WASHINGTON — Market participants said they are concerned and confused about an aspect of the Municipal Securities Rulemaking Board’s proposed municipal advisor core conduct rule that some observers are reading as allowing investment banks to provide certain advisory services on deals they underwrite.

Groups representing both dealer and non-dealer MAs said Thursday that they are particularly interested in proposed Rule G-42’s provision that would prohibit MAs from acting as a principal in most financial transactions related to their advice to state and local government clients, except certain transactions addressed in the board’s Rule G-23 on the activities of financial advisors. That rule prevents dealers from “role switching” and acting as a financial advisor and underwriter on the same deal, and the SEC staff has said that an underwriter relationship is not consistent with a fiduciary relationship.

November 2011 guidance from the MSRB on G-23 states that “it shall not be a violation of Rule G-23(d) for a dealer that states that it is acting as an underwriter with respect to the issuance of municipal securities to provide advice with respect to the investment of the proceeds of the issue, municipal derivatives integrally related to the issue, or other similar matters concerning the issue.”

Some market participants said that proposed Rule G-42 and Rule G-23 can coexist as written because G-23 applies to financial advisors and G-42 would apply to municipal advisors — roles that can overlap but which are not necessarily the same thing. G-23 prevents financial advisors from underwriting, while allowing underwriters to provide advice on proceeds and derivatives. Some groups affected by the rule argue the issue is confusing and warrants clarification.

“NAMA is concerned the provisions of Revised Rule G-42, specifically related to principal transactions, may serve to increase marketplace confusion and decrease clarity,” said National Association of Municipal Advisors president Terri Heaton. “There is concern that the Revised Rule G-42 conflicts with MSRB Rule G-23 and provides basis for investment banks to provide advice and underwrite same transactions in connection with derivative products and investment of bond proceeds transactions. NAMA supports rulemaking and regulation which serves to eliminate the practice of market participants to serve in dual roles, or to switch roles, in municipal transactions.”

Heaton said NAMA is highly supportive of the MSRB’s efforts to expedite MA rulemaking, but stressed that the rules should strengthen the market and protect issuers, investors, and the public trust while cutting down on confusion and eliminating inconsistencies in the marketplace.

Jessica Giroux, general counsel and managing director at the Bond Dealers of America, said her group could benefit from some clarification.

“We believe that the revisions to MSRB proposed Rule G-42 will go a long way toward regulating a previously unregulated component of the industry, but the BDA still has some questions as it relates to certain elements in the proposed rule,” she said. “In particular, we would like to see more clarity around what it means for a transaction to be considered ‘directly related’ to another transaction and how Rule G-42 meshes with Rule G-23. While we still have some analysis to do, we hope to be able to work with the MSRB on some interpretive guidance which might alleviate any outstanding concerns.”

Leslie Norwood, managing director, associate general counsel, and co-head of the Securities Industry and Financial Markets Association’s municipal group also applauded the MSRB’s efforts and said SIFMA is pleased with changes from previous drafts that removed a requirement that MAs disclose potential conflicts of interest to investors and other clarifications it made about conflict disclosure.

“We have concerns, however, including our disappointment that the MSRB didn’t take our suggestions regarding narrowing the principal transactions ban even further, and suitability for brokerage transactions,” she said.

All three groups said they plan to comment to the SEC, which general solicits a fresh round of comments before approving significant rule changes.

THE BOND BUYER

BY KYLE GLAZIER

APR 16, 2015 2:41pm ET

WASHINGTON — The Municipal Securities Rulemaking Board has filed a proposed rule with the Securities and Exchange Commission that would govern the core conduct of municipal advisors, including their fiduciary duty to put the interests of state and local government clients ahead of their own.

The MSRB filed its proposed Rule G-42 on the conduct of non-solicitor municipal advisors in a 639-page release on Wednesday. Subject to SEC approval, the proposal is a key piece of the MSRB’s efforts to regulate MAs under the Dodd-Frank Act’s requirement that MAs act as fiduciaries to their issuer clients.

The rule is expected to affect roughly 740 firms and 3,800 individuals, the MSRB said.

“The MSRB believes this rule will further Congress’ intent to build a framework of federal oversight for the advice state and local governments count on when considering municipal securities transactions and financial products,” said MSRB executive director Lynnette Kelly. “The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing a comprehensive package of rules and professional qualification standards for municipal advisors, many of whom were previously unregulated at the federal level.”

The proposed rule states that MAs owe a fiduciary duty of loyalty to their municipal issuer clients, requiring “without limitation … to deal honestly and with the utmost good faith with a municipal entity client and act in the client’s best interests without regard to the financial or other interests of the municipal advisor.”

It spells out a less stringent “duty of care” owed to all clients, including obligated persons such as conduit borrowers. The duty of care requires that an MA exercise “due care” in its work, be qualified to provide MA services, make a “reasonable inquiry” into the facts relevant to a client’s request or a recommendation before deciding whether or not to proceed, and undertake a “reasonable investigation” to determine that its advice is not based on bad information.

The MSRB requested comment on the rule twice in 2014, initially in January and then again in July. The version filed with the SEC differs from the July version that was put out for comment in several ways.

The newest version states explicitly that, while an MA must document the municipal advisory relationship between the advisor and its client, that documentation does not have to take the form of a contract superseding existing agreements. The MA must, however, put into writing details such as the compensation structure to be used in the relationship, the scope of activities the MA will perform, any required disclosures, and any means for terminating the relationship.

The filed proposal adds that in addition to disclosing to a client any potential conflicts of interest that an MA might have it, the advisor must also disclose its disciplinary history. The MA could fulfill this requirement by directing a client to its Form MA filed with the SEC.

The filed proposal adds guidance to G-42’s requirement that MAs not recommend a client enter into a transaction without determining through “reasonable diligence” that the transaction or product is suitable for the client. It states that the MA’s suitability analysis can be client-specific, taking into account factors such as the client’s financial situation and needs, objectives, tax status, risk tolerance, liquidity needs, experience with muni bond transactions, and more.

Another tweak to the filed version of G-42 concerns what happens when a firm inadvertently provides bond-related advice to a municipality. The previous draft introduced a provision allowing a firm to largely avoid the documentation and conflict of interest disclosure requirements of G-42 so long as it provided the municipality with a disclaimer stating that it did not mean to give that advice and had no intention of continuing an advisory relationship.

The filed version makes clear that the inadvertent advice provision “does not eliminate responsibility for compliance with the SEC’s registration rule, other provisions of Rule G-42, other MSRB rules or any other applicable laws; rather, it offers narrow relief from specified requirements of Rule G-42 that are intended to apply to intentional advisory relationships.”

The proposed rule would prohibit certain behavior that would be inconsistent with the fiduciary standard, including the MA acting as a principal in transactions with municipal issuer clients that are directly related to a transaction on which it is providing advice. The filed version of the rule makes clear that such prohibited transactions include bank loans of more than $1 million in size that are “economically equivalent to the purchase of one or more municipal securities.”

The MSRB said it expects the SEC to publish the proposal in the Federal Register and ask for public comments. The commission could approve the proposal as is, or require changes. The MSRB is proposing that the rule become effective six months after SEC approval.

The MSRB plans to propose a separate rule governing the conduct of firms who solicit business on behalf of municipal advisors.

THE BOND BUYER

BY KYLE GLAZIER

APR 15, 2015 1:30pm ET

The BDA submitted a comment letter to the MSRB regarding their requested approval from the SEC for a proposal to expand the post-trade data displayed on EMMA.

Amendments to the MSRB’s Real-Time Transaction Reporting System (RTRS) would require dealers to indicate trades executed on an alternative trading system and trades involving non-transaction based compensation arrangements, among other changes. You can find our final letter here.

The BDA’s letter includes discussion on the following:

• Support for increased transparency
• Concern regarding additional associated reporting costs
• Request for nine-month testing period

04-17-2015

WASHINGTON – Bond Dealers of America is stepping up efforts to educate its members on regulatory compliance as well as electronic trading and to get them to meet with more lawmakers and staff on Capitol Hill, said new board chairman Steve Genyk.

Genyk, a managing director and the head of fixed-income capital markets at Janney Montgomery Scott in Philadelphia who became BDA chair on March 1, spoke about the group’s agenda and priorities during an interview with The Bond Buyer.

Genyk said the trade group for middle-market dealers has been trying to provide educational resources in recent months to add more value for its more than 50 member firms.

“Joining a trade organization like the BDA is an expense for firms,” he said. “We have to constantly strive to provide value to the membership.”

BDA has begun some new initiatives to that end, he said.

“We’re doing compliance training webinars now, which have been attended through WebEx by a lot of people,” Genyk said. “Three-hundred people participated in the due diligence webinar, which is only available to members. The webinar focused on “the evolving need to do due diligence and the regulators’ focus on the importance of due diligence,” he said.

“We’ve recently formed an electronic trading and technology committee,” Genyk continued. “Electronic trading is something that in the retail world has been pretty prevalent for a while now. It’s becoming talked about more and more in the institutional world.”

“A lot of our membership really benefits from learning more and becoming more facile with the technology aspects.”

Genyk said the committee can help members learn about the alternative trading systems that are operating and how to integrate electronic trading into their firms — something smaller firms may not be familiar with.

Regulators want to encourage use of ATS’, but Genyk said they have the potential to alter the market.

“The ATS’ will continue to play a role in municipals, particularly as it relates to retail,” he said, but added it’s not clear what their growing role will mean for the market. “This is an evolving area of the marketplace that many of our members don’t know about,” he said.

BDA has also started monthly “member fly-ins,” in which member-firm officials come to Washington and meet on Capitol Hill with federal lawmakers and senior staff from the key committees involved in muni-related and other issues.

“This type of work is really, really important because those in Washington who are making rules and regulating our industry, they need to hear from us directly and they need to hear from the practitioners directly,” Genyk said.

The fly-ins “have been really, really well-received by Washington and by membership,” Genyk said.

Two legislative issues that BDA is focusing on are preserving the tax-exemption for municipal bonds and increasing the annual issuance limit for issuers of bank-qualified bonds.

The exemption is “very, very important,” said Genyk. “I think the notion of education around the tax exemption is critical.”

Recently, as part of a member fly-in, George K. Baum & Company executive vice president Guy Yandel participated in a roundtable for the Senate Finance Committee tax-reform working group on community development and infrastructure that included staff from that panel and from the Joint Committee on Taxation. JCT staff had technical follow-up questions. After the roundtable, Yandel and BDA met with staff in lawmakers’ offices and provided more basic information about the importance of the muni exemption, said BDA general counsel and managing director Jessica Giroux, who also participated in the interview.

BDA initiated the Municipal Bonds for America coalition, whose members have conversations weekly and meet in person once a month. The coalition plans to hold more “muni bonds 101 seminars” for congressional staff members, Giroux said.

Last year, the group held a seminar on the House side, and the previous year, it held one on the Senate side. This year, the group wants to hold seminars on both sides of Capitol Hill because there has been a lot of interest in learning about the exemption and tax reform, Giroux said.

“Tax reform isn’t imminent, but it’s more or less on everybody’s radar consistently,” she said.

Bank-Qualified Bonds

BDA also has been pushing for Congress to pass legislation to increase the annual issuance limit for issuers of bank-qualified bonds.

Under current law, banks can buy the bonds of issuers who issue $10 million or less of tax-exempt bonds per year and deduct 80% of their carrying costs, the interest expense they incur from purchasing or carrying an inventory of tax-exempt bonds. The $10 million limit was temporarily increased to $30 million under the American Recovery and Reinvestment Act, but that expired at the end of 2010. Outside of that temporary increase, the bank-qualified limit has not been raised or indexed to inflation.

The bank-qualified bond issue is “right in our members’ wheelhouse” because it pertains to small and medium-sized issuers working with small and medium-sized underwriters, said BDA chief executive officer Mike Nicholas, who was on-hand for the interview as well.

BDA is working with the Independent Community Bankers of America, the Government Finance Officers Association, and other state and local government groups on the bank-qualified bond issue. One of the reasons BDA started its member fly-in program was to have its members talk about the benefits of increasing the bank-qualified limit, Nicholas said.

Bipartisan legislation to increase the bank-qualified limit to $30 million and index it to inflation has been introduced several times in past years in both chambers of Congress, but has not yet been offered in this Congress. It was offered in the House last year. There is still interest in that bill, which was called the Municipal Bond Market Support Act and was sponsored by Rep. Tom Reed, R-N.Y., Rep. Richard Neal, D-Mass., Giroux said.

On the Senate side, Sen. Mike Crapo, R-Idaho, and former Sen. Jeff Bingaman D-N.M., introduced a version of that bill in 2011. Bingaman retired from the Senate in 2013, and BDA and other groups are looking for a new Democratic sponsor of the bill so that it can be bipartisan, said Giroux said. Having bills be bipartisan helps the legislation move faster in Congress and attract more cosponsors, she said.

President Obama proposed increasing the bank-qualified limit to $30 million in his fiscal 2016 budget request. Last year’s tax-reform proposal by former House Ways and Means Committee chairman Dave Camp, R-Mich., would have done away with bank-qualified bonds.

On the regulatory side, Genyk said, BDA is focused on what it feels is the disproportionate impact of rules and enforcement actions on small and medium-sized firms.

“You’re going to hear that from us over and over again,” Genyk said, making the point that while certain costs may be easily absorbed by major Wall Street firms, they are typically a burden for BDA members.

“The simple example is MCDC,” Genyk said, referring to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative. Launched about one year ago, the MCDC offered both dealers and issuers a chance to take advantage of lenient settlement terms if they self-reported instances in the previous five years in which the official statements of their bond deals falsely claimed the issuer was in full compliance with its continuing disclosure agreement. The civil penalties for dealers under the initiative were structured based on the sizes of their bond deals, but capped based on the size of the firm. The maximum total voluntary settlement penalty for a dealer was $500,000, but was capped at $100,000 for underwriters who reported less than $20 million of revenue in fiscal year 2013.

A $500,000 settlement for a medium-sized firm is far different monetarily than a $500,000 settlement for one of the “Big Five,” Genyk said.

Another example is the cost of overhauling automated systems to comply with new Municipal Securities Rulemaking Board regulations, such as its recently-approved best execution rule.

“That expense is far greater to a small or medium-sized firm than it is to a large firm that has more revenue over which to spread the expense,” he said.

MA Rules

Genyk said there is a “lack of uniformity” with how BDA members are interpreting what is or is not permitted under the SEC’s municipal advisor registration rule, which was adopted in late 2013. The rule implements the 2010 Dodd-Frank Act’s requirement that firms giving bond advice to state and local issuers owe those municipalities a fiduciary duty to put issuers’ interests ahead of their own. The roughly 18 months since the rule’s adoption have been marked by conversations about what behaviors dealers can engage in without having to register as MAs, something the SEC has said would preclude them from underwriting a bond issue resulting from their advice. Genyk said BDA firms view the boundaries differently.

“I don’t think that’s anybody’s fault,” Genyk said. “That’s just the nature of a new rule.”

Giroux said BDA’s membership encompasses a diverse range of business practices and that the irregularity in interpretations of the MA rule has emerged as firms have been reworking their written policies and procedures pursuant to the rule. BDA is doing its best to keep members educated about the rule, Giroux said, but its actual application is up to the firms themselves.

Officials from the SEC’s muni office have said repeatedly that they have no concrete plans to issue a third round of guidance on the MA rule, but also have not ruled it out. Giroux said BDA would always consider that helpful.

“We’d love to see additional guidance,” she said.

Genyk also talked about his own background and his views on the challenges the muni market faces. Born in Detroit and raised in Ann Arbor, Mich., Genyk went on to earn a bachelor’s degree at Wesleyan University in Connecticut. He moved to New York and began a career in corporate finance, initially at Morgan Guaranty Trust Company, now J.P. Morgan, and Shearson Lehman Hutton, which ultimately became Lehman Brothers.

After about three years, Genyk proceeded to earn a master’s degree in government administration at the University of Pennsylvania in Philadelphia, inspired by his family’s track record of public service. His father worked as a probation and corrections officer in Michigan, Genyk said, while his brother works for the Department of Justice and his mother and sister have each been social workers.

“I come from a family of public servants, literally everybody but me,” said Genyk.

Genyk entered the muni world through an internship with the former advisory firm, PG Corbin and Co. while at graduate school, and decided to pursue a career in financial services after graduation. He worked at advisory firm A. H. Williams in Philadelphia for about five years before joining Legg Mason in the same city for more than eight years, rising to become co-head of public finance. After a short stint at Bear Stearns in 2005-2006, Genyk said, he saw the chance to fulfill a personal goal of working in the public sector for the Philadelphia Industrial Development Corporation. After two years in 2008, he joined Janney, following Legg Mason’s Timothy Scheve, who had become president and chief executive officer of Janney the previous year.

Moving forward, Genyk said he sees the long-standing low interest-rate environment as posing a challenge for the muni industry.

“Persistently low interest rates are a challenge for the investors out there,” Genyk said. “Good for the issuers, a challenge for the investors. A rising interest rate, when that happens, is something the entire industry is going to have to pay attention to.”

“Will new money issuance increase as the economy expands?” he asked. Or will we remain sort of mired in the post-Great Recession anti-tax, anti-spend mode?”

Genyk said distressed muni issuers that have made headlines such as Detroit and Puerto Rico are “distractions for the industry” but are also important, particularly because of how widely-held Puerto Rico’s bonds are. He said the industry should also be looking at the ongoing issue of pension underfunding, which the SEC has made clear in both enforcement actions against multiple states and in speeches from commissioners, that it is watching very closely.

“We’re cautious.” Genyk said. “We want to continue to stay focused on making sure that the regional middle market firm’s voice is heard in a marketplace that is changing due to the market and due to increased regulation.”

THE BOND BUYER

BY KYLE GLAZIER and NAOMI JAGODA

APR 13, 2015 11:06am ET

The SEC’s revised estimates of the compliance burden imposed by its main disclosure rule still contain “gross inaccuracies,” according to a March 27 letter the Securities Industry and Financial Markets Association sent to the SEC.

The letter was a response to updated SEC estimates about the amount of time required for market participants to comply with Rule 15c2-12. The rule requires dealers to review issuers’ official statements before underwriting municipal bonds, and to reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s EMMA website.

“We continue to be seriously concerned about the gross inaccuracies in the current notice and the original notice of the SEC’s time estimates for compliance with the rule and the failure of the SEC to estimate the rule’s primary disclosure compliance burdens, as separate and distinct from its secondary market compliance burdens,” the letter stated.

“These estimates continue to seriously and materially underestimate the time burden of the rule on broker dealers,” SIFMA said of the commission’s latest numbers, “which peg the dealer compliance burden as 10 hours per year per firm to determine that an issuer has entered into a continuing disclosure agreement. In a competitive offering,” a Bond Buyer article reported. “SIFMA estimates firms spend on average six man-hours on each offering they bid.”

Tuesday, April 14, 2015

Alexandria, VA – With the filing today of a key rule proposal with the Securities and Exchange Commission (SEC), the Municipal Securities Rulemaking Board (MSRB) took a significant step toward fulfilling its Congressional mandate to address concerns that a regulatory gap had allowed unaccountable and unqualified individuals to advise state and local governments on multibillion-dollar municipal finance deals. MSRB Rule G-42 would establish core standards of conduct for municipal advisors, provide guidance on the obligations and prohibitions that accompany their federal fiduciary duty to state and local governments, and clarify their duties of care and fair dealing to all clients.

“The MSRB believes this rule will further Congress’ intent to build a framework of federal oversight for the advice state and local governments count on when considering municipal securities transactions and financial products,” said MSRB Executive Director Lynnette Kelly. The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing a comprehensive package of rules and professional qualification standards for municipal advisors, many of whom were previously unregulated at the federal level.

“The MSRB carefully considered input from across the municipal market and the public to develop a core set of duties tailored to the unique nature of the relationship between a trusted advisor and a state or local government issuer,” Kelly said. “Much like existing regulatory regimes for other financial professionals, the MSRB’s rule would prohibit particular activities and ensure clients get the information they need to make informed decisions about hiring financial professionals and evaluating their recommendations.”

The rule addresses the specific duties of care and loyalty that are components of the federal fiduciary duty established under the Dodd-Frank Act for municipal advisors when dealing with municipal entity clients. The rule includes a ban on engaging in principal transactions with a municipal entity client that are directly related to the transaction for which the municipal advisor is providing advice. Other provisions of the rule apply to municipal advisors in their work with both municipal entity clients and obligated person clients. These provisions include requirements to document the advisory relationship, provide written disclosure of conflicts of interest, and conduct reasonable diligence to support the suitability of recommendations, among other duties. Read an executive summary of key provisions of the rule.

In 2014, the MSRB twice sought industry and public feedback on draft versions of the rule. Today’s SEC filing describes the regulatory justification for each provision of the final proposal and includes detailed written responses to all of the substantive issues raised by commenters. The SEC is expected to publish the MSRB’s proposal in the Federal Register and invite additional public comment before considering whether to approve the new rule.

“MSRB Rule G-42 is deliberately designed to accommodate the diversity of municipal advisors and their clients while still creating strong protections against the types of conduct that can expose state and local government issuers and other borrowers to unnecessary risks and costly consequences,” Kelly said. “The MSRB intends Rule G-42 to serve as the cornerstone of the MSRB’s developing regulatory framework for municipal advisors and to support our overall mission of promoting market integrity.”

For up-to-date information on the MSRB’s development of a regulatory framework for municipal advisors, visit the Resources for Municipal Advisors section of the MSRB’s website.

Date: April 15, 2015

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

WASHINGTON – Two divisions of Morgan Stanley have been censured and ordered to pay $675,000 to settle Financial Industry Regulatory Authority charges that they misrepresented municipal bond interest paid to customers as tax-exempt, when it should have been taxable.

Morgan Stanley Smith Barney and Morgan Stanley & Co. agreed to the penalties April 1 without admitting or denying FINRA’s charges that they violated a slew of Municipal Securities Rulemaking Rules from July 2009 through December 2013.

“The settlement involves a very small fraction of the firm’s interest payments on municipal bonds during the relevant period,” said Morgan Stanley spokeswoman Christine Jockle. “The firm addressed the tax issues with the [Internal Revenue Service] without impact to its customers. The firm cooperated fully with FINRA and revised its procedures to prevent recurrence of such issues. FINRA did not allege any willful or fraudulent behavior.”

During the examination period, FINRA said, the firm paid out to customers at least $880,000 dollars of interest that the customers believed was tax-exempt from muni bonds held by the companies in customer accounts. In fact, FINRA found, the firm was “short” on its positions and the interest they were paying was actually taxable.

Short positions occur when a firm sells bonds that it does not own at the time. A dealer who executes a short sale must then go to the market and subsequently purchase the securities from a third party in order to make delivery on the transaction. When a short position corresponds to a customer’s “long” position, the dealer makes a substitute interest payment to the customer. But because only interest from municipal issuers is tax-exempt, interest generated from a short position is taxable.

“During the relevant period, Morgan Stanley generated or held more than 1,500 short positions in tax-exempt municipal securities that corresponded to long positions in customer accounts,” FINRA found. “The short positions resulted primarily from trading and operational errors. ln these instances, Morgan Stanley paid the interest to the customer and the interest was taxable.”

Most of the short positions resulted from trading errors that occurred at the firm’s retail branches, FINRA said. When an error occurred in connection with a customer’s municipal bond order, the resulting short position was first moved to a branch error account and then, if not covered by the branch, eventually moved to a centralized error account maintained by the firm’s muni desk.

FINRA examiners found that the firm knew as early as 2006 that its short positions were not being covered quickly enough, with some positions remaining short for months or even years. Morgan Stanley’s capital markets division, which was responsible for covering short positions, was not made aware of how the firm was characterizing interest payments, FINRA found.

The firm’s tax reporting department, which was responsible for issuing 1099 forms on interest income, and its income processing department responsible for how interest was coded on the 1099s, were not aware that the short positions existed.

FINRA alleged that because of these issues, Morgan Stanley’s automated system calculating interest owed to customers was not taking into account whether interest paid to customers who held munis should be designated as taxable when the interest was being paid by Morgan Stanley rather than by a municipal issuer.

When FINRA examiners discovered the problems in 2013, Morgan Stanley agreed to pay a settlement to the IRS to prevent customers from having to file amended tax returns.

The alleged conduct resulted in violations of MSRB rules G-27 on supervision, G-17 on fair dealing, and G-8 on books and records, FINRA said. The firm failed to maintain a supervisory system reasonably designed to prevent rule violations, misstated the nature of interest payments to at least 1,500 customers, and created and distributed inaccurate account statements.

Morgan Stanley Smith Barney agreed to a censure and fine of $675,000, of which $124,406.93 was paid jointly with Morgan Stanley & Co. The latter division was censured along with its share of the fine.

THE BOND BUYER

BY KYLE GLAZIER

APR 10, 2015 12:01pm ET

WASHINGTON — The municipal advisory business has exploded over the past 30 years, as economic, regulatory, and technological developments have combined to create a bigger business that is increasingly dominated by firms focused mostly on MA services.

While financial advisors have worked with municipal issuers for many years, the business transformed enormously during the three decades leading up to the Securities and Exchange Commission’s adoption of its final MA registration rule in 2013.

That rule, and the associated MA regulations written by the Municipal Securities Rulemaking Board, implement provisions of the 2010 Dodd­ Frank Act that for the first time subjected MAs to federal regulation and imposed a fiduciary duty on them to put the interests of their state and local government clients ahead of their own.

But while MA regulation represents a pivotal time in the history of the financial advisory business, radical changes were already well underway before the financial crisis that led to Dodd­ Frank.

According to data from Thomson Reuters, only $9.7 billion of long-­term bonds were issued with a financial advisor in 1980. By the end of 1985, when deals were rushed to market to beat implementation of the tax­exempt bond restrictions in the Tax Reform Act of 1986, that number had jumped almost nine fold to $86.3 billion.

Following a drop in the years after tax reform and the stock market crash of 1987, the par value of bond deals with advisors continued to trend sharply up after 1991. It was $104.8 billion in 2000, $257.9 billion in 2005, and $331.8 billion in 2010.

In 1980, issuers had advisors on only 21.4% of the total par value of bonds issued. Last year, 81.8% of the par value of bond deals had FAs.

Practitioners with longtime experience in the field said the explosive growth of FAs has been spurred by economic issues, technological changes, and shifts in issuer attitudes.

“The cost of doing a bond issue has shrunk significantly,” said Keith Curry, a former managing director with non­dealer MA giant Public Financial Management. Curry, who is now a member of the Newport Beach, Calif. city council and a visiting professor at Concordia University in Irvine, said that technological advancements such as the Internet totally “changed the game” so that some of the broker dealers that dominated the business 30 years ago lost their grip on the business.

“It was certainly a business dominated by Wall Street investment banks,” Curry said.

Changes in Rankings

The annual FA rankings by par value of bonds reflect a shift in the balance of financial advisors, away from traditional New ­York based giants and towards firms that are either totally dedicated to, or place great emphasis on, municipal advisory services as a key part of their businesses. While firms like PFM and FirstSouthwest have had strong positions within the advisory industry going back to 1980, others have vaulted into the top 10 with the declining position of underwriter-­first firms.

Wall Street and foreign financial service giants had a strong showing in the 1980 top ten by par value of bonds, with Swiss­-based dealer UBS Securities taking a close second behind Dallas-based FirstSouthwest. Merrill Lynch, JP Morgan Securities, Wells Fargo & Co., and Citi were also among top 10 financial advisors. Goldman Sachs and RBC Capital markets joined the top 10 list at various times over the next several years.

That dynamic began to shift in the late 1980s, a development some sources attributed partly to large banks streamlining their operations in response to a two-­year financial downturn following the Black Monday stock market crash on Oct. 19, 1987.

By the mid­-1990s, PFM and Public Resources Advisory Group ­­ two non­-dealer advisors ­­ had established themselves as the perennial industry leaders. From 1999 onward those firms joined FirstSouthwest, a dealer firm that has always had a large advisory business, to form the top three FAs by par value of bonds.

Robert Lamb, partner and president at Fairfield, N.J.­based Lamont Financial Services Corp., also said technology was a major transformative influence as the advent of accessible pricing services reduced the data resources advantage long enjoyed by dealer firms.

“We’re able to look at most of the same data that the underwriters do,” Lamb said.

John White, the chairman of PFM who has more than 40 years of muni industry experience, said that for many years issuers saw no reason to spend money on a financial advisor because they believed that their underwriter would offer them any advice they needed. More specialized advisory practices had to actively persuade issuers of the benefits of having an FA on the deal.

“It took a while for that to get accepted,” White said. “Now you almost have an institutionalized presence of an FA in the deal.”

Many market participants have said that the role of advisors could become even more institutionalized by the MA rule because of an exemption that allows underwriters and others to provide unfettered advice to a municipality as long as the issuer retains and certifies that it will rely on its own independent registered municipal advisor, or IRMA. The IRMA exemption is emerging as a key way for underwriters to protect themselves from having to register as MAs and losing their ability to underwrite bonds as a result.

Compared to 30 years ago, many issuers are now more aware of the conflict of interest inherent when a financial advisor also intends to underwrite the bonds they advise on ­ a conflict that became apparent in the debates surrounding the MSRB’s Rule G­23.

Prior to 2011, Rule G­23 on activities of financial advisors allowed dealers to advise a state or local government to issue bonds and then formally resign that role to become underwriter of the bonds. The rule was revised to prohibit that practice.

Robert Doty, a lawyer and former financial advisor who now runs his own litigation consulting firm AGFS in Annapolis, Md., said that one common practice for decades was for a dealer to pitch its services as an FA and not even mention underwriting, even though the firm’s overwhelming focus was to eventually underwrite the bonds.

“There were geographic regions where few firms said, ‘We’re an underwriter,'” Doty said. “They always said, ‘We’re an FA.'”

He said the MSRB deserves credit for changing the practice.

Complexity and Size of Deals

Several sources said that the mounting complexity and size of muni financings over the years pushed more issuers to seek financial advisors skilled in those kinds of deals. Relatively straightforward general obligation and project revenue bonds were joined by complex municipal derivatives and other more sophisticated structures, leading to the rise of swap advisors in 1990s.

Peter Shapiro, managing director at South Orange, N.J-based Swap Financial, an MA as well as a registered swap advisor, said that firms like his were formed to cater to issuers doing complex swap deals. But the firm has broadened its reach as the interest rates swap business as declined.

“Since the financial crisis, firms like ours have been called upon to advise our clients not just on swaps, but on bonds,” Shapiro said.

Shapiro said these advisors have extra credibility on certain deals, such as those that feature some portion of taxable debt.

“There’s a need for some additional expertise,” Shapiro said.

Shapiro said his own firm has also moved into providing advice to major endowments like those maintained by large universities.

“That’s a growing client base for us,” he said.

Michael Bartolotta, vice chairman at FirstSouthwest, said that issuers increasingly began to rely on advisors because deals became larger and more complicated. A larger transaction could justify the added cost of an MA on the deal, he said.

“I think it’s complexity of product, Bartolotta said. “I think it’s the sheer size of the transaction.”

White said that during the 1990s more issuers also began to use advisors to help them with the investment of their bond proceeds, which became more complex and important after the 1986 Tax Reform Act required municipalities to track the investment income earned on muni proceeds and rebate to the federal government amounts earned in excess of the yield on the bonds.

Doty said the advent of MA regulation, which applies equally to dealer and non­-dealer firms as long as they give bond advice to municipalities as advisors, is “a pivotal time” in the municipal market. The latest regulatory developments have the potential to make a huge positive difference in the industry, but execution by the regulators will be key in making that happen, he said.

“I hope in my lifetime to see this go into effect,” Doty said of the MSRB MA regulatory framework that is still evolving, as well as SEC and Financial Industry Regulatory Authority enforcement. “It’s going to be up to the regulators to bring these unruly advisors along.”

While he stressed that many “really good, conscientious” MAs exist among both dealer and non-dealer MAs, Doty said there are also many incompetent or unqualified FAs that may have to fold their tents soon after the MSRB’s qualifications exam comes out and regulation is effective. Issuers often look to their advisors to lead the transaction team, and some of them are not qualified to do it, he said.

“Often times, one of the least competent members of the team is in charge,” he said.

Doty also is concerned about the “contingent fee” payment model for MAs. Hourly and fixed-afee structures have been used by numerous firms since the 1990s, Doty said, but contingent fee structures in which the advisor gets paid based on the closing of a deal is a serious conflict of interest. The advisor is incentivized to close the deal, especially after putting many months of work into it. Doty said that issuers should be: aware of that conflict; offered alternative fee structures; and be given the right to choose a different fee structure if they want one.

There is a huge need for MA services in the future, Doty said. “There are so many issuers that need competent advice from competent advisors,” he said.

Some of the provisions of Dodd­ Frank intended to protect issuers are still taking shape as the MSRB works to finalize its MA rules, especially its proposed Rule G­42, which will govern the core conduct of muni advisors. MSRB chair Kym Arnone has said repeatedly that completion of the board’s muni advisor rulemaking is a top priority. The SEC must also approve those rules.

THE BOND BUYER

by Kyle Glazier

APR 6, 2015 12:58pm ET

Today, BDA submitted a comment letter to FINRA in response to its request for comment on a proposal to expand dissemination of TRACE data to include an additional group of securitized products. The BDA’s letter can be accessed here.

Proposal Executive Summary:

FINRA is soliciting comment on a proposal to expand dissemination of TRACE data to include “additional Securitized Products” defined as CMOs, CMBSs, and CDOs. FINRA is also proposing to reduce the reporting time frame for these “additional Securitized Products” from end-of-day to 45 minutes and, after nine months, to 15 minutes after the transaction. FINRA also is proposing to simplify the reporting requirement for pre-issuance CMOs.

FINRA proposes to amend Rule 6730 to change the reporting time frame for transactions in CMOs that are executed before the issuance of the security to no later than two business days prior to the first settlement date of the security. Under current Rule 6730, firms generally must report CMO transactions that are executed prior to the issuance of a security on the earlier of the business day that the security is assigned a CUSIP, or the date of issuance of the security.

FINRA is proposing a two-tiered approach for dissemination of transaction information.

• For transactions of $1M or less FINRA proposes requiring real-time price dissemination

For transactions of $1M or more FINRA proposes:

• Weekly and monthly dissemination of aggregate transaction information when 5 or more transactions occur in any given week of a month
• Monthly dissemination of aggregate transaction information when 5 or more transactions occur in a given month but 5 trades do not occur in any single week.

BDA’s letter focuses on the following topics and questions:

• The unique operational challenges that exist in these more complex securities and how a 15 minute reporting time frame will increase operational and regulatory challenges, especially for smaller dealers.
• The letter requests a market-based rationale that justifies the proposal’s $1m real-time dissemination threshold, noting that the proposed limit may not strike the proper balance between transparency, liquidity, and retail investor pricing.
• The letter requests a further amendment to Rule 6730 to reduce the reporting time frame to 1 day prior to the first settlement day as opposed to the proposal’s 2 day prior to the first settlement day proposed amendment.
• The letter notes that due to the activity of some non-dealer financial institutions in these markets there is not a level playing field from a regulatory reporting standpoint.

04-09-15

WASHINGTON — A group has developed a model document that will standardize the information that investors provide to dealers to affirm they are sophisticated municipal market professionals that need less regulatory protection than retail investors.

The document was written by the Securities Industry and Financial Markets Association to resolve the concerns of some dealer about how they would get more detailed information from investors that are SMMPs to comply with best execution and other Municipal Securities Rulemaking Board rules.

“The SMMP modified dealer obligations cover more than just assessing suitability for institutional customers,” said SIFMA managing director and associate general counsel David Cohen. “They now include suitability, time of trade disclosure, best execution, and pricing obligations for certain agency transactions.”

Cohen said SIFMA chose Tuesday to release the model document because April 7 is exactly eight months from Dec. 7 when, it will be needed to comply with the amendments the Municipal Securities Rulemaking Board made to its Rule D-15 on SMMPs to make the affirmations more expansive.

The amendments require institutional investors or individuals with assets of at least $50 million to provide to dealers more detailed affirmations that they do not need extra protections under the MSRB’s best execution and other rules. The best execution rule, for example, does not apply to SMMPs.

Until the amendments take effect on Dec. 7, existing SMMP affirmations that satisfy the institutional investor exemption in the Financial Industry Regulatory Authority’s suitability rule will continue to work for MSRB purposes.

Under the modified Rule D-15, approved by the Securities and Exchange Commission late last year, dealers seeking to treat a customer as an SMMP that gets less regulatory protection must determine the customer is an institutional investor or has $50 million of assets, and must further get that customer to indicate that it is using its own judgment to evaluate the dealer’s recommendations, the quality of its executions, and pricing.

The current D-15 on SMMPs requires less detailed information and says only that the customer is independently evaluating the dealer’s recommendations.

The model document is a single page that contains the language of the modified D-15 and asks customers to sign an agreement that they will be considered an SMMP for all muni transactions. The rule allows dealers to get affirmations from SMMPs verbally and does not explicitly require they obtain an affirmation letter.

But Cohen said dealer firms will have to take notes detailing the conversations and keep those as records. The affirmation letter in the model document would be evidence that the dealer established that the customer is an SMMP without having to talk about it and file away notes.

“This facilitates that recordkeeping,” Cohen said.

The implementation of the best execution rule, which requires dealers to use “reasonable diligence” to seek the best prices for their customers and the more expansive requirements of D-15, were contentious because dealers said getting the new affirmations and reprogramming their automated trading systems would be costly.

More recently, some market participants have worried that money managers’ lawyers may not let them affirm they are SMMPs because that may be seen as an abrogation of the policies and procedures they already have in place to clients, as those clients’ fiduciaries. And if money managers don’t affirm they are SMMPs, then dealers may not want to trade with them because of the additional regulatory burdens.

The new model document is available for download on SIFMA’s website.

THE BOND BUYER

BY KYLE GLAZIER

APR 7, 2015 3:13pm ET

New York NY, April 7, 2015 – SIFMA today announced that is has developed a model Sophisticated Municipal Market Professional, or SMMP, Affirmation. This new affirmation is necessary in light of Municipal Securities Rulemaking Board (MSRB) rule changes which were approved by the SEC in December 2014 and which become effective December 7, 2015. Until that time, an affirmation from an institutional customer indicating exercise of independent judgment that satisfies FINRA 2111 can be used to satisfy MSRB rules, but current affirmations are no longer a valid means of satisfying MSRB rules as of December 7, 2015.

“The SMMP modified dealer obligations cover more than just assessing suitability for institutional customers,” said David Cohen, managing director and associate general counsel at SIFMA. “They now include suitability, time of trade disclosure, best execution, and pricing obligations for certain agency transactions. SIFMA developed the new affirmation to help the marketplace comply with the new rule, MSRB Rule D-15.”

Dealers can start immediately contacting customers so that the new affirmation is in place by the December 7 deadline. The scope of modified dealer duties to SMMP’s is detailed in MSRB Rule G-48.

To be considered an SMMP, a customer must be (1) a bank, savings and loan association, insurance company or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (3) any other person or entity with total assets of at least $50 million.

Dealers must also have a reasonable basis to believe that the customer is capable of evaluating investment risks and market value independently, both in general and with regard to particular transactions and investment strategies in municipal securities. Additionally, as part of the reasonable basis analysis, the dealer should consider the amount and type of municipal securities owned or under management by the customer.

Under the rule, the customer must affirm the following:

1. It is a customer of the nature defined in MSRB Rule D-15(a)[1];
2. It is capable of evaluating investment risks and market value independently, both in general and with regard to all transactions and investment strategies in municipal securities;
3. It (1) is exercising independent judgment in evaluating: the recommendations of any Dealer or its associated persons; the quality of execution of the customer’s transactions by the Dealer; and the transaction price for non-recommended secondary market agency transactions as to which (i) the Dealer’s services have been explicitly limited to providing anonymity, communication, order matching and/or clearance functions and (ii) the Dealer does not exercise discretion as to how or when the transactions are executed; and (2) has timely access to material information that is available publicly through established industry sources as defined in MSRB Rule G-47.

The SIFMA SMMP affirmation is available here.

via PRWEB – Lumesis Inc., a leading provider of data, business efficiency and regulatory compliance solutions for the municipal market, has announced a strategic partnership with Ipreo, a leading global provider of workflow solutions and market intelligence to financial services and corporate professionals. The two companies will now offer direct access to DIVER Advisor Municipal Bond Reports directly from Ipreo’s Bookrunning system.

“This partnership brings a solution for time-of-trade disclosure regulations directly into the Ipreo new issue workflow,” said Gregg L. Bienstock, Esq., CEO and Co-Founder of Lumesis. “Delivery of the Official Statement does not address disclosure obligations, so Ipreo users will benefit from the simplicity of accessing our comprehensive muni bond reports for new issue compliance.”

The DIVER Advisor Municipal Bond Reports are the only solution to efficiently address the MSRB Time-of-Trade Disclosure Rule (G-47), amended Suitability Rule (G-19) and Supervisory requirements (G-27). The reports are comprehensive, CUSIP-driven municipal bond overviews for over 1.1 million bonds. A subscription to DIVER Advisor is available immediately through the Ipreo and Lumesis sales teams.

“Streamlining our clients’ workflow through the integration of data and software is the core premise of our solutions,” said Allen Williams, EVP & Managing Director, Global Fixed Income Capital Markets at Ipreo. “Having the DIVER Advisor reports directly available from our bookrunning application enhances our clients’ compliance efforts in keeping with new regulations.”

About Ipreo

Ipreo is a global leader in providing market intelligence, data, and technology solutions to all participants in the global capital markets, including sell-side banks, publicly traded companies, and buy-side institutions. By combining state-of-the-art new issuance systems with the premier global financial and investor data, Ipreo enables our capital markets clients to execute deals more efficiently, maximizing time and resources. Our applications include end-to-end bookbuilding systems, roadshow & conference management platforms, and electronic document delivery. Additionally, Ipreo’s suite of investor prospecting and CRM solutions offer the most accurate and comprehensive institutional contacts data and profiles in the industry. Ipreo is the only financial services provider to offer solutions across all asset classes for the Equity, Fixed Income, Municipal, and Syndicated Loan markets. Ipreo is private-equity held by Blackstone and Goldman Sachs Merchant Banking Division, and has more than 800 employees supporting clients in every major financial center around the world. For more information, please go to http://www.ipreo.com.

About Lumesis, Inc.

Lumesis, Inc. is a financial technology company focused on providing business efficiency, data and regulatory solutions to the municipal bond marketplace. Founded in 2010, Lumesis is completely dedicated to serving the municipal market with industry-leading analysis and compliance solutions that meet the needs of an evolving regulatory environment. Today, the company’s DIVER platform helps over 100 firms with over 30,000 users efficiently meet credit, regulatory and risk needs. Lumesis investors include Safeguard Scientifics, Inc. SFE, -0.28% Learn more at http://www.lumesis.com

Published: Mar 30, 2015 5:04 a.m. ET

In a no-action letter dated February 18, 2015, the U.S. Securities and Exchange Commission (SEC) extended relief from the application of Rule 482 of the Securities Act of 1933 to certain retirement plans that are exempt from the Employee Retirement Income Security Act of 1974, as amended (ERISA) (e.g., certain deferral only 403(b) plans, governmental 457(b) plans, church plans).

When the U.S. Department of Labor (DOL) issued final regulations in 2010 pertaining to participant-level fee disclosures for tax-qualified retirement plans that provide for participant-directed investments, it was identified that the DOL-required disclosures might be inconsistent with certain disclosure requirements under SEC Rule 482. Rule 482 provides parameters around information provided by an investment company that could be classified as advertisements (e.g., investment performance data). Because of the potential conflict between the DOL regulations and Rule 482 (pertaining to such items as timing of updated investment information as well as various narrative disclosures), the SEC issued a no-action letter in October 2011 stating “[the SEC] agrees to treat information provided by a Plan Administrator to Plan Participants…that is required by and complies with the disclosure requirements set forth in the DOL Rules as if it were a communication that satisfies the requirements of Rule 482…” This alleviated the tension created when an ERISA plan attempted to comply with both set of rules and concluded that it could simply follow the DOL final regulations instead without violating Rule 482.

Although the DOL disclosure regulations apply only to ERISA plans, many plan sponsors offering retirement plans not subject to ERISA find that participants benefit from the same investment disclosure information. However, those same plan sponsors found that they were not exempt from the application of Rule 482, because the October 2011 no-action letter does not extend to non-ERISA plans. Consequently, the SEC has now issued a comparable no-action letter to equally cover participant-level fee disclosure statements issued to participants in non-ERISA plans (including, but not limited to, non-ERISA 403(b) plans, governmental and non-governmental 457(b) plans, governmental 401(a) plans, 415(m) plans, church 401(a) plans, governmental or tax-exempt 457(f) plans, and governmental or tax-exempt 409A plans).

In order to avail itself of the protection of the SEC no-action letter, a non-ERISA plan must comply with the following:

• Each investment vendor must enter into a written agreement with the plan sponsor that the vendor will provide the DOL required investment information on each investment option it offers under the particular non-ERISA plan, as well as the respective fee and expense information, to the extent it is available.
• The written agreement must state the date on or before which the investment vendor will provide the information to the non-ERISA plan participants.
• The investment vendor must agree to update the investment information at least annually, update the performance information at least quarterly (disclosed on an internet website address listed pursuant to the DOL requirements) and identify a designated contact person as a source of additional information to address participant requests for information specified in the DOL disclosure regulations.
• The investment information must be provided to new participants before their first investment and to all other participants at least annually.
• The investment information cannot include any other information that is not otherwise required to comply with the DOL disclosure regulations.
• Assuming the above conditions are satisfied, the SEC will treat the DOL disclosure as not violating Rule 482.

Sponsors of non-ERISA plans might want to consider providing fee disclosures to participants now that the SEC has extended relief from Rule 482. Since the relief for ERISA and non-ERISA plans is now aligned, many sponsors of non-ERISA plans may be able to utilize standard fee disclosure services provided by recordkeepers without violating SEC rules.

Last Updated: March 23 2015
Article by Mary K. Samsa, Todd A. Solomon and Brian J. Tiemann
McDermott Will & Emery

In a letter to the SEC, the Securities Industry and Financial Markets Association (SIFMA) told Chair Mary Jo White that it “believes that investors should not lose important protections by permitting municipal advisors to act as placement agents without registration as broker-dealers… [and] that the Commission should not provide for an exemption from the Investment Advisers Act for registered municipal advisors, as such an exemption would leave municipal issuers without the significant protections provided for under the Investment Advisers Act, as to which there is no adequate substitute in the municipal advisor regime.”

The letter was in response to one submitted to the SEC by the National Association of Municipal Advisors (NAMA) in December which requested that the SEC exempt registered municipal advisors from being required to register as broker-dealers or as investment advisers in connection with specified municipal advisor activities.

The SIFMA letter can be seen here.

WASHINGTON – The Securities and Exchange Commission’s revised estimates of the burden of complying with its main disclosure rule are still full of “gross inaccuracies,” the Securities Industry and Financial Markets Association told the commission.

SIFMA managing director, associate general counsel and co-head of municipal securities Leslie Norwood made the dealer group’s position clear in a five-page letter sent to the SEC on March 27. The letter was a response to an updated set of SEC estimates about how much time it takes market participants to comply with the commission’s Rule 15c2-12.

The rule requires dealers, before they underwrite munis, to review issuers’ official statements and reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s EMMA website.

In November, the SEC sought comment on its estimated burdens for complying with the rule and received widespread industry criticism. Market participants said the commission drastically underestimated the time and effort required to comply with the rule. The commission asked for the comments as required by the Paperwork Reduction Act of 1995, which states that federal agencies must publish a notice describing, among other things, the information it collects, the current estimate of the number of respondents providing the information, the annual burden imposed on each respondent, and the total burden for all respondents.

In its original request for comment, the SEC estimated that 20,000 issuers, 250 dealers, and the MSRB spend more than 115,000 hours per year complying with 15c2-12. The commission has since raised that estimate to 621,758 hours. The SEC now estimates that an issuer requires two hours to prepare and submit material event notices to EMMA, up from 45 minutes in the first estimate.

“These estimates continue to seriously and materially underestimate the time burden of the rule on broker dealers,” Norwood said of the commission’s latest numbers, which peg the dealer compliance burden as 10 hours per year per firm to determine that an issuer has entered into a continuing disclosure agreement. In a competitive offering, she wrote, SIFMA estimates firms spend on average 6 man-hours on each offering they bid.

“First, the deemed-final preliminary official statement, or offering document, must be reviewed for completeness against publicly available financials and industry news,” Norwood wrote. “The offering document also needs to be reviewed to make sure that the security for the bonds is adequately and correctly described and that there is no outstanding litigation that would tend to impair the bonds’ validity or the ability of the issuer or obligor to make the interest and principal payments.”

Norwood said the SEC may be sending a troubling “mixed message” to the industry by running an enforcement program that is targeted to hammering home the point that more review of issuer disclosures is needed while simultaneously underestimating the work needed to do those reviews.

SIFMA suggested that automated collection techniques could help reduce the burden. Since all muni rating agencies now report their ratings live to EMMA, issuers should no longer have to file rating changes as material events notices, Norwood wrote. Bond lawyers meeting at a National Association of Bond Lawyers conference earlier this year had discussed that possibility, but were split on whether the SEC would take that step.

THE BOND BUYER

BY KYLE GLAZIER

MAR 30, 2015 2:21pm ET

WASHINGTON – Non-dealer municipal advisors should not be allowed to act as placement agents for municipal bonds, the Securities Industry and Financial Markets Association told Securities and Exchange Commission chair Mary Jo White in a recent letter.

Leslie Norwood, SIFMA managing director, associate general counsel, and co-head of municipal securities, penned the letter directly challenging the position of the National Association of Municipal Advisors. NAMA president Terri Heaton wrote White a letter late last year asking the SEC to consider granting non-dealer MAs a waiver from broker-dealer registration when they serve as middlemen between institutional investors and municipal issuer clients, comparing the idea to the MA registration exemptions available to dealers.

The Municipal Securities Rulemaking Board warned in 2011 that MAs that introduce potential investors to issuers or negotiate with potential investors in exchange for transaction-based compensation may be subject to federal securities laws and MSRB rules that apply to dealers.

Bond Dealers of America chief executive officer Mike Nicholas, who had earlier urged the SEC to crack down on MAs acting as unregistered broker-dealers, challenged the NAMA position almost immediately. The more recent SIFMA letter, dated March 12, acknowledges NAMA’s argument that MAs are now regulated by an SEC rule that requires them to put the interests of their clients ahead of their own, but said that MA regulation and dealer regulation are not directly comparable.

“NAMA’s request proceeds from a mistaken premise that the two schemes of regulation have similar purposes or effects, and reflects a flawed view of the function that broker-dealer registration and regulation serves in our system of regulation,” Norwood wrote. “While broker-dealers have extensive duties under commission and self-regulatory organization rules and common law to their issuer clients, the overarching purpose of broker-dealer regulation is to protect investors.”

Conversely, MA regulation is focused on issuer protection, Norwood continued. Acting as a broker between issuers and investors involves inherent conflicts of interest that dealer regulations are structured to address with rules governing communications, fair pricing, disclosure, suitability, personnel qualifications, and more. Those investor protections do not exist in the MA regulatory regime, Norwood pointed out.

“Where municipal advisors engage in activities that constitute acting as a broker, the investors with whom they deal should be entitled to the same protections they receive when dealing with a registered broker—protections not provided by municipal advisor regulation,” Norwood wrote.

Norwood further argued that granting NAMA’s request could potentially allow non-dealers to skirt MSRB Rule G-23, which prohibits an MA from switching roles and acting as a placement agent. SIFMA also opposes a second NAMA request that MAs be exempt from investment adviser registration, pointing out that the MA rule was not crafted with an eye to investment advisory services.

The MSRB is still working on completing its MA regulations, and its draft rule governing the core duties of MAs is not finalized.

THE BOND BUYER

BY KYLE GLAZIER

MAR 20, 2015 1:00pm ET

The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission (SEC) of a proposal to expand the post-trade data displayed on its Electronic Municipal Market Access (EMMA®) website. Amendments to the MSRB’s Real-Time Transaction Reporting System (RTRS) would require municipal securities dealers to indicate trades executed on an alternative trading system and trades involving non-transaction based compensation arrangements, among other changes.

View the rule filing.

Prior to the Great Recession, interest rates on municipal bonds were generally lower than Treasury rates. This relationship has reversed since 2008, imposing substantial extra costs on state and local government borrowers. Further, the municipal-bond market witnessed major interest-rate spikes in the aftermath of Wall Street analyst Meredith Whitney’s dire (and errant) 2010 warning of widespread bond defaults and the Detroit bankruptcy.

High borrowing costs and volatility are the result of ignorance about the risk of municipal securities. A drumbeat of negative news headlines deters investors from buying municipal bonds, limiting liquidity and raising yields above levels necessary to compensate for the very limited risk of lending to most U.S. cities and counties.

By replacing fear and ignorance with data and insight, we can lower municipal borrowing costs and reduce the market’s vulnerability to negative headlines. Much of the data needed for this task is buried in audited financial statements published each year by about 18,000 of the nation’s local governments.

Unfortunately, municipal investors are less apt to perform financial statement analysis than their counterparts who invest in corporate securities, where discussion of such measurements as P/E ratios and EBITDA is common. Municipal-bond-market participants are largely ignorant of which government financial ratios presage bankruptcy or default and what levels signify danger.

There are many reasons why the municipal market lacks sophistication in this area, but a big part of the problem has been a lack of free (or even low-cost) financial-statement data. In this regard, some strides are being made. First, the 2009 launch by the Municipal Securities Rulemaking Board (MSRB) of its Electronic Municipal Market Access (EMMA) system gave investors a one-stop shop for municipal financial disclosure. But as the Securities and Exchange Commission (SEC) observed recently, a large number of municipal-bond issuers have been posting their statements late or not at all. The commission’s Municipal Continuing Disclosure Cooperation Initiative has greatly increased the number of statements on EMMA. Finally, late this year the Census Bureau is expected to begin posting federal single-audit submissions online. These packages include the same basic financial statements typically found in municipal market disclosure.

But the simple publication of thousands of voluminous PDFs does not provide the degree of transparency needed to raise the level of municipal-bond-market financial literacy. The vast majority of investors and analysts lack the patience and/or technical skills needed to extract the valuable needles of insight from this haystack of disclosure.

Investors in corporate securities do not face these difficulties. For the last 20 years, company financial reports have been available in textual form on the SEC’s Electronic Data Gathering, Analysis and Retrieval system. As a result, corporate financial-statement data is freely available in convenient forms around the Internet: Yahoo Finance, MarketWatch, Morningstar and your broker’s website are just a few of the places you can find this data.

So while corporate investors can readily compare the financial statistics of a safe company like Apple to an insolvent one like Radio Shack, municipal investors cannot easily perform the same exercise for Dallas and Detroit.

It wasn’t always this way. Between 1909 and 1931, the Census Bureau published an annual volume entitled “Financial Statistics of Cities Having a Population of Over 30,000.” The final edition — available at the St. Louis Federal Reserve’s website — covered 311 American cities and included hundreds of revenue, expenditure, asset and liability data points for each municipality. Unfortunately, ever since 1931, Census financial data on local governments has become less comprehensive, less timely and less comprehensible to the lay user.

In the years after 1931, we lost the understanding that comparative local-government financial statistics were a public good. While we might look to the federal government to once again offer this information in today’s era of heightened need, it may be challenged to take on this role in an era of sequesters.

But while we may need the private sector to provide this public good, the federal government can greatly reduce the cost of compiling a local-government financial-statement database. The SEC has required companies to file financial statements in text form — rather than via PDF — since the mid-1990s. In 2008, the SEC further standardized company financial reporting by requiring firms to file their statements in the form of eXtensible Business Reporting Language (XBRL), which imposes a consistent format on all filings. To date, neither the SEC nor the MSRB has pursued a similar course with respect to municipal financial disclosure.

Next week, the Data Transparency Coalition, a group that advocates for the use of XBRL, will hold a Financial Regulation Summit featuring numerous congressional representatives and regulators. Perhaps the extension of XBRL to the municipal-bond market can find its way onto the agenda.

Innovative financial regulation has done much to increase the liquidity and efficiency of equity markets. It is now time to extend these efficiencies to the municipal-bond market. Local government bond issuers and the taxpayers who ultimately service municipal debt stand to benefit.

GOVERNING.COM

BY MARC JOFFE | MARCH 19, 2015

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has filed a rule change with the Securities and Exchange Commission to increase the development fee for MSRB professional qualification examinations to $150 from $60. The change, reflected in an amendment to MSRB Rule A-16, is effective immediately. Individuals who register for an MSRB-owned exam on or after April 1, 2015 will be charged the new rate.

The $150 MSRB fee will apply to its forthcoming Municipal Advisor Representative Qualification Examination and the pilot version of this exam to be administered later this year. Sign up here to receive details about pilot municipal advisor exam as they become available. The MSRB has scheduled an educational webinar on Thursday, April 2, 2015 at 3:00 p.m. ET to discuss municipal advisor professional qualification requirements. Register for the webinar.

The development fee for the MSRB’s existing Series 51, 52 and 53 licensing exams for municipal securities professionals has been unchanged since 2009. Test fees help offset a small portion of the resources needed to create and maintain effective professional qualification exams. Municipal securities professionals that take an MSRB exam also pay an administrative fee to the Financial Industry Regulatory Authority (FINRA), which provides the online portal for exam registration and coordinates with nationwide testing centers to administer the MSRB’s tests.

The MSRB’s Professional Qualification Program sets basic standards of competency for municipal securities professionals and municipal advisors, and fosters compliance with MSRB rules through required examinations and continuing education. Read more here.

View the rule filing.

Read the regulatory notice.

(Reuters) – A key U.S. regulator said on Wednesday it supports banks making prudent investments in the U.S. municipal bond market but showed no indication it would soften its stance on refusing to allow banks to include muni bonds as liquid assets.

Regulators in September issued rules that banks must hold enough easy-to-sell assets in case of a crisis. Municipal bonds, used by U.S. localities to fund infrastructure investments and other spending, were not included in the buffer.

Since then towns and cities have lobbied regulators to change the rules, fearing that exclusion of muni bonds from capital requirements would discourage banks from holding the bonds and drive up their borrowing costs.

“The agency considers bank investments in municipal securities a prudent activity when part of a safe and sound investment strategy,” the Office of the Comptroller of the Currency (OCC) said in a statement.

The OCC issued the statement after a Bloomberg report said the OCC and the Federal Deposit Insurance Corporation (FDIC) were refusing to budge on the issue. The Fed has publicly said it wants to amend the rule to include munis.

A rule change, however, would require agreement of the other two bank regulators, the OCC and the FDIC. While the Fed is open to a change, the OCC is most opposed to amending the rule, while the FDIC holds a middle ground, with more of a “wait-and-see” approach, a regulatory source said.

The OCC and the Federal Reserve declined to comment. The FDIC did not immediately return a request for comment.

The OCC pointed out that bank ownership of muni bonds had increased since the so-called Liquidity Coverage Ratio Rule became final in October of last year.

Retail investors are the largest holders in the $3.7 trillion municipal bond market. In the second quarter, households held 40 percent of all outstanding municipal bonds, $1.5 trillion, while banks held $458 billion, or around 12 percent according to Federal Reserve data.

U.S. states and cities wrote a letter urging regulators to allow banks to treat municipal bonds as liquid assets in October, arguing that munis are among the safest investments and “highly tradeable”.

The letter was signed by the National Governors Association, National Conference of State Legislators, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association and the Government Finance Officers Association.

BY EDWARD KRUDY

NEW YORK, March 18, 2015

(Additional reporting by Douwe Miedema; editing by Gunna Dickson)

WASHINGTON • States and cities have griped for months that a rule designed to make big banks safer will prompt a Wall Street exodus from the $3.7 trillion municipal bond market. While the Federal Reserve wants to make changes, two key regulators are standing in the way.

At issue is a measure approved in September that requires banks to hold a chunk of assets that could be easily converted into cash during a crisis. While munis weren’t considered liquid enough to make the cut, Fed officials have been convinced after aggressive lobbying by lenders and local governments, said three people with knowledge of the matter.

The problem: The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency remain unconvinced, the people said. With the largest U.S. banks accounting for about 12 percent of investments in munis, politicians are concerned that unless the rule is revised, it will become more expensive to build bridges, roads and schools.

This will have “real price and yield impacts,” James McIntire, the treasurer of Washington state, said in an interview. “To drive up the cost of our debt issuance for no quantifiable reason would be a mistake.”

The September rule was among several measures adopted by regulators to prevent a repeat of the 2008 financial meltdown, when markets froze and some banks needed a government bailout to stay afloat. It requires lenders to hold enough assets that are deemed high-quality — such as Treasuries, highly-rated corporate bonds and even the debt of foreign governments — to be able to endure a 30-day squeeze.

Many bonds backing infrastructure projects are bought and sold infrequently. Still, Fed officials have privately advocated that banks shouldn’t face restrictions on holding munis that trade more often, said the people who asked not to be named because discussions between the agencies are private.

So far, regulators at the FDIC and OCC say they haven’t seen enough evidence to bring them around to the Fed’s point of view, according to the people. The rule, which banks must fully comply with by 2017, can’t be changed without their consent.

Spokesmen for the Fed, FDIC and OCC declined to comment.

Sen. Charles Schumer, D-New York, has been a vocal critic of the decision regulators made on munis. At a September hearing, he told representatives from the Fed, FDIC and OCC that the rule would undermine “the lifeblood of development in this country.” Schumer has since continued to make his case behind the scenes in private conversations with regulators, said a person with knowledge of the discussions.

“Many municipal bonds are highly liquid and they should count as such,” Schumer said in a statement. “Creating a disincentive for banks to hold these bonds could slow or even stop major infrastructure projects in their tracks.”

While Wall Street generates revenue underwriting munis, banks also have been the biggest purchasers of the bonds in recent years, adding $200 billion to their holdings since 2010, Fed data shows. The buying has boosted prices at a time when some investors are selling because of concerns that as interest rates rise, some issuers may struggle to pay their debt.

One argument in favor of letting banks continue their buying is that borrowers in the muni market typically default less frequently than corporate issuers. Rep. Michael Capuano, D-Mass., made that point to Fed Chair Janet Yellen last month, saying at a hearing that curtailing muni investments was akin to telling lenders that their money would only be safe if it’s stuffed under a mattress.

Yellen’s response: “It’s not a question of safe; it’s a question of liquid and how rapidly these assets can be converted into cash.”

March 18, 2015 4:00 pm • By JESSE HAMILTON and CHEYENNE HOPKINS

Bloomberg News

With assistance from William Selway in Washington.

WASHINGTON — The muni market may learn more about how issuers fared under the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative after they respond next month to a survey from the Government Finance Officers Association.

The GFOA launched the survey last month in an effort to find out how issuers responded to the MCDC, which allowed both them and underwriters to report to the SEC any instances in the last five years in which they sold bonds and were not truthful in official statements about whether they were in compliance with their continuing disclosure agreements. The MCDC reporting deadline was Sept. 10 last year for underwriters, but issuers had until Dec. 1.

Bond lawyers and other market watchers have been clamoring for months for the SEC to release data about the MCDC submissions, but commission officials have played it close to the vest and declined to give any details. The GFOA survey, which first went live on the group’s website late last month, could provide some information straight from issuer officials.

The survey features 19 questions, some of which are multiple choice and others in a short answer format. It asks issuers not only whether they participated in the MCDC, but also for information about their size, the frequency with which they issue debt, and how much time and money they put into deciding whether or not to take part in the initiative.

Issuer officials were also asked how they interacted with their underwriters under the program. The MCDC placed issuers and underwriters into what SEC enforcement division officials repeatedly called a “modified prisoner’s dilemma” because they effectively report each other when self-reporting. The survey asks, for example “Were you contacted by an underwriter regarding your continuing disclosure compliance?” and “If an underwriter contacted you indicating you failed to comply with continuing disclosure obligations, were you able to resolve all alleged instances of non-compliance without either your entity or underwriter reporting under the MCDC initiative?”

The survey also asks issuers whether the program was truly “voluntary.” SEC officials have repeatedly said that participation in the MCDC was completely voluntary, though some issuer officials have said they felt forced to at least conduct a thorough review of their compliance histories.

About 200 GFOA members have responded to the survey so far, a GFOA official. The SEC said earlier this month that it will release settlements with dealer firms first because they were the first to report, but that enforcement attorneys are still working on verifying many of the self-reports that the commission received. The GFOA survey closes April 3.

THE BOND BUYER

BY KYLE GLAZIER

MAR 16, 2015 2:34pm ET

WASHINGTON – Rep. Randy Hultgren, R-Ill. got a first-hand look at how municipal bonds can be beneficial when he visited Freedman Seating Company in Chicago.

The company has been in business for more than 100 years. It originally made cushions for carriages and is now one of the largest manufacturers of seating for commercial vehicles such as busses.

FSC has done several new-money bond financings during the last 17 years and has used the bond proceeds to purchase and renovate property in a blighted area in Chicago’s west side, as well as to purchase equipment for the facilities, said its president, Craig Freedman.

The bonds allowed FSC to purchase over half a million square feet of manufacturing space and over $10 million of equipment and facilities. When the company did its first bond deal in 1998, it had fewer than 200 employees, Freedman said. Now it has more than three times that, about 750.

Hultgren, whose district includes some Chicago suburbs and is not far from FSC, said the company is “very impressive, but they absolutely would not have been able to hire as many people as they have or produce as much product as they produce but for access to manufacturing bonds.”

He visited the company in September, not long after he introduced the Modernizing American Manufacturing Bonds Act. The bill would increase the maximum size of an industrial development bond issue and would expand the types of projects that could be financed with IDBs.

“We’re certainly supportive of what congressman Hultgren has put forth in the bill,” Freedman said.

And that’s not all Hultgren has done on the muni bond front since joining Congress in 2011. The 49-year-old has been one of the most vocal supporters of municipal bonds in the House and a leading co-sponsor of legislation on bank-qualified bonds. He serves on the House Financial Services Committee, which has jurisdiction over munis and other securities.

In an interview with The Bond Buyer from his Capitol Hill office, Hultgren said he has developed an appreciation for bonds as a result of his past experiences in both the public and private sectors. He has held local and state government positions and has also worked for an investment advisory firm.

“The early public service work and then also … my career work has sparked an interest in bonds and their value,” he said.

Hultgren’s Background

Hultgren’s first publicly elected post was on the board of DuPage County, Ill., where he served from 1994 to 1998. During this time, he saw how “we, as the county or townships within the county, could get things done so much more effectively and efficiently and transparently and accountably than even [the] state government or federal government.”

County board members were also on the forest preserve commission, which was involved in bond-financed projects for land acquisition.

Hultgren then served in the Illinois General Assembly, first in the state House from 1999 to 2007 and then in the state Senate from 2007 to 2011. The state had several infrastructure programs that were bond-financed, and state legislators could work with local governments to help them fund projects, he said.

“I’ve been a strong supporter of infrastructure and making sure that we’ve got safe roads, safe bridges, that we’re able to move people safely to and from work and school,” Hultgren said.

In the state House, Hultgren was in the minority, and in the state Senate, he was in a minority so small that it could not block legislation the majority wanted to move. As a result, he learned that it is important to build bipartisan support for legislation. He took this lesson with him to the U.S. Congress.

“That has really been the focus we’ve taken with any new bills that we’ve had, is getting good, strong Democratic co-sponsors, people … we’re not going to agree with every day, but that we can work together on important issues,” he said.

Hultgren has also learned from his time in state and local government “to be realistic, that it takes some time to get things done.”

“Ultimately, we want to work towards good laws, good strategy, good plans,” and achieving that takes time, he said.

His time in Congress has reaffirmed his belief that “the best things happen locally, and the very best happen when we can work together at different levels of government — federal, state, local government — working together ultimately to serve people.”

For part of the time he was in the state Senate, Hultgren also was employed part-time as vice president at Performance Trust Investment Advisors in Chicago. He worked to find investors for bond funds created by the firm, which is now called PT Asset Management. Hultgren said he got interested in the value of bonds in people’s portfolios and the predictability and security they provide to investors.

Munis are important to Hultgren’s constituents, he said, because with interest rates very low right now, it’s hard for people, especially retirees, to find investments with returns that are high enough to live on, but not too risky.

And people tend to invest in bonds issued in their state, “so there is an accountability on the side of the person purchasing the bond also being able to follow the progress or the need for the project that’s being done,” Hultgren said.

“I think people benefit, because good work gets done and it gets done pretty quickly,” he said.

Michael Decker, managing director and co-head of municipal securities for the Securities Industry and Financial Markets Association, said Hultgren’s state and local government and financial services background gives him a unique perspective on muni issues.

“We love working with him,” Decker said. “He’s a great representative of his district and a strong bond supporter.”

Legislation

Hultgren said he hopes to reintroduce the bills on IDBs and bank-qualified bonds in the current Congress “as soon as possible and as makes sense to increase likelihood of success. His office is trying to get support for the legislation in the Senate and is trying to figure out when the bills have the best chance of being considered by a House committee and ultimately by members on the House floor.

The bill on IDBs would increase the maximum size of an industrial development bond issue to $30 million from $10 million. It would also allow facilities that produce intangible property, such as software, and facilities that are functionally related to and subordinate to the production of property, such as warehouses, to be financed with IDB proceeds.

IDBs have not only benefited Freedman Seating Company, but they have also benefited other companies in Illinois. Bison Gear & Engineering Corp., a company in Hultgren’s district that he’s visited several times, has also taken advantage of IDBs.

The Council of Development Finance Agencies has worked with Hultgren on the IDB bill.

“Congressman Hultgren has been a bold and courageous supporter of tax-exempt bonds, exemplified by his introduction of the Modernizing American Manufacturing Bonds Act last year,” said Toby Rittner, CDFA president and chief executive officer.

SIFMA also supports expanding the use of IDBs, which many of its members underwrite, Decker said.

The bill on bank-qualified bonds, called the Municipal Bond Market Support Act of 2014, would increase the annual issuance limit for issuers of bank-qualified bonds to $30 million from $10 million and would apply the limit to nonprofit borrowers rather than to the issuers through which they borrow.

SIFMA also supports raising the bank-qualified bond limit. A temporary increase in the issuance limit under the American Recovery and Reinvestment Act, which has since expired, was successful, Decker said.

“We think it’s a smart idea to raise the limit,” he said.

Hultgren also wants munis to be added to the definition of high-quality liquid assets in a new federal banking liquidity rule. He is trying to figure out the right timing to do something in this area.

The current surface transportation funding law expires May 31, and Hultgren thinks Congress needs to debate how to fund transportation in a new bill. He would not support a gas tax increase, in part because it is becoming less effective as more cars use alternative power sources. He has encouraged and will continue to encourage the use of public-private partnerships, he said, but acknowledged that not every project is a good fit to be developed as a P3.

Congress will need to look at a number of different options to determine the fairest way to fund infrastructure, Hultgren said.

“I think the worst possibility is to make our kids pay for it,” he said. “So we have to be responsible and do the right thing now, find a way to live within our means, and find funding sources that really are impacting people who are using the roads.” Congress needs to find “something again that won’t immediately be cutting ourselves off to not be able to finish the work that we need to do,” he added.

Pro-Muni Letters

In addition to working on legislation relating to specific types of bonds, Hultgren is also pushing for preservation of the tax exemption for munis.

Currently, he and Rep. Dutch Ruppersberger, D-Md., are circulating a letter for their colleagues to sign that urges House leaders to support the tax exemption for municipal bonds. The two Congressmen authored a similar letter in 2013, and it had the support of more than 100 other members of Congress.

The signatories of the 2013 letter were split roughly evenly between Democrats and Republicans, Hultgren said.

“That’s encouraging that there is still bipartisan support for this,” he said.

Hultgren said he hopes that the new letter will have similar bipartisan support and about the same number of signers.

The letter will hopefully educate members of Congress about the importance of tax-exempt bonds so that there isn’t “a late night surprise of some treatment of municipal bonds getting thrown into legislation at the last minute,” Hultgren said.

The congressman said he would be surprised if Congress passes comprehensive tax reform this year and that if there are changes to the tax code this year they would be more likely to be targeted, particularly on the international tax system.

Last year, former House Ways and Means Committee chairman Dave Camp released a comprehensive tax-reform proposal that would have imposed a surtax on muni interest for high earners and would have prevented new private-activity bonds from being issued as tax-exempt.

Hultgren said he disagreed with significant parts of the proposal and saw the former Michigan Republican congressman’s plan as an opportunity to talk about parts of the current tax code that work.

“Hopefully they will have heard enough from us, from others, of the value here to not do something that further hinders us,” he said.

In addition to circulating the letter, Hultgren said he’s encouraging issuers and borrowers in the muni market to talk to other members of Congress “about how this is a valuable tool for them that needs to be preserved.” Issuer officials should explain that if the exemption goes away to increase revenues, there will be a long-term cost, since it will be harder for them to do good projects, he said.

The Municipal Bonds for America coalition has also had dealings with Hultgren. When the 2013 letter was being circulated, MBFA made its members aware of it. Groups then brought up the letter in meetings with Congress members, said Jessica Giroux, general counsel and managing director of the Bond Dealers of America.

Also, ahead of MBFA’s educational seminar for Capitol Hill staff last July, Hultgren, Ruppersberger, Rep. Richard Neal, D-Mass., and Rep. Tom Reed, R-N.Y., wrote a “dear colleague” letter asking their fellow Congress members to send staff to the event, Giroux said.

Hultgren is an “advocate for munis,” she said.

THE BOND BUYER

BY NAOMI JAGODA

MAR 16, 2015 1:14pm ET

The SEC Commissioners again this week gave muni market participants a great deal to think about. First was a speech by Commissioner Daniel Gallagher which revisited some of the themes he raised in a speech last May concerning how liabilities, particularly pension liabilities, should be disclosed. Later in the week, SEC Chair Mary Jo White gave a speech concerning disqualifications, exemptions and waivers under the securities laws, subjects which are of interest to broker-dealers who may enter into consent decrees under MCDC. While Chair White’s speech did not specifically talk about the muni market or MCDC, her remarks were enlightening not only about disqualifications and waivers but also about what she thinks is the
best approach to enforcement.

Commissioner Gallagher noted “growing calls for changes to the bond disclosure regime, particularly in the muni space.” In particular, he said

The failure by municipal issuers to provide adequate disclosures of underfunded pension plans is an unpardonable sin. Politically-powerful state workers’ unions, and state constitutional protections for benefits, make the reduction of these liabilities extremely difficult. The failure to set aside adequate funds to cover these liabilities creates a material risk that future payments to bondholders would need to be sacrificed. This risk is not merely theoretical; we have seen it play out already in Detroit’s bankruptcy.

He goes on to say that “municipalities have taken advantage of heretofore lax governmental accounting standards to hide the yawning chasm in their balance sheets.” He acknowledged that the new GASB standards regarding pensions were an improvement and can result in better disclosure of pension liabilities but he called for GASB to bring back the Annual Required Contribution, which he described as “an easy point of reference to help investors and voters compare the contribution that would be required to steadily chip away at these accumulated liabilities with that which was actually appropriated.” (The definition of Annual Required Contribution and other pension-related terms can be found in the appendix to NABL’s Considerations in Preparing Disclosure in Official Statements Regarding an Issuer’s Pension Funding Obligations(Public Defined Benefit Pension Plans).)

However, as beneficial as Commissioner Gallagher finds the GASB rules, their use is voluntary. Commissioner Gallagher’s solution is “a legislative fix to mandate the use of GASB standards for municipal issuers.” That mandate could take the form either a grant of authority for the SEC to recognize GASB standards as it recognizes FASB or – and this is what got some attention – conditioning the exemption of municipal securities under the securities laws on the use of GASB standards.

One could read the text of the speech to mean that he was talking about the exemption of interest on municipal securities from federal income tax, but a footnote makes it clear he was talking about securities laws. Conditioning tax exemption on providing certain pension disclosures, though, has been proposed by Congressman Devin Nunes (R-CA) (H.R. 1628 in the 113th Congress). Congressman Nunes is a senior member of the House Ways and Means Committee and an original co-sponsored of his bill was Rep. Paul Ryan (R-WI), now chair of that committee and a representative from a state whose governor and legislature have been involved in disputes with unions, particularly public employee unions, that have gotten national attention. Congressman Nunes’ proposal should not be discounted.

Chair White’s speech dealt generally with the automatic disqualifications under the securities laws and the process by which the Commission grants waivers from those disqualifications. Whether waivers will be granted in MCDC cases has become a concern among some broker dealers.

Chair White also discussed her view of what incentives are most effective in inducing compliance with the securities laws and she was very clear:

In my experience, in the enforcement arena, the most effective deterrent is strong enforcement against responsible individuals, especially senior executives. In the end, it is people, not institutions, who engage in unlawful conduct. And the greatest disincentive for wrongdoing occurs when people believe that their own liberty, reputations and livelihoods are on the line and they recognize that real, personal consequences will follow from their misconduct. “It isn’t worth the price” becomes the equation, an equation that is harder to have internalized by an impersonalized institution. (Emphasis added).

We could well see more enforcement actions against issuer officials.

National Association of Bond Lawyers

The Weekly Wrap – March 13, 2015

WASHINGTON – Three dealer firms have donated more than $1 million to a Los Angeles nonprofit closely associated with the city’s mayor, gifts some market participants say create an appearance of impropriety even though the donations didn’t violate any rules.

Goldman Sachs Gives, JP Morgan Chase & Co., and Citi Community Development made the donations last year to The Mayor’s Fund, which has collected more than $5 million since its creation last June. A registered 501(c)(3) organization with no formal tie to Los Angeles Mayor Eric Garcetti, the fund is similar to other programs in New York and elsewhere. But the fund is nonetheless headquartered at city hall and Garcetti speaks to the fund about his goals for the city and helps facilitate its fundraising efforts.

Lawyers, issuer officials, and others consulted about it agreed that the three firms did not violate the rules when they gave the money to the fund, which is governed by a board independent of the city leadership and which does nothing to politically support Garcetti or any other political interest.

The Municipal Securities Rulemaking board’s Rule G-37 on political contributions prohibits dealers from engaging in negotiated muni business with state or local governments for two years after making political contributions to issuer officials who can influence the award of bond business. The MSRB has published guidance that explicitly allows gifts to charitable organizations.

Also, there is no indication that the dealers have received any benefit as a result of their donations to the fund.

Los Angeles has historically done the majority of its deals competitively, but has turned to more negotiated deals in recent years. The city’s chief administrative officer recommends potential debt issuances to both Garcetti and the city council and both must approve all financings. All three dealers are current members of Los Angeles’ underwriter pool for both long and short-term debt.

A Goldman spokesman said the firm’s $250,000 donation was targeted to a fund-backed program dedicated to providing summer jobs to at-risk Los Angeles youth, while a JP Morgan spokesman said the same of that company’s $500,000 gift. Citi officials did provide any comments. All three dealer firms who gave to the fund have, in fact, gone on record as supporting strengthening pay-to-play protections by including bond ballot campaign donations as gifts that would trigger the two-year business ban.

Ernie Lanza, a partner at Greenberg Traurig in Washington and former MSRB deputy executive director said that the question of whether firms should be able to give money to charities associated with political figures is well-established, and was part of the debate during G-37’s development in the early to mid-1990s. A 1997 letter written to then-Securities and Exchange Commission chairman Arthur Levitt by then-Goldman Sachs partner David Clapp and preserved by the SEC Historical Society reflected that debate. Clapp, who chaired the MSRB during G-37’s development in 1993 and 1994 wrote that the MSRB’s attorneys told the board that writing the rule broadly to include contributions to bond ballot campaigns and charities with close ties to politicians could be too restrictive of First Amendment rights and might be overturned by federal courts.

“From the very start of G-37 the question was there,” Lanza said. “From time to time it does pop up, and people raise questions about it.”

Some bond lawyers have said the rule, which withstood a First Amendment challenge some 20 years ago, could face yet another in the near future. A very similar rule for investment advisers is under attack in a lawsuit brought in the U.S. Court of Appeals for the District of Columbia Circuit by two state Republican parties and its outcome could have implications for another challenge of G-37.

Glenn Byers, assistant treasurer and tax collector for Los Angeles County, acknowledged that the fund might look questionable to some people but said that it doesn’t bother him.

“On the surface, this may not sound the best,” Byers said. “But because this is a 501(c)(3) non-profit that is directed by a board independent, in theory at least, from the mayor and spending money on public projects, I’m OK with it.”

Craig Holman, government affairs lobbyist for the advocacy group Public Citizen in Washington, said that as long as the board governing the fund is independent of the mayor and the fund takes no part in supporting the mayor, it is within the boundaries of the rules. But Holman said the fund’s name alone could cause some to be concerned.

“It does raise red flags,” he said. “I would automatically assume that it was associated with the mayor.”

But some industry sources said the appearance of potential impropriety created by these kinds of donations should be captured by G-37.

“This is what the pay-to-play rules need to catch,” said one executive of a dealer who did not want to be named. “The appearance just casts a negative light on the industry. The optics don’t look good.”

The MSRB did not respond to a request to comment.

THE BOND BUYER

BY KYLE GLAZIER

MAR 12, 2015 1:26pm ET

WASHINGTON – Securities and Exchange Commission member Daniel Gallagher is calling for Congress to mandate that municipal issuers use Governmental Accounting Standards Board standards, possibly as a condition for their bonds to be tax-exempt.

Gallagher issued the call at the Financial Industry Regulatory Authority’s Fixed Income Conference in New York City on Tuesday, continuing to build on his track record as the SEC’s most outspoken voice on munis.

He also said Congress could grant the SEC authority to recognize GASB standards, as it does for FASB benchmarks, as an alternative to requiring issuers use them as a condition of their bonds’ tax-exempt status.

The Republican commissioner said that too many issuers are not adhering to GASB standards for accounting for pension liabilities, leading some to be able to “hide the yawning chasm in their balance sheets” created by overly ambitious projections of pension investment returns.

“According to the most recent information I could locate, just over two-thirds of the 30,000 or so largest state and local municipal issuers use GASB standards,” Gallagher said. “Data were not available for the extent to which an additional 20,000 smaller municipal issuers use GASB standards, but I would hazard a guess that their rate of compliance with GASB is lower than the larger issuers.”

Issuers are not currently required to adhere to GASB standards, but must do so in order to get a “clean audit” from their auditors. Also if the say they are using GASB standards, they must do so. “We need a legislative fix to mandate the use of GASB standards for municipal issuers — whether it is a grant of authority to the Commission to recognize GASB standards as they do the [Financial Accounting Standards Board’s] or as a condition placed on the bonds’ exempt status,” Gallagher continued. “This should help drive better transparency for investors in the muni market.”

Gallagher has said repeatedly that he is worried about bond exposure to muni pension and other post-employment benefit (OPEB) liabilities. The SEC’s enforcement division has also taken action on this front. Most recently, the commission charged Kansas for understating bond exposure to its pension liabilities, the third state the commission has charged for pension reporting problems.

He also said he is pleased that a number of firms have been meeting with SEC to discuss ways to facilitate electronic trading, after he called on SEC last year to engage with market participants and other interested parties to “develop creative solutions to increase liquidity in the secondary fixed income markets.”

Gallagher also touched on other issues in the muni market, repeating some of his past passionate calls for improved transparency for retail investors in the secondary market. Gallagher applauded FINRA and the Municipal Securities Rulemaking Board for their introduction late last year of joint proposals to require dealers acting in a principal capacity to disclose to investors a “reference price” of the same security traded that same day. He said in a December interview that he would have liked the rule to be more similar to a true disclosure of the dealer’s markup, but added on Tuesday that the proposals are a positive step.

He also praised the enforcement division’s work in the muni space, pointing to the SEC’s enforcement action in Harvey, Ill. and saying he supports SEC efforts to bar access to the market for muni officials or cities that don’t follow the rules. Last summer, the SEC secured an emergency order to stop a bond offering by the city based on evidence that the proceeds were to be fraudulently diverted with some of those sums directed to pay the city’s comptroller and muni adviser, Joseph Letke. In December, the city agreed to a settlement in which it agreed to stay out of the markets for as many as three years. The SEC also won a judgment against Letke, along with a bar against participating in future muni offerings.

“This case was an outstanding use of agency resources, and I fully support prohibiting municipalities that cannot or will not comply with the law from accessing the securities markets, as well as pursuing the culpable officials who perpetrate the fraud,” Gallagher said.

THE BOND BUYER

BY KYLE GLAZIER

MAR 10, 2015 5:24pm ET

The rise of oil and gas production in the Utica and Marcellus shale plays, encouraged by state policies, has led many municipalities to seek to exert some control over oil and gas drilling within their borders. In the past two years, the highest courts in Pennsylvania and New York have sided with municipalities and have upheld municipal zoning ordinances against challenges that such ordinances were preempted by state regulation.

The Ohio Supreme Court has weighed into this controversy, striking down a municipality’s zoning and oil and gas ordinances on preemption grounds. The case produced five opinions, including a lead opinion signed by only three justices and concurred in by another. Because of the breadth of the ordinance at issue and the limited holding by the majority of justices, the Ohio court’s decision leaves open the possibility that more traditional zoning approaches limiting drilling could be upheld.

In State ex rel. Morrison v. Beck Energy Corp., Slip Op. No. 2015-Ohio-485 (Feb. 17, 2015)

On February 17, 2015, the Supreme Court of Ohio issued its opinion in In State ex rel. Morrison v. Beck Energy Corp,1 holding that several municipal ordinances were preempted by Ohio’s oil and gas wells and production operations statute, Chapter 1509 of the Ohio Revised Code. The decision was split, with four of seven justices in favor of striking the ordinances. Three justices joined in the lead opinion. The concurring opinion agreed with the result because the ordinances at issue set up a parallel licensing and permitting scheme that conflicted with the licensing and permitting scheme set forth in Chapter 1509. Notably, however, the concurring justice, drawing on recent decisions in New York and Pennsylvania, appeared to favor allowing municipal ordinances reflecting traditional zoning concerns that would indirectly prohibit oil and gas drilling. Thus, the Beck decision leaves open the possibility that municipal zoning ordinances that have the effect of prohibiting oil and gas drilling could be upheld.

Relevant Facts and Procedural History

Beck Energy Corporation (“Beck Energy”), an Ohio oil and gas driller, entered into a lease agreement with a landowner who owned several acres of property within the corporate limits of the City of Munroe Falls (the “City”).2 Pursuant to that agreement, Beck Energy acquired the right to produce any natural gas under the landowner’s property.3 In 2011, Beck Energy obtained a permit from the Ohio Department of Natural Resources (“ODNR”) to begin drilling operations.4 The permit was issued pursuant to Section 1509.02 of the Ohio Revised Code.5

Amended in 2004 to provide “uniform statewide regulation”6 of oil and gas well operations, Section 1509.02 provides that the ODNR “has sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state…with respect to all aspects of the locating, drilling, well stimulation, completing, and operating of oil and gas wells within this state…”7 Further, “Nothing in this section affects the authority granted to…local authorities in section 723.01 or 4513.34 of the Revised Code, provided that the authority granted under those sections shall not be exercised in a manner that discriminates against, unfairly impedes, or obstructs oil and gas activities and operations regulated under this chapter.”8

After Beck Energy began surface activities related to drilling, the City served Beck Energy with a stop-work order and filed a complaint for injunctive relief.9 The complaint alleged that Beck Energy violated several municipal ordinances related to oil and gas drilling and zoning. The oil and gas ordinances established a local permitting process, including a public hearing requirement, with fines and penalties attached for failure to comply.10 The zoning ordinances required the issuance of general and conditional use zoning certificates prior to the commencement of drilling and incorporated the permitting process set forth in the oil and gas ordinances.11 On May 3, 2011, the trial court granted the City’s request for injunctive relief until Beck Energy complied with the City’s ordinances.12 On appeal, the appellate court reversed and held that the ordinances at issue could not be enforced because they were “in direct conflict” with Section 1509.02.13

Lead Opinion

In its lead opinion written by Justice Judith French and joined by two other justices, the Court held that the Home Rule Amendment to the Ohio Constitution did not grant the City the power to enforce the ordinances under review. The Home Rule Amendment provides that “Municipalities shall have authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws.”14 Ordinances in conflict with a state law, however, are preempted. Specifically, a “municipal ordinance must yield to a state statute if (1) the ordinance is an exercise of the police power, rather than of local self-government, (2) the statute is a general law, and (3) the ordinance is in conflict with the statute.”15

The lead opinion observed that the ordinances constituted an “exercise of police power,” stating that the “[ordinances] prohibit—even criminalize—the act of drilling for oil and gas without a municipal permit.”16 The lead opinion also stated that Section 1509.02 was a general law that operated uniformly throughout the State because it “imposes the same obligations and grants the same privileges to anyone seeking to engage in oil and gas drilling” anywhere in Ohio.17

Justice French reasoned that the ordinances conflicted with Section 1509.02 in two ways. First, the ordinances prohibited what the statute permitted: “state-licensed oil and gas production within Munroe Falls.”18 She said: “This is a classic licensing conflict under our home-rule precedent. We have consistently held that a municipal-licensing ordinance conflicts with a state licensing ordinance if the ‘local ordinance restricts an activity which a state license permits’.”19

Second, the lead opinion observed that the ordinances conflicted with Section 1509.02 because the language of the statute demonstrated that “the General Assembly intended to preempt local regulation on the subject.”20 The lead opinion noted that by designating ODNR as the “sole and exclusive authority to regulate the permitting, location and spacing of oil and gas wells” and by reserving to the State “all aspects” including “permitting” relating to the location, drilling and operation of oil and gas wells, the General Assembly intended to preempt any local regulation of the same.21 In concluding that such a “double licensing” scheme was impermissible, the lead opinion cautioned, however, that its review was “limited to the five municipal ordinances at issue in this case.”22

The City had argued that no conflict existed “because the statute and the ordinances regulate two different things,” i.e., the ordinances supposedly addressed “traditional concerns of zoning” while the statute related to “technical safety and correlative rights topics.”23 This argument drew on recent decisions in New York and Pennsylvania for support. In Wallach v. Dryden,24 the Court of Appeals of New York held that local zoning ordinances that in effect prohibited “all oil and gas exploration, extraction and storage activities” within a municipality’s corporate limits were not preempted by New York’s oil and gas statute.25 As that Court further held, New York’s oil and gas statute preempted “only local laws that purport to regulate the actual operations of oil and gas activities, not zoning ordinances that restrict or prohibit certain land uses within town boundaries.”26 The zoning ordinances at issue did not run afoul of this distinction because they were “directed at regulating land use generally and do not attempt to govern the details, procedures or operations of the oil and gas industries.”27

Similarly, in Huntley & Huntley v. Borough of Oakmont28, the Supreme Court of Pennsylvania held that a local zoning ordinance which had the effect of restricting the site selection of oil and gas wells was not preempted by Pennsylvania’s Oil and Gas Act.29 The Huntley court noted that the intent behind the ordinance was to promote “the safety and welfare of [the Borough’s] citizens, encouraging the most appropriate use of land throughout the borough [and] conserving the value of property.”30 The Huntley court also reasoned that while government interests regarding oil and gas development and land-use control may on occasion overlap, those interests are at base distinct.31 The state’s interest in oil and gas development seeks to further the efficient use of natural resources while a municipality’s interest in “land-use control … is one of orderly development and use of land in a manner consistent with local demographic and environmental concerns.”32

Justice French derided the City’s argument and the notion that zoning ordinances could survive a preemption challenge because they dealt with an area that was different than the subject addressed by oil and gas statutes and regulations. Specifically, she called this alleged distinction “fanciful”:33 “The ordinances and R.C. 1509.02 unambiguously regulate the same subject matter—oil and gas drilling—and they conflict in doing so.”34

Concurring Opinion

In a separate opinion concurring in the judgment only, Justice Terrence O’Donnell agreed that the City had created a “parallel municipal permitting process for oil and gas wells” that conflicted with Section 1509.02, a general law, whereby the City’s oil and gas and zoning ordinances were preempted.35 The concurring opinion, however, emphasized “the limited scope of our decision,”36 i.e., to wit:

This appeal does not present the question whether R.C. 1509.02 conflicts with local land use ordinances that address only the traditional concerns of zoning laws, such as ensuring compatibility with local neighborhoods, preserving property values, or effectuating a municipality’s long-term plan for development.37 [Further] “it remains to be decided whether the General Assembly intended to wholly supplant all local ordinances limiting land uses to certain zoning districts” that did not regulate the “details of oil and gas drilling expressly addressed” by Section 1509.02.38

The concurring opinion noted that under Ohio law “municipalities have…authority to regulate land uses within zoning districts to promote the public health, safety convenience, comfort, prosperity and general welfare”39 and the zoning ordinances enjoy a “strong presumption … of … validity.”40 Justice O’Donnell stated that while the statute vests ODNR with “sole and exclusive authority” regarding the location and spacing of oil and gas wells, the lead opinion purportedly ignores the fact that “‘location’ and ‘spacing’ have specialized, technical meanings in oil and gas law.”41 “Scientific expertise” is thus required for the proper placement of oil and gas wells, thereby requiring special regulations directed to their location and spacing.42 “In contrast, that same scientific and regulatory expertise is not required to determine whether an oil and gas well is compatible with the character and aesthetics of a particular zoning district, such as a residential neighborhood, and we generally presume that zoning authorities are far more familiar with local conditions and therefore are better able to make land use decisions.”43

In contrast to the lead opinion, the concurring opinion relied on Dryden and Huntley to support the proposition that “Courts of last resort in other jurisdictions have declined to view preemptive language in oil and gas statutes that preclude all local regulation of oil and gas drilling as irreconcilable with local zoning laws.”44 The concurring opinion further observed that the Ohio legislature enacted Chapter 1509 to “preempt the inconsistent patchwork of local health and safety regulations governing the technical aspects of drilling….”45 Unlike other Ohio statues which expressly preempt local zoning ordinances, such as laws dealing with hazardous waste facilities, casinos, or public utilities, Chapter 1509 does not do so. “Nothing in R.C. Chapter 1509 expressly addresses zoning or requires ODNR to regulate the location of oil and gas wells to ensure compatibility with local land use, preserve property values, effectuate a municipality’s long-term plan for development, or uphold any of the other traditional goals of zoning.”46

Conclusion

Municipal ordinances that directly attempt to regulate the means or manner of oil and gas drilling are now not permitted in Ohio. Given the limited nature of the majority holding, however, Beck expressly leaves open the question of whether a zoning ordinance that bans or limits oil and gas drilling using more traditional zoning concepts would be permitted.

Footnotes

1 Slip Op. No. 2015-Ohio-485 (Feb. 17, 2015).

2 Appellees’ Merit Br. at 2 (Oct. 23, 2013).

3 Id.

4 Beck Energy at 2, ¶3.

5 Id.

6 Id. citing Legislative Service Commission Bill Analysis, Sub H.B. No. 278 (2004).

7 R.C. 1509.02.

8 .Id. Section 723.01 grants municipalities “special power” to regulate public rights of way and Section 4513.34 vests municipalities with the authority to grant permits regarding the operation of heavy vehicles on local highways.

9 Beck Energy at 4, ¶7.

10 Id. at ¶9.

11 Id. at¶¶8; 37.

12 The State of Ohio ex. rel. Jack Morrison, Jr., Law Director of Munroe Falls, Ohio v. Beck Energy Corp., Case No. 2011-04-1897 at 3-4 (Summit Cty. C.P. May 3, 2011).

13 The State of Ohio ex. rel. Jack Morrison, Jr., Law Director of Munroe Falls, Ohio v. Beck Energy Corp., Case No. 25953 at 2 (Summit Cty. Ct. App. Feb. 6, 2013).

14 Ohio Const., Article XVIII, Section 3.

15 Beck Energy at 6, ¶15, citing Mendenhall v. Akron, 117 Ohio St.3d 33, 2008-Ohio-270, ¶17.

16 Id. at ¶18.

17 Id. at 8, ¶23.

18 Id. at 9, ¶25.

19 ¶26 citing Ohio Assn. of Private Detective Agencies, Inc. v. N. Olmsted, 65 Ohio St.3d 242, 245 (1992); Anderson v. Brown, 13 Ohio St.2d 53, 58 (1968).

20 Id. at 11, ¶29 citing Westlake v. Mascot Petroleum Co., 61 Ohio St.3d 161, 164 (1991).

21 Id. at ¶¶29-30.

22 Id. at 12-13, ¶33.

23 Id. at 10, ¶28.

24 23 N.Y. 3d 728 (2014).

25 Id. at 739.

26 Id. at 746.

27 Id.

28 600 Pa. 207 (2009).

29 Id. at 217; 224.

30 Id. at 224.

31 Id.

32 Id. at 225. The Huntley court, however, affirmed the appellate court’s holding that the Borough had improperly denied the driller a conditional use certificate. See id. at 226-230.

33 Id.

34 Id.

35 Id. at 13-14, ¶36.

36 Id. at 14, ¶38.

37 Id.

38 Id. at 15, ¶39.

39 Id. at ¶41.

40 Id. at 16, ¶42.

41 Id. at ¶43.

42 Id. at 17, ¶44.

43 Id.

44 Beck Energy at 17-18, ¶45.

45 Id. at 18, ¶46.

46 Id. at 19, ¶47.

Last Updated: March 6 2015

Article by Michael R. Gladman, David A. Kutik, Roy A. Powell, Todd S. Swatsler, Jeffery D. Ubersax and Martin T. Harvey

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

The Securities and Exchange Commission’s (SEC’s) year-old Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative or MCDC) has encouraged municipal securities issuers, borrowers, and underwriters to self-report possible securities law violations related to inaccurate representations in offering documents concerning an issuer’s prior compliance with its continuing disclosure obligations. At the National Association of Bond Lawyers’ Tax & Securities Law Institute (TSLI) last week, members of the SEC enforcement staff appeared on a panel to provide additional MCDC details, including that underwriter MCDC cease-and-desist orders will be announced in the “coming months” and that issuers will not be named in these enforcement actions.

LeeAnn G. Gaunt, chief of the SEC’s Municipal Securities and Public Pensions Unit, told the TSLI audience that there was broad market participation in the MCDC Initiative. The SEC, however, does not plan to announce the precise number of MCDC self-reports it received or the percentage that result in a cease-and-desist order. The SEC will announce its MCDC orders against underwriters before it announces any MCDC settlements with issuers or obligated persons. Ms. Gaunt declined to assure underwriters that the SEC will waive certain statutory disqualifications that could be triggered by MCDC settlements, but indicated such waivers eventually should be obtainable.

In July 2014, the SEC announced its first MCDC cease-and-desist order against Kings Canyon Joint Unified School District of California (District). The order was noted by securities lawyers for its lack of detail about the underlying facts and legal analysis supporting the SEC’s conclusion of a securities law violation. In response, Ms. Gaunt stated at TSLI that, in each underwriter order, there will be a few detailed examples of the types of continuing disclosure failures upon which the order is based. Ms. Gaunt believes that these examples will provide the municipal market with a representative and diverse set of facts that can illustrate circumstances that may prompt an SEC enforcement action. The examples will not identify a municipal securities issuer or borrower or the name of the issue.

One of the MCDC settlement terms requires underwriters to retain an independent consultant to conduct a compliance review and provide recommendations to the underwriter on its due diligence process and procedures. Ms. Gaunt indicated that the SEC will not alter its “independence” standard for purposes of MCDC. This means underwriters will have to retain a consultant who has not worked with the underwriter for a two-year period before or after the MCDC settlement.

Upon receipt of a settlement offer, the SEC is setting a tight deadline of two weeks to respond and negotiate the terms. The SEC plans to follow up with all MCDC self-reporters, including entities that will not face a cease-and-desist order. Ms. Gaunt stated that an MCDC enforcement action against an underwriter for a particular transaction will not automatically result in a related action against the issuer or other obligated person involved in the transaction.

The SEC is likely to follow up soon with issuers and other obligated persons who self-reported and/or who were reported by an underwriter. If you receive a call from the SEC, remember:

• Extensive discussions may not serve your interests. You should politely listen, ask the SEC staff member for his or her contact information, and let the staff member know that your counsel will call him or her back.
• Contact your counsel. The issuer or obligated person should contact its MCDC counsel as soon as possible. Keep in mind that the internal notes and e-mails of issuer and obligated person officers and employees are discoverable. By contrast, communications with your lawyer are protected by attorney-client privilege.
• Retain records. Do not destroy any potentially relevant documents.

Please refer to our webinar recording for more information on what to expect following MCDC self-reporting or a decision not to report, how the SEC may determine the materiality of any reported misstatement, and the process of SEC investigations.

March 13, 2015

by M. Norman Goldberger, John C. Grugan, Bradley D. Patterson, William C. Rhodes, and Tesia N. Stanley

Ballard Spahr’s Municipal Securities Regulation and Enforcement Group helps municipal market participants navigate a rapidly evolving regulatory, investigative, and enforcement environment, enabling them to anticipate and address compliance issues and respond effectively to investigations when necessary. For more information, please contact M. Norman Goldberger at 215.864.8850 or [email protected], John C. Grugan at 215.864.8226 or [email protected], Bradley D. Patterson at 801.531.3033 or [email protected], William C. Rhodes at 215.864.8534 or [email protected], or Tesia N. Stanley at 801.517.6825 or [email protected].

Copyright © 2015 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

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

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

FINRA Arbitration Claim Filed by the Securities Arbitration Law Firm of Klayman & Toskes, P.A. and Carlo Law Offices Against UBS on Behalf of Retired Couple for Losses in Puerto Rico Municipal Bonds and UBS Proprietary Closed-End Funds.

SAN JUAN, Puerto Rico, Mar 11, 2015 (GLOBE NEWSWIRE via COMTEX) —

The securities arbitration law firm of Klayman & Toskes, P.A., and the Carlo Law Offices, P.S.C., located in Puerto Rico, recently filed a securities arbitration claim with the Financial Industry Regulatory Authority (FINRA), on behalf of a retired couple against UBS Financial Services Incorporated of Puerto Rico and UBS Financial Services, Inc. UBS, +1.32% (collectively “UBS”). The securities arbitration claim alleges financial damages that were the result of FINRA sales practices violations, including unsuitable investment advice, that resulted in concentrated investments in Puerto Rico municipal bonds and UBS’ proprietary closed-end bond funds due to the failure to supervise its financial advisor’s investment recommendations.

The FINRA arbitration claim alleges UBS and its financial advisor failed to disclose the risks associated with the recommended investment strategy. Furthermore, the undisclosed risks included increased default risks of Puerto Rico municipal securities and increased risks from the use of leverage in UBS’ proprietary closed-end bond funds that were the result of material misrepresentations and omission of facts that Claimants were entitled to have disclosed. According to securities attorney, Steven D. Toskes, “In light of the retired couple’s lack of investment sophistication, they relied upon UBS to devise an investment strategy that was consistent with my clients’ risk tolerance and need for retirement income. UBS failed to do so and, as a result, my clients suffered damages.”

The securities arbitration law firm of Klayman & Toskes, P.A., and Carlo Law Offices, P.S.C., are committed to the protection of Puerto Rico investor rights. It is our belief and conviction in the FINRA dispute resolution process and the legitimacy of Puerto Rico investor rights that governs our current investigations. The sole purpose of this release is to investigate, on behalf of our clients, the sales practices of UBS in connection with investment recommendations provided to their customers. Current and former customers of UBS who have information concerning UBS’ sales practices related to investments in UBS proprietary closed-end bond funds and Puerto Rico municipal bonds are encouraged to contact Steven D. Toskes of Klayman & Toskes, P.A. or Lcdo. Osvaldo Carlo of Carlo Law Offices, at (787) 919-7325, or visit our website at www.sueubspuertorico.com.

About Klayman & Toskes

Klayman & Toskes, a leading securities and litigation law firm, practices exclusively in the field of securities arbitration and litigation, on behalf of retail and institutional investors. The firm represents investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms.

CONTACT: Klayman & Toskes, P.A. Steven D. Toskes, 787-919-7325 [email protected] www.nasd-law.com
Copyright (C) 2015 GlobeNewswire, Inc. All rights reserved.

Two recent SEC enforcement actions demonstrate that the Securities and Exchange Commission remains intently focused on the municipal market and, in particular, on officials participating in financings that fail to accurately and completely disclose material information. In an action arising from defaulted bonds sold by a Michigan city to develop a soundstage, the SEC successfully brought fraud charges against the former mayor of the City of Allen Park, Gary Burtka, and, for the first time, charged a municipal official with “control person” liability, thereby barring him from participating in any future municipal bond offerings. In another case involving a proposed bond issue, the SEC obtained a court order halting the City of Harvey, Illinois from issuing bonds for an economic development project and brought charges against the City’s comptroller, Joseph Letke.

The SEC’s enforcement actions over the past several years, read together, comprise a line of cases clarifying the SEC’s views of the scope of securities fraud in the municipal markets and, increasingly, the personal liability of officers of the issuers or borrowers. Although the facts in each of these cases are relatively clear and often damning, the lessons that the SEC’s enforcement actions teach are important for officers of health care institutions that are borrowers in the municipal market to take to heart.

The SEC is clearly sending a message to the municipal market that inadequate, incomplete or misleading disclosure relating to municipal bonds is not only unacceptable, it is a violation of the federal securities fraud statutes and will not be tolerated. Thus, officers of borrowers of tax exempt bonds must ensure that the disclosure contained in the Official Statement regarding the borrower, as well as in the on-going annual and event disclosure, is accurate and complete. Failure to meet this obligation can lead to significant penalties, including fines and a bar from involvement with the issuance of municipal bonds, potentially threatening the ability of such officers to continue to serve in their existing positions.

What can officers of health care borrowers do to protect themselves from such liability?

1. Understand the scope of the borrower’s disclosure responsibilities.
2. Assemble a strong team of internal staff and external experts to assist in preparing disclosure, both for the primary offering and for continuing disclosure.
3. Ensure that you obtain input from those persons in your organization that are knowledgeable about the various areas that are addressed in the disclosure document – it is unlikely that any single person will have all of the necessary information to prepare accurate and complete disclosure.
4. Do not completely rely on others. Read the draft disclosure and test the statements, ask questions of those preparing the materials and be certain that any inaccuracies that come to light are corrected. Do not assume that someone else will catch an inaccurate statement; ultimately, the document is the issuer or borrower’s responsibility.

The National Law Review

Tuesday, March 10, 2015

Foley & Lardner LLP

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David Y. Bannard is a partner and business lawyer with Foley & Lardner LLP. He focuses his practice on representing airports in a wide variety of matters, including regulatory compliance, leasing, rate-setting and concessions agreements, and public finance matters. Mr. Bannard is an experienced bond lawyer, having served as bond counsel to airports and other issuers, and counsel to borrowers and underwriters, as well as in-house issuer’s counsel, in many transactions. He is a member of the firm’s Finance & Financial Institutions, Public Finance,…

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Law360, New York (March 10, 2015, 3:31 PM ET) — A top Republican on the U.S. Securities and Exchange Commission on Tuesday backed the agency’s increased use of enforcement powers to clamp down on municipal bond fraud, and delivered a tough message to municipalities when he called a failure to adequately disclose pension shortfalls “an unpardonable sin.”

In a speech before a Financial Industry Regulatory Authority conference in New York, SEC Commissioner Daniel Gallagher heaped praise on the efforts of the agency’s specialized enforcement unit for municipal bonds and public pensions. He noted in particular the unit’s emergency action last year to stop a bond offering by a Chicago suburb after finding evidence that some of its proceeds were going to be illegally diverted to the city’s comptroller and bond adviser, Joseph Letke.

The city of Harvey in December reached a settlement with the SEC that imposed certain conditions on it for three years, while the agency also secured a default judgment against Letke himself.

“This case was an outstanding use of agency resources, and I fully support prohibiting municipalities that cannot or will not comply with the law from accessing the securities markets, as well as pursuing the culpable officials who perpetrate the fraud,” Gallagher said.

His remarks come as the SEC continues to turn away from a historical reticence to bring enforcement actions against municipalities and government workers over alleged bond frauds and misconduct, even though its powers over the market are limited. For example, the so-called Tower Amendment prevents the SEC from requiring issuers to file offering documents ahead of an issuance, and the agency has no authority to directly regulate the content and form of municipal disclosures, Gallagher said.

However, the SEC’s enforcement efforts appear to be improving transparency within the municipal bond market, he said.

For one, its Municipalities Continuing Disclosure Cooperation initiative, an effort the agency launched last year to get issuers and underwriters to come forward about possible disclosure violations in exchange for leniency, is perhaps the reason for a 40 percent bump in the number of financial and operating disclosures made publicly available last year compared to the previous year before, Gallagher noted.

The commissioner did not signal any new enforcement initiatives targeting failures to disclose unfunded pension liabilities, but it is an area in which the SEC has previously taken action in settlements with New Jersey, Illinois and, most recently, Kansas.

In addition to poor disclosure of pension shortfalls being an “unpardonable sin,” Gallagher also said these liabilities amount to “a true systemic risk,” particularly given recent changes to accounting for pension liabilities that has forced plan administrators to disclose a more realistic assessment of their shortfalls than they had before.

“But don’t hold your breath waiting for FSOC to address it,” Gallagher quipped, referring to the Financial Stability Oversight Council. “They are probably too busy with Level III assessments of lemonade stands anyway.”

Separately, Gallagher urged the bond industry to lead its own migration toward electronic or exchange-based trading of corporate bonds, saying it otherwise may face the prospect of Congress imposing its own solution on the industry if rising interest rates spark a liquidity crisis.

In his speech, the commissioner repeated warnings about storm clouds brewing over the corporate debt market, as dealer bond inventories shrink to record low levels and rising rates could force investors to flee riskier assets. Put together, these could put a freeze on the market’s liquidity, Gallagher said, a particular problem considering the degree to which mutual fund complexes and insurance companies have bulked up their reserves of these assets.

To address this, Gallagher repeated calls he made in the fall for the SEC to help spur electronic or exchange trading of corporate debt, which he said could help keep the marketplace flowing for these securities. But, he added, the process should not wait for issuers to start standardizing typically “bespoke” offerings that would be easier to trade.

Instead, it is the market’s infrastructure that could adapt to the challenges of trading corporate paper, he continued, noting that options exchanges regularly transact unique contracts.

If the industry doesn’t move, then Congress could step in with a “draconian” solution such as forcing all corporate bonds to be traded on an exchange, Gallagher added. “This is exactly what happened in another over-the-counter market, the swaps markets, in the Rube Goldberg invention known as Title VII of Dodd-Frank.”

By Ed Beeson

–Editing by John Quinn.

(Reuters) – Issuers of municipal bonds should be required to adhere to certain accounting standards to enhance transparency in the $3.7 trillion U.S. muni market, U.S. Securities and Exchange Commissioner Dan Gallagher said on Tuesday.

In a speech at a Financial Industry Regulatory Authority conference in New York, the Republican commissioner said that just over two-thirds of the nation’s 30,000 biggest state and local government bond issuers incorporate practices recommended by the Governmental Accounting Standards Board (GASB). He added that the 20,000 remaining smaller issuers probably have a lower rate of compliance.

“We need a legislative fix to mandate the use of GASB standards for municipal issuers, whether it is a grant of authority to the commission to recognize GASB standards as they do the (Financial Accounting Standards Board’s), or as a condition placed on the bonds’ (tax) exempt status,” Gallagher said.

Past attempts in the U.S. Congress to beef up transparency through accounting practices, particularly with regard to growing public pension costs, have fizzled under opposition from labor unions and others.

While new GASB standards for pension liabilities “are a step in the right direction,” Gallagher said, they are not the complete answer.

“By permitting partial use of the rate of return on assets for funded liabilities, the new GASB standards allow for some political gamesmanship, such as legislation asserting that lawmakers in the future will make back-loaded, catch-up contributions to fully fund the liability,” Gallagher said.

Disclosure of annual required contributions (ARC) by the governments, which was eliminated by GASB, should be resurrected, he added.

“Bringing back the ARC can help hold accountable governments whose contributions are insufficient to make good on their pension promises,” he said.

March 10, 2015 4:44pm EDT

(Reporting By Karen Pierog; Editing by Steve Orlofsky)

NEW ORLEANS – The Securities and Exchange Commission’s enforcement division is contacting dealers who reported their own possible violations of securities laws under a voluntary enforcement program initiated last year, giving them two weeks to decide if they still want to take advantage of the lenient settlement terms.

LeeAnn Gaunt, chief of the enforcement division’s municipal securities and public pensions unit, updated bond lawyers on the progress of the Municipalities Continuing Disclosure Cooperation initiative during a panel at the National Association of Bond Lawyers’ Tax and Securities Law Institute here.

Much of the discussion in multiple panels focused on the MCDC, a program launched last year to allow both issuers and underwriters to voluntarily report, for any bonds issued during the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. Underwriters had to report by Sept. 10 and issuers by Dec. 1 last year.

While declining to offer a time frame or the number of participants in the program, Gaunt said the market can expect to see a wave of settlements with dealers first because the SEC received their submissions before issuers and has had longer to investigate them. Gaunt asked attorneys in the room to raise their hands if they had clients who self-reported, and many indicated that they did.

“We are confirming for ourselves that all of the violations you all reported are violations in our view,” Gaunt said. “We are contacting dealers. Some dealers have been contacted.”

Gaunt said that while the SEC is willing to discuss terms with a dealer, it will only offer two weeks for the dealer to decide if it wants to settle under the MCDC program or take its chances with a traditional enforcement action. For now, Gaunt said, the two week decision period has only been applied to dealers and not to issuers.

Gaunt said that the orders coming out of the MCDC will be about real violations and will provide some guidance on the SEC’s thinking about what sorts of continuing disclosure failures it considers material. Many bond lawyers were upset after a vague settlement with King’s Canyon Joint Unified School District in California last year offered little meat for lawyers to parse through.

Gaunt and Mark Zehner, deputy chief of the unit, also discussed other major recent enforcement actions with bond lawyers at the conference. Dean Pope, a partner at Hunton & Williams in Richmond, Va., who spoke on a panel, said the SEC’s case against officials in Allen Park, Mich. has many public officials spooked. In January, the SEC settled with the former mayor and city administrator of the Detroit suburb for fraudulent conduct related to a failed movie studio financing. The case set a precedent by charging the ex-mayor, Gary Burtka, with being liable as a “control person” with authority over the issuer and administrator, even though he had not executed any fraudulent bond documents himself.

“This is a big case,” Pope said. “It’s generating, and will continue to generate, a lot of concern.”

Zehner said the SEC clumps charges into primary and secondary liability. Secondary liability includes not just a control person, but also things like aiding and abetting, failure to supervise, and others, he said.

“We are fairly comfortable with, and accustomed to, bringing secondary liability claims,” Zehner said.

One lawyer asked if the SEC could have chosen to bring secondary liability charges against other Allen Park officials such as the city council and simply chose not to because of the facts and circumstances there. Zehner said that was correct.

Enforcement activities were a major topic in discussions in the continuing disclosure panel at the conference as well. The MCDC was designed to stop issuers from releasing offering documents that inaccurately claim that they that they have been in compliance with their self-imposed disclosure obligations when they have not.

This approach has led to some debate about what information issuers should include in their official statements. Robert Feyer, a partner in Orrick Herrington & Sutcliffe’s San Francisco office, said he had a client simply say nothing in its most recent OS because it was confident it has been in compliance for the past five years and the SEC’s Rule 15c2-12 does not require an OS to say anything if the issuer is in compliance.

Rebecca Olsen, chief counsel in the SEC’s Office of Municipal Securities, said OMS has coordinated closely with enforcement on the MCDC and will use what it learns from the initiative to give the office direction going forward. The Municipal Securities Rulemaking Board revealed earlier this week that continuing disclosures on its EMMA website rose sharply last year, a spike MSRB executive director Lynnette Kelly attributed partly to the MCDC.

“In my mind the MCDC has already been a tremendous success,” Olsen said.

The NABL conference continues on Friday.

THE BOND BUYER

BY KYLE GLAZIER

MAR 5, 2015 2:44pm ET

NEW ORLEANS — Many bond lawyers feel that, with all municipal rating agencies already or preparing to beam rating changes to EMMA, the Securities and Exchange Commission should amend its rules so that issuers no longer have to worry about filing event notices of their upgrades and downgrades.

Many attendees at the National Association of Bond Lawyers’ Tax and Securities Law institute conference here expressed that sentiment over two days in panel discussions and in separate interviews. The conversation is being driven by the Municipal Securities Rulemaking Board’s announcement earlier this month that the ratings of Moody’s Investors Service would soon begin appearing live on EMMA, joining those of Standard & Poor’s, Fitch Ratings, and Kroll Bond Rating Agency.

The SEC’s Rule 15c2-12 on disclosure prohibits dealers from underwriting bonds unless they reasonably determine that the issuer has entered into an agreement to disclose via EMMA its audited financial and operating information as well as “material events,” including rating changes, when they occur.

During a panel discussion on continuing disclosure Thursday, MSRB executive director Lynnette Kelly said she hoped Moody’s would begin providing ratings on EMMA and live updates to those ratings as soon as May. Panelist Bill Hirata, a former general counsel to Digital Assurance Certification who now runs his own firm in North Carolina, asked SEC muni office chief counsel Rebecca Olsen if the commission would drop rating changes from 15c2-12’s material events list.

“Right now we’re closely monitoring this development,” Olsen said.

The conversation continued at a later panel on disclosure policy, where several lawyers were confident that the SEC would soon drop requiring issuers to manually upload notices that their ratings had been changed.

“They have to,” one bond lawyer said.

Another attorney said that because of the new technology on EMMA, the SEC would be unlikely to think an issuer materially breached its continuing disclosure agreement by not uploading a notice of the rating change. But a few were less sure and thought the SEC might still think that was a problem.

“They would,” another lawyer said. “The SEC would.”

Ben Watkins, the director of Florida’s division of bond finance and a lawyer himself, said in a separate interview that the current disclosure rule has never worked very well and that it might be time for the SEC to come around to adjusting it.

“Sometimes it’s better to acknowledge that there’s a defect in the system,” Watkins said.

The rule has been the subject of much talk following an SEC Paperwork Reduction Act request made late last year for comments on the burdens associated with complying with the rule. Many market participants submitted comments that went beyond that scope, including NABL, which questioned the efficacy of many parts 15c2-12 in the digital age. The MSRB has called for the commission to take a comprehensive look at the rule.

The NABL conference concluded Friday.

THE BOND BUYER

BY KYLE GLAZIER

MAR 6, 2015 12:38pm ET

Regulators will continue to scrutinize large financial firms for risk management, internal controls, and governance, Federal Reserve chair Janet Yellen said Tuesday night in New York.

“Large firms still have room for improvement in this area, and supervisors will be watching closely,” Yellen said in her keynote address during the Citizens Budget Commission’s 83rd annual awards dinner at the Pierre Hotel.

“It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly,” she said. “These incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.”

Yellen, the first female Federal Reserve chair and a Brooklyn native, received the watchdog organization’s medal for high public service.

According to Yellen, the Fed’s actions since the financial crisis of 2008 helped improve oversight of large financial institutions, which she defined as firms whose financial distress would pose a significant risk to financial stability-“firms that are, in that sense, ‘systemically important.’ ”

She cited the Basel III international agreement, the Dodd-Frank Act, stress testing and a yearly review of how firms are planning future capital needs. The Fed expects to release its latest review within days.

“Capital stress testing for banks is not new but the Federal Reserve has employed it much more extensively since the crisis,” she said.

Yellen added that the Fed itself must share some blame for not having looked more broadly at the financial system.

“In the decades of relative financial stability leading up to the crisis, it is fair to say that the Fed focused too much on individual firms and not enough on their role in the financial system and the implications of those firms’ operations for financial stability,” she said.

Last week, Yellen told the House Financial Services Committee that the Fed is working with other banking agencies to identify municipal securities that could be treated as high-quality liquid assets under rules requiring banks to maintain liquidity coverage ratios.

Yellen, a Brown University graduate and professor emeritus from the University of California, Berkeley, began her four-year term as Fed chair on Feb. 3, 2014. Previously she served four years as vice chair.

“Janet Yellen’s presence says a lot about the importance of the CBC,” said New York Mayor Bill de Blasio. “We certainly have enough checks and balances for offering critiques and ideas. [CBC president] Carol Kellermann is a strong and persistent presence.”

De Blasio presented the commission’s prize for public service innovation to the Mayor’s Office of Data Analytics.

The office creates a citywide data platform and implements the city’s open-data law. A major project last year was its implementation of universal pre-kindergarten, which involved adding 36,321 seats to full-day, pre-K capacity, an expansion of more than 170%.

Other projects included implementation of the city’s first comprehensive business census, which maps all commercial activity and enables the city to target resources to small businesses affected by Hurricane Sandy, and the Fire Department’s risk-based inspections system, which helps the city predict and inspect buildings most at risk of serious fires.

ClaimStat, which operates within city Comptroller Scott Stringer’s office, received honorable mention.

The CBC also honored Douglas Durst and H. Dale Hemmerdinger for their 20 years as trustees.

THE BOND BUYER

BY PAUL BURTON

MAR 4, 2015 9:29am ET

FORT LAUDERDALE, FLA. – Municipal issuers’ disclosures of financial and operating data have increased dramatically, while disclosures of bank loans have been disappointing, Municipal Securities Rulemaking Board executive director Lynnette Kelly said at a conference.

Speaking at the National Municipal Bond Summit on Monday night, Kelly said there was a 40% increase in the financial and operating documents issuers filed to EMMA between June 2013 and June 2014. That is much higher than the 7% increase the MSRB normally sees year over year, she said.

Some of this increase was probably due to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative, Kelly said.

The MCDC, announced last March, allowed both issuers and underwriters to voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. Underwriters had to report by Sept. 10 and issuers by Dec. 1 last year.

SEC was particularly concerned about issuers who maintained in offering documents that they were fully in compliance with their self-imposed obligations to file annual financial and operating information by certain dates, when in actuality they had filed the documents late or not at all. SEC offered lenient settlement terms in exchange for the voluntary reporting under the MCDC program.

“Where we’ve not seen an increase in disclosures and would like to is … bank loans,” Kelly said.

The MSRB began urging muni bond issuers to voluntarily post information about their bank loans on EMMA in 2012. Yet since then it has only received 88 such filings, Kelly said, adding, “That is far too low.”

Issuers have increasingly turned to bank loans to meeting their financing needs, typically because of lower interest and transaction costs, a simpler execution process, the lack of need for a rating, greater structuring flexibility, or the desire to deal to interact with a bank rather than multiple bondholders. A bank loans is a term used broadly to mean a bank’s direct loan to an issuer or the private placement of an issuer’s bonds to a bank. But there are no requirements that these be disclosed.

The MSRB, rating agencies, and some market groups have all said it’s important for issuers to disclose such loans, because they could affect an issuer’s financial condition, its credit or liquidity profile, as well as its outstanding bonds and the holders of those bonds.

The National Federation of Municipal Analysts on Tuesday released a paper detailing what disclosure practices it thinks should be adopted for bank loans. In January, the MSRB’s made its most recent call for disclosure of bank loans well as other alternative debt such as direct loans from hedge fund investors.

Kelly told those attending the conference that the MSRB has urged the SEC to revisit its Rule 15c2-12 on disclosure and that bank loan disclosure is one of the areas the MSRB wants the SEC to address during that effort.

THE BOND BUYER

BY LYNN HUME

MAR 4, 2015 1:28pm ET

FORT LAUDERDALE, Fla. — The Municipal Securities Rulemaking Board is likely in the future to propose requiring alternative trading systems to disclose to the board pre-trade price information on municipal securities, industry officials said after listening to speakers on a federal regulatory update panel at a conference here on Monday afternoon.

The industry officials said that Cynthia Friedlander, the director of fixed income regulation for the Financial Industry Regulatory Industry, who spoke on the panel at the National Municipal Bond Summit, “telegraphed” the future MSRB action, when she pointed out that FINRA and the MSRB have been working closely and coordinating on pre-trade price transparency initiatives.

FINRA has already proposed two such initiatives for corporate bonds and agency securities. The MSRB has followed by proposing one of those for munis and is likely to propose the other one for munis too, Friedlander indicated.

FINRA last year issued Regulatory Notice 14-52, which proposed requiring a dealer, for a same-day retail-size principal transaction in corporate or agencies securities, to disclose on the confirmation to a customer, the price to that customer, the price to the member firm of a transaction in the same security, and the differential between those two prices. The MSRB issued its own similar proposal for munis at the same time.

More recently FINRA issued Regulatory Notice 15-03, which proposed requiring ATS’ to report to FINRA quotation information relating to corporate and agency securities. Under the proposal, dealers would have to identify the party that submitted the quotation information as well as the price of the quotation. ATS’ match buyers and sellers for trades. Quotation information would include any offer to buy from or sell to any person or entity at a specified price, yield or spread, including any priced orders that may be displayed on behalf of a customer, according to the notice. FINRA is not proposing to make this information public, but is seeking public comments on that idea.

The MSRB has not yet made any public statements about this initiative. When asked about it by a reporter, Lynnette Kelly, the MSRB’s executive director, noted that it was not in the speech she gave at the conference. But industry officials said they expect the board to follow up with its own similar proposal for munis.

Friedlander also said that FINRA, which has responsibility for examining dealer-municipal advisors, examined 80 of them last year and expects to examine a similar number of them this year. The self-regulator is looking at whether MAs are complying with registration, recordkeeping and supervisory rules, among other things, she said. While the Securities and Exchange Commission is responsible for examining non-dealer MAs, it may still question dealer-MA activities in its examinations of dealers, she cautioned those at the conference.

Friedlander said FINRA is trying to identify dealers that are engaging in MA activities without being aware of it. For example, she said, some dealers are not aware that if they recommend issuers invest bond proceeds in Treasuries or certificates of deposit, they become MAs subject to registration and other MA requirements.

When questioned by the moderator of the federal regulatory update panel about reports that some issuers are hiring “paper [independent registered municipal advisors,] or IRMAs, so dealers that advise them on munis don’t have to register as MAs, Jessica Kane, deputy director of the SEC’s Office of Municipal Securities said the SEC would find that “extremely concerning” and that IRMAs must be meaningfully engaged. Friedlander said, “We’ll be looking at whether the MAs are meaningfully engaged.”

Friedlander also warned MAs to “be very careful with the documents you create on your fiduciary duty.” The Dodd-Frank Act imposed a fiduciary duty on MAs to put their issuer clients’ interests first, before their own. But Friedlander said FINRA has seen some dealer-MA documents that take a “mix and match approach” or are a “cut and paste of various documents” that contain provisions that are incompatible with fiduciary obligations. For example, if an MA says it has an arms-length relationship with an issuer for some activities, that would not be in line with its fiduciary duties. Underwriters have arms-length relationships with issuers, not MAs.

Kane warned that MAs that work for both an issuer, to whom they have a fiduciary duty, and a borrower, to whom they have no such duty, “should think very carefully about the disclosure of conflicts.”

Similarly, on another panel on the evolving role of the MA, Dan Campbell, managing director of ACA Compliance Group, which helps muni market participants with compliance issues, said, “I can’t over-emphasize enough that the concept of conflicts of interest is going to be a major issue for the SEC staff.”

“That’s something MA’s need to think about,” he said.

The MSRB is preparing to release a draft of Rule G-42 that would detail the kinds of conflicts of interest an MA should disclose to an issuer to comply with its fiduciary duty to that issuer. The draft will also cover other fiduciary requirements as well, such as the need for an MA to document its relationship with an issuer, and prohibitions on principal transactions, certain kinds of compensation and fees, and other MA activities, Kelly said in her speech at the conference.

During the panel on MAs, Marianne Edmonds, a senior managing director at Public Resources Advisory Group and MSRB board member, said some small issuers can only afford to hire an MA, or IRMA, on a contingent fee basis, under which the MA would get paid only if the transaction is completed. That is less expensive that hiring an MA on a monthly or indefinite basis. Edmonds noted that some people think such fees create a conflict of interest, but said she disagrees.

Those that worry about a conflict contend the fee structure could incentivize an MA to want to make a transaction work even if it’s not in the issuer client’s best interest.

Edmonds was worried about the fact that the an MA cannot become an IRMA in a transaction if the firm or one of its employees worked for the underwriter in a certain capacity or vice versa and the underwriter or one of its employees worked for the MA.

“We’ve struggled with that,” Edmonds said. “This is something we have to think through and maybe talk to the SEC about. We don’t want to discourage cross-pollination. I don’t think it’s to anyone’s benefit to avoid crossing over.”

Lourdes Reyes Abadin, an executive vice president at Estrada Hinojosa & Co, pointed out that during the financial crisis in 2008 and 2009, “You had a hard time figuring out who was working for whom.”

But Kane, at the later panel, said it is only a two-year look-back. “It’s a two-year cooling off process,” she said and after that entities and individuals “can be screened off” the prohibition.

The MA rule generally exempts engineers, lawyers and certain other market participants from being MAs, but Edmonds and Campbell were aware of situations in which an engineer and an environmental consultant wrote reports that had recommendations that, had they been given to the issuer, would have forced the engineer or environmental consultant to register as MAs.

Most of the panelists said the market has generally adjusted to the MA rules. “There was a lot of concern that this was going to stop communication in its tracks. We really have not seen that,” said Edmonds.

“I think the confusion level has gone down somewhat,” said Campbell.

But the rules have led to changes. Abadin said her small dealer firm used to try to gain a “competitive edge” by presenting financing ideas to issuers. “That is no longer an acceptable avenue for us,” she said.

Abadin also noted her firm’s compliance department has grown from one to three individuals.

THE BOND BUYER

BY LYNN HUME

MAR 3, 2015 11:02am ET

The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to create baseline standards of professional qualification for municipal advisors. The new standards will be incorporated through amendments to the MSRB’s existing Rules G-2 and G-3 on professional qualifications and take effect April 27, 2015.

“The MSRB’s professional qualification program aims to ensure that regulated municipal market professionals meet certain threshold requirements in order to engage in business activities that have a direct impact on financial decisions made by investors, states and municipalities,” said MSRB Executive Director Lynnette Kelly. “Municipal securities dealers have had to meet competency requirements for many years. The approval of these rule amendments takes us a step closer to putting municipal advisors under a similar regime.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing professional standards as part of a comprehensive regulatory framework for municipal advisors. Revised MSRB Rule G-3 establishes two classifications of municipal advisor professionals, representative and principal, with firms required to designate at least one principal to oversee the municipal advisory activities of the firm.

The MSRB last month approved the content outline for the Municipal Advisor Representative Qualification examination, which will be filed with the SEC and made publicly available as a study aid. The MSRB plans to administer a pilot exam later this year that will precede the final exam, which is expected to be available in 2016. To facilitate the transition to the new exam requirement, the MSRB’s rule provides for a one-year grace period during which individuals will be able to take the municipal advisor representative exam while still engaging in municipal advisory activities.

Amended Rule G-3 also eliminates the requirement of apprenticeship. Previously, municipal securities representatives were required to apprentice for 90 days before conducting business with the public. Omitting the apprenticeship requirement for dealers — and not establishing it for municipal advisors – allows both types of firms to identify appropriate training and supervision for new employees.

The MSRB has scheduled a webinar to provide more information on the municipal advisor representative professional qualifications test and related requirements on April 2, 2015 at 3:00 p.m. ET. Register for the webinar.

Read the regulatory notice. 

FORT LAUDERDALE – The Municipal Securities Rulemaking Board’s best execution rule may create liquidity problems for certain areas of the municipal market and will pose compliance challenges for everyone, industry officials said at a conference here on Monday.

The officials spoke at the National Municipal Bond Summit on a panel on the best-ex rule, which was approved by the Securities and Exchange Commission in December and will take effect late this year.

The rule requires dealers to use “reasonable diligence” to determine the best market for a municipal security and then buy or sell the security in that market so that the resulting price to the customer “is as favorable as possible under prevailing market conditions.” Dealers do not have any new responsibilities under the rule to investors with assets of at least $50 million as long as those investors affirm that they are sophisticated municipal market professionals or SMMPs.

Steve Winterstein, managing director of research and chief strategist for municipal fixed income at Wilmington Trust Investment Advisors who was on the panel, said money managers’ lawyers may not let them affirm they are SMMPs because that may be seen as an abrogation of the policies and procedures they already have in place to clients, as those client’s fiduciaries. And if money managers don’t affirm they are SMMPs, then dealers may not want to trade with them because of the additional regulatory burdens.

“I don’t think those issues have been fully vetted with in-house counsel,” Winterstein said. If a money manager or other investor doesn’t sign on with a dealer as an SMMP, it may never hear from that dealer again, he added.

“It could be that there is a part of the market that just won’t be able to function,” said Tom Vales, the chief executive officer of TMC Bonds, an alternative trading system, who moderated the panel.

Vales pointed out that ATS’, which electronically match buyers and sellers to find counterparties for trades, must register as dealers, but do not have any “middlemen” or staff that can provide the due diligence needed to comply with the best-ex rule.

Vales added, however, that TMC Bond’s clients are very sophisticated and that the TMC provides a lot of price information for dealers that would help them comply with the best-ex rule.

Sheila Amoroso, co-director of the municipal bond department for Franklin Templeton Fixed Income Group, said from the audience that she is worried the rule will impact liquidity by forcing traders to take more time and be more cautious before bidding on munis.

Angelique David, senior managing director, general counsel and corporate secretary for the dealer firm Ziegler said “that’s a challenge.” How do you get traders to do their jobs, while documenting everything so that they can show they got a good price? she asked.

Traders have to do due diligence and “document their decision tree” in determining pricing for a muni, she said. The problem, she added, is that people can disagree over what constitutes “reasonable diligence.”

David said it is critical for dealers to develop and put in place new policies and procedures, as well as to test them, to make sure they will allow a trader to comply with the best-ex rule. “It’s not enough to say you are complying with the fair dealing rule,” she said.

“It’s important to test them … before [the Financial Industry Regulatory Authority] does” in an examination, she said.

“FINRA will rarely tell you that a price was wrong,” David said. “They will tell you that your procedures and your policies weren’t designed to get your there. They will say your process didn’t get to that fair price.”

Vales asked the panelists how or whether the best-ex rule plays into new bond issuances and whether it would make a difference whether the bonds were sold competitively or on a negotiated basis.

Dan Kiley, senior vice president and head of municipal fixed income trading at Wells Fargo Advisors, said that he doesn’t think a new issue warrants due diligence on pricing. “I think market forces take you to where the market is priced,” he said.

But David cautioned against that view, saying the Securities and Exchange Commission recently visited her firm and wanted to look at primary market transactions.

A number of the panelists questioned how one determines the best price. Winterstein said that munis sometimes have characteristics that must be factored into the price. He used the analogy of a real estate transaction, saying two houses may look the same, but one has an extra bedroom or bathroom or a pool and therefore a higher price.

THE BOND BUYER

BY LYNN HUME

MAR 2, 2015 12:37pm ET

A widely-used online database that provides credit ratings of municipal bonds has long lacked the participation of a big name: Moody’s Investors Service.

That all changed Monday, when Moody’s and the Municipal Securities Rulemaking Board said the world’s second-largest ratings agency would join the database’s ranks later this year. The database and website, called Electronic Municipal Market Access, or Emma, is heavily leaned upon by mom-and-pop investors who make up the bulk of the $3.6 trillion municipal bond market.

The free website contains ratings information, prices and even disclosure documents. It generally caters to investors doing their research at home — and not a trading-floor desk. On Emma’s home page, site visitors are asked, “Are You Getting a Fair Price?” and are encouraged to watch a video on how to use the database.

Moody’s had been noticeably absent from the Emma database, creating confusion at a time when ratings agencies are taking increasingly divergent views on municipal debt. Standard & Poor’s Ratings Services and Fitch Ratings joined Emma in 2011. Upstart firm Kroll Bond Rating Agency provided its bond grades last year.

Most individual, or retail, investors lack the sophisticated network of financial data, market intelligence or subscription-based terminals—where the credit ratings are aggregated.

“We are pleased that Moody’s will provide its ratings for display,” said Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board, which runs the Emma website.

One of the reasons why Moody’s declined providing its ratings to the database was a different level of disclosures used by the ratings agency itself on its website versus those demanded by Emma, according to a person familiar with the matter. Because Emma is available to the general public, there were concerns providing Moody’s ratings to the database could create liability-related issues, the person said.

“Moody’s ratings have always been available without cost to all market participants via our website, which, as our primary distribution channel, provides convenient access to all of our credit ratings and research,” a Moody’s spokesman said.

It’s unclear what may have changed Moody’s mind about providing its ratings to Emma.

A report last year by Janney Capital Markets found that the potential for discrepancy between ratings from Moody’s and S&P increased last year after S&P released new criteria for local governments, and warned of potential ratings shopping by issuers, financial advisors and investment bankers.

“The divergence of Moody’s and S&P’s ratings in the post-Great Recession era has been startling,” wrote analysts Tom Kozlik and Alan Schankel.

Investors applauded Moody’s decision to join Emma but were unclear how the rating agency’s arrival would affect the market.

“It’s certainly good they added Moody’s but I don’t know how much it helps investors,” said Allan Roth, founder of Colorado Springs-based Wealth Logic. “If I own a bond and it gets downgraded, it’s too late to sell.”

THE WALL STREET JOURNAL

By TIMOTHY W. MARTIN and AARON KURILOFF

Mar 2, 2015

WASHINGTON — Legislation that would amend the U.S. Bankruptcy Code to allow government-owned corporations in Puerto Rico to reorganize through Chapter 9 may face an uphill battle in Congress after drawing a lukewarm reception from Republicans on a House panel Thursday, despite strong support from Democrats.

Witnesses testifying before the House Judiciary Committee’s subcommittee on regulatory reform, commercial and antitrust law, which has jurisdiction over bankruptcy law, mostly expressed strong support for the bill.

The Puerto Rico Chapter 9 Uniformity Act of 2015 is sponsored by Democrat Pedro Pierluisi and has bipartisan support on the island, but some major funds invested in Puerto Rico bonds oppose it. If enacted, the bill would allow issuers such as the cash-strapped Puerto Rico Electric Power Authority to formally reorganize under court supervision, something it cannot do under current law. Pierluisi introduced the bill last year but it went nowhere.

Rep. Tom Marino, R-Pa., said the potential ramifications of the legislation needed to be carefully considered because the relatively small island is a huge municipal issuer and the fate of its bonds could affect a diverse array of investors from hedge funds to small retail investors.

“Much is at stake for both Puerto Rico and investors in its debt,” Marino said. “We need to be mindful of its potential broad and wide-ranging impact,” he said.

Rep. Darrell Issa, R-Calif., said lawmakers would have to be mindful of whether it is their role to “retroactively” apply this change to billions of dollars of bonds that were issued and purchased under a different set of legal circumstances. He also questioned whether it is the role of Congress to grant this option to Puerto Rico when a federal court had already disallowed a local law that tried to do the same thing.

On Feb. 9 a federal court in Puerto Rico struck down the Puerto Rico Debt Enforcement and Recovery Act, a law that was enacted last year to give the island’s public corporations a process to restructure their debts.

“While I’ve not made a decision about the bill in its current form, I have serious questions,” said Issa.

The full Judiciary Committee chairman, Bob Goodlatte, R-Va., did not attend but submitted a statement expressing some of Issa’s same skepticism.

“Chapter 9 of the Bankruptcy Code could provide predictability, transparency, and stability to a Puerto Rican municipal bankruptcy,” Goodlatte said in his statement. “It also could serve as a framework within which parties could come to the negotiating table and reach a consensual restructuring. That said, bondholders purchased Puerto Rican bonds at a time when chapter 9 was not an option. Proposals to retroactively impact investors’ rights should be reviewed with care and caution.”

Democrats, outnumbered on the panel and unable to advance the legislation without Republican support, expressed strong backing for the law. Ranking subcommittee Democrat Hank Johnson, D-Ga., said he supports the bill because it will provide “a vital roadmap” for distressed Puerto Rico issuers. John Conyers, D-Mich., the full committee’s top Democrat, called the current exclusion of Puerto Rico from Chapter 9 access “inexplicable.”

“This is so important,” said Conyers, who represents Detroit.

John Pottow, an attorney and professor at the University of Michigan, told the subcommittee that the bill is a “long overdue” technical correction that is narrowly-tailored to grant Puerto Rico the authority already given the states to determine under whether and what conditions its political subdivisions can declare bankruptcy. Pottow said that the federal court’s decision to strike down the local Recovery Act served as “an invitation” to seek this exact remedy.

Robert Donahue, a managing director at Municipal Market Analytics, told the panel that the bill poses no systemic risk and reduces the likelihood Puerto Rico will ask for outside help to meet basic needs for its citizens.

“This is the best option among a limited set of unattractive options,” Donahue said.

Thomas Mayer, a lawyer who represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds, Inc. said the bill should be killed in favor of a receivership. Chapter 9 hurts bondholders because it is slow and unpredictable he said, and PREPA should handle the situation itself.

“PREPA itself does not need Chapter 9,” he said. “It can fix itself. It can raise revenues in the same manner as nearly every other municipally owned utility in the United States. PREPA has not raised its ‘base rate’ – the rate that pays for everything other than fuel and purchased power – in nearly 26 years.”

The Puerto Rican government has warned that without reorganization authority, bondholders could take actions that would impact PREPA’s functionality such as suing to raise electric rates or asking a court to appoint a receiver who would take control of its operations. Pierluisi told Mayer he does not understand how that path could be an improvement over Chapter 9. Other debtors could also sue PREPA, Pierluisi said, providing bondholders with no certainty. But Mayer responded that events in Detroit’s Chapter 9 proceeding, where pensioners got paid more than bondholders, makes his clients concerned.

The hearing was sparsely attended by lawmakers, with only three of the subcommittee’s 13 members appearing. MMA partner Matt Fabian said that a poorly-attended hearing could indicate a dim outlook for the legislation.

THE BOND BUYER

BY KYLE GLAZIER

FEB 26, 2015 1:17pm ET

WASHINGTON — Par volume traded for municipal securities was $2.77 trillion in 2014, the lowest in over a decade, according to the Municipal Securities Rulemaking Board fact book released Wednesday.

The dramatic drop in trade volume is 11% below the 2013 level and nearly 60% lower than the peak of $6.69 trillion traded in 2007. The 8.91 million of total trades in 2014 is 16% lower than 2013 and is the lowest level since 2006, when 8.47 million trades were executed.

Matt Posner, a managing director at Municipal Market Analytics, said banks and broker-dealers have analyzed the regulatory environment post-Dodd-Frank Act as well as the growing market for bank loans to issuers and are choosing to move away from the secondary muni market.

“I think a lot of them are deciding to put less capital into the market,” he said.

Marcelo Vieira, director of research at the MSRB, said the low trade volume is probably the result of a confluence of factors.

“You have a relatively low primary market supply. You have a low-interest environment,” he said. “Obviously the numbers are very low, historically speaking.”

The report also shows continuing disclosures increased nearly 19% in 2014, possibly the result of the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative. That program, launched last spring, gave issuers and dealers the chance to get lenient settlement terms for voluntarily reporting instances where they misled investors about their compliance with continuing disclosure agreements. MCDC has vastly increased the focus on continuing disclosure over the past several months.

The MSRB collects data via its EMMA system, the sole required disclosure repository for the muni market.

THE BOND BUYER

BY KYLE GLAZIER

FEB 25, 2015 4:47pm ET

WASHINGTON – Conduit issuers and dealers face challenges under the eight month-old municipal advisor registration rule, though most market participants say the new regime is running fairly smoothly.

The Securities and Exchange Commission’s MA rule took final effect July 1 last year, codifying the Dodd-Frank Act’s requirement that firms giving muni bond-related advice to a state or local government owe those issuers a fiduciary duty to put their interests first.

Initial industry panic about the rule’s potential to put the deep freeze on mutually beneficial relationships between investment bankers and muni issuers has subsided, but practical issues involving the fiduciary duty and the use of certain exemptions from the rule continue to be problematic for issuers and dealers.

Robert Donovan, executive director of the Rhode Island Health and Educational Building Corporation, said the MA rule has badly complicated the RIHEBC’s mission to provide capital access to its eligible borrowers. Donovan said the corporation engages an MA on every one of its deals, and makes that MA available to its borrowers.

But while the SEC rule says that the MA has a fiduciary duty to the RIHEBC as a conduit municipal issuer, there is no such explicit duty to a conduit borrower. The Municipal Securities Rulemaking Board has floated a proposed Rule G-42 on the core standards for MAs that would spell out the fiduciary duty in more detail. That proposal states that the fiduciary duty would not apply to borrowers, but it is not yet at the SEC for approval and could still be months away from taking effect.

“It has created some type of a rift,” Donovan said of his relationship with borrowers, to whom he now sends letters asking that they acknowledge that the MA working on the transaction does not owe them a fiduciary duty and is actually RIHEBC’s MA and not theirs.

“I think a lot of the borrowers don’t have a great understanding of the rule,” Donovan said. “It has created some confusion. It has caused some additional work for us.”

Donovan said he fully understands the rule’s motivation and thinks it does provide good benefits for many issuers, especially those issuing primarily straightforward general obligation bonds.

“For conduit issuers it just complicates it,” he said. “I just have to send out a lot more letters than I used to accomplish the same thing.”

Dave Sanchez, a California-based lawyer who worked on the MA rule as a lawyer in the SEC’s muni office from 2010-2013 and now runs his own practice, said the presence of an MA advising both a conduit issuer and borrower is a conflict of interest that likely should be fully disclosed because the issuer and borrowers sit on opposite sides of the negotiating table.

Dealers, who have been extremely vocal about the potential negative impacts of the rule on their relationships with issuers, said they are having trouble getting the documentation they need in order to rely on the registration rule’s independent registered municipal advisor, or IRMA exemption.

An investment banker who wants to give bond-related advice to a state or local government generally wants to avoid having to register as an MA because doing so saddles them with the fiduciary duty and bars them from underwriting any resulting deal. The IRMA exemption allows a dealer to give that advice without registering as an MA if the issuer retains its own MA that has no relationship to the dealer firm and certifies that it will rely on that that IRMA’s advice.

Many market participants have said that the IRMA provision, which is one of several exemptions and exclusions in the rule, is generally the exemption of choice for underwriters because it offers the most wide-ranging MA rule immunity and because most medium to large issuers have their own MAs already.

But Jessica Giroux, general counsel and managing director for federal regulatory policy at the Bond Dealers of America, said verifying that an IRMA is in place and properly registered involves wading through sometimes hundreds of filings on the SEC’s EDGAR system to find the IRMA’s MA registration forms and make sure they are in order.

“Our firms don’t want to rely on the IRMA exemption unless they can verify that everything is in place and as it should be,” Giroux said.

Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at The Securities Industry and Financial Markets Association, said firms want to use the IRMA exemption but that it can be cumbersome to find the documentation that makes them comfortable doing so.

“You have to keep digging,” she said.

Most issuers said the rule, which does not directly regulate them, has not impacted their operations.

“It has kind of been a non-event,” said Jonas Biery, debt manager for Portland, Ore.

Rodney Miller, finance director for Catawba County, N.C., said some of the financial institutions he invests with have reached out wanting to make sure that bond funds are not being comingled with tax revenues in a way that could make their accounts subject to the MA rule, but that the rule has not been disruptive.

Katherine Kardell, an administrator in the budget and finance office of Hennepin County, Minn., said the rule is not a big deal for her or other issuers to whom she has spoken. Kardell said she uses an IRMA and shows them most pitches the county receives from banks.

Giroux said that the SEC’s muni office has been responsive and helpful in answering one-off questions about the rule, and that her group’s member dealers are less concerned about it now than they were in the past.

“Operationally, I think firms are getting more comfortable with issuers’ understanding of the rule,” she said.

National Association of Municipal Advisors president Terri Heaton said regulators have done a good job with outreach on the rule but that her group remains concerned that there may still be rule breakers out there.

“We believe more municipal issuers are more aware of the roles of municipal securities transaction participants,” Heaton said. ” NAMA members have noted increased interest by issuers to engage municipal advisors in transactions, however such is not the case in all parts of the country.”

“We note concern there may be entities which continue to provide MA services that are not in compliance with rules which are now in effect,” she continued. “We note concern there may be entities that are providing MA services which are registered with the MSRB and SEC, but may lack the core competencies and qualifications which may be deemed necessary by the SEC to achieve a fiduciary duty standard.”

Several MSRB MA rules have yet to be finalized, including one requiring a basic competency test. The MSRB has said finishing the MA rules is a top priority.

THE BOND BUYER

BY KYLE GLAZIER

FEB 25, 2015 2:14pm ET

(Bloomberg) — Michelle Choi, an analyst for Moody’s Investors Service, gave a credit rating to bonds issued by a New Jersey town in September. In October, she switched sides and started working for the town’s underwriter, Morgan Stanley.

Choi is one of hundreds of employees at Moody’s and other credit-rating companies, including Standard & Poor’s and Fitch Ratings, who’ve gone to work for Wall Street since the 2008 financial crisis exposed the conflicts at the heart of the ratings business.

While there’s no evidence that Choi’s job-hunting influenced the grade she gave Evesham Township’s debt, and the town chose Morgan Stanley after Choi rated its bond, the rising number of job changes in the industry raises a question: can credit analysts be impartial about grading bonds while looking for employment at banks that underwrite them?

The ratings companies say the answer is yes. An academic study by longtime industry observers suggests otherwise.

“The fact that analysts can get employed by the issuers is a problem and the SEC should be doing something about it,” said Marcus Stanley, policy director at Americans for Financial Reform, a Washington-based coalition of 200 advocacy groups. Ratings analysts can work for issuers immediately because there’s no rule about a waiting period like there is in other industries. Accountants, in some cases, must wait one year before working for a company they audited.

Choi’s new job at Morgan Stanley is “an internal risk function and is not part of the underwriting group,” said Mary Claire Delaney, a Morgan Stanley spokeswoman. Choi declined to comment, Delaney said.

Credit Bust

Since 2008, more than 300 analysts have left the major ratings companies for jobs at banks and other debt issuers, according to U.S. Securities and Exchange Commission data. Last year alone, more than 80 people made the switch, the most since the SEC began compiling such data in 2006. That’s out of a total of about 4,000 analysts employed by the ratings firms, according to SEC data.

The migration shows that the credit graders and Wall Street banks are as close as ever. Their symbiotic relationship first came to widespread attention in the aftermath of the 2008 credit bust, when Moody’s and S&P were accused of inflating the rankings of mortgage bonds in order to win and keep business from underwriters.

The U.S. Justice Department has been investigating the role the two played in the fiasco, and this month S&P agreed to pay $1.5 billion, without admitting guilt, to settle cases with state and federal authorities. The investigation into Moody’s continues.

By Committee

“Moody’s ratings are determined by ratings committees, not by individual analysts, and we have robust policies in place to safeguard the independence and integrity of the ratings process, including ‘look-back’ reviews for analysts who have left the company,” said Thomas J. Lemmon, a Moody’s spokesman. The company declined to comment about the Justice Department probe.

Buyers of the Evesham Township bonds weren’t told about Choi’s change of employer, and Moody’s hasn’t disclosed the possible conflict of interest, nor is it required to.

Higher ratings, if inaccurate, can understate a security’s risk and cost bond buyers money.

The working paper, “Revolving Doors on Wall Street,” found that money is the biggest factor causing ratings inflation. The more an analyst gets paid at her new job, the higher her ratings relative to those of other analysts, the study said.

Largest Discrepancies

Analysts hired by the biggest Wall Street banks were the ones responsible for the largest discrepancies with other raters of the same bonds, according to authors Jess Cornaggia of Georgetown University and Kimberly Cornaggia of American University, both in Washington, and Han Xia of the University of Texas at Dallas.
“Even if there is no quid-pro-quo dynamic, if I have the ability to affect the performance of my future employer, it’s in my own interest to think positively about it,” Kimberly Cornaggia said in a phone interview.

The authors quantified the difference. If an analyst is hired by one of the top 20 banks, rankings rise by 0.35 level on average compared with an average 0.18 grade increase for all analysts switching positions.
If that bump-up elevates the bond to investment grade from a speculative, or junk, rating, the borrower would save $85 million in interest over the life of a $1 billion 10-year bond, according to data compiled by Bloomberg.

In September, while Choi was a Moody’s analyst, she assigned an Aa3 grade, the fourth-highest, to a $13.2 million general obligation bond issued by Evesham Township, a 30-square-mile (77-square-kilometer) municipality with a population of 45,500 east of Philadelphia.

It’s not possible to compare Choi’s rating because Moody’s was the only company hired to offer an opinion.

New Rules

In new rules slated to take effect in June, the SEC is trying to reduce possible conflicts of interest by directing ratings companies to use their discretion to determine if a grade needs to be re-evaluated after an analyst or manager leaves the company.

John Nester, an SEC spokesman, declined to comment.

Ratings companies should inform bond buyers any time an analyst leaves to work for an issuer, said Jeffrey Manns, an associate professor of law at George Washington University in Washington.

“It would be simpler and more transparent if there was a disclosure system,” Manns said.

Waiting Period

The biggest banks are the largest employers of former credit analysts. Since 2006, New York-based Morgan Stanley has hired the most, 16, followed by Frankfurt-based Deutsche Bank AG with 14, according to SEC data compiled by Bloomberg.

The job hunt is international. Oliver Issl worked as an analyst at Fitch in Frankfurt for more than five years evaluating securitized debt. He took that experience to Dutch bank NIBC Bank NV in October to help create the same type of securities he was grading for the Hague-based lender.

Spokesman Diederik Heinink declined to comment on behalf of NIBC or Issl.

“Fitch has very robust policies and procedures in place to ensure the objectivity of our ratings, including policies around the credit work of any analyst who leaves Fitch for employment with a rated entity,” Rebecca O’Neill, a Fitch spokeswoman, said in a statement.

In London, Roneil Thadani joined the rating advisory team at Credit Agricole SA in November, helping guide underwriters through the ratings process. He worked at S&P for eight years grading structured finance securities and infrastructure bonds.

Spokeswoman Maryse Dournes declined to comment on behalf of Montrouge, France-based Credit Agricole and Thadani.

“If an analyst participates in rating an entity and then leaves our employment and goes to work for the rated entity, we review the analyst’s rating on the entity to determine if it was appropriate,” said Catherine Mathis, a spokeswoman for New York-based S&P.

by Matthew Robinson

February 24, 2015

To contact the reporter on this story: Matt Robinson in New York at [email protected]

To contact the editors responsible for this story: Shannon D. Harrington at [email protected] Bob Ivry

NEW YORK — A proposed bill to give Puerto Rico’s ailing public agencies a way to restructure debts under U.S. bankruptcy law is a “Wild West” solution that would likely hurt bondholders, an adviser for major investors argued in written testimony ahead of a key congressional committee.

The bill to give Puerto Rico’s agencies the ability to file under Chapter 9 of the U.S. bankruptcy code – used by cities such as Detroit, Michigan, and Stockton, California – was proposed by the U.S. territory’s representative to Congress, Democrat Pedro Pierluisi. It will be heard on Thursday.

“Use of Chapter 9 by any of Puerto Rico’s public corporations will cause more harm than good, for both millions of Americans who invested in Puerto Rico bonds and for the Commonwealth,” according to testimony from Thomas Mayer, a partner at Kramer Levin.

Mayer represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds Inc in respect to their investment in $1.6 billion of bonds issued by Puerto Rico’s electric utility, PREPA. PREPA is in dire shape, laden with about $9 billion in debt and already deep in restructuring negotiations with bondholders.

Using Chapter 9 would force bondholders to shoulder the burden of PREPA’s operational failures and Puerto Rico’s fiscal irresponsibility, Mayer said.

“Chapter 9 is the Wild West,” Mayer’s testimony said. “The only certainty is that Chapter 9 takes a long time – at least 18 months to three years – and is very expensive.”

Pierluisi has argued that the bill empowers the Puerto Rico government to authorize its insolvent public corporations to use a “tried-and-true legal procedure” and would be in the best interests of all stakeholders, including creditors.

Discussion about the bill was reignited when a federal court on Feb. 6 struck down a local law enacted by the Caribbean island granting agencies similar debt-restructuring authority.

Puerto Rico’s Government Development Bank, which finances many of the territory’s official functions, said Chapter 9 would be a “useful tool for Puerto Rico’s long-term economic success, whether or not it is actually invoked,” according to testimony from GDB President Melba Acosta.

Acosta said Chapter 9 provides a legal regime already understood by the markets, creditors, prospective lenders and suppliers.

By REUTERS

FEB. 25, 2015, 6:17 P.M. E.S.T.

(Reporting by Nick Brown and Megan Davies)

This week the GFOA is circulating a member survey to inquire about your experiences with the SEC’s Municipalities Continuing Disclosure Cooperation initiative. The MCDC initiative was launched by the SEC last March and invited issuers and underwriters to self-report instances of material misstatements in bond offering documents regarding the issuer’s prior compliance with its continuing disclosure obligations. The initiative created an incentive for underwriters to self-report, which in turn caused many issuers to be questioned about their prior continuing disclosure compliance. Issuers could report instances of material misstatements up to December 1, 2014. The brief, multiple choice, 19-question GFOA survey is designed to gather information that will allow us to estimate the time and costs incurred by issuers in responding to the MCDC initiative.

The survey will close on March 17, 2015.

Friday, February 20, 2015

Feb 24 (Reuters) – The Securities and Exchange Commission has closed its investigation into bonds issued by the scandal-plagued city of Bell, California, and plans no enforcement action, according to filings posted on Monday.

Federal securities regulators opened an investigation into Bell’s bond debt in October 2010 after large scale fraud by the city’s former administration surfaced.

In a letter to the city’s attorneys dated Feb. 18, Robert H. Conrad, the SEC’s assistant regional director, wrote: “We have concluded the investigation into the City of Bell. Based on the information we have as of this date, we do not intend to recommend an enforcement action by the Commission against the City of Bell.”

Conrad added, however, that the letter “must in no way be construed … that no action may ultimately result from the staff’s investigation.”

Five former officials from Bell, a working class municipality near Los Angeles with a population of roughly 40,000, were convicted in 2013 of corruption charges. They had stolen nearly $11 million from taxpayers, in part through awarding themselves lavish salaries, often for work they did not do.

The SEC investigated $184 million in debt issued by Bell between 2004 and 2007. The bond debt in question, and the conclusion letter from the SEC, were posted by the city on the Municipal Rulemaking Board’s EMMA website, a repository for information relating to municipal bonds.

Bell is now run by an entirely new administration. The SEC did not immediately return emailed requests for comment.

BY TIM REID
LOS ANGELES Tue Feb 24, 2015

(Reporting by Tim Reid; Editing by Alan Crosby)

WASHINGTON — Securities and Exchange Commission officials are seeking improved disclosure practices in the municipal market and more stringent enforcement of rules protecting investors.

SEC Commissioners and other officials made those comments at the Practicing Law Institute’s SEC Speaks 2015 conference Friday. The annual two-day event brings together officials and staff from nearly every arm of the commission. Commissioner Luis Aguilar spoke about enforcement matters, calling on the commission to seek more industry bars for financial professionals caught committing egregious fraudulent conduct.

“These bars, not only serve to punish the wrongdoer, but also protect investors from future misconduct by such person, Aguilar said. “These bars send a clear message to the next potential fraudster.”

Industry bars have recently become a highly controversial topic in the muni market with simultaneous settlements last month barring public officials in Harvey, Ill. and Allen Park, Mich., from participating in future offerings of municipal bonds. Aguilar said he has witnessed defendants fight hard to avoid industry bar punishments, but added that the high resistance of wrongdoers to accept bans from the industry is proof of bars’ effectiveness.

“Defendants’ vigor to avoid being barred is to be expected, as those bars and suspensions take fraudsters out of the industry, and often have a far more lasting impact than the imposition of a monetary fine,” Aguilar said.

SEC Investor Advocate Rick Fleming also spoke about the need to bring securities disclosure into the 21st century. Fleming is the first head of the Office of the Investor Advocate, which was established by the Dodd-Frank Act. He assumed his role about a year ago. He reports directly to SEC chair Mary Jo White and his job is to promote the interests of investors by analyzing the impact of proposals by the SEC and self-regulators and finding ways the commission and the SROs can improve investor protection.

Fleming told those attending the conference that the next generation of Americans will be used to information that is presented in an engaging and digestible way, and that old-fashioned methods of providing investor information will not cut it going forward.

After his speech, Fleming told The Bond Buyer that he wants to be active in improving disclosure in the municipal market. He recently submitted a comment letter to the Municipal Securities Rulemaking Board in support of a joint MSRB/Financial Industry Regulatory Authority proposal that would require dealers acting as principals to disclose to customers on their confirmations a “reference price” of the same security traded that same day.

Nearly every SEC commissioner has been pounding the drum for more muni disclosure in recent months, something Fleming said he also wants to lend his voice to.

“I’m pounding that same drum,” Fleming said, explaining that the high concentration of retail investors in the fixed income market makes the space important to him. While there will be more work to do, the principal disclosure proposal and other recent MSRB initiatives aimed at improving market transparency are moves in the right direction, Fleming said.

“They don’t solve everything, but they’re positive steps,” Fleming said.

Fleming said he expects his office to continue to be involved in muni market issues and submit comment letters on MSRB proposals.

THE BOND BUYER

BY KYLE GLAZIER

FEB 20, 2015 2:26pm ET

WASHINGTON — A House subcommittee will hold a hearing Feb. 26 on legislation that would allow Puerto Rico government-owned corporations to restructure their debts under Chapter 9 of the federal Bankruptcy Code.

The U.S. House Judiciary Committee’s subcommittee on regulatory reform, commercial and antitrust law, which has jurisdiction over bankruptcy law, will hold the proceeding. The bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, is sponsored by Democrat Pedro Pierluisi, Puerto Rico’s non-voting representative to the House. Pierluisi introduced the bill last session, but it failed to gain any traction.

Puerto Rico isn’t currently eligible to use Chapter 9 to adjust the debt of its municipalities and public corporations. On Feb. 9 a federal court in Puerto Rico struck down the Puerto Rico Debt Enforcement and Recovery Act, a Puerto Rico law that was enacted last year to give the island’s public corporations a process to restructure their debts. Pierluisi was critical of that law, and has said repeatedly that Chapter 9 would be a better approach.

In a statement Thursday, Pierluisi thanked the leaders of the committee as well as the subcommittee, which is chaired by Rep. Tom Marino, R-PA, and consists of eight Republicans and five Democrats.

“It is my hope and expectation that the hearing next Thursday will be productive,” Pierluisi said. “Many stakeholders support this bill, and this hearing will provide them with the opportunity to memorialize and explain their support. Although no objections to the bill have been registered with me up until now, if there are any concerns about the legislation, those concerns can be raised and addressed at the hearing. The point of the hearing is to create a comprehensive record that will help the committee’s leadership determine whether to take the next step in the legislative process, which would be to hold a vote on the bill.”

The fate of the bill could be key for investors holding the bonds of financially distressed government corporations on the island. The Puerto Rico Electric Power Authority had to draw on its debt service reserves to make a July 1 interest payment. PREPA, which has more than $8 billion of bonds outstanding, is now in discussions with its creditors, and there had been speculation that it might ultimately use the Recovery Act.

The Puerto Rican government has said that while it supports amending Chapter 9, it felt it had to move quickly with local legislation rather than wait for Congress to take action.

THE BOND BUYER

BY KYLE GLAZIER

FEB 19, 2015 1:30pm ET

NEW YORK — Municipal advisors remain concerned about one of the key exemptions to the Securities and Exchange Commission’s municipal advisor registration rule, even though they said communications between issuers and underwriters remain robust nearly eight months after the final rule took effect.

Municipal advisors expressed concern about the independent registered municipal advisor, or IRMA, exemption in remarks at The Bond Buyer’s National Outlook 2015 conference Wednesday.

The IRMA exemption allows an underwriter firm to avoid having to register as an MA as long as the issuer retains, as its own MA, an advisor that doesn’t have ties to an underwriting firm, and says that it will rely on that MA’s advice. Underwriters who give bond advice to state or local governments without an exemption from the rule, such as the IRMA exemption, otherwise assume a fiduciary duty to put the municipality’s interests before their own and are precluded from underwriting any bonds in that same transaction.

“There’s still a lot of feeling our way through it,” said Noreen White, co-president at Acacia Financial Group, Inc. While there have been some growing pains, White said, she has seen no evidence of a major concern expressed by issuers and underwriters when the rule was unveiled in fall 2013, when there was fear that the regulation would effectively end the practice of investment bankers offering ideas to issuers.

“I haven’t seen any of the dreaded impeded conversations,” White said. “We still see as many proposals coming across the transom as we ever did.”

Steven Peyser, president at Public Resources Advisory Group, said the IRMA exemption should be tweaked to allow for more of what he called a beneficial “cross fertilization” between muni advisors and underwriters. The SEC rule says that an IRMA is only independent if it has been separate from the underwriter seeking to use the exemption at both the entity and employee levels for two years. The MA cannot have been controlled by the underwriter and MA employees involved in the transaction cannot have worked for the underwriter. Peyser said the SEC should either eliminate the two-year cool-off period for individuals or should grant another exemption for sophisticated issuers – a suggestion that has garnered support from industry groups and large issuers in the past.

Peyser added, however, that he also has seen no restrictions on market conversations since the rule’s final effectiveness July 1 of last year, so long as the IRMA exemption is used.

“Communications between issuers and underwriters have remained virtually the same,” he said.

White said she has another important concern about the potential for abuse of the IRMA exemption through the use of so-called “paper IRMAs” that are listed on a transaction but are not really very involved. SEC muni office officials have said repeatedly that an IRMA has to be meaningfully engaged in the work at hand to qualify as an IRMA and provide the exemption. White said she expects there could be SEC action on that front eventually, perhaps as soon as the Municipal Securities Rulemaking Board has finished writing its own MA rules. White said she would be wary of the potential for trouble in such a situation and told the conference that issuers need to show any serious proposals they get from investment bankers to their IRMA.

“I’m not going up the river for anybody with a pair of silver bracelets,” she said.

Federal regulators at the conference discussed expectations for the coming year. Rebecca Olsen, chief counsel at the SEC’s muni office, told the group that 2015 could indeed be another “year of the municipal advisor.”

“There’s a lot of work left to do,” she said.

MSRB chair Kym Arnone provided an update on MSRB rulemaking, and spoke about the board’s reaction to a Feb. 13 speech by SEC commissioner Luis Aguilar. In that public statement, released by Aguilar’s office, the commissioner expressed dissatisfaction with transparency in the muni market and called on the regulators to move swiftly to implement the recommendations included in the SEC’s 2012 Report on the Municipal Securities Market. Arnone said Aguilar’s sentiments are in line with the MSRB’s goals and with those previously stated by SEC chair Mary Jo White. She said the MSRB welcomes Aguilar’s interest in the muni market.

THE BOND BUYER

BY KYLE GLAZIER

FEB 18, 2015 12:51pm ET

(Bloomberg) — Charles Schwab Corp. and New York agreed to settle a 2009 lawsuit in which the state accused the firm of promoting auction-rate securities as safe while failing to disclose the risks before the market for them froze.

New York claimed Schwab engaged in “fraudulent and deceptive conduct” in promoting the investments. Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. Andrew Cuomo, then attorney general, brought the suit.

The settlement was disclosed in a filing in state Supreme Court in Manhattan. No terms were provided. Schwab and New York said in a November filing that they were in talks to end the case.

The $330 billion worldwide market for auction-rate securities collapsed during the 2008 credit crunch as potential buyers vanished. The crisis sparked regulatory investigations and lawsuits alleging that underwriters and brokers had falsely promoted the securities as safe, cash-like investments.

Liz DeBold, a spokeswoman for current Attorney General Eric Schneiderman, confirmed the settlement and declined to comment further. Sarah Bulgatz, a spokeswoman for San Francisco-based Schwab, said in an e-mail that the company is pleased to have the matter resolved.

Schwab said in an SEC filing in November that it’s been responding to “industrywide inquiries” from federal and state regulators about sales to clients who couldn’t trade their holdings when the “normal auction process for those securities froze unexpectedly in February 2008.”

A Manhattan judge in 2011 granted Schwab’s bid to dismiss the case after the firm said the complaint didn’t cite statements that were false when made or identify who made any misstatements. An appeals court reinstated two of four claims in 2013, saying the state presented enough evidence for a trial.

The case is New York v. Schwab, 453388/2009, New York State Supreme Court, New York County (Manhattan).

by Christian Dolmetsch
7:16 AM PST
February 17, 2015

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at
[email protected]

To contact the editors responsible for this story: Michael Hytha at [email protected] David Glovin, Andrew Dunn

A U.S. House committee is planning a hearing on a proposal to grant public agencies in cash-strapped Puerto Rico access to the same bankruptcy protections provided to cities such as Detroit, according to a person familiar with the plans.

The hearing, expected to take place in coming weeks before the U.S. House Judiciary Committee, would address bondholder concerns about how a possible default by any of the island’s heavily indebted agencies would be handled. The U.S. commonwealth is struggling with more than $70 billion in debt, a sluggish economy and a declining population.

The U.S. Bankruptcy Code denies Puerto Rico’s so-called public corporations the protections afforded under Chapter 9, and a federal judge in San Juan last week blocked a law that would have allowed some of those agencies to restructure their debts, ruling it unconstitutional.

Pedro Pierluisi, Puerto Rico’s nonvoting representative and a member of the committee, on Wednesday resubmitted a bill that would extend Chapter 9 protections to the Commonwealth, saying lawmakers should act swiftly to avert uncertainty.

The bill would allow the agencies to follow the same path as Detroit, which emerged from a record bankruptcy last year, and aims to reassure investors who are already familiar with the Chapter 9 process, Rep. Pierluisi said.

“The current state of matters is there’s no legal framework here for enforcing a restructuring or reorganization plan for any government-owned entity in Puerto Rico,” Rep. Pierluisi said.

The law that was struck down, known as the Recovery Act, would have paved the way for public agencies, such as the island’s power, water and highway authorities, to restructure debt. The Puerto Rico Electric Power Authority, which has about $9 billion outstanding, is negotiating to extend an agreement with creditors to postpone some obligations that expires at the end of March. Moody’s Investors Service said on Tuesday that it expects the utility to default later this year.

Rep. Pierluisi’s bill, which was first submitted last summer but failed to advance, has garnered support from some investors and lawyers. Fitch Ratings said on Wednesday that amending the bankruptcy code to include Puerto Rico’s entities would benefit bondholders and “place Puerto Rico on an equal footing with the 50 states.”

‘The current state of matters is there’s no legal framework here for enforcing a restructuring or reorganization plan for any government-owned entity in Puerto Rico.’
—Pedro Pierluisi, Puerto Rico’s nonvoting congressman and a member of the committee.
Prices for some power-authority bonds maturing in 2036 traded at about 58 cents on the dollar Friday, up from about 40 cents after the Recovery Act’s passage in June. Yields went to 12.4% from 17.5%. Yields fall as prices rise.

Standard & Poor’s Ratings Services on Thursday cut its rating on Puerto Rico debt further into junk territory and increasing liquidity problems. S&P lowered its rating on the island’s general obligation debt to B from BB.

“All of this poses a threat, in our view, to the commonwealth’s ability to continue providing basic public services,” S&P’s report said. “We have observed in other jurisdictions that such an environment can easily give way to political and policy instability.”

The bill’s chances are improving as lawmakers realize Puerto Rico’s importance to stability in the bond markets, where the debt is widely held because of its tax advantages, said Robert Donahue, managing director at Concord, Massachusetts-based research firm Municipal Market Analytics. More than half of municipal mutual funds still hold Puerto Rico bonds, down from about 70% in 2013, according Morningstar data.

“Having a territory default on its bonds is not something that looks good internationally,” Mr. Donahue said. “That would be a black eye for the U.S., so it’s in the interests of Congress to rectify this problem.”

Several analysts, however, said the bill had little chance of advancing beyond the committee, where even Rep. Pierluisi’s fellow Democrats have other legislative priorities. Daniel Hanson, an analyst with Washington, D.C.-based investment firm Height Securities LLC, said in a report on Friday that the bill faces opposition from some Republicans and may be all-but dead already.

The Puerto Rico government may also resist having its public corporations enter Chapter 9, because a judge could force politically unpalatable moves such as tax increases and increased user fees, said Mike Comes, a portfolio manager and vice president of research at Sarasota, Florida-based Cumberland Asset Management, which owns some insured bonds issued by the island.

Puerto Rico, meanwhile, is appealing the court decision on the Recovery Act and is working to avert a cash crunch by borrowing at least $2 billion to repay a loan the island’s highway authority took from the Government Development Bank, the government’s fiscal arm. Puerto Rico’s Gov. Alejandro Garcia Padilla this week also proposed reforms that would move the island from an income tax to a consumption tax, an action aimed at increasing collections and stabilizing government revenue.

Rep. Pierluisi said protecting public corporations is another key to Puerto Rico’s economic development. “You want them viable,” he said. “You want them operating. And if they are insolvent, you want to return them to financial stability through an orderly and stable process.”

THE WALL STREET JOURNAL

By AARON KURILOFF

Feb. 13, 2015 5:30 p.m. ET

Write to Aaron Kuriloff at [email protected]

ALEXANDRIA, Va.–(BUSINESS WIRE)–The Municipal Securities Rulemaking Board (MSRB) announced today that Robert Fippinger, one of the country’s preeminent municipal securities attorneys, will join the MSRB as its Chief Legal Officer, overseeing all legal and external affairs. Fippinger, who currently is Senior Counsel at Orrick, Herrington & Sutcliffe and has served on the MSRB Board of Directors since October 2010, tendered his resignation from the Board effective immediately.

“The MSRB is pleased to bring in-house the man who literally wrote the book on ‘The Securities Law of Public Finance,’”

“The MSRB is pleased to bring in-house the man who literally wrote the book on ‘The Securities Law of Public Finance,’” said MSRB Executive Director Lynnette Kelly. “Bob’s knowledge of municipal securities law is unparalleled and he has made enormous contributions to the municipal market, including serving on the MSRB Board of Directors. We are excited to draw upon his talents even more as he assumes this leadership position.”

The MSRB also announced that it has promoted Deputy General Counsel Michael L. Post to General Counsel-Regulatory Affairs. Post continues in his role as policy advisor to the MSRB and its Board of Directors, and is taking on additional responsibilities, including managing regulatory relationships and professional qualifications regulations for municipal securities dealers and municipal advisors.

“Since joining the MSRB in 2013, Mike has quickly made significant contributions and in his new role, he will focus his exceptional skills on rulemaking and policy issues, as well as key relationships with other regulators,” Kelly said.

Fippinger joins the MSRB at an important time in its development of a regulatory framework for municipal advisors and initiatives to increase price transparency in the municipal market. He will be responsible for overseeing market regulation, communications, education and outreach, and legislative affairs. He will also oversee the MSRB’s professional qualification and enforcement support programs, as well as corporate governance.

A legal educator, Fippinger has been an Adjunct Associate Professor of Law at the New York University School of Law, a Visiting Lecturer in Law at Yale University Law School and an Adjunct Law Professor at Hofstra Law School. He is a sought-after expert and lecturer on securities law whose two-volume treatise, first published in 1986 and now updated annually, remains the definitive reference text on the regulation of the municipal securities market.

Prior to his position at Orrick, Herrington & Sutcliffe, Fippinger was a partner and an associate at Hawkins, Delafield & Wood. He received a bachelor’s degree from Duke University, and master’s and doctorate degrees from Northwestern University. He received a law degree from the University of Michigan Law School.

Before joining the MSRB, Post served for a decade at the Securities and Exchange Commission. He was counsel to Chair Christopher Cox and Chair Mary Schapiro, advising on legal and policy matters arising primarily out of the Divisions of Trading and Markets and Enforcement and the Office of Municipal Securities. Most recently, he was a senior counsel in the SEC’s appellate litigation group. Prior to the SEC, he was an associate at Sidley, Austin, Brown & Wood LLP, and began his legal career as a law clerk to the Honorable Paul J. Kelly, Jr., on the U.S. Court of Appeals for the Tenth Circuit. He received a bachelor’s degree in economics from the University of California, Los Angeles and a law degree from The George Washington University Law School.

February 19, 2015 08:54 AM Eastern Standard Time

About the MSRB

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a Congressionally-chartered, self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is subject to oversight by the Securities and Exchange Commission.

Contacts

Municipal Securities Rulemaking Board (MSRB)

Jennifer A. Galloway, Chief Communications Officer
703-797-6600
[email protected]

The Municipal Securities Rulemaking Board (MSRB) is reminding municipal market participants of the February 20, 2015 deadline to apply for a position on its Board of Directors. To be considered for a position on the Board, please complete the application available on the MSRB’s website.

All applications must be submitted by 11:59 p.m. ET on February 20, 2015.

AUSTIN — The municipal bond industry is struggling to cope with heavy regulation while trying to broaden its appeal to the investment community, experts told The Bond Buyer’s Texas Public Finance Conference.

The Securities Industry and Financial Markets Association’s Leslie Norwood described the current regulatory environment as “death by a thousand cuts.”

The most recent struggle came from the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative, or MCDC, which allowed issuers to report violations of disclosure events that they might have failed to report over the last five years. The SEC offered lenient settlement terms in exchange for the voluntary reporting, but not blanket amnesty.

To find any information that the SEC might consider a violation, issuers, their financial advisors and attorneys had to pore over records for the past five years, a time-consuming and costly process, said Norwood, SIFMA’s managing director, associate general counsel and co-head of municipal securities.

“Was there any consideration of the cost to the industry searching the same deal over and over?” Norwood asked fellow panel member David Woodcock, regional director of the SEC. “We have an estimate of the costs and they are staggering.”

Woodcock said the MCDC effort was one of several firsts for the SEC in 2014, which were designed to “encourage people to take seriously these continuing disclosures.”

Woodcock said the SEC is currently examining the disclosures before deciding which ones to pursue, comparing it to “triage” in a hospital emergency room.

“Ultimately, what we’re talking about are violations,” Woodcock said.

Kit Addleman, a partner with the firm of Haynes and Boone, said that an issuer who stated that it had never failed to disclose any material events would effectively be opening more than five years of record to scrutiny.

“The settlements that were offered in MCDC were not all that different than those offered pre-MCDC,” Addleman said. “There was a lot of incentive to participate or cooperate and the cost was enormous.”

Norwood questioned how “voluntary” the MCDC disclosure was in the fall of 2014.

“Did you really think it was voluntary when the SEC said we’re going to come down on you like a ton of bricks?” Norwood said.

Penelope Blackwell, deputy regional chief counsel for the south region of the Financial Industry Regulatory Authority, disagreed with the notion that pre- and post-MCDC enforcement measures were the same.

“The settlement you’ve seen in the past for non-reporting are not going to be the settlements you’ll see going forward,” Blackwell said.

Another issue that also needs more clarity, the experts said, is the municipal advisor rule that went into effect in 2014. The MA rule, which took effect July 1, puts into practice the Dodd-Frank Act’s requirement that firms providing advice to muni issuers have a fiduciary duty to put their clients’ interests first ahead of their own.

Since the MA rule’s requirement that municipal advisors register with the SEC and the MSRB, some advisors remain confused about what the registration entails, according to

Lawrence Sandor, deputy general counsel of the Municipal Securities Rulemaking Board. He said that since the rule went into effect, there have been 550 registrations with the SEC and 780 with the MSRB.

“Obviously, That’s going to have to be reconciled,” Sandor said.

In another panel discussion on the future of the muni market, Thomas Doe, president and founder of Municipal Market Analytics, said the trend of increasing regulation is in conflict with the need to bring more liquidity to the market.

The only way to invest in the muni bond market is to own bonds, Doe said. In equities, investors can bet against various companies or sectors by short-selling and using arbitrage, Doe said.

“It’s a long-only market,” Doe said. “There is not a hedge for muni debt.”

One way to think of the muni market in the current world is as a parallel to “crowd funding” that is popular with start-ups and new proposals.

“We really are the original version of crowd funding,” Doe said. “That’s certainly a positive way to think about raising money for infrastructure.”

THE BOND BUYER

BY RICHARD WILLIAMSON

FEB 10, 2015

WASHINGTON – As regulators increasingly push for more disclosure of bank loans, some of these “loans” may actually be securities that are already subject to federal securities laws and rules, including municipal disclosure requirements, lawyers said this week.

The Municipal Securities Regulatory Board, rating agencies, and other groups have recently stepped up efforts to promote voluntary disclosure of bank loans, pointing out that the interests of bond investors could be at risk if bank loans and private placements of debt draw on government resources also used to back securities.

But their plea for voluntary disclosure is running up against a tangled web of legal issues involving issuers, broker-dealers and municipal advisors.

In general, issuers are not required to disclose information about their bank deals. While certain information about a loan, such as its size will eventually turn up in the city’s financial documents, detailed information about its terms may remain hidden.

The MSRB and rating agencies have urged issuers to put detailed information about their bank loans on EMMA, raising legal concerns for muni analysts who want to be able to consider the impact of the perhaps $60 billion muni bank loan market on the bond market.

But some transactions that are structured as, and classified by, banks as “loans,” can be municipal securities that are subject to federal securities laws and MSRB rules.

In September 2011, the MSRB published a warning that loans and direct purchases could be subject to these laws and rules. The warning acknowledged the difficult legal issues.

“Municipal securities that are purchased by banks and subsequently restructured do not lose their character as municipal securities,” the MSRB warned. “However, when banks make ‘loans’ to state and local governments, even if only to provide a source of funds for those governments to purchase their own securities, whether such ‘loans’ will be considered securities can be a difficult question.”

The Financial Industry Regulatory Authority chimed in the following February, telling dealers that “these financings may be municipal securities and thus subject to all MSRB rules.”

There is widespread agreement that the question of whether a transaction is a security or a loan is problematic. The Securities Act of 1933 defines a “security” to include most notes, evidence of indebtedness, and certificates of participation. Many muni bank loans are evidenced by notes.

The most concrete guidance available comes from a Supreme Court ruling in 1990, in Reves v. Ernst & Young that provides a four-part test for determining whether such notes are securities.

The court ruled that notes are presumably securities unless they fall into a limited category decided by the court to be outside the securities realm, or if the instrument in question bears a “family resemblance” to an excluded category. The test involves: whether the instrument is motivated by investment or commercial purposes; the plan of its distribution; the expectations of the public; and whether the notes fall under other federal regulations which make applying the securities laws unnecessary.

The MSRB explained the test in its September 2011 notice, pointing out the court said an instrument is likely a security if it was sold to finance substantial investments and the buyer expected a profit or if there were trading for speculation or investment. The court also opined that it might consider instruments to be “securities” on the basis of public expectations, even if other factors pointed to a loan, the board said.

While the so-called “Reves Test” provides guidance suggesting that debt instruments structured as closely as possible to traditional bank loans might not fall under Securities and Exchange Commission oversight or be subject to any MSRB rules, bond lawyers and disclosure experts said the question of whether something is a loan or a security is still very hard to answer.

“That is not an easy determination to make,” said Dave Sanchez, who runs his own law firm in California. “Not with legal certainty.”

Ernesto Lanza, a shareholder in Greenberg Traurig’s Washington office, said the status of the debt can wind up being “pretty amorphous.”

“It’s almost a gut feel,” he said.

“There’s no telltale sign that something is a bank loan or is a security,” said Jessica Giroux, Bond Dealers of America senior counsel and managing director for federal regulatory policy.

If a security is being mischaracterized as a loan that is not subject to securities laws, and regulators discover it, the implications could be severe. Dealers acting as placement agents between issuers and banks could potentially violate a host of MSRB rules, including those requiring dealers to obtain CUSIP numbers and report trades, as well as comply with the pay-to-play rule and restrictions on gifts and gratuities to municipal officials.

Bank loans have already been a source of tension between non-dealer municipal advisors and dealer firms. BDA has accused non-dealer MAs of acting as broker-dealers, even though they are not registered as such, when they serve as go-betweens for loans that are really securities.

The National Association of Municipal Advisors has countered by claiming that negotiating the terms of an issuer’s loan with a bank constitutes an MA activity and asking the SEC to clarify this by providing an exemption from broker-dealer registration for MAs acting in this capacity.

Larry Kidwell, president of Brentwood, Tenn.-based MA Kidwell & Company, however, continues to caution non-dealer MAs about such activities. “I would recommend in the strongest possible terms that registered independent municipal advisors avoid activities which may be deemed to be those of a dealer firm by the SEC,” Kidwell said.

Sanchez described a flip side of that coin, saying broker-dealers have to be worried about pitching bank loans as alternatives to bond financings, because this would make them subject to the municipal advisor registration regime. The Dodd-Frank Act places a fiduciary duty on MA firms that offer advice “with respect to” an issuance of munis that is considered by regulators to be inconsistent with the relationship between an underwriter and an issuer. The duty requires an MA to put the issuer’s interests first before its own. Any dealer actively recommending a loan needs to be sure they are complying with MA rules and G-23, Sanchez said.

While the growing popularity of bank loans and direct purchases has thrust these issues to the forefront, the lack of clarity about how to categorize them may not be resolved any time soon. Bond lawyers said the SEC would be hard-pressed to provide useful guidance on such a facts and circumstances-based standard. Lanza said it’s likely only a major SEC enforcement action would provide much for the market to go on.

“People would love to have the SEC say ‘here’s the definition,’ Lanza said. “The only guidance you’ll get is if there’s a really meaty case.”

Sanchez said it remains a question whether bank loans that are not securities should become subject to continuing disclosure obligations. The SEC would have to amend its Rule 15c2-12 on disclosure to require that they be included as financial information relevant to bondholders.

The Government Finance Officers Association has recommended voluntary disclosure of bank loans. But issuers who release this information voluntarily are still under antifraud obligations to ensure the information is not misleading.

Giroux said disclosure would generally be helpful to the market, and help alleviate regulators’ primary anxiety that investors could be harmed by undisclosed debt that draws on the same tax flows as outstanding bonds.

“Nobody can really point fingers if it’s all disclosed,” Giroux said.

THE BOND BUYER

BY KYLE GLAZIER

FEB 12, 2015 12:32pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds dealers of the February 24, 2015 effective date for new Rule G-45 requiring underwriters of 529 college savings plans to electronically submit information about those plans to the MSRB through its Electronic Municipal Market Access (EMMA®) system. Rule G-45 establishes semiannual reporting periods, the first of which is January 1 – June 30, 2015. Additional data on investment option performance is due on an annual basis, beginning with information for calendar year 2015.

Underwriters have 60 days following the end of each semiannual reporting period and calendar year to submit the required information to the MSRB. Read the approval notice for Rule G-45.

The MSRB will host an educational webinar about Rule G-45 on Thursday, March 12, 2015 at 3:00 p.m. ET. Register here.

To assist 529 plan underwriters in using electronic Form G-45 to comply with the new submission requirements, the MSRB is providing a manual and specifications document. As the manual describes, submitters can choose to submit Form G-45 via the EMMA Dataport web user interface or via an automated computer-to-computer (B2B) interface. The MSRB has also created beta test environments to allow submitters to conduct tests and ensure proper programming and configuration of their applications for making Form G-45 submissions to the EMMA system using either method:

EMMA Dataport Web User Interface Beta Environment

Automated B2B Interface Beta Environment

Please contact MSRB Support at 703-797-6668 with any questions.

Feb 13 (Reuters) – A top U.S. regulator called for a major overhaul of the rules governing the $3.6 trillion municipal bond market on Friday, taking aim at a law many traders, issuers and underwriters have considered sacrosanct.

In a wide-ranging statement, Securities and Exchange Commission member Luis Aguilar called on Congress to repeal the so-called “Tower Amendment” which prevents the SEC from requiring bond issuers to file details of their offerings before selling them to investors.

“Unfortunately…the municipal securities market has been subjected to a far lesser degree of regulation and transparency than other segments of the U.S. capital markets,” said Aguilar, a Democrat, in his statement.

“Investors in municipal securities are afforded second-class treatment under current law in many ways,” he added.

For years, the municipal bond market considered the amendment, a part of securities law, a protection against heavy federal regulation.

But in recent years the SEC has taken a narrow interpretation of the amendment, saying it only bars the federal government from requiring pre-sale documents on debt and does not pre-empt regulation of other areas of disclosure and trading.

Using that interpretation, the SEC has been chipping away at the Tower Amendment through some precedent-setting enforcement cases.

Last year, the SEC took the unusual step of seeking an emergency restraining order to stop a planned bond sale by the Chicago suburb of Harvey.

Harvey ultimately settled, agreeing to hire an independent consultant, undergo an audit and face some restrictions on selling new debt.

Aguilar said Friday that Congress needs to go beyond just repealing the Tower Amendment, and should also repeal other exemptions that the municipal market receives from various federal securities laws that shield some players from registration and reporting rules.

“With the appropriate statutory authority, the commission could take a number of steps to enhance disclosure in the municipal securities markets,” he said.

In addition to calling on Congress to grant the SEC new powers, Aguilar laid out numerous other possible reforms.

One such step the SEC could take, he said, would be to revise SEC rules to improve municipal issuers’ disclosures.

This could pave the way for more information about terms of bond offerings and distribution plans, as well as ongoing reporting requirements concerning potential risks such as credit downgrades.

In addition, Aguilar said there needs to be pre-trade price transparency for investors – especially as the market braces for the impending rise of interest rates.

BY SARAH N. LYNCH

WASHINGTON Fri Feb 13, 2015 1:39pm EST

(Reporting by Sarah N. Lynch; additional reporting by Lisa Lambert; editing by Andrew Hay)

Securities and Exchange Commissioner Luis Aguilar claimed Friday retail investors in municipal bonds are victimized by a lack of transparency, higher markups than for institutional investors and the SEC’s inability to regulate public offerings by issuers.

He asserted retail investors paid more than $10 billion in excessive markups and markdowns between 2005 and 2013.

Pointing out consumers paid an average of double the spread of institutional investors, the Democratic commissioner said, “Retail investors lack access to reliable price information about the municipal securities they may want to buy or sell. As a result, it is exceedingly difficult for retail investors to determine if the prices they are offered and the fees they are charged by their brokers are reasonable.”

He noted the vast quantities of municipal bonds—more than 1.5 million different issues—makes it difficult for investors to buy or sell a particular one.

Aguilar urged the Financial Industry Regulatory Authority (Finra) and the Municipal Securities Rulemaking Board to impose an accurate markup disclosure requirement and to require dealers to disclose their proposed markups before a trade is executed.

FINANCIAL ADVISOR

FEBRUARY 13, 2015 • TED KNUTSON

Earlier this week SEC Commissioner Luis Aguilar addressed the American Retirement Initiative’s Winter 2015 Summit. The Summit, which was held at SEC headquarters in Washington, is a forum that focuses on how advisors can improve retirement outcomes for Americans. Commissioner Aguilar’s remarks were entitled “Advocating for Investors Saving for Retirement” and he took the opportunity to focus on two areas where he believes improvements are necessary for investors to make informed decisions, one of which was disclosure in the municipal market.

Commissioner Aguilar acknowledges that the SEC has limited authority to regulate the municipal market and that situation will continue, as he puts it, “short of a Congressional fix to repeal the Tower Amendment.” While he does not directly say so, his remarks seem to indicate that he believes such a fix is unlikely. However, he does say that “more things can be done to enhance disclosure practices in the municipal securities market” and that the SEC should “carefully consider” moving forward using the authorities that it has – regulating underwriters to ensure that investors have “certain limited disclosures” (i.e., 17 CFR 240.15c2-12, “15c2-12”) and enforcing the antifraud provisions.

Although he acknowledged improvements in recent years though industry efforts and the introduction of the MSRB’s EMMA system, his negative characterizations of the current situation were strong. He spoke of “the entrenched practice among issuers of municipal securities to provide inadequate disclosures” and “pervasive problems” in providing timely and complete continuing disclosures. He cited the enforcement actions against Kansas, Illinois, New Jersey and Kings Canyon Unified School District as support for the proposition that serious problems remain in municipal disclosure.

Among the specific concerns he mentioned were the “absence of detailed information” about an issuer’s outstanding debt – specifically liens and collateral pledges – and the disclosure of bank loans.

Commissioner Aguilar mentioned in particular four of the recommendations that were made in the SEC’s 2012 Report on the Municipal Securities Market:

• Require fuller, and more specific types of disclosures in the initial offering documents, including the final terms of the offering and the price to be paid for the municipal securities in the initial issuance;
• Mandate more specific types of ongoing disclosures, including disclosures concerning the issuance of new debt;
• Provide a method to address noncompliance with continuing disclosure requirements; and
• Make disclosures easier to understand.

The MSRB recently submitted comments to the SEC calling for a review of 15c2-12 and mentioned some of the same concerns that Commissioner Aguilar raised. SIFMA also filed comments saying that SIFMA and its members “welcome a full and complete review of [15c2-12]”, though saying that “fundamental flaws exist with regard to the structure” of 15c2-12 and that SIFMA and its members “are concerned that responsibility for compliance under [15c2-12] is not placed with those who have the best access to issuer information.”

NABL WEEKLY WRAP
February 6, 2015

WASHINGTON — The Securities and Exchange Commission’s disclosure violation self-reporting program has highlighted that issuers and underwriters should take steps to strengthen their disclosure and due diligence procedures to protect themselves from SEC enforcement action, bond lawyers said Thursday.

Attorneys from Orrick, Herrington & Sutcliffe described the state of continuing disclosure in the aftermath of the SEC’s Municipalities Continuing Disclosure Cooperation initiative during a webinar the firm presented in conjunction with The Bond Buyer.

The MCDC, announced last March, allowed both issuers and underwriters to voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations. The SEC offered lenient settlement terms in exchange for the voluntary reporting.

Though the deadline was in September for underwriters and December for issuers, the SEC is still in the process of combing through the many submissions it has acknowledged receiving from deal participants. Elaine Greenberg, a partner in Orrick’s Washington office, said that while it is likely many settlements will result from the MCDC, it may be some time before the SEC gets around to them all.

“The process is likely to take a good part of the rest of the year,” she said.

The MCDC was based on the SEC’s Rule 15c2-12, which requires dealers to review issuers’ official statements in primary offerings and reasonably determine that the issuers have contracted in writing to disclose annual financial and operating information, as well as material event notices.

The Municipal Securities Rulemaking Board is among groups who called for the rule to be revisited and possibly overhauled after the SEC requested comment on the burdens the rule poses. Eileen Heitzler, a partner in Orrick’s New York office, said the MCDC has resulted in a lot of discussion of disclosure requirements.

“There has been more discussion of what is or isn’t material,” Heitzler said.

Heitzler said the in-depth materiality analyses issuers and underwriters conducted could potentially be carried forward to help determine which, if any, instances of past compliance failure should be included in future official statements. But she cautioned that the SEC has still not ruled on the materiality of the disclosure failures reported under MCDC.

Robert Feyer, a partner in the firm’s San Francisco office, offered some specific steps issuers could take to help with their compliance. Continuing disclosure agreements contained in offering documents should set specific dates for filing audited financial statements, rather than adhering to a common practice of promising to file a certain number of days after the end of the fiscal year, Feyer said.

“That makes compliance crystal clear,” he said.

Feyer added that issuers should choose a date by which they can confidently complete their audits, and file unaudited information if the audited data is not available by the date in the continuing disclosure agreement.

Alison Radecki, another partner in the New York office, said it is important for both issuers and underwriters to emphasize written policies and procedures related to their compliance obligations, and to have training on the requirements at least annually.

The SEC has only publicized one settlement under the MCDC, a July 2014 action against Kings Canyon Joint Unified School District. That settlement was vague, annoying many bond lawyers. But the SEC has said future MCDC settlements would be more revealing of the commission’s views on what should or should be disclosed as material.

THE BOND BUYER

BY KYLE GLAZIER

FEB 5, 2015 2:57pm ET

The Municipal Securities Rulemaking Board (MSRB) is updating the municipal advisory community and other market participants on the status of the development of MSRB Rule G-42, on duties of non-solicitor municipal advisors. As a reminder, the following steps of the rulemaking process have been completed:

COMPLETED STEPS

Request for Comment, January 2014
Draft MSRB Rule G-42 seeks to ensure that municipal advisors are fulfilling their fiduciary duty to their municipal entity clients and their duty of care toward all clients.

Review of Comments Received, March 2014 – August 2014
The MSRB received significant public comment on the initial draft rule and determined to seek additional public comment on a revised draft rule.

Second Request for Comment, July 2014
Input on the revised draft rule has significantly aided the MSRB in its further development of the rule.

The MSRB Board of Directors has approved the submission of a further revised version of the rule for the SEC’s formal consideration. The process related to this formal submission is described below.

NEXT STEPS

Formal Filing to the SEC
The MSRB plans to submit a revised version of the rule for the SEC’s formal consideration. The MSRB will distribute a link to the filed rule proposal to all registered firms.

Publication of MSRB Filing in Federal Register
When the SEC receives the filing, it will publish the MSRB’s proposed rule in the Federal Register for an additional public comment period, the length of which is determined by the SEC but typically is 21 days. The MSRB will notify registered firms about this opportunity for comment via email.

SEC Action on Proposed Rule
Following the Federal Register comment period, the SEC will have 45 days to act on the proposed rule, during which time the MSRB typically responds to all public comments received by the SEC. The SEC can seek up to a 45-day extension of its deadline to act, and then institute additional proceedings to determine what action to take that can last up to an additional 150 days.

Effective Date of MSRB Rule
The MSRB anticipates that the rule, if approved, would become effective six months following the date of approval. The information in this status update is being provided so that advisors may plan, as much as possible given the nature of the rulemaking process, for the effectiveness of any approved rule. Advisors are encouraged to familiarize themselves with the proposed rule that the MSRB files with the SEC to begin to consider implementation strategies and how they would prepare timely to comply with an approved rule.

WASHINGTON — The Securities and Exchange Commission’s requested fiscal year 2016 budget of $1.722 billion would allow the commission to hire hundreds of examination staff and step up enforcement, as well as help the muni office coordinate with self-regulators.

The SEC justified its budget request this week in a lengthy document laying out goals for each of its divisions and explaining how a budget increase of 9% over the fiscal year 2015 enacted level of $1.574 billion would help the commission reach those objectives. Topping its priorities is a big boost to National Examination Program staffing, putting more boots on the ground to ensure that entities regulated by the SEC are in compliance with the rules.

“The SEC’s responsibilities have increased significantly over the last few years across all fronts, and, at the same time, the financial markets and market participants have grown in size and complexity,” SEC chair Mary Jo White said in a statement. “Providing the SEC with the resources it needs to effectively oversee these markets and participants benefits America’s investors, businesses and our economy.”

The SEC’s budget is deficit neutral, because its expenditures are offset with fees collected from the securities industry rather than with money appropriated by Congress. Another regulator, the Commodities Futures Trading Commission, would operate under the same model under the Obama budget.

The budget request would allow the SEC to hire an additional 431 staff, the commission said, including 225 in the examination program. Many of them would be involved with examining investment advisers, though others would take part in the SEC’s initiative to examine municipal advisors. The SEC in August announced a two-year exam program focusing on MAs who are not dealer firms and members of the Financial Industry Regulatory Authority. FINRA is taking point on examining dealer-affiliated MAs.

“I am pleased that the President’s budget request would allow us to hire additional staff to enhance our enforcement and examination capabilities, provide greater oversight of our markets, add more experts to implement our expanded rulemaking responsibilities and permit the agency to continue to leverage technology to help fulfill its important mission,” said White.

The budget would also support 93 new enforcement staff, the SEC said. The budget justification document explains that the SEC is involved in more litigation now than in previous years, leading to increased costs. The budget money would also support the mission of the Office of Municipal Securities, which plays a major role in working with FINRA and the Municipal Securities Rulemaking Board to develop and approve new rules affecting the muni market.

“In FY 2016, the OMS will continue to implement the final rules for municipal advisor registration by monitoring and improving the new registration system for municipal advisors, participating in the review of these registrations, advising the Office of Compliance Inspections and Examinations regarding examinations of municipal advisors, and providing interpretive guidance,” the SEC said.

Obama’s overall budget proposals have already met with a frosty reception from congressional Republicans, some of whom have declared them as dead on arrival.

THE BOND BUYER

BY KYLE GLAZIER

FEB 3, 2015 3:07pm

In business, when an employee diverts money it is a crime. When they attempt to make things seem other than they are—cooking the books—it is a crime. So why are municipal bond regulators lax in initiating punitive actions against municipalities for diverting funds and cooking the books? Whether it’s a state misleading investors, or a municipality whose officials divert funds, a rap on the knuckles only hurts investors and taxpayers, not those perpetrating the crime.

An example of such light punishment occurred in Harvey, Ill. where its comptroller—Joe Letke—was found to have diverted millions in bond proceeds to other projects and to his own pocket. His punishment was merely to pay a fine that appears to be a fraction of what he stole and be barred from ever participating in a municipal bond offering again.

For their role in this fraud, the city of Harvey agreed to stop violating federal securities law and to hire a different consultant other than the one who was caught with his hand in the cookie jar. Oh, and the city was allowed to neither admit nor deny any wrongdoing.

Municipal bond fraud seems to be on the rise. In the recent past the SEC slapped a civil fraud on the State of Illinois for lack of disclosure on its public pensions. New Jersey was charged with fraudulent bond offerings. The court order states that New Jersey has a significant disregard…for the principles of fair and accurate disclosure.

On a smaller scale, Grossmont Union High School District in San Diego County was found to have diverted monies from a voter-approved measure and into non-authorized projects—a classic bait and switch scheme.

When we investors read what the uses of money are for and the issuer does not adhere to that specified project, why aren’t the people involved sent to jail? In the case of Grossmont High Schools, once they had the money in their hot little hands they thought they could do whatever they wanted with it rather than what they promised the taxpayers who voted for the bond issue.

As you might guess, Grossmont is seeking to resolve its financial woes in court. However, in such an action, only the lawyers win, not the taxpayers. Consider the audacity of Grossmont in issuing another $60 million in bonds over the next few months. Why would any bond investor trust a word Grossmont’s, Harvey’s, or the States of Illinois or New Jersey officials say? We don’t.

During the legal process of putting together a municipal bond offering, the most important document is the Official Statement. This identifies how and where the monies are spent once the bonds are issued. Those responsible to the bond investors sign off on the Official Statement attesting to the validity of the financial statements, sources and uses of funds, debt service coverage calculations, and cash reserves. Investors rely on the Official Statement.

When the issuers lie about the facts or don’t execute what the Official Statements says they will—as in the case of Harvey, Ill, the state of Illinois and the state of New Jersey—the entire issuers integrity craters into a morass of incredulity. That’s when the regulators must step in—with an Abrams tank rather than their usual fly swatter that does little in the way of deterring others.

Underwriters, lawyers, regulators and issuers should all abide by and comply with the rules. It’s the retail investors who need their protection. As a bond manager, it is frustrating to get only half-truths or worse—outright lies—while the culprits live large without a hint of remorse or consideration toward the bondholders or voters.

There should be significant punishments for those who break securities laws. Investors beware. Always study compliance with an issuer’s past bonds and the promises made. Ask, did they execute what they said they would? Did they deliver? Finding even one instance of noncompliance with the Official Statement is one too many. As with the cockroach theory—there’s never just one.

Forbes

Marilyn Cohen, Contributor

2/05/2015 @ 8:42AM

Marilyn Cohen is president of Envision Capital Management, a Los Angeles fixed-income money manager.

WASHINGTON – The Municipal Securities Rulemaking Board is preparing to submit to the Securities and Exchange Commission a proposal limiting the gifts municipal advisors can give to state and local employees as well as a study guide for its MA qualifications exam.

MSRB chair Kym Arnone announced the decisions Monday following the board’s meeting at its headquarters Alexandria, Va. Last week. Arnone, a managing director and head of municipal securitization at Barclays Capital, inherited several unfinished MA rulemaking endeavors when she assumed the chair in October, and SEC approval of these latest MSRB proposals would be another step toward completion of that agenda.

“The MSRB continues to prioritize the development of regulations and professional qualifications to protect the interests of states and municipalities that rely on the services of municipal advisors,” Arnone said. “These measures are consistent with the MSRB’s development of a comprehensive framework of rules and standards for municipal advisors stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

The MSRB will seek SEC approval to amend its rule G-20 on gifts and gratuities to cover municipal advisors as well as the broker-dealers it currently restricts. The rule currently prohibits a dealer from giving directly or indirectly any thing or service of value, including gratuities, in excess of $100 per year to a person if that gift is related to the muni securities activities of the employer of the recipient. The amendment would clarify that the gifts also cannot be related to muni advisory activities.

The rule also would explicitly prohibit dealers and MAs from receiving reimbursement of certain entertainment expenses from the proceeds of an offering of municipal securities. The amended rule will include applicable interpretive guidance, the MSRB said in a release.

In addition, the board is preparing to give the SEC a “content outline” or study guide to the MA competency exam it is developing, Arnone said. The board plans to send the outline to the commission as soon as the SEC approves the related proposal to create different categories of MAs and requires them to take a qualifications test. The MSRB filed that proposal with the SEC in December.

“If approved, a pilot Series 50 municipal advisor exam will be administered later this year and a permanent exam is expected to be in place by 2016,” the MSRB said.

“Municipal advisors play a key role in municipal finance transactions, from the most basic to highly complex transactions,” said Arnone. “Going forward, passing a basic competency exam will be a requirement for all municipal advisors in—or entering—the profession. Finalizing the blueprint for the municipal advisor exam is a major milestone in this effort.”

The Board agreed to an increase in the fees to take the other exams that it has developed and that are administered by the Financial Industry Regulatory Authority. The fees, which have not been adjusted since 2009, would rise to $150 from $60, Arnone said. That figure does not include the cost of administrative fees assessed by FINRA, which range from $95-$120 per exam.

Arnone said the board will continue to carefully consider comments on its proposal to require dealers, when acting as principals, to disclose to customers on their confirmations a “reference price” of the same security traded that same day. That proposal, released in November, would apply to principal transactions of less than $100,000 or those with 100 bonds or fewer, in an effort to attempt to address concerns about hidden markups in so-called “riskless principal transactions.” Dealers have told the MSRB it should withdraw the proposal, but the SEC’s Investor Advocate has voiced support.

The board will next meet April 22-24.

THE BOND BUYER

BY KYLE GLAZIER

FEB 2, 2015 2:22pm ET

Although the MSRB’s new best execution rule is generally consistent with FINRA’s, differences exist and questions remain regarding FINRA’s examination and enforcement of the requirements.

On December 5, 2014, the U.S. Securities and Exchange Commission (SEC) approved a Municipal Securities Rulemaking Board (MSRB) proposal to establish explicit best execution requirements for brokers, dealers, and municipal securities dealers (Dealers) effecting transactions in municipal securities, subject to certain exceptions.1. The MSRB’s best execution rule is largely consistent with the best execution rule of the Financial Industry Regulatory Authority (FINRA), with some key differences.2.

The MSRB characterizes its best execution rule as an order-handling standard, and not a pricing standard, that would require Dealers to use “reasonable diligence” in seeking to obtain the best price for a customer under prevailing market conditions. Although the MSRB already requires that Dealers trade with customers at fair and reasonable prices, and exercise diligence in establishing the market value of municipal securities and the reasonableness of their compensation, it is unclear whether the MSRB’s new best execution rule will conflict with the MSRB’s existing pricing standards because, for example, those pricing standards explicitly recognize that Dealers are “entitled to a profit.”3. The substantive requirements of the MSRB’s best execution rule are discussed below, as are some of the issues that Dealers might consider when implementing the requirements of the new rule.

The MSRB’s best execution rule becomes effective on December 7, 2015.

BEST EXECUTION

New MSRB Rule G-18—Best Execution—consists of three main provisions and nine paragraphs of supplementary material that inform the best execution standard. We provide an overview of each of these provisions below.

General Best Execution Standard

MSRB Rule G-18(a) contains the substantive best execution standard. In relevant part, MSRB Rule G-18(a) requires Dealers to

use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under the prevailing market conditions.

Although MSRB Rule G-18(a) does not specifically define “reasonable diligence,” it does identify six factors for determining whether a Dealer has used “reasonable diligence,” with no single factor being determinative:

1. The character of the market for the security (e.g., price, volatility, and relative liquidity)
2. The size and type of transaction
3. The number of markets checked
4. The information reviewed to determine the current market for the subject security or similar securities
5. The accessibility of quotations
6. The terms and conditions of the customer’s inquiry or order, including any bids or offers, that result in the transaction, as communicated to the Dealer

Although the substance of MSRB Rule G-18 is substantially similar to FINRA’s best execution rule (FINRA Rule 5310), MSRB Rule G-18 contains an additional factor not found in FINRA’s Rule—the information reviewed to determine the current market for the subject security or similar securities. As explained by the MSRB when it proposed the rule, this additional factor is intended to “guide the use of reasonable diligence when, for example, there are no available quotations for a security . . . [, and] take into account that [D]ealers may use information about similar securities and other reasonably relevant information.”4.

Interpositioning Prohibited

As with FINRA Rule 5310(a)(2), MSRB Rule G-18(b) prohibits “interpositioning,” which is the practice of unnecessarily interjecting a third party between the Dealer and the best market for a security. Unlike FINRA Rule 5310(b), however, which requires FINRA members to show why it is reasonable to use a broker’s broker when effecting a transaction for a customer, the MSRB’s best execution rule does not require Dealers to establish such a showing. Indeed, the definition of a “market” for purposes of the MSRB’s rule (as discussed below) includes broker’s brokers.

MSRB Rule G-18 Not a Pricing Standard

Finally, MSRB Rule G-18(c) states that the obligations under MSRB Rule G-18 are distinct from the pricing obligations in MSRB G-30. It is unclear, however, whether MSRB Rule G-30 and its various interpretations will cause interpretive dilemmas for Dealers, in particular, if regulatory examiners misapply the standard from the FINRA rule when reviewing a Dealer’s compliance with the MSRB rule.

Supplementary Material

The supplementary material to MSRB Rule G-18 is intended to clarify certain aspects of MSRB Rule G-18. In particular, the supplementary material addresses the following:

          Failure to Obtain the Most Favorable Price: The supplementary material clarifies that the failure to have actually obtained the most favorable price will not necessarily mean that a Dealer failed to use reasonable diligence in connection with the Dealer’s best execution obligations under the rule.5.

          Adequate Resources: Under the rule, a failure to maintain adequate resources, such as staff or technology, is not a justification for executing away from the best available market. 6. This provision parallels a similar requirement in FINRA Rule 5130(c).

          Timing of Execution: Paragraph .03 of the supplementary material acknowledges that although customer transactions should be executed promptly, under certain circumstances, Dealers may need more time to use reasonable diligence to determine the best market for a security.7.

          Definition of Market: The rule defines the terms “market” and “markets” broadly to include brokers’ brokers, alternative trading systems or platforms, and other counterparties. Significantly, the rule makes clear that a market through which a most favorable price could be obtained includes a Dealer acting as principal.8. In contrast, the definition of “market” in FINRA Rule 5310/.02 does not explicitly include a FINRA member acting as principal.

          Executing Brokers: Supplementary Material .05 indicates that a Dealer’s duty to provide best execution to customer orders received from another Dealer arises only if that other Dealer routes the order to the Dealer for handling and execution.9.

          Limited Quotations and Pricing Information: The rule requires that a Dealer (1) have policies and procedures in place that address how its best execution determinations will be made for securities in which there is limited pricing information or quotations and (2) document compliance with such policies and procedures.10.
Customer Instructions: Paragraph .07 of the supplementary material states that a Dealer is not required to make a best execution determination if the Dealer receives an unsolicited instruction from a customer that designates a particular market for execution.

          Periodic Reviews: On at least a yearly basis, a Dealer is required to review its policies and procedures for determining the best available market for the execution of its customers’ transactions.11. In conducting the review, a Dealer is required to assess whether its policies and procedures are reasonably designed to achieve best execution while taking certain factors into account, such as the following:

• The quality of execution that the Dealer is obtaining under its current policies and procedures
• Changes in market structure
• New entrants
• The availability of pre-trade and post-trade data
• The availability of new technologies

          Municipal Fund Securities: Excluded from the scope of MSRB’s best execution rule are transactions in municipal fund securities.12. A municipal fund security is a municipal security issued by an issuer that, but for the application of section 2(b) of the Investment Company Act of 1940 (1940 Act), would constitute an investment company within the meaning of section 3 of the 1940 Act.13. Examples of municipal fund securities include local government investment pools and 529 college plans. As explained in the Proposal, municipal fund securities are typically distributed through continuous primary offerings at calculated prices, and the decision to purchase such funds involves special tax and other considerations unique to such securities, making the best execution standard in proposed MSRB Rule G-18 “inapt.”14.

Exceptions for Sophisticated Municipal Market Professionals; Affirmations

In connection with its best execution framework, MSRB also amended MSRB Rule G-48—transactions with Sophisticated Municipal Market Professionals (SMMPs)—to exclude transactions with SMMPs from the best execution requirements. The MSRB also amended the definition of an SMMP in MSRB Rule D-15 to indicate that, to qualify as a SMMP, a customer must affirmatively indicate that it is exercising independent judgment in evaluating the recommendations of a Dealer. More specifically, the affirmation would require the customer to indicate that it

• is exercising independent judgment in evaluating the recommendation of the Dealer, the quality of execution of the customer’s transactions by the Dealer, and the transaction price for nonrecommended secondary market agency transactions as to which the Dealer’s services have been explicitly limited to providing anonymity, communication, order matching and/or clearance functions and
• the dealer does not exercise discretion as to how or when the transactions are executed, and
  has timely access to material information that is available publicly through established industry sources as defined in MSRB Rule G-47(b)(i) and (ii).

The supplementary material to MSRB Rule D-15 indicates that this affirmation may be given, either orally or in writing, (1) on a trade-by-trade basis, (2) on a type-of-municipal-security basis, or (3) on an account wide basis.

Implications

Although compliance with the MSRB’s best execution rule is roughly a year away, Dealers should begin to consider what changes they have to make to their order management and back office systems to comply with the rule. In particular, Dealers should review their current practices for complying with FINRA Rule 5310 and MSRB Rule G-30 and determine how to incorporate, in their policies and procedures, the enumerated factors in MSRB Rule G-18 that can be used to establish the use of “reasonable diligence” in fulfilling the best execution obligations under the rule. Although the “reasonable diligence” factors identified by the MSRB are intended to be nonexclusive, Dealers may want to address in their policies and procedures why a particular factor was not included. In this regard, we caution, as some commenters on the Proposal did,15. that rather than view the list as nonexhaustive, FINRA examination staff might take the view that each of the factors needs to be addressed in any policies and procedures to ensure compliance with the rule.

In addition, although MSRB’s best execution rule indicates that a Dealer’s inventory holdings qualify as a market that can be used to satisfy their obligations under the rule, Dealers should take care to ensure that other markets do not offer comparable or better pricing for a fixed-income product that satisfies the attributes that a customer is seeking. This is particularly the case because MSRB rules do not contain a direct methodology for establishing the prevailing market price for a security as does FINRA Rule 2121/.02 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities). Although the MSRB did propose creating such a methodology,16. it never filed a notice with the SEC to do so. Such a methodology would be helpful in connection with the information reviewed to determine the current market for the subject security or similar securities, especially when reviewing the market for “similar securities” when engaging in a reasonable diligence exercise. Dealers may want to establish criteria for determining what qualifies as a “similar security,” and in this regard, may want to reference the discussion of a “similar” municipal security in the 2010 MSRB Mark-Up Proposal. That proposal states that “a ‘similar’ municipal security should be sufficiently similar to the subject security that it would serve as a reasonable alternative investment to the investor. At a minimum, a market yield for the subject security should be able to be fairly estimated from the yields of the similar securities.” The 2010 MSRB Mark-Up Proposal then goes on to identify the following factors for evaluating the similarities between securities:

• Credit quality considerations, such as whether the municipal security is issued by the same or similar entity, bears the same or similar credit rating, or is supported by a similarly strong guarantee or collateral as the subject security (to the extent that securities of other issuers are designated as “similar” securities, significant recent information of either issuer that is not yet incorporated in credit ratings should be considered (e.g., changes to ratings outlooks)).
• The extent to which the spread (i.e., the spread over U.S. Treasury securities of a similar duration) at which the “similar” municipal security trades is comparable to the spread at which the subject security trades.
• General structural characteristics and provisions of the issue, such as coupon; maturity; duration; complexity or uniqueness of the structure; callability; the likelihood that the municipal security will be called, tendered, or exchanged; and other embedded options, as compared with the characteristics of the subject security.
• Technical factors, such as the size of the issue, the float and recent turnover of the issue, and legal restrictions on transferability as compared with the subject municipal security.
• The extent to which the federal and/or state tax treatment of the “similar” municipal security is comparable to such tax treatment of the subject security.17.

Finally, we note that with respect to SMMPs, Dealers may want to amend their account-opening documents to include materials through which SMMPs can make the required affirmations under MSRB Rule D-15. As mentioned in the Approval Order, however, for existing customers that are SMMPs, Dealers will likely have to get new affirmations. 18.

Conclusion

As explained by the MSRB, the best execution rule is among several initiatives under way to fulfill the MSRB’s long-term plan for market transparency and to align MSRB rules with recommendations from the SEC’s 2012 Municipal Securities Report.19. Indeed, the MSRB and FINRA recently coordinated on requesting comments from their respective members regarding a proposal to disclose pricing information and price differentials in customer confirmations for many same-day transactions.20. We will continue to monitor these and other developments as they progress.

Footnotes

1. See Securities Exchange Act Release No. 73764 (December 5, 2014), 79 Fed. Reg. 73658 (Dec. 11, 2014) (Approval Order). A copy of the approval order is available here. See also SEC Approves MSRB Rule G-18 on Best Execution of Transactions in Municipal Securities and Related Amendments to Exempt Transactions with Sophisticated Municipal Market Professionals, MSRB Regulatory Notice 2014-22 (December 8, 2014) available here.

2. See FINRA Rule 5310.

3. See MSRB Rule G-30/.02(b)(iii) (indicating that a factor a Dealer may consider in determining fairness and reasonableness of prices is that the Dealer is entitled to a profit).

4. Securities Exchange Act Release No. 72956 (September 2, 2014), 79 Fed. Reg. 53236, 53238 (September 8, 2014) (Proposal).

5. MSRB Rule G-18/.01.

6. MSRB Rule G-18/.02. The supplementary material also indicates that “[t]he level of resources that a dealer maintains should take into account the nature of the [D]ealer’s municipal securities business, including its level of sales and trading activity.”

7. MSRB Rule G-18/.03.

8. MSRB Rule G-18/.04.

9. MSRB Rule G-18/.05.

10. MSRB Rule G-18/.06. By way of example, the supplementary material states that a Dealer should generally seek out other sources of pricing information and potential liquidity for such a security, including other dealers that the Dealer previously has traded within the security. In addition, the supplementary material states that a Dealer generally should, in determining whether the resultant price to the customer is as favorable as possible under prevailing market conditions, analyze other data to which it reasonably has access.

11. MSRB Rule G-18/.08.

12. MSRB Rule G-18/.09.

13. Section 2(b) of the 1940 Act states: “No provision in this title [1940 Act] shall apply to, or be deemed to include, the United States, a State, or any political subdivision of a State, or any agency, authority, or instrumentality of any one or more of the foregoing, or any corporation which is wholly owned directly or indirectly by any one or more of the foregoing, or any officer, agent, or employee of any of the foregoing acting as such in the course of his official duty, unless such provision makes specific reference thereto.”

14. Proposal, 79 Fed. Reg. at 53240.

15. Approval Order, 78 Fed. Reg. at 73662 (indicating a belief among some commenters that the exhaustive list of factors to be considered by Dealers could become a de facto enforcement checklist for FINRA).

16. See Request For Comments On Draft Interpretive Guidance On Prevailing Market Prices And Mark-Up For Transactions In Municipal Securities, MSRB Notice 2010-10 (April 21, 2010) (2010 MSRB Mark-Up Proposal).

17. Id. See also SEC, Report on the Municipal Securities Market (July 31, 2012) (Municipal Securities Report), pages 129–130, available here.

18. Approval Order, 78 Fed. Reg. at 73663.

19. Supra note 17.

20. Please see our previous LawFlash for a discussion of these proposals, available here.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

Last Updated: January 26 2015

Article by Steven W. Stone, Peter K.M. Chan and Ignacio A. Sandoval

Morgan Lewis

Alexandria, VA – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting January 28-29, 2015, where it reached another milestone in its development of a baseline qualifying exam for individuals who engage in municipal advisory activities, such as providing financial advice to state and local governments on municipal bond issuances.

The Securities and Exchange Commission (SEC) is reviewing a related MSRB proposal to establish two classes of municipal advisor professionals – representative and principal – both of whom would be required to pass a basic competency examination. If this proposal is approved by the SEC, the MSRB will submit to the SEC for its approval the study outline for the examination, the Board decided at its meeting. The planned test will cover the role and responsibilities of municipal advisor professionals as well as the rules and regulations governing their activities. If approved, a pilot Series 50 municipal advisor exam will be administered later this year and a permanent exam is expected to be in place by 2016.

The study outline was developed after the MSRB conducted extensive outreach to gather input from municipal advisors and others. The outline includes topics to be covered by the test and provides sample questions and reference material to assist municipal advisor professionals in preparing for the exam. All MSRB professional qualifications exams are developed in accordance with established national standards.

“Municipal advisors play a key role in municipal finance transactions, from the most basic to highly complex transactions,” said MSRB Chair Kym Arnone. “Going forward, passing a basic competency exam will be a requirement for all municipal advisors in—or entering—the profession. Finalizing the blueprint for the municipal advisor exam is a major milestone in this effort.”

The MSRB also developed and maintains the Series 51, 52 and 53 qualification examinations for municipal securities professionals. At its meeting, the Board agreed to an increase in the fees for these exams, which have not been adjusted since 2009. Even with the increase, costs to maintain MSRB tests far exceed test revenues. The MSRB is currently engaged in a holistic review of all its fees to ensure that they are reasonably distributed across regulated entities. It should be noted that these fees still fall short of the development costs.

In other municipal advisor rulemaking action, the Board agreed to make certain revisions, after considering the comments received, to the MSRB’s draft amendments to Rule G-20 on gifts and gratuities to extend its provisions to municipal advisors. The revised amendments, to be filed with the SEC, would prohibit municipal advisors, with limited exceptions, from giving more than $100 per year to a person in connection with the municipal securities or municipal advisory activities of the recipient’s employer. The rule also would explicitly prohibit dealers and municipal advisors from receiving reimbursement of certain entertainment expenses from the proceeds of an offering of municipal securities. To ease compliance burdens, the amended rule will codify applicable interpretive guidance.

“The MSRB continues to prioritize the development of regulations and professional qualifications to protect the interests of states and municipalities that rely on the services of municipal advisors,” Arnone said. “These measures are consistent with the MSRB’s development of a comprehensive framework of rules and standards for municipal advisors stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

In addition to municipal advisor topics, the Board began its review of comments recently received on a proposal to require dealers to disclose reference prices on retail customer trade confirmations executed by dealers on the same day. The MSRB’s pricing reference information proposal, released in November 2014 in conjunction with a similar FINRA proposal for the corporate bond market, aims to enhance price transparency for retail investors in municipal securities. The Board will continue to carefully consider the issues raised by commenters and continue to coordinate with FINRA as it determines next steps.

In furtherance of its effort to promote greater transparency in the municipal securities market, the MSRB continues to explore adding pre-trade information to its Electronic Municipal Market Access (EMMA®) website, and recently decided to seek SEC approval to add additional post-trade information to the site. Finally, the MSRB is engaged in a review of all its uniform practice rules to determine if changes might be necessary to modernize the rules, which were established primarily in the 1980s, consistent with advancements in technology and current market practices.

Date: February 2, 2015
Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

WASHINGTON – The Federal Reserve Board’s decision to delay certain aspects of the Volcker Rule are a plus for the municipal market, a major rating agency and a dealer group said.

The Fed decided earlier this month to delay until July 21, 2017 implementation of Dodd-Frank Act provisions that would prevent banks and their affiliates from gambling federally-insured money in risky funds. The municipal market has been preparing for a major change to the roughly $70 billion to$80 billion tender-option bond market. But Moody’s Investors Service said this week the Fed’s decision will delay a mass liquidation of bonds associated with TOB programs.

The deadline was originally in July of this year.

Under Volcker, banks will no longer be able to sponsor a TOB program, own a residual certificate issued by a TOB trust, or provide credit enhancement, liquidity, or remarketing services to these programs. TOB programs have historically been used to provide short-term, tax-exempt munis to money market funds. In a typical TOB program, the sponsor will deposit a fixed-rate bond or note into a trust, which will issue two new certificates — a floating rate certificate and a residual certificate.

The floating rate certificate will have a tender option, through a liquidity facility that is typically issued by the program’s sponsor or an affiliate that shortens the maturity of the bond or note so it becomes eligible to be purchased by a tax-exempt money market fund.

Alternative TOB structures have been formulated, and Merrill Lynch, Pierce, Fenner & Smith executed the first Volcker-compliant TOB transaction in June last year. Due to aspects of the rule already in place, no TOBs can be created using the traditional structure.

“TOBs represent about 25% of muni [closed-end fund] leverage, through investments in residual certificates,” Moody’s said. “As a result of the extension, CEFs will be able to continue using existing TOB structures for financing, and can avoid replacing that leverage, most likely at a higher cost.”

“Without the delay announced last month, TOB trusts with up to $75 billion in floating rate certificates and $90 billion in underlying assets would have been unwound during the first half of 2015. Market participants project approximately $300 billion in long-term, tax-exempt new issues for all of 2015,” Moody’s continued. “Liquidation of up to $90 billion in bonds currently held in TOB trusts during the first half of the year would represent 60% of the $150 billion of new issuance expected in the same period. Postponement of that liquidation relieves pressure on the overall market.”

Mike Nicholas, chief executive officer of the Bond Dealers of America, said the delay is a positive for the whole muni market although BDA continues to cast a wary eye at the rule.

“The delay in unwinding tender option bonds simply gives banks more time and flexibility which will help prevent a sharp pricing event in the muni market – good for all muni market participants,” he said. “However, the BDA continues to be concerned with the Volcker Rule’s negative impact on overall credit market liquidity and the rule’s negative impact on investors.”

THE BOND BUYER

BY KYLE GLAZIER

JAN 27, 2015 1:15pm ET

A one-time top accountant for several south suburbs was ordered to pay more than $200,000 and barred by a federal judge from ever taking part in a key way local governments borrow money.

Tribune investigation spurs suit that leads to official being fined $217,000 and barred from certain deals.
A one-time top accountant for several south suburbs was ordered to pay more than $200,000 and barred by a federal judge from ever taking part in a key way local governments borrow money.

The case against Joseph T. Letke followed a Tribune investigation in 2013 that exposed an insider deal in Harvey that cost taxpayers up to $20 million. The deal was supposed to redevelop an old hotel between Interstate 80 and a strip club. Instead, the deal enriched Letke while leaving taxpayers with a half-gutted hotel in foreclosure.

U.S. District Judge Amy St. Eve on Tuesday barred Letke from advising or consulting in any municipal bonds. Bonds are essentially IOUs that local governments issue in exchange for cash. They’re the common way towns borrow money for big projects. One of Letke’s firms, Public Funding Group, has touted itself as a specialist in municipal bonds.

The judge also ordered Letke to pay $217,115 in restitution, fines and interest. He’s supposed to pay it within two weeks.

The FBI, in what it has called a criminal investigation, has sought documents about Letke’s firms and asked questions of a number of Harvey officials about the hotel deal. But the lead agency in the action against Letke was the U.S. Securities and Exchange Commission. That agency typically acts as a watchdog in the bond market to ensure borrowers don’t cheat lenders.

“The harm caused by Letke’s misconduct was severe,” SEC attorney Eric Phillips wrote in a brief filed this month. “Harvey raised millions of dollars through bond offerings which were supposed to benefit Harvey residents, and instead Harvey and Letke wasted the money.”

The SEC sued Letke and Harvey last year, calling the hotel deal a “scheme” that defrauded lenders. Letke was Harvey’s comptroller during the deal and made money three ways when the town borrowed the money in stages from 2008 and 2010. He or his firms were paid more than $1 million by the town over that time to keep its books, paid $547,000 by the town to advise it on how to borrow the money, and paid $269,000 by the developer getting the money, records show.

In complaining about Letke’s actions, the SEC focused on the payouts to Letke by the developer. The SEC complained those payouts were never disclosed on documents given to lenders — violating federal law.

Letke never offered a defense, instead telling the SEC that — if called to testify — he’d invoke his Fifth Amendment right not to answer questions, citing a fear that what he said could be used to prosecute him. By then, he’d already invoked his Fifth Amendment right under oath — in an unrelated lawsuit — when asked about the hotel deal and his work in Harvey.

Letke wasn’t the only one to invoke his Fifth Amendment right regarding the hotel deal. So did Harvey Mayor Eric Kellogg — a longtime political ally of Letke.

The SEC had accused Kellogg’s administration of diverting borrowed money from the deal to make payroll in a town that had long spent more than it brought in, with little oversight from the state. In December, in a deal cut with the SEC, Harvey agreed to let the federal court oversee how it borrows and tracks spending.

No Harvey official other than Letke was singled out for punishment in the lawsuit.

Letke stopped working for Harvey last summer. Kellogg said Letke was fired. Letke said he quit. In recent years, he also stopped working for three other suburbs: Riverdale, Dolton and Robbins. It’s unclear if he still works for Markham.

Letke also is tied to several businesses whose websites pitch accounting and marketing consulting to the public, private and nonprofit sectors. Those firms include Alli Financial and what is called a new branch of it, Alli Media Group.

On the latter’s website, Letke was listed early Wednesday afternoon as the CEO of Alli Media Group. But Letke’s name disappeared from that firm’s website after the Tribune emailed Alli Media Group on Wednesday about Letke’s connection.

Letke did not respond to an email.

By Joe Mahr and Matthew Walberg

Chicago Tribune

1/29/15

[email protected]

[email protected]

Jan 29 (Reuters) – The board overseeing the $3.6 trillion U.S. municipal bond market wants to shed more light on a dark and growing area of public finance: direct lending from banks.

In a strongly worded advisory, the Municipal Securities Rulemaking Board on Thursday said many state and local governments do not disclose bank loans and the resulting murkiness threatens investors.

“Given the current regulatory ambiguities regarding bank loans, inconsistent market practices and lack of commonly accepted provisions within bank loan agreements, the MSRB believes that informing the market of the incurrence of a bank loan and its terms is beneficial to the continued fairness and efficiency of the municipal securities market,” it wrote.

In these alternative financings, issuers sell bonds directly to banks or take out loans. The advantages, the MSRB said, can include lower costs, less exposure to bank capital requirements, simpler execution and no need to obtain a rating.

By law issuers do not have to disclose loans if they are not considered municipal securities. Bondholders, taxpayers and others only learn about the loans’ terms, as well as their impact on bondholders’ rights and existing debt, when an issuer releases audited financial statements or documents for a public bond sale, the MSRB said.

For more than two years the board, a self-regulatory organization made up of bankers, issuers and advisers, has asked borrowers to post information to the public database called EMMA, for Electronic Municipal Marketplace Access.

But “bank loan executions have far exceeded bank loan disclosures in comparison,” it said, adding that about 88 loans have been disclosed since April 2012. Outstanding loans number in the hundreds.

It suggested detailed steps for fostering transparency, including determining whether loan payments have a higher priority to bond payments.

Both Standard and Poor’s Ratings Services and Moody’s Investors have raised alarms about the amorphous practice.

Last year Standard & Poor’s investigated 404 direct loans totaling $15.8 billion, it said in a special report on Wednesday. The loans did not impair the rights of existing bondholders and their terms did not erode borrowers’ credit quality.

About 243 of the loans were repaid by taxes, appropriations or utility fees, and had an average size of $25 million. The remainder, which had a much bigger average size of $61 million, were in the higher education, healthcare, transportation and public power sectors.

S&P “observed an increase in the number of banks offering such products, especially smaller local banks.”

BY LISA LAMBERT

(Reporting by Lisa Lambert; Editing by Leslie Adler)

Jan 28 (Reuters) – A federal judge ordered the former comptroller and financial adviser to Harvey, Illinois, to pay more than $200,000 as part of a judgment over the misuse of municipal bond proceeds.

Federal District Judge Amy St. Eve ordered Joseph Letke to pay disgorgement, interest and penalties totaling $217,115 and barred him from participating in any municipal bond deals, the Securities and Exchange Commission said in a release posted late Tuesday.

Letke was not available for comment.

The SEC is tightening oversight of the municipal bond market, which had long escaped regulatory scrutiny, and also of individuals involved in bond deals. In November it charged a Michigan city and two of its former leaders with fraud over a municipal bond offering. One of the officials had to pay a much smaller fine of $10,000.

In court in September, Letke, an accountant, said he had health issues and was “virtually destitute” because of the case.

“The federal government came into my offices – an accountant – over a year ago and asked me to participate or cooperate, and I said no,” he told the judge. “And they said, ‘We will run you over with a train and you will not be able to get a job at McDonald’s when we are finished with you.'”

Harvey has already settled with federal regulators. The case took an unusual turn this summer when the SEC obtained a restraining order against a bond sale that Harvey had prepared.

Starting in 2008, the city sold $14 million in bonds for the construction of a Holiday Inn that would be repaid from dedicated hotel-motel and sales tax revenues. It then diverted at least $1.7 million to fund its daily operations and also made $269,000 in undisclosed payments to Letke, the SEC alleged.

In June, when it learned that Harvey would return to the $3.7 trillion municipal bond market, the SEC asked a federal court in Illinois to block the sale. By law, municipal bond issuers do not have to involve federal regulators in planned debt sales.

(Reporting by Lisa Lambert; Editing by Leslie Adler)

Cities and states should promptly disclose any loans they have taken from banks, the Municipal Securities Rulemaking Board said Thursday in the latest regulatory effort to promote transparency for investors in the $3.6 trillion market.

Such obligations “could impair the rights of the issuer’s existing bondholders,” the self-regulator said in a regulatory notice. Existing bondholders could find themselves pushed down in the order of creditors to be paid if a bondholder runs into financial problems, and the added debt could also “impact on the credit or liquidity profile of an issuer,” the MSRB said.

While some cities and states have begun posting information about their loans on the MSRB’s free Electronic Municipal Market Access website, known as Emma, many others have not.

Individuals own about three-quarters of the debt issued by cities, states and other municipalities, either directly or through mutual funds. Many buy the bonds for tax-free income as a way to fund their retirements.

Disclosure has long been an issue in the muni-bond market, which was described in a 2012 Securities and Exchange Commission report as “illiquid and opaque.”

The MSRB has been encouraging state and local governments to disclose bank loans voluntarily since 2012. This month the board urged the SEC to review disclosure requirements, saying that changes in the market—including the increased use of direct loans—require a thorough look at the rules.

The SEC has recently targeted cities and states for improper disclosures, such as settling with Kansas, New Jersey and Illinois for failing to note the risks posed by underfunded pension obligations to bondholders. The agency also halted a bond sale by Harvey, Ill., saying officials had misused funds from previous sales and then misled investors in offering documents. In November, the SEC charged Allen Park, Mich., and two public officials with fraud, saying bond offering documents contained false statements about the viability of a movie-studio project and Allen Park’s financial condition.

In its regulatory notice issued Thursday, the MSRB recommends that issuers develop voluntary disclosure policies, post loan information to Emma, determine where loans stand in the priority of repayment relative to existing bonds, and highlight any factors that could accelerate debt repayment or change the interest rate.

The MSRB’s advisory comes as rating agencies have expressed concern about the growth of bank loans and other private debt placements by municipal entities. Moody’s Investors Service in an October report that a review of 10,000 local-government issuers it rates found more than 100 bank loans large enough for the firm to consider them worth disclosing.

Standard & Poor’s Ratings Services said in a report this week that it studied 404 loans with a par amount totaling $15.8 billion last year and found they didn’t impair the rights of existing bondholders. Disclosing those loans and their terms, however, is “critical to identifying those instances where the loans do compromise credit quality and existing bondholders’ rights,” the report said.

THE WALL STREET JOURNAL

By AARON KURILOFF

Jan 29, 2015

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today published its second notice calling for more transparency of undisclosed debt of municipal bond issuers. The MSRB is concerned that investors and other market participants are often unaware of the potential impact of bank loans and other debt-like obligations on the seniority status of existing bondholders and the credit or liquidity profile of an issuer, among other implications.

“As issuers increasingly turn to bank loans to finance infrastructure projects, the MSRB is concerned that current disclosure requirements may not provide a complete picture of an issuer’s indebtedness,” said MSRB Executive Director Lynnette Kelly. “The MSRB’s advisory aims to promote greater market transparency and investor confidence by reminding market participants of current best practices for the voluntary disclosure of bank loans.”

The MSRB first encouraged state and local governments in 2012 to make information about their bank loans publicly available on a voluntary basis on the MSRB’s Electronic Municipal Market Access (EMMA®) website. Today’s market advisory notes that fewer than 100 bank loan documents have been properly submitted to EMMA since that time. The MSRB this month urged the Securities and Exchange Commission (SEC) to consider requiring bank loan disclosure as part of an extensive review of the federal municipal market disclosure regime established by SEC Rule 15c2-12. Read about the MSRB’s market leadership on bank loans and municipal market disclosure.

The current advisory highlights the importance of bank loan disclosure for the transparency and efficiency of the municipal securities market, and provides best practices to support voluntary disclosure of bank loan information through EMMA. These guidelines draw on those espoused by municipal market participants, and the advisory provides examples of steps issuers and their financial professionals can take to ensure investors have a full understanding of the terms of a bank loan and its implications for existing debt.

“The MSRB believes that access to bank loan information can provide current or prospective bondholders and other market participants with key information that can be useful in assessing their current holdings of municipal securities or in making informed investment decisions regarding transactions in municipal securities,” Kelly said.

Date: January 29, 2015

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

WASHINGTON — The Municipal Securities Rulemaking Board, at its quarterly meeting in Alexandria, Va., next week, will discuss municipal advisor qualification examinations, as well as comments on proposals that would restrict MA gift giving and require dealers to disclose reference prices to customers.

The MSRB announced its discussion topics for the Jan. 28-30 meeting on Thursday. The meeting will be the second of the MSRB’s Oct. 1- Sept. 30 fiscal year, but the first of the new calendar year. The board is in the process of completing several muni advisor rules stemming from the final Securities and Exchange Commission MA registration rule, which took full effect last July. The board is also pursuing several price transparency initiatives.

The MSRB has already asked for the SEC to approve setting baseline qualifications for muni advisors, including requiring them to take and pass one-time exams. The Securities Industry and Financial Markets Association has said that a new exam is unnecessary for professionals who have already passed the necessary tests to become dealer representatives. The Investment Company Institute has said that there should be MA exams tailored to specific types of advisory work. The MSRB is working on a pilot exam that it expects to unveil this year.

The MSRB proposal to extend its Rule G-20 on gift and gratuities to also cover MAs was released in October. The rule currently prohibits a dealer from giving directly or indirectly any thing or service of value, including gratuities, in excess of $100 per year to a person if that gift is related to the muni securities activities of the employer of the recipient.

While most market participants have voiced support to extend the regulation to MAs, dealers and MAs have suggested that the board use the opportunity to make changes to the rule. Dealers told the MSRB the rule should allow dealer firms to use bond proceeds to reimburse themselves for business costs as long as the issuer agrees. Public Financial Management, a large MA firm, said the rule should be amended to explicitly restrict gifts to elected officials.

The comment period just closed on the MSRB’s proposal to require dealers acting as principals to disclose to customers on their confirmations a “reference price” of the same security traded that same day. Dealer groups want the proposal withdrawn, but the SEC’s Investor Advocate supports it.

THE BOND BUYER

BY KYLE GLAZIER

JAN 22, 2015 12:24pm ET

WASHINGTON — The Securities and Exchange Commission’s Rule 15c2-12 on muni disclosure is outdated and could be overhauled to reduce the regulatory burden for issuers and underwriters, bond lawyers and underwriters told the SEC.

Muni groups sent letters to the SEC in response to its Nov. 18 call for comments on the rule, which requires underwriters to review issuers’ official statements and reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s EMMA website. The call for comments was required by a federal law aimed at reducing regulatory paperwork.

National Association of Bond Lawyers president Antonio Martini, a partner at Locke Lord Edwards in Boston, told the SEC that its rule hails from a time before Internet dissemination of financial information, meaning that it may not be providing any necessary investor protection in many cases.

“NABL believes that collection of information under Rule 15c2-12 is not necessary for, but generally does enhance, the proper performance of the functions of the SEC in regulating the municipal securities market,” Martini wrote. “However, Rule 15c2-12 was adopted (and amended to require continuing disclosure) before the widespread adoption of the Internet as a means of exchanging information permitted issuers of municipal securities to quickly and efficiently provide pertinent updates to holders of those securities. Many issuers today maintain publicly accessible websites on which they include information of the type that is required to be provided to the MSRB pursuant to the contractual filing requirements mandated by Rule 15c2-12, and their information can easily be located by using Google or another readily available search engine.”

Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at The Securities Industry and Financial Markets Association, wrote that the SEC could take several approaches to ease the regulatory burden of the rule.

“SIFMA feels that automated collection techniques or other forms of information technology can be used to reduce the burden on filers and increase the certainty that filings are made,” Norwood told the commission. “For instance, the SEC should explore the possibility of whether bond insurers should be indirectly or contractually required to report rating changes on all bonds they insure to EMMA. Also, EMMA currently collects and disseminates rating changes from the majority of rating agencies. The SEC also should explore the possibility of whether all rating agencies should be required to report all rating changes on all municipal bonds they rate to EMMA.”

Moody’s Investors Service is the lone holdout that is not streaming its ratings to EMMA, and was rebuked by the Government Finance Officers Association last week for its inaction. Moody’s maintains that its ratings are available for free on its website.

Some specific filing requirements could be changed to improve the rule, wrote Bond Dealers of America chief executive officer Mike Nicholas. For example, 15c2-12 requires certain event notices to be posted to EMMA within 10 days of the event, even though the person responsible for posting the notices might have no way of knowing about it for days or even weeks, he told the SEC. Instead, it should be 10 days after the appropriate person becomes aware of the event, Nicholas argued.

The rule should not designate rating changes as material events that have to be reported to EMMA, and audited financial statements should only be required to be disclosed annually if they were included in the final official statement of the bonds, he wrote.

The MSRB released its own comment letter, calling for the SEC to undertake a comprehensive review of the rule. Most groups agreed that the commission’s estimates of the time required to comply with the rule are low. Issuers require about 45 minutes to prepare and submit material event notices to the MSRB, the SEC estimated. Dustin McDonald, director of the GFOA’s Federal Liaison Center, said issuer officials reported times ranging up to 4 hours.

The SEC has said it invites comments on 15c2-12 or any of its rules at any time.

THE BOND BUYER

BY KYLE GLAZIER

JAN 22, 2015 3:18pm ET

On December 18, 2014, FERC granted a Petition for Declaratory Order filed by the Public Service Company of Colorado (“PSCo”) which requested certain clarifications regarding the application of FERC’s prior approval jurisdiction under section 203 of the Federal Power Act (“FPA”) in the context of the assertion of eminent domain by a political subdivision of a state over the transmission assets of a public utility. In granting the Petition, FERC clarified that transfers by condemnation, regardless of the fact that they are involuntary, are appropriately within the domain of FERC’s 203 prior approval authority.

Currently, PSCo serves the City of Boulder, Colorado (“Boulder”) under the Xcel Energy Operating Companies (“Xcel”) Open Access Transmission Tariff. In 2011, voters in Boulder approved two separate measures relating to the creation of a municipal electric utility with the goal of eventually separating the portion of the distribution system that serves Boulder from Xcel’s larger system. Xcel has refused to sell the assets used to serve Boulder, and to proceed without Xcel’s consent, Boulder will have to condemn the assets through a public domain process. See Nov. 7, 2011 edition of the WER. According to the pleadings, Boulder has maintained that as a political subdivision of the state, it was not included in the definition of a public utility as set out in FPA section 203, and was therefore exempt from seeking FERC approval to consummate the condemnation of Xcel’s transmission facilities. Further, Boulder argued that a taking of facilities through eminent domain does not qualify as a disposition of the facilities as set out in the language of FPA section 203.

FERC disagreed with Boulder’s arguments, explaining that “[i]t is well established that voluntary transfers of jurisdictional facilities to non-jurisdictional entities require Commission approval under section 203, and there is no basis for finding that the involuntary nature of a transfer distinguishes it from this precedent and permits a jurisdictional void.” FERC further explained that, under FPA section 203, FERC in its determination of whether the transfer is in the public interest will continue to consider both its traditional criteria as well as any other factors it deems necessary, as transfers by condemnation are no different from other types of transfers. FERC reiterated that its own exercise of its authority under FPA section 203 would not diminish the authority of the Public Utilities Commission of the State of Colorado to also regulate the transfer of any facilities that are subject to its jurisdiction.

In issuing the decision, FERC explicitly made no determinations regarding whether the transfer of Xcel’s assets to Boulder by condemnation would be consistent with the public interest for purposes of section 203.

To view the order, click here.

Last Updated: January 21 2015

Article by Troutman Sanders LLP

The Municipal Securities Rulemaking Board (MSRB) today urged the Securities and Exchange Commission (SEC) to conduct an extensive review of the disclosure requirements in the municipal securities market outlined in SEC Rule 15c2-12. The MSRB pledged its support for a thorough review of the rule in a letter submitted to the SEC in response to a request for comment on the collection of information under the rule mandated by the Paperwork Reduction Act.

Read the MSRB’s letter to the SEC.

View the full press release.

The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet January 28-30, 2015 where it will discuss the following rulemaking topics:

Professional Qualification of Municipal Advisors

The Board will review a draft content outline for the municipal advisor representative exam.

Gift-Giving by Municipal Advisors

The Board will discuss comment letters received on draft amendments to MSRB Rule G-20, on gifts, gratuities and non-cash compensation, to extend its provisions to municipal advisors.

Pricing Reference Information

The Board will discuss comment letters received on its proposal to require dealers to provide pricing reference information on retail customer confirmations.

WASHINGTON – Dealers want the Municipal Securities Rulemaking Board to withdraw a proposed rule that would require them, when acting as principals, to disclose to customers on their confirmations a “reference price” of the same security traded that same day. The dealers are urging enhancements to existing transparency systems as an alternative to the proposed rule.

They made their comments, as did investors and the Securities and Exchange Commission, in responses to the MSRB’s request for comment on its draft amendments to Rule G-15 on confirmation.

The MSRB proposed the rule in November. It would apply to principal transactions of less than $100,000 or those with 100 bonds or fewer, in an effort to attempt to address concerns about hidden markups in so-called “riskless principal transactions.” The Financial Industry Regulatory Association released a very similar proposal simultaneously that would apply to corporate bonds.

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, told the MSRB that SIFMA supports the goals of the rule but not this approach to reaching those goals.

“Unfortunately, the proposals fail to leverage the very tools that have led to unprecedented improvement in fixed income price transparency: the price dissemination systems operated by FINRA and the MSRB,” Cohen wrote.

In a brief interview, Cohen told The Bond Buyer that EMMA is a far more meaningful way of informing retail investors about market prices, and that enhancements to the system and further investor education could be part of a better approach. Dealer firms have put too much money into transparency systems through fees paid to the MSRB and FINRA to not utilize them to the fullest, Cohen argued.

“Dealers have invested tens of millions of dollars to fund TRACE and EMMA,” he said. TRACE is FINRA’s transparency system for corporate bonds.

Mike Nicholas, chief executive officer of the Bond Dealers of America, warned that investors could be confused by reference prices on their confirmations. A reference price would not provide an accurate picture of the market conditions, Nicholas wrote.

He urged the MSRB to conduct a thorough study on the burden dealers would bear in altering their trading systems to accommodate the proposed rule, and suggested allowing dealers to use a disclosure methodology of their choice subject to a baseline requirement. The rule should not apply to institutional investors or primary offerings, he added.

Several retail investors also submitted letters. Karin Tex, a California retiree, told the MSRB she has invested in munis and is shocked that transparency is so limited given the available technology. “Disclosure of a municipal bond commission or markup to the general public should be mandatory,” she wrote.

An anonymous investor said dealers should be required to discuss with investors how the firm arrived at the price for a bond, and should know just before a trade what the most recent price for that bond was. Otherwise, the proposal does not go far enough, the investor said.

“Greater transparency should be made available to the customer at the point of purchase/sale, not after the fact,” the investor wrote.

Rick Fleming, the SEC’s Investor Advocate, said his office supports the MSRB proposal.

“By requiring firms to disclose the price to the dealer in a reference transaction and the differential between the price to the customer and the price to the dealer, customers in retail-size trades will be better equipped to evaluate the transaction costs and the quality of service provided to them by dealers,” Fleming wrote.

The MSRB would need SEC approval before the proposal could take effect, and the SEC will likely solicit its own requests for commentary after it receives a request to approve the amendments to G-15.

THE BOND BUYER

BY KYLE GLAZIER

JAN 21, 2015 12:40pm ET

WASHINGTON – The Municipal Securities Rulemaking Board is urging the Securities and Exchange Commission to conduct a comprehensive review of its Rule 15c2-12 on muni disclosure, and to consider requiring the disclosure of debt-like arrangements such as bank loans, swap transactions, guarantees and lease financing arrangements.

The MSRB made the request in a letter sent to the commission on Tuesday in response to its request in November for comment mandated by the Paperwork Reduction Act of 1995.

The SEC has received wide-ranging comments on the rule, but lawyers with the Office of Municipal Securities said last month that its staff is only able to respond to comments under the PRA with respect to the amount of time and resources spent providing required information to the SEC.

Rule 15c2-12 requires dealers to review issuers’ official statements in primary offerings and reasonably determine that the issuers have contracted in writing to disclose annual financial and operating information, as well as material event notices.

“The MSRB recognizes that the SEC is fulfilling its duty to regularly review the volume of regulatory paperwork involved in complying with its rules,” said MSRB executive director Lynnette Kelly. “However we are taking this opportunity to encourage more extensive dialogue about the federal disclosure framework by urging the SEC to conduct a wholesale re-examination of the rule and consider potential changes to improve its operation and reflect current market practices.”

The rule’s primary disclosure requirements were adopted in 1989. Its secondary market requirements were approved in 1994 and the rule last amended in 2010.

The MSRB has been encouraging issuers to disclose their bank loan debt since 2012, and the board told the SEC that the increasing popularity of bank loans warrant a good look at the current disclosure regime.

“The MSRB is concerned that bank loans or other debt-like obligations such as swap transactions, guarantees and lease financing arrangements, that create significant obligations and which similarly do not get reported, could impair the rights of existing bondholders, including the seniority status of such bondholders, or impact the credit or liquidity profile of an issuer,” said the letter, signed by chair Kym Arnone, managing director and head of municipal securitization initiatives at Barclays.

“Requiring similar reporting by municipal issuers would address our concerns about these obligations that are not subject to Rule 15c2-12 and therefore are not now reported,” said the MSRB’s letter. “The MSRB believes that the availability of timely disclosure of additional debt in any form and debt-like obligations is essential to foster market transparency and to ensure a fair and efficient municipal market.”

The board said the SEC could take various measures to enhance the quality of disclosure, even looking at corporate “Form 8-K, as precedent for events that might be appropriate to include for continuing disclosure by municipal issuers as additional material events.”

The MSRB also told the SEC that the commission’s estimates for the disclosure costs to MSRB are understated. The MSRB’s costs have grown with increased EMMA use in the wake of actions by the SEC, Arnone told the board, including the issuance of a March 2012 risk alert warning issuers and underwriters about potential violations of the rule and the recent Municipalities Continuing Disclosure Cooperation Initiative. The MCDC allowed issuers and underwriters to self-report instances in which they sold bonds with offering documents containing false claims that they were in compliance with disclosure requirements.

The MCDC showed a lot of issuers were not meeting their self-imposed deadlines for disclosing annual financial and operating information.

The SEC had estimated the MSRB would require 9,360 hours each year for work related to 15c2-12, but last fiscal year, which was from Sept. 30, 2013 to Oct. 1, 2014 the board required 12,699 hours and at least $10,000 in hardware and software costs for that job, the letter said.

THE BOND BUYER

BY KYLE GLAZIER

JAN 20, 2015 5:28pm ET

Recently, the SEC approved FINRA’s proposed new Rule 3110(e) relating to background investigations of registered persons. FINRA Rule 3110(e), which replaces NASD Rule 3010(e) and goes into effect on July 1, 2015, streamlines and clarifies the rule language by providing that “each member shall ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the member applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.” The rule further clarifies that a firm is required to review a copy of an applicant’s most recent Form U5, if available. Most importantly, the rule requires that firms adopt “written procedures that are reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 no later than 30 calendar days after the form is filed with FINRA.”

The written procedures required under new FINRA Rule 3110(e) must provide for, at a minimum, a national search of reasonably available public records for the verification of the accuracy and completeness of information provided by a registered representative on his Form U4 and such a national search must be satisfied no later than 30 days after the initial or transfer Form U4 is filed with FINRA. FINRA explained that this verification requirement is meant to be complimentary, not duplicative, of the investigation requirement and while the rule provides that the verification requirement be completed no later than 30 days after a registered representative’s Form U4 is filed with FINRA, nowhere does the rule state that the verification process cannot start prior to the 30-day window after the form is filed. Depending on circumstances, FINRA noted that firms may find it necessary to conduct a more in-depth search of public records as the required national search of reasonably available public records is a minimum or base requirement under the rule. For additional details on new FINRA Rule 3110(e)’s requirements, see here.

The requirement that Firms develop written procedures that require, at a minimum, a national search of reasonably available public records in order to verify the accuracy and completeness of information provided by a soon-to-be or new hire will likely result in increased costs for firms. While most firms already conduct background checks on potential and new hires, these new requirements will likely require that firms either retain an outside vendor or dedicate additional time, resources and in-house personnel to complete. Additionally, national searches of reasonably available public records for each applicant, to the extent not currently being performed by firms, may take some time to complete, further driving up costs.

Generally, FINRA rules do not create a private cause of action. But claimants suing their firms and/or brokers in FINRA arbitration have argued that the failure to act in conformity with such rules is evidence of a breach of one’s duty of care and, hence, evidence (or proof) of negligence. Thus, by creating new requirements for firms in the on-boarding process of its brokers, firms are faced with increased potential exposure for negligence or negligent hiring claims absent careful compliance with this new rule and the procedures firms create pursuant thereto. Firms are thus encouraged to implement workable and practical written procedures.

Last Updated: January 16 2015

Article by David A. Picon and Massiel Pedreira

Proskauer Rose LLP

Today, BDA submitted comment letters to both FINRA and MSRB in response to their request for comment on a proposed rule to require a pricing reference disclosure on certain retail-size fixed income trades.

BDA submitted an identical comment letter to both FINRA and MSRB in response to their request for comment on a proposed rule to require a pricing reference disclosure on certain retail-size fixed income trades. The BDA’s letter can be accessed here.

The BDA’s letter focuses on several core issues with the proposed rule.

• Regulators have yet to explore or even begin to understand what this proposal means from a day-to-day operational standpoint for dealers. BDA requests that regulators engage in a feasibility study in order to be informed of the operational and technological impact of this proposal.
• The scope of the universe of trades that the proposed rule applies to is too broad and is not based on any empirical, market-based data. BDA urges regulators to provide an data-driven explanation for why the time scale and trade size makes sense.
• The proposed disclosure would trigger a requirement to disclose information to investors that is incomplete and potentially misleading without the appropriate context.
• BDA urges regulators to explore alternatives to the proposed rule that would allow the regulators to meet their goals through improvements to EMMA and TRACE.
• BDA urges regulators to allow dealers to make the specialized disclosure in whichever way best fits with their existing system capabilities.
• Finally, BDA urges regulators to exclude ‘retail-size’ trades with sophisticated institutional investors from the scope of the proposed rule. Additionally, BDA urges regulators to focus the proposed rule on secondary market trades and exclude primary market transactions.

01-20-15

New York, NY, January 20, 2015 -SIFMA, in a comment letter filed today with the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board on their Matched Trade Proposals, expresses that it shares the goal of regulators to enhance bond market price transparency for retail investors. But because the enormous costs and burdens associated with the proposals would significantly outweigh the purported benefits, SIFMA recommends that the proposals be withdrawn in favor of a uniform rule that encourages increased usage of the extensive pricing data already available on the existing Trade Reporting and Compliance Engine (“TRACE”) and Electronic Municipal Market Access (“EMMA”) systems rather than the creation of something new.

“SIFMA fully supports increasing transparency in the municipal and corporate bond markets in a cost-effective manner that meets investor protection goals and promotes efficient functioning of the markets, which is important to investors’ interests,” said Randy Snook, executive vice president, business policies & practices at SIFMA. “We believe leveraging the existing FINRA and MSRB systems to inform investors is a better approach towards achieving this goal than what the proposals suggest.”

SIFMA believes FINRA and the MSRB should promote TRACE and EMMA as the solution for increased transparency, using the power of the internet to reach the ever-increasing portion of retail investors who rely on it on a daily basis for communications and commerce of every sort. This is a more sensible approach than requiring the proposed matched trade disclosure on traditional paper confirmations.

Any new confirmation disclosure should be designed to encourage retail bond investors to access TRACE or EMMA and should coincide with renewed education efforts to help those investors better understand the information available on those systems. In contrast to the steep costs and uncertain benefits associated with the Proposals, enhancing retail investors’ use of these existing systems – developed over the past two decades after considerable and ongoing investment – would constitute a more cost-effective use of limited resources and result in greater price transparency for investors.

Educational efforts to make investors more aware of the availability of information on the TRACE and EMMA systems could be made in connection with account opening documents, customer statements, or trade confirmations. This would provide greater information about bond prices and transactions. There are also greater opportunities for direct access to TRACE and EMMA by retail customers through their online brokerage account platforms, as well as retail investor education efforts more generally.

SIFMA raises the following points in its letter:

• The FINRA and MSRB Proposals must be uniform in design and terminology. Despite an effort to be uniform, the Proposals use different terms, phrases, and structure. In the context of the Proposals, there is no policy justification for having divergent approaches or terminology.
• The cost-benefit analysis undertaken by FINRA and the MSRB is inadequate. Nothing in the Proposals suggests that FINRA or the MSRB has even begun to compile a record – as required under federal law and their own policies – that would either permit an informed analysis of the costs and benefits presented by the Proposals or allow an appropriate review by the SEC. Nor do the Proposals even purport to comply with federal laws governing new recordkeeping requirements or burdens on small businesses.
• The Proposals require a number of critical changes to minimize the risk of investor confusion and to mitigate the unnecessary implementation challenges if FINRA and the MSRB continue to pursue a new confirmation disclosure obligation with specific price references.
• The same day trade window would create confusing and misleading disclosure to investors by paring or matching trades in a manner that creates too much variability in what the price difference would represent.
  Any confirmation disclosure obligation with specific price references should be better tailored to retail trades and investors by using defined terms to exclude institutional and other sophisticated investors and more appropriate quantity thresholds.
  If FINRA and the MSRB continue to pursue a disclosure obligation with a specific price reference, SIFMA recommends more carefully tailoring the obligation to avoid investor confusion by limiting the proposed confirmation disclosure to riskless principal transactions involving retail customers and making additional changes to mitigate the excessive burdens and costs associated with the current formulation.

The letter is available here.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today urged the Securities and Exchange Commission (SEC) to conduct an extensive review of the disclosure requirements in the municipal securities market outlined in SEC Rule 15c2-12. The MSRB pledged its support for a thorough review of the rule in a letter submitted to the SEC in response to a request for comment on the collection of information under the rule mandated by the Paperwork Reduction Act.

“The MSRB recognizes that the SEC is fulfilling its duty to regularly review the volume of regulatory paperwork involved in complying with its rules,” said MSRB Executive Director Lynnette Kelly. “However we are taking this opportunity to encourage more extensive dialogue about the federal disclosure framework by urging the SEC to conduct a wholesale re-examination of the rule and consider potential changes to improve its operation and reflect current market practices.” SEC Rule 15c2-12 was adopted in 1989 and last amended in 2010.

Since 2009, the MSRB’s Electronic Municipal Market Access (EMMA®) website has served as the SEC-designated centralized platform for disclosure of offering documents and continuing disclosures under SEC Rule 15c2-12. The MSRB maintains EMMA with the goal of facilitating public access to disclosure information and minimizing the burden on dealers and issuers of compliance with disclosure requirements.

“The availability of information about municipal issuers and their debt obligations on the EMMA website is essential to the integrity of the municipal securities market and the protection of investors,” Kelly said.

In its letter, the MSRB noted that changes in the municipal market, including the increasing prevalence of bank borrowing by issuers, necessitates an extensive look at the disclosure regime. The letter encourages the SEC to look to its disclosure standards for the corporate market as a precedent for disclosure of off-balance sheet obligations such as bank loans. “Requiring similar reporting by municipal issuers would address our concerns about these obligations that are not subject to Rule 15c2-12 and therefore are not now reported,” the MSRB’s letter says. “The MSRB believes that the availability of timely disclosure of additional debt in any form and debt-like obligations is essential to foster market transparency and to ensure a fair and efficient municipal market.”

The MSRB first encouraged state and local governments in 2012 to make information about their bank loans publicly available on a voluntary basis on the EMMA website. Read about the MSRB’s market leadership on municipal market disclosure.

Read the MSRB’s comment letter to the SEC on Rule 15c2-12.

Date: January 20, 2015

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

Investors seeking to buy municipal bonds should watch out for the markups that plague the market for debt sold by U.S. cities, states and other public entities.

A trio of U.S. regulators has begun heightening their surveillance of those fees, collecting troves of electronic bond quotes and scrutinizing trading in the $13 trillion corporate, agency and municipal bond markets.

For investors looking for individual bonds, the Electronic Municipal Market Access website, known as “Emma,” provides a wealth of information that can help people determine prices and avoid steep markups. Run by the Municipal Securities Rulemaking Board, Emma stores municipal issuers’ disclosures, documents, trade data and other information.

Last year, the site added a price-disclosure tool, allowing investors to compare the trade histories of bonds with similar characteristics, helping to establish comparable prices for securities that don’t change hands often. New features also let users graphically display what others are paying for a security on any given day.

Investors buying both municipal and corporate bonds could also soon see more pricing transparency on their trade confirmations under new rules proposed by the MSRB and the Financial Industry Regulatory Authority. The proposal would require brokers to disclose on the confirmations the prices they paid that same day for the same bond issue. The disclosure would go to anyone buying less than $100,000 in bonds.

Some financial advisers suggest mom-and-pop investors stay away from buying individual bonds, because even small markups can eat up the returns on low-yield securities, and those fees can be hard to identify.

Allan Roth, founder of Colorado Springs-based Wealth Logic, says most people should instead buy low-fee bond funds. The markups funds pay are smaller, because fund companies buy in bulk and know the market. Funds also help investors diversify, by holding bonds from many different issuers.

“Even if I have $5 million to buy municipal bonds, I really can’t diversify enough by buying individual bonds,” Mr. Roth says. “And if I have $500,000, then I really can’t diversify.”

Buying municipal bonds from your home state often provides the biggest tax breaks, but it also ties your bond investments to the same economy that supports your job and the market for your home, he says. Muni bonds make up about 10% of the bond market, but comprise closer to 90% of many investors’ bond portfolios. Mr. Roth says the limit should be 20% to 25%.

With interest rates low, some analysts and advisers recommend staying with short- or intermediate-term funds, because longer-term debt is the most vulnerable to losses when rates rise. Investment researcher Morningstar recommends several such funds with low fees, including the Fidelity Intermediate Municipal Income Fund, the T. Rowe Price Summit Municipal Intermediate Fund and the Vanguard Intermediate-Term Tax-Exempt Fund.

Vanguard Group also recently filed regulatory paperwork to launch its first municipal-bond index fund, to be called Vanguard Tax-Exempt Bond Index Fund. The target benchmark is the S&P National AMT-Free Municipal Bond Index and the firm says the fund is designed to offer exposure to investment-grade municipal bonds across the entire yield curve.

THE WALL STREET JOURNAL

Jan 14, 2015

By AARON KURILOFF

As Sherry Dixon was researching her retirement in 2010, the 63-year-old home builder from Albuquerque, N.M., asked her broker to buy her municipal bonds for safety.

Two years later, she was shocked to learn that fees she had paid on some trades were far larger than she expected.

“I learned how naive I’d been and I never enjoy that,” said Ms. Dixon, who switched financial advisers and sold one-third of her bonds.

Experiences like Ms. Dixon’s have led a trio of U.S. regulators to take closer looks at buy and sell orders in the bond market, scrutinize trading and heighten their surveillance of brokers’ markups on retail clients’ trades.

Wall Street firms are pushing back at those measures, which arrive decades after initial calls to protect individual or “retail” investors from unreasonable charges in the $13 trillion corporate, agency and municipal bond markets.

The Securities and Exchange Commission has asked for reams of bond quotations from operators of retail-oriented electronic bond-trading platforms, in some cases asking for pricing data from August to November of last year to be delivered by the third week of January, said people familiar with the matter.

THE WALL STREET JOURNAL

By KATY BURNE and AARON KURILOFF

Jan. 13, 2015 6:55 p.m. ET

Jan 14 (Reuters) – Morgan Keegan & Co on Wednesday settled a class action lawsuit accusing the brokerage of bilking investors who bought $39 million of municipal bonds meant to build a Missouri artificial sweetener plant that failed.

Terms were not disclosed. The settlement averted a civil trial set to begin on Wednesday against Morgan Keegan, now a unit of Raymond James Financial Inc.

It also came two months after Bruce Cole, the former chief executive of Mamtek U.S. Inc who oversaw the project, was sentenced to seven years in prison for fraud and theft.

Roughly 133 investors accused Morgan Keegan of securities fraud over its underwriting of bonds issued by the Industrial Development Authority of the City of Moberly, located in north-central Missouri, and sold from July 2010 to September 2011.

These bonds were issued to help fund Mamtek’s construction of a plant to produce the low-calorie sweetener sucralose, and create about 600 jobs.

Investors said the bonds became worthless after Mamtek defaulted in August 2011, leaving behind an unfinished factory. They said Morgan Keegan failed to do proper due diligence to ensure that the bond offering documents were accurate.

Jurors had been seated on Tuesday for the trial against Morgan Keegan in the federal court in Jefferson City, Missouri.

Raymond James bought Morgan Keegan from Regions Financial Corp in April 2012.

Regions spokeswoman Evelyn Mitchell declined to comment. Raymond James spokeswoman Katy Barrett declined immediate comment. Rich McLeod, a lawyer representing the investors, said his clients were pleased to settle.

Missouri Attorney General Chris Koster has said Cole pleaded guilty after diverting bond financing for his own use, including to stop the foreclosure of his Beverly Hills, California home, and winning tax credits by falsely promising to create jobs.

The case is Cromeans et al v. Morgan Keegan & Co et al, U.S. District Court, Western District of Missouri, No. 12-04269.

By Jonathan Stempel

(Reporting by Jonathan Stempel in New York; Editing by Christian Plumb)

Regulations & Securities Law

FINRA Margin Amendments

In January, FINRA published a request for comment on proposed amendments to Rule 4210—margin rules for the TBA market. The proposed amendments would require the collection of margin for exposures greater than $250,000 on a variety of transactions on which there is currently no margin requirement.

In March, BDA submitted a comment letter to FINRA asking for certain specific changes which would enable FINRA to meet their goals while reducing the burden to small and middle market dealer firms. Following up on that letter, BDA has met and worked closely with FINRA senior staff to provide workable changes to the published amendments. We are awaiting submission of those updated amendments to the SEC and intend to reengage on this issue with both FINRA and the SEC.

• FINRA’s proposed amendments to Rule 4210 are available here.
• BDA’s comment letter to FINRA is available here.

Clarifying SEC Rule 15c2-12

In November, the SEC filed a notice in the Federal Register soliciting comments on the regulatory burden for underwriters and issuers associated with Rule 15c2-12 compliance. Specifically, the SEC is seeking comments on “ways to enhance the quality, utility, and clarity” of information collected pursuant to 15c2-12.

Improving and clarifying 15c2-12 was a topic that BDA members raised directly with the Office of Municipal Securities in October during a DC member fly-in. Comments are due on January 20th and BDA is currently working on drafting a comment letter.

• The SEC notice on 15c2-12 is available here.

Private Placement Activity

In October, BDA wrote to the SEC and the MSRB to inform regulators that non-dealer MAs might be violating securities law in certain instances by acting as unregistered dealers in private placements.

In mid-December, the National Association of Municipal Advisors (NAMA) responded by sending a letter to regulators that argued for an exemption for registered MAs to make dealer activities permissible. The Bond Buyer ran a story about NAMA’s letter.

BDA responded to NAMA’s letter and published a Commentary in the Bond Buyer that highlighted the flaws in NAMA’s analysis. Additionally, the BDA is currently drafting a letter to regulators as a follow-up. The follow-up letter will include specific policy recommendations for regulators to consider should they seek to make policy changes.

• BDA letters to SEC and MSRB are available here.
• Bond Buyer article about NAMA exemption request is here.
• BDA Bond Buyer Commentary is available here.

MSRB Best Execution

On December 5, 2014, the SEC approved the MSRB’s Rule G-18 establishing best execution standards for municipal securities. The best execution rule will require municipal securities dealers to use “reasonable diligence” to identify the best potential trading venue for a particular security and then execute transactions in that venue to provide the customer with a price as favorable as possible under prevailing market conditions.

The BDA submitted several comment letters to the MSRB and SEC and in October, the BDA met with the SEC, MSRB, and FINRA to discuss the rule’s expansive definition of “market.” Additionally, based on those meetings, we submitted a comment letter requesting a bifurcated approach, which would have allowed a Sophisticated Municipal Market Professional (SMMP) to opt-in to best execution without losing SMMP status. The rule was adopted without these changes, however, over the course of the next few months, the BDA plans to work with the MSRB to inform its development of interpretive guidance surrounding the rule. The rule will take effect December 7, 2015.

• The MSRB’s regulatory notice is available here.
• The BDA’s comment letter to the SEC on G-18 is available here.
• The BDA’s comment letter to the MSRB on G-18 is available here.
• The BDA’s letter asking for a bifurcated approach to establishing SMMP designations is available here.

MSRB and FINRA Pricing Information Disclosure Proposal

In November, FINRA and the MSRB each released rule proposals to require dealers to disclose markups on certain retail trades. The draft rule would require dealers to disclose markups on trades of 100 bonds or $100,000 or less when they have entered into a principal trade on the same day in the same security.

BDA is currently working on a comment letter for submission to FINRA and MSRB by January 20th. The letter will focus on the significant costs of upgrading systems to comply with this additional confirmation disclosure.

• The FINRA and MSRB regulatory notices can be found here.

FINRA CARDS Proposal

In October, FINRA released a proposed rule to implement the Comprehensive Automated Risk Data System (CARDS). CARDS would alter FINRA’s examination and surveillance programs in a significant way by requiring dealers to submit account and transaction information for each of its customers to FINRA on monthly basis. FINRA would then house the data and run analyses designed to identify regulatory infractions.

In late October, BDA member firms met with FINRA senior staff in Washington, D.C. to discuss the cyber security concerns and cost issues related to CARDS.

On December 1, 2014 BDA submitted a comment letter to FINRA expressing concerns with the costs of CARDS and also expressed skepticism in FINRA’s ability to protect CARDS data from a cyber attack.

• FINRA’s proposed rule is here.
• BDA’s comment letter to FINRA is here.

SEC MCDC

BDA worked to secure modifications to the SEC’s Municipal Continuing Disclosure Cooperation (MCDC) initiative, including advocating for tiered civil penalty caps to reduce the disproportionate burden for smaller firms active in the municipal market. In addition, BDA partnered with trade groups including GFOA, NABL and SIFMA to educate staff and Members on Capitol Hill. We also sent an industry letter asking for certain additional modifications to the initiative beyond those that the SEC offered.

Further, BDA worked with members and staff on Capitol Hill to request their assistance with outreach to the SEC prior to the deadline for underwriter self-reporting deadline.

BDA’s initial letter and follow up letter to SEC regarding MCDC are available here.

Request for Municipal Bond Inclusion as High Quality Liquid Assets in Banking Liquidity Rule

In September, federal banking regulators approved a final rule to implement the Liquidity Coverage Ratio (LCR). The LCR requires banks with $50 billion or greater in total assets to identify a specific set of High Quality Liquid Assets (HQLA) that the bank could sell to raise cash in the event of a liquidity crisis. The rule was approved and currently municipal bonds are not eligible for treatment as HQLA.

BDA has consistently argued that munis should be included in a bank’s stock of HQLA. Staff at the Federal Reserve has recommended the inclusion of municipal bonds in HQLA. An amended final rule is forthcoming. BDA will continue to track this issue and push for inclusion.

MSRB Municipal Advisor Regulatory Regime

The MSRB is developing a series of rules and amendments to regulate previously unregulated municipal advisors. Below are the MSRB’s key proposals issued this year and the BDA’s corresponding comment letters.

G-44

The SEC approved MSRB Rule G-44 October 23, which establishes baseline supervisory and compliance obligations for municipal advisors.

The BDA submitted comment letters to both the MSRB and SEC during the comment solicitation process. You can view the BDA’s April 2014 letter to the MSRB and our August 2014 letter to the SEC here.

The new supervision requirements take effect April 23, 2015.

G-42

The MSRB proposed draft amendments to Rule G-42 to establish the core duties of municipal advisors when providing advice on municipal securities transactions and related products. The BDA submitted a comment letter on March 10, 2014 and the MSRB issued a revised draft Rule G-42 on July 23, 2014, which incorporated a number of changes made by the MSRB to the rule text based upon comments received from the industry. Some of these changes were in direct response to the BDA’s suggestions in our March 2014 comment letter. On August 25, the BDA submitted a comment letter to the MSRB regarding the revised rule, focusing on BDA’s support for the MSRB’s revised approach to principal transactions, with one further request for clarification; review of recommendations and a request that the MSRB provide specific language that permits the use of reasonable policies and procedures in certain instances; reference to Rule G-23 and a desire for further clarification; and allowances for acting as Underwriter for Conduit Issuer and Municipal Advisor for Obligated Person.

You can find our March 2014 letter and our August 2014 letter here.

G-37

On August 18, 2014, the MSRB requested comments on draft amendments to Rule G-37, the MSRB’s pay-to-play rule for municipal securities dealers that would extend the rule to municipal advisors. You can view the full regulatory notice here. BDA submitted a comment letter generally supporting the MSRB’s efforts in creating a level playing field between dealers and municipal advisors.

You can find our full comment letter here.

G-20

The MSRB issued a request for comment on October 23, 2014 to extend the provisions of its Rule G-20 on gifts, gratuities, and non-cash compensation to apply to non-dealer municipal advisors.

The BDA submitted a comment letter expressing our general support for extending the provisions to non-dealer municipal advisors, with a couple of reservations including a request for clarification on what constitutes an “entertainment expense” prohibited from reimbursement and what constitutes normal travel costs. The BDA also requested an alignment of recordkeeping requirements for municipal advisors and dealers.

G-3

On November 19, 2014, the MSRB announced the filing of the proposed amendments to Rule G-3 on professional qualification requirements for municipal advisors with the SEC.

The amendments create a standard of professional qualification for municipal advisors and establish two classifications of municipal advisor professionals: representative and principal.

You can read text of MSRB’s proposal here and BDA’s G-3 comment letter here.

The amended rule took effect January 1, 2015.

Municipal Advisor Compliance

The BDA is actively engaged in assisting members by facilitating useful discussions regarding MA rule compliance. In July, outside counsel Nixon Peabody prepared “The Municipal Advisor Rule: Receiving Advice from your Broker-Dealer Regarding Investments”. The paper provides factual and concise answers to common questions regarding the MA rule and investment advice.

The paper is available here.

IRS Issue Price

In September 2013, the IRS proposed arbitrage rules, which would remove the ability of underwriters to establish an issue price using reasonable expectations and contain an unworkable safe harbor for establishing issue price. The BDA submitted comments in 2013 and in February 2014 testified before the Internal Revenue Service and Treasury Department regarding the need for a reasonable expectations standard. We have also met with senior staff at the IRS and Treasury regarding the impacts of their proposed regulations. Treasury and IRS staff indicated that they understand, based upon numerous comments submitted, that the rule as proposed will need to be made more clear and flexible prior to finalization. Furthermore, Treasury and the IRS have indicated that they will publish further guidance on issue price as a priority item for them in 2015. The BDA intends to meet again soon with senior staff at both the IRS and Treasury.

Legislation

Bank Qualified Bonds

Rep. Tom Reed (R-NY) introduced the Municipal Bond Market Support Act (HR 5199) in July 2014. HR 5199 would permanently increase the bank qualified annual debt limit from $10 million to $30 million, index that amount for inflation, and apply it to individual borrowers. Bank qualified debt allows small governments and authorities to directly place their debt with banks, particularly community banks, and the banks are then able to deduct a percentage of the carrying costs for purchasing these bonds as with their other investments. The legislation has bipartisan support with five cosponsors, and the support of more than 20 state and local government and industry associations including the BDA. We have been working closely with Rep. Reed’s and the bill’s cosponsors’ offices in getting the bill introduced over two sessions of Congress. We will continue to educate other members of Congress on the issue and work to get the bill reintroduced in the 114th Congress.

Tax-Exempt Bonds

Now-retired House Ways and Means Committee Chairman Dave Camp (R-MI) unveiled his long-awaited tax reform draft in 2014, which included several provisions that would negatively impact municipal bonds. The draft included a new 10 percent surtax that would apply to municipal bond interest income (among other income). It also included a provision to eliminate private-activity bonds and advance refunds of bonds.

In his FY 2014 budget request President Obama reiterated his proposal to cap the tax exemption of municipal bond interest at 28 percent. In his budget Obama also proposed a new America Fast Forward (AFF) Bond program. AFF bonds would be direct-pay bonds with a 28 percent subsidy rate that could be used to fund infrastructure projects and other kind of projects that had been funded by the now expired Build America Bonds program (BABs).

In addition, several studies and reports have cited the tax exemption for municipal bonds as a significant expenditure, which increases the threat that eliminating or limiting the exemption could be used as an offset for other legislation.

BDA has and continues to work directly with key congressional offices, taking the lead on the effort to prevent the modification or elimination of the tax exemption for municipal bonds from being included in tax reform, budget, and other legislation. We continue to work with our industry partners including many issuers and state and local groups through the Municipal Bonds for America (MBFA) Coalition. The MBFA’s efforts have been reinvigorated throughout 2014, with a growing membership and strengthening strategy for educating Congress on tax-exempt bonds. With Rep. Paul Ryan becoming the new Chairman of the House Ways and Means Committee and Senator Orrin Hatch (R-UT) becoming the new Chairman of the Senate Finance Committee, BDA will work with these key offices in the 114th Congress to provide education on tax-exempt bonds as tax reform discussions progress.

Events

BDA events, roundtables, and training seminars all drew record participation in 2014. BDA brought member firms together to discuss the top market, regulatory, and legislative issues facing the U.S. fixed income markets. In addition, BDA events and member fly-ins created opportunities for members to interact directly with top regulators.

In 2015, the BDA will continue to offer meaningful, interactive trainings and roundtables on the most critical issues facing the dealer community. Furthermore, the BDA will design DC “fly in” days for member firms to interact directly with Members of Congress, top Congressional staff, and the regulatory community.

01/08/2015

WEST ORANGE — A brief submitted by the office of acting Attorney General John Hoffman argued that local redevelopment and housing law does not mandate that municipalities must submit ordinances issuing bonds to the Local Finance Board for review. His opinion was part of an amicus curiae brief submitted to the New Jersey Supreme Court on Dec. 22.

The brief was requested by the court which is currently reviewing an appeal of a case brought by five West Orange residents to block the issuance of the bonds.

The Attorney General’s Office, which was weighing in on behalf of the LFB in the case meant to decide whether the township followed proper procedure in issuing $6.3 million in municipal bonds to real estate operator Prism Capital Partners, wrote in its brief that LFB approval is only necessary under circumstances specifically defined in the law.

According to the document, which was provided to the West Orange Chronicle by the Supreme Court Clerk’s office, an example of such a circumstance is when a bond is granted for the purpose of providing funds to let a housing authority extend credit or loans to redevelopers.

However, as the brief pointed out, the law never makes a blanket statement that all cases need to be reviewed by the LFB. “The fact that a municipality issues bonds that include payments in lieu of taxes and/or special assessments is not, in itself, sufficient to require LFB review,” the brief said.

Furthermore, the Attorney General’s Office argued that the language of the law passage in question never stipulates that bonds can only be issued after review by the LFB. The section is worded in a way that does leave room for debate: It starts with the statement that bonds may be issued and sold in a number of manners, which it then lists, and ends with the phrase “upon application to and prior approval of the Local Finance Board in the Department of Community Affairs.”

While it is the plaintiffs’ case that the concluding phrase encompasses the entire section — meaning that every bond would be subject to LFB approval — the Attorney general’s Office cited legal precedent to argue that it only referred to the phrase immediately preceding it.

In effect, the brief supports the township’s case that it did not need to submit its bond issuance to the LFB. But the acting attorney general is not the only one participating in the case as a friend of the court.

Of the parties the Supreme Court Clerk Mark Neary invited amicus briefs from, Hoffman’s office was the only one to submit by the Dec. 22 requested deadline. According to Mayor Robert Parisi, the New Jersey State League of Municipalities and the Institute of Local Government Attorneys will be filing a joint brief on Jan. 12. The New Jersey State Bar Association and the National Association of Bond Lawyers declined to file anything, he said.

Still, Parisi is optimistic about the township’s chances of winning the case.

“The court is being diligent in its review of this matter, but the township remains confident that the court will ultimately rule in our favor,” Parisi told the Chronicle in a Jan. 5 email. “We are anxious to have this matter resolved.”

The five residents who filed the lawsuit also have not given up hope. Windale Simpson, one of the plaintiffs and the spokesman for the group, said they would prefer to comment after all of the amicus briefs have been submitted. But he said he did not expect to lose the case.

According to the Supreme Court Clerk’s office, a new date for oral arguments has not yet been set. The original Nov. 10 date was postponed after the court requested the amicus briefs.

Essex News Daily

By: Sean Quinn – Staff Writer

Jan. 18, 2015

WASHINGTON – The Securities and Exchange Commission’s examination priorities for 2015 include protecting retail investors and assessing the compliance of municipal advisor firms, commission officials said Tuesday.

SEC exams are handled by the Office of Compliance Inspections and Examinations, known as OCIE. The office checks whether firms registered with the SEC are complying with federal securities laws, and passes its findings along to the enforcement division if it thinks it has uncovered wrongdoing.

SEC chair Mary Jo White and Commissioners Daniel Gallagher and Michael Piwowar have all recently and repeatedly expressed interest in bulking up protection for the retail investors who dominate the muni market and OCIE’s 2015 priorities reflect that.

“Our examination program collects information for the commission on a range of important trends, issues, and risks,” White said in a release about the priorities, which was followed by a press conference. “OCIE helps us to maintain a strong presence with SEC registrants and to make a positive impact for the benefit of investors and our markets.”

Besides evaluating securities firms’ sales practices and recommendations to retail investors, OCIE is also interested in examining whether mutual funds with exposure to interest rate increases are being transparent with investors in the face of a likely rate climb in future months. The Federal Reserve Board of Governors has held rates at artificial low levels for years, but is expected to move off that policy.

“With interest rates expected to rise at some point in the future, we will review whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading and that their investments and liquidity profiles are consistent with those disclosures,” the SEC said in its announcement about the priorities.

OCIE will also be conducting examinations of municipal advisors, who have been required to register with the SEC since July of last year. The SEC in August announced a two-year exam program focusing on MAs who are not members of the Financial Industry Regulatory Authority. FINRA will examine and discipline firms affiliated with its member-dealers. FINRA announced its own exam priorities last week.

Andrew Bowden, director of OCIE, said sharing his office’s priorities with the public has a positive effect on compliance behavior. This will mark the third time OCIE has published its priorities for the coming year, he said.

“We share our annual examination priorities to promote compliance,” Bowden said. “We have observed that when we share our areas of focus, many industry participants independently review their controls in the areas we have identified.”

THE BOND BUYER

BY KYLE GLAZIER

JAN 13, 2015 2:48pm ET

Disclosures of annual financial information and operating data and audited financial statements (or CAFRs) from issuers of municipal securities rose sharply in 2014, with nearly 68,000 total disclosures, compared to approximately 55,000 in 2013. Over 10,000 of these disclosures were submitted to the MSRB in December 2014, the most in a single month since the MSRB became the official repository for continuing disclosures. The higher volume may be attributed to underwriters and issuers participating in the Securities Exchange Commission’s Municipal Continuing Disclosure Cooperation initiative. The initiative was announced in March 2014 and provided issuers and underwriters the opportunity to self-report previously unreported disclosure documents in an effort to comply with continuing disclosure obligations specified in SEC Rule 15c2-12.

For data on municipal new issuance, trading activity, continuing disclosures or variable rate resets, visit the MSRB’s EMMA website.

The MSRB recently announced that is is accepting applications for its Board of Directors, which helps craft policies on the regulation of financial professionals, market structure, the MSRB’s Electronic Municipal Market Access (EMMA®) website and other topics. The MSRB Board consists of 11 independent members that are representative of the public, including investors, municipal entities and other non-MSRB regulated individuals. The Board also has 10 members that represent MSRB-regulated entities, including broker dealers, bank dealers and municipal advisors.

Given the MSRB’s current rulemaking and transparency objectives, the MSRB is encouraging individuals with strong knowledge of the pricing and trading of municipal securities, including those with institutional “buy-side” experience, to apply. The MSRB will fill four public and three regulated-entity Board positions for three-year terms that begin October 1, 2015. All qualified individuals from around the country representing diverse organizations and market perspectives should consider applying. MSRB Rule A-3, available on the MSRB’s website, msrb.org, outlines requirements for all applicants.

To be considered for a position on the MSRB Board of Directors, submit an application by February 20, 2015. Applications are available on the MSRB Board of Directors Application Portal.

The brokerage industry’s self-regulator will spend 2015 looking into whether deals between brokers and exchanges are taking money out of investors’ pockets, regulators said in a letter outlining the year’s oversight priorities.

The Financial Industry Regulatory Authority will also review whether customers get fair prices on electronic bond-trading platforms and how brokers market financial products that are sensitive to interest-rate changes such as alternative mutual funds, structured retail products and bank-loan mutual funds, it said.

The letter lays out some of this year’s biggest concerns for Finra, which is funded by the brokerage industry that it polices. The group, which levied about $60 million in fines last year, has faced repeated criticism from other regulators and investors that it isn’t tough enough on Wall Street misconduct.

In recent brokerage inspections, Finra found that some firms don’t have active “best-execution committees” or other supervisors in place to ensure that clients get the best price as securities rules require, according to the letter.

“We certainly expect to see tightening up and much greater focus from firms,” Finra Chief Executive Officer Richard Ketchum said in an interview. “There is a high likelihood you’ll see enforcement actions as well.”

Regulators and lawmakers have said that brokers face a conflict of interest when exchanges offer them rebates and other incentives to draw their business. Brokers have more than 40 exchanges and private trading venues to choose from when filling their clients’ orders.

The Securities and Exchange Commission, which oversees Finra, has already been looking into the issue. Senator Carl Levin in a June hearing grilled TD Ameritrade Holding Corp. (AMTD) executives over the firm’s practice of selling retail orders to be filled by market makers.

Bond Trading

Finra also said that it will launch a pilot program to probe whether brokers who use electronic bond-trading platforms are getting the best prices for customers. Unlike stock exchanges, bond-trading venues generally don’t make prices available to the public. That leaves investors with little means to verify whether they’re receiving the best price or paying a significant markup over what a dealer paid.

The venues have grown in popularity as more trading moves to computer platforms. About 16 percent of investment-grade corporate bond trading happens on such systems, according to Greenwich Associates. Regulators such as Finra and the SEC have largely allowed them to develop free from stringent oversight.

“We’re at a significant flex moment with respect to the handling of fixed-income orders,” Ketchum said. “We do think it deserves more attention.”

Last year, the SEC and Finra began a campaign to force more transparency of bond prices and markups on sales to retail customers. Such a move could generate opposition from banks, which derive a significant portion of their income from bond trading and sales. It’s historically been more profitable to trade bonds than stocks because the debt markets are less transparent, making it easier for brokers to take a bigger fee for each exchange.

Alternative Funds

Finra will also examine brokers’ sales of alternative mutual funds, structured retail products and bank-loan mutual funds, Finra said. The regulator will be looking for cases in which brokers may have pushed investors into large, concentrated positions in products that are highly sensitive to interest-rate changes.

Alternative mutual funds are among the fastest-growing segments of the $15 trillion fund industry. Finra said it has found some brokers aren’t adequately reviewing new alternative mutual funds, which mimic riskier hedge-fund strategies, before selling them.

“It’s important for customers to understand they are dealing with higher fees and a level of complexity,” Ketchum said. “They have to really understand the risk-return involved in the products.”

Bloomberg

By Dave Michaels Jan 6, 2015 12:22 PM PT

To contact the reporter on this story: Dave Michaels in Washington at [email protected]

To contact the editors responsible for this story: Joshua Gallu at [email protected] Gregory Mott

WASHINGTON – The Financial Industry Regulatory Authority’s exam priorities for 2015 include making sure that both municipal advisors are complying with registration and other requirements and broker-dealers are meeting minimum denomination restrictions on bonds.

FINRA laid out its areas of focus in its 2015 regulatory and examination priorities letter, which it released Tuesday. Those areas include municipal advisor regulation, which FINRA will enforce with respect to dealer-affiliated MAs. FINRA only oversees MAs affiliated with dealers that are its members. The Securities and Exchange Commission oversees all MAs, including non-dealer MAs.

As of July 1 last year, any firm that provides state or local governments with advice related to muni bond issuance or the investment of muni proceeds must register as an MA with both the SEC and the Municipal Securities Rulemaking Board.

“FINRA has observed through onsite examination and regulatory coordinator outreach that some firms do not realize that the activities in which they engage subject them to municipal advisor registration requirements,” FINRA said in its priorities letter.

“In 2015, FINRA examiners will focus on current SEC and MSRB municipal advisor requirements, reviewing for proper application of exclusions and exemptions, and potential unregistered activity,” the letter continued. “Examiners will adjust their reviews to include new rules as they become effective.”

Another priority cited in the letter, minimum denomination requirements, were highlighted last year when some firms sold a highly-anticipated $3.5 billion issuance of Puerto Rico general obligation bonds at amounts less than the specified $100,000 minimum.

MSRB Rule G-15 on uniform practice requirements prohibits broker-dealers from executing trades in sizes below the minimum denomination set by the issuer, except under very limited circumstances. The SEC sanctioned 13 firms for 66 illegal trades in November.

“In 2015, FINRA will focus on firms that sell municipal bonds in less than the minimum denomination, in violation of MSRB Rule G-15,” the authority wrote. “Issuers often set high minimum denominations for lower-rated bonds that may make the investments inappropriate for retail investors. Investors who buy the bonds in smaller denominations may find limited liquidity, and thus poor pricing, when they choose to sell the bonds.”

The letter also addresses some other priorities, such as best execution and fair pricing. The MSRB recently adopted a best execution standard for the muni market, requiring dealers to use “reasonable diligence” to ensure that customers get the most favorable price possible for a customer under the market conditions.

“In 2015, FINRA will increase its emphasis on reviewing firms’ pricing practices, including whether firms have the supervision and controls in place to ensure they are using reasonable diligence and employing their market expertise to achieve best execution for their customers and avoiding excessive mark-ups (and mark-downs),” FINRA wrote.

FINRA urged firms to review their business practices with the authority’s concerns in mind.

“Serving the interests of the investing public and entities raising capital in a fair manner should be a guiding principle as firms pursue their business in 2015,” FINRA concluded.

THE BOND BUYER

BY KYLE GLAZIER

JAN 6, 2015 2:45pm ET

WASHINGTON – Dealers want the Securities and Exchange Commission to direct the Municipal Securities Rulemaking Board to use a single qualifications exam for all muni professionals, while the Investment Company Institute wants separate municipal advisor exams tailored to the type of MA work being done.

The Securities Industry and Financial Markets Association as well as ICI made their arguments in recent written comments to the SEC, which is considering whether to approve the MSRB’s proposal to create baseline standards of professional qualification for MAs and require them to pass a test.

The proposal, which the MSRB released last March and filed with the SEC on Dec. 1, would establish two classifications of municipal advisor professionals, representative and principal. It would require firms to designate at least one principal to oversee the firm’s MA activities. It also would require each MA representative and principal to take and pass a qualifications test that the MSRB is currently developing.

SIFMA believes that dealer representatives who have already taken and passed the necessary Financial Industry Regulatory Authority exams to become muni securities dealers are already qualified to be MAs, wrote Leslie Norwood, managing director, associate general counsel, and co-head of municipals at SIFMA.

“Persons currently qualified to perform municipal securities activities should also be qualified to perform municipal advisor activities, if they so choose,” Norwood told the commission. “The Series 52 qualification examination should be sufficient for municipal securities representatives and municipal advisor representatives alike.”

Dealers voiced that position when the MSRB floated its proposal last year, but the version sent to the SEC did not differ significantly from the initial proposal.

“The MSRB summarily dismissed the vast majority of the comments received on this point, including SIFMA’s,” Norwood wrote.

If the MSRB does move forward with separate tests for MAs, Norwood continued, qualified dealer representatives should be grandfathered in.

The ICI told the SEC that managers of municipal fund securities should have their own test.

“We are concerned that, by using one examination, the MSRB will be unable to tailor the examination to the type of advice the representative will render, a result that is not in the interests of municipal advisers’ clients,” wrote Tamara Salmon, senior associate counsel at ICI. “We recommend instead that the MSRB utilize at least two examinations – one for representatives of a municipal advisor whose advisory activities are limited to municipal fund securities and one for representatives whose advice is limited to municipal securities other than municipal fund securities.”

Salmon said the knowledge required to perform different MA services can vary, and providing only one test could be contrary to the interests of an MA’s clients.

“For example, providing advice on municipal securities likely requires a representative to be knowledgeable about issues such as negotiated prices, debt limits and ratios, underwriting periods, agreements, par values, etc.,” Salmon wrote. “None of these topics would be relevant for a municipal advisor whose advisory business is limited to providing advice relating to a municipal fund security such as an interest in a 529 education savings plan.”

The SEC could require changes to the MSRB proposal, or could approve it as is.

THE BOND BUYER

BY KYLE GLAZIER

JAN 9, 2015 1:55pm ET

Nationally recognized statistical rating organizations are lacking in their management of conflicts of interest, as well as information technology and cybersecurity issues, reports the Securities and Exchange Commission.

The SEC issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs) and submitted a separate report on NRSROs to Congress.

There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in place—and to recognize that examiners are not the enemy.
“These reports provide the most current and comprehensive picture of the credit rating industry,” said SEC Chairwoman Mary Jo White. “The SEC’s enhanced oversight of NRSROs, informed by risk assessment, regular examinations and policy considerations, provides increasingly robust and effective oversight of the industry, as reflected by overall improvements in compliance, documentation, and board oversight.”

The 2014 exams, which focused on NRSROs’ activities for 2013, includes several recommendations from the SEC staff. While the SEC has not determined whether any finding “constitutes a material regulatory deficiency,” it is possible the commission may do so in the future.

The 10 credit rating agencies registered as NRSROs as of Dec. 1, 2014 – A.M. Best Co. Inc. (AMB); DBRS Inc. (DBRS); Egan-Jones Ratings Co. (EJR); Fitch Ratings Inc. (Fitch); HR Ratings de México, S.A. de C.V. (HR); Japan Credit Rating Agency Ltd. (JCR); Kroll Bond Rating Agency, Inc. (KBRA); Moody’s Investors Service Inc. (Moody’s); Morningstar Credit Ratings LLC (Morningstar); and Standard & Poor’s Ratings Services (S&P) – generally remain nameless in specific statements made in the SEC’s report.

One area that drew concern from the SEC was NRSROs’ management of conflicts of interest related to the rating business operations.

The SEC found that all seven of the smaller NRSROs had “weaknesses in policies and procedures concerning certain conflicts of interest or did not sufficiently disclose certain conflicts of interest.”

Of the 10 agencies, one larger and six smaller NRSROs were found by the SEC to have weaknesses in their policies and procedures and controls governing employee securities ownership.

“It is a conflict of interest if an NRSRO allows its personnel to directly own securities or money market instruments or have direct ownership interests in issuers or obligors subject to a credit rating determined by that NRSRO,” states the SEC report.

For example, at one of the smaller NRSROs, the SEC says an analyst participated in determining or approving the ratings of two issuers in which that analyst owned securities.

The SEC staff recommended that this NRSRO enhance its securities ownership policies and procedures, including establishing policies and procedures for the review of a prior rating where a conflict of interest is discovered and for securities divestiture – as this NRSRO did not have policies and procedures in place.

The SEC also found that all three of the larger NRSROs and two of the smaller NRSROs did not have sufficient policies and procedures or controls related to IT or cybersecurity.

The report states, “IT and cybersecurity are increasingly significant components of an NRSRO’s internal control structure … They also often affect an NRSRO’s capacity to publish accurate ratings in a timely fashion.”

The staff recommended that the two smaller NRSROs establish or enhance written IT and cybersecurity policies and procedures and internal controls, and enhance their IT testing and responses to IT-related tests.

In addition, the SEC also found that all three of the larger NRSROs had weaknesses in their IT policies and procedures concerning personnel’s access to information that is confidential or otherwise restricted. The Staff recommended that all three of the larger NRSROs enhance their internal controls governing access to IT networks, systems, applications, and file shares.

The SEC also found improvements in several areas. Since the SEC’s last report, NRSROs have enhanced their compliance resources, monitoring, and culture, as well as improving its board of directors or governing committee oversight.

The SEC also found that NRSRO’s document retention in general had gotten better, as did these agencies’ documentation and resources for criteria and model validation.

ThinkAdvisor

By Emily Zulz
Staff Reporter
@think_emilyz

December 31, 2014

WASHINGTON — This year will bring more municipal advisor and secondary market transparency regulation, while a newly Republican-controlled Senate could lead Congress to scrutinize and possibly ease existing laws and rules.

“We expect 2015 to be again the year of municipal advisor regulation, said Leslie Norwood, managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association. The Municipal Securities Rulemaking Board is still working on several rules governing MAs, including the crucial G-42 which spells out the core duties of non-solicitor advisors.

Dave Sanchez, a former Securities and Exchange Commission muni office lawyer who now runs his own firm in California, said MA regulation will be a major theme of the year as some market participants continue to adjust to the more than year-old SEC registration rule, which took effect July 1.

“On the regulatory front there will probably be a continued focus on implementing the municipal advisor regime,” Sanchez said. “It is clear to me that market participants are still legitimately struggling with how all of the various exemptions and exclusions work together and that the market needs more time to understand the rule. And that is fine.”

The final registration rule and subsequent MSRB proposals have caused some large issuer officials to complain that they feel directly regulated because they are essentially required to produce proof of exemptions to the rule that underwriters can rely on before providing advice. Federal law prohibits the SEC and the MSRB from requiring issuers to send them any documents prior to a bond offering.

SIFMA president and chief executive officer Kenneth Bentsen said earlier this month that SIFMA continues to be dissatisfied with the rule and believes it misinterpreted congressional intent in the Dodd-Frank Act provision authorizing creation of the MA regulatory regime. But most issuers and many individual underwriting firms have begun to make peace with it and operate more comfortably within the rule’s structure.

“I think many of the largest issuers increasingly understand that the important protections the rule provides for small and medium sized municipal entities are worth any small inconveniences they may endure in the way they do business,” Sanchez continued. “The rule is designed to put municipal issuers in control of their financing programs. And I do think that broker-dealers will continue to appreciate that the SEC provided important exclusions and exemptions for them that went beyond the narrow statutory exclusions articulated by Congress.”

MA Standards of Conduct

Leo Karwejna, chief compliance officer and managing director at Public Financial Management, said both the MSRB and the SEC will have the opportunity to fill in some of the remaining blanks on the MA regime. The MSRB has proposed its Rule G-42 on the standards of conduct for non-solicitor municipal advisors, but has not sent it up to the SEC yet. It is not clear how similar the proposal the SEC receives will be to the very controversial one the MSRB floated earlier this year.

“That will introduce much of the practical detail that is necessary,” Karwejna said.

He added that while most of the misunderstandings and apprehension about the SEC’s MA rule are “under our belt” now, 2015 will be an important year for advisors and underwriters to continue to make sure that smaller and less frequent issuers understand the new regulatory regime. SEC muni office officials said this month they have no “concrete plans” to release further MA guidance, but could do so if they see a need. Karwejna said the chance could present itself in the coming year.

“I think there is ample opportunity for them to provide more guidance,” he said.

Ernie Lanza, a shareholder at Greenberg Traurig in Washington who left the role of MSRB deputy executive director earlier this year, said he would be surprised if the SEC did not issue some more guidance in the coming year. Lanza said the board’s development of a pilot qualification exam for MAs would also be a major development to watch in the coming year. He also said the MSRB could propose another core duties rule focusing on MAs who solicit business on behalf of other firms.

“They haven’t yet hit the solicitors,” Lanza said.

MSRB executive director Lynnette Kelly said the board remains very focused on MA rulemaking, but is also prioritizing secondary market initiatives. The board recently proposed, in conjunction with the Financial Industry Regulatory Authority, a rule that would require dealers acting as principals to disclose to customers on their confirmations a “reference price” of the same security traded that same day as well as the difference between that price and the customer’s price.

Secondary market transparency and retail investor protection were major themes of the SEC’s 2012 Report on the Municipal Securities Market, which recommended markup disclosure and other steps the SEC and MSRB could take to improve the market.

Mike Nicholas, chief executive officer of the Bond Dealers of America, said he expects the regulatory agenda to move more and more into secondary market issues in the common year.

“I think it’s going to pivot,” he said. The principal transactions proposal and implementation of the recently-adopted best execution rule, which would require muni dealers to seek the most favorable price possible when executing transactions for most investors, are top priorities for his group going forward.

“These are tough issues that will be focused on in 2015,” Nicholas said.

Wildcard

A wildcard in the calculus for 2015’s regulation outlook is the 114th Congress that will begin meeting on Jan. 6. Republicans seized control of the Senate and widened their lead in the House to historic levels, meaning that for the first time in years a single party may be able to move legislation through both chambers without much help from across the aisle. Sources said Republican leaders like incoming Senate Finance Committee chairman Sen. Orrin Hatch, R-Utah and Senate Banking Committee chairman Sen. Richard Shelby, R-Ala., could be interested in joining the House to roll back some Dodd-Frank provisions.

“I don’t know that the Republicans have a clear sense of what they want to do,” said a House staffer who asked not to be identified. “You’re going to have a more conservative Congress.”

Bentsen said earlier this year that SIFMA would like to see Congress reexamine the MA rule to allow more freedom for investment bankers to contact issuers without having to become MAs and lose their ability to underwrite the resulting bonds. Michael Decker, a managing director and co-head of municipal securities at SIFMA, said Congress could use legislation previously introduced by Rep. Steve Stivers, R- Ohio, as the starting point. Stivers’ bill would have defined MAs more narrowly by applying the fiduciary duty to advisors working for compensation and including an exception for dealers seeking to be underwriters.

“I think you can make a strong case for Congress taking another look at that issue,” Decker said.

But the staffer said that the exemptions included in the final SEC rule, such as a broad exclusion that underwriters could rely on when giving advice to issuers who have their own MA, makes the idea of revisiting the MA rule a tough sell. Most larger, frequent issuers have their own MAs, so dealer groups would essentially be asking Congress to give them more leeway to pitch deals to less sophisticated issuers who might need more protection.

“If the issue is pitching, that’s going to be hard,” the staffer said.

Sanchez said Congress would be hasty if it does reopen that issue.

“I believe that any legislative change to the municipal advisor regime is premature and will only serve to prolong uncertainty in the market while potentially undermining valuable issuer protections that are supported by responsible broker-dealers and municipal advisors,” he said.

Kelly said the MSRB will also have some educational priorities in 2015, such as ensuring that dealers understand and take seriously the requirement to sell securities only to retail investors during issuer-specified retail-only periods. The board is also concerned about the lack of transparency surrounding bank loans and private placements and will continue to encourage issuers to voluntarily disclose them. The board is also going to be continuing to review its current rulebook to find ways to harmonize its rules with FINRA’s.

Lanza said it’s also possible that the beginning of the 2016 presidential election cycle next year could spur a challenge to the MSRB’s pay-to-play rule, which aims to prevent muni firms from peddling influence with donations to public officials who can influence the award of negotiated bond business. The SEC’s investment advisor rule was the target of a lawsuit challenging its constitutionality earlier this year, but the suit was dismissed by a federal court in D.C. after the court determined it was not the proper venue to hear the case. That case is on appeal and observers say it could have implications for the MSRB’s rule.

“It should be an interesting year,” Lanza said.

THE BOND BUYER

BY KYLE GLAZIER

JAN 2, 2015 11:07am ET

The Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that oversees the $3.6 trillion municipal securities market, is accepting applications for its Board of Directors. To be considered for a position on the MSRB Board of Directors, submit an application no later than February 20, 2015.

The MSRB will host an educational webinar for potential applicants on Tuesday, January 13, 2015 at 12:30 p.m. ET. Register for the webinar.

The Securities and Exchange Commission announced its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative on March 10, 2014. Under the terms of the Initiative, the SEC asked underwriters and issuers/obligated persons to self-report potential violations of securities laws regarding misstatements in offering documents regarding prior compliance with continuing disclosure undertakings.

This survey is intended to gather information regarding NABL members’ participation in the MCDC Initiative, observations regarding the process and time invested as part of the MCDC Initiative. Please respond to each question based on your observations and best estimates. This survey is being done on an anonymous basis. NABL will compile the results and share a summary of the responses with members at a later date. We may also publish general observations and the summary results, but this will be done strictly without attribution to any individual member.

Please complete the survey no later than Friday, January 9.

The Municipal Securities Rulemaking Board (MSRB) today announced that its Electronic Municipal Market Access (EMMA®) service would begin collecting and disseminating disclosures related to municipal asset-backed securities required under the Securities and Exchange Commission’s (SEC) Rule 15Ga-1 on January 9, 2015.

Read the regulatory notice.

Read the SEC’s Rule 15Ga-1.

View the full press release.

Critics Say ‘Pay-to-Play’ Regulation Needs to Be Broadened to Include Super PACs; Others Call for Scrapping It

A Securities and Exchange Commission rule designed to limit conflicts of interest in state contracting is becoming less effective amid the rise of super PACs and should be broadened, groups that track campaign finance say.

The SEC’s so-called pay-to-play rule, which applies to state officials including governors, could become a prominent factor in the 2016 presidential election given that four or more Republican governors who would be in office during the campaign have said they may run or are thought to be considering a candidacy.

The rule effectively prohibits certain employees of financial-services companies that do—or might do—business with state agencies from contributing to the officials who oversee those agencies. The rule, adopted in 2010, was intended to prevent political contributions from influencing state contracting decisions.

Critics say the SEC rule’s effectiveness could be blunted in 2016 by the rise of super PACs, which can raise money without contribution caps but can’t coordinate with or give to candidates’ campaigns, as well as politically active nonprofit groups. In particular, they point to the increasing number of super PACs that form to support only a single candidate. Critics argue that a contribution to a group that spends money on behalf of a single candidate is akin to giving to the candidate.

Others say the SEC rule should be eliminated, not expanded, with some noting that it creates an advantage for members of Congress, who aren’t subject to the rule, over governors in campaign fundraising. Some states have rules that are even more restrictive than the SEC’s.

Earlier this year, a federal judge dismissed a lawsuit brought by the state Republican parties of New York and Tennessee challenging the SEC rule on the grounds that it violated free-speech protections.

The SEC declined to comment. Its rule already covers contributions to certain PACs that coordinate with or donate to candidates, but doesn’t specifically address super PACs.

“The ability to game these regulations with a super PAC shows that our campaign finance system is more loophole than law these days. The SEC should look into whether there’s anything the agency can do to update these rules,’’ said Adam Smith, a spokesman for Every Voice, a group that aims to reduce the influence of money in politics.

Craig Holman, a lobbyist for the nonpartisan nonprofit group Public Citizen, which advocates for tighter campaign spending limits, said he might appeal to the SEC to tighten the rules on contributions to single-candidate super PACs from employees covered by the pay-to-play rule.

Several compliance lawyers said their financial-services-industry clients are often reluctant to allow employees to make political contributions even to super PACs, to avoid any possible problems.

Joseph Birkenstock, a campaign-finance lawyer with Sandler Reiff, said he asks clients to give him a full explanation of what strings are attached to a contribution before they give to super PACs, including whether their contribution will allow them new access to a candidate or official.

In 2012, GOP Gov. Rick Perry of Texas was hardest-hit by pay-to-play rules. Officials for his presidential campaign said the restrictions unduly burdened their fundraising but not that of other candidates in the race.

“Had those rules not been in effect for him, we likely would have raised more funds and therefore might have been able to stay in the race longer,” said Ray Sullivan, communications director for the Perry campaign in 2012.

Despite limits on his fundraising on Wall Street, Mr. Perry received a surge of outside support through a cluster of seven super PACs, according to the nonpartisan Center for Responsive Politics. Those super PACs, which only supported Mr. Perry, spent at least $4.3 million on his behalf—about a quarter of what the governor raised for his campaign until he dropped out in early 2012.

In the 2014 elections, 42% of groups that spent more than $100,000 and were allowed to raise money without contribution caps supported a single candidate, according to a report by Public Citizen.

GOP governors who may join the White House race in 2016 include Chris Christie of New Jersey, Bobby Jindal of Louisiana, Scott Walker of Wisconsin and John Kasich of Ohio, among others.

The cost of breaking pay-to-play rules is high: In 2012, Goldman Sachs Group Inc. paid a $12 million settlement after the SEC found an employee had violated the rules by working on the political campaign of a former Massachusetts treasurer while winning bond underwriting business in the state. The firm was also temporarily restricted from underwriting bonds in the state. Goldman didn’t admit or deny the SEC’s findings.

THE WALL STREET JOURNAL

By REBECCA BALLHAUS

Dec. 28, 2014 7:52 p.m. ET

Debt raters failed to follow their own methodologies, let senior credit officers view market-share data and allowed a trade group to affect criteria changes, according to a U.S. Securities and Exchange Commission report.

The SEC’s Office of Credit Ratings didn’t name specific companies in its fourth annual examination released today, which looked at practices in 2013. The report refers to the raters as either larger firms, such as McGraw Hill Financial Inc., Standard & Poor’s, Moody’s Corp., Moody’s Investors Service and Fitch Ratings, or smaller ones, including DBRS Inc. The regulator also didn’t identify firms in prior reports.

One large company and four smaller firms didn’t follow their own methodologies in determining ratings, the SEC said in its report on Nationally Recognized Statistical Rating Organizations, or NRSROs.

After reviewing e-mails of one of the larger raters, the regulator determined that business and market-share conditions influenced the substance of its criteria. Employees on the business side of this rater worked in a concerted effort to change the criteria to appease an industry trade group, the SEC said.

At one of the larger companies, the chief credit officer reviewed nonpublic information about its revenue, financial performance and market share even though its policies prohibit such employees from accessing this information.

“We continue to make significant investments to enhance our training, quality, criteria, compliance and risk management functions,” John Piecuch, spokesman for Standard & Poor’s, said in an e-mailed response to questions.

The SEC began filing its annual examination reports after Congress passed the Dodd-Frank financial reform law in 2010, instructing regulators to stop relying on ratings and increase oversight of the companies that issue them. The Financial Crisis Inquiry Commission blamed the firms for awarding top credit grades to risky mortgage bonds, helping ignite the worst recession since the Great Depression.

Bloomberg

By Matt Robinson December 24, 2014

To contact the reporter on this story: Matt Robinson in New York at [email protected]

To contact the editors responsible for this story: Shannon D. Harrington at [email protected] Faris Khan, Mitchell Martin

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers (dealers) that amendments to MSRB Rule G-3 regarding Firm Element Continuing Education become effective on January 1, 2015. Each municipal securities dealer must comply with the new requirements by December 31, 2015 and each year thereafter. The rule amendments require certain persons registered with dealers to participate in annual firm training on municipal securities matters. The new requirements are designed to prompt firms to deliver municipal securities training to those registered persons who are regularly engaged in or supervise municipal securities activities.

Read the approval notice.

Listen to a recording of a webinar about the rule changes.

Wall Street pressed S&P, Moody’s and Fitch to assign more favorable credit ratings to their deals and bragged that the raters complied. Now many of the bonds are headed for default.

When the economy nosedived in 2008, it didn’t take long to find the crucial trigger. Wall Street banks had peddled billions of dollars in toxic securities after packing them with subprime mortgages that were sure to default.

Behind the bankers’ actions, however, stood a less-visible part of the finance industry that also came under fire. The big credit-rating firms – S&P, Moody’s and Fitch – routinely blessed the securities as safe investments. Two U.S. investigations found that raters compromised their independence under pressure from banks and the lure of profits, becoming, as the government’s official inquiry panel put it, “essential cogs in the wheel of financial destruction.”

Now there is evidence the raters also may have succumbed to pressure from the bankers in another area: The sale of billions of dollars in bonds by states and municipalities looking to quickly cash in on the massive 1998 legal settlement with Big Tobacco.

Continue reading.

by Cezary Podkul

ProPublica, Dec. 23, 2014, 1:53 p.m.

Washington, DC, December 16, 2014 – Today, SIFMA issued the following statement from Kenneth E. Bentsen, Jr., SIFMA president and CEO, after President Obama signed into law a spending bill to keep the government running through FY2015 which contains a provision preventing the federal government from supporting state and local efforts to use eminent domain to acquire mortgages:

“SIFMA applauds Congress and the Administration for wisely stepping into the eminent domain debate and preventing the misuse of an important federal backstop by private parties to facilitate an unconstitutional taking of personal property for private gain. Today’s action should go a long way in improving investor confidence in the housing finance system and installs one more obstacle to this reckless proposal. SIFMA and its members welcome this development and encourage communities considering this form of eminent domain to reconsider and work to find alternatives that help homeowners and protect taxpayers and investors.”

Release Date: December 16, 2014

Contact: Carol Danko, 202.962.7390, [email protected]

The Securities and Exchange Commission (“SEC”) was recently granted a preliminary agreement by a federal judge to bar a municipal official from participating in future bond sales. As reported by the Wall Street Journal, the move marks a new enforcement method utilized by the SEC and was undertaken pursuant to the SEC’s broad antifraud authority. While the SEC has received preliminary agreement in one case, other requests are still outstanding.

The preliminary agreement awarded to the SEC involved a Harvey, Illinois city official who allegedly diverted municipal bonds for undisclosed purposes. The city official refused to settle the claims with the SEC and did not respond to the SEC’s lawsuit against him. As a result of the official’s failure to respond, the court preliminarily approved the agreement to bar the official from participating in future municipal-bond sales.

The Harvey, Illinois enforcement action coincides with another ground-breaking action brought by the SEC against the City of Allen Park, Michigan and two former Allen Park city officials. In that action, the SEC is seeking to settle fraud claims against all of the parties arising from municipal bonds issued to finance a movie-studio project. The officials allegedly misrepresented the viability of the studio project, and investors relied on the false information in purchasing the bonds. The studio project subsequently failed, and the bonds suffered losses as a result. The SEC’s settlements with the Allen Park officials included requests that the officials be banned from future municipal-bond transactions. Although the settlements have not yet been approved by the court, approval is highly likely given the broad deference afforded to the SEC in this area.

Municipal officials and firms that assist with municipal-bond sales can expect continued and heightened scrutiny. Speaking at the annual meeting of the Securities Industry and Financial Markets Association in New York last month, the director of the SEC’s enforcement division, Andrew Ceresney, publicly announced the SEC’s intent to remain focused on municipal securities. In particular, Ceresney indicated that the focus of the SEC’s increased enforcement in municipal securities would be on pension fund abuses, pay-to-play violations, and undisclosed conflicts of interest. Combined with the ongoing oversight of municipal advisors under the Dodd–Frank Act, both municipal officials and firms that assist with municipal-bond sales can expect continued and increased scrutiny. Moreover, officials and firms should be aware of the implications raised by the SEC’s new enforcement techniques in this area, including whether officials who provide information on misrepresentations will receive any favorable treatment in a subsequent prosecution.

12/23/2014

by Kip Nesmith | Burr & Forman

SIFMA believes that tremendous strides have been made in improving market transparency for retail investors over the past twenty years – yet for people who are familiar with the equities market that operates with a central exchange and constant trading activity, the municipal market may still seem opaque. In fact, the municipal market operates differently-but those differences are not incomprehensible and they are not part of any deliberate plan to obscure the facts or impede the ability of investors to understand bonds or their pricing. Continuing retail investor confidence in the municipal bond market that has financed four million miles of roads, half a million bridges, 16,000 airports and 900,000 miles of water pipes all across the country is critical.

First, the bond “market” is not the same as the stock “market”. There are several structural differences between the two. There is no central place or exchange to sell or buy municipal bonds; the municipal market is a huge “over-the-counter” market consisting of a network of over 1,600 independent dealers across the country. The muni bond market is so vast that its size, which consists of approximately $3.7 trillion of outstanding bonds, is sometimes hard to imagine. This year alone, state and local governments across the country have accessed over $215.4 billion in funding through the municipal bond markets.

Second, stocks are traded frequently by investors-so frequently that there is a minute-by-minute ticker of trades that took place seconds ago. In contrast, municipal bonds tend to be a “buy and hold” product. Most retail investors do not ever intend to trade their bonds; they bought them to collect the interest and receive a return of principal at maturity. Third, there are many more municipal bonds than stocks – over a million different bonds versus several thousand different stocks; and the number of units of each security available are very different allowing investors to select a bond based upon the maturity that best fits their individual goals and risk profile, as well as tax benefits. While a public company often has millions of shares of stock outstanding, a single maturity of a municipal bond issue has far fewer bonds outstanding (several hundred is typical).

This means that for the vast majority of municipal bonds bought and sold in the secondary market, there just aren’t a lot of trades. Overall, there are on average 42,000 trades per day in the municipal bond market, versus 10,500,000 in the stock market. In other words, the vast majority of individual bonds do not trade on a given day, resulting in the absence of a continuous two-sided market (one with lots of bids and offers), limited depth of market (few people buying and selling), and the absence of fresh, up-to-the-minute pricing data (infrequent trading of most bonds).

Regulation may be able to enhance the way the muni market trades, but it cannot create a minute-by-minute two-sided market for the simple reason that most bond-owners don’t care to sell their bonds.

As a result of all this, the process for selling municipal bonds is very different from selling stocks. When customers want to sell publicly traded stock, their sell orders are generally executed within seconds of being placed. In contrast, selling municipal bonds generally involves one of two possibilities. The financial firm may simply buy them back from the customer (this practice makes it easier for customers to quickly sell their bonds, known as “liquidity”). Or there may be a bid solicitation process: when a customer decides to sell a municipal bond, the financial advisor’s firm must actively look for bids to buy that bond. To find the best bid, one of the firm’s bond traders places the bond out for bid. Some firms do this through a municipal securities broker’s broker or through an electronic trading platform – that connects many, but not all, bond dealers throughout the country to solicit anonymous bids. In some cases, one trader inside a financial services firm may bid on bonds placed on the bid-wanted listing system by another trader at the same firm without knowing the source of that bid wanted.

But, as discussed, there are many, many different bonds and not a large number of trades. Sometimes a bond that is for sale does not receive any bids, or may receive a bid that is, in the trading firm’s opinion, not reflective of a fair price for the bond, even if it is the best available bid in the market at the time. As a result, a customer seeking to sell a bond may be left with a difficult choice: either sell the bond at a price below perceived or expected value, or hold the bond in anticipation of more buyers (and potentially better bids) entering the market, though there can be no assurance that this will occur. In fact, it is possible that the bids will be lower later or there may not be a bid available at all. In such cases, a firm may make an accommodation bid — the purchasing firm buys the bond for its own account and will seek to sell the bonds at a later time. As with any bid, the customer may either accept the accommodation bid or reject it.

Strengthening the execution standard in the municipal market is something that SIFMA has long championed. Adding additional protection for investors, firms will soon be subject to a muni best-execution rule that is based on the best-execution rule that governs the equities and other fixed income markets. Municipal bond dealers will be required to diligently search for the best price for a customer. Some firms have already put such rules in place internally, despite the considerable technology costs of implementation.

As for transparency, more trade and transaction data is available to retail investors than ever before. The MSRB began the limited dissemination of prices for the municipal securities market in 1995 (when not everyone had a computer), and has increased price transparency in a series of measured steps as technology, and access to it, has advanced. These initial transparency efforts began with daily price transaction reports, available only to subscribers. In 1998, SIFMA’s predecessor made this data publicly available to investors free of charge through its investor education website. By 2000, the MSRB was making all trade data public on a one-day delay. And in 2005, the MSRB began disseminating near-real-time, or immediate, municipal bond prices, which continued to be made publicly available by SIFMA.

Ten years after SIFMA began making municipal bond prices available to the public, the MSRB launched its EMMA website – emma.msrb.org – in 2008 as a free online source of key municipal market information for retail investors. Since 2009, EMMA has been the centralized repository of all primary offering disclosure documents as well as continuing financial and significant event disclosures in the municipal market pursuant to Securities and Exchange Commission (SEC) Rule 15c2-12. Along with this development, the market moved to an “access equals delivery” standard for distribution of official statements. This standard allows brokers to notify customers to whom they are selling municipal securities that offering documents are immediately available on EMMA rather than provide them with mailed, printed copies.

In addition to disclosures identified in SEC rules (issuers contractually agree with bondholders to make these disclosures via EMMA), the MSRB also provides issuers and obligated persons with the ability to voluntarily post additional disclosures about their securities to EMMA. The EMMA website also serves as the go-to web venue for public access to variable rate security information, transaction data, dealer reportable political contributions, as well as market statistics and investor education. Funded by a $1 per trade technology fee tax paid by dealers that has raised in excess of $22 million since 2011, the MSRB has made significant improvements to EMMA including adding comprehensive investor education tools and other functionality. Through the investor tools at this website, anyone with internet access can track his or her own portfolio, easily review daily and historical trade data, view trade price and trade yield graphs, and utilize the Price Discovery Tool which allows the user to find and compare trade prices of municipal bonds with similar characteristics.

The “access equal delivery” model for primary market disclosures has been very successful and puts customers in control of deciding how much and what kind of information they want to review. It is efficient and cost effective. SIFMA believes that this model should be followed for other municipal market information that may be of interest to investors. Dealers should be encouraged to direct retail customers to EMMA instead of creating costly new systems to provide customers with data that is already publically available and easily accessible on EMMA.

As securities regulators consider regulatory reforms to the fixed income markets, SIFMA urges them to weigh the unique characteristics and structural realities of each of these varied over-the-counter markets. Copying the existing standards from equity and other fixed income markets is simply unfeasible. “Square peg; round hole; force to fit” is a bad recipe for success. We all want to advance investor protection and improve, where possible, market liquidity in the municipal market. But it will not aid investors familiar with the operation of the equities market if regulators impose the exact same rules and unrealistically expect the same results. Improvements in the municipal market should be market-participant driven. Some changes, such as an expressed desire for increased electronic trading, should evolve organically and are already occurring. SIFMA will continue to support regulatory reform that reflects the unique characteristics and structural realities of the municipal bond market, and which appropriately balances investor-protection interests with the need for efficient municipal markets and the economic impact of such proposals on all participants.

David Cohen

Managing Director and Associate General Counsel

SIFMA

December 09, 2014

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) has received approval from the Securities and Exchange Commission (SEC) to require municipal securities dealers to seek the most favorable terms reasonably available for their retail customers’ transactions. While investors are already protected from unfair pricing practices under long-standing MSRB rules, the new “best-execution” rule taking effect December 7, 2015 will establish explicit standards for how dealers handle and execute customer orders for municipal securities.

“Today, we reached an important new milestone in the municipal market,” said MSRB Executive Director Lynnette Kelly “Introducing a ‘best-ex’ standard will buttress pricing standards, promote fair competition among dealers and enhance market efficiency all for the benefit of retail investors in municipal bonds.”

The new rule is among several MSRB initiatives underway that are designed to enhance fairness and transparency in municipal securities transactions. In November, the MSRB released a proposal to require dealers to disclose certain pricing reference information on customer confirmations. This proposal and the new best-execution rule advance the vision outlined in the MSRB’s long-range plan for market transparency and align with recommendations in the SEC’s July 2012 report on the municipal securities market.

The best-execution rule will require municipal securities dealers to use “reasonable diligence” to identify the best potential trading venue for a particular security and then execute transactions in that venue to provide the customer with a price as favorable as possible under prevailing market conditions. The rule is modeled on a similar rule for the equity and corporate fixed income markets, but is appropriately tailored to the characteristics of the municipal securities market. Dealers will generally meet the new obligations by establishing and periodically improving their policies and procedures for handling and executing customer orders.

Notably, transactions with sophisticated municipal market professionals (SMMPs) are exempt from the rule, and its adoption, accordingly, is accompanied by amendments to related provisions to help ensure that only appropriate investors are treated as SMMPs.

The MSRB is providing dealers with a one-year implementation period to come into compliance with the new rule. During that time, the MSRB plans to provide dealers with practical guidance on the application of the rule.

The MSRB will host an educational webinar about the key provisions of the new rule on February 5, 2015 at 3:00 p.m. ET. Register for the webinar.

Date: December 8, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

WASHINGTON — The Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal to require muni dealers to seek the most favorable price possible when executing transactions for most investors.

The SEC approved the MSRB proposal on Friday after having received it form the board in August. The new amendments to MSRB Rule G-18 on execution of transactions, which carries a one-year implementation period, generally would require dealers to use “reasonable diligence” to determine the best market for a security and then buy or sell the security in that market so the resulting price to the customer “is as favorable as possible under prevailing market conditions.”

To meet their due diligence obligations, dealers would have to take into account a list of factors, including the character of the market for the security, the size and type of transaction, the number of markets checked, the information reviewed to determine the current market for the subject security or similar securities, the accessibility of quotations, and the terms and conditions of the customer’s inquiry or order.

The adoption of a best execution standard was among the recommendations in the SEC’s 2012 Report on the Municipal Securities Market, but some dealers were initially uncomfortable with the term. The Securities Industry and Financial Markets Association suggested an “execution with diligence” standard that the MSRB reviewed but declined to adopt.

Some market participants questioned the necessity of a best ex rule, because some dealers are already bound by fair dealing and fair pricing standards.

Muni dealers also expressed concern that sophisticated municipal market professionals, to whom they will not owe any new responsibility under the best execution rule, would have to provide a new affirmation stating that they are SMMPs and that they do not need or want the rule’s protection. SMMPs are institutional investors or individuals with assets of at least $50 million.

Firms have said getting new affirmations will be burdensome and problematic for their automatic systems. David Cohen, managing director and associate general counsel at SIFMA, said Monday that his group supports best-ex but remains concerned about the SMMP issue.

“SIFMA welcomes the SEC’s approval of the muni best execution rule,” Cohen said. “Raising the execution standard for retail investors in the municipal market has been a priority of SIFMA’s. However, we are concerned about the impact new SMMP affirmation requirements will have on liquidity. This may need to be evaluated over time.” In its approval order, the commission said the approach will be beneficial for the market.

“The commission believes that the proposed rule change will protect investors by helping to ensure that the exemption for dealers from the best-execution obligation for transactions with SMMPs (as well as the reduced dealer obligations related to time-of-trade disclosure and pricing) will apply only to transactions with SMMPs,” the SEC said.

Furthermore, while some commenters opposed certain aspects of the rule change, none pointed out any ways in which the proposal would be inconsistent with the federal securities laws, the SEC noted.

THE BOND BUYER

BY KYLE GLAZIER

DEC 8, 2014

WASHINGTON — The Municipal Securities Rulemaking Board’s proposal to extend gifts and gratuities regulation to municipal advisors may be too vague or over-reaching and should be reworked to establish uniform recordkeeping requirements, dealers told the self-regulator.

At the same time, a major non-dealer firm said the proposal should be used to fix a gap in the existing rule.

The MSRB proposed the amendments to its Rule G-20 on gifts and gratuities, which is already in place for broker-dealer advisors, in October. The rule currently prohibits a dealer from giving directly or indirectly any thing or service of value, including gratuities, in excess of $100 per year to a person if that gift is related to the muni securities activities of the employer of the recipient. The amendment would clarify that the gifts also cannot be related to muni advisory activities.

While market participants widely agree that MAs should be brought under these restrictions, there are concerns that some of the terms are not well defined or are vague enough to create potential regulatory gaps.

“We are concerned that the provision prohibiting reimbursement of entertainment expenses leaves too much room for interpretation and lacks clarity regarding the type of expenses that constitute ‘entertainment expenses’ versus expenses that constitute ‘normal and necessary meals’ and ‘normal travel costs,'” Bond Dealers of America chief executive officer Mike Nicholas wrote the MSRB in a comment letter.

Leslie Norwood, managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association, warned the MSRB that it might be overreaching in restricting dealers from using bond proceeds to reimburse them for expenses if the issuer wants such reimbursements. The MSRB cannot directly regulate issuers.

“If a municipal securities issuer would like to spend their bond proceeds in a manner that is not otherwise prohibited by state or local law, in theory we see no reason for the MSRB to prohibit such an expenditure,” Norwood wrote. “SIFMA’s members are concerned that this will become another area where regulators will hold dealers responsible indirectly for state and local issuer behavior that they cannot regulate directly.”

Both dealer groups said that recordkeeping requirements should be the same for both dealer and non-dealer MA firms. Under the proposed rules, dealers would need to preserve records for at least six years while non-dealer MAs would only have to do so for five years.

Public Financial Management, a large muni advisor firm, said the draft changes to G-20 continue to appear to leave a regulatory gap by not including elected and perhaps even appointed officials as people to whom the gift restrictions would apply. The rule refers to the “employer” of the person receiving the gifts, but PFM counsel Joseph Connolly wrote that elected officials are not often understood as “employees” in the traditional sense.

“If the board has made a deliberate choice to exempt gifts to elected officials — at the same time as it maintains an extensive structure to limit election-related contributions — the board has not explained the decision to create that disparity.”

The MSRB held a webinar on the proposal last month and has set up a web resource to provide education and news to MAs, many of whom are unused to be regulated by any agency. The Securities and Exchange Commission will need to approve the proposal before it can become effective.

THE BOND BUYER

BY KYLE GLAZIER

DEC 9, 2014 2:56pm ET

SIFMA submitted comments to the Municipal Securities Rulemaking Board (MSRB) in response to MSRB’s request for comments on draft amendments to MSRB Rule G-20, relating to gifts, gratuities and non-cash compensation given or permitted to be given by brokers, dealers and municipal securities dealers (dealers). The draft amendments are intended to apply Rule G-20 and the related record-keeping requirements of MSRB Rules G-8 and G-9 to municipal advisors.

SIFMA believes current standards set forth in MSRB Rule G-20 as they relate to dealers are strict enough to cover an entity with a fiduciary duty.

However, SIFMA and its members expressed concern about the prohibition of seeking or obtaining reimbursement for entertainment expenses from the proceeds of an issuance of municipal securities, and suggested additional minor changes to the draft amendments, including to the definition of “entertainment expenses” and having similar recordkeeping requirements for non-dealer municipal advisors and dealers.

Read the Letter.

WASHINGTON — Municipal bonds should be encouraged, not limited, because state and local governments face challenges financing projects through other means, Rep. Randy Hultgren said Friday.

Communities have used munis to improve their infrastructure after disasters, and they haven’t necessarily had other tools to finance the projects, he said. Localities aren’t getting many funds from the federal government and their states’ governments, the Illinois Republican said at the Government Finance Officers Association’s winter meeting.

Hultgren discussed big challenges that munis face at the federal level. The first is that President Obama in recent budget requests has proposed capping the value of the municipal bond tax exemption at 28%.

Another challenge is tax reform, Hultgren said. The proposal released by House Ways and Means Committee Chairman Dave Camp, R-Mich., would impose a 10% surtax on municipal bond interest for high earners. It also would eliminate the tax-exemption for new private-activity bonds.

Hultgren said he thinks Camp put out his plan, which was released in February and formally introduced in the House on Thursday, to see what kind of pushback he would receive. It’s important for people to be vigilant and explain the importance of the tax exemption for municipal bonds, Hultgren said, because if they don’t, the exemption may be seen as a tax preference that can be easily changed in tax reform.

The Congressman also said that dealing with regulatory agencies can be a challenge for state and local governments. Hultgren, who is on the financial services committee, said he is going to continue push for munis to be included in the definition of high-quality liquid assets in a federal banking rule that becomes effective Jan. 1.

“Excluding investment-grade securities from HQLA’s definition will decrease the demand for such securities,” and will hurt municipalities’ abilities to finance infrastructure projects, he said.

Hultgren said he has introduced two bond-related bills in the last few months, which he said after his remarks that he likely would reintroduce the bills early next year, in the new Congress.

One of the bills would increase the annual issuance limit for issuers of bank-qualified bonds to $30 million from $10 million. “This will, we think, help local, municipal governments and school districts access lower-cost borrowing,” he said.

The other bill would increase the maximum size of an industrial development bond issue and would allow more types projects to be financed with these bonds.

Hultgren also spoke about the $1 trillion spending bill that the House passed Thursday night. The congressman voted for the measure.

While the bill isn’t perfect, “I think it is important for us to get back to regular order as fast as we can, a real appropriation process,” he said.

Next year, both chambers of Congress will be controlled by Republicans, but there will not be enough Republican Senators to override a filibuster, and there still be a Democratic president. Hultgren said he thinks that a multi-year transportation bill is something that can get done even with a divided government.

Hultgren also said that he thinks Internet sales tax legislation could pass the House next year. A bill called the Marketplace Fairness Act — which would allow states to require out-of-state remote sellers, such as online retailers, collect sales taxes — passed the Senate last year but stalled in the House.

THE BOND BUYER

BY NAOMI JAGODA

DEC 12, 2014 3:21pm ET

Registration: What Every Municipal Advisor Needs to Know

While there has been considerable focus on initially registering as a municipal advisor, that is really just the first step in an on-going process. To remain in compliance with MSRB rules, all regulated entities must update their registration information with the MSRB as changes arise and also participate in an annual registration review and affirmation process. In 2014, municipal advisors had extra registration steps to complete as the Securities and Exchange Commission (SEC) transitioned from its temporary to permanent registration process. Below is a list of key steps that currently registered municipal advisors need to take.

Step One: SEC Permanent Registration

In order to continue conducting municipal advisory activities lawfully, municipal advisors are required to register with the SEC under the SEC’s final municipal advisor registration rule. All temporary registrations with the SEC are slated to expire on or before December 31, 2014. To request permanent registration, municipal advisors must submit SEC Form MA for the firm and a separate SEC Form MA-I for each natural person associated with the firm who is engaged in municipal advisory activities, as well as additional required documents, to the SEC’s EDGAR system. The SEC will issue a file number that begins with an 867-prefix for all permanently registered municipal advisor firms.

More information about the SEC’s municipal advisor registration requirements may be found here. Questions regarding registration with the SEC should be directed to the SEC’s Office of Municipal Securities at 202-551-5680.

Step Two: Update Registration with the MSRB

Once a municipal advisor receives a permanent SEC registration number with an 867-prefix, the municipal advisor is required to replace its temporary SEC registration number on file with the MSRB within 30 days, as with any change of information on the form. To replace the registration number or make other updates to MSRB registration information, municipal advisors must log into MSRB Gateway and amend their electronic MSRB Form A-12. The MSRB registration manual includes instructions for amending Form A-12. Questions regarding MSRB registration should be directed to MSRB Support at 703-797-6668.

Step Three: Municipal Advisor Professional and Annual Fee

MSRB Rule A-11 establishes a municipal advisor professional fee equal to $300 annually for each Form MA-I on file with the SEC. Any municipal advisor that was temporarily or permanently registered with the SEC on or before September 30, 2014 is required to pay the MSRB a transitional professional fee within 10 business days of acceptance of their permanent registration by the SEC. Read more about the transitional fee here.

Beginning in 2015, the MSRB professional fee for municipal advisors will be due by April 30 of each year. Municipal advisors will receive an invoice from the MSRB for the total amount due based on the number of Form(s) MA-I on file with the SEC as of January 31 of each year. Rule A-11 also establishes an annual registration fee of $500 for all regulated entities, including municipal advisors. This fee is due to the MSRB by October 31 each year.

Step Four: Annual Affirmation

Registered firms are required each January to log into MSRB Gateway to affirm or correct their registration information in MSRB Form A-12. The annual affirmation window opens January 1 and concludes January 27. The MSRB will email the primary and optional regulatory contacts at each firm to remind them of the affirmation period.

Upcoming Events

The MSRB will host a free educational webinar on the supervision and compliance obligations of municipal advisors under new MSRB Rule G-44 on Thursday, March 19, 2015 at 3:00 p.m. ET.

Register for the webinar.

Did You Know?

Municipal advisors can watch a recording of the 2014 Compliance Outreach Program for Municipal Advisors on the SEC website. The joint program of the SEC, the Financial Industry Regulatory Authority and MSRB addressed current issues in compliance and regulation and provided municipal advisor professionals a forum for discussions with regulators about risk management, regulatory issues and compliance practices.

Professional Qualification Update

In November 2014, the MSRB filed a proposed rule change with the SEC to create baseline standards of professional qualification for municipal advisors. The creation of uniform standards of competency will help ensure municipal advisors engaged in advisory work are qualified in their duties. The proposed amendments to the MSRB’s existing Rule G-3 would establish two classifications of municipal advisor professionals – representative and principal. The proposed rule change also will require each municipal advisor representative and principal to take and pass a qualification test.

To inform the development of this test, the MSRB conducted an electronic survey of the business activities of registered municipal advisors. In early 2015, the MSRB plans to approve and file with the SEC a final content outline for the exam and administer a pilot exam shortly thereafter.

Status of Municipal Advisor Rulemaking

As the MSRB’s regulatory initiatives for municipal advisors move from draft to final form, the MSRB will continue to provide information on their status. The information below is current as of December 5, 2014.

• Comments on draft amendments to MSRB Rule G-20 on gifts and gratuities are due to the MSRB no later than December 8, 2014.
• The MSRB filed amendments to its Rule G-3 on professional qualifications with the SEC in November 2014.
• MSRB Rule G-44 on supervision and compliance obligations was approved by the SEC and takes effect April 23, 2015.
• A revised version of proposed MSRB Rule G-42 on core standards of conduct for municipal advisors is expected to be filed with the SEC in early 2015.
• Proposed amendments to MSRB Rule G-37 on pay-to-play practices are expected to be filed with the SEC in early 2015.

NEW YORK – The Securities Industry and Financial Markets Association is seeking a legislative fix to the municipal advisor rule so that it is less burdensome for bank and broker-dealer firms, executives of a broker-dealer group said Thursday.

The plan was mentioned as SIFMA leaders commented on the state of the muni market during SIFMA’s annual press briefing in midtown Manhattan.

Kenneth Bentsen, SIFMA president and CEO, said his group wants Congress to ease the MA rule so that it does not impact dealer firms so much.

The MA rule, which was approved by the Securities and Exchange Commission last year and took effect July 1, puts into practice the Dodd-Frank Act’s requirement that firms providing advice to muni issuers have a fiduciary duty to put their clients’ interests first ahead of their own.

SIFMA has been critical of the SEC approach, arguing that it overstepped congressional intent to regulate previously unregulated MAs.

“We would prefer to see Congress go back and revisit that,” Bentsen said. “We’re dealing with a flawed rule. We’re trying to make the best of it.”

William Johnstone, chairman and chief executive officer at D.A. Davidson Companies and chair of SIFMA’s board of directors, said the rule has changed the way SIFMA members interact with muni clients, as firms must now be sure they have an exemption to the rule before offering advice about muni bonds.

“It’s had a significant impact on our operations in the municipal market,” he said.

Randy Snook, SIFMA’s executive vice president for business policies and practices, said lawmakers ought to allow firms to give their best advice to muni issuers and still underwrite those issuer’s bonds. Regulators have said that would be a violation of the rule.

“It’s just not a sensible construct,” Snook said.

“On the whole, 2014 has been a good year for the industry,” said Johnstone.

“The fixed income business this last year has been challenged.”

Johnstone said that muni business has been particularly tough for smaller and regional firms, which he said bear a heavier burden with regulatory costs relative to their sizes.

“We will continue to advocate for balanced regulatory reform,” Johnstone said.

SIFMA’s muni issuance survey, also released this week, showed continued weak issuance due to increased bank lending and state and local governments’ deferral of maintenance and improvements to capital projects.

THE BOND BUYER

BY KYLE GLAZIER
DEC 4, 2014 1:34pm ET

WASHINGTON — The Securities and Exchange Commission needs to come up with new ways to address public pension reporting problems and obtain more staff for municipal bonds, Commissioner Daniel Gallagher told The Bond Buyer on Monday.

In a wide-ranging interview conducted in his 10th floor SEC office, Gallagher focused in on the need for regulators to protect the huge majority of retail investors who populate the bond market.

A commissioner since 2011, Gallagher, a Republican, has been outspoken on muni issues for much of his tenure, particularly since the departure of SEC Commissioner Elisse Walter in 2013. He has publicly advocated for various muni market reforms, and remains particularly concerned that less sophisticated investors are not getting the disclosures they need to make informed decisions about the muni securities they buy or sell.

In May, Gallagher spoke to self-regulatory officials about his dissatisfaction with muni pension and other post-employment benefit disclosure, including recent Governmental Accounting Standards Board standard changes that he viewed as less than ideal. In that speech he called for a “disclosure baseline” based on a low-risk discount rate such as the U.S. Treasury yield curve.

This week, Gallagher said the SEC needs to figure out a way to get around the fact that it cannot force issuers to adhere to GASB standards.

“I think the commission more generally needs to think past GASB,” Gallagher said. “What other things can we do to incentivize muni issuers to use GASB standards? Because that’s one of the other maddening things, you can get GASB exactly right, and everyone can agree that the pension accounting standards are terrific, but not every issuer is going to use them.”

Gallagher said muni securities may still be a great product, but that many retail investors are buying bonds under woefully inadequate disclosure documents with undisclosed underfunded pensions.

“I just find that deplorable,” Gallagher said. “I think there’s just more that we can be doing with these issues.”

Asked about repeal of the Tower Amendment, Gallagher said, “I’m not going to hold my breath on that one. I’m more pragmatic.”

The Tower Amendment, which was added to the Securities Exchange Act of 1934 in the mid-1970s, prevents the SEC or the Municipal Securities Rulemaking Board from directly requiring issuer disclosures in connection with a bond offering. The SEC’s 2012 Report on the Municipal Securities Market recommended legislative action to grant the commission some authority to directly dictate aspects of issuer disclosure, and former SEC enforcement division lawyer Peter Chan said earlier this year that issuers might be better off if Tower were repealed.

Gallagher said that he would be hesitant to pile on more regulation of underwriters and other muni intermediaries, but remains confident the SEC can do something to improve disclosure of issuers’ major financial liabilities.

He is also a major advocate, along with fellow commissioner Michael Piwowar, of requiring dealers to disclose their markups in so-called “riskless principal” transactions. Last month the Municipal Securities Rulemaking Board and Financial Industry Regulatory Authority released complimentary proposals that would require dealers to reveal a “reference price” of a same day transaction for trades of retail size. Gallagher said that approach is not as good as true markup disclosure, and will need to be analyzed carefully.

“I think this is an improvement on the status quo,” Gallagher said. “I do think it’ll bring, on some level, more transparency to retail. But I do think we’ll need to analyze [it]. Assuming that these rules become final largely as proposed, I think we’ll have to monitor their impact and see if it’s really giving the benefit to investors that we’re looking for.”

“Is it exactly what I thought it should be? No. Is it a positive step forward? Yes.”

There are good arguments from dealers about why such disclosure could be problematic, including different views about how to define riskless principal trades, Gallagher acknowledged. But he added that broker-dealer representatives have personally shown him how they can, and in some cases do, disclose their markups on trade confirmations, proving that it can be done.

Enforcement The last two years have included several precedent-setting enforcement actions by the commission, including its first ever financial penalty extracted from a municipal issuer and multiple cases targeting muni officials directly. SEC Enforcement Chief Andrew Ceresney has publicly promised to ramp up muni enforcement even more, a move Gallagher said will be beneficial for market behavior.

“Once every ten years doing a couple muni cases I don’t think is going to send the right message to the community,” he said.

Targeting public servants for their roles in fraudulent offerings is tricky, Gallagher acknowledged, but it is a more powerful enforcement tool than a simple cease and desist order and will probably happen more and more often.

“You can’t go from zero to 60 on this kind of issue,” Gallagher said. “There’s been a pattern and practice for decades where the commission has focused on intermediaries. Traditionally we’ve afforded [public officials] some deference, which I think you’re seeing a move away from that. It’s really got to be the exceptional case where we can bring a fraud case against somebody. But you’ve seen obviously, recently, that we’re willing to do it. We clearly have shifted into that mode and I would think that would continue to increase.”

At the end of the day, the commission needs to devote more staff to munis, Gallagher said.

“We have five and a half people that cover, from a policy perspective, markets that combined are around $15 trillion,” Gallagher said of the SEC’s combined resources for both muni and corporate bonds. “And hugely retail.”

“We have 150 or so people focused on equities and options markets every day,” he pointed out.

“We all need to recognize that the fixed income markets have been on a bull run for decades,” he said. “Things have been going very well. But if they didn’t, if something happened, we’d be ill-prepared.”

“I think we need to resource these things here,” Gallagher continued. “Not because I think we need to regulate more. Not because I think we need to overlay the equity market structure into the fixed income market. We need to be savvier.”

Gallagher said criticism of the SEC’s oversight of asset managers has been largely driven by a perception that the SEC is not expert enough in that space to do that job effectively.

“The same thing applies in fixed income markets,” he said. “We’re just not sophisticated enough. As an institution, we don’t know enough about how the products trade, where they trade, what the incentives are in the market right now, what retail investors understand and what they don’t.”

The SEC’s muni office is in a transitional state, with five lawyers remaining following the departure of muni chief John Cross to the Treasury Department last month. Gallagher praised Cross’ work in attracting talent to the muni office, which was reconstituted as independent and reporting to the SEC chair under Dodd-Frank, but said such a small staff is too little to focus on munis.

“If we don’t have the staff looking at it, then the ideas aren’t going to float up,” Gallagher said. “Some people have said this seems like a top-down initiative. I’ve been talking about it a lot, Commissioner [Michael] Piwowar, [SEC chair Mary Jo White]. It seems like it’s coming top down. It’s not like the staff is resisting. We just don’t have 150 people that come in every day and think about these markets.”

THE BOND BUYER

BY KYLE GLAZIER
DEC 3, 2014 9:47am ET

A distressed suburb of Chicago will be allowed to go back to the municipal bond markets after it promised to take steps to avoid repeating previous episodes in which it raised money under false pretenses and misused millions of dollars, federal regulators said on Friday.

The city of Harvey, Ill., agreed not to sell municipal bonds for the next three years without first retaining independent counsel to tell investors the truth about what the money would be used for and how the city planned to repay its debts. In addition, Harvey agreed to hire a consultant to straighten out its troubled finances and to have an outside auditor certify that its financial statements were accurate instead of leaving investors to rely on the city comptroller’s word.

Until recently, Harvey employed an outside comptroller under contract, who gained an extraordinary degree of power over the city’s finances.

The settlement came five months after the Securities and Exchange Commission took the unusual step of going to federal court to keep Harvey from selling any more municipal bonds. The emergency order came in June as Harvey was preparing to raise money to help a developer build a supermarket. The city of about 25,000 residents, which is south of Chicago, was issuing the bonds under a federal provision that lets local governments share the value of their bonds’ tax exemption with commercial enterprises. The provision is supposed to promote the well-being of cities by giving companies a lower cost of capital when they agree to invest in worthy local developments.

Harvey’s case was the first time the S.E.C. had ever sought an emergency court order to stop a municipal bond sale. In its complaint, the S.E.C. said that Harvey had issued bonds fraudulently three times since 2008 and was likely to do so again without an injunction.

Harvey had told bond buyers that it was raising money to revamp a large dilapidated former Holiday Inn hotel and retail complex, which gained notoriety when it was used to film an indoor car-chase scene for the movie “The Blues Brothers.” The hotel site is near a busy stretch of interstate highway, and Harvey said the bonds would be repaid from a dedicated stream of occupancy and sales taxes that it would collect from travelers and shoppers who used the refurbished complex.

But the prospectus also said that the securities were “general obligation bonds,” which are repaid out of a municipality’s general revenue. The distinction is important, because general obligation bonds have long been marketed a city’s most reliable pledge and a safer investment than bonds repaid with proceeds from tolls or limited revenue — particularly the projected revenue of an unfinished nonessential city project. The false statements left Harvey’s investors bearing more risk than they knew of or were compensated for.

The S.E.C. said that even after raising about $14 million, Harvey had not done the necessary renovations but instead engaged in a complicated shell game in which some of the money was improperly transferred to the developer, who has since left the country, and some to the city comptroller, Joseph T. Letke.

Regulators said that the city council was told falsely that some of the payments were loans and that the dealings had clouded the title to the hotel property, which was now standing unusable by the highway, “with dangling wires and exposed studs.” In addition, regulators said the struggling city had used another part of the bond proceeds to meet its payroll and carry out general operations. Using long-term bond proceeds for day-to-day operations is widely seen as a sign of severe distress. The S.E.C. also said Harvey had not issued audited financial statements since 2008.

The S.E.C. said Mr. Letke was improperly paid $269,000 of the bond proceeds when he was working not only as the city’s comptroller but also as a financial adviser to the city on the bond sales and a consultant to the would-be hotel developer. It said Mr. Letke had failed to tell investors he had received this money, as required, or to update them on the hotel debacle and explain how the city would repay the bonds. Regulators also told the court that the name of Mr. Letke’s consulting firm, Letke & Associates had changed to Alli Financial, and that it continued to provide advisory and comptroller services to several other municipalities and private entities in the region south of Chicago.

The S.E.C. named Mr. Letke as a defendant in its complaint against Harvey last summer, asking the court to bar him, his companies and his employees from participating in future municipal bond sales. It also asked the court to freeze Mr. Letke’s assets and order him to give back the $269,000. That litigation is still pending. No one responded to messages seeking comment that were left at Mr. Letke’s firm, or with his lawyer, on Friday.

THE NEW YORK TIMES – DEALBOOK

By MARY WILLIAMS WALSH

DECEMBER 5, 2014 4:50 PM

Dec 5 (Reuters) – The Chicago suburb of Harvey has settled civil charges in an unusual case where federal regulators had rushed to obtain an emergency restraining order against a planned bond sale, the Securities and Exchange Commission said on Friday.

Under the settlement reached with the SEC on Thursday, Harvey will be required to obtain an independent consultant and undergo an audit, and the city faces certain restrictions on selling new debt.

In a complaint filed in June against the city and its comptroller, the SEC asked the U.S. District Court for the Northern District of Illinois to prevent Harvey from selling bonds and also demanded a jury trial.

Both were unusual requests in the commission’s current crackdown on the $3.7 trillion municipal bond market. By law, municipal bond issuers do not have to involve federal regulators in planned debt sales.

As part of the settlement, Harvey agreed to a final judgment forcing it to stop selling municipal bonds for three years unless it retains independent bond counsel. The litigation against the comptroller, Joseph Letke, is pending, the SEC said.

“These measures are designed to prevent future securities fraud by Harvey and to enhance transparency into Harvey’s financial condition for future bond investors,” the agency said in announcing the deal.

Starting in 2008, the city sold $14 million in bonds for the construction of a Holiday Inn that would be repaid from dedicated hotel-motel and sales tax revenues. It then diverted at least $1.7 million to fund its daily operations and also made $269,000 in undisclosed payments to Letke, the SEC alleged.

The SEC has described the city of 30,197 people as “in a desperate financial condition” and the hotel project as a “fiasco.”

Over the last two years, the SEC has tightened the vise on the municipal bond market, rapping cities, individuals and even states for not properly informing investors of the risks involved with certain municipal bonds.

Fri Dec 5, 2014 12:15pm EST

By Lisa Lambert and Sarah N. Lynch

(Editing by Susan Heavey)

A city outside Chicago settled with the U.S. Securities and Exchange Commission over charges it defrauded investors by misusing bond money raised for an ill-fated development project.

Harvey, which has about 25,000 residents, agreed to more oversight of its finances without admitting or denying the charges, according to documents filed in U.S. District Court in Illinois yesterday. The settlement still needs court approval.

The SEC alleged in June that Harvey deceived investors by paying salaries and other bills with money borrowed to build a Holiday Inn, which was supposed to help rejuvenate a city where more than one-third of its residents are in poverty. The SEC said the project was a “fiasco,” with the building a tattered shell with holes in the facade and gutted interiors.

At the time of the suit, the SEC obtained a court order blocking Harvey from another planned bond sale that the agency said misled investors.

States and cities typically settle cases filed by securities regulators, rather than challenge them in court.

A receptionist at Harvey Mayor Eric Kellogg’s office said he wasn’t in the office and referred questions to an outside publicist, who didn’t immediately return a request for comment on the settlement.

Bloomberg

By William Selway

Dec 5, 2014 10:50 AM PT

To contact the reporter on this story: William Selway in Washington at [email protected]

To contact the editors responsible for this story: Stephen Merelman at [email protected] Stacie Sherman

Just before speculation mounted four years ago that defaults would soar in the U.S. municipal-bond market, a school system in California’s San Joaquin Valley assured investors that it was making adequate financial disclosures.

It wasn’t. The Kings Canyon Unified School District hadn’t filed or was late in disclosing a half-dozen financial statements, a lapse it didn’t report in documents used to market about $7 million of bonds in November 2010.

The district in July became the first municipality to accept the U.S. Securities and Exchange Commission’s offer of leniency for borrowers that report by today any failures in providing adequate documentation to investors. It’s part of a push by the agency to pressure localities to comply with the laws in the $3.7 trillion market, where disclosure rules are more lax than they are for companies selling stocks and bonds.

“We’ve got to put municipals on the same level of disclosure that you have in other markets — and that’s what this is really all about,” said Richard Ciccarone, the chief executive officer of Hiawatha, Iowa-based Merritt Research Services LLC, which analyzes municipal finance.

Default Call

As the leniency program ends, borrowers may face fines if they’re charged with fraud.

The SEC has increased its focus on the municipal market since the credit crisis and 18-month recession that ended in June 2009. Those events helped push Jefferson County, Alabama, Detroit and three California cities into bankruptcy and left government pension plans reeling from investment losses. In a December 2010 interview on CBS Corp.’s “60 Minutes,” banking analyst Meredith Whitney forecast that there would be widespread defaults, a prediction that didn’t materialize yet helped trigger months of sales by individual investors.

The agency has settled with the governments of New Jersey, Illinois and Harrisburg, Pennsylvania, for misleading investors about their financial state. Last year, in a case against an agency in Washington state, the SEC levied its first fine against a municipal issuer that misled investors.

SEC enforcement director Andrew Ceresney told a meeting at the Securities Industry and Financial Markets Association in New York last month that the agency plans to impose fines more often in fraud cases against states and cities.

Bankers Too

The leniency program introduced in March is aimed at municipalities that fail to file timely reports on rating changes and other information of interest to investors, while claiming in bond documents that they do. It’s also open to the bankers who underwrote the debt. The SEC said borrowers could settle without fines if they turn themselves in. Banks’ penalties are capped at $500,000.

Elaine Greenberg, the former head of municipal enforcement at the SEC, said the program reflects regulators’ view that borrowers routinely neglect to disclose required information.

“There has been a perception at the SEC that there has been widespread failure by issuers as well as underwriters with regard to continuing disclosure obligations,” she said.

The SEC has limited power to compel states and cities to disclose information to investors because of curbs on its power that have been in place since the 1970s. It imposes the rules indirectly by forbidding underwriters from selling securities unless governments agree to provide investors ongoing financial updates.

Company Contrast

Analysts, investors and others told the SEC that some municipalities don’t report pertinent information or take months to do so, according to a 2012 report from the agency.

While corporations must file quarterly financial statements and have four business days to report information relevant to investors, municipalities only submit annual reports and agree to disclose material events within 10 business days.

Michael Decker, who follows municipal-bond regulation for Sifma, which represents banks, said dozens of underwriters have sought leniency under the SEC offer. The institutions had until Sept. 10 to do so.

“I haven’t talked to a firm that hasn’t participated,” he said.

Kevin Callahan, an SEC spokesman in Washington, declined to comment on how many submissions the agency has received. The SEC’s Ceresney said during the November Sifma panel that the agency had received a “tremendous number of submissions.”

South Dakota

Mitchell, South Dakota, a city of 16,000 people about 70 miles (113 kilometers) west of Sioux Falls, is among them. It reported that it filed an annual financial report late after being told of the breach by its underwriter, Dougherty & Co., said Marilyn Wilson, who handled the city’s finances until her retirement last month. Pam Ziermann, the chief compliance officer for the Minneapolis-based underwriter, declined to comment.

“We are clearly not the only one who is going to do this,” Wilson said.

Greenberg, the former SEC official, who’s now a partner at Orrick, Herrington & Sutcliffe LLP in Washington, said the program is making public officials scrutinize whether they’ve been flouting the law.

“It has caused all of the market participants to look seriously at their continuing disclosure obligation,” she said. “This is already leading to change.”

Staffing Turnover

Regulators have taken other steps to improve the flow of information to investors in the municipal market. Since 2009, issuers have filed documents to a centralized, public website run by the Municipal Securities Rulemaking Board, instead of private vendors. The SEC in 2012 issued guidance to banks instructing them to review the disclosure practices of governments whose bonds they underwrite.

“Things have improved considerably in the muni market in the last couple of years in terms of the amount of information that is available,” said Gary Pollack, the New York-based head of fixed-income trading at Deutsche Bank AG’s private-wealth management unit, which manages $7 billion of munis. “Anything that improves the issuers’ timeliness in terms of disclosure of their financial well-being is positive.”

The SEC program may push the market further in that direction. When the Kings Canyon district settled with the SEC, it agreed to comply with disclosure rules within 180 days and make sure it doesn’t break the law again.

John Quinto, the district’s business manager, said the failures resulted from staff turnover, not an effort to deceive.

“We weren’t out to purposely mislead or do any harm,” he said. “That doesn’t relieve us of the responsibility.”

Bloomberg Muni Credit

By William Selway

Dec 1, 2014 8:47 AM PT

To contact the reporter on this story: William Selway in Washington at [email protected]

To contact the editors responsible for this story: Stephen Merelman at [email protected] Mark Tannenbaum, Alan Goldstein

WASHINGTON – The Municipal Securities Rulemaking Board plans to begin collecting and publicly disseminating certain disclosures related to municipal asset-backed securities on its EMMA site in January.

Many of the disclosures are expected to be related to the housing market.

In a notice posted on Wednesday, the board said the disclosures will be made available on EMMA beginning between Jan. 9 and Jan. 31. It said it will later announce a precise date within this period in a separate notice to be posted on its website.

The MSRB action facilitates Securities and Exchange Commission rules adopted in 2011, under the Dodd-Frank Act, that requires issues to make certain representations and warranties be made for ABS.

The board filed proposed rule changes with the SEC, with the provision that they become effective upon filing.

THE BOND BUYER

BY LYNN HUME

NOV 26, 2014 11:27am ET

WASHINGTON – The Securities and Exchange Commission is seeking public comments on the collection of disclosure information under its Rule 15c2-12, but may get proposed revisions to the rule and criticism that its estimated burdens for compliance are unrealistically low, some sources said.

The request for comments, published in The Federal Register Nov. 18, is required by a federal law aimed at reducing regulatory paperwork. Under the Paperwork Reduction Act of 1995, federal agencies are required to publish a notice describing, among other things, the “collection of information”, the current estimate of the number of respondents providing the information, annual burden imposed on each respondent, and total burden for all respondents. The law specifies a 60 day comment period. The Office of Management and Budget must approve this collection of information every three years.

But the request comes during a time of intense scrutiny of Rule 15c2-12, which requires dealers to review issuers’ official statements and reasonably determine that the issuer has contracted to disclose annual financial and operating information, as well as material event notices, on the Municipal Securities Rulemaking Board’s EMMA website. Issuers’ OS’ must state whether the issuer has complied with its continuing disclosure agreement during the last five years.

The rule is the basis for the SEC’s Municipalities Continuing Disclosure Cooperation initiative, which provides both issuers and underwriters with reduced penalties if they fess up to offering bonds under OS’ in which they falsely claimed to be compliant with their continuing disclosure agreements.

Earlier this month, Richard Lehmann, president of Miami Lakes, Fla.-based Income Securities Advisor, sent a letter to SEC chair Mary Jo White urging the commission to tighten 15c2-12 so that investors would be better protected from issuers who provide less than fulsome disclosure.

Bill Oliver, industry and media liaison at the National Federation of Municipal Analysts, said the opportunity to comment could set the stage for amendments to 15c2-12. The commission previously amended the rule two times since it adopted continuing disclosure requirements in 1994, with one of those making EMMA the sole recipient of issuer disclosures. But the SEC’s 2012 Report on the Municipal Securities Market recommended revising the rule further to require OS’ to include more information and mandating that OS’ include agreements for more expansive ongoing disclosure.

“It was clearly on the table in the report,” Oliver said, adding that this comment period could provide a chance for further discussion on the topic.

The notice includes the SEC’s estimates for the burden of compliance with the rule. The SEC estimated that 20,000 issuers, 250 dealers, and the MSRB will spend more than 115,000 hours per year complying with 15c2-12. Issuers will require about 45 minutes to prepare and submit material event notices to the MSRB, the SEC estimated, and about 30 minutes to prepare and submit notices that it had failed to file earlier notices. Roughly 65% of issuers use designated agents to handle the submissions for them, the SEC estimated, and the issuer community probably spends about $9.75 million each year paying for those services, the commission guessed.

Some market participants took issue with some of the estimates, particularly one that states the broker-dealer community spends only 300 hours annually on compliance with 15c2-12. That would mean an estimate of 1.2 hours per year for each dealer, which sources said seemed extremely low.

The comments can focus on whether the information collected under 15c2-12 is necessary for the SEC to fulfill its mission, as well as on the SEC’s estimates and on ways the commission could improve the way the rule works.

THE BOND BUYER

BY KYLE GLAZIER

NOV 25, 2014 4:36pm ET

The Municipal Securities Rulemaking Board (MSRB) today announced the effectiveness of a change to the Electronic Municipal Market Access (EMMA®) service to add disclosures related to municipal asset-backed securities required under Securities Exchange Act Rule 15Ga-1. The change will provide for the collection and public dissemination of certain disclosures related to municipal asset-back securities.

Read the regulatory notice.

View the full press release.

In the recent decision, Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., 764 F.3d 210 (2d Cir. 2014), the Second Circuit held that nearly-identical forum selection clauses in broker-dealer agreements between the broker-dealers/underwriters of auction rate securities (“ARS”) and the public financing authorities who issued the ARS superseded the Financial Industry Regulatory Authority, Inc. (“FINRA”) rule mandating arbitration between a customer and member. In so holding, the Second Circuit potentially has opened an avenue for firms seeking to litigate – rather than arbitrate – customer disputes subject to FINRA’s mandatory arbitration rule.

In Golden Empire, the Second Circuit decided two district court cases, Goldman Sachs & Co. v. Golden Empire Sch. Fin. Auth., 922 F. Supp. 2d 435 (S.D.N.Y. 2013) and Citigroup Global Mkts. Inc. v. N.C. E. Mun. Power Agency, No. 13 CV 1703 (S.D.N.Y. May 10, 2013). In those cases, the parties’ broker-dealer agreements (“BDAs”) included a forum selection clause providing that, “all actions and proceedings arising out of this [BDA] or any of the transactions contemplated hereby shall be brought in the United States District Court in the County of New York and that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such court.” In 2012, the municipal authorities instituted separate FINRA arbitrations in connection with the ARS market collapse during the financial crisis. Goldman Sachs and Citibank then sought to enjoin those arbitrations in the Southern District of New York. In both cases, the district court found that the forum selection clauses in the BDAs superseded FINRA’s Rule 12200 governing arbitration.

In affirming the decisions below, the Second Circuit noted that whether similar forum selection clauses supersede the mandatory obligation to arbitrate under FINRA Rule 12200 “has been the subject of litigation in multiple circuits, with decidedly mixed results,” highlighting the Ninth Circuit decision, City of Reno v. Goldman Sachs & Co., 747 F.3d 733 (9th Cir. 2014), holding that “such a forum selection clause supersedes Rule 12200,” and contrasting the Fourth Circuit decision, UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), holding that “a nearly identical forum selection does not supersede Rule 12200.” The Second Circuit held that “an agreement to arbitrate is superseded by a later-executed agreement containing a forum selection clause if the clause specifically precludes arbitration, but there is no requirement that the forum selection clause mention arbitration.”

The Second Circuit also distinguished an earlier case, Bank Julius Baer & Co. v. Waxfield Ltd., 424 F.3d 278 (2d Cir. 2005), where it held that “an arbitration agreement was not superseded by an agreement providing that a bank’s customer submit to the jurisdiction of any New York State or Federal court’ and ‘agrees that any Action may be heard’ in such court” by holding that the “subsequent agreement was not exclusive of any rights or remedies provided under any other agreements.”

The Second Circuit also rejected the municipal authorities’ arguments that the BDAs did not cover their entire relationship with the broker-dealers/underwriters and that, in any event, the language in the forum selection clause, “all actions and proceedings,” did not include arbitrations. The Second Circuit explained that the forum selection clauses in the BDAs were broadly worded and plainly included the ARS issuances and held that “all actions and proceedings” must be interpreted based on its plain meaning; arbitrations are regularly described as “proceedings” by the U.S. Supreme Court, the Second Circuit, New York state courts and the FINRA rules. The Second Circuit concluded by noting its disagreement with the Fourth Circuit’s conclusion in Carilion Clinic, rejecting that District’s reasoning that “if ‘all actions and proceedings’ includes arbitration proceedings, then ‘the paragraph becomes nonsensical’ because it would require arbitration proceedings to be ‘brought’ in federal court.”

On September 4, 2014, the municipal authorities filed a motion to stay issuance of the mandate for 90 days to file a petition for a writ of certiorari with the U.S. Supreme Court with the Second Circuit, which was granted on September 16, 2014. In their motion, the municipal authorities argued that their writ of certiorari would present three substantial questions to the Supreme Court:

1. the Second Circuit’s opinion conflicts with opinions from other circuits that apply a presumption in favor of arbitration when a party claims a broad arbitration agreement is waived or superseded through a subsequently executed forum selection clause that does not specifically reference arbitration;
2. the Second Circuit’s “recognized” split with the Fourth Circuit decision; and
3. the Second Circuit’s opinion is contrary to Supreme Court precedent and pro-arbitration policies of the Federal Arbitration Act.

Notably, the municipal authorities in City of Reno had previously filed a petition for a writ of certiorari with the Supreme Court on August 7, 2014, making arguments similar to those raised by the municipal authorities in Golden Empire. Supreme Court Case No. 14-146. On November 10, 2014, the Supreme Court denied that petition. Though the Golden Empire municipal authorities have until December 15, 2014 to file their petition for a writ of certiorari with the Supreme Court, it seems unlikely that the Supreme Court will grant their petition so soon after denying the petition for a writ of certiorari in City of Reno.

Given the pro-claimant shift that FINRA arbitration rules have taken in recent years, if left undisturbed, the Second Circuit’s decision in Golden Empire has the potential to remove from FINRA’s purview any dispute where the parties agreed to a forum selection clause like the one in Golden Empire. It remains to be seen whether firms will now elect to attempt to expand this apparent carve-out from mandatory arbitration to a larger group of potential disputes with customers.

Last Updated: November 20 2014

Article by David A. Picon and Massiel Pedreira

Proskauer Rose LLP

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

As the December 1, 2014, deadline approaches for governments to participate in the SEC Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the GFOA’s Committee on Governmental Debt Management has released a final alert to provide guidance to governments on the initiative. MCDC, a voluntary program announced by the SEC on March 10, 2014, provides government issuers and underwriters with the opportunity to self-report instances of material misstatements in bond offering documents regarding the issuers’ prior compliance with its continuing disclosure obligations. While the program is voluntary, the GFOA raised a number of concerns with the SEC (see July 23, 2014, advocacy letter), including concerns about the limited time that governments would have to review instances of material misstatements reported to the SEC by underwriters participating in the initiative.

On August 1, 2014, the SEC’s Enforcement Division announced that it would extend the deadline for state and local government issuers to participate in the MCDC Initiative from September 10, 2014, to December 1, 2014. The deadline for underwriters to participate was not extended beyond September 10, 2014. The extended deadline provides state and local governments with nearly three months after underwriters have submitted their findings to the SEC for governments to communicate with underwriters, review and determine the accuracy of their findings, and discuss whether or not to dispute the findings. The GFOA’s alerts on the initiative recommend that governments use this time to have these discussions with their underwriters, and determine whether or not to participate in MCDC. Beyond this recommendation, the newly issued alert also urges governments to carefully consider the consequences of self-reporting under the initiative. For example, though the terms of the initiative preclude SEC from imposing monetary fines on participating issuers, the SEC reserves the right to pursue separate enforcements against individuals within a government who it deems to be culpable of the misstatements. Additional information on individual liability and standardized settlement terms under the initiative are listed in Appendix A in the GFOA’s original MCDC Alert. All three of GFOA’s alerts on this initiative are available here.

Tuesday, November 18, 2014

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) are hosting a joint educational webinar on companion rule proposals that would require disclosure of pricing reference information on customer confirmations for transactions in fixed income securities. The free webinar will take place Thursday, December 18, 2014 at 3:00 p.m. ET. The goal of the webinar is to help market participants submit meaningful comments in response to the rule proposals.

Register for the webinar.

Read the MSRB’s rule proposal.

Read FINRA’s rule proposal.

During the webinar, staff from the MSRB and FINRA will review the organizations’ respective proposals, which are substantially similar but seek input on factors unique to the corporate and municipal bond markets. Under the two proposals, bond dealers in retail-sized fixed income transactions would be required to disclose on the customer’s confirmation the price of certain same-day principal trades in the same security, as well as the difference between this reference price and the customer’s price.

The MSRB and FINRA proposals have asked for input on likely economic implications and alternative regulatory approaches, including a potential markup disclosure requirement targeting trades that could be considered riskless principal transactions. Comments should be submitted to the MSRB and FINRA no later than January 20, 2015.

Date: November 25, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today filed a proposed rule change with the Securities and Exchange Commission (SEC) to create baseline standards of professional qualification for municipal advisors. The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the MSRB with developing professional standards as part of a comprehensive regulatory framework for municipal advisors.

“The creation of uniform standards of competency will help ensure municipal advisors engaged in advisory work are qualified in their duties,” said MSRB Executive Director Lynnette Kelly. “The MSRB’s proposed standards aim to protect the interests of state and local governments and other municipal entities that rely on the services of municipal advisors, as well as the investing public.”

The proposed amendments to the MSRB’s existing Rule G-3 on professional qualifications establish two classifications of municipal advisor professionals, representative and principal, with firms required to designate at least one principal to oversee the municipal advisory activities of the firm. The proposed rule change also will require each municipal advisor representative and principal to take and pass a qualification test. The MSRB currently is developing the content outline for the test and plans to administer a pilot exam in 2015.

“Given the significant changes that accompany a new regulatory regime, the MSRB believes it is important for all municipal advisor representatives, regardless of their years of experience or other certifications, to take the exam,” Kelly said.

The MSRB recently received SEC approval to create supervision and compliance obligations for municipal advisors. The MSRB also plans to file a proposal for SEC approval to create core standards of conduct for non-solicitor municipal advisors. Additionally, the MSRB plans to file amendments to extend the MSRB’s pay-to-play rule for dealers to municipal advisors. The MSRB has also proposed extending its existing gifts rule for dealers to include municipal advisors.

For up-to-date information on the MSRB’s professional qualifications program and other rulemaking for municipal advisors, visit the Resources for Municipal Advisors section of the MSRB’s website.

Date: November 19, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

WASHINGTON—A Federal Reserve plan that could stop big banks from owning oil pipelines, metals warehouses and other physical-commodity assets is sounding alarm bells hundreds of miles from Wall Street.

Small-town officials from Alabama, Louisiana, North Carolina and other states are warning of unintended consequences from the Fed’s proposal, telling lawmakers and regulators it could prevent municipalities from delivering natural gas to tens of thousands of customers.

The pushback threatens to complicate an already thorny issue, with mayors and other local officials descending on Capitol Hill to defend the big banks in lawmakers’ cross hairs.

At issue is a Fed proposal that could impose restrictions on banks’ activities in physical-commodity markets like aluminum and oil. The Fed, pressed by lawmakers, has become concerned that banks’ commodities ownership has expanded beyond what regulators originally envisioned and could pose risks to the firms and the financial system.

On Thursday, the Senate Permanent Subcommittee on Investigations begins a two-day hearing on whether banks like Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley should be restricted from owning or trading physical commodities. The subcommittee has been investigating whether banks’ participation in the market influenced prices and harmed consumers. Democratic lawmakers argue such activity—particularly banks’ ownership of power plants, shipping containers and metals warehouses—creates the potential for anticompetitive behavior.

One concern of lawmakers is banks that warehouse aluminum or other metals are inflating prices by holding on to it for longer than necessary. The banks have denied those allegations. The issue is expected to be a focus of Thursday’s hearing.

In the past year, some big banks such as J.P. Morgan have retrenched from the physical-commodities business amid tighter regulation and capital constraints.

A coalition led by Sheldon Day, the mayor of Thomasville, Ala., and Al Bean, co-general manager of Alabama’s Clarke-Mobile Counties Gas District, is warning that any crackdown will ripple far beyond Wall Street. The group has spent the past few months raising the issue with staff of at least a dozen senators, including Sen. Richard Shelby (R., Ala.), who is expected to be the next chairman of the powerful Banking Committee, and Sens. Sherrod Brown (D., Ohio) and Elizabeth Warren (D., Mass.), whose criticism helped prompt the Fed’s proposal.

A spokeswoman for Sen. Mary Landrieu (D., La.), whose staff met with the group this summer, said the senator “has directed her staff to look into the issue.”

On Monday, the group met with staff from the Senate Permanent Subcommittee on Investigations to raise concerns. In July, they met with Fed General Counsel Scott Alvarez for 90 minutes, according to those who attended.

“Like everyone else, we want a safe banking system but this has become part of our business over the last 10 to 12 years,” Mr. Day said.

Mr. Bean said the restrictions would “curtail or end our ability to engage in vital natural-gas transactions.” Without Wall Street firms in the market, he said, municipalities would have trouble finding a counterparty that’s regarded as safe by credit-ratings firms and could also handle large contracts.

After Congress deregulated the natural-gas industry in the 1990s, municipalities banded together to create public gas systems to increase their purchasing power. They quickly realized they could save money and hedge against price swings by locking in part of their gas supply in a long-term contract.

Energy companies like Enron Corp. were initially financiers of such deals. After that company’s collapse in 2001, Wall Street banks—freer to engage in commodities markets after another deregulation law passed in 1999—have filled the void.

Municipal gas districts began engaging in prepaid gas transactions, a strategy in which they issue tax-free bonds and use the proceeds to prepay for natural gas that a bank promises to deliver over the long term, typically 20 years or longer. The bank, which profits from the prepayment, will then hedge against its long-term risks, including price fluctuations and supply. There have been more than $20 billion of gas prepayment transactions over the past decade, according to industry lawyers.

People familiar with the matter said the Fed was initially unaware the rule could affect municipalities’ ability to get long-term natural-gas contracts until it was brought to the regulator’s attention.

The proposal also could restrict other types of activities. “Recent disasters involving physical commodities demonstrate that the risks associated with these activities are unique in type, scope and size,” the Fed said in its January proposal.

In particular, the Fed is concerned about disasters like the Deepwater Horizon spill in 2010. BP PLC has paid more than $40 billion in cleanup and legal costs and continues to fight in U.S. courts to limit further payments.

The Fed is trying to determine what risks a bank faces when it finances or trades in commodities like oil and natural gas, and whether it poses any threat to financial stability. The Fed wants to understand whether a bank would be liable if, for example, a pipeline carrying natural gas or oil that it was contractually obligated to deliver exploded or ruptured, causing damage or deaths, according to the proposal.

Congressional aides said lawmakers didn’t intend to prohibit natural-gas trading and financing.

“The ownership of the power plants and the shipping containers and warehouses, those are the things we had the biggest concerns about from a systemic risk and market manipulation perspective,” said a congressional aide to a top Democrat. “The other stuff, the trading and financing deals, we’re not saying banks get out of that stuff entirely.”

THE WALL STREET JOURNAL

By DEBORAH SOLOMON and RYAN TRACY

Nov. 17, 2014 5:49 p.m. ET

Write to Deborah Solomon at [email protected] and Ryan Tracy at [email protected]

Charles Schwab Corp. said in a court filing it’s negotiating with the New York attorney general to resolve claims it falsely described auction-rate securities as liquid investments without disclosing the risks.

The San Francisco-based brokerage was sued by Andrew Cuomo in 2009, when he was attorney general, on behalf of investors who bought the securities. Schwab was accused of engaging in “fraudulent and deceptive conduct” and promoting auction-rate securities — municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions — as safe, cash-like investments.

A trial judge in Manhattan, Justice O. Peter Sherwood of New York Supreme Court, granted Schwab’s motion to dismiss the case in 2011. An appeals court reinstated two of the four claims in the case in August 2013, securities fraud allegations based on the state’s Martin Act, saying the state had presented enough evidence for a trial.

Faith E. Gay, a lawyer with Quinn Emanuel Urquhart & Sullivan LLP representing Schwab, asked Sherwood in a letter filed yesterday to remove two appearances from his calendar while the parties discuss a settlement. The parties are hopeful that the talks will resolve the matter, Gay wrote.

Matt Mittenthal, a spokesman for state Attorney General Eric Schneiderman, declined by phone to comment immediately on the filing.

Global Collapse

The $330 billion worldwide market for auction-rate securities collapsed during the 2008 credit crunch as potential buyers vanished. The crisis sparked regulatory investigations and lawsuits alleging that underwriters and brokers had falsely promoted auction-rate securities as safe, cash-like investments.

Schwab argued that the suit didn’t allege statements that were false when made or identify who made the misstatements, when and where they were made or how they were misleading, according to Sherwood’s order dismissing the case.

Sherwood said the suit was “devoid of any allegation of misrepresentations made that were untrue when made,” noting that the attorney general’s office spent more than a year investigating before filing the suit.

The appeals court said Sherwood based his conclusion on a finding that there had been no failures in the auctions in the 20 years preceding August 2007 and erroneously evaluated the merits of the claims.

Misapplied Law

The appeals court upheld Sherwood’s decision to dismiss the first claim in the suit, saying that the statute upon which it is based authorizes the attorney general to seek injunctive relief and other remedies only in cases that involve persistent fraud or illegal activity. The appeals court also agreed with Sherwood on dismissal of the fourth claim, saying the state’s general business law doesn’t apply to securities transactions.

The case is People of the State of New York v. Charles Schwab & Co., 453388/2009, New York State Supreme Court, New York County (Manhattan).

BLOOMBERG

By Chris Dolmetsch

Nov 20, 2014 2:12 PM PT

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at [email protected].

To contact the editors responsible for this story: Michael Hytha at [email protected]. Charles Carter, Andrew Dunn

WASHINGTON — Many issuers mulling whether to self-report disclosure violations under a Securities and Exchange Commission initiative will probably weigh their decisions right down to the deadline, and will not see any further guidance from the SEC, a muni law expert told market participants Tuesday.

John McNally, a partner at Hawkins Delafield & Wood in Washington, made the prediction at The Bond Buyer’s Transportation Finance/P3 Conference here.

Issuers are wrestling with whether to self-report under the Municipalities Continuing Disclosure Cooperation initiative. MCDC allows both issuers and underwriters to get favorable settlement terms if they voluntarily report, for any bonds issued in the last five years, any time they misled investors about their compliance with their continuing disclosure obligations.

The deadline for underwriters to self-report incidences of noncompliance was in September, and the SEC has said many firms participated. The deadline for issuers is Dec. 1.

“I’m expecting this will go right to the wire,” McNally said, adding that he continues to get many calls from issuer clients seeking guidance on their reporting considerations. McNally was the principal author of a National Association of Bond Lawyers paper released earlier this year that laid out an analytical framework issuers and their lawyers could use as an aid in deciding whether or not to self-report.

Bond lawyers, issuers, and underwriters have all repeatedly called for the SEC to offer some sort of guidance on what the commission might consider a “material” misstatement under the MCDC. The Supreme Court has held that information is material if knowing it would influence the decision of a reasonable investor to buy or sell a bond. But the SEC has declined to say anything on that front.

“The SEC will never give guidance on what is material for an antifraud purpose.” McNally told the group. He and others have publicly said that the SEC could offer MCDC guidance without speaking about materiality for fraud purposes. They have also suggested that the SEC release an MCDC settlement with an underwriter and use that as an opportunity to provide some guidance McNally told conference attendees that he does not expect either of those things by the deadline.

“We’re not going to hear from them on materiality,” he said. “We’re not going to see an enforcement action between now and Dec. 1.”

McNally also discussed the municipal advisor rule with Michael Decker, a managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, as well as Lawrence Sandor, deputy general counsel at the Municipal Securities Rulemaking Board.

Decker told issuers in attendance to expect underwriters to take great care to avoid being roped in as MAs, which owe a fiduciary duty to the state and local governments to which they offer advice. He warned underwriters will probably ask them to sign many documents they have not seen in the past. Underwriters, which are exempted from being MAs if issuers have their own independent registered MAs advising them, have been asking issuers to sign affirmations that they have IRMAs and that the underwriters can therefore provide advice freely without worrying about becoming MAs.

“What you will see under the rule going forward is bankers asking you to execute documents that you haven’t had to execute before,” Decker said.

Sandor said that the MSRB, which is working on several rules to compliment the year-old SEC MA registration rule, has made an effort to provide long comment periods and plenty of educational outreach about the new regulatory regime.

The conference began Nov. 16 and concluded Tuesday.

THE BOND BUYER

BY KYLE GLAZIER

NOV 18, 2014 3:21pm ET

The Securities and Exchange Commission (“SEC”) is continuing its scrutiny of the municipal market and using provisions of the Securities Exchange Act of 1934 previously unused in the municipal market to bring enforcement actions against individual public officials. On November 6, 2014, the SEC announced that it had charged the City of Allen Park, Michigan (“City”), and two city officials with fraud with respect to the City’s $31 million general obligation limited tax bonds issued in 2009 and 2010 (“Bonds”).

For the first time, the SEC has charged a municipal official as a “control person” under Section 20(a) of the Securities Exchange Act of 1934. This provision was enacted to prevent high-level officials from hiding behind lower-level officials. The SEC alleges that the former mayor of the City, Gary Burtka, directly or indirectly controlled both the City and the former city administrator, Eric Waidelich, when the City omitted material facts that rendered statements and disclosures in the City’s offering materially misleading.

In 2008, the City entered into a public-private partnership to finance, in part, with the proceeds of the Bonds, a $146 million movie studio project (“Project”) to be run by a Hollywood producer (“Producer”). The Bonds were “double-barreled” bonds set to be serviced with revenues from the Project and the City’s tax revenue. By the time the Bonds were issued the City was aware that it could not keep its commitment to donate land to the Project, and therefore the Producer chose to withdraw his financial support for the Project. As a result the City faced a $2 million budget deficit for Fiscal Year 2010 and lost a major source of revenue for the Bonds. The City failed to disclose any of these facts in its offering documents and provided outdated budget information. The SEC found that the City’s offering documents related to the Bonds contained false and misleading statements about (1) the scope and viability of the Project, (2) the financial condition of the City and (3) the City’s ability to service the Bonds.

Burtka was charged despite not preparing or signing the offering documents, which were primarily prepared by Waidelich. In charging Burtka individually under Section 20(a), the SEC alleged that Burtka championed the Project, making numerous public pronouncements about it that were materially misleading, and was in a position to control the actions of the City and Waidelich. As mayor, Burtka attended meetings where the Project was discussed and never mentioned the various problems plaguing the Project.

Without admitting or denying the SEC’s findings, the City, Burtka and Waidelich have agreed to settle the SEC’s charges. Burtka has agreed to pay $10,000 to settle. As part of its settlement, the City has agreed to a cease and desist order from the SEC. The terms of the City’s settlement include the adoption of a written disclosure policy and the retention of disclosure counsel who will consult on future offering documents and provide training to all personnel involved in the City’s bond offering and disclosure process.

In addition to increased scrutiny generally, the SEC’s Division of Enforcement (“Division”) has stated publicly that it plans to look for opportunities to bring charges against individuals who participate in violating federal securities laws. The Division plans to increase its focus on pension fund abuses, pay-to-play violations and undisclosed conflicts of interest. The director of the Division recently stated that he believes “the most effective deterrent is individual liability.” The SEC hopes that its increased enforcement efforts will alter market behavior. Issuer officials who want to cast their municipality’s finances or economic development projects in an uncritical positive light should reassess that position in view of the SEC’s recent actions and pronouncements.

The attorneys in Day Pitney’s Municipal Finance group routinely counsel clients on proactively addressing compliance with their disclosure obligations. Please feel free to contact any of the attorneys on the right of this advisory if you would like to discuss this advisory or your disclosure obligations.

Last Updated: November 22 2014

Article by Judith A. Blank and Kristin S. Burgess

Day Pitney LLP

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

Nov 21 (Reuters) – A large number of U.S. municipalities and bond underwriters have reported through a federal program that they violated securities disclosures law, with many revealing they failed to give investors material information, a top securities cop said on Friday.

Issuers face a Dec. 1 deadline to report disclosure violations to the Securities and Exchange Commission in the regulator’s latest stab at strengthening regulation of the $3.7 trillion municipal market.

In the last two years, the SEC has charged cities, school districts and even a state with failing to disclose required information. Last March it launched an initiative, called MCDC, where issuers and underwriters could self-report inaccurate statements in bond documents and receive favorable settlement terms. Underwriters had until September to come forward.

A large number have reported, said SEC Enforcement Director Andrew Ceresney on the sidelines of an American Bar Association meeting. He declined to give an exact count. Next year the SEC plans on “bringing cases under our MCDC initiative,” he told the meeting.

He bristled when an audience member said MCDC cases appear to involve “immaterial footfalls,” and not serious violations.

“Our sense so far is that there are material violations, many material violations,” Ceresney said.

Next week, smaller issuers could flood the SEC with completed questionnaires showing they made misstatements in sale documents.

Then, the SEC will likely review submissions and issue cease-and-desist orders, said Bill Daly, federal liaison for the National Association of Bond Lawyers.

“We’re only about halfway through,” he said.

By law, issuers must describe in bond sale documents when they did not comply with federal disclosure requirements within the previous five years

Some question the initiative’s value.

It requires issuers to scour for documents that were posted before the Municipal Securities Rulemaking Board centralized disclosures on a single web platform, said Dustin McDonald, director of the Government Finance Officers Association’s federal center. Before 2009, issuers mailed paper filings to about a dozen disparate storage centers.

Issuers must also find out if underwriters disclosed violations, and track down underwriters that may be out of business.

Smaller issuers with fewer resources are struggling to figure out if they even have any violations to report, McDonald added. That could be tricky when it comes to timely disclosures.

“If I had to hazard a guess I would say it would be the small issuers (that would report),” said Gregory Serbe, president of Lebenthal Asset Management’s municipal division.

BY LISA LAMBERT

WASHINGTON Fri Nov 21, 2014 5:11pm EST

(Additional reporting by Megan Davies; Editing by David Gregorio)

(Reuters) – The fight over dealer compensation in the $3.7 trillion U.S. municipal bond market is heating up, with the groups that oversee the market floating proposals on Monday that would require dealers to provide bond buyers with pricing references.

The Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) released twin proposals that would have dealers tell individual investors, also called a retail buyers, how much a security traded for in other transactions on the same day.

Investors would see the price comparisons on their trade confirmation sheets and also see the differences between the reference prices and what they paid.

Through “markups” and “markdowns,” dealers tack their compensation to the prices of bonds, making it difficult for individual investors to discern how much they have been charged. The MSRB has been working toward greater visibility of the fees in what are called “riskless principal transactions” for about a year.

Regulation is hazy on dealer compensation. Dealers must disclose their remuneration if they act as agents facilitating trades, but not if they act as principals in the trade. For most trades in the municipal bond market, dealers are “riskless principals” purchasing securities from their customers and immediately reselling them to other dealers.

In a sweeping report on the municipal bond market in 2012, the Securities and Exchange Commission said the lack of information about markups and markdowns in these transactions put retail buyers at a disadvantage. Then, last January, commissioners began calling for regulatory change.

The MSRB – made up of banks, issuers and advisers – writes the rules the SEC enforces. In June, SEC Chair Mary Jo White said she was “concerned that in the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries.”

Her comments directly led to the development of the proposals.

The MSRB and FINRA are self-regulatory organizations overseeing the municipal bond market, which is dominated by individual investors, but FINRA also helps govern the private sector and the requirements would cover corporate bonds.

MSRB Executive Director Lynnette Kelly said the groups released the proposals at the same time to “facilitate consideration of whether any differences between the municipal securities and corporate bond markets justify differences in regulations.”

Comments on the proposals are due by Jan. 20, 2015.

WASHINGTON Mon Nov 17, 2014 4:28pm EST

(Reporting By Lisa Lambert; Editing by Steve Orlofsky)

Alexandria, VA – The Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) today released companion proposals that would require disclosure of pricing reference information on customer confirmations for transactions in fixed income securities. The proposals are substantially similar but seek input on factors unique to the corporate and municipal bond markets.

Under the two proposals, bond dealers in retail-sized fixed income transactions would be required to disclose on the customer’s confirmation the price of certain same-day principal trades in the same security, as well as the difference between this reference price and the customer’s price. Read the MSRB’s request for comment. Read FINRA’s request for comment.

“Requiring additional pricing-related disclosure to investors as part of the customer confirmation promotes price transparency and will benefit customers in retail-sized trades,” said Robert Colby, FINRA’s Chief Legal Officer.

Trade prices are publicly available for corporate bonds on FINRA’s Trade Reporting and Compliance Engine® (TRACE®) and for municipal securities on the MSRB’s Electronic Municipal Market Access (EMMA®) website.

“Our approach takes information already available to the public online but provides it directly to retail investors at the time of the transaction, enabling them to more easily evaluate their transaction costs,” said MSRB Executive Director Lynnette Kelly.

The Securities and Exchange Commission (SEC) recommended that the MSRB consider requiring disclosure of pricing reference information to retail investors as part of a series of recommendations related to price transparency in the SEC’s 2012 Report on the Municipal Securities Market.

“Publishing these proposals simultaneously will allow for efficient responses to both proposals and facilitate consideration of whether any differences between the municipal securities and corporate bond markets justify differences in regulations in this area,” Kelly said.

FINRA and the MSRB are seeking input on the likely economic implications of the proposals as well as on alternative regulatory approaches, including a potential markup disclosure requirement targeting trades that could be considered riskless principal transactions.

“We invite commenters to provide data where possible to inform our analysis of the potential economic impact of the current proposals and any alternative approaches,” said FINRA’s Chief Economist Jonathan Sokobin.

Comments should be submitted to FINRA and the MSRB no later than January 20, 2015.

Read the MSRB’s request for comment.

Read FINRA’s request for comment.

Date: November 17, 2014

Contacts: George Smaragdis, FINRA, (202) 728-8988
Jennifer Galloway, MSRB, (703) 797-6675

Individuals who buy municipal bonds may get more information on what their securities firm paid for them under new requirements proposed by the Municipal Securities Rulemaking Board.

The proposal by the self-regulator, released Monday in conjunction with a similar proposal for corporate bonds from the Financial Industry Regulatory Authority, would require brokers to disclose on trade confirmations the prices they paid that same day for the same bond issue. The disclosure would go to anyone buying less than $100,000 in bonds.

If a securities firm purchased bonds and then immediately sold them to an investor, the buyer would clearly see the dealer’s markup. A customer selling bonds to a dealer would also see that dealer’s same-day sale price for that security.

The proposal is the latest effort by regulators to increase transparency in the $3.7 trillion municipal-bond market, which was described in a 2012 Securities and Exchange Commission report as “illiquid and opaque.” Individual investors own almost three-quarters of the debt issued by cities, states and other municipalities, either directly or through mutual funds. Many buy the bonds for tax-free income as a way to fund their retirements.

The proposal comes as municipal bonds have posted gains for 10 consecutive months, the longest rally in state- and local-government debt since 1992, according to Barclays BARC.LN +0.95%. The strong gains have attracted investors who abandoned munis in 2013 amid widespread concern over Detroit’s bankruptcy and Puerto Rico’s financial woes.

The SEC’s 2012 report recommended the MSRB consider requiring increased price disclosure to individual investors. The MSRB already makes trade prices available through its Electronic Municipal Market Access website, known as Emma, the group said in a news release announcing the new proposals. Corporate-bond trades can be found at Finra’s Trade Reporting and Compliance Engine, called Trace.

“Our approach takes information already available to the public online but provides it directly to retail investors at the time of the transaction, enabling them to more easily evaluate their transaction costs,” said Lynette Kelly, executive director of the MSRB, in the release.

The SEC has made its own efforts to protect investors in the muni market. Those have included settling with Kansas, New Jersey and Illinois for failing to note underfunded pension obligations in disclosures to bond investors and fining 13 brokerage firms for improperly selling junk-rated Puerto Rico bonds in increments below $100,000, the agency’s first action under a rule designed to protect retail investors from high-risk debt. The states and brokerages didn’t admit or deny wrongdoing.

The MSRB and Finra are both seeking input on the economic implications of the proposals as well as alternative approaches. Comments should be submitted to the agencies by Jan. 20, 2015.

“Publishing these proposals simultaneously will allow for efficient responses to both proposals and facilitate consideration of whether any differences between the municipal securities and corporate bond markets justify differences in regulations in this area,” Ms. Kelly said.

THE WALL STREET JOURNAL

By AARON KURILOFF

November 17, 2014

On November 12, NABL submitted comments to the MSRB with general suggestions on the priority of issues that are the focus of the MSRB during the next fiscal year.

The letter can be seen here.

The U.S. Securities and Exchange Commission recently settled the first securities fraud charges brought against a municipal official alleging “control person” status under the federal securities laws. The SEC’s settlement with the former mayor of the city of Allen Park, Michigan bars him from participating in future securities offerings and imposes a $10,000 penalty. A city administrator also was charged and barred from participation in future securities offerings

The SEC’s enforcement actions, brought against the city and the two city officials, alleged that the offering documents for a “double-barreled” general obligation bond issue contained false and misleading statements. In particular, the SEC alleged that the offering documents failed to disclose adverse developments relating to a proposed public-private transaction for a film studio project to be located on land purchased with the bond proceeds; the project was not consummated, leading to financial difficulties that caused the state of Michigan to appoint an emergency manager for the city. The bonds issued for the project were rated A by S&P and subsequently downgraded to BB+, and recent audited financial statements for the city have carried a going concern qualification.

The enforcement action against the city was brought under Section 17(a)(2) of the Securities Act of 1933, which permits administrative action by the SEC for negligent conduct, and under SEC Rule 10b-5, which permits administrative action by the SEC as well as a private right of action by affected investors, but requires proof of “scienter”, or an intent to deceive (which has been interpreted to include highly unreasonable conduct or recklessness.)

More notably, the SEC charged the mayor as a “control person” under Section 20(a) of the Securities Exchange Act, under which any person who directly or indirectly “controls” another person found liable for a violation of the Securities Exchange Act or any regulation thereunder is jointly and severally liable, to the same extent as the controlled person, to any person to whom the controlled person is liable. Liability as a “control person” can be avoided if the “control person” establishes that he or she acted in good faith and did not directly or indirectly induce the act or acts constituting the violation.

Liability under Section 20(a) generally requires two elements: a primary violation of the federal securities laws by the “controlled person”, and proof that the person charged with the Section 20(a) “controlled” the primary violator. It is unclear whether there are any circumstances under which a municipal official sitting on a multi-person board or council could be held to “control” an issuer, or issuer personnel, found to be a primary violator responsible for fraudulent statements in an offering document for municipal securities. But in the Allen Park enforcement action the SEC appears to have alleged that the mayor controlled the city, the alleged primary violator.

If a primary violation and “control” of the person or entity that made the misleading statement is established, the burden shifts to the “control person” to establish good faith, which, unsurprisingly, means the absence of bad faith, which is akin to the absence of scienter. In theory, even if an accused official does not establish good faith, he or she can avoid liability upon proof that he or she did not “induce” the primary violation. The courts have not conclusively adjudicated whether to “induce” requires active encouragement, or whether in some circumstances the failure to exercise efforts to prevent a violation can be deemed to induce the violation.

The Allen Park enforcement action was settled by the issuer and the officials without admitting or denying liability, and sets no precedent on what type of conduct by an issuer official constitutes “control” over a primary violator of the securities laws or induces the violation. But it suggests that in the aftermath of U.S. Supreme Court decisions that have eliminated aiding and abetting liability in private actions under Section 10(b) of the Securities Exchange Act and narrowed the circle of potential primary violators that the SEC can allege “make”, within the meaning of Section 10(b), a fraudulent statement in a securities offering document, the SEC intends, when feasible, to use a “control person” theory to go after actors it deems culpable for securities fraud in municipal offerings but cannot reach as primary violators.

Initial reaction to the SEC’s introduction of “control person” charges to municipal securities enforcement actions has included concern that public officials involved with municipal entities that issue bonds or other securities may now face charges and potential vicarious liability for disclosure malfeasance by other issuer officers or employees. However, the SEC will face an uphill battle proving allegations of “control”, bad faith and “inducement” of a primary violation by an issuer board member or official who may have approved the distribution of an official statement but was not actively involved in its preparation, did not sign the official statement, and did not urge another official to exclude or include particular disclosure. The extent to which the SEC will include “control person” charges in future enforcement actions alleging primary securities law violations by an issuer or another issuer official remains to be seen, but such charges are most likely to be brought where there is evidence of active complicity in deceptive disclosure.

Article by Leonard Weiser-Varon

Last Updated: November 11 2014

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

NEW YORK — The municipal market should expect increased attention from the Securities and Exchange Commission’s enforcement division, with a focus on pension fund abuses and pay to play violations, and undisclosed conflicts of interest, the SEC’s top cop said Monday.

Andrew Ceresney, director of the SEC’s division of enforcement, made those comments while speaking on a muni panel at the Securities Industry and Financial Markets Association’s Annual Meeting in Manhattan. Ceresney said the enforcement division’s municipal securities and public pensions unit has set important precedents with first-of-their-kind enforcement actions in recent months, and will continue to be a growing presence in trying to affect market behavior.

“I think it’s fair to say this is a place we’re here to stay,” Ceresney said, adding that the SEC will continue to look for opportunities to hold individuals personally accountable for their roles in breaking federal securities laws. The SEC scored a major first last week when it charged the mayor of Allen Park, Mich., and extracted a financial penalty from him for his role in controlling the city and lower-level personnel who misled investors with false language in offering documents.

“From my perspective, the most effective deterrent is individual liability,” Ceresney said.

Ceresney also announced that the SEC will be focusing on ramping up its partnerships with law enforcement agencies when criminal prosecution could be appropriate.

Kent Hiteshew, director of Treasury’s State and Local Finance Office, urged dealers to be familiar with the SEC’s 2012 comprehensive muni market report, which foreshadows many of the regulatory developments of the past two years.

“The industry should be more cognizant of how the market is perceived by policy makers,” Hiteshew said, urging market participants to become more engaged in the regulatory process. There is a sense among federal agencies that the muni market has not been historically subject to the same level of scrutiny as corporate and other capital markets.

Chris Hamel, managing director and head of the municipal finance group at RBC Capital Markets said the top threat to his business is the attempt of regulators to alter its business practices through new rules and enforcement firsts.

“There is a certain pride that the SEC is taking in its regulatory enforcement,” Hamel said, noting Ceresney’s emphasis on precedent-setting cases. “Those kinds of firsts worry me.”

Asked whether the regulatory regime for the muni market should change, Ceresney said the commission’s enforcement actions play an “outsized role” because the regulatory system is not as robust for munis as it is in other markets. The Tower Amendment, which was added to the Securities Exchange Act of 1934 in the mid-1970s, prohibits the SEC and Municipal Securities rulemaking Board from requiring issuers to file documents with them before selling munis.

“We certainly are upping our scrutiny in this area,” he said.

The panel also discussed the future of the market. Hamel said issuers could gravitate toward public-private partnerships if Congress decides to limit of eliminate the value of the muni tax exemption.

He said it is hard to know yet what the effect of new municipal advisor regulations will be, as the SEC only approved its MA registration rule a year ago and many of the MSRB’s rules are not yet effective. Ultimately, Hamel said, market participants have to understand that there is no going back to less regulatory days of 2007.

“There is only moving ahead,” he said.

THE BOND BUYER

BY KYLE GLAZIER

NOV 10, 2014 3:57pm ET

Yesterday, the Securities and Exchange Commission (SEC) announced fraud charges against the City of Allen Park, Michigan (City), and two of its former officials—the former City Mayor and former City Administrator. It is the first time the SEC has imposed “control person” liability on a mayor, or any municipal official, under Section 20(a) of the Securities Exchange Act of 1934 (Exchange Act), which provides that a control person may be held jointly and severally liable for the securities law violations of the persons over which it exercises control.

While unprecedented, the SEC’s action was not unexpected. In the May 2013 Section 21(a) Report it issued following its investigation of the City of Harrisburg, the SEC warned:

“The statements by the Harrisburg public officials were part of, and could have altered, the total mix of information available to the market. There is a substantial likelihood that a reasonable investor would consider the financial condition of the City important in making an investment decision, and there were no other disclosures made by the City as part of the total mix of information available to enable investors to consider other information. These public officials’ statements were the principal source of significant, current information about the issuer of the security and thus could reasonably be expected to influence investors and the secondary market. Because statements are evaluated for antifraud purposes in light of the circumstances in which they are made, the lack of other disclosures by the municipal entity may increase the risk that municipal officials’ public statements may be misleading or may omit material information.”

The Allen Park matter accordingly demonstrates the resolve the SEC warned about in the City of Harrisburg matter.

The facts in Allen Park likely roughly coincide with the economic conditions many municipalities face, and with the optimistic statements many public officials make in connection with similar economic development projects. In 2008, the City initiated plans for an economic development project consisting of a $146 million movie studio with eight sound stages. The studio was to be financed and operated by a public-private partnership (PPP) consisting of a limited liability company, a producer, and a private developer. The City planned to acquire the land for the project using municipal bond proceeds and subsequently donate the land to the PPP. The bonds were to be initially repaid from revenues generated by the City from leases with media-related entities. In April 2009, the City issued a press release covering the project that included a statement from the former City Mayor characterizing the project as an “economic development blockbuster” and emphasizing the job opportunities created by the project.

In May 2009, the producer committed to pay up to $2 million to cover the City’s budget deficit. The payment was contingent upon the land being donated by the City to the PPP. Shortly thereafter, the City entered into an agreement—signed by the former City Mayor—with the producer and the developer under which the developer pledged $20 million for the first phase of building the studio, according to the SEC. The SEC alleged that the PPP collapsed after the City was informed in July 2009 by its bond counsel that it was prohibited from using bond proceeds to purchase land that would be donated to the PPP. By August 2009, plans for the project had deteriorated into leasing a piece of the property for the operation of a movie production vocational school.

Despite the knowledge of the former City Mayor, the SEC alleged he made false statements to the public and the City Council about the timing and scope of the project in a press release and public meeting. The SEC also alleges that neither the former City Mayor nor former City Administrator disclosed to the City Council any of the negative developments affecting the project prior to the issuance of the municipal bonds. Although the former City Mayor was alleged to have promoted the underlying project, the SEC’s action does not rest on that fact alone.

The City issued $31 million in municipal bonds in November 2009 and June 2010. According to the SEC, the City Administrator provided information used in drafting the offering documents, reviewed the offering documents, and providing certification that the information contained therein was true, correct, and complete. According to the SEC, the offering documents failed to disclose the negative developments concerning the project. The SEC further alleged the offering documents contained material misstatements about the projected lease revenue available to pay bondholders as well as the City’s financial health.

The SEC charged the City and the City Administrator with violating Section 17(a)(2) of the Securities Act of 1933 (Securities Act) and Section 10 (b) of the Securities Exchange Act and Rule 10b-5(b). The City consented to a cease-and-desist order without admitting or denying the findings of the SEC. Without admitting or denying the findings of the SEC, the City Administrator consented to a final judgment barring him from participating in municipal bond offerings and enjoining future securities law violations.

The SEC charged the former City Mayor under Section 20(a) of the Exchange Act based on his position as a controlling person of the City and the City Administrator at the time the alleged fraud was committed. The former City Mayor consented to a final judgment barring him from participating in municipal bond offerings and enjoining future securities law violations without admitting or denying the SEC’s findings. The former City Mayor also agreed to pay a $10,000 financial penalty.

In the SEC press release announcing its charges, Chief of the SEC’s Municipal Securities and Public Pensions Unit LeeAnn Gaunt stated that “[w]hen a municipal official like [the City Mayor] controls the activities of others who engage in fraud, we won’t hesitate to use every legal avenue available to us in order to hold those officials accountable.”

The SEC’s action against the former City officials is consistent with its increased focus on individual liability. This increased focus has been brought into sharper relief through the parameters of the SEC’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, under which the SEC has attempted to incentivize issuers and obligated persons to come forward and disclose misstatements in primary offering documents relating to past compliance with continuing disclosure obligations. The MCDC Initiative, however, offers no protection to individuals the issuers or obligated persons employ. Accordingly, and consistent with the views we previously expressed, issuers and obligated persons should carefully consider the consequences of participating in the Initiative.

by M. Norman Goldberger, John C. Grugan, and Tesia N. Stanley

November 7, 2014

Attorneys in Ballard Spahr’s Municipal Securities Regulation and Enforcement Group provide representation in proceedings involving the SEC. For more information, please contact M. Norman Goldberger at 215.864.8850 or [email protected], John C. Grugan at 215.864.8226 or [email protected], Tesia N. Stanley at 801.517.6825 or [email protected], or the member of the Group with whom you work.

Copyright © 2014 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

WASHINGTON -Two self-regulators are proposing rules that would require dealers acting as principals to disclose to customers on their confirmations a “reference price” of the same security traded that same day as well as the difference between that price and the customer’s price.

The Municipal Securities Rulemaking Board and the Financial Industry Regulatory Association are asking for public comments to be filed on the proposals no later than Jan. 20

The draft amendments to the MSRB’s Rule G-15 on confirmation would apply to principal transactions of $100,000 or less, which the regulators are proposing to classify as “retail-sized” trades. The MSRB rule covers municipal bonds. FINRA has responsibility for enforcing MSRB rules under Securities and Exchange Commission supervision. FINRA’s proposal covers fixed income securities in general.

The MSRB announced in August that it would propose this rule in an effort to attempt to address concerns about hidden markups in so-called “riskless principal transactions,” when bonds are bought and sold within a short period of time so the dealer has little risk the market will change.

“Our approach takes information already available to the public online but provides it directly to retail investors at the time of the transaction, enabling them to more easily evaluate their transaction costs,” said MSRB executive director Lynnette Kelly.

There have been increasingly loud calls for dealers to disclose their markups on riskless principal transactions, with Securities and Exchange Commission chair Mary Jo White and Commissioners Michael Piwowar and Daniel Gallagher sounding the call in recent months.

Additionally, Sens. Mark Warner, D-Va. and Tom Coburn, R-Okla., introduced a bill in March that would require disclosure of such markups. The SEC recommended that the MSRB consider requiring disclosure of pricing reference information to retail investors as part of a series of price transparency recommendations in its unanimously-approved 2012 Report on the Municipal Securities Market.

The proposal would not be the same as requiring disclosure of markups. For a customer sale of munis to a dealer, the dealer would have to disclose pricing information for same-day transactions in which it sold those bonds in a principal capacity. For a customer purchase from the dealer, the dealer would be required to disclose pricing information for same-day transactions in which it purchased the bonds in a principal capacity.

“While this differential is not necessarily the same as a markup, it can provide the investor increased price transparency and significant insight into the market for the security,” the board wrote in the proposal. “An analysis of this differential may also achieve many of the objectives of an explicit markup disclosure requirement.”

The MSRB’s Rule G-30 on prices and commission requires that muni prices be fair and reasonable, but does not require dealers to disclose their compensation or transaction costs, which are often factored into customer prices.

Rule G-15 currently requires dealers to disclose on a confirmation the price of a municipal securities transaction, but they are not required to disclose their markups on principal transactions. There were attempts by the SEC in both the 1970s and the 1990s to require such disclosure, but heavy industry resistance stalled it both times. Dealers have said that defining a trade as “riskless” is problematic and that compliance difficulties could hamper the market.

FINRA and the MSRB are seeking input on the likely economic implications of the proposals as well as on alternative regulatory approaches, including a potential markup disclosure requirement meant to specifically target trades that could be considered “riskless.” The MSRB could also alter other aspects of the proposal, such as changing the $100,000 threshold. The proposal suggests that adopting it as a rule would enhance competition between dealers while also changing the competitive landscape.

“Retail customers will have information that will allow them to make more informed choices about which dealers to use for future transactions, incentivizing dealers to offer competitive prices in retail transactions,” the board wrote in the proposal. “It is possible that the costs associated with the requirements of the proposal relative to the baseline may lead some dealers to reduce services to retail investors. In some cases, the costs could lead smaller dealers to consolidate with larger dealers or to exit the market.”

Jessica Giroux, Bond Dealers of America senior counsel and managing director for federal regulatory policy, said BDA has been awaiting the proposal and wants to work with regulators to ensure any rule changes address a specific market problem.

“The BDA has been anticipating the release of these notices since SEC Chair Mary Jo White announced her intention to examine so-called ‘riskless principal transactions’ over the summer and since then, the BDA has been working proactively with the SEC, FINRA, and the MSRB to discuss the best approach to such a proposal by urging regulators to ensure that the pricing disclosure solves a defined problem and creates meaningful information for the retail investors and in the appropriate context,” Giroux said.

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said SIFMA supports increasing transparency in the municipal market in a cost-effective way.

“The MSRB proposal correctly identifies several considerations to the construction and cost of the proposed disclosure and further identifies alternative approaches,” Cohen said. “We feel that it is important to note that much of this information is currently available to retail investors on EMMA.”

THE BOND BUYER

BY KYLE GLAZIER

NOV 17, 2014

The city of Allen Park, Mich., and two of its former officials settled fraud charges related to the sale of a $31 million municipal bond issue to raise funds for a movie studio project to spur needed economic development, according to the Securities and Exchange Commission.

The SEC and other regulators have been moving to protect the small investors who make up the bulk of the $3.7 trillion municipal-bond market, which the SEC described in a 2012 report as “illiquid and opaque.” That has included fining Kansas, New Jersey and Illinois for failing to disclose that underfunded pension obligations posed a risk to the repayment of some bonds. The states settled without paying a penalty or admitting wrongdoing.

This week, the SEC fined 13 brokerage firms for improperly selling junk-rated Puerto Rico bonds in increments below $100,000, the agency’s first action under a rule designed to protect mom-and-pop investors from high-risk debt. The firms didn’t admit or deny the SEC’s findings and agreed to pay fines between $130,000 and $54,000.

Andrew J. Ceresney, director of the SEC’s enforcement division, said in a news release Thursday, “Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit.”

The SEC had alleged that former Allen Park mayor Gary Burtka championed the project and was in the position to influence the actions of co-defendant, former city administrator Eric Waidelich. As a result, Mr. Burtka, who agreed to pay a $10,000 penalty under the settlement, was charged with liability for violations allegedly committed by Mr. Waidelich and the municipality.

The SEC said it is the first time it has charged a municipal official under a federal statute that provides for “control person” liability.

According to the SEC, the city began initial planning for the project in 2008. The initial plans included a $146 million facility with eight sound stages led by a Hollywood executive director. However, by the time the bonds were issued in 2009 and 2010, the project had deteriorated into merely building and operating a vocational school on the site.

However, the changes weren’t reflected in the bond offering statements or public documents, the SEC said. Investors also weren’t informed of the substantial impact the diminished project would have on the city’s ability to repay the debt.

Without admitting or denying the allegations, Messrs. Burtka and Waidelich consented to the final judgment, which bars them from participating in any municipal bond offerings. Also without admitting or denying the allegations, the city agreed to cease and desist from future violations.

Mark Mandell, Mr. Waidelich’s defense council, said Mr. Waidelich thoroughly cooperated with the SEC in its investigation. He added that no criminal charges or civil penalties were filed against Mr. Waidelich, and that his client was “glad to have the matter behind him.”

“Every action he took was at the direction of council members, the mayor and attorneys representing the city, including the attorneys who drafted the bond,” Mr. Mandell said.

Defense counsels for the city and the two former officials couldn’t immediately be reached to comment.

THE WALL STREET JOURNAL

By TESS STYNES

Updated Nov. 6, 2014 1:22 p.m. ET

— Aaron Kuriloff contributed to this article.

Write to Tess Stynes at [email protected]

The Securities and Exchange Commission fined 13 brokerage firms for improperly selling junk-rated Puerto Rico bonds in increments below $100,000, the agency’s first action under a rule designed to protect mom-and-pop municipal-bond investors from high-risk debt.

Firms including Riedl First Securities Co. of Kansas and TD Ameritrade were among those that agreed to settle SEC charges that they sold portions of the U.S. commonwealth’s $3.5 billion March bond offering that were smaller than the $100,000 minimum, the agency said. The firms didn’t admit or deny the SEC’s findings and agreed to pay fines that range from $130,000 for Riedl to $54,000 for J.P. Morgan Securities, a unit of J.P. Morgan Chase & Co., and Lebenthal & Co.

Other firms fined by the SEC include Charles Schwab & Co. and UBS AG. Representatives for Riedl and J.P. Morgan declined to comment. A spokeswoman for Schwab said the firm canceled the trades when alerted and is reviewing its procedures. A representative of TD Ameritrade said the firm agreed to the settlement without admitting or denying the allegations. The other firms either declined to comment or didn’t immediately respond to a call or email seeking comment.

“These firms violated a straightforward investor protection rule that prohibits the sale of muni bonds in increments below a specified minimum,” said LeeAnn Gaunt, chief of the SEC’s Municipal Securities and Public Pensions Unit. “We conduct frequent surveillance of trading in the municipal-bond market and will penalize abuses that threaten retail investors.”

The SEC and other regulators have been moving to protect the small investors who make up the bulk of the $3.7 trillion municipal-bond market, which the SEC described in a 2012 report as “illiquid and opaque.” That has included fining Kansas, New Jersey and Illinois for failing to note underfunded pension obligations in disclosures to bond investors.

The agency’s move comes during a rally in the municipal bond market, which has posted its longest string of monthly positive returns in more than two decades, according to Barclays PLC data. Debt sold by U.S. cities and states returned 8.32% through the end of October, including price increases and interest payments, outpacing gains in blue-chip U.S. stocks, corporate debt and Treasurys.

Investors, led by retail investors purchasing the debt through mutual funds, have poured about $18.2 billion into municipal-bond funds this year, after withdrawing about $43.38 billion in the same period of 2013, according to Lipper.

Among the beneficiaries of the rally have been issuers of low-rated debt, including Puerto Rico, which in March sold $3.5 billion in junk-rated debt to investors including hedge funds with an 8% coupon. The $100,000 minimum was listed in the official statement and established to protect individual investors from the risks of noninvestment-grade debt, which includes default, not being able to sell the bonds quickly or interest-rate spikes that cause prices to decline, the SEC said. The bonds were rated double-B-plus at the time by Standard & Poor’s Ratings Services.

The agency said enforcement officials observed some of the sales in their surveillance of the municipal-bond market and subsequently identified 66 transactions in which dealer firms sold the bonds in units smaller than $100,000, in violation of the rule. The SEC’s order against Riedl, which received the largest fine, says its transactions fell below the minimum 28 times. J.P. Morgan and Lebenthal went below the minimum once each, according to the SEC.

“This signals yet a larger presence of the SEC in the day-to-day workings of the municipal-bond market,” said Matt Fabian, managing director at research firm Municipal Market Advisors. “This was a very high-profile transaction, massive and widely covered in the media. And the problems…were widespread and widely discussed.”

The following is a complete list of firms fined: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.

THE WALL STREET JOURNAL

By AARON KURILOFF

Updated Nov. 3, 2014 6:50 p.m. ET

—Matthias Rieker contributed to this article.

Write to Aaron Kuriloff at [email protected]

WASHINGTON – The Securities and Exchange Commission needs to remove regulatory impediments to the development of electronic trading platforms for the fixed income market and work to avoid a looming “liquidity cliff,” Commissioner Daniel Gallagher said Friday.

Gallagher spoke extensively about the muni and corporate fixed income markets in a speech at the 47th Annual Securities Regulation Seminar of the Los Angeles County Bar Association. The Republican commissioner has been an outspoken proponent of municipal market transparency and a prominent critic of the priorities set for the SEC by the Dodd-Frank Act. He and fellow Republican commissioner Michael Piwowar have each spoken about a need to improve transparency for retail investors, including requiring dealers to disclose markups in riskless principal transactions.

“Topping the list of issues in need of our immediate attention are the fixed income markets,” Gallagher said, noting the extremely high 75% retail participation in the muni market. “It should be a wakeup call to us all that such a staggering percentage of our fixed income markets rests in the hands of ordinary investors who often do not understand the product they hold or the accompanying risks, including the devastating effect an inevitable interest rate hike could have on their investment.”

Gallagher sounded his support for the development of electronic trading platforms, a recommendation from the commission’s 2012 comprehensive muni market report, and joined Piwowar in publicly voicing skepticism about the complexity of bond deals. Gallagher said the SEC should work to reduce the number of “bespoke” bond offerings in favor of more standardized offerings because the complex securities are unlikely to trade frequently. Piwowar spoke on that topic earlier this year, and said that his research as an economist has led him to believe that simplified bond offerings that do not include features like sinking funds, special redemption provisions, and credit enhancements would benefit issuers and investors alike.

Gallagher said he is concerned about “the clear and present danger” of a liquidity cliff in the debt markets.

“Over the past few years, these markets have witnessed historic growth due to a zero percent interest rate environment,” Gallagher said. “While investors have been flocking to bonds at a record pace, dealer inventories have shrunk by nearly 75% since 2008 as financial institutions have been forced to deleverage in the wake of Basel III, the Volcker Rule, and other constraints introduced by prudential regulators ostensibly in response to the crisis. This has set the stage for a potentially dire liquidity crisis. When interest rates rise — which the Fed has indicated could happen as early as next summer— outflows from high yielding and less liquid debt could drive bond prices down. Which raises the question of the hour — where is the necessary liquidity going to come from?”

But Gallagher said the SEC needs to work with the bond industry to create more liquidity and not try to impose an unworkable regulatory system, he warned.

“The SEC needs to take steps to facilitate bond market liquidity, ideally by working with the industry and investors to create workable, market-based solutions,” he said. “The last thing we need is a Dodd-Frank Title VII-like regime in which an equity market structure is overlaid on a market that operates in a fundamentally different manner.”

Gallagher added that the commission needs to finish removing references to credit ratings from its rules, something it took a step toward when it proposed last week to remove those references to credit from its Rule 2a-7 governing money market funds. Above all, the SEC needs to do a big picture reevaluation of the course it is on, he said.

“But beyond these discrete items, we must take a step back and realize where we are today as a regulator and where we have been for the past five years,” he said. “We need to set a course to once again [be] a preeminent federal agency and thought leader in the policy debates that have been for too long happening around us.”

THE BOND BUYER

BY KYLE GLAZIER

OCT 27, 2014 2:42pm ET

WASHINGTON – Though the municipal market has recently been focused on primary market disclosure compliance, dealers should expect the Securities and Exchange Commission to start policing the secondary market just as diligently, warned former SEC enforcement lawyer Peter Chan.

In an interview with The Bond Buyer, Chan, who left the SEC early this month and now practices at Morgan, Lewis & Bockius in Chicago, said SEC Commissioners’ concerns about activities in the secondary market will inevitably lead to an increased focus on them by the muni enforcement unit.

Market participants have been buzzing about the SEC’s Municipalities Continuing Disclosure Cooperation Initiative, created by Chan, which targets misleading statements about continuing disclosures in official statements. But Chan warned that the enforcement division’s focus would not remain rooted to that spot.

Commissioners Daniel Gallagher and Michael Piwowar have both voiced repeatedly voiced concerns about secondary market pricing in the fixed income markets, including municipals. Gallagher gave a speech last week highlighting the bond market’s overwhelming participation of vulnerable retail investors.

“There is tremendous unanimity and consensus among the commissioners with regard to the municipal market issues. And when two commissioners keep mentioning the same issues on the secondary market, on pricing and transparency, people need to pay attention,” Chan said.

“What the commissioners say about the opaqueness of the market is something the staff also listens to,” he added. “As much as there have been a lot of discussions from an enforcement standpoint about disclosure at the offering stage, I think there should be an expectation that the other shoe is going to drop with regard to the secondary market.”

Chan said market participants should be on the lookout for two types of SEC scrutiny of the secondary market. The enforcement division will be interested in pricing and transaction costs with respect to retail investors, as well as the quality of the dealers’ recommendations. Dealers are bound by a duty to deal fairly with their customers and are also bound by suitability rules requiring them to be able to form a reasonable basis to conclude the securities they recommend are good fits for the customers.

The enforcement staff also will be looking to use the antifraud provisions contained in federal securities laws, which make it illegal to commit fraud or deceit, and to make false or misleading statements, in connection with the purchase or sale of securities.

The Financial Industry Regulatory Authority often fines dealers for violating the Municipal Securities Rulemaking Board’s fair dealing rule in selling bonds at unfair prices, but the SEC could charge dealers for fraud if the conduct rises to that level,” Chan said.

The SEC historically has been hesitant to set a bright line on what constitutes an unfair markup or a good price on a bond sale. Firms should be protecting themselves by having in place a “reasonable, good faith process” in setting prices and markups, Chan said. There is a rich body of casework dealing with excessive markups in riskless principal transactions outside the muni market, he said, cautioning that the enforcement staff will not hesitate to apply antifraud standards from other markets in the muni market.

“What would be an easy mark, or low-hanging fruit, is when they can show that a broker-dealer did not have an adequate process in either price discovery or determination of markup/markdown,” he said.

Chan also said that relying on ratings to satisfy suitability requirements would be dangerous. He said he worked on a 2012 case in which the SEC charged Wells Fargo with improperly selling asset-backed commercial paper structured with high-risk mortgage-backed securities without knowing much about the products and relying almost entirely on their credit ratings. Some broker-dealers use ratings as too much of a surrogate for due diligence, he said.

“It would be a problem if a registered representative recommended a bond without the rep or anyone else at the firm at least going through the offering statement or some of the continuing disclosure information,” he explained.

As with pricing, the commission will look at procedures to see if they are sufficient to form a reasonable basis to believe the investments were suitable, Chan said, stressing that dealers should be looking at the wider securities industry and listening closely to the commissioners for clues as to what to expect.

“I think the cautionary tale is broker dealer reps need to do their homework,” he said.

THE BOND BUYER

BY KYLE GLAZIER

OCT 29, 2014 2:16pm ET

Alexandria, VA – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting October 29-31, 2014 where it focused on regulatory and market transparency initiatives aimed at promoting a fair and efficient municipal securities market, and held its annual policy meetings with the chairs of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

As part of the MSRB’s ongoing development of a comprehensive regulatory framework for municipal advisors, the MSRB Board carefully considered issues raised by commenters on a recent proposal to address potential pay-to-play activities by municipal advisors. The Board agreed to seek SEC approval of amendments to MSRB Rule G-37 that would—consistent with the existing approach for dealers—generally prohibit municipal advisors from engaging in municipal advisory business with municipal entities for two years if certain political contributions have been made to entity officials with influence over the award of business. Like dealers, municipal advisors would be required to disclose their political contributions to officials and bond ballot campaigns for posting on the MSRB’s Electronic Municipal Market Access (EMMA®) website.

“Two decades ago, the MSRB adopted its landmark pay-to-play rule to address any actual link, and the appearance of a link, between political contributions and municipal securities underwriting, a bold move that dramatically improved the integrity of the market,” MSRB Board Chair Kym Arnone said. “Extending the well-established principles of this rule to municipal advisors will similarly work to promote the integrity of the market and the municipal advisory industry.”

At its meeting, the Board also reviewed public comments on enhancements to the MSRB’s Real-Time Transaction Reporting System (RTRS) and approved proceeding with rule changes to effect certain enhancements including the provision of indicators for customer trades involving non-transaction-based compensation arrangements and for transactions that occur on alternative trading systems. Another change would streamline trade reporting for dealers by eliminating a requirement for dealers to report the yield on customer trades although transaction yields would continue to be available for price transparency purposes and dissemination on EMMA.

“These changes are among the many steps the MSRB is taking to enhance EMMA and ensure it continues to evolve in response to user needs, changing municipal market practices and technological capabilities,” Chair Arnone said.

Since 2012, the MSRB has been working to develop the next generation of a transaction reporting system that would provide additional post-trade and new pre-trade data to investors and other market participants. The MSRB is continuing the development of a “central transparency platform” for the municipal market and will soon turn to seeking market feedback on potential changes to the pre-trade reporting framework.

At its meeting the Board received an update from MSRB staff on a rulemaking initiative stemming from the SEC’s 2012 Report on the Municipal Securities Market. That report recommended the MSRB consider for the municipal securities market a “best-execution” transaction standard, which already exists in the corporate market, and the development of practical guidance on such a rule. The MSRB is awaiting SEC action on the MSRB’s best-execution proposal to create an explicit obligation for dealers to use “reasonable diligence” when handling orders and executing municipal security trades for retail investors to obtain a price that is as favorable as possible under prevailing market conditions. At its meeting last week, the Board agreed to develop, in coordination with FINRA, practical guidance for dealers on the application of best-execution regulations for both the municipal and corporate markets, and to harmonize that guidance as appropriate. The MSRB’s proposed best-execution rule is in the late stages of the rulemaking process at the SEC and the MSRB is turning to the development of practical guidance in anticipation of the rule being approved before the end of the year.

The Board also received a staff update on a rulemaking initiative to require dealers to disclose pricing information for the dealers’ same-day principal trades in the same security on retail customer trade confirmations. This effort also stems from a recommendation in the SEC’s 2012 report that the MSRB consider requiring the disclosure of pricing reference information to retail investors. In July 2014 the Board agreed to seek comment on a draft rule in coordination with FINRA’s effort to develop a similar proposal for the corporate bond market. The proposed approach would provide investors with information generally already publicly available on the MSRB’s EMMA website but would provide it directly to investors in connection with their transactions so they can independently assess the prices they are receiving from dealers.

The SEC is playing a coordinating role among the three regulatory organizations, and the MSRB and FINRA are harmonizing their proposed rules and plan to publish them for public comment simultaneously to allow for efficient responses to both proposals. The MSRB plans to seek specific comment on whether any differences between the municipal and the corporate bond markets justify differences in regulations in this area. The MSRB, consistent with its policy on economic analysis in rulemaking, also plans to seek input on alternative regulatory approaches, including a potential markup disclosure requirement targeting trades that could be considered riskless principal transactions.

In a final rulemaking action, the Board agreed to seek SEC approval of changes to regulations governing the EMMA system in response to a new disclosure requirement established by the SEC for asset-backed securities. The changes would enable EMMA to receive submissions that will be required beginning in early 2015 by Rule 15Ga-1 under the Securities and Exchange Act, related to repurchases and replacements of assets pooled in asset-backed securities.

As part of its meeting last week, the Board met with SEC Chair Mary Jo White and FINRA Chairman and Chief Executive Officer Richard Ketchum to discuss top issues facing the municipal securities market. These conversations with the leadership of the SEC and FINRA support regulatory coordination and informed policymaking in areas of mutual interest.

Date: November 3, 2014
Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

Financial advisers to U.S. state and local governments would be barred from using political contributions to win business under a proposal advanced by bond-market regulators.

The Municipal Securities Rulemaking Board said today it will ask the Securities and Exchange Commission to approve curbs on political giving by firms that help officials arrange bond sales.

The proposal is aimed at stopping those businesses from using contributions to curry favor with the officials who hire them. The rules would prevent advisers from working for a local government within two years of making a contribution. Banks that underwrite bonds in the $3.7 trillion municipal market already face such limits.

“Extending the well-established principles of this rule to municipal advisors will similarly work to promote the integrity of the market and the municipal advisory industry,” Kym Arnone, a Barclays Plc managing director who chairs the board, said in a statement.

The curbs are among rules being placed on government advisers as a result of the 2010 Dodd-Frank law, which imposed regulations on such firms for the first time.

The Alexandria, Virginia-based board for years has intended to extend the political-giving ban to municipal advisers. That step was delayed as it waited for the SEC to define which firms should be covered by the new regulations, a move that didn’t conclude until last year.

Arnone told reporters on a conference call that she didn’t know when the proposal would be submitted to the SEC for approval.

“This will get up there as quickly as we can get it up there,” she said.

Bloomberg

By William Selway

Nov 3, 2014 11:30 AM PT

To contact the reporter on this story: William Selway in Washington at [email protected]

To contact the editors responsible for this story: Stephen Merelman at [email protected] Mark Schoifet, Mark Tannenbaum

To follow up on discussions during a meeting the BDA had with the SEC’s Office of Municipal Securities last week, we submitted a letter today to the Commission asking for a bifurcated approach to establishing Sophisticated Municipal Market Professional (SMMP) designations under MSRB Rule G-48.

This letter focuses on the SMMP exemption and its relation to the best execution rule. Currently, the proposed rule provides for one affirmation which allows a market participant to declare itself an SMMP or not. In the proposed rule, a market participant that declares itself an SMMP would effectively exclude its transactions from the protections of the best execution rule. The BDA believes having one affirmation which would automatically exclude an SMMP from the best execution rule is problematic because it is likely that many market participants would want to be considered an SMMP in addition to the having its transactions subject to the best execution rule.

In our letter, we are requesting that the affirmation contained in Rule G-48 be bifurcated into two affirmations:

An affirmation treating the investor as an SMMP for all purposes other than for the application of the best execution rule and
An affirmation treating the investor as an SMMP just for the best execution rule.

You can find BDA’s letter here.

10/30/2014

WASHINGTON — The Securities and Exchange Commission granted approval Friday of a rule establishing supervisory requirements for municipal advisors, the first new Municipal Securities Rulemaking Board MA rule to get the nod since the SEC’s registration regime was adopted last year.

The new requirements of Rule G-44 on supervisory and compliance obligations of municipal advisors take effect April 23, 2015 meaning firms have six months to put the required policies and procedures in place.

By April 23, 2016, the leaders of MA firms must make the first of their annual certifications in writing that the firm has in place processes to establish, maintain, review, test and modify written compliance and written supervisory procedures reasonably designed to achieve compliance with MSRB rules.

“Developing effective procedures for supervision and compliance is a critical step for municipal advisor firms that are newly subject to regulatory oversight,” said MSRB executive director Lynnette Kelly. “The MSRB’s supervision rule will help firms prevent and promptly detect and address any compliance issues.”

The rule requires firms to designate a chief compliance officer, but allows flexibility for smaller or even single-person firms to tailor their compliance policies as appropriate to their size. Dealers have argued that the rule creates too much wiggle room for smaller firms and disproportionately burdens larger firms. Kelly said the rule will promote compliance among all MA firms.

“In addition to the federal fiduciary duty established by Dodd Frank, municipal advisors currently are subject to registration and fair dealing rules, among other requirements established by the MSRB,” Kelly said. “When Rule G-44 is in effect, municipal advisor firms will have an explicit obligation to effectively supervise their personnel in the interest of promoting compliance with all regulatory requirements.”

The MSRB is in the process of formulating other MA rules, including a core rule on the duties of an advisor. The MSRB will host an education outreach event for MAs in Chicago Nov. 3.

THE BOND BUYER

BY KYLE GLAZIER

OCT 24, 2014 5:03pm ET

John Cross says it’s time to bring the individual buyers who dominate the $3.7 trillion municipal-bond market out of the dark.

Cross, who’s set to step down next month as director of the Securities and Exchange Commission’s Office of Municipal Securities, said his successor’s challenge is to enable the public to trade off the same bond prices as Wall Street firms, eliminating an edge dealers have over their customers.

Individuals own about 60 percent of the market directly or through mutual funds, benefiting from the tax-exempt income generated by municipal securities. Leveling the playing field for those investors and bolstering their confidence is crucial for the states and cities that rely on the marketplace to finance projects from roads to schools.

“It would give retail investors more direct access to assess prices, rather than having to rely on their dealers,” Cross, 58, said in an interview. “That should lead to better prices, and investors would be more informed.’

SEC Chair Mary Jo White this year proposed improving transparency in fixed-income markets, where the lack of a central exchange gives dealers an advantage in evaluating prices. That dynamic holds sway in the local-government bond market, where half of securities trade an average of two times or fewer each year, according to the Municipal Securities Rulemaking Board, the industry’s regulator.

Trading munis can be costly. Muni investors pay brokers transaction fees that are about twice those on corporate debt, according to a report released this year by Standard & Poor’s Dow Jones Indices. A study by the Government Accountability Office in 2012 found that individuals weren’t receiving prices as favorable as investment firms, which are more capable of assessing the market.

Craig McCann, an economist with Securities Litigation & Consulting Group in Fairfax, Virginia, estimates that investors pay about $1 billion in excess fees a year to trade munis.

‘‘Quote disclosure would have a big impact,” he said. “It would lower those markups.”

The cost of individual bonds can vary, with broker fees frequently included in the price of securities instead of as a separate commission. For example, the price of Illinois munis maturing in June 2033, one of the market’s most frequently traded bonds in the second quarter, ranged on Oct. 23 from $95.80 per $100 face value to as high as $100.57.

Private Networks

“In the equity market, any investor can see prices all day long at 19 different exchanges on the buy and sell side,” said Cross. “You just don’t have that in munis.”

Brokers use private networks to sell or bid on securities. There are dozens of such electronic systems where broker-dealers, mutual funds and other large investors can trade, according to the SEC.

Jessica Giroux, who tracks regulatory issues in Washington for the Bond Dealers of America, which represents municipal securities firms, said the group didn’t have a position on the matter, given that no concrete proposals have been advanced.

The Securities Industry and Financial Markets Association “supports reasonable efforts to improve transparency in the fixed-income markets,” Michael Decker, co-head of munis in Washington for the broker lobbying group, said in a statement.

Market Scrutiny

The municipal market has attracted scrutiny from the SEC since the financial crisis, which contributed to bankruptcies in Stockton, California and Jefferson County, Alabama, and left governments nationwide reeling from investment losses in their pension plans.

The SEC’s enforcement division has brought cases against borrowers, including New Jersey, Illinois, and Kansas, for making insufficient financial disclosures in bond documents.

In 2012, the SEC, which approves regulations drawn up by the Municipal Securities Rulemaking Board, released a report proposing overhauls to improve the information available to muni investors. Among the recommendations was requiring disclosure of bid and offer prices on electronic trading networks. SEC Chair White endorsed the plan in a June speech.

Disclosure Push

The rulemaking board this year began considering steps requiring brokers to disclose markups, and approved another measure mandating that they seek the most favorable prices for customers. The SEC suggested both measures.

Cross plans to return to the Treasury Department, where he previously worked on tax policy. The SEC hasn’t named a successor. Since 2012, Cross has headed the municipal unit, which advises the agency. He is the first to lead the office since it was revamped under the Dodd-Frank law in 2010.

Cross’s office oversaw the first step toward regulating municipal advisers, drafting the definition of which firms would be covered by the rules.

SEC Commissioner Michael Piwowar credited Cross’s division for advancing the push for tougher price rules.

“They’ve been raising the stature — not only of the office — but just raising the issue of how important this market is to retail investors,” he said in an interview. “You see momentum on these issues.”

Bloomberg

By William Selway and Brian Chappatta

Oct 26, 2014 5:00 PM PT

To contact the reporters on this story: William Selway in Washington at [email protected]; Brian Chappatta in New York at [email protected]

To contact the editors responsible for this story: Stephen Merelman at [email protected] Mark Tannenbaum, Alan Goldstein

WASHINGTON — Dealers want the Municipal Securities Rulemaking Board to reduce the cost of compliance and to move quickly to finish the municipal advisor rules, while issuers are unsure they want the MSRB’s protection.

Market participants offered their views in response to the MSRB’s call for commentary on its recently published strategic objectives, which include implementing the MA rules, protecting municipal entities, facilitating market efficiency, and improving price transparency. The board is federally mandated to protect both issuers and investors, and is required to write rules fleshing out the requirements of the Securities and Exchange Commission’s MA registration rule.

Dealers have long said that non-dealer advisors needed to be subject to the same rules with which they already comply and both the Securities Industry and Financial Markets Association and the Bond Dealers of America said that the board should focus on quickly completing its MA rulemaking.

“A key initiative for the MSRB in 2015 will be the execution of rulemaking projects that will bring previously unregulated non-dealer municipal advisors under full and appropriate regulatory oversight,” wrote David Cohen, a managing director and associate general counsel at SIFMA. “In general, we believe the MSRB’s focus with regard to MA regulation should be to establish on an expedient basis a set of regulations that protects issuers and regulates dealer and non-dealer MAs equally.”

Cohen also said the MSRB needs to figure out ways to reduce the cost of compliance for regulated entities and find a way to spread the costs more evenly between dealers and the newly-regulated non-dealer MAs. Cohen told The Bond Buyer in a separate interview that dealers pay more than 85% of the MSRB’s fees and that MSRB revenues have increased sharply since 2010.

“It is vital that the MSRB find a means of taxing all industry members in an appropriately balanced manner to ensure that each segment of your membership pays its fair share of your expenses,” he wrote. “We believe the MSRB should undertake an across-the-board evaluation of your financing model and consider alternatives that would ensure that non-dealer municipal advisors pay their fair share.”

Mike Nicholas, chief executive officer of the Bond Dealers of America, urged the MSRB to move forward with the MA rulemaking, but cautioned that the group not be too rash in pursuing price transparency.

“The BDA supports this goal but would like to reiterate our concern that the information that the MSRB seeks to collect and report from dealers in striving to achieve this goal be examined and thoroughly considered in order to determine if this information is likely to result in any significant or real transparency benefit to the investor and issuers,” Nicholas wrote. “Simply making more information available about the pricing of municipal securities is not the best way to achieve price transparency and may, in fact, confuse investors and issuers.”

Nicholas added that while the BDA appreciates the MSRB including a formal cost-benefit analysis in its procedures, it should be more rigorous.

“In a market with so many unique securities, rules should be designed to encourage more participants in the business and support competition, not to drive people out of the business,” he wrote.

Dustin McDonald, director of the Federal Liaison Center at the Government Finance Officers Association, said the issuers’ group is “wary” of the MSRB’s mission to protect state and local governments.

“While we are supportive of the board’s educational outreach initiatives to governments through online videos and factsheets and in-person seminars, we have concerns about any efforts by the board to develop regulations over governments under the pretext of municipal entity protection,” McDonald wrote.

The board should continue to focus on education and on making the most possible rating agency information available on EMMA, McDonald concluded.

THE BOND BUYER

BY KYLE GLAZIER

OCT 24, 2014 3:02pm ET

The Municipal Securities Rulemaking Board (MSRB) received approval from the Securities and Exchange Commission (SEC) to create the first new rule for municipal advisors since the SEC released its final registration rule for these professionals in September 2013. New MSRB Rule G-44 establishes baseline supervisory and compliance obligations for municipal advisors. View the SEC approval order.

The new supervision requirements take effect April 23, 2015. The MSRB will announce details of a webinar on the key provisions in advance of the effective date.

Read the regulatory notice.  View the full press release.

WASHINGTON — The Municipal Securities Rulemaking Board is proposing to establish limits on the gifts and non-cash benefits that municipal advisors can provide in their professional capacities.

The MSRB on Thursday released draft amendments to its Rule G-20 on gifts and gratuities, which is already in place for broker-dealer advisors. The board seeks to extend the existing provisions to cover non-dealer MAs who are facing many new regulations for the first time.

The rule currently prohibits a dealer from giving directly or indirectly any thing or service of value, including gratuities, in excess of $100 per year to a person if that gift is related to the muni securities activities of the employer of the recipient. The amendment would clarify that the gifts also cannot be related to muni advisory activities.

“Restrictions on excessive gift-giving by municipal finance professionals are critical to ensuring that important state and local financing decisions are based on merit,” said MSRB executive director Lynnette Kelly. “The MSRB seeks to hold all regulated financial professionals to the same high standards of integrity in their work with state and local governments.”

Not all gifts will be subject to the limit. “Normal business dealings” such as occasional gifts of meals or entertainment recognized by the Internal Revenue Service as deductible business expenses are not subject to the proposed rule, nor are gifts commemorating a transaction, such as a desk ornament. De minimis and promotional gifts of nominal value are allowed, as are personal gifts such as wedding presents and bereavement gifts “that are reasonable and customary for the circumstances.”

The amendments would add the requirement that exempt gifts not be “so frequent or so extensive as to raise any question of propriety or to give rise to any apparent or actual material conflict of interest.” The draft amendments for municipal advisors also would explicitly prohibit dealers and municipal advisors from receiving reimbursement of certain entertainment expenses from muni bond proceeds.

That provision would address a regulatory gap recently highlighted by a first of its kind Financial Industry Regulatory Authority enforcement action against Alabama-based Gardnyr Michael Capital, Inc. in April. FINRA slapped that firm with $20,000 of fines for using bond proceeds to pay itself back for three trips to New York during which, according to FINRA investigators, GMCI executives and sometimes members of their families spent thousands of dollars unrelated to muni business. FINRA charged the group with violating fair dealing and supervision rules, but conceded that no rule specifically prohibited such conduct.

The MSRB further proposed to modify its Rules G-8 on books and records and G-9 on preservation of records to reflect that municipal advisors will need to keep and preserve a history of the gifts they give for at least five years. The MSRB is seeking comment on some specific areas, including the prevalence of gift giving among muni advisors, whether the rule’s exceptions are appropriate, and what the adoption of the changes would likely mean for the market.

The MSRB will host a webinar on the proposed changes on Nov. 13. The MSRB has set up a web resource to provide education and news to MAs, many of whom are unused to be regulated by any agency.

“As the regulatory environment continues to evolve, the MSRB recognizes the need for continued education and outreach to municipal advisor professionals,” Kelly said.

Comments on the proposal are due to be submitted to the MSRB by Dec. 8.

THE BOND BUYER

BY KYLE GLAZIER

OCT 23, 2014 2:08pm ET

WASHINGTON — Market participants are concerned that language in the Securities and Exchange Commission’s proposal to remove references to credit ratings from its Rule 2a-7 governing money market funds could be too restrictive on what securities MMFs could purchase.

Under the current rule, funds can only purchase eligible securities defined as those having a remaining maturity of 397 days or fewer that has received a rating from a designated nationally recognized statistical rating organization (NRSRO) in one of the two highest short-term rating categories. Funds must hold 97% of their assets in “first tier” securities, which have the highest short-term rating.

MMFs are huge investors in short-term muni debt, and recent regulatory scrutiny of them has raised apprehension amongst dealers, investors, and issuers.

The Dodd-Frank Act of 2010, in response to concerns that over-reliance on faulty credit ratings helped drive the financial crisis, required all federal agencies to review any regulations requiring the use of a credit worthiness assessment or a reference to credit ratings and consider not including them.

The commission first proposed changes to 2a-7 in March 2011, and was met by a hail of criticism from market groups that said the proposal to define a first-tier security as one the fund’s board determined had “the highest capacity to meet its short-term financial obligations,” would be too subjective and create a new, higher credit standard for first-tier securities.

The new proposal, floated in July, would eliminate the distinction between the two tiers of eligible securities and define an eligible security as one whose issuer the fund’s board determines has “exceptionally strong capacity” to meet its short-term obligations. That would remove the ban on funds investing more than 3% of their portfolios in second tier securities. However, many commenters maintained their original concerns about removing the objective rating agency standard. They were especially with concerned about a requirement that a determination of minimal credit risk “must include a finding that the security’s issuer has an exceptionally strong capacity to meet its short-term financial obligations.”

“Our members object to the new language,” wrote members of the Securities Industry and Financial Markets’ asset management group, including managing director and associate general counsel Matthew Nevins and managing director Timothy Cameron. The letter was also signed by John Maurello, managing director of the SIFMA Private Client Group.

“We understand that the commission may intend the new standard to replicate the ‘floor’ provided by an external ratings standard, to prevent an adviser from investing in an issuer that poses inappropriate credit risk based on an outlier credit analysis,” the SIFMA group said. “However, the proposed language does not serve that purpose for at least two reasons. First, a new subjective standard is not an effective floor, because the subjective standard is susceptible to an outlier interpretation. Second, the phrase ‘exceptionally strong capacity to meet its short-term financial obligations’ does not seem to create a floor. Rather, it appears to impose a new, additional standard that may be more stringent than ‘minimal credit risk.'”

Investment Company Institute deputy general counsel for securities regulation Dorothy Donohue told the SEC that the ICI views the proposal as an improvement over the 2011 draft, but is concerned the wording could restrict the number of securities that could qualify as eligible.

“‘Exceptional’ implies something unusual that might be read as not including a large number of money market securities of very high credit quality,” she wrote. “The SEC requests comment on whether a finding that a security’s issuer has a ‘very strong’ capacity to meet its short-term financial obligations better reflects the current limitation in Rule 2a-7. We believe it does.”

Other commenters didn’t see a problem with the SEC’s approach.

“We believe that in its totality, the new standard together with previous changes to regulations, provide an appropriate substitute standard,” wrote James Allen and Matt Orsagh, head and director of capital markets policy, respectively, at the investment professional organization CFA Institute.

The rule would not become effective until after a vote by the commission and would then likely provide an adjustment period for funds to prepare to comply, sources said.

THE BOND BUYER

BY KYLE GLAZIER

OCT 21, 2014 3:24pm ET

WASHINGTON — The Securities and Exchange Commission said Thursday that new technology and investigative techniques led to a strong fiscal 2014 enforcement year, including municipal bond cases.

“Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” SEC chair Mary Jo White said in a release. In the fiscal year that ended on Sept. 30, the SEC filed a record 755 enforcement actions, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. That is well up from fiscal 2013, when the commission brought 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties.

“Time and again this past year, the division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew Ceresney, director of the SEC’s division of enforcement. “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”

The SEC pointed to several firsts in the muni market, including the SEC’s first emergency action to halt a bond sale when it charged Harvey, Ill. in June of failing to disclose the misuse of bond funds and the commission’s first ever use of the investment adviser pay-to-play rule when it charged TL Ventures that same month with violating it.

White also noted a first for the Municipalities Continuing Disclosure Cooperation Initiative, which is designed to get issuers and dealers to report their own violations of their primary offering obligations under the federal securities laws. In July, the SEC reached a settlement with Kings Canyon Joint Unified School District in California for charges of misleading bond investors, making it the first settlement under the MCDC.

THE BOND BUYER

BY KYLE GLAZIER

OCT 16, 2014 3:44pm ET

The Bond Dealers of America is urging the SEC and MSRB to look more closely into the growth of instances in which non-dealer advisory firms have been acting as “placement agents” on direct placement transactions.

The BDA sent two identical letters to the SEC and MSRB, focusing on the rapid growth of “direct placement, direct loan or private placement” transactions to banks and other investors.

In its letter, the BDA states, “Now that the SEC is enforcing its own, and the MSRB’s regulations in regards to non-broker dealer municipal advisors we believe that this practice should be an important area of focus for the Commission’s municipal advisor enforcement priorities.”

Specifically, we ask that the regulators take potential violations into consideration when drafting the final rules governing municipal advisor activities and to communicate to the market their concerns about non-dealer advisors conducting placement agent activities.

You can view the letter to the MSRB here and to the SEC here.

The Bond Dealers of America submitted a comment letter to the MSRB in response to its request for input on its strategic priorities for 2015.

BDA’s letter focuses on:

• Municipal Advisor Regulation and Education
• Municipal Entity Protection
• Price Transparency
• MSRB Rule Language and Objectivity
• Cost-Benefit Analysis Should be More Rigorous and
• Education, Outreach and Market Leadership

You can find BDA’s final comment letter here.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) is requesting comment on a proposal to establish limitations on gifts given by municipal advisors in their professional capacity. The draft amendments to the MSRB’s existing gifts rule for dealers, Rule G-20, are designed primarily to extend the provisions of the rule to municipal advisors.

The MSRB recently sought public input on a proposal to apply its dealer rule on pay-to-play practices to municipal advisors. The MSRB’s focus on developing rules to address potential conflicts of interest is consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which charged the MSRB with developing a comprehensive regulatory framework for municipal advisors.

“Restrictions on excessive gift-giving by municipal finance professionals are critical to ensuring that important state and local financing decisions are based on merit,” said MSRB Executive Director Lynnette Kelly. “The MSRB seeks to hold all regulated financial professionals to the same high standards of integrity in their work with state and local governments.”

MSRB Rule G-20 currently establishes a $100 limit for gifts given by dealers to employees of entities engaged in municipal securities activities, subject to certain exceptions. The draft amendments would hold municipal advisor gift-giving to this same limit. Additionally, as part of the MSRB’s broad initiative to streamline its rulebook and facilitate compliance, the MSRB is proposing to codify guidance on the application of the rule in particular situations that is currently in several MSRB and MSRB-referenced Financial Industry Regulatory Authority (FINRA) interpretive materials.

The draft amendments for municipal advisors also would explicitly prohibit dealers and municipal advisors from receiving reimbursement of certain entertainment expenses from the proceeds of an offering of municipal securities. This provision would address a regulatory gap recently highlighted by a FINRA enforcement action.

Comments are due no later than December 8, 2014. The MSRB will host a webinar on the proposed changes on Thursday, November 13, 2014 at 3 p.m. ET. Register for the webinar.

To assist municipal advisors in sharing their input on proposed rules, the MSRB has produced a guide to participating in the rulemaking process. The Resources for Municipal Advisors section of the MSRB’s website includes additional educational resources and news for municipal advisors.

“As the regulatory environment continues to evolve, the MSRB recognizes the need for continued education and outreach to municipal advisor professionals,” Kelly said.

The draft amendments to the MSRB’s gifts and pay-to-play rules are among several new regulatory provisions for municipal advisors now in development. The MSRB filed its proposed municipal advisor supervision and compliance rule for Securities and Exchange Commission (SEC) approval. The MSRB plans to file a proposal for SEC approval to set baseline professional qualification requirements for municipal advisors. The MSRB also plans to file a proposal for SEC approval to create core standards of conduct for non-solicitor municipal advisors.

Alexandria, VA – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet October 29-31, 2014 where it will discuss the following rulemaking topics:

Pay-to-Play Rule for Municipal Advisors

The Board will discuss comment letters received on its draft amendments to MSRB Rule G-37 to address potential pay-to-play activities by municipal advisors.

Enhancements to Price Transparency

The Board will discuss comment letters received on potential enhancements to post-trade transaction data that would be disseminated through a new central transparency platform.

The Board will discuss the MSRB’s Long-Range Plan for Market Transparency Products and the phased development of a central transparency platform for the municipal market.

Asset-Backed Securities Disclosure

The Board will consider changes to the Facility for the Electronic Municipal Market Access (EMMA) system to reflect the new category of disclosure under Rule 15Ga-1 under the Securities and Exchange Act, on repurchases and replacements related to asset-backed securities.

This list is subject to change without notice. A summary of actions taken by the Board at the meeting will be sent to regulated entities and published on the MSRB’s website following the meeting.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today announced that it is offering a free six-week video series to educate municipal securities investors about fundamental disclosure documents. Each installment of the “Diving into the Documents” video series will be distributed to subscribers of the MSRB’s investor education email list. Sign up here. The series will also be available in its entirety in the MSRB’s Education Center.

“As part of our mission to protect investors, the MSRB develops engaging, multimedia educational resources about the complex municipal securities market,” said MSRB Executive Director Lynnette Kelly. “This video series brings to life the important information contained in a bond’s official statement and financial disclosure documents.”

“Diving into the Documents” will focus on the core disclosure documents that investors can refer to in order to make informed investing decisions. The series will also address how to find disclosure documents on the MSRB’s Electronic Municipal Market Access (EMMA®) website, the official repository for information on virtually all municipal securities.

Program Agenda

• October 31, 2014: Why Official Statements Matter
  November 7, 2014: What’s Inside an Official Statement
  November 14, 2014: Where to Find Official Statements on EMMA®
  November 21, 2014: Why Financial Disclosure Matters
  December 5, 2014: What’s Inside Financial Disclosure Documents
  December 12, 2014: Where to Find Financial Disclosures on EMMA®

Sign up for the MSRB’s investor education email list to watch the weekly video and access additional related resources. All videos and supplemental resources will be available in the MSRB Education Center, an online library of free, objective information on the municipal securities market.

Over the next few weeks, leading up to the December 1 deadline, NABL members will be advising issuer and obligated person clients on self-reporting under the Municipal Continuing Disclosure Cooperation Initiative. To assist its members in advising their clients, NABL has prepared a summary of views broadly held by practitioners on procedural aspects of self-reporting. The summary, Viewpoints on Issuer Participation in MCDC, is available here.

WASHINGTON – Eight state and local groups are urging federal banking regulators to classify investment-grade munis with demonstrated liquidity as high-quality liquid assets.

The National Governors Association, National Conference of State Legislators, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, Government Finance Officers Association, and International City/County Management Association all put their signatures to an Oct. 16 letter asking that high-quality marketable muni bonds count as HQLA under a new liquidity coverage ratio rule adopted last month.

That rule, a joint effort by the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency, requires the largest banks to hold a certain amount of high-quality, easily-marketable securities that could be converted to cash in a fiscal crisis. HQLA are categorized on the basis of risk and liquidity. Level 1 assets are viewed as the most liquid and least risky, and Level 2a and 2b considered less liquid but still readily marketable.

Corporate bonds, U.S. Treasuries, and foreign sovereign debt are included in the rule’s HQLA list, while munis are not. While the Fed has acknowledged that some munis could qualify and that members of its staff are working on an amendment to include some as HQLA, regulators have expressed doubt about how liquid munis really are and have argued that banks don’t hold them for liquidity purposes. Though some analyst have said the market can adjust to the new rule, market participants remain concerned that it will inhibit banks’ appetite when it becomes effective Jan. 1, driving up costs for issuers.

The state and local group letter stopped short of suggesting specific issuer size parameters as the Securities Industry and Financial Markets Association suggested did in its own letter, which proposed that the investment grade bonds of issuers and obligors with at least $100 million of marketable securities outstanding should qualify as HQLA. But the issuer groups still made the case that munis should be able to qualify as level 2a HQLA and suggested that large volume issuers whose bonds who display low price volatility should qualify.

“Municipal securities are and continue to be among the safest for investors and are highly tradeable,” the groups wrote. “The final rule should reflect the strength, integrity and value of municipal securities by identifying them as HQLA.”

Any amendment proposal produced by the Fed staff would need to be approved by the regulators before it could take effect.

THE BOND BUYER

BY KYLE GLAZIER

OCT 17, 2014 4:09pm ET

WASHINGTON – The investment grade bonds of issuers and obligors with at least $100 million of marketable securities outstanding should qualify as high-quality liquid assets under federal banking rules, the Securities Industry and Financial Markets Association told regulators in a just-released letter.

SIFMA managing director and co-head of municipal securities Michael Decker made the case in a letter sent Tuesday to banking regulators responsible for a recently-adopted banking rule that requires the largest banks to hold a certain amount of high-quality, easily-marketable securities that could be converted to cash in a fiscal crisis. The liquidity coverage ratio rule, adopted last month and effective Jan. 1, was a joint effort by the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency.

The liquidity rule principally applies to U.S. banking companies with at least $250 billion in total assets or consolidated on-balance sheet foreign exposures of at least $10 billion. Corporate bonds, U.S. Treasuries, and foreign sovereign debt are included in the rule’s HQLA list, which is categorized on the basis of risk and liquidity. Level 1 assets are viewed as the most liquid and least risky, and Level 2a and 2b considered less liquid but still readily marketable.

Muni market participants are concerned that the decision not to classify any municipal bonds as HQLA will cause banks to reduce their muni holdings, thereby increasing borrowing costs for issuers while adding to volatility in the muni market. Many market commentators have said it is unreasonable to classify corporate bonds as HQLA, if munis are not because corporates have higher default rates.

Moody’s Investors Service said the muni omission could hurt some credit ratings. And Sen. Chuck Schumer, D-N.Y., has pressed the regulators to move quickly with ongoing staff work to classify some of the most liquid munis as HQLA.

The LCR rule utilizes a four-part test to qualify securities as HQLA. The securities must have more than two committed market makers, a large number of non-market maker participants on both the buying and selling sides of transactions, timely and observable market prices and a high trading volume. Decker wrote that while SIFMA believes that test is appropriate for munis, additional criteria could be useful.

“Examining municipal market liquidity as measured by trading volume against issuer debt outstanding, there is no clear inflection point below which trading volume drops significantly,” Decker wrote. “Nevertheless, bonds of issuers and obligors with at least $100 million of marketable debt securities outstanding tend to demonstrate the highest degree of market liquidity.”

SIFMA also suggested that the LCR rule impose a composition cap on munis, limiting them to 10% of an institution’s total HQLA holdings.

“We believe amending the LCR Rule to provide for Level 2A liquid asset treatment for the appropriate segment of the municipal securities market would be consistent with ensuring that banks subject to the rule hold a sufficient level of liquid assets and would contribute to safety and soundness by providing a means for banks to diversify liquid assets into a distinct asset class,” Decker wrote.

The regulators have all signaled that they are open to amending the rule, but have expressed doubt about how liquid munis really are and have argued that banks don’t hold munis for liquidity purposes. Market experts have said the current rule should be regarded as final until an amendment is adopted.

THE BOND BUYER

BY KYLE GLAZIER
OCT 15, 2014 1:53pm ET

WASHINGTON – Gary Goldsholle will leave his post as general counsel at the Municipal Securities Rulemaking Board after serving just over two years, according to multiple sources.

The MSRB has retained the New York firm of Major, Lindsey & Africa to lead the search for Goldsholle’s replacement.

Sources said Goldsholle announced his intentions last week, but it is not clear what his last day at the MSRB will be. The MSRB declined to comment citing a policy of not discussing personnel changes, though it has made announcements of the departures of long-tenured staff in the past.

Goldsholle joined the MSRB in October 2012 after more than a decade at the Financial Industry Regulatory Authority, where he was vice president and associate general. Before joining FINRA, he worked in the office of the chief counsel in the trading and markets division of the Commodity Futures Trading Commission.

The MSRB is seeking a lawyer with 20 or more years of experience at a law firm, corporate legal department, or federal regulator, including at least eight in the securities industry, sources said.

The right hire will also have a deep knowledge of the muni market and relevant laws and regulations, as well as experience with speaking publicly, they said. These requirements will likely force the MSRB to hire from outside, although there are MSRB staff attorneys who could qualify, several sources said. Major, Lindsey & Africa has contacted a number of private muni lawyers for help in the search.

THE BOND BUYER

BY KYLE GLAZIER
OCT 14, 2014 3:49pm ET

Today, the BDA submitted a comment letter to the MSRB in response to a request for comment on draft amendments to Rule G-37 on political contributions made by dealers and prohibitions on municipal securities business and to extend the rule to cover municipal advisors. You can view our final comment letter here.

Specifically, our comments focused on:

• Generally supporting the MSRB’s efforts in creating a level playing field between dealers and municipal advisors.
  Request that the MSRB consider revising the provisions in the draft amendment to prevent duplicative maintenance of records and disclosures.
  Request that the MSRB increase the de minimis contribution limits for dealers and municipal advisors with respect to officials for whom they are entitled to vote from $250 to $350.

10-09-2014

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today received approval from the Securities and Exchange Commission to require dealers to provide annual municipal securities training for registered persons who are regularly engaged in or supervise municipal securities activities. While dealers have been obligated to conduct continuing education under MSRB rules, there was no requirement that dealer personnel be trained on municipal securities issues.

The amendments to MSRB Rule G-3, which take effect January 1, 2015, for the first time require dealers to train certain individuals annually on municipal securities issues, rather than allowing firms to base their continuing education topics on an overall assessment of training needs. The amendments permit dealers the flexibility to determine which of their registered representatives and principals regularly engage in or supervise municipal securities activities and should receive this topical training. The amendments also allow firms to determine the extent of their annual training on municipal securities matters.

“The MSRB’s revised continuing education requirements for dealers are designed to prompt firms to focus on the particular training needs of staff responsible for understanding municipal securities products and complying with all applicable requirements,” said MSRB Executive Director Lynnette Kelly. “Effective training facilitates compliance with MSRB rules and furthers the MSRB’s mission to protect investors and issuers.”

The rule amendments will help ensure that those individuals who are active in the municipal securities market, whether they have contact with customers or not, receive periodic training on municipal securities issues. The MSRB will host an educational webinar about the rule amendments on December 4, 2014 at 3 p.m. EDT. Register for the webinar.

The MSRB establishes standards of competency for municipal market professionals and facilitates compliance with MSRB rules through professional examinations and continuing education requirements. Separately, the MSRB is in the process of developing a professional qualifications program for municipal advisors. Read more here.

PORTLAND, ORE. – The Securities and Exchange Commission is concerned that municipal advisors are not registering properly and that some may be attempting to manipulate the MA registration rule as a marketing tool.

Jessica Kane, deputy director of the SEC’s Office of Municipal Securities, told members of the National Association of Municipal Advisors that the muni office is concerned about MAs who are failing to register in a timely fashion. October is the final month of the rolling registration deadlines that took effect with the final rule in July. Kane said her office is aware of notable numbers of MAs who have not swapped their temporary registrations for permanent ones as required by the rule.

NAMA is the former National Association of Independent Public Finance Advisors (NAIPFA).

A mass email went out to everyone listed as a contact on temporary registration Form MA-T late last month as a reminder, but some MAs attending NAMA’s conference here said they have had extensive problems trying to register because of technical difficulties with the SEC’s EDGAR computer system. Kane said she had heard anecdotally that some MAs were confused about their registration requirements, such as when their deadline was, what form to use, or other aspects.

One advisor asked Kane if there was a chance the registration deadline could be extended beyond this month. The SEC lawyer declined to commit to that, but encouraged all MAs who missed their deadlines to register as soon as possible.

Kane also heard from several of the MAs in attendance that some firms might be using the registration rule’s independent registered municipal advisor, or IRMA, exemption as a way to solicit easy business. Investment bankers who want to give bond-related advice to state and local governments generally want to avoid having to register as an MA because doing so saddles them with a fiduciary duty to the client and bars them from underwriting a resulting deal. The IRMA exemption allows them to give that advice without registering if the issuer retains them and says it will rely on them as its own MA.

Leo Karwejna, managing director and chief compliance officer at Public Financial Management, said he has heard of MAs offering to act as IRMAs for a relatively low fee. His firm has been approached by issuers seeking a similar arrangement, he said, but PFM has declined to work with potential clients if discussions about the scope of services led PFM to believe it would be acting as a nominal “shield” to protect a non-MA from registering rather than serving as a true fiduciary as the MA rule requires.

“I have concerns hearing these comments,” Kane said. She said an IRMA must be “meaningfully engaged,” to satisfy the requirements of the exemption, regardless of the amount of compensation involved.

“If the IRMA is not meaningfully engaged, then the exemption is not working as designed,” she said.

The SEC has issued two rounds of guidance on the MA rule following its release a year ago, targeting areas where market participants said they were unclear about the requirements. Kane said the muni office currently has no concrete plans to issue more guidance, although other lawyers in the muni office have said previously that another round is not out of the question.

THE BOND BUYER

BY KYLE GLAZIER
OCT 10, 2014 1:35pm ET

Oct 2 (Reuters) – FINRA plans to flood Puerto Rico with more than 800 arbitrators who have agreed to hear cases from investors who lost money in closed-end Puerto Rico bond funds, according to Wall Street’s industry-funded regulator.

The figure is more than a ten-fold increase from the roughly 70 arbitrators whom the Financial Industry Regulatory Authority (FINRA) said had initially agreed to hear the rush of cases.

FINRA, which runs the securities arbitration forum where investors must resolve their legal disputes with brokerages, disclosed the figures in a letter to the U.S. Securities and Exchange Commission on Sept. 30.

FINRA ramped up its efforts earlier this year to find arbitrators to hear the Puerto Rico bond fund cases, which are taking place in the U.S. territory. FINRA has typically flown arbitrators to Puerto Rico from south Florida, since few arbitrators live in Puerto Rico.

Investors have filed about 500 cases for losses they say they sustained because of the bond funds, a FINRA spokeswoman said. But there could be more than 1,000, some lawyers for investors say. A FINRA spokeswoman declined to provide an estimate of the number cases the regulator anticipates.

The flood of cases follows a sharp decline in the value of Puerto Rico municipal bonds last year that resulted in big losses for investors in closed-end funds with heavy exposure to those bonds. Lawyers for investors have accused UBS Financial Services, Bank of America’s Merrill Lynch and other brokerages of inappropriately putting clients’ money into such funds.

In March, FINRA imposed a month-long hold on the cases while it looked for more arbitrators. It has been locating arbitrators in other states, including Georgia, Florida, Alabama, Mississippi and Louisiana, and Texas, who are willing to fly to San Juan at FINRA’s expense.

Some lawyers are already concerned that even 800 arbitrators may not be enough. “I appreciate the fact that FINRA has expanded the pool,” said Jeffrey Sonn, a lawyer in Fort Lauderdale, Florida whose firm has filed 147 bond fund cases, mostly against UBS Financial Services in Puerto Rico. Still, there “aren’t enough arbitrators who are probably available to keep going to Puerto Rico,” Sonn said.

“We are confident that we will have enough arbitrators to handle all the cases that go to hearing,” said Linda Fienberg, who heads FINRA’s arbitration unit.

The SEC, on Sept. 29, approved a pay-hike for arbitrators, which FINRA has said will help it to recruit more arbitrators to its system.

BY SUZANNE BARLYN
Thu Oct 2, 2014 4:02pm EDT

(Reporting by Suzanne Barlyn in New York; Editing by Lisa Shumaker)

WASHINGTON – Three municipal securities regulators plan to hold the first Compliance Outreach Program for Municipal Advisors in Chicago on Nov. 3 and are asking folks to register for it.

The program is a collaborative effort of the Securities and Exchange Commission, Financial Industry Regulatory Authority, and the Municipal Securities Rulemaking Board. It will be similar to compliance outreach events for broker dealers and investment advisers and will give MAs the chance to talk with regulators about risk management, regulatory issues, and compliance practices, according to a release.

“The municipal advisor program will be a good opportunity for new municipal registrants to better understand regulatory expectations,” said Kevin Goodman, national associate director of the SEC’s broker-dealer and municipal advisor examination programs. “The program will allow registered municipal advisors to interact with all three regulators, which is an important aspect of our overall outreach efforts.”

Mike Rufino, FINRA’s head of member regulation-sales practice explained, “This program will provide municipal advisor compliance professionals across the country with the opportunity to hear directly from their collective regulators on the issues and expectations regarding municipal advisors. Compliance Outreach Programs also provide us with an opportunity to hear from municipal advisor firms regarding their day-to-day compliance initiatives.”

Lynnette Kelly, the MSRB’s executive director, said, “The outreach program will help reinforce the importance of complying with rules being developed for the municipal advisor community. We are pleased to participate in this event and help educate advisors on their responsibilities.”

There is no cost to attend the program, and there will also be a no registration required webcast. Registration is open to all muni professionals, but space is limited and regulators said preference will be given to employees of registered municipal advisors on a first-come, first-served basis.

THE BOND BUYER

BY KYLE GLAZIER
OCT 1, 2014 11:46am ET

WASHINGTON – Dealers want the de minimis contribution limit increased in the Municipal Securities Rulemaking Board’s proposed application of its Rule G-37 on political contributions to municipal advisors, and one lawyer told the board the rule is probably unconstitutional unless it is raised.

Both the Securities Industry and Financial Markets Association and the Bond Dealers of America told the MSRB in letters filed Wednesday that the de minimis exception for political contributions to candidates for whom an individual is entitled to vote should be bumped up to $350 from the current $250 to be consistent with the de minimis exceptions under Securities and Exchange Commission rules for investment advisers and Commodity Futures Trading Commission rules for swap-dealers.

The Rule G-37 amendments, proposed in August, would generally mirror existing dealer obligations by prohibiting MAs from engaging in muni advisory business with state or local governments for two years after making political contributions to officials who can influence the award of MA business. The rule would apply to all MAs, but would represent the first such restrictions on the non-dealer advisors.

Hardy Callcott, a partner at Sidley Austin in San Francisco, told the MSRB that the pay-to-play rule as proposed wouldn’t pass muster in the light of the U.S. Supreme Court’s decision earlier this year in McCutcheon v. Federal Election Commission. Callcott believes the current limit of $250, which restricts dealers and dealer MAs, is already problematic.

“As was true in 2011, unless the MSRB conforms Rule G-37 to the higher contribution limits contained in SEC Rule 206(4)-5, there is no hope that the proposed limits in Rule G-37 could be deemed ‘narrowly tailored to achieve a compelling government interest,'” Callcott wrote.

Leslie Norwood, associate general counsel and co-head of municipal securities at SIFMA, told The Bond Buyer that her group suggested harmonizing the de minimis limit with SEC and CFTC rules in order to make sure the final rule complies with the Supreme Court’s mandate. The rule also should provide an exception for individuals who were previously regulated by the SEC or CFTC rules and donated within those limits, Norwood wrote.

SIFMA also said that the proposal’s definition of “municipal advisor representative” might be overbroad, because it captures “any associated person engaged in municipal advisory activities on the firm’s behalf, other than a person whose functions are solely clerical or ministerial.” SIFMA wants the term to include only individuals whose primary job is their MA work, and not those who merely do a few tasks related to MA business, Norwood said. SIFMA further requested an effective date of no less than six months after SEC approval.

Bond Dealers of America chief executive officer Mike Nicholas wrote that the BDA supports the MSRB’s approach, but takes issue with the proposal’s recordkeeping requirements.

“We note that the approach the MSRB has taken with respect to the draft rule may entail unnecessary duplication for dealers,” he wrote. “For example, as is the case with some dealers, all of their employees who act as a municipal advisor also serve as bankers in an underwriting capacity. The way the MSRB has written the rule will require these employees to keep dual records and disclosures for the same contributions – contributions they are already required to monitor and disclose. We would therefore suggest to the MSRB that they consider revising the provisions of amended Rule G-37 to permit those employees to maintain one set of records and disclosures.”

The SEC must approve the proposal before it becomes final, and can require the MSRB to make changes to it.

THE BOND BUYER

BY KYLE GLAZIER
OCT 1, 2014 2:07pm ET

WASHINGTON — Securities and Exchange Commission member Michael Piwowar said Tuesday that it isn’t clear if implementing a uniform fiduciary standard of conduct for broker-dealers and investment advisers providing personalized investment advice about securities would benefit retail investors.

Piwowar explained his thinking in a speech at the National Association of Plan Advisors D.C. Fly-In Forum, though he made clear that he has not yet decided whether or what new obligations should be imposed on broker-dealers. The Dodd-Frank Act mandated an SEC study of the effectiveness of existing legal or regulatory standards of care for providing personalized investment advice and recommendations about securities to retail customers. The act said the study should examine whether there are legal or regulatory gaps or other shortcomings in the protection of retail customers.

The commission is now mulling whether to adopt a rule meant to clarify what Piwowar called the “blurry line” between IAs and broker-dealers, both of whom give investors advice on their securities purchases. Investment advisers are fiduciaries who must put their clients’ interests ahead of their own, while broker dealers are subject to fair-dealing and suitability rules that require them to have a reasonable basis to believe a security is suitable for a customer.

Bond Dealers of America senior counsel and managing director for federal regulatory policy Jessica Giroux said BDA has generally been supportive of further regulating brokers under certain situations, but has reservations about any rule that would restrict what kinds of advice a broker could provide.

Piwowar said that while it is obvious that retail investors are confused about the difference between IAs and broker-dealers, a fiduciary rule might not help.

“I am not aware of any evidence that retail investors are systemically being harmed or disadvantaged under one regulatory regime as compared to the other,” Piwowar said. “In fact, the SEC study found that ‘investment advisers and broker-dealers are subject to extensive regulation and oversight designed to protect clients and customers, whether retail or other.'”

“Both regulatory regimes require investment advisers and broker-dealers to adhere to high standards of conduct in their interactions with retail investors, which are intended to encourage both broker-dealers and investment advisers to act in the interests of their investors and minimize conflicts of interests when providing personalized investment advice or recommendations,” he continued.” “Therefore, a uniform fiduciary standard of care may not even result in a client getting different investment advice than they receive today.”

Piwowar expressed concern about the potential costs of the SEC imposing a uniform fiduciary standard and suggested that the commission should instead consider developing a concise disclosure document that could help alleviate investor confusion about the duties owed to them by their financial professionals. It is not clear when the SEC could take action on a fiduciary standard, but it is generally believed it would have to be next year. Piwowar said the commission should not act before the Department of Labor revises its definition of fiduciary, a redraft of which the DOL is set to unveil in January.

THE BOND BUYER

BY KYLE GLAZIER
SEP 30, 2014 3:01pm ET

Alexandria, VA —The Securities and Exchange Commission, Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) today announced the opening of registration for the first Compliance Outreach Program for Municipal Advisors that will take place in Chicago, IL on November 3, 2014.

The SEC’s Office of Compliance Inspections and Examinations, in coordination with the SEC’s Office of Municipal Securities, is partnering with FINRA and the MSRB to sponsor the program. Similar to the compliance outreach programs for broker-dealers and investment advisers, the municipal advisor program will provide municipal advisor professionals a forum for discussions with regulators about risk management, regulatory issues and compliance practices.

“The municipal advisor program will be a good opportunity for new municipal registrants to better understand regulatory expectations,” said Kevin Goodman, National Associate Director of the SEC’s broker-dealer and municipal advisor examination programs. “The program will allow registered municipal advisors to interact with all three regulators, which is an important aspect of our overall outreach efforts.”

Mike Rufino, FINRA’s Head of Member Regulation-Sales Practice said, “This program will provide municipal advisor compliance professionals across the country with the opportunity to interact with FINRA, the MSRB and the SEC staff. Compliance Outreach Programs also provide us with an opportunity to hear from municipal advisor firms regarding their day-to-day compliance initiatives.”

Lynnette Kelly, Executive Director of the MSRB, said the outreach program will help reinforce the importance of complying with rules being developed for the municipal advisor community. “We are pleased to participate in this event and help educate advisors on their responsibilities.”

There is no cost to attend the program. Registration is open to all municipal professionals with limited seating available and preference given to employees of registered municipal advisors on a first-come, first-served basis. Please visit the registration page for more information about attending.

This event will be webcast. Information regarding accessing the webcast will be posted on the SEC website, at sec.gov, on the day of the event. For additional information visit the SEC, FINRA or the MSRB website.

WASHINGTON – Dealer groups are making a final push for changes to the Municipal Securities Rulemaking Board’s proposed best execution rule, warning the Securities and Exchange Commission that it should hold off on any changes to how firms interact with sophisticated municipal market professionals until the MSRB can solicit comments on them.

Securities Industry and Financial Markets Association managing director and associate general counsel David Cohen made his group’s case in a letter filed with the commission Monday. Cohen told The Bond Buyer that SIFMA believes the MSRB has taken a thoughtful approach to developing its Rule G-18 on Best Execution of Transactions in Municipal Securities, which would require dealers to use “reasonable diligence” when handling orders and executing municipal security trades for retail investors to “obtain a price that is as favorable as possible under prevailing market conditions.”

But changes to the MSRB’s definition of SMMPs, to whom dealers would owe only a duty to deal fairly, would be costly and warrant market commentary, Cohen said.

The proposed changes did not appear in the MSRB’s first best execution draft floated in February. The MSRB’s SMMP definition has been harmonized for the past two years with the Financial Industry Regulatory Authority’s rule governing institutional accounts. Dealers could get a single letter from an SMMP stating that it will exercise independent judgment in evaluating dealer recommendations. The letter could satisfy both FINRA and MSRB requirements. But the new definition requires further affirmations from an SMMP customer, such as a statement that it has access to “established industry sources” of information, such as the MSRB’s EMMA system and rating agency reports as well as other “material information.”

That would require new letters and a costly overhaul of dealers’ automated systems, Cohen said.

“It is unclear what the MSRB’s rationale is for these changes,” he wrote to the SEC. “The record does not reflect any commenters, SMMP or other, requesting such a change or suggesting that SMMPs were not protected adequately.”

The SEC should decline to approve the D-15 changes until the MSRB seeks comment on that section specifically, Cohen told The Bond Buyer. “There should be an opportunity for a thoughtful discussion,” he said.

SIFMA suggested keeping affirmations harmonized with FINRA requirements and adding language to the SMMP definition that requires a dealer wishing to treat a customer as sophisticated to have “a reasonable basis to believe is capable of evaluating investment risks, and market value, and execution quality independently.”

Bond Dealers of America chief executive officer Mike Nicholas wrote the commission that the expanded customer affirmation under D-15 is of little value, but said his group continues to remain somewhat confused about how dealers’ obligations under the new rule would differ from their current obligations. BDA is very concerned about how regulators will approach enforcement of the rule, he said.

Dealers have said from the start that “best execution” is an equity market concept, and Nicholas told the SEC that the term “best execution” should be swapped for “execution diligence” in some instances. SIFMA has previously suggested its own “execution with diligence” standard.

The SEC must approve the MSRB proposals before any can take effect.

THE BOND BUYER
BY KYLE GLAZIER
SEP 29, 2014 4:52pm ET

WASHINGTON – The Municipal Securities Rulemaking Board could accomplish many of its transparency goals more cheaply by providing more information itself than by requiring dealers to provide it, the Securities Industry and Financial Markets Association told the MSRB Friday.

SIFMA associate general counsel and co-head of municipal securities Leslie Norwood penned a lengthy comment letter in response to the MSRB’s latest round of proposals aimed at enhancing post-trade muni market data through a new central transparency platform, or CTP. The MSRB is considering requiring dealers to disclose a variety of new information in their electronic trade reports, such as flagging trades: executed on alternative trading systems; using non-transaction-based compensation agreements or; originating as conditional trade commitments.

While SIFMA said it appreciates the MSRB’s deliberate approach to the CTP, and its decision not to seek changes to reporting deadline requirements, it warned that some of the proposals would require costly overhauls of dealers’ automated systems without offering enough market value to justify those costs.

“We’re certainly pleased that they’re being methodical,” Norwood told The Bond Buyer. “Transparency is important to everybody in the market.”

One of the biggest changes the MSRB is proposing is the requirement to indicate which trades result from conditional trade commitments. CTCs occur when dealers solicit, accept, and conditionally allocate orders prior to the signing of the bond purchase agreement. The prices agreed upon in a CTC may not reflect market conditions at the time of the formal award of the bonds. Because trades cannot officially be executed until the bond purchase agreement is signed and the bonds are formally awarded to the underwriter, CTCs appear on EMMA the same day as the day the bonds are issued and initially sold. There is no current means of distinguishing between CTCs and bonds sold the same day they were issued.

“SIFMA and its members recognize that the marketplace may benefit from an MSRB indicator denoting that the post-trade pricing information for a transaction reflects pricing under a conditional trading commitment,” Norwood wrote. “The indicator, however, would be operationally very difficult to implement and may be misleading because it’s an indication only of the client’s interest at that specific point in time.”

It would also be very expensive, she added, estimating that the required system overhauls could cost hundreds of thousands of dollars per dealer.

Norwood said that other CTP proposals, such as an indicator of when an alternative trading system was used on a transaction, could easily be handled by the MSRB itself to achieve the same end without pushing the associated cost onto dealers.

“The MSRB proposes that for those ATS’ that take a principal position between a buyer and seller, the ATS and the dealers that transact with the ATS would be required to include the ATS indicator on trade reports,” Norwood noted. “SIFMA feels that this is unnecessary and unduly burdensome, as the MSRB already knows what ATS firms take a principal position between a buyer and a seller, and can flag trades with those entities as ATS trades, just like it flags trades currently between dealers and municipal securities broker’s brokers.”

Bond Dealers of America chief executive officer Mike Nicholas told the MSRB that his group has some concerns with how new indicators could mislead investors with information not indicative of market conditions or irrelevant to improving transparency.

“While the use of a venue indicator, and specifically an ATS indicator, may provide for higher quality research and analysis of market structure by providing information about the extent to which ATS’ are used and may complement the existing indicator disseminated for transactions involving a broker’s broker as the MSRB suggests, this information is not likely to result in any significant or real transparency benefit to the investor and dealers should not be required to report such information,” Nicholas wrote.

BDA said it supports requiring dealers to indicate which transactions occurred under non-transaction-based fee agreements because it could help investors account for differences compared to trades with transaction fees built in, but asked the MSRB to work with the industry in setting an appropriate implementation date on such a requirement.

Darren Wasney, program manager at the Financial Information Forum, a group that addresses the implementation issues that arise from securities orders, told the MSRB that the CTC indicator should be incorporated but without requiring dealers to report the date and time of the CTC agreement. The MSRB should instead define a CTC as any trade report executed on the first day of trading in a new issue that is a result of an order formed more than a specified number of hours in the past, Wasney wrote.

THE BOND BUYER
BY KYLE GLAZIER
SEP 26, 2014 2:55pm ET

WASHINGTON – Issuers battling dealer firms over the right to seek arbitration to settle disputes over auction rate securities are planning to take their case to the Supreme Court now that a federal appeals court has ruled against them.

Two dealer firms are disputing the issuers’ rights to arbitration in separate cases, which have been combined. Citigroup brought its suit against the North Carolina Eastern Municipal Power Agency in 2013, while Goldman Sachs sued the Golden Empire Schools Financing Authority of Kern County, Calif. in 2012. Both firms sought to prevent the issuers from seeking arbitration after it was determined the charges could not be brought before the courts.

The U.S. District Court for the Southern District of New York ruled in favor of the two firms. The issuers appealed.

The U.S. Court of Appeals for the Second Circuit in Manhattan ruled in favor of the underwriters last month, finding that financing documents barred the issuers from being heard by a Financial Industry Regulatory Authority arbitrator, but decided last week to withhold issuing a mandate for 90 days in order to give Golden Empire and NCEMPA a chance to appeal to the nation’s highest court. The issuers have each indicated they plan to appeal to the Supreme Court. When the mandate is issued the jurisdiction of the appeals court will end, ending the case if the Supreme Court does not decide to hear it.

FINRA Rule 12200 states that FINRA members and their customers must arbitrate a dispute if a customer requests it. Attorneys for both Goldman and Citi argued that the claims of both NCEMPA and Golden Empire were time-barred by statutes of limitation from being brought in court, and that the documents signed by both parties specified that “all actions and proceedings” arising from the transaction be brought in U.S. district court in New York.

NCEMPA is seeking arbitration in connection with a 2004 issuance of auction-rate securities, complaining that Citi advised it to issue the securities and then “abandoned” the ARS market in 2008 causing it to suffer financial losses. The issuer said that it never waived its right to arbitration and that “actions and proceedings” do not include arbitration under the laws of New York where Citi is based and the suit was brought.

NCEMPA further argued that the governing law clause appeared in only one of a number of documents related to the transaction, which should be insufficient to invalidate a broader arbitration right under FINRA rules.

Golden Empire also wants arbitration related to ARS and is making the same claims. It also said it never waived its right to arbitration.

The appeals court agreed that the clauses in the underwriter contracts superseded the issuers’ right to FINRA arbitration, but noted that similar cases have had very mixed results on appeal. The Ninth Circuit in California has held that a forum selection clause supersedes the FINRA rule, while the Fourth Circuit in Richmond, Va. has held that it does not.

The Second Circuit relied on its own precedent in a similar non-muni case, noting that the clause in question is “all inclusive and mandatory” and thus supersedes the FINRA rule.

Decisions by the courts of appeal are binding only in the states covered by their jurisdictions, which means that identical cases could continue to be decided differently depending on which court hears it. A Supreme Court decision would create binding legal precedent over all U.S. courts.

THE BOND BUYER
BY KYLE GLAZIER
SEP 24, 2014 2:00pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers that amendments to MSRB Rule G-3, on professional qualifications, become effective on September 30, 2014. The amendments narrow the activities permitted of Limited Representatives – investment company and variable contracts products (Series 6 representatives) exclusively to sales to and purchases from customers of municipal fund securities (such as interests in 529 college savings plans); eliminate the Financial and Operations Principal (FINOP) classification, qualification and numerical requirements; and clarify in supplementary material that the term “sales” as used in Rule G-3 includes the solicitation of sales of municipal securities. In order to clarify MSRB rules and to conform other rules to the amendments, the MSRB has made several technical amendments to Rule G-3 and non-substantive conforming amendments to MSRB Rules G-27 and Rule G-7.

Read the August 4, 2014 MSRB Regulatory Notice.

A new financial regulation meant to ensure that banks are able weather a panic would have an unpleasant side effect — making it more expensive for cities and states to fund projects.

The liquidity coverage rule, finalized by bank regulators in early September, would require banks to hold enough safe, liquid assets, such as Treasury bonds, that would be sellable even in a crisis to fund their operations for at least 30 days. Part of the 2010 Dodd-Frank financial reform law, the regulation is meant to prevent a repeat of 2008, when investment bank Lehman Brothers found itself unable to meet its creditors’ demands and failed.

But by excluding municipal bonds from the definition of assets considered safe and making them less attractive to banks, some lawmakers and financial industry leaders say, the federal government may have unnecessarily raised the cost of doing business for cities and states, which rely heavily on issuing bonds for projects such as highways and schools.

“If there’s less demand for bonds, obviously you end up paying higher interest rates,” said Richard Ellis, state treasurer for Utah and president of the National Association of State Treasurers. “I don’t know if you can quantify the impact” of the rule, Ellis said, “but it will mean less projects to fund.”

Local governments and industry groups had been vocal about the potential harm that the rule would do while it was being considered by officials at the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. They noted that some municipal bonds were at least as liquid as the corporate bonds included in the proposed rule.

When the agencies finalized the rule, Fed Governor Daniel Tarullo acknowledged those concerns and said that the Fed staff would look into amending the rule to include municipal bonds as high-quality liquid assets. It’s not clear when a fix would be proposed, although implementation of the rules begins in January for the biggest banks and will be completed by 2017.

Treasurers have at least one powerful advocate pushing for the change — New York’s Chuck Schumer, a member of the Senate Banking Committee and the No. 3 Democrat in the Senate.

After confronting Tarullo over the treatment of municipal bonds in a September congressional hearing, Schumer wrote a letter to the regulators saying “it is hard to understand how all three federal regulators finalized … with such glaring inconsistencies. … The broad exclusion of all municipal bonds from counting as [high-quality liquid assets] under the current rule makes no sense on the merits and could have disastrous side effects, so I hope the regulators will heed our call and reconsider it quickly.”

Regulators likely will revisit the topic and categorize some segment of the roughly $3.6 trillion municipal bond market as liquid, speculated Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association. “We’re convinced that there would be a negative effect” on state finances if the rule is kept as is, Decker added.

Some analysts believe that the regulators got it right — that municipal securities are not as liquid as high-quality corporate bonds or Treasury securities, and that leaving them out of the liquid assets category will not harm small governments’ finances.

In a note written in response to the final rule, Wells Fargo’s Brian Jacobsen wrote that the impact of the rule on the municipal bond market would be “negligible” and that “banks have already prepared for these regulatory changes, so a lot of the market adjustment has probably already taken place.”

Others, however, warn that the rule could cause trouble over time.

“Even though in the near term the impact would be masked … when it could manifest itself is when you have a considerable downturn and municipals will continue to sell off for a considerable period because some of the liquidity providers — the big banks – may not be as quick to pick up munis as other assets that would help their liquidity ratios,” said John Dillon, managing director at Morgan Stanley Wealth Management.

Dillon said that, while most municipal bonds are held by individual investors interested in their tax-exempt interest payments and are not liquid, there are enough widely traded municipal bonds to be included in the rule.

Leaving them out, he said, would ultimately hurt taxpayers. “Higher borrowing costs in munis, for whatever reasons, would just mean mom and pop — the residents of every state — paying more for their borrowing,” Dillon said. “It really does have a trickle-down effect.”

WASHINGTON EXAMINER

BY JOSEPH LAWLER | SEPTEMBER 22, 2014 | 5:00 AM

To date, 2014 has seen the Securities and Exchange Commission (SEC) continue its trend of the past several years of heightened enforcement in the municipal securities and public pension plan markets. This year has been remarkable, however, for the SEC’s significant efforts to compel greater disclosure, and impose far more rigorous disclosure obligations, than is required either under current federal legislation or in practice. Unquestionably, the most meaningful enforcement event has been the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative), announced on March 10 and intended to address what the SEC perceives as widespread noncompliance with issuers’
continuing disclosure agreements.

Click here to read the full report.

A new federal rule opens the door to counting municipal bonds in bank assets.

Let’s dispatch with the bad news first: The municipal bond market has taken yet another hit this month. A new federal rule excludes muni bonds from the liquid assets that banks must hold in case of an emergency. Issued by the U.S. Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, the rule exists to make sure banks have enough assets on hand that can quickly be converted to cash in the event of a financial crisis.

The good news is that public finance officials were prepared for the ruling. Ever since the draft rule was released a year ago, they’ve been slowly building a case to reverse it, arguing that municipal bonds should be designated high quality liquid assets (HQLA) alongside easily sellable assets like Treasuries or highly rated corporate bonds. While the Federal Reserve still issued the rule, it did recommend that some municipal bonds eventually be included as HQLAs.

Why is this inclusion important? A big reason is that the blanket exclusion of munis “would have negative long-term implications for the municipal market, potentially dampening demand and liquidity,” according to RBC Capital Markets’ Chris Mauro. An assessment by Fitch Ratings in January noted that if banks weren’t allowed to count municipal bonds as liquid assets, it would be more expensive for banks to hold the bonds on their balance sheets and, as a result, could lead to banks reducing their muni bond portfolios.

Fortunately for cities, the new liquidity rule won’t likely have an immediate impact. As long as overall interest rates remain low, muni bonds will be an attractive option for banks. Indeed, banks have been increasing their presence in the $3.69 trillion municipal market, holding $425.2 billion up from $221.9 billion in 2008. But, wrote Chicago’s CFO Lois Scott in a letter to more than a dozen of her counterparts, “when economic conditions change, we will need and want America’s big banks to stand by us.”

Until then, observers will be watching to see which muni bonds will be exempted and counted as easily sellable liquid assets. Mauro finds the wording of the final rulemaking document troubling for its repeated assertion that “most” municipal bonds do not possess liquidity characteristics consistent with the objectives of the rule. Specifically, the final rulemaking notes that “many municipal securities are not liquid and readily-marketable.”

“Accordingly,” said Mauro, “we fear that the proposed new rule will award the HQLA designation to only a narrow slice of the municipal market. As we have previously articulated, we believe that most investment-grade municipals, particularly those of frequent issuers, should qualify as HQLAs.” In fact, most municipal governments are investment grade, rated BBB- or higher.

In any case, transportation advocates worry that the cost of project financing will increase for governments whose bonds are excluded from this rule. “That could also adversely impact development of public-private partnerships for transportation projects,” said Pete Ruane, president and CEO of the American Road & Transportation Builders Association.

The high-borrowing-cost argument is one that gets made a lot on Capitol Hill, most often as a reason not to start taxing investors’ interest earned on municipal bonds. In recent years, though, that same argument has gotten regulators to drop municipal bonds from being part of the Volcker Rule’s “risky investments” category (although it did place limits on banks’ use of tender-option bonds, which represent a small fraction of the municipal market).

GOVERNING.COM

BY LIZ FARMER | SEPTEMBER 25, 2014

[email protected] | @LizFarmerTweets

CHICAGO – Future Municipalities Continuing Disclosure Cooperation initiative settlements may offer more detail on the Securities and Exchange Commission’s priorities and the SEC’s Office of Municipal Securities may offer more municipal advisor rule guidance, commission officials said Thursday.

The information came from two SEC lawyers speaking on separate panels at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop, which concluded Friday.

The SEC’s MCDC program, which offers reduced settlement terms to issuers and underwriters who voluntarily report instances over the past five years in which their official statements falsely claimed compliance with continuing disclosure obligations, was the hottest topic of the conference. Lawyers repeatedly tried to get the lone SEC enforcement official present to reveal more detail on the SEC enforcement division’s thinking.

During a discussion panel devoted to MCDC, Kevin Guerrero, a senior counsel in the enforcement division’s municipal securities and public pensions unit, revealed some additional detail on what market participants can expect from MCDC settlements. Although he was unprepared to make promises to the attorneys present, Guerrero said the commission is mindful of the criticism that was doled out by the legal community after the SEC released an MCDC settlement with Kings Canyon Joint Unified School District in July that was vague. That settlement order referenced various failures to file continuing disclosures by the district, but did little to offer the market more clues about what sorts of continuing disclosure lapses the SEC is most interested in.

Guerrero told the bond lawyers that he hopes future orders will be more detailed. He also said it is likely that settlements with broker-dealers, whose deadline to self-report passed at midnight Sept. 9, would include all deals they reported to the SEC as opposed to separate orders for each different issuer for which they underwrote bonds. The SEC probably will not wait until the issuer reporting deadline of Dec. 1 to start releasing those dealer settlements, he added.

“I expect we will try to churn these out as we get the settlements completed,” Guerrero said.

Rebecca Olsen, chief counsel in the SEC’s muni office, told bond lawyers that the commission staff could issue further municipal advisor rule guidance. Although the muni office has no “concrete plans” to release another batch of information about the massive rule approved last fall, it is mulling the possibility, she said.

“It’s possible we may consider a few additional topics on the investment side, including possibly something on local government investment pools,” Olsen said.

There is still apprehension among dealers about dealing with investments under the MA rule, which implemented the Dodd-Frank Act’s requirement that individuals and firms giving advice to municipalities be subject to a fiduciary duty to place the clients’ interests over their own.

All bond proceeds and muni escrows are subject to the rule, and Utah State Treasurer Richard Ellis noted during a different panel discussion that municipalities must keep track of where they put bond money because even a small amount of bond proceeds could “taint” a much larger pool of tax revenue dollars so that the advisers would be considered municipal advisors subject to federal oversight.

The SEC has already offered some guidance on the subject, saying that dealers could rely on a good faith effort to determine that a fund did not contain bond proceeds, if there was evidence to support that conclusion. Dealers could make use of exemptions from the MA rule to protect themselves from having to register, including by running that business through a registered investment advisory arm of the business, but firms have said that would increase costs for issuers.

THE BOND BUYER

BY KYLE GLAZIER
SEP 19, 2014 12:07pm ET

Bond dealers who match retail buyers and sellers without assuming much risk themselves would be required to disclose their sales markups under a rule proposed today by the brokerage industry’s self-regulator.

The Financial Industry Regulatory Authority measure would cover matched pairs, where firms fill client orders with bonds they hold for no more than one day, according to a statement released today. While stock brokers must tell investors how much they earn, many corporate bond dealers have profited from an opaque market where most trades are completed by telephone.

Securities regulators have sought a way to force dealers to disclose markups on certain bond sales, proposing rules on three occasions that were never adopted. Under Finra’s new plan, which applies to trades involving 100 bonds or fewer, investors would see the price they paid or received as well as the dealer’s price on their confirmation statement.

“The fact that we see these trades occurring in the vast majority of cases in a very short time period, and we see significant variation with respect to the type of markups that occur, suggest to me there could be significant value to relaying that information to customers,” Finra Chief Executive Officer Richard G. Ketchum said in an interview this week.

Lobbyists for Wall Street brokerages say regulators should be careful to avoid judging markups based simply on how much time passes between when a dealer buys and sells a bond.

Balancing Needs

“We support reasonable efforts to improve bond-market transparency and we intend to study and comment on Finra’s proposal,” Sean Davy, managing director of the Securities Industry and Financial Markets Association, said in a statement. “A key issue for Sifma will be balancing the need to improve transparency with the need to preserve market liquidity.”

The Finra proposal was prompted by Securities and Exchange Commission Chair Mary Jo White, who called in June for regulators to develop rules for disclosure of markups by the end of the year. SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar also have called for the disclosure. The SEC must approve the proposal for it to become effective.

Finra’s Board of Governors today also approved rule proposals aimed at improving transparency in off-exchange venues that trade stocks and bonds. One would require electronic bond-trading platforms to report to the regulator the price quotes they disseminate for corporate debt and mortgage bonds backed by the U.S. government. Finra said it would separately seek public comment on whether to make those quotations available to the public.

Oversee Testing

The board approved another proposal sought by White — extending Finra’s registration requirements to employees of trading firms who develop computerized trading algorithms. Finra also issued new guidance for how firms are expected to oversee the testing and use of automated trading tools to ensure they aren’t manipulative and don’t harm markets.

“What we’re basically describing is best practice in the industry,” Ketchum said. “There is a wide variation of controls existing there and we think there ought to be a greater focus across the board.”

By Dave Michaels Sep 19, 2014 11:56 AM PT

To contact the reporter on this story: Dave Michaels in Washington at [email protected]

To contact the editors responsible for this story: Gregory Mott at [email protected]

CHICAGO – The Securities and Exchange Commission will probably use emergency court action to stop state and local governments from selling municipal bonds if it thinks their offerings are fraudulent, an enforcement division official told bond lawyers meeting here.

Kevin Guerrero, a senior counsel at the muni and public pensions unit in the SEC’s enforcement division made the comments during a panel discussion at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop conference. Guerrero referenced the commission’s June enforcement action against Harvey, Ill., when the SEC went to court and filed a successful request to block a planned debt issue by the Chicago suburb after it and its Comptroller, Joseph Letke, allegedly engaged in a several-year fraudulent scheme to divert bond proceeds for improper, undisclosed purposes.

While it is not unusual for the commission to seek emergency action from a court to restrain a party from making a fraudulent offering, Guerrero noted the Harvey, Ill. case was the first time the commission had done so in the muni market. The SEC found the alleged fraud in a previous offering, and when it discovered an upcoming offering during the course of the investigation, it moved to block a muni sale for the first time.

“I don’t think it will be the last,” Guerrero warned.

The SEC lawyer also reinforced the SEC’s stance of offering minimal concrete guidance on participation in its Municipalities Continuing Disclosure Cooperation initiative, which offers lenient settlement terms to issuers and underwriters who self-report instances in the last five years in which their official statements falsely claimed compliance with their continuing disclosure obligations. NABL members and issuers have asked for more guidance from the SEC about the MCDC, including information on both what the commission might consider to be “material” disclosure failures as well as procedural guidance on how to submit the reports.

Guerrero continued to deflect requests under questioning from attending bond lawyers. While the deadline for underwriters to participate has passed, attorneys are still interested in how issuers should process their filings, which are due by Dec. 1. Some bond lawyers have questioned whether only the most flagrant violations should be submitted under the MCDC.

“Is it better to just send in the stinkers?” asked Bracewell & Giuliani partner Paul Maco, who was on the panel.

Guerrero said issuers need to use their own best judgment, but added that the SEC thinks it is reasonable to use a “bucket” approach to classify some submissions as very obvious violations and others as borderline. He added that issuers who have had their deals reported by their underwriters could choose to send the enforcement division a letter making the case that a deal didn’t include an enforceable violation. The SEC can’t offer much guidance beyond that on how issuers should organize their deals for submission, he said.

The NABL conference concludes Friday.

THE BOND BUYER
BY KYLE GLAZIER
SEP 18, 2014 1:49pm ET

CHICAGO – Bankruptcies in Jefferson County, Ala. and Detroit, as well as regulatory and enforcement actions, have garnered increased scrutiny of the bond market in Washington, D.C. and market participants need to better understand the policymaking process, a key Treasury Department official told bond lawyers on Wednesday.

Kent Hiteshew, director of Treasury’s State and Local Finance Office, made the remarks at the opening session of the National Association of Bond Lawyers’ Bond Attorneys’ Workshop, which is in session here until Friday. He discussed municipal bankruptcies, the Municipalities Continuing Disclosure Cooperation Initiative, the new liquidity coverage ratio rule, and other current topics in the market to illustrate how the perception of the muni market have changed in ways that market participants should be aware of.

Also during the session, Kevin Guerrero, a senior counsel at the Securities and Exchange Commission’s enforcement division’s muni and pensions unit, warned that that the SEC will likely seek financial penalties against issuers who have violations and do not participate in the MCDC. Issuers have until Dec. 1 to self-report failures to disclose noncompliance with continuing disclosure obligations for bonds issued during a five-year period.

Hiteshew began his remarks by talking about the tremendous growth of the municipal market. “When I started my career in the early 1980s, total municipal debt outstanding was just $575 billion.” he recalled. Today the $3.7 trillion muni market is unique in the world as it provides low cost, easy capital market access to state and local governments large and small to finance our nation’s critical infrastructure needs. But, the system’s advantage of de-centralized capital planning and execution is also its challenge: there are over 50,000 issuers with more than 1.5 million distinct CUSIPs issued under more than 50 separate legal frameworks and state income tax exemptions.”

“Notwithstanding remarkably low historic default experience,” he continued, “the recent bankruptcies of Jefferson County, several California local governments and Detroit, and bid-rigging and swap scandals, while isolated, have increasingly captured headlines.”

“These events have increased attention and focus on the municipal market, particularly in the regulatory community,” he said.

Hiteshew urged a close reading of the Securities and Exchange Commission’s 2012 comprehensive muni market report, and said that understanding the SEC’s view that muni market is “opaque, illiquid and fragmented,” is important to understanding why bank regulators did not include munis as high-quality liquid assets in its liquidity coverage rule. Hiteshew acknowledged market fears that the exclusion of munis as HQLAs could hamper banks’ appetite for them and hurt the market, and said his office will be monitoring the situation to understand what impact the new rule is having on the market.

“My point here is that there is significant focus on the municipal market in Washington today,” Hiteshew said. “Whether you agree with these developments or not, the municipal bond industry should be more cognizant of how it is perceived by policymakers and work to better understand the policymaking process.”

Hiteshew also challenged NABL to perform an analysis of the legal treatment of “special revenues” during and after municipal bankruptcy. Recent municipal bankruptcies have brought increased attention to the treatment of bonds backed by a user or service fee versus general obligation bonds in bankruptcy proceedings. Hiteshew said recent NABL papers on other topics have been helpful.

Hiteshew also touted the Obama administration’s proposal to create a permanent America Fast Forward Bond program. This proposal was included in the president’s fiscal 2015 budget proposal.

The AFF bond program “would attract new sources of capital for infrastructure investment and provide significant benefits for both issuers and the overall municipal market,” he said.

AFF bonds would be similar to Build America Bonds in that they would be in the direct-pay mode, but the subsidy rate would be 28% instead of 35%. AFF bonds could be used for the same types of projects as BABs as well as current refundings and 501(c)(3) financings. They could also be used for projects that could be financed with private-activity bonds.

Starting in 2013, the subsidy payments to issuers have been reduced because of federal spending cuts known as sequestration. But the Obama administration’s proposal precludes subsidies for AFF bonds from being reduced because of sequestration.

Hiteshew noted that AFF bonds would be a supplement, rather than a substitute, to tax-exempt bonds. The program would “make the tax-exempt market more efficient and actually bolster support for tax-exempt bonds among federal policymakers,” he said.

Hiteshew said it is important that the AFF program be permanent in order to “incentivize investors to make a longer-term commitment to the municipal bond market and more effectively broaden the taxable investor base for infrastructure investment in our country.” When BABs were being marketed, potential investors, particularly foreign investors and U.S. pension funds, told Treasury that they found the fact that BABs could only be issued for a short time period to be a disincentive to developing credit expertise and portfolio management systems for the bonds, he said.

“Overall, a new large class of institutional investors could be a healthy addition to the municipal market – enhancing both market liquidity and promoting improved disclosure standards,” he said.

Additionally, AFF bonds would be helpful to the market because they “would provide issuers with an effective alternative when tax-exempt market supply-demand technicals turn negative and the value of tax exemption cheapens,” Hiteshew said. “[AFF] Bond issuance could be used to reduce tax-exempt supply, thereby improving tax-exempt pricing — particularly on the long end of the curve where traditional tax-exempt demand is more limited.”

Furthermore, “for larger issuers, America Fast Forward Bonds would provide an important additional source of demand when their traditional tax-exempt investors reach capacity limits,” he said.

Hiteshew invited NABL members to give a new working group suggestions about innovative financing approaches to infrastructure.

The group, called the Interagency Infrastructure Finance Working Group, is co-led by Treasury Secretary Jack Lew and Transportation Secretary Anthony Foxx. It is supposed to submit to President Obama by mid-November recommendations about how to increase collaboration between the public and private sectors on infrastructure development and promote awareness and understanding of innovative infrastructure financing programs.

Guerrero said the SEC enforcement division’s muni and pensions unit of roughly 30 attorneys will spend the coming months combing through underwriter self-reports under MCDC, which were due earlier this month. Under the terms of the initiative, the enforcement division will recommend to the commission favorable settlement terms for both underwriters and issuers who self-report instances in the past five years in which the participated in deals where official statements falsely claimed compliance with continuing disclosure obligations.

Guerrero said that when evaluating MCDC submissions, the SEC may ask follow-up questions of the self-reporting entities and will contact them if the commission thinks enforcement is warranted. Guerrero urged issuers, who still have until Dec. 1 to report, to use their best judgment in deciding to do so.

THE BOND BUYER
BY KYLE GLAZIER and NAOMI JAGODA
SEP 17, 2014 4:20pm ET

(Reuters) – The U.S. Treasury will monitor the impact of a recent bank liquidity rule on the cost of new municipal debt issuance, a federal official said on Wednesday.

Kent Hiteshew, director of the Treasury’s newly-formed Office of State and Local Finance, told a meeting of bond attorneys that he was aware of concerns that the elimination of municipal bonds from the definition of banks’ high-quality liquid assets could potentially limit bank demand for the debt, pumping up costs of new bond issuance.

Earlier this month, the U.S. Federal Reserve, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency tightened rules on which assets banks can sell in the event of a credit crunch.

The rule did not count municipal bonds as “liquid assets,” raising an outcry from states, cities, schools and other issuers of the debt.

Issuers say the rule will drive down banks’ demand for their bonds, forcing them to offer higher interest rates on their debt in order to attract buyers. That, in turn, will make borrowing more expensive and curb their ability to embark on capital improvement projects.

Hiteshew noted that banks own just 12 percent of the $3.7 trillion market, although they have doubled their aggregate exposure to municipal debt since 2008.

He also told the National Association of Bond Lawyers’ workshop that the Obama Administration continues its legislative push for America Fast Forward Bonds as an alternative to tax-exempt issuance. The proposed bond program would follow the short-lived, but popular Build America Bond program that was part of the economic stimulus act.

“Overall, rather than a threat to tax-exempt financing, we think a permanent direct-pay taxable program, like America Fast Forward Bonds, would make the tax-exempt market more efficient and actually bolster support for tax-exempt bonds among federal policy makers,” Hiteshaw said in prepared remarks.

Another speaker, Kevin Guerrero, senior counsel in the U.S. Securities and Exchange Commission’s enforcement division, said the regulator continues to crack down on deficient disclosures by borrowers, noting settlements with high-profile issuers New Jersey, Illinois and Kansas involving their unfunded pension liabilities.

“Municipal disclosure has been and will continue to be an ongoing focus for us,” Guerrero said, adding that the SEC’s new initiative that encourages issuers and underwriters to self-report potential disclosure problems is just one aspect of that focus.

He also said the first phase of the initiative, which began in March, ended earlier this month for underwriters to report potential disclosure problems and that the SEC was pleased with the response. Issuers have a reporting deadline of Dec. 1.

Wed Sep 17, 2014 11:12pm BST

(Reporting By Karen Pierog, additional reporting by Lisa Lambert in Detroit; Editing by Diane Craft)

(Reuters) – A top U.S. regulator called for major reforms in the fixed income markets on Tuesday, saying many of the rules are out of date and lack enough protections for retail investors.

In prepared remarks for a market structure conference at Georgetown University, Securities and Exchange Commission Republican member Daniel Gallagher said he is concerned by “a troubling asymmetry of information” in the bond market.

“Retail participation in the municipal and corporate bond market is very high,” Gallagher said. “And yet, these markets are incredibly opaque to retail investors.”

Gallagher called for a handful of reforms, including potential changes by the industry to permit the use of more standardized contracts similar to the standardized structure of many derivatives products.

Such a change, he said, could help improve price transparency because it would facilitate a migration toward the less opaque exchange and electronic dealer-to-dealer trading.

He also said the SEC should consider removing references from the agency’s rules to CUSIP identifiers, or the nine-character code used to identify securities that are assigned by Standard & Poor’s CUSIP Global Services.

“The commission needs to do something about the de facto monopoly forcing the use of CUSIPs in the fixed income markets,” Gallagher said.

The push for reforms in the multi-trillion dollar municipal and corporate bond market by Gallagher and several other SEC commissioners marks a shift in focus by the agency.

Over the last several years, the SEC has mostly been focused on reforming the U.S. equity market, after a series of high-profile glitches and major market events damaged investor confidence.

Among those events were the May 2010 “flash crash,” the collapse and sale of Knight Capital to what became KCG Holdings after a technology error flooded the market with erroneous orders, and most recently, the major outage of Nasdaq OMX’s securities information processor (SIP), which receives all traffic quotes and orders for the exchange’s stocks.

Gallagher said Tuesday that some reforms are also needed in the equities space, particularly around SIPS, which are owned and operated by exchanges.

The market’s reliance on SIPs lessens competition for trading data, creates delays in gaining access to the information and concentrates risk around a single point of failure, he said.

This raises questions about whether the SEC should instead encourage market players to decide which data feeds they want to use, he said.

“We could mandate that the exchanges make their direct feeds available, for a fee, to third-party data vendors, who can then aggregate the last-sale prices. This could facilitate market competition for consolidated data,” Gallagher said.

BY SARAH N. LYNCH
WASHINGTON Tue Sep 16, 2014 2:20pm EDT

On June 19, 2014, the Federal Energy Regulatory Commission (“FERC”) issued a notice of proposed rulemaking (“NOPR”) proposing to revise its policies for applications to sell energy, capacity, and ancillary services at market-based rates.

Generation owners and power marketers that sell wholesale energy, capacity, or ancillary services in the continental United States, outside of the area operated by the Electric Reliability Council of Texas, must obtain prior authorization from FERC to sell at market-based rates. FERC grants requests for market-based rate authority from sellers that can demonstrate that they and their affiliates lack or have adequately mitigated horizontal and vertical market power in the relevant geographic market. FERC uses a seller’s balancing authority area or the relevant regional transmission organization (“RTO”) or independent system operator market, as applicable, as the default geographic market. A seller that obtains market-based rate authority is subject to ongoing compliance obligations to demonstrate that it continues to lack or has adequately mitigated market power in its relevant market.

FERC’s policy is to use two indicative screens for assessing an applicant’s horizontal market power: the “pivotal supplier analysis” and the “wholesale market share analysis.” Under each screen, FERC examines all of the generation owned or controlled by an applicant and its affiliates in the relevant market. Applicants that fail either indicative screen are rebuttably presumed to have market power and are given an opportunity to present other evidence to demonstrate that, despite the screen failure, they do not have market power. Once an applicant obtains market-based rate authority, it must comply with ongoing compliance obligations to demonstrate that it continues to lack or has adequately mitigated horizontal and vertical market power.

To streamline its horizontal market power analysis, FERC proposes to no longer require sellers in RTO markets to submit the indicative screens. Instead, wholesale power sellers in RTO markets would be permitted to rely on RTO market monitoring and mitigation measures to prevent the exercise of market power. FERC also clarifies that if all of the generation owned by a seller and its affiliates in the relevant and first-tier markets is fully committed, a seller does not need to submit the market screen analyses; instead, the seller can state that its capacity is fully-committed. FERC also proposes to clarify how sellers should prepare simultaneous transmission import limit studies, which measure the amount of power that can be imported into the relevant market.

FERC proposes to require sellers to provide an organization chart depicting their affiliates and upstream owners when filing initial market-based rate applications, updated market power analyses and notices of change in status. Under the proposed rule, sellers also would be required to submit the indicative screens and affiliated asset appendices in an electronic spreadsheet format that can be searched, sorted, and otherwise accessed using electronic tools. FERC seeks comment on whether it would be useful for FERC to develop a comprehensive searchable public database of the information contained in the asset appendices.

Under FERC’s existing regulations, sellers with market-based rate authority must report to FERC any change in status that would reflect a departure from the characteristics FERC relied upon in granting market-based rate authority, including increases in affiliated generation of 100 MW or more. FERC proposes to clarify that the 100 MW reporting threshold is not limited to the geographic markets previously studied by a seller. That is, a seller must file a notice of change in status if it or its affiliates acquire generation that causes a cumulative net increase of 100 MW or more in any relevant geographic market. The revised regulations also would require sellers to include long-term firm purchases of capacity and/or energy in calculating the 100 MW change in status threshold.

FERC requires all market-based rate applicants, and sellers submitting a notice of change in status reporting new affiliates, to submit an asset appendix in the form prescribed in Order No. 697. In its NOPR, FERC states that the asset appendix should include all behind-the-meter generation and qualifying facilities owned or controlled by the applicant or its affiliates. FERC also proposes to allow sellers to aggregate their behind-the-meter generation by balancing authority area or market into one line on the asset appendix. Similarly, FERC proposes to allow sellers to aggregate their qualifying facilities under 20 MW by balancing authority area or market into one line. We note that while the proposed rule would alleviate some of the burdens associated with reporting numerous on-site generation, such as multiple rooftop residential or commercial solar facilities owned by a solar energy developer, the requirement to report all behind-the-meter generation will still be quite burdensome for sellers that own multiple small distributed generation facilities. We recommend that such sellers submit comments to FERC suggesting that the asset appendix should exclude all behind-the-meter generation that is 1 MW or smaller or that does not export power to the grid.

Finally, FERC provides guidance on the use of joint tariffs. FERC allows affiliated sellers within the same corporate family to choose whether to transact under a single market-based rate tariff for an entire corporate family or under separate tariffs. These “joint tariffs” allow sellers that are part of the same corporate family to designate a filing party to submit a single tariff on behalf of all affiliates within the corporate family. FERC notes that it is providing guidance on its website on how the corporate family should identify its designated filer and what each of the other filers should submit as a tariff record.

Comments on the NOPR are due by 5 PM Eastern on Tuesday, September 23, 2014.

Click here for a copy of the NOPR.

Last Updated: September 15 2014
Article by Adam Wenner and A. Cory Lankford
Orrick

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

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today continued its focus on promoting timely and complete disclosure in the municipal securities market with the release of an educational podcast that emphasizes for issuers the importance of disclosures to bondholders. “Providing Disclosure Information to Investors,” provides an audio overview of issuers’ obligations to disclose key financial information to investors through the MSRB’s Electronic Municipal Market Access (EMMA®) website.

“Choosing financial disclosure as the subject of the MSRB’s first-ever podcast highlights the importance of this issue to the MSRB,” said MSRB Executive Director Lynnette Kelly. “The MSRB has developed an extensive library of educational resources for state and local governments to assist them in understanding their obligations to disclose information to investors.”

The podcast can help state and local governments ensure that staff responsible for making municipal securities disclosures understand the requirements. This is particularly important in light of a recent enforcement initiative by the Securities and Exchange Commission that provides issuers and underwriters the opportunity to submit to the MSRB previously unreported disclosure documents to honor commitments specified in their bond offering documents. The podcast, as well as other multimedia resources on disclosure, is available in the MSRB Education Center.

The MSRB today also published a new report on the volume and types of municipal securities continuing disclosure submitted to the EMMA website. The newest edition of the MSRB’s annual report on continuing disclosure submissions provides data about the nearly 700,000 documents submitted to EMMA between July 2009 and June 2014. The report notes a marked increase in submissions in June 2014. Bond calls continue to be the most common type of submission, accounting for 36 percent of all submissions. Read the report.

The EMMA website is the official repository for information on virtually all municipal securities. EMMA provides free public access to official disclosures, trade data, credit ratings, educational materials and other information about the municipal securities market.

Date: September 17, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
[email protected]

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a Congressionally-chartered, self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is subject to oversight by the Securities and Exchange Commission.

A Cobb County attorney said Tuesday that she filed a complaint with the U.S. Securities and Exchange Commission in relation to the county’s plan to issue up to $397 million in bonds for construction of the new Atlanta Braves stadium.
Susan McCoy said that she filed the complaint in March because municipal bonds are overseen by the SEC and she was unsettled by how quickly the Braves deal was approved by commissioners — just two weeks after the Braves made public their intention to move to Cobb County before the 2017 season.

“The SEC has jurisdiction if there is fraud or material misstatement,” in a bond issuance, McCoy said. When asked if she believes there has been fraud or misstatement, McCoy responded: “The full extent of what that means would have to come from them.”

The SEC does not comment on investigations or complaints. McCoy said she knows of at least two other complaints filed with the SEC.

Posted: 6:55 p.m. Tuesday, Sept. 9, 2014

By Dan Klepal

The Atlanta Journal-Constitution

Banks, insurance companies and financial advisors want more clarity on principal transactions and disclosures in proposed rules drafted by regulators governing the conduct of nonsolicitor municipal advisors.

The draft rules are part of the federal government’s new regulatory framework of the $3.7 trillion municipal market.

Local and state governments tap the municipal market to raise billions of dollars every year to fund public improvement projects. Financial reforms contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act called for more scrutiny of the municipal market.

The Municipal Securities Rulemaking Board (MSRB) had already gone through a first round of comments earlier this year related to amendments to Rule G-42 on the standards of conduct and duties of municipal advisors.

Subsequent to comments received from industry groups on the MSRB’s initial draft rules, the board asked for more comments following the release of revised draft rules.

The National Association of Independent Public Finance Advisors (NAIPFA) was swift to condemn parts of the revised draft rules.

The MSRB’s proposal surrounding the disclosure of “inadvertent advice” would benefit “municipal advisors who are also registered broker/dealers who wish to avoid being prohibited from underwriting an issuance of securities pursuant to MSRB Rule G-23,” NAIPFA said.

Rule G-23 prohibits a broker/dealer who serves as a financial advisor to an issuer — a school district or local government — for a particular municipal bond issue, from switching roles and underwriting the same bond issue.

Allowing broker/dealers an exemption under the “inadvertent advice” clause would lead to “widespread abuses by broker/dealers” looking to circumvent fiduciary duty requirements already put in place by the Securities and Exchange Commission and the MSRB, NAIPFA said.

NAIPFA further called the inadvertent advice clause “both troubling and unwarranted.”

In a letter to the MSRB, the powerful Bond Dealers of America took issue with what it said was language “vague and open to interpretation” when it came to prohibiting municipal advisors or affiliates from engaging in transactions “directly related to the same municipal securities transaction or municipal financial product as to which the municipal advisor is providing advice.”

“It is not clear to us exactly what transactions would be considered ‘directly related to’ other transactions, the BDA said in the letter. “Would acting as a municipal advisor for a swap while acting as the underwriter on a related series of variable rate bonds be too ‘directly related’?”

Underwriters and big financial services companies also had questions for MSRB regulators about the prohibition of principal transactions for an advisor’s own account.

The Financial Services Roundtable, which represents 100 financial services companies offering banking, insurance, payment and investment products, said regulators should include in the revised draft rules alternative mechanisms for advisors “that would permit them to engage in principal transactions with municipal entitles subject to disclosure and consent requirements.”

FSR members also said G-42’s draft rules around disclosure requirements for advisors and the advisors’ affiliates were “vague and overly broad,” and would make it “very difficult for a municipal advisor to comply with if it is part of a large, multiservice financial conglomerate.”

For decades, municipal market players — including bond dealers, securities broker/dealers, bond issuance advisors, bond counsel, advisors to the municipal governing body, and consultants — have plied a lucrative trade with little oversight.

In the municipal market, it is often difficult to discern who is representing whom, and where to draw the line between who has a fiduciary standard of care toward the municipal entity — the taxpayer — and who doesn’t, and how far that standard extends.

Last year, the SEC filed suit against the Greater Wenatchee Regional Events Center Public Facilities District, in Wenatchee, Wash., in connection with a real estate project that soured during the financial crisis.

In its complaint, the SEC noted that the director of executive services for the City of Wenatchee, while “on loan” to the facilities district, signed off on financial documents for a development project despite no formal financial background.

The director of executive services, at the behest of the local mayor, found herself the de facto liaison between the municipality, the developer, attorneys and underwriters.

Unlike U.S. Treasury securities that are traded every day and subject to transparent pricing, price-setting in the municipal market remains an exercise shrouded in relative opacity with layers of intermediaries, often politically connected, benefiting from every transaction.

Proponents of municipal market reform say the difficulty with which to pin down advice when it comes to the municipal market is exactly why this market is in need of a robust regulatory framework.

September 09, 2014

By Cyril Tuohy

InsuranceNewsNet

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

© Entire contents copyright 2014 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Bank of America Merrill Lynch today weighs in on the new federal regulations governing what liquid, easy-to-sell securities big banks need to hold in reserve, regulations that so far exclude municipal bonds from this category of high-quality liquid assets. BofA is among those who see limited harm to the muni markets, and it lists five specific reasons why:

[T]he immediate impact of the adopted rule is likely to be limited for several reasons. First, as Regulators point out, only roughly half of the $425 billion of municipal securities held by domestic banks are held by those large banks subject to the new requirements. Second, most banks subject to these regulations are already in compliance with, or have made significant strides toward compliance with, the regulations as currently drafted. Third, were municipal securities to be added to the definition of HQLA in accord with the international regulations under Basel, municipal securities would still be subject to a 15% haircut as a Level 2a asset type, and further limited by the requirement that Level 2a and 2b assets can make up no more than 40% of total HQLA. Fourth, some municipal securities may be allowed to be counted toward HQLA in the near future, though no proposal or criteria for inclusion have yet been released. And, lastly, the Regulators contend that banks likely purchase municipal securities for profit generation rather than as a means of meeting Regulator’s capital and liquidity requirements.

Although regulators have said they’re still reviewing whether munis should be treated as high-quality liquid assets, BofA says investors shouldn’t assume they’ll eventually be included in the category:

While political opposition to the exclusion of municipal securities in the definition of HQLA is likely to persist following the adoption of the rule, some municipal securities may get a reprieve if the Fed adopts a rule allowing those securities in the future. That said, the market should treat these rules as final until further notice. They serve to introduce a new long-term regulatory risk that should be priced. Over time, the muni market may be compelled to find a higher-priced source of liquidity if these rules become binding on banks.

Barrons
By Michael Aneiro

A federal judge expressed strong doubts Friday about the constitutionality of the Securities and Exchange Commission’s effort to rein in political donations from investment advisers who take business from state and local governments.

However, at an hourlong hearing, U.S. District Court Judge Beryl Howell expressed doubts that the lawsuit filed by the New York and Tennessee Republican parties was the correct vehicle to block the SEC’s so-called “pay to play” rules. She said the state parties could lack the legal standing of someone more directly affected by the rules, like a candidate seeking to raise money or an investment adviser seeking to donate funds.

Howell also said that a technical legal issue might be fatal to the state parties lawsuit, at least in its current incarnation. The law appears to require those aggrieved by an SEC order to file suit within 60 days. The pay-to-play rules were adopted in 2010. The parties did not file their suit until last month.

“We believe that the rule exceeded the agency’s statutory authority,” said Jason Torchinsky, a lawyer for the state parties.

Howell repeatedly faulted the state parties for a lack of specifics in their legal papers, such as the names of candidates who could be affected or affidavits from investment advisers who claim they’re holding back giving money.

“I’m a little troubled by the plaintiffs’ standing here. It seems quite dependent on the actions of third parties,” the judge said. “I’m a district court. I deal with facts. I need facts.”

However, Howell said the SEC’s rule—aimed at reining in donations intended to help investment advisers win business from state-controlled endowments or pension funds—was vague, especially when it comes to preventing indirect donations.

It’s “very troubling that nobody understands the scope of the SEC’s rule,” the judge said, later referring to “the chilling nature of this catch-all” provision on indirect gifts.

SEC lawyer Jeffrey Berger defended the provision, saying it is aimed at donations routed through a spouse or family member. He also said it would be implemented only where the agency could prove an intent to circumvent the rule.

“There’s an intent component to that,” Berger said. “There’s another layer of protection.”

Berger also noted that political parties are not mentioned in the rule, which targets officials who can influence the selection of investment advisers.

However, Torchinsky said the provisions banning indirect support could discourage donations to state parties because of concerns that such a donation could be seen as an indirect gift to a covered candidate, if a state party later gives funds to that candidate.

Howell, an appointee of President Barack Obama, also expressed skepticism about the fact that the limits only apply to donations of more than $350. “The $350 seems like it came out of thin air,” she said.

If the judge uses the 60-day time limit in SEC-related suits as a reason to turn down the state parties request for a preliminary injunction against the rule, it likely won’t be the end of the matter. The parties could ask the SEC to reconsider the rule and then they could return to court.

However, Torchinsky asked the judge not to make the state parties go that route.

That “would be somewhat of a futile effort,” he said, noting that the agency has made clear that it believes the rule is well-justified and that recent legal developments have not undermined it.

Howell issued no immediate ruling and did not say directly how she expected to decide the case, but she promised to publish a decision soon.

POLITICO
By JOSH GERSTEIN | 9/12/14 6:30 PM EDT

WASHINGTON – Bank regulators may think excluding municipal securities from high-quality liquid assets in their liquidity rule is no big deal, but Moody’s Investors Service issued a report on Friday saying it may negatively affect credit ratings in the muni market.

“The first minimum liquidity coverage requirements for U.S. banks is a credit negative for the municipal bond market because municipal bonds would not qualify as high-quality liquid assets that banks must hold to cover potential liquidity draw downs,” Moody’s said. “The exclusion presents one less reason for banks to buy municipal bonds and will likely increase funding costs in the municipal market as a result.”

The muni market shrunk this year while bank holdings of munis rose. Outstanding municipal debt during the first quarter of 2014 was $3.66 trillion, compared to $3.77 trillion as of December 2010. However, during that time, U.S. bank holdings of munis grew faster than any other investor category – increasing by $171 billion to $425 billion, according to the Federal Reserve Board’s Flow of Funds data.

The liquidity rule was adopted by bank regulators on Sept. 3 to implement Basel III and ensure banks have enough assets that can be converted into cash or easily marketed during a period of financial stress. Bank regulators said they did not include munis as HQLAs because generally munis are not liquid and are not easily marketable.

But dealer groups and individual dealers fought against the exclusion, arguing investment-grade munis have lower default rates than corporate bonds and are easily marketable. They warned that the exclusion of munis would raise borrowing costs for issuers, as well as decrease liquidity and increase volatility in the municipal market.

At a recent Senate Banking Committee, Sen. Schumer made the same points, urging the bank regulators to include investment grade munis as HQLAs.

The regulators from the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, all told Schumer that they were open to the idea of adding munis as HQLA to the liquidity rule. But many market participants are skeptical they will change their minds, since they continue to say that banks don’t hold munis for liquidity.

Moody’s also said there is no guarantee that the liquidity rule will be changed.

“U.S. regulators have said they will continue to review municipal bonds to develop criteria under which some of them could be included as HQLAs, but at this time there is no indication of how these will be determined or when such revision will be implemented,” the rating agency said. “In the meantime, [the] exclusion will put downward pressure on banks’ purchase of municipal securities.”

THE BOND BUYER
BY LYNN HUME
SEP 12, 2014 1:14pm ET

WASHINGTON — A large number of dealer firms have voluntarily reported to the Securities and Exchange Commission deals they underwrote where issuers failed to disclose noncompliance with their continuing disclosure agreements, the SEC’s top cop said Wednesday.

The deadline for dealers to participate in the Municipalities Continuing Disclosure Cooperation Initiative was Sept. 10, though issuers will still have until Dec. 1 to report any deals during the last five to 10 years in which official statements were misleading about past continuing disclosure compliance.

Under the terms of the initiative, the SEC’s enforcement division will recommend to the commission favorable settlement terms for both underwriters and issuers who self-report.

“The enforcement staff is currently reviewing the large number of self-reports we have received from municipal securities underwriters under the MCDC initiative,” said enforcement division director Andrew Ceresney. “This marks an important milestone in the success of the initiative, which we believe will improve the quality of information in the municipal securities market for the benefit of the investing public.”

Market participants also said they believed there was broad participation by underwriter firms. Most muni underwriters probably reported at least some deals under the initiative, but it is unclear how many firms reported enough transactions to hit the civil penalty cap, said one source who asked not to be identified.

Underwriter penalties under the MCDC are capped at $500,000 for firms that reported total revenue of more than $100 million for fiscal 2013 on their annual audited report; $250,000 if they reported fiscal 2013 revenue of between $20 million and $100 million; and $100,000 if they reported fiscal 2013 revenues of less than $20 million. If the caps are not met, underwriters will have to pay $20,000 per offering of $30 million or less with continuing disclosure failures and $60,000 for offerings of more than $30 million with such failures.

Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, said dealers who think they will pay the max cap, have little reason not to be very inclusive in the deals they self-report.

“There is an incentive for underwriters, once they hit their civil penalty cap, to be more inclusive,” Decker said. He predicted that because issuers have more time to investigate those deals than underwriters did, it is likely that new information will come to light that will cast doubt on whether some of those transactions should have been reported at all.

Bond Dealers of America senior counsel and senior vice president for federal regulatory policy Jessica Giroux said her group was disappointed that the SEC did not extend the underwriter deadline or base the penalty caps strictly on muni business revenues.

“Ultimately, this was a costly and burdensome exercise for our member firms,” she said.

THE BOND BUYER
BY KYLE GLAZIER
SEP 10, 2014 2:40pm ET

WASHINGTON — Sen. Chuck Schumer, calling municipal securities the “lifeblood” of U.S. infrastructure development, pressed regulators to revise federal banking liquidity rules to classify certain munis as high-quality liquid assets.

“I hope all three agencies will reassess the final rule,” Schumer, D-NY, said at a Senate Banking Committee hearing Tuesday. He noted that corporate securities can be used as HQLA, while even highly-rated munis cannot.

Dealers have said the rule, which implements Basel III to ensure banks will have adequate assets that can be easily converted to cash to cover expected net cash outflows in periods of financial stress, will cause banks to reduce their muni holdings, increasing borrowing costs for issuers, and reducing liquidity while adding to volatility in the muni market. The rule requires banks to have a liquidity coverage ratio that includes holding a certain amount of HQLAs, but does not define munis as HQLAs.

Schumer said he has yet to hear a convincing argument for excluding them.

Representatives of the Federal Reserve Board of Governors, Federal Deposit Insurance Corp., and the Comptroller of the Currency said they would be open to including investment-grade municipal bonds as HQLA after Schumer pressed them on the issue. Fed governor Daniel Tarullo said that he has asked staff to analyze muni liquidity with an eye toward determining what bonds could qualify as HQLA. When the rule was adopted earlier this month, Tarullo said it needed to be put forward now without the muni change in order to give banks time for compliance by Jan. 1.

“If they really are liquid, we want banks to be able to take that into account,” Tarullo said.

But Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., had said in his prepared testimony that the Fed would only modify the rule “if necessary.” He later told Schumer he was open to changing it. Thomas Curry, the Comptroller of the Currency, said he was open to including munis if Fed research supported that conclusion.

“A number of commenters have expressed concern about the exclusion of municipal securities from HQLA in the final rule,” Gruenberg told the committee in his prepared testimony. “It is our understanding that banks do not generally hold municipal securities for liquidity purposes. We will monitor closely the impact of the rule on municipal securities and consider adjustments if necessary.”

Schumer said it has become clear from hearing from state and local stakeholders that the rule will negatively impact the muni market and ultimately stunt economic growth and job creation. He said some of his constituents were “howling” about the muni exclusion. He pressed the regulators to move forward in altering the rule.

“I hope you’ll go ahead and do it, because it’s really important,” he said.

The Senate panel also heard from SEC chairman Mary Joe White about the priorities of the SEC’s Office of Municipal Securities, over the next year. The Muni office will spend much of its time implementing the final municipal advisor registration rule, reviewing Municipal Securities Rulemaking Board MA regulations, overseeing MA exams and monitoring muni market issues, White said.

White focused her testimony on the SEC’s progress in implementing rules mandated by the 2010 Dodd-Frank Act. That law mandated that the commission’s muni securities office be independent and report directly to the chairman. It also imposed a fiduciary duty on all MAs to put clients’ interests firsts and subjected non-dealer MAs for the first time to federal regulatory oversight and rules.

The office will be scrutinizing other hot topics in the muni market, White told the panel.

“OMS also continues to monitor current issues in the municipal securities market (such as pension disclosure, accounting, and municipal bankruptcy issues) and to assist in considering further recommendations to the commission with respect to disclosure, market structure, and price transparency in the municipal securities markets,” she said in her testimony.

THE BOND BUYER
BY KYLE GLAZIER
SEP 9, 2014 11:49am ET

WASHINGTON—Federal banking regulators said they plan to revisit a decision to exclude municipal securities from a postcrisis rule aimed at ensuring banks have enough cash on hand to survive a crisis, saying they are open to allowing some debt issued by states and localities to count as a “safe” asset.

Top officials from three bank regulators—the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.—told Senate lawmakers Tuesday they would consider altering a rule completed last week that requires banks to hold enough cash or cash-like assets to fund their operations for 30 days. Previously, only the Fed had expressed a willingness to alter the rule.

Municipal securities currently don’t count as a “high-quality liquid asset” under the rule, which means they won’t qualify under the new funding requirements. State and local officials have said the exclusion could prompt banks to retreat from the municipal debt markets, forcing governments to scale back spending on roads, schools and other infrastructure projects financed with municipal bonds. Banks play an increasingly important role in the market, having nearly doubled their ownership of municipal securities over the past decade to more than 11%, according to Fed data.

“I hope all three agencies will reassess the final rule,” said Sen. Charles Schumer (D., N.Y.), who slammed the current restrictions at a Senate Banking Committee hearing. Mr. Schumer said excluding municipal bonds from the rule could crimp bank purchases of the debt and increase borrowing costs for states and localities.

At Tuesday’s hearing, Fed Gov. Daniel Tarullo said he has asked his staff to analyze the trading of municipal securities to determine which bonds would meet the definition of a “high-quality liquid asset.” The comments are similar to those he made last week when finalizing the rule, saying there is evidence some state and local debt is frequently traded and may be “comparable to that of the very liquid corporate bonds” that qualify as high-quality and liquid.

Martin Gruenberg, chairman of the FDIC, said his agency would support revising the rule “if there’s reason to make adjustments.”

Thomas Curry, the Comptroller of the Currency, said any decision to alter to the rule would rest on the Fed’s analysis.

“We’re open but we need to talk with our colleagues,” he said.

The Fed’s decision to reconsider whether to fully exclude municipal securities was first reported by The Wall Street Journal last week. By law, the Fed could amend the definition of safe assets unilaterally, though banking experts said it is unlikely they would act without the support of the two other regulators.

THE WALL STREET JOURNAL
By ANDREW ACKERMAN
Sept. 9, 2014 1:43 p.m. ET

The Municipal Securities Rulemaking Board’s (MSRB) request for approval from the Securities and Exchange Commission (SEC) of a proposal to require municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors has been published in the Federal Register. The “best-execution” standard for transactions in the municipal market aims to protect investors and improve the structure and efficiency of the municipal market.

Read the notice of publication in the Federal Register.

Read the rule filing.

The deadline for submitting comments to the SEC is September 29, 2014.

The Municipal Securities Rulemaking Board (MSRB), which oversees the $3.7 trillion municipal securities market, is seeking public input on its priorities to help guide the organization’s strategic direction for the next several years. The mission of the MSRB is to protect investors, state and local government issuers, other municipal entities and the public interest by promoting a fair and efficient municipal market.

Comments should be submitted to the MSRB no later than October 23, 2014.

View the regulatory notice.

Read the full press release.

WASHINGTON — Municipal securities will not qualify as high-quality liquid assets under a new federal liquidity coverage ratio rule slated to take effect on Jan. 1. Federal Reserve Board officials said they are working on a proposal to include some municipal bonds as HQLA at a later date, but municipal market participants were disappointed at the delay.

The rule unveiled and adopted unanimously by the Fed on Wednesday, would implement Basel III regulations. It would require large banks to maintain a certain ratio of HQLA to total net cash outflows. The idea is that the banks would then be able to easily and immediately convert those assets to cash during a period of liquidity stress.

Fed board member Daniel Tarullo said Wednesday that the Fed staff are at work on a proposal to allow some munis to qualify as HQLA, but that proposal is not ready and the agency wanted to finalize the rule now so that banks can begin to prepare to implement it.

A draft rule earlier this year alarmed the muni market, prompting groups to warn regulators that excluding munis from the definition of HQLA will increase borrowing costs for state and local governments, reduce liquidity and increase volatility in the muni market, and put muni issuers at a disadvantage to foreign governments in accessing the U.S. capital markets. Market advocates have argued doggedly that many munis can be sufficiently liquid to be included as HQLA.

“While it is true that most state and municipal bonds are not sufficiently liquid to serve the purposes of HQLA in stressed periods, public comments and staff analysis over the past several months suggest that the liquidity of some state and municipal bonds is comparable to that of the very liquid corporate bonds that can qualify as HQLA,” Tarullo said. “Staff has been working on ideas to develop some criteria for determining which such bonds fall into this category and thus might be considered for inclusion as HQLA. That work has not yet been completed, and it is important to get this final rule adopted now, so that the largest banks can begin to prepare for its implementation on Jan. 1. However, I anticipate that staff will be coming back to us with a report on efforts to develop a proposal along these lines.”

A staff presentation at the meeting said that a “limited number” of municipal securities exhibit liquidity characteristics comparable to the highly liquid corporate bonds that do satisfy the coverage ratio rule, and that the future proposal will include “the most liquid” munis.

Fed chair Janet Yellen said municipalities are fearful that their access to capital markets could be impacted by the failure to classify munis as HQLA, but Fed manager of credit, market, liquidity risk and policy David Emmel told her that staff believe the impact on local economies and bank behavior will be minimal.

Banks hold munis for reasons other than to have high-quality assets on hand, Emmel told Yellen, and staff expect banks to continue to hold munis.

“We don’t believe the impact will be significant,” Emmel said.

Market participants were disappointed with the outcome, especially after a full-scale campaign by dealers and issuers alike to pressure regulators into allowing at least some highly-rated munis to satisfy HQLA requirements under the rule. Thirty-one state treasurers signed onto an 11th-hour appeal sent to the board late last week. But the indication that some munis could be HQLA in the future did take some of the sting from the news.

“While it was disappointing to see munis not included in the final rule, it is encouraging to know that governors and Federal Reserve staff are committed to developing rule changes that will allow some muni securities to qualify as HQLA,” said Dustin McDonald, director of the Federal Liaison Center at the Government Finance Officers Association. ” GFOA will be reaching out to staff to discuss next steps.”

Tom Dresslar, spokesman for California State Treasurer Bill Lockyer, expressed concern at continuing statements about how most munis are not sufficiently liquid and said the Fed should take care not to exclude too many munis when it proposes the revision later.

“The exclusion of municipal bonds is wholly unjustified, so the commitment to adopt a subsequent rule that brings at least some of them under the tent is welcome,” Dresslar said. “But any future rule should not be stingy in welcoming munis. It should be generous. ”

Bond Dealers of America senior counsel and senior vice president for federal regulatory policy Jessica Giroux said the group was disappointed, but wanted details on the muni proposal.

“We would be interested to find out more of the specifics behind this consideration since our position is that muni’s generally should be included as HQLA,” Giroux said.

THE BOND BUYER
BY KYLE GLAZIER
SEP 3, 2014 2:01pm ET

WASHINGTON — A bipartisan House duo is threatening the Securities and Exchange Commission, warning it must further ease the Municipalities Continuing Disclosure Cooperation initiative for dealers before the Sept. 10 deadline for participation or they will step in with legislative action.

Reps. Steve Stivers, R-Ohio, and Kyrsten Sinema, D-Ariz., delivered the ultimatum to SEC chairman Mary Jo White in an Aug. 28 letter obtained by The Bond Buyer.

The pair of lawmakers told White that the MCDC, which allows both issuers and underwriters to get favorable settlements by voluntarily reporting instances in the past five years in which they sold or underwrote bonds with materially misleading official statements, is causing confusion and needs to have its deadlines and financial penalty structure changed again before the dealer self-reporting deadline just after midnight Sept. 9.

The SEC announced the MCDC in March and amended it July 31 after weeks of near constant requests from various muni market groups and Stivers to do so. The changes included pushing the issuer and borrower reporting deadline back to Dec. 1, and introducing a tiered approach to financial penalty caps for dealers based on the gross revenues of the firms.

Those changes mostly drew approval from the issuers, but dealer groups and some issuers said having different reporting deadlines would only increase tension between an underwriter and an issuer, who effectively report on each other under the MCDC initiative, if one reports a transaction and the other does not.

Stivers and Sinema told White that extending the deadline for dealers would improve the program. “There is simply no justification for separate reporting deadlines,” the lawmakers wrote. “Giving dealers additional time to communicate with their issuer clients before self-reporting violations would promote cooperation and help ensure consistency in self-reports.”

The legislators are also pushing the SEC to adopt a civil penalty structure based on the revenues of either a firm’s muni bond underwriting business or its muni business in general, rather than its overall size. The high-level cap of $500,000 should remain in place, Stivers and Sinema wrote.

“Penalties based on the sizes of firms’ municipal securities business would help ensure that fines are proportional to firms’ footprints in the municipal market,” they told the SEC.

The lawmakers closed their letter with the threat of action if the SEC does not address their concerns soon, and requested a response by Sept. 5.

Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, said that SIFMA is glad to see Stivers and Sinema getting involved. Decker echoed the concerns in the Stivers/Sinema letter, saying that some firms want to participate but might not beat the clock. “Some firms are concerned they’re not going to be able to review all their transactions by the reporting deadline,” he said.

Stivers has been very active on muni issues and has benefited from $10,000 of SIFMA campaign contributions during the 2014 election cycle, records show.

It is unlikely that Congress would be able to act prior to the MCDC underwriter deadline. Though Decker said there is interest among lawmakers, legislation would have to be introduced and passed by both the Republican-controlled House and Democrat-controlled Senate before also getting a prompt signature from President Obama.

THE BOND BUYER
BY KYLE GLAZIER
AUG 29, 2014 12:28pm ET

Yesterday the Fed and other regulators announced a new rule detailing what easy-to-sell investments big banks need to hold in reserve in case of a crisis. When it came to deciding if municipal bonds should be eligible for this category of so-called high-quality liquid assets, regulators basically punted. Munis aren’t eligible for now, but Fed Governor Daniel Tarullo went to the trouble of releasing a separate statement saying that while most muni bonds “are not sufficiently liquid to serve the purposes of HQLA in stressed periods,” regulators are still “working on ideas” to figure out how some munis could eventually be considered for inclusion in the HQLA club.

The announcement didn’t cause any real drop in muni-bond prices, but analysts say munis could suffer in the long run if they’re not eventually granted HQLA membership.

“The potential impact of this decision is difficult to assess but none of it is good for the municipal bond market,” writes J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, today. ”Discouraging banks from buying or holding municipal bonds most likely will have the consequence of reducing the liquidity of certain municipal bonds normally pursued by the banking community.”

Chris Mauro, head of U.S. municipals strategy at RBC Capital markets, says most investment-grade munis, particularly those of regular muni-bond issuers, ought to qualify, and fears the issue will hang over the market for a while. From Mauro today:

[W]e believe that the blanket exclusion of munis from the definition of HQLAs would have negative long-term implications for the municipal market, potentially dampening demand and liquidity for the asset class. Additionally, it could have the effect of reducing the amount of bank liquidity available to fund credit and liquidity support for Variable Rate Demand Note (VRDNs) programs, bank direct purchase programs, and tender option bond programs…. [W]e fear that the proposed new rule will award the HQLA designation to only a narrow slice of the municipal market….

While we are encouraged by the regulators openness to discuss including municipals as an HQLA, we are worried that the final ruling may extend beyond the January 1, 2015 effective date of the LCR rule, thus introducing an added element of uncertainty to the municipal market.

September 4, 2014, 4:44 P.M. ET

By Michael Aneiro

Barrons

WASHINGTON — State treasurers and financial officers are urging federal banking regulators to identify quantitative liquidity standards or characteristics that would allow at least some municipal securities to qualify as high-quality liquid assets in a rule to be released on Wednesday.

“It is unreasonable to treat an entire asset class of securities in the same way, as securities of different issuers will have different characteristics,” the National Association of State Treasurers and the National Association of State Auditors, Comptrollers, and Treasurers warned the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation said in an Aug. 29 letter. “A more reasonable approach would be for the rule to identify quantitative liquidity standards or characteristics that should be met in order for that particular security to be defined as an HQLA.”

Excluding munis from the definition of HQLA will increase borrowing costs for state and local governments, reduce liquidity for and increase volatility of the muni market, and put muni issuers at a disadvantage to foreign governments in accessing the U.S. capital markets, the two groups warned the regulators.

The liquidity coverage ratio [LCR] rule that is due out on Wednesday would implement Basel III regulations. It would require large banks to maintain a certain ratio of HQLA to total net cash outflows. The idea is that the banks would then be able to easily and immediately convert those assets to cash during a period of liquidity stress.

But press reports stating the rule will not classify most or any munis as HQLA have caused issuers, rating agencies and dealers alike to raise concerns like those NAST and NASACT wrote about in their letter last week.

The two groups argued that muni bonds are low-risk, high-volume securities with transparent pricing and that they are readily marketable. Because of this, they argued, there is no reason to adopt a rule that will adversely impact the market.

Fed chair Janet Yellen told a Senate panel in July that munis did not approve to be liquid enough to qualify as HQLA.

But the groups told banking regulators: “We believe the proposed LCR rule will (1) increase borrowing costs for municipal issuers; (2) reduce market liquidity and increase volatility; and (3) disadvantage U.S. municipalities relative to foreign governments in accessing the U.S. capital markets, which NAST believes is not only unjustifiable but against the broader policy interests of the United States.”

Dealer groups and lawmakers have also weighed in on the need to allow muni bonds to be HQLA. Citigroup Inc. managing director and senior municipal strategist George Friedlander predicted that bank appetite for bonds would shrink if munis are not HQLA under the rule. Banks have been major drivers of the market, and their holdings of munis have grown sharply since 2009.

More important, if munis are excluded as HQLA, then during periods of liquidity stress, if a bank’s liquidity coverage ratio is constrained, it would not be able to provide any support or any marginal demand to the municipal securities market., thereby inducing additional market stress, Citi said in a research paper released last week.

THE BOND BUYER
BY KYLE GLAZIER
SEP 2, 2014 1:24pm ET

WASHINGTON—States and localities that raise cash in the $3.7 trillion municipal bond market moved closer to winning a reprieve Wednesday after regulators agreed to consider allowing banks to use certain types of municipal debt to satisfy a new post-crisis financing rule.

Banking regulators on Wednesday finalized safeguards to require that banks hold enough liquid assets such as cash or Treasury notes to fund their operations for 30 days if other sources of funding aren’t available. Under the final rules, municipal securities issued by states and localities won’t count as “high-quality liquid assets,” meaning such securities wouldn’t qualify for use under the new funding requirements.

Still, the Federal Reserve, which helped craft the rules with two other agencies, opened the door to eventually including at least some municipal securities. Federal Reserve Gov. Daniel Tarullo said he expects the central bank to reconsider the issue in response to evidence that some state and local debt is frequently traded and may be “comparable to that of the very liquid corporate bonds” that qualify as high-quality liquid assets.

The market for municipal debt is vast, with roughly 60,000 borrowers and 1.2 million individual bonds. Only a relatively small number of the bonds—from large states and cities such as California and New York—see their securities frequently traded, according to industry experts. That is partly because the features of the market, including the tax-exempt status of most securities, encourage most investors to hold their bonds until maturity.

The Fed’s decision to reconsider whether to fully exclude municipal securities was first reported last week by The Wall Street Journal.

States and localities have warned excluding their securities could cause banks to retreat from the municipal market in which they have increasingly become an important player, with four of the largest U.S. banks alone holding some $100 billion of such debt, according to consulting firm Municipal Market Advisors. State Treasurers and other officials say their costs to finance roads, schools and bridges could jump if banks retreat from the market—costs that will ultimately be borne by taxpayers.

“The exclusion of municipal bonds is wholly unjustified, so the commitment to adopt a subsequent rule that brings at least some of them under the tent is welcome,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. “But any future rule should not be stingy in welcoming munis. It should be generous.”

Mr. Dresslar added municipal bonds meet every criterion the agencies established to define high quality liquid assets. “Continued statements from staff and regulators that there’s only a small slice of munis that might qualify as HQLA do not comport with the facts,” he said.

The Fed stressed any change in treatment for municipal bonds would only apply to a limited number of the securities, given that few are frequently traded. While many securities issued by states and municipalities have low likelihoods of default, “the liquidity characteristics of these securities range significantly, with most securities issued by public sector entities exhibiting low average daily trading volumes and limited liquidity, particularly under stressed economic scenarios,” the Fed staff wrote in a memo released Wednesday.

THE WALL STREET JOURNAL
By ANDREW ACKERMAN