a government by an external party or by formal action of the government’s highest level of decision-making authority—such as a voter-approved property tax cap or a state-imposed debt limit. Concentrations and constraints may limit a government’s ability to acquire resources or control spending.

Disclosure Criteria

This proposal would require a government to disclose information about a concentration or constraint if all of the following criteria are met:

1. It is known to the government prior to issuing the financial statements
2. An associated event either has occurred or is more likely than not to occur or begin to
   occur within 12 months of the financial statement date or shortly thereafter, and
3. It is at least reasonably possible that within three years of the financial statement
   date the event will cause a substantial effect on the government’s ability to (1) continue
   to provide services at the level provided in the current reporting period or (2) to meet its
   obligations as they come due.

Note Disclosures

If a government determines that those criteria have been met, it would disclose information in notes to financial statements in sufficient detail to allow users of financial statements to understand the general nature of the circumstances disclosed and their potential effect on the government’s ability to provide services or meet its obligations.

Stakeholders are asked to review the proposal and provide input to the Board by September 30, 2022. Comments may either be submitted in writing or through an electronic input form.

More information about commenting on the ED can be found in the document, which is available on the GASB website, www.gasb.org.

Norwalk, CT, July 7, 2022 — The Governmental Accounting Standards Board (GASB) today issued a Concepts Statement to guide the Board when establishing note disclosure requirements for state and local governments. The document is part of the GASB’s response to the results of its research reexamining existing note disclosure requirements.

The concepts contained in the document are primarily intended to provide the GASB with criteria to consistently evaluate future requirements for notes to financial statements in the standards-setting process. They also may help stakeholders to understand the fundamental concepts underlying note disclosure requirements contained in future GASB pronouncements.

Concepts Statement No. 7, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements: Notes to Financial Statements, details concepts including:

• The purpose of notes to financial statements
• The intended users of note disclosures
• The types of information that should be disclosed in notes>
• The types of information that are not appropriate for note disclosures, and
• The degree of importance that information disclosed in notes to financial statements should possess.

A key element of the Concepts Statement is the concept of essentiality. The document establishes that notes to financial statements are essential to making economic, social, or political decisions or assessing accountability. The Concepts Statement also identifies the characteristics of essential information:

• The information has or is expected to have a meaningful effect on users’ analyses for making decisions or assessing accountability.
• A breadth or depth of users utilize or are expected to utilize the information in their analyses for making decisions or assessing accountability.

The concepts included in Concepts Statement 7 establish that information disclosed in notes to financial statements should correspond to the reporting units presented in the financial statements.

The GASB issued an Exposure Draft (ED) on this topic in early 2020. The Board issued a Revised Exposure Draft in July 2021 to incorporate feedback received from stakeholders on the previous ED and to seek feedback on the resulting proposed revisions.

Concepts Statement No. 7 is available for download at no charge on the GASB website, www.gasb.org.

SUMMARY

SIFMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s Notice 2022-03 and its Filing of a Proposed Rule Change to Amend Certain Rates of Assessment for Rate Card Fees Under MSRB Rules A-11 and A-13, Institute an Annual Rate Card Process for Future Rate Amendments, and Provide for Certain Technical Amendments to MSRB Rules A-11, A-12, and A-13.

View the SIFMA Comment Letter.

SUMMARY

SIFMA, BDA and NAMA provided comments to the U.S. Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB) Proposed Changes to its Fee Setting Process.

View the Comment Letter.