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 wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net 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 wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net 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
jgalloway@msrb.org

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
jgalloway@msrb.org

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 deborah.solomon@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

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 cdolmetsch@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net. 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 goldbergerm@ballardspahr.com, John C. Grugan at 215.864.8226 or gruganj@ballardspahr.com, Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com, 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 tess.stynes@wsj.com

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 AARON.KURILOFF@wsj.com

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
jgalloway@msrb.org

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 wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net 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 wselway@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net 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

lfarmer@governing.com | @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 dmichaels5@bloomberg.net

To contact the editors responsible for this story: Gregory Mott at gmott1@bloomberg.net

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
jgalloway@msrb.org

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 cyril.tuohy@innfeedback.com.

© 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

WASHINGTON – The Municipal Securities Rulemaking Board failed to address concerns that its proposed municipal advisor supervision rule will be too costly and burdensome, non-dealer MAs told the Securities and Exchange Commission this week.

National Association of Independent Public Finance Advisors counsel Nathan Howard told the SEC in a comment letter that proposed Rule G-44 on supervisory and compliance obligations of municipal advisors, as well as proposed amendments to Rules G-8 on books and G-9 on preservation of records, remain substantively unchanged after it asked MSRB to reduce the burdens.

Rule G-44 would require MAs to establish, implement, maintain and enforce written supervisory procedures designed to ensure compliance with the federal securities laws and rules. It would mark the first time non-dealer MAs have been subject to supervisory requirements under MSRB rules., NAIPFA remains concerned that the burdens of those requirements would drive up costs for issuers and force smaller MAs out of the business altogether.

Meanwhile, Dave Sanchez, a former SEC muni office lawyer who most recently served as general counsel at a dealer firm, suggested some changes he told the commission would help avoid confusion and reduce regulatory burdens. For example, Sanchez wrote, the portion of the proposal requiring “prompt” amendment of written procedures after rule changes should be altered to “within a reasonable time after changes occur in the applicable rules.” That language matches the requirement of the existing G-27 rule governing dealer supervision requirements, and would help reduce confusion for dealer-affiliated MAs who will have to comply with the new rule as well as existing supervision requirements.

The proposal’s revisions to Rules G-8 and G-9 on preservation of records would require MAs to keep and maintain records of their compliance policies for at least five years and records of those responsible for compliance for at least six years after they are no longer in charge of compliance. If the SEC approves the set of proposals, it will be the first of the new MA rules to get the final go-ahead.

Dealer groups largely support the MSRB proposal, but Bond Dealers of America chief executive officer Mike Nicholas told the SEC that the rule still offers too much wiggle room for smaller MAs. The proposal allows small MA firms to take their size into account when designing their compliance programs.

“As the BDA mentioned in our April letter to the MSRB, we believe draft Rule G-44 provides too much flexibility to small firms by allowing [them] to determine and make accommodations for themselves simply because of their size,” Nicholas wrote. “As a result, we requested that the MSRB set forth certain minimum standards that all municipal advisor firms must meet when establishing supervisory and compliance procedures but still allow these firms appropriate flexibility to decide how to implement such procedures.”

“We continue to believe that the draft Rule G-44 is biased toward larger firms and that the accommodations smaller firms are allowed to make should be more circumscribed,” he continued. Nicholas told the SEC that all implementation of the MSRB’s MA rules should be delayed until they are all complete.

The Securities Industry and Financial Markets Association asked for at least six months between approval and implementation.

THE BOND BUYER
BY KYLE GLAZIER
AUG 28, 2014 12:25pm ET

On August 7, 2014, the New York Republican State Committee and Tennessee Republican Party (the “Plaintiffs”) filed a civil suit against the Securities and Exchange Commission (the “SEC”) seeking to overturn Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”), commonly referred to as the SEC’s “pay-to-play” rule (the “Rule”).

Rule 206(4)-5 was approved by the SEC in 2010 as a means to curb perceived abuses resulting from investment advisers making political contributions in order to influence government officials involved in selecting investment advisers to manage public pension fund assets. Under the Rule, investment advisers are prohibited from providing investment advisory services for compensation to a government entity for a two-year period after any covered associate of the adviser makes an impermissible contribution to an official or candidate for an office that has or would have the ability to influence the selection of an investment adviser by such government entity, as well as placing restrictions on activities of an adviser to any government entities from soliciting or coordinating contributions from others. The Rule applies to any investment adviser that is registered (or required to be registered) with the SEC, as well as to certain advisers that operate under an exemption from registration available under the Advisers Act.

In their complaint, the Plaintiffs argue, amongst other grounds for relief, that (i) Congress has delegated authority over campaign contributions exclusively to the Federal Election Commission under the Federal Election Campaign Act of 1970, and thus the SEC is preempted from regulation of this area, and (ii) by forcing investment advisers to choose between exercising their right to make contributions to their preferred candidates and retaining the ability to engage in their professional activities, the Rule creates an impermissible restraint in violation of the First Amendment.

This suit follows a recent SEC settlement in which TL Ventures, an investment adviser to venture capital funds, agreed to pay substantial disgorgement fees in order to settle allegations that it violated the Rule when a covered associate made campaign contributions to mayoral and gubernatorial candidates. The suit also follows the Supreme Court’s recent McCutcheon decision, which is cited prominently in the Plaintiff’s complaint, which overturned, on First Amendment grounds, rules placing aggregate limits on federal campaign contributions.

We will continue to monitor and provide further updates on this matter as it progresses.

Last Updated: August 27 2014

Article by Robert G. Sawyer and Diana W. Lo

Foley Hoag 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.

Regulatory changes aimed at heading off another financial crisis may curb purchases of municipal bonds by banks, potentially undermining demand from the biggest buyer in the $3.7 trillion market.

The Federal Reserve and the Federal Deposit Insurance Corp. will meet separately on Sept. 3 to consider measures laying out what easy-to-sell assets banks must keep on hand to weather a month-long credit squeeze. A draft of the rules excludes munis, according to a person familiar with the matter, which would give banks less incentive to own state and local debt.

The companies have added more than $200 billion to their muni holdings since the start of 2010, more than any other segment of investor, according to Fed data. The influx has buoyed prices at times when individuals were selling because of speculation that interest rates were set to rise or bets that issuers such as Puerto Rico would struggle to pay their bonds.

“Banks have been large purchasers of municipal bonds, and that’s certainly been helpful in keeping rates low,” said Ben Watkins, director of Florida’s bond-finance division. “Removing banks as one of the demand components will exacerbate the impact in situations where munis have fallen out of favor.”

Crisis Prevention

The new regulations are based on international standards developed by the Basel Committee on Banking Supervision. They’re designed to prevent a repeat of the 2008 credit crisis by ensuring that banks can produce enough cash to operate during times of stress.

The initial proposal, released in 2013 and with a suggested phase-in beginning next year, would allow banks to use securities including Treasuries, foreign-government debt and corporate bonds to satisfy those requirements. The regulators said state and city obligations don’t trade frequently enough to be included.

The FDIC, the Office of the Comptroller of the Currency and the Fed are formulating the rules. The Wall Street Journal reported yesterday that the Fed is considering allowing banks to use some munis toward the requirement, in response to criticism from lawmakers and state officials.

David Barr, an FDIC spokesman; Bryan Hubbard at the OCC; and Eric Kollig at the Fed all declined to comment.

Taxpayers’ Lament

The proposed treatment has riled state and local officials, who say it will boost interest rates on debt sold for projects such as bridges, roads and schools. Officials from Chicago, Los Angeles, New York and Philadelphia were among those who pressed regulators to reconsider. California, the biggest issuer of munis, assailed the plan.

“If the regulators exclude municipal bonds, they will poke a stick in the eye of American taxpayers,” said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. “It will increase their borrowing costs because it will reduce demand for municipal bonds.”

Individual investors seeking munis’ tax-exemption still dominate local-government bonds. Households own about $1.6 trillion, or 44 percent, directly through brokerage accounts.

Yet since the 2008 credit crisis, banks have become a growing force as demand for other types of loans dimmed.

JPMorgan’s Holdings

The institutions have increased their holdings for 18 consecutive quarters since late 2009, even as the overall market shrank in 10 of those periods, Fed data show. As of March 31, banks held $425 billion, about 12 percent of the market, twice the share from four years earlier.

JPMorgan Chase & Co. and Wells Fargo & Co. own the most among the biggest U.S. banks, with $44 billion and $47 billion, respectively, at the end of June, according to regulatory filings. Jessica Francisco, a spokeswoman for JPMorgan in New York, declined to comment, as did Ancel Martinez, a spokesman for San Francisco-based Wells Fargo.

The change probably won’t influence JPMorgan’s muni holdings because the bank has already planned to exclude the securities from the assets it will use to satisfy the new rules, according to a person with knowledge of the matter who requested anonymity without authorization to speak publicly about the bank’s decisions.

Austerity Cushion

While Fitch Ratings has said that the new regulations could lead banks to reduce holdings, a slowdown in municipal issuance may mask the impact.

The market is on pace to shrink for a fourth straight year as local officials stung by the recession’s financial strains have been reluctant to take on new projects.

Munis have earned 8 percent this year through Aug. 27, beating corporate bonds and Treasuries, according to Bank of America Merrill Lynch indexes, Yields on benchmark 10-year munis fell to 2.17 yesterday, the lowest since May 2013.

“The supply-demand equation is so out of whack right now that at least in the short-run I don’t think it will have much effect,” said Justin Land, who helps oversee $3.5 billion of munis at Wasmer Schroeder & Co. in Naples, Florida.

“I don’t think banks will necessarily become sellers of muni debt, just because they have a lot of excess capital and are trying to build reserves,” he said. “They just may not be the aggressive buyers they’ve been over the past few years.”

The repercussions of the change will become most evident during times of market stress, when banks may be more prone to stay on the sidelines, Citigroup Inc. muni analysts Vikram Rai, Mikhail Foux and George Friedlander said in an Aug. 26 research note.

“We haven’t seen any definitive effect to date, but that doesn’t mean it won’t be felt,” said Watkins, the Florida official. “How that occurs and when that occurs is difficult to predict, but there definitely will be an impact.”

By William Selway

Aug 28, 2014 5:00 PM PT

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net Mark Tannenbaum, Mark Schoifet

The BDA submitted a comment letter to the MSRB regarding revised Draft Rule G-42, to establish the core duties of municipal advisors when providing advice on municipal securities transactions and related products.

Revised draft rule G-42 incorporates a number of changes made by the MSRB to the rule text based upon comments received from the industry.

Specifically, BDA’s letter focuses 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 view the full text of our letter here.

For BDA’s previous letter to the MSRB on draft Rule G-42, click here. For revised draft rule language, you can click here.

The BDA submitted a comment letter to the SEC on a proposed rule change consisting of proposed amendments to MSRB Rule G-3, on professional qualification requirements regarding continuing education.

The final letter focuses on:

• Support for Increased Municipal Securities Training;
• Concerns with Additional Compliance Burden and Duplicative Requirements;
• Concerns with Enforcement of Continuing Education Requirements.

You can find the final letter, as submitted, here.

You can view the MSRB’s submission to the SEC in the Federal Register here and BDA’s previous letter to the MSRB on the same topic here.

The BDA submitted a letter to the SEC on a proposed New Rule G-44, on supervisory and compliance obligations of municipal advisors; proposed amendments to Rule G-8, on books and records; and proposed amendments to Rule G-9, on preservation of records.

The final letter focuses on:

• A Request for Minimum Standards for all Municipal Advisors;
• The Importance of Self-Certification;
• Outsourcing of the CCO Function;
• Concerns with the Implementation Date.

You can view our final letter here.

You can view the MSRB’s submission of the proposed new rule to the SEC in the Federal Register here and BDA’s previous letter to the MSRB on the same topic here.

The Federal Energy Regulatory Commission’s (FERC) Order No. 1000 mandate that going forward the high-voltage electric transmission grid be planned and fairly financed regionally by all of its operators and beneficiaries, survived myriad challenges from 45 petitioners in the unanimous August 15 decision of a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit in South Carolina Public Service Authority v. FERC. The rigorous 97-page opinion rejected challenges coming from all directions to the 2011 rulemaking entitled “Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities.”

According to the panel, nearly all of the challenges misapprehended Order No. 1000’s regional planning mandate. The court repeatedly emphasized that Order No. 1000’s mandate is nothing new, but rather the next step in evolving efforts under section 206 of the Federal Power Act to combat undue discrimination. That evolution, the panel explained, began in 1996 when Orders No. 888 and No. 889 required that electricity transmission be “unbundled” from sales and offered via the internet pursuant to open-access tariffs, and 11 years later continued in Order No. 890’s directive that a transmission provider standardize how it measures available transmission capacity and open to its customers the process for planning transmission upgrades and expansions.

The panel’s decision affirmed FERC’s authority to require each of the key elements that FERC prescribed for regional transmission planning. Those elements include:

All public utility transmission providers are required to participate in a regional planning process, and non-public utilities such as cooperative or municipal utilities effectively must also participate pursuant to a reciprocity requirement carried forward from Order No. 888.

The planning process must include procedures for taking into account federal, state and local laws and regulations affecting transmission, such as federal air quality rules and state or local renewable portfolio standards.

Transmission tariffs must be amended to remove provisions that confer on the incumbent transmission provider a right of first refusal to construct, own, and operate new regional transmission, thereby opening the regional process to input, innovation, and investment from non-incumbents and new entrants, subject to state and local restrictions on siting and eminent domain.

A methodology must be added to transmission tariffs for allocating up-front the cost of new regional transmission facilities, consistent with six principles, including a causation principle directing that the allocation be roughly commensurate with the benefits received by those consumers required to pay, and a prohibition on one region allocating costs to its neighbors without their advance consent.

FERC Chairman Cheryl LaFleur promptly praised the panel’s decision upholding Order No. 1000 in its entirety as critical for inducing the “substantial investment in transmission infrastructure [needed] to adapt to changes in its resource mix and environmental policies.” In its decision the panel noted that the electric industry in 2008 estimated the infrastructure investment needed at $298 billion between 2010 and 2030.

Following FERC’s lead, the panel chose not rule at this time on challenges that elements of the regional planning mandate violate the Mobile-Sierra doctrine —eponymously named for two 1956 Supreme Court decisions —which limits FERC’s authority unilaterally to alter the terms of bilateral contractual relationships. FERC explained that it would not rule on these challenges in the context of Order No. 1000, but would instead address them in connection with a transmission provider’s filing of tariff amendments in compliance with the Order. Mobile-Sierra challenges prosecuted at that time are unlikely to succeed since precedents interpreting the doctrine give the Commission much greater leeway when implementing industry-wide changes to tariffs than when seeking to alter individual contracts.

August 19 2014
Article by Jeffrey D. Watkiss
McDermott Will & Emery

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.

Dealers are objecting to new provisions added to the best execution standard the Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission for approval that would increase the information customers have to provide to be considered sophisticated municipal market professionals who are exempt from the standard.

David Cohen, associate general counsel of the Securities Industry and Financial Markets Association said the new provisions “would significantly increase compliance costs and burdens” and would run counter to the MSRB’s goal of harmonizing the rule changes with Financial Industry Regulatory Authority rules.

Current MSRB guidance under its Rule G-17 on fair dealing says that for a customer to be an SMMP, the dealer was have “a reasonable basis to believe [it] is capable of evaluating market risks and market value independently in evaluating the recommendations of the dealer.” The customer must also “affirmatively indicate it is exercising independent judgment” in evaluating the dealer recommendations.

MSRB referred to this language in the MSRB best execution rule proposal released in February and it is virtually identical to the provisions in FINRA Rule 2111.

To comply with this requirement, dealers typically obtain certificates to this effect from customers, although the rule says the information can be obtained verbally instead of in writing.

The new provisions contained in new Rule G-48 would also require the customer to affirmatively indicate “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 of functions and (ii) the dealer does not exercise discretion as to how or when the transactions are executed.”

The customer must also affirmatively indicate that it has access to “established industry sources” such as the MSRB’s EMMA system and rating agency reports as well as “material information.”

Sources say dealers will have to get new certificates or verbal indications from customers.

SIFMA and Bond Dealers of America officials said they are still reading the proposal the MSRB filed with the SEC on Wednesday, which includes proposed changes to the board’s Rule G-18 on execution of transactions, as well as amendments to its Rule D-15 and G-48 governing SMMPs.

SIFMA is still unhappy with the proposal. “We continue to believe that the current standard is fair and reasonable, that best execution is an equity market standard that is more appropriate when there is a central exchange and is inappropriately applied to over-the-counter markets,” Cohen said.

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at BDA said, “We are pleased that transactions with SMMPs remain exempted from the proposal and that rule language and supplementary material tailor best-execution obligations to the unique characteristics of the municipal securities market. Further, it seems as if the supplementary material addresses some of the concerns we continue to discuss with our membership including the promotion of reasonable diligence versus a substantive pricing standard as well as allowances in instances where there are limited pricing information. We still need to more closely analyze the proposal and plan to submit comments to the SEC.”

The MSRB asked the SEC to make the proposed changes to its Rule G-18 on execution of transactions, which are generally similar to those the MSRB issued in February, to take effect one year after the SEC approves them.

The best execution standard 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,” the MSRB said.

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.

One MSRB factor does not appear in the Financial Industry Regulatory Authority best-ex rule for corporate bonds — information reviewed to determine the current market for the subject security or similar securities. This factor will help guide the use of reasonable diligence when dealers cannot find quotations for a bond, the MSRB told the SEC in the filing.

The board’s action follows recent complaints by some market participants that a best execution rule is not needed because it is very similar to the board’ s Rule G-30 on fair prices and commissions.

But the MSRB told the SEC, “While G-30 contains substantive pricing standards, under which dealers must (among other things) use reasonable diligence in determining a security’s fair market value, a best execution standard is an order-handling and transaction-execution standard, under which the goal of the dealer’s reasonable diligence would be to ascertain among the variety of venues where the municipal security may be executed, the best market for the security.”

As proposed in February, broker-dealers would be exempt from the best execution standard in transactions with sophisticated municipal market professionals. SMMPs are institutional investors or individuals with assets of at least $50 million.

The MSRB’s revised Rule G-18 would differ from the FINRA rule in another major way, as it does not require dealers to show why it was reasonable to use a broker’s broker. The MSRB said it wanted to develop a rule that did not favor any particular market venue over any other.

The MSRB said it received 10 comment letters on its proposed standard and that “many commenters supported the development of an explicit best-execution standard for the municipal securities market.”

The National Association of Independent Public Finance Advisors had raised concerns that the rule could create a different “substantive pricing standard” for issuers than for investors. But MSRB said the rule proposal is an “order-handling and transaction execution standard” that would not impact dealer behavior in new issuances.

SIFMA had complained about proposed rule’s costs and burdens. The MSRB told the SEC that it “welcomes SIFMA’s offer to provide the MSRB reliable empirical data.” The board also noted that SIFMA proposed “a highly similar order-handling rule” and said, “It has not been shown that the costs of proposed Rule G-18 would be significantly greater than the costs of SIFMA’s proposal.”

THE BOND BUYER
BY LYNN HUME and KYLE GLAZIER
AUG 21, 2014 1:43pm ET

SEC Extends MCDC Deadline for Issuers, Tiers Penalty Caps for Underwriters

WASHINGTON – The Government Finance Officers Association has issued a new alert on the Municipalities Continuing Disclosure Cooperation initiative, offering guidance to issuers on how to make use of the extra time they were granted to participate in the program and explaining problems state and local governments face in performing due diligence.

The Securities and Exchange Commission initiative 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 initiative originally set a deadline around midnight Sept. 9 for both issuers and underwriters to participate, but the SEC late last month extended that deadline to Dec. 1 for issuers.

The latest GFOA alert, dated Aug. 19, makes issuers aware of their extra time, urges them to review information from underwriters they’ve worked with, and warns them to be prepared for the MCDC submissions to contain flaws.

“Issuers should expect errors in the underwriter’s findings due to the deficiencies in the data and systems that are being used to conduct these investigations,” the alert counsels. “The data available prior to EMMA from the Nationally Recognized Municipal Securities Information Repository system is either not available or seriously flawed. Adding to the confusion is Bloomberg data, which routinely shows the posted date rather than the filing date on its system. Also, filings that were made on EMMA may not contain all relevant CUSIP numbers or the filing may be made under tabs or headings that do not reflect the entire content of the information filed.”

GFOA also told its members to be prepared to analyze the materiality of any misstatements or omissions regarding their continuing disclosure compliance, citing a recent National Association of Bond Lawyers paper on MCDC materiality. That paper provided issuers and their attorneys with a framework for conducting an analysis of whether past offering documents included “material misstatements” that they might want to consider reporting under the MCDC.

“Not all failures to file continuing disclosures or material event notices constitute a ‘material’ misstatement or omission under the federal securities laws,” the GFOA alert advises. “For example, failure to file a bond insurer downgrade may not be considered ‘material’ because this fact was widely reported and common knowledge by investors.”

Market participants assume most underwriters will participate in the MCDC and therefore expose the issuers they’ve worked with to SEC scrutiny. The extra three months given issuers gives them more time to decide if they want to make materiality decisions and dispute underwriters’ findings, the GFOA alert states.

GFOA is continuing to urge issuers to use caution when deciding whether or not to participate in the initiative. Although the terms of the MCDC stipulate that the commission’s enforcement division will recommend no civil penalties for issuers, they also make clear that individual public officials could still be charged if appropriate. Securities lawyers have also warned that SEC investigators performing a probe in connection with an MCDC submission could find other violations not covered by the initiative and would be free to act on those.

THE BOND BUYER
BY KYLE GLAZIER
AUG 20, 2014 1:38pm ET

The Municipal Securities Rulemaking Board has asked the Securities and Exchange Commission to approve its proposal to require municipal securities dealers to seek the most favorable price possible when executing transactions for most investors.

The board wants the proposed changes to its Rule G-18 on execution of transactions, which are similar to those the MSRB issued in February, to take effect one year after the SEC approves them.

The best execution standard 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,” the MSRB said.

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.

One MSRB factor does not appear in the Financial Industry Regulatory Authority best-ex rule for corporate bonds — information reviewed to determine the current market for the subject security or similar securities. This factor will help guide the use of reasonable diligence when dealers cannot find quotations for a bond, the MSRB told the SEC in the filing.

The board’s action follows recent complaints by some market participants that a best execution rule is not needed because it is very similar to the board’ s Rule G-30 on fair prices and commissions.

But the MSRB told the SEC, “While G-30 contains substantive pricing standards, under which dealers must (among other things) use reasonable diligence in determining a security’s fair market value, a best execution standard is an order-handling and transaction-execution standard, under which the goal of the dealer’s reasonable diligence would be to ascertain among the variety of venues where the municipal security may be executed, the best market for the security.”

As proposed in February, broker-dealers would be exempt from the best execution standard in transactions with sophisticated municipal market professionals. SMMPs are institutional investors or individuals with assets of at least $50 million.

But one market participant said the MSRB would make dealers get a whole new certificate of affirmation from SMMPs that significantly differs from the one dealers get for SMMPs under FINRA’s Rule 2111 on suitability. The rule changes proposed in February would have allowed dealers to use the same SMMP certificate that they use to comply with the FINRA rule. Obtaining new certificates will be burdensome, the source said.

The MSRB’s revised Rule G-18 would differ from the FINRA rule in another major way, as it does not require dealers to show why it was reasonable to use a broker’s broker. The MSRB said it wanted to develop a rule that did not favor any particular market venue over any other.

The MSRB said it received 10 comment letters on its proposed standard and that “many commenters supported the development of an explicit best-execution standard for the municipal securities market.”

The National Association of Independent Public Finance Advisors raised concerns that the rule could create a different “substantive pricing standard” for issuers than for investors. But MSRB said the rule proposal is an “order-handling and transaction execution standard” that would not impact dealer behavior in new issuances.

Some dealers remain skeptical of the use of an equities market concept in the muni market. The Securities Industry and Financial Markets Association and others were concerned about the cost of compliance.

The MSRB told the SEC that it “welcomes SIFMA’s offer to provide the MSRB reliable empirical data.” The board also noted that SIFMA proposed “a highly similar order-handling rule” and said, “It has not been shown that the costs of proposed Rule G-18 would be significantly greater than the costs of SIFMA’s proposal.”

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at Bond Dealers of America, said, “We are pleased that transactions with SMMPs remain exempted from the proposal and that rule language and supplementary material tailor best-execution obligations to the unique characteristics of the municipal securities market. Further, it seems as if the supplementary material addresses some of the concerns we continue to discuss with our membership including the promotion of reasonable diligence versus a substantive pricing standard as well as allowances in instances where there are limited pricing information.”

But Giroux added, “We still need to more closely analyze the proposal and plan to submit comments to the SEC.”

THE BOND BUYER
BY LYNN HUME and KYLE GLAZIER
AUG 20, 2014 5:38pm ET

The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission (SEC) to establish explicit requirements for municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors. Proposed MSRB Rule G-18 supports the MSRB’s goal of protecting investors and improving the structure and efficiency of the municipal market.

Read the rule filing.

WASHINGTON — The Municipal Securities Rulemaking Board’s proposal to extend its dealer pay-to-play rule to include municipal advisors contains provisions that would affect both dealer and non-dealer MAs, market participants said Tuesday.

The draft amendments to the MSRB’s Rule G-37 on political contributions, which the MSRB proposed for public comment Monday, would generally mirror existing dealer and dealer-MA obligations by prohibiting non-dealer MAs from engaging in municipal advisory business with state or local governments for two years after making political contributions to officials who can influence the award of MA business. But the proposal also suggests some changes to the rule affecting all MSRB registrants, tightening regulations in some ways and loosening them up in others.

The proposal, for example, provides for “cross bans” for firms that include both muni advisor and underwriting businesses. But the rule would require a link between a ban on underwriting or MA business and a contribution made to an official with the ability to influence the awarding of that type of business.

Some issuer officials can influence both types of business and a significant contribution to them from a firm or professional from either the dealer or MA side of the firm would subject both sides of the business to a two-year ban. But other issuer officials might only have influence over the MA, or only over the underwriting business. Contributions to those officials would not trigger a ban for the other side of the business.

The rule also takes a new approach to contributions that might come from MAs soliciting business on behalf of other firms, which market participants said could be potentially problematic. Under the proposal, if a contribution is made by a third-party MA or its associated persons, a ban on securities business would apply both to the dealer that hired the firm to solicit MA business and the solicitor.

A dealer generally is prohibited under MSRB Rule G-38 from making payments to a third-party to solicit muni securities business on its behalf. Under the MSRB proposal a dealer could violate G-38 and also be subject to a two-year ban on MA business with a certain issuer under G-37 if it retains an MA to solicit business on its behalf and contributions trigger the ban.

If an MA firm retains a third party MA that makes a significant contribution triggering the ban, the ban would apply both to the MA that retained the solicitor firm as well as the solicitor firm.

Ki Hong, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington, said the provision raises “concerning questions” about how to control the actions of third-party solicitors. A version of this rule, proposed and then withdrawn three years ago, would have subjected only solicitors to the ban, he said.

Dealers groups reacted mostly positively, because they have long said that non-dealer MAs are unfairly able to operate without fear of how their political contributions could affect their business.

“We are pleased that the MSRB is extending Rule G-37 to cover municipal advisors,” said Leslie Norwood, associate general counsel and co-head of municipal securities at the Securities Industry and Financial Markets Association. “We are reviewing with our members the other changes the MSRB is proposing for all regulated entities, and look forward to submitting a comment letter.”

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at Bond Dealers of America, said the details of how the rule will be enforced will be important.

“We are and have been in favor of establishing a level playing field especially on this issue and we are hopeful this effort on the part of the MSRB accomplishes that,” Giroux said. “We will continue to evaluate the rule and plan to submit comments to the MSRB, however, our concern is and remains how this will be enforced.”

Nathan Howard, counsel to the National Association of Independent Public Finance Advisors, said the rule needs a close look because of the new approaches it takes.

“NAIPFA has and will continue to support restrictions on practices that have historically harmed the public interest,” he said. “This version of the rule, however, appears to contain significant variances from the version that was released in 2011 and, therefore, will require us to carefully review this proposal.”

THE BOND BUYER
BY KYLE GLAZIER
AUG 19, 2014 4:13pm ET

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) is requesting comment on draft amendments to Rule G-37, the MSRB’s landmark pay-to-play rule for municipal securities dealers, that would extend the rule to municipal advisors. The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the jurisdiction of the MSRB to include the regulation of municipal advisors and the protection of state and local governments that often rely on these professionals for advice.

“Addressing corruption, or the appearance of corruption, in the awarding of municipal advisory business is a fundamental goal of the MSRB’s comprehensive regulatory framework for municipal advisors,” said MSRB Executive Director Lynnette Kelly. “Applying our well-established dealer pay-to-play rule to municipal advisors will help ensure that all regulated municipal market entities and professionals are held to the same high standards of integrity.”

The MSRB’s draft amendments seek to curb pay-to-play activities by municipal advisors and provide greater transparency regarding their political contributions. The draft amendments would, consistent with the existing rule 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 officials of those entities who can influence the award of business.

Municipal advisors would be required, like dealers under the existing rule, to disclose their political contributions to officials and bond ballot campaigns for posting on the MSRB’s Electronic Municipal Market Access (EMMA®) website. Public availability of this information would facilitate enforcement of the rule and promote public scrutiny of political giving and municipal advisory business.

Read the request for comment to view all proposed changes to the existing rule. Comments are due no later than October 1, 2014. The MSRB will host a webinar on the proposed changes on September 11, 2014 at 3 p.m. ET. Register for the webinar.

The draft amendments to Rule G-37 are among several new regulatory provisions for municipal advisors now in development. The MSRB recently filed its proposed municipal advisor supervision and compliance rule for Securities and Exchange Commission (SEC) approval, with comments due to the SEC by August 26, 2014. The MSRB plans to file a proposal for SEC approval to set baseline professional qualification requirements for municipal advisors. The MSRB is continuing to solicit input on its revised draft rule to create core standards of conduct for non-solicitor municipal advisors through August 25, 2014. Additionally, the MSRB plans to seek comment on amending its existing gifts rule for dealers, MSRB Rule G-20, to establish limitations on gifts given by municipal advisors in their professional capacity.

For news and resources on municipal advisor rulemaking, outreach and education initiatives, visit the Resources for Municipal Advisors section of the MSRB’s website.

U.S. securities regulators are moving to require brokers to seek the best prices available when trading state and local bonds for customers, a step aimed at keeping investors from being shortchanged.

The Municipal Securities Rulemaking Board today asked the Securities and Exchange Commission to approve a new rule that would require traders to use “reasonable diligence” to obtain the most favorable terms available for customers.

The rule would place stricter standards on brokers who trade in the $3.7 trillion municipal bond market, which, unlike the stock market, lacks a centralized exchange. Current regulations require that brokers buy and sell bonds at “fair and reasonable” prices.

“A requirement that dealers seek the best execution of retail customer transactions in municipal securities will have benefits for investors, promote fair competition among dealers and improve market efficiency,” the Alexandria, Virginia-based regulator said in its proposal to the SEC.

The move is part of a push by regulators to protect investors who buy and sell municipal bonds. The market is dominated by individual investors who seek tax-free income by buying bonds sold by states, cities and counties, which have little risk of default.

Embedded Fees

This month, the board said it may also force brokers to reveal to their clients what they paid for municipal bonds, which would allow customers to see dealers’ profit on the trades. Such fees are typically embedded in the price and aren’t currently disclosed.

The SEC in 2012 suggested that the board require brokers to seek the best prices available for customers. The MSRB then proposed the rules this year, and the submission today seeks the SEC’s approval to put them in place.

The new regulations would require that brokers gauge prices on electronic platforms from various sources before deciding where customers would get the most favorable prices.

The rule wouldn’t apply to institutional investors, such as money-management firms, which are better equipped than individuals to monitor prevailing prices, or individuals with at least $50 million to invest, the board said.

Bloomberg
By William Selway Aug 20, 2014 1:03 PM PT

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Schoifet, Justin Blum

Securities and Exchange Commission Investor Advocate Rick Fleming called Wednesday for municipal bond market reforms.

Noting three quarters of muni bonds are owned by individual investors directly or indirectly, he said his office will work with the SEC and self-regulatory organizations (including presumably the Municipal Securities Rule Making Board and the Financial Industry Regulatory Authority) to improve disclosures and other protections.

He added a new law may be necessary.

In prepared remarks to the Southwest Securities Conference in Dallas, the investor advocate said he also will look at the cybersecurity efforts of the agency, the exchanges and market participants.

“Hackers and electronic terrorists present a constant threat to the financial security and privacy of investors,” said Fleming, explaining his rationale for jumping into this area.

Looking ahead, he promised to advocate new tools to help advisors protect elderly and other clients with declining brain function when advisors suspect financial or other abuse.

Fleming reiterated his call for increased Congressional funding of the SEC through advisor fees so the agency can raise the number of advisors examined from the current 9 percent a year.

Countering objections from House Republicans who have refused to let Congress consider the idea, he acknowledged the idea of a “user fee” sounds a lot like a tax, but advisor trade groups have shown their support of them to improve quality control within the industry.

“A shorter examination cycle won’t stop all fraud, but I believe it will allow the SEC to halt these types of activities sooner and will provide a stronger deterrent to advisors who might otherwise succumb to the temptation to steal,” he said.

And, as he has said in the past, in the absence of more money, Fleming said requiring advisors to hire third-party consultants to conduct SEC-like examinations could be an alternative to increase protections, though a lesser one.

FINANCIAL ADVISOR
AUGUST 20, 2014 • TED KNUTSON

The Securities and Exchange Commission (SEC) has recently modified its Enforcement Division’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative in order to encourage as much participation in the program as possible.

Under the Initiative, the SEC has agreed to recommend favorable settlement terms for issuers, obligors and underwriters of municipal securities who voluntarily report materially inaccurate statements made in offering documents regarding prior compliance with continuing disclosure obligations. Issuers, obligors and underwriters can take part in the MCDC Initiative by completing and submitting a questionnaire by the required deadlines. If the SEC determines the violations should be processed under the MCDC Initiative, the SEC will abide by a predetermined schedule of settlement terms that are relatively lenient and include certain remedial measures aimed at ensuring accurate disclosures.

Extended Deadline for Issuers and Obligors Only

To allow issuers and obligors more time to self-report potential violations, the division has extended the deadline from September 10, 2014 to December 1, 2014 (5:00 p.m. EST). For underwriters, the deadline remains unchanged, ending at 12:00 a.m. EDT on September 10, 2014. To encourage greater participation for underwriters, however, the division has implemented a tiered approach that caps civil penalties according to the size of the firm, which is as follows:

• underwriters with 2013 reported total annual revenue more than $100 million – capped at $500,000
• underwriters with 2013 reported total annual revenue between $20 million and $100 million – capped at $250,000
• underwriters with 2013 reported total annual revenue less than $20 million – capped at $100,000.

Limited Guidance on ‘Materially Inaccurate’

Since announcing the Initiative, the division has offered little guidance as to what constitutes “materially” inaccurate disclosures. In a recent case that involved a settlement agreement between the SEC and the State of Kansas, the SEC charged that the state made materially misleading statements by failing to disclose that its pension system was significantly underfunded and posed a risk to the repayment of some municipal bonds. Shedding some light on its notion of materiality, the SEC made clear that violations not only result from materially inaccurate statements, but they also involve the failure to disclose material facts, such as facts relating to the issuer’s true financial condition; conflicting interests of various parties; how bond proceeds were used or invested; or how the valuation of bond-financed property was determined.

Finally, although the SEC intended its modifications to the MCDC Initiative to promote greater participation, by extending the deadline for issuers and not underwriters, the SEC has increased the potential for conflict between the interests of issuers and those of underwriters. Because the underlying set of facts only concerns whether there was a material misstatement or omission in a final official statement, both the issuer and the underwriter have potential securities law liability. To obtain the favorable settlement terms, each of these parties has to self-report. If one party self-reports first and the other does not, then a problem arises for the non-reporting party in the event that the SEC staff determines that the facts warrant enforcement action.

Failure to Properly Use Proceeds

Post-bond-issuance monitoring, and associated policies and procedures must be in place. Have you determined whether the facility, built with proceeds from tax-exempt bonds, is being leased out for unauthorized commercial purposes, for example, power generation, cell transmission towers, or to softball and basketball leagues? A qualified private activity bond issue can lose its tax-exempt status if a failure to properly use proceeds occurs subsequent to the issue date, which results in sufficient nonqualified use to cause the issue to fail any of the applicable use requirements. Hence, the issue becomes a taxable private activity bond issue. Generally, a failure to properly allocate proceeds occurs when an action is taken which results in the bonds not being used for the qualified purpose for which they were issued. However, with respect to unspent proceeds, a failure to properly use those proceeds may occur as early as the date on which either the issuer or conduit borrower reasonably determines that the bonds will not be expended on the qualified purpose for which they were issued. More than just a tax issue, however, failure to put proceeds to proper use is a material inaccuracy subject to self-reporting under the MCDC Initiative.

Limitations on Acquisition of Land or Other Property

Under section 147(c) of the Internal Revenue Code, a qualified private activity bond will lose its tax-exempt status if 25 percent or more of the net bond proceeds are used directly or indirectly to acquire real property. However, certain exceptions to this rule are available.

Remedial Actions for Nonqualified Use

Treasury regulations provide that certain prescribed remedial actions can be taken to cure nonqualified uses of proceeds that would otherwise cause qualified private activity bonds to lose their tax-exempt status. Such remedial actions can include the redemption or defeasance of bonds and, when the disposition of bond-financed property is exclusively for cash, the alternative use of such disposition proceeds to acquire replacement property within six months of the disposition date. For conduit borrowers, it is important to assess whether you will be able to enter into a closing agreement under the TEB Voluntary Closing Agreement Program (VCAP).

Pepper Points

Despite the deadline extension, issuers and obligors should not relax their sense of urgency. Put appropriate post-issuance monitoring, policies, and procedures in place. From the outset, the SEC has made clear that where an entity could have self-reported under the MCDC Initiative but failed to do so, and the SEC later decides to bring an enforcement action, more severe sanctions and penalties will be targeted. Accordingly, the extended deadline simply offers the opportunity to accommodate a necessarily labor-intensive review process that will require careful attention to detail.

Issuers, obligors and underwriters all would be well-advised to review their compliance obligations in their offering documents through a wider lens. Beyond materially inaccurate statements, the SEC would appear to expect self-reporting of failure to disclose:

• issuer’s true financial condition
• conflicting interests of various parties
• failure to monitor and manage the legal use of tax-exempt bond proceeds
• methodology for valuation of bond-financed property
• any risk that bonds could lose their tax-exempt status, resulting in potential taxable income to bond holders.

Pepper Hamilton LLP
Frank A. Mayer, III , Jonathan L. Levin and Nefertiri R. Sickout
August 18 2014

WASHINGTON — Many municipal market professionals are concerned that the Municipal Securities Rulemaking Board’s proposed best execution rule would not be functionally different from the fair pricing obligations that the MSRB and Financial Industry Regulatory Authority already impose on dealers.

The MSRB announced earlier this month that it will very soon seek Securities and Exchange Commission approval of the proposed best-ex rule, a well-known concept that already exists in the corporate market.

The proposed Rule G-18 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.” While market participants have expressed general support for many of the MSRB’s concepts, many claim the proposed rule is not that different from existing fair pricing obligations and that it would create new burdensome compliance procedures for no good reason.

Elizabeth Baird, a partner in Bingham McCutchen’s Washington office, said she does not view a best execution rule in the muni market as being distinct from rules requiring fair pricing and prohibiting unfair markups. The MSRB’s Rule G-30 on prices and commissions requires that dealers conduct principal transactions at a price that is “fair and reasonable” and that they also make a “reasonable effort” to obtain a fair price for customers in agency transactions.

Baird said it is unclear what conduct would lead to a violation of the best ex rule, if and when the SEC gives it the go-ahead. The best execution proposal is basically an equities market concept ported over to the bond market so that regulators could appear to be reforming it, Baird said.

“They’re doing it to appease somebody,” she said. “Little by little, they’re making it harder to operate in the municipal bond market.”

The SEC’s 2012 comprehensive report on the municipal market recommended that the MSRB adopt a best execution rule, and the MSRB has said in written materials that the rule would strengthen and support existing obligations.

Most dealers believe they already abide by the MSRB’s best execution concept, sources said, but have concerns about how FINRA examiners will assess their compliance. The MSRB proposal includes a list of factors similar to those listed under the FINRA corporate best ex rule that could be used to determine if a dealer used “reasonable diligence,” including what information the firm reviewed before the transaction and the terms and conditions of the customer’s inquiry of the dealer.

Nathan Howard, an attorney who is counsel to the National Association of Independent Public Finance Advisors, said his group has argued that the rule would establish a “substantive pricing standard” because if best execution is applicable in a primary issuance then dealers will have to provide the “best price” to issuers while merely offering a “fair price” to investors. The MSRB said in its proposal that the rule would not be a substantive pricing standard, but rather an “order-handling and transaction-execution standard.”

“If the MSRB is correct, and the rule doesn’t create a substantive pricing standard, then I would agree, it is not necessary since it will not have a substantive impact on pricing,” Howard said. “However, this would seem contrary to the ‘provide the customer the most favorable price possible’ comment contained within the initial release.”

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the proposal creates a higher standard than the current obligations in terms of what it will require from dealers’ policies and procedures. SIFMA previously floated its own execution standard to the MSRB, calling it “execution with diligence.”

“The current execution standard is ‘fair and reasonable,’ which SIFMA believes is the proper standard in light of the structure of the municipal market,” Cohen said. SIFMA members believe that ‘best execution’ is an equity market concept that is inapplicable to the over-the counter markets such as municipal securities.”

The SEC would have to approve the MSRB proposal before it could become a rule, and could choose to require changes before doing so.

THE BOND BUYER
BY KYLE GLAZIER
AUG 12, 2014 2:09pm ET

WASHINGTON — The Municipal Securities Rulemaking Board announced Tuesday that it will rebate $3.6 million to broker-dealers because it has collected more money in technology fees than the board needs to maintain its systems.

The MSRB will provide rebates to currently active registered firms in amounts equal to the technology fees assessed on their trades during the six months that ended with June 2014, the board announced in a release.

Firms pay $1.00 per sales transaction, and that money goes into a technology renewal fund that the MSRB created in January 2011. That fund has reached a level three times higher than the board needs to update and maintain its hardware and software.

“The technology fund provides the resources required to maintain critical systems relied upon by the municipal securities industry,” said MSRB executive director Lynnette Kelly. “However the fund has now reached its targeted level and future technology needs are not projected to exceed funding levels. So it is only fair to return the excess to the entities that paid those fees.”

Firms eligible for the rebate will receive an email notification of the amount and whether they will receive a credit against future billings or have the option to receive an electronic payment, the MSRB said. They should receive the rebates before Sept. 30.

As a self-regulatory organization, the MSRB is funded through various fees it assesses on regulated members. The board said it plans to review its funding structure soon.

“The MSRB recognizes that changes to its funding structure may be appropriate to ensure that fees are fair and equitably assessed and distributed,” the board said in a release. In the coming fiscal year, the MSRB plans to begin a comprehensive review of fees from dealer assessments, municipal advisors and other sources.

THE BOND BUYER
BY KYLE GLAZIER
AUG 12, 2014 11:32am ET

WASHIGNTON — The Municipal Securities Rulemaking Board is asking for comment on proposed changes to its G-14 trade reporting rule, including whether to require dealers to identify conditional trade commitments, which differ from newly issued bonds but are reported at the same time.

The inability to distinguish between CTCs and newly issued bonds has created some confusion among investors.

The MSRB notice, issued Wednesday, touches on a variety of market transparency initiatives that would affect how muni market information is reported and disseminated. Among the proposed new data elements are indicators of both which trades result from CTCs and which transactions are executed through alternative trading systems, as well as other proposals related to the board’s goal of building a comprehensive central transparency platform for munis. Comments are due by Sept. 26.

“All of these post-trade data elements would enhance transparency in the municipal securities market,” said MSRB executive director Lynnette Kelly. “These proposed changes are among the many steps we are taking to ensure that EMMA continues to evolve in response to changing municipal market practices and technological capabilities.”

Conditional trade commitments occur when dealers solicit, accept, and conditionally allocate orders prior to the signing of the bond purchase agreement. The prices agreed upon do not necessarily 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, conditional commitments appear on EMMA the same day as the day the bonds are issued and initially sold. There is no current means of distinguishing between conditional commitments and bonds sold the first day.

The MSRB proposal would require dealers to identify trade reports resulting from CTCs with a new indicator and report the date and time the CTC was made in a new field on the publicly-available trade reports. All dealers, including those outside the underwriting group, would include the new information on trade reports.

“The CTC indicator, together with the date and time at which the pricing of the commitment was made, would provide important transparency as to whether such price is indicative of current market conditions,” the MSRB proposal states. “Further, capturing the date and time that the commitment was formed would enable market participants to discern the sequence of new issue trading as well as to link specific transactions to market conditions as of the time an order was formed.”

The MSRB indicated its interest in these transparency steps in a July 2013 concept release, which prompted dealers to warn that providing such information could be burdensome without providing much help to investors.

Leslie Norwood, associate general counsel and co-head of municipal securities at the Securities Industry and Financial Markets Association, said SIFMA supports the MSRB’s goals of increased transparency but continues to believe that the cost of a CTC indicator would outweigh any benefit to investors.

“It’s going to take a re-write of many back office systems,” Norwood said, explaining that existing dealer and bank computer systems would need to be reprogrammed to allow for such an indicator.

Ernesto Lanza, a partner at Greenberg Traurig in Washington and former MSRB deputy director said that the CTC indicator could prove very helpful to investors, but would probably not cause a major shift in market practices.

“The question is how to do it in a way that is not cost-prohibitive or process-prohibitive,” he said.

Another new indicator would identify which trades occurred via alternative trading systems. The MSRB already identifies transactions done through a broker’s broker, because the broker’s broker informs the MSRB. The board does not currently identify trades executed through an ATS, but is proposing to require that trade reports identify if an ATS was used as well as the identity of the ATS.

“Identifying in disseminated transaction information that an ATS was employed should provide for higher quality research and analysis of market structure by providing information about the extent to which ATS’ are used and should complement the existing indicator disseminated for transactions involving a broker’s broker,” the MSRB proposal states.

THE BOND BUYER
BY KYLE GLAZIER
AUG 13, 2014 3:51pm ET

The Municipal Securities Rulemaking Board (MSRB) is requesting comment on draft amendments to Rule G-37, the MSRB’s landmark pay-to-play rule for municipal securities dealers, that would extend the rule to municipal advisors. The Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the jurisdiction of the MSRB to include the regulation of municipal advisors and the protection of state and local governments that often rely on these professionals for advice.

Comments are due no later than October 1, 2014. The MSRB will host a webinar on the proposed changes on September 11, 2014 at 3 p.m. ET. Register for the webinar.

View the regulatory notice.

Read the full press release.

The MCDC Initiative And Recent Modifications: Window For Issuers And Obligated Persons Now Closes On December 1, 2014, While Underwriters Window Still Set To Close On September 9, 2014

As highlighted in the SEC’s 2012 Municipal Market Report, the SEC has expressed significant concern that many issuers have not been complying with their obligation to file continuing disclosure documents and that federal securities law violations involving false statements concerning such compliance may be widespread. Increasingly, the SEC also has been taking enforcement actions under either Section 17(a) of the Securities Act of 1933 and/or Section 10(b) of the Securities Exchange Act of 1934 against issuers or obligated persons (collectively, “Borrowers”) for inaccurately stating in final official statements that they have substantially complied with their prior continuing disclosure obligations.

The SEC’s Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC Initiative”), announced on March 10, 2014, is intended to address potentially widespread violations of the federal securities laws by issuers and obligated persons involved in the offer or sale of municipal securities (collectively, “issuers”) and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. The SEC recently announced certain modifications to the MCDC Initiative. This Alert summarizes those modifications. Reference is made to our first Alert on the MCDC, a copy of which can be obtained on Foley.com.

SEC Enforcement Division Modifies MCDC Initiative

On July 31, the SEC announced two primary modifications to its MCDC Initiative: first, to allow issuers and obligors more time to complete their reporting requirements, the division has extended the deadline for Borrowers — but not underwriters– to self-report potential violations from September 10, 2014 to December 1, 2014; and second, with respect to underwriters, the division has determined to implement a tiered approach to civil penalties based on the size of the firm, in order to encourage smaller underwriters to participate in the initiative.

The deadline for underwriters remains unchanged at September 10, 2014 (actually midnight on September 9th).

The division’s tiered approach to the cap on civil penalties for eligible underwriters is as follows:

• For underwriters with 2013 reported total annual revenue of more than $100 million: $500,000
• For underwriters with 2013 reported total annual revenue between $20 million and $100 million: $250,000
• For underwriters with 2013 reported total annual revenue of less than $20 million: $100,000

The SEC also acknowledged difficulties with the NRMSIR filing system that predated the current EMMA system maintained by the MSRB. The division states that parties may use “reasonably available sources of information to make good faith efforts to identify potential violations but may not be able to identify certain violations during the period of the initiative due to the limitations of the pre-EMMA NRMSIR system. Potentially mitigating the lack of certainty due to the inconsistency of filings with the NRMSIRS, the division has stated that it “will consider reasonable, documented, good faith, and documented efforts in deciding whether to recommend enforcement action and, to the extent enforcement action is recommended, in determining relief.”

For a variety of reasons, including the SEC’s often stated views on the manner in which underwriters may comply with Rule 15c2-12, together with this tiered fee structure, we anticipate that underwriters will take advantage of this self-reporting program and scrutinize a Borrower’s prior disclosures and possible failures to comply. We note that some market participants have expressed concern that the tiered cap will encourage even more reporting by underwriters of borderline disclosure failures, thus enhancing the tension created by the “modified prisoner’s dilemma” of the original MCDC Initiative.

The two and a half month delay in the reporting deadline for Borrowers, will allow for a greater period of time by such Borrowers to understand potentially material misstatements or omissions that may have been disclosed to the SEC by its underwriter.

The MCDC Initiative

Our recommendations related to initial steps to be taken by a Borrower stated in our first Alert, remain the same. We continue recommend that Borrowers take the following steps to determine whether to opt into the MCDC program:

• Borrowers should first review their Official Statements for the past 10 years to determine what was said about continuing disclosure. Borrowers also should note the underwriters of each series of bonds.
• Borrowers next should review their undertakings to determine the scope of their continuing disclosure responsibilities.
• Borrowers then should review the filings actually made. This review should cover both the (1) timely filing of reports and (2) the substance of the reports (making sure the information furnished is that required to be filed); but also (3) the filing of material event notices.

If a Borrower determines that there is a potentially material misstatement in an Official Statement (for example, the Borrower has not described any failure to comply with a continuing disclosure undertaking), then they should consult with counsel to determine, first, if such misstatement was material, and if so, whether to file under the MCDC.

Notwithstanding the foregoing, we strongly encourage Borrowers to coordinate their review with the underwriters of each series of bonds referenced in (i) above. Because the window for self reporting by underwriters closes before the December 1 deadline applicable to Borrowers, Borrowers will need to understand what action (if any) an underwriter has taken with respect to the Borrower’s outstanding disclosures.

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.

Last Updated: August 11 2014

Article by Michael G. Bailey, David Y. Bannard, Laura L. Bilas, Heidi H. Jeffery, Chauncey W. Lever and David B. Ryan

Foley & Lardner

WASHINGTON — The Securities and Exchange Commission has charged the state of Kansas with violating federal securities laws by failing disclose in bond documents that the state’s pension system was significantly underfunded, creating a repayment risk for investors.

According to the SEC order settling administrative proceedings against the state, the Kansas Development Finance Authority raised $273 million through eight series of bonds from August 2009 to July 2010 without disclosing in bond documents that the Kansas Public Employees Retirement System was among the most underfunded state pension systems in the U.S. At the end of the 2008 calendar year, the SEC said in court documents, KPERS had a total unfunded actuarial accrued liability of $8.3 billion and was only 59% funded. The underfunding was not disclosed in the state’s annual financial information or in official statements for the series of bond offerings, though KPERS did disclose it in its own annual financials.

That behavior violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, the SEC charged. Part of that section of the law makes it illegal to obtain money by omitting a material fact. The SEC alleged that the materiality of the omitted information is clear because in 2009 the state informed both Standard & Poor’s and Moody’s Investors Service about the pension fund’s 2008 investment losses, and both agencies referenced it in their reports.

“We’re pleased that our actions have resulted in improved disclosure of pension liabilities in states that were not making investors aware of a significant repayment risk,” said Andrew Ceresney, director of the SEC Enforcement Division. “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.”

The action emerged from a nationwide review of muni bond disclosure that had previously produced similar charges against New Jersey and Illinois. The KDFA had been disclosing in recent bond documents that it was under investigation by, and cooperating with, the SEC. Like the two states charged before it, Kansas agreed to settle the charges by adopting new policies and procedures to “help ensure that appropriate disclosures about pension liabilities are being made in its offering documents.” The SEC investigation found that the failure to disclose the liability resulted from “insufficient procedures” and faulty communications between the KDFA and the Kansas Department of Administration, which provided the KDFA with the information for its offering documents.

The remedial measures, which the state has fully implemented, included designating responsible individuals in relevant state agencies, mandating more effective communications among those agencies, the establishment of a disclosure committee, and annual training of key personnel.

“Kansas failed to adequately disclose its multi-billion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” said SEC muni enforcement chief LeeAnn Gaunt. “In determining the settlement, the commission considered Kansas’s significant remedial actions to mitigate these issues as well as the cooperation of state officials with SEC staff during the investigation.”

The KDFA declined to talk about the SEC’s action, and the office of Gov. Sam Brownback did not respond to a request for comment.

THE BOND BUYER
BY KYLE GLAZIER
AUG 11, 2014 1:58pm ET

SEC Claimed State Misled Investors by Failing to Disclose Underfunding of Pension System

Kansas has agreed to settle a fraud case in which the Securities and Exchange Commission charged the state misled investors when it failed to disclose that its underfunded pension system posed a risk to the repayment of some municipal bonds.

Kansas officials didn’t provide important information about the state’s pension system in eight bond offerings totaling $273 million in 2009 and 2010, the SEC had said in a cease-and-desist order. Kansas has since adopted new policies to ensure its finances are more transparent in offering documents, the agency said in a news release Monday. The state neither admitted nor denied any wrongdoing, the agency said. There were no penalties or fines.

The action is the third the SEC has taken against states as part of a nationwide review to determine if municipalities are properly disclosing pension liabilities or other risks to investors, who are predominantly retail, in the $3.7 trillion municipal bond market. New Jersey and Illinois also reached similar settlements with the agency without paying a penalty or admitting wrongdoing, and Kansas began to improve its practices even as the agency began questioning them, the SEC said in a news release.

“We’re pleased that our actions have resulted in improved disclosure of pension liabilities in states that were not making investors aware of a significant repayment risk,” Andrew Ceresney, director of the SEC Enforcement Division, said in the release. “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.”

The bonds were issued by the Kansas Development Finance Authority at a time when one study found that Kansas’ pension system for public employees was the second-most underfunded in the U.S., the SEC said. Because of “insufficient procedures and poor communications” between state agencies, that information wasn’t provided to bondholders, who also didn’t learn that the liability posed risks to the repayment of their bonds, the agency said.

In response to the SEC action, Kansas Gov. Sam Brownback said in a statement that such reforms as boosting employer and employee contributions have reduced the projected pension deficit. Jim Clark, secretary of administration, said state officials acted promptly in 2011 to improve transparency in bond offerings.

“The SEC has considered these changes and we are pleased that the SEC did not seek any financial penalties,” Mr. Clark said in a statement. “We remain committed to complying with all disclosure requirements and require training and updating of the policies and procedures annually.”

Cities and states have historically received mixed messages about how seriously to treat pension liabilities, and the SEC has taken the position that understating those liabilities is prohibited, said Matt Fabian, managing director at Municipal Market Advisors. Because investors are growing accustomed to such actions by the SEC, the move was unlikely to roil the market, he said.

“If anything, this should improve market function, because you have prospects for better disclosure in the future,” Mr. Fabian said.

By MARIA ARMENTAL and AARON KURILOFF
Updated Aug. 11, 2014 5:07 p.m. ET

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) is requesting comment from municipal market stakeholders on a proposal to enhance the public availability of municipal securities trade data on the MSRB’s Electronic Municipal Market Access (EMMA®) website.

The MSRB is seeking input on proposed changes to the current system of collecting and disseminating trade data that would expand the data made available on EMMA. Among the proposed new data elements is information about trades in new issues that result from conditional allocations by dealers, information regarding sale transactions by dealers that have long-term marketing agreements with underwriters and information about transactions executed through alternative trading systems. Additionally, the proposed changes include a new indicator for customer trades involving non-transaction-based compensation arrangements. Comments are due no later than September 26, 2014.

“All of these post-trade data elements would enhance transparency in the municipal securities market,” said MSRB Executive Director Lynnette Kelly. “These proposed changes are among the many steps we are taking to ensure that EMMA continues to evolve in response to changing municipal market practices and technological capabilities.”

The MSRB first articulated plans to develop the next generation of its Real-time Transaction Reporting System (RTRS) in its 2012 long-range plan for market transparency products. The plan called for the incremental development of a new “central transparency platform” on EMMA to provide integrated, real-time trade data to investors and other market participants. Market feedback, gathered through two concept releases and ongoing dialogue with industry members, informed the development of the MSRB’s proposed post-trade reporting framework.

As the MSRB advances the proposed framework for post-trade transparency, it will continue engaging in outreach with market participants to gather additional input for the first phase of an incremental approach for collecting and disseminating bid-wanted information and other pre-trade data on EMMA.

Date: August 13, 2014

Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
jgalloway@msrb.org

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) announced today that it will distribute a discretionary technology fee rebate of $3.6 million to eligible brokers, dealers and municipal securities dealers. The technology fee funds the replacement of and upgrades to MSRB technology systems.

The MSRB established a technology renewal fund in January 2011 to ensure the operational integrity of its information systems and to update associated hardware and software to keep pace with changing technology and market system needs. The technology fee is assessed at $1.00 per transaction for all qualified sales transactions. The fund has been building to a target level of three times annual depreciation on technology capital expenditures.

“The technology fund provides the resources required to maintain critical systems relied upon by the municipal securities industry,” said MSRB Executive Director Lynnette Kelly. “However the fund has now reached its targeted level and future technology needs are not projected to exceed funding levels. So it is only fair to return the excess to the entities that paid those fees.”

The MSRB will provide rebates to currently active and registered firms equal to the technology fees assessed on trades during the six months ended June 2014. Qualified firms will receive an email notification of their rebate amount and whether they will receive a credit against future billings or have the option to receive an electronic payment. The rebates are expected to be processed before September 30, 2014.

The MSRB recognizes that changes to its funding structure may be appropriate to ensure that fees are fair and equitably assessed and distributed. In the coming fiscal year, the MSRB plans to begin a holistic review of fees from dealer assessments, municipal advisors and other sources.

Date: August 12, 2014
Contact: Jennifer A. Galloway, Chief Communications Officer
(703) 797-6600
jgalloway@msrb.org

On March 10, 2014, the Securities and Exchange Commission (“SEC”) announced a voluntary self-reporting program for issuers and underwriters of municipal bonds for reporting of inaccurate statements made in offering documents regarding prior continuing disclosure compliance through a program called the Municipalities Continuing Disclosure Cooperation Initiative (the “MCDC initiative”).

The MCDC initiative permits issuers and obligated persons, for a limited time only, to self-report misstatements concerning prior compliance with continuing disclosure obligations in an official statement for a municipal bond issue. In exchange, the SEC Division of Enforcement agrees to recommend favorable settlement terms for issuers and obligated persons involved in the offering of those municipal bonds. The Division of Enforcement has warned that it will likely recommend seeking significant financial sanctions against issuers and obligated persons that elect not to participate in the MCDC initiative and that are determined to have made material misstatements in an official statement concerning their prior compliance with their continuing disclosure obligations.

Both underwriters and issuers (a term which includes colleges and universities as obligated persons) can participate in the MCDC initiative by completing a questionnaire and submitting it no later than September 10, 2014 in the case of underwriters, or December 1, 2014 in the case of issuers and obligated persons.

The MCDC initiative potentially applies to all colleges and universities that issued tax-exempt debt during the last five years.

CONTINUING DISCLOSURE

For official statements for bonds issued on behalf of a college or university, institution is considered to be the issuer with responsibility for the various statements in the official statement, including statements concerning its prior compliance with its continuing disclosure obligations. Generally, under SEC Rule 15c-2(12), colleges or universities are required to describe failures to comply with prior continuing disclosure obligations over the last five years.

Since 1993, SEC Rule 15c-2(12) has obligated underwriters to require colleges or universities to enter into continuing disclosure agreements that mandate annual filing of audited financial statements and certain financial and operating data for dissemination to the municipal marketplace.

The obligation to provide continuing disclosure applies to most long-term bond issues with the exception of certain variable rate demand bonds secured by letters of credit.

Under most continuing disclosure agreements, a college or university is required to file its annual financial statements and certain operating and financial data with designated repositories, currently the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) system within 180 days of the end of each fiscal year.

Colleges and universities must also file notices of certain material events. Material events include:

(a) principal and interest payment delinquencies;

(b) non-payment related defaults, if material;

(c) unscheduled draws on any debt service reserves reflecting financial difficulties;

(d) unscheduled draws on credit enhancements reflecting financial difficulties;

(e) substitution of credit or liquidity providers, or their failure to perform;

(f) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material event notices or determinations with respect to the tax status of the bonds, or other material events affecting the tax status of the bonds;

(g) modifications to the rights of holders of the bonds, if material;

(h) bond calls, if material, and tender offers;

(i) defeasances;

(j) release, substitution, or sale of property securing repayment of the bonds, if material;

(k) rating changes;

(l) any bankruptcy, insolvency, receivership or similar event of the obligor;

(m) the consummation of a merger, consolidation or acquisition involving the obligor or the sale of all or substantially all of the assets of the obligor, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and

(n) appointment of a successor or additional trustee or the change of name of a trustee, if material.

Notices of material events are generally required to be filed within ten (10) business days of the occurrence of the material event.

CONTINUING DISCLOSURE COMPLIANCE PROBLEMS

Generally, under SEC Rule 15c-2(12), colleges and universities are required to describe failures to comply with prior continuing disclosure obligations over the last five years. There is a five year statute of limitations for SEC enforcement actions so the MCDC initiative covers potential continuing disclosure compliance misstatements or omissions in official statements published within the past five years.

SEC SETTLEMENT TERMS

Under the MCDC initiative, if the SEC Division of Enforcement concludes that there has been a violation, the SEC settlement would require the college or university to do the following as part of an agreed cease and desist order resolving the SEC proceeding:

• Establish policies, procedures and training regarding continuing disclosure obligations within 180 days;
• Comply with existing continuing disclosure undertakings and bring all prior filings up to date within 180 days of institution of the proceedings;
• Cooperate with any subsequent investigation by the SEC Division of Enforcement regarding the false statements, including the roles of individuals and/or other parties involved (underwriters, financial advisors, attorneys);
• Disclose in a clear and conspicuous fashion the settlement terms in the final official statement for any offering by the college or university within five years of the date of institution of the proceeding; and
• Provide the SEC staff with a compliance certification regarding the applicable continuing disclosure undertakings by the college or university on the one year anniversary of the date of institution of the proceedings.

PRISONER’S DILEMMA

The MCDC initiative creates tension between obligors and underwriters, or what is called a “prisoner’s dilemma.”. Both the college or university and the underwriter are required to self-report any material misstatement or omission in a final official statement concerning prior compliance with continuing disclosure obligations. If one party self-reports and the other does not, a problem arises for the second party if the SEC staff determines that the facts warrant an enforcement action. The MCDC initiative is clear that favorable settlement terms are only available for institutions and underwriters that elect to self-report. The SEC’s Division of Enforcement has stated that it will likely recommend and seek financial sanctions in amounts greater than those available under the MCDC initiative.

Another complication is that the MCDC initiative only applies to institutions and underwriters as entities. Although a college or university may self-report and obtain a settlement under the predetermined terms, the SEC retains the right to seek enforcement action against individuals who may be culpable. This may include individuals working at the college or university, or third parties such as attorneys or financial advisors. This increases the difficulty in deciding whether and what to self-report.

WHAT TO DO

Any college or university that issued tax-exempt bonds in the last five years, it needs to review the statements made in the official statements concerning compliance with prior continuing disclosure obligations over the previous five years. In the case of a bond issue in 2010, this would require examination of continuing disclosure filings from 2005. If prior unreported continuing disclosure violations are discovered – failures to file, late filings, or non-reporting of material events that were not disclosed in an official statement – an analysis needs to be performed as to whether the misstatement or omission was “material.”. “Material” is not defined in securities law or regulations and depends on the overall facts and circumstances of a situation. One factor in this analysis is whether the failure would affect a bondholder’s confidence in the institution’s covenant to provide ongoing continuing disclosure.

In the first instance, a college or university may make its own determination as to whether or not to self-report certain violations on the grounds that they are immaterial. For difficult cases, the MCDC initiative does provide a second review by the SEC staff. The SEC will review each submission and only recommend taking the predetermined enforcement action if the misstatements or omissions were material. Thus, a college or university may self-report while arguing that the circumstances disclosed are not material and should not result in enforcement action. If, however, SEC staff determines otherwise, the institution is still entitled to accept the sanctions included in the MCDC initiative.

8/11/2014

by Jr.Edwin Kelley, Jr. | Bond Schoeneck & King PLLC

The Securities and Exchange Commission today announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors. According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.

According to the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies. According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation. In the offering documents for the bonds, however, Kansas did not disclose the existence of the significant unfunded liability in KPERS. Nor did the documents describe the effect of such an unfunded liability on the risk of non-appropriation of debt service payments by the Kansas state legislature. The SEC’s investigation found that the failure to disclose this material information resulted from insufficient procedures and poor communications between the KDFA and the Kansas Department of Administration, which provided the KDFA with the information to include in the offering materials.

According to the SEC’s order, Kansas has since adopted new policies and procedures to help ensure that appropriate disclosures about pension liabilities are being made in its offering documents. Kansas designated responsible parties in state agencies critical to the disclosure process, mandated closer communication and cooperation among those agencies, established a disclosure committee, and now requires annual training of key personnel.

The SEC press release with a link to the order can be seen here.

WASHINGTON — The Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal that would simplify its rules on professional designations by limiting the activities of some dealer representatives and eliminating one of its professional designations.

Approved Aug. 1 and effective Sept. 30, the changes alter the MSRB’s Rule G-3, on classification of principals and representatives, and makes corresponding changes to Rules G-7 on information concerning associated persons and G-27 on supervision.

The non-controversial changes were supported by dealers, who said MSRB’s rules will now be more harmonized with the Financial Industry Regulatory Authority’s rules. The Securities Industry and Financial Markets Association was the only group to file comments about the proposed changes with the SEC and they were favorable.

Under G-3, limited representatives are individuals whose activities, with respect to municipal fund securities, may include: underwriting or sales; research or investment advice with regard to underwriting or sales; or any other activities that involve communication, with public investors with regard to underwriting or sales. The newly-approved change restricts the activities of limited representatives exclusively to sales to, and purchases from, customers of municipal fund securities. The MSRB has said this approach is consistent with the approach taken by FINRA. The revised rule also defines the term “sales” to include the solicitation of sales of municipal securities.

The amended rules eliminate the designation of “financial operations principal” under G-3, because FINRA has overlapping FINOP designation requirements, including an exam. The section of G-7 that defines “associated person” has been amended to include limited representatives and to replace the term FINOP with “general securities principal.” References to FINOP have been removed from amended rules G-7 and G-27.

THE BOND BUYER
BY KYLE GLAZIER
AUG 5, 2014 11:14am ET

WASHINGTON — The Municipal Securities Rulemaking Board plans to request comment on whether it should require dealers to disclose a price rather than a markup as a way of improving muni market transparency for retail investors.

The board made that decision at its quarterly meeting in Chicago last week, MSRB chairman Daniel Heimowitz said in a conference call Tuesday.

The MSRB proposal would be an attempt to address concerns about hidden markups in so-called “riskless principal transactions,” when bonds are bought and sold within a short time frame so the dealer has little risk the market will change. But Heimowitz said the board had trouble coming to a consensus on what constitutes a riskless principal transaction, and will be interested in hearing from market participants about whether the disclosure of a reference price could achieve the same goal as disclosure of a markup.

The board would propose a rule that would require a dealer to disclose to its customer, when making a retail-sized sale of $100,000 or less, what the dealer paid for that same security on the same day. The rule would only apply to principal and not agency trades.

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 Commissioner Michael Piwowar sounding the call in recent weeks. Additionally, Sens. Mark Warner, D-Va. and Tom Coburn, R-Okla., introduced a bill in March that would require that disclosure.

“The MSRB recognizes the importance of a coordinated and workable approach to providing investors with additional information about the market for the securities they trade,” said Heimowitz. “We are committed to publishing a proposal that can be shaped with public input into regulations that address improved transparency.”

The MSRB also will be seeking input on other approaches, including requiring markup disclosure, Heimowitz said.

More imminently, the board will seek SEC approval this month of a best execution rule, something that has long existed in the corporate market but which has been a sticking point for munis until recently. The rule 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.” The final MSRB draft includes some changes that the board’s executive director, Lynnette Kelly, called “technical” tweaks clarifying the exemption from the rule for transactions involving sophisticated municipal market professionals who need less protection. An earlier draft made it seem as if SMMPs must read the policies and procedures of dealer firms, but the board wants them to only understand that dealers have those policies and procedures, Kelly said.

The board also discussed a slew of municipal advisor rules, Heimowitz said. The MSRB will publish for public comment in the coming weeks a proposal to amend its Rule G-37, its pay-to-play rule for municipal securities dealers, to also cover municipal advisors. The proposal would prohibit MAs from engaging in muni advisory business with state or local governments or their subdivisions for two years if certain political contributions are made to those entities’ officials. The board also agreed to propose applying to MAs its existing rule G-20, governing the giving of gifts by dealers to persons whose employers are engaged in municipal securities activities.

“Establishing appropriate pay-to-play and gift regulations for municipal advisors will help ensure that all regulated municipal market professionals are held to the same standards of integrity,” said Heimowitz. “Uniform rules on pay-to-play activities and gift-giving will serve to effectively and fairly guard against corruption, an appearance of corruption and conflicts of interest in the municipal market.”

The board also plans to ask the SEC to sign off on an earlier proposal to set professional qualification requirements for MAs. The proposal would create two classes of MA professionals, principals and representatives, and require all MA representatives to pass an exam once one becomes available. The draft submitted to the SEC will not be greatly changed from the one offered for comment earlier this year, the MSRB officials said.

THE BOND BUYER
BY KYLE GLAZIER
AUG 5, 2014 4:59pm ET

NABL today released a paper on considerations for issuers and obligated persons on the questions of materiality and of self-reporting for the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The paper is available here. The paper and the analysis in it will be discussed on NABL’s teleconference, “MCDC – Should the Issuer Self-Report.” The call will be from 1:00 to 2:30 ET, Wednesday, August 6. Additional lines have become available for the teleconference and will be issued on a first-come, first-served basis to regular NABL members. Email registration requests to registration@nabl.org. Confirmations will be sent by 10AM ET Wednesday, August 6. NABL members who are not registered for the teleconference can listen in with someone who is registered or can listen to the audio recording of the teleconference on NABL’s website. The audio recording will be available Thursday, August 7.

A key interpretive issue under MCDC is the meaning of “material” in the context of the Initiative. This document is intended to serve the limited purpose of suggesting a framework to analyze this issue. This document does not address whether a municipal issuer or other obligated person under a continuing disclosure agreement should self-report under the Initiative, as there are numerous factors that are involved in any such determination, but the paper does briefly describe some of the considerations the could go into a decision by an issuer or obligated person to self-report.

The paper is focused on materiality determinations by and self-reporting of issuers. NABL believes that this focus will provide the greatest benefit to its members. Because a determination of materiality is dependent on the unique facts and circumstances in any particular instance, and involves the exercise of judgment informed by experience, different parties may reach different conclusions about what is material with respect to similar facts. Moreover, it can be anticipated that issuers and underwriters will have different perspectives, both regarding what may be material and what should be self-reported, particularly in light of the cap on liability applicable to underwriters and the direct application of Rule 15c2-12 only to underwriters.

Alexandria, VA – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting July 30 – August 1, 2014 in Chicago, Ill., where it approved the advancement of significant regulatory proposals to enhance the transparency and integrity of the municipal securities market. These proposals include:

• Enhancing disclosure of pricing information for retail investors
• Expanding the availability of pre- and post-trade data on the MSRB’s Electronic Municipal Market Access (EMMA®) website
• Establishing rules to curb pay-to-play practices for municipal advisors and the giving of gifts in their professional capacity
• Requiring all municipal advisors to take a professional qualifications exam

Price Transparency

In the MSRB’s continued focus on enhancing price transparency for municipal securities investors, the Board developed a proposal regarding disclosure of information by municipal securities dealers to their retail customers to help them better understand some of the factors associated with the costs of their transactions. The proposal focuses on disclosure on customer confirmations of the price of a corresponding dealer transaction in the same security that occurs on the same day as the customer trade. 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 proposal, which will be published for public comment this fall, will also broadly seek input on alternative regulatory approaches, including markup disclosure on confirmations for trades that could be considered riskless principal transactions.

The MSRB has previously stated that it is working with the Financial Industry Regulatory Authority as it develops a similar proposal for the corporate bond market. The two regulatory authorities will continue to coordinate their approaches to the extent possible in advance of the public comment process.

“The MSRB recognizes the importance of a coordinated and workable approach to providing investors with additional information about the market for the securities they trade,” said MSRB Board Chair Daniel Heimowitz. “We are committed to publishing a proposal that can be shaped with public input into regulations that address improved transparency.”

In a related effort on price transparency, the MSRB Board approved a forthcoming request for comment on enhancing its Real-time Transaction Reporting System (RTRS) to collect additional post-trade information for public display on EMMA. MSRB market structure staff also will continue engaging in outreach with market participants to gather additional input for the first phase of an incremental approach for collecting and disseminating bid-wanted information and other pre-trade data on EMMA.

Additionally, the Board agreed to proceed with its proposed rule establishing a “best-execution” standard for transactions in the municipal market, with an exception for transactions with sophisticated municipal market professionals. The MSRB will seek Securities and Exchange Commission (SEC) approval of this first 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.

Municipal Advisor Regulation

As part of its ongoing effort to implement a comprehensive regulatory regime for municipal advisors, the Board agreed to publish for public comment a proposal to amend MSRB Rule G-37, the MSRB’s landmark pay-to-play rule for municipal securities dealers, to also cover municipal advisors. The proposal would prohibit municipal advisors from engaging in municipal advisory business with municipal entities for two years if certain political contributions have been made to those entities’ officials. The rule proposal intends to ensure that the high standards and integrity of the municipal securities market are maintained by municipal advisors.

Similarly, the Board agreed to request comment on applying to municipal advisors its existing rule governing the giving of gifts by municipal securities dealers to persons whose employers are engaged in municipal securities activities, MSRB Rule G-20.

“Establishing appropriate pay-to-play and gift regulations for municipal advisors will help ensure that all regulated municipal market professionals are held to the same standards of integrity,” said Chair Heimowitz. “Uniform rules on pay-to-play activities and gift-giving will serve to effectively and fairly guard against corruption, an appearance of corruption and conflicts of interest in the municipal market.”

The Board also agreed to seek approval from the SEC on an earlier proposal to set baseline professional qualification requirements for municipal advisors. The Board reviewed the comment letters received on its proposal to create two classes of municipal advisor professionals – representatives and principals – and to require all municipal advisor representatives to take and pass an exam within a year of its availability. The MSRB plans to file its proposed rule with the SEC without significant change.

The professional qualifications rule will be the third new municipal advisor rule filed with the SEC since the SEC’s adoption of a final definition of “municipal advisor” in September 2013. Last month, the MSRB filed its proposed supervision and compliance rule for SEC approval. In April 2014, the MSRB implemented a fee for municipal advisor professionals. The MSRB is continuing to solicit input on its revised draft rule to create core standards of conduct for municipal advisors through August 25, 2014.

Other Business

In addition to price transparency initiatives and municipal advisor rulemaking, the MSRB Board discussed and approved the annual operating plan and associated budget for the upcoming fiscal year in support of the organization’s strategic goals. Consistent with the MSRB’s risk management policy, the Board also reviewed the organization’s top risk report, which is the product of the MSRB structured risk management program to strengthen internal control environment and accountability, ensure responsible stewardship of all MSRB assets and generate information to inform strategic and operational decision-making.

WASHINGTON — A bipartisan bill quietly introduced in the Senate months ago may serve as a starting point for key discussions among regulators about how to develop rules requiring dealers to disclose markups on “riskless principal” transactions.

The Bond Transparency Act of 2014, sponsored by Sens. Mark Warner, D-Va. and Tom Coburn, R-Okla., was introduced in March. The bill would require dealers to disclose to their customers, in writing, at or before the time of completion of a riskless principal transaction, the amount of the difference between the customer’s price and the dealer’s price. These transactions have not been formally defined, but are generally understood to mean purchases and sales done almost simultaneously so there is little or no chance that the market could move against the dealer.

The idea of requiring dealers to disclose markups in riskless principal transactions is not new, and was included in the Securities and Exchange Commission’s 2012 muni market report. More recently SEC Commissioner Michael Piwowar has called for disclosures of such markups, and SEC chair Mary Jo White has instructed the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority to begin work on a framework for that purpose.

The SEC does not need legislative authority from Congress to require markup disclosure, but sources said the introduction of the bill could have prodded the SEC into action.

Warner and Coburn introduced the bill after a column appearing in The Wall Street Journal claimed muni investor’s profits were being eaten up by markups.

“When buying or selling shares in a stock, customers are told the commission they pay; it only makes sense that the same occur when trading a bond,” Warner told The Bond Buyer. “I am encouraged chair White has made our commonsense, bipartisan idea of bond price transparency a priority and that MSRB and FINRA are moving forward on this. I hope they can move expeditiously to protect investors and strengthen our markets.”

The bill does not define riskless principal beyond saying it means the dealer is “acting as principal for its own account” leaving it to the SEC to decide what the appropriate standard should be.

The question for the dealer community is how the regulators plan to define a riskless principal. Were the Warner/Coburn bill to become law, a dealer would have to tell a customer at the time of the transaction what the markup would be. In a speech in Boston last week, Piwowar said that the SEC staff’s initial opinion is that a same-day time frame to identify riskless principal transactions would be workable for market participants. Piwowar added that he is looking forward to “seeing further analysis on this issue and hearing from market participants on their views.”

David Cohen, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the support of the dealer community for the new disclosures and the Bond Transparency Act depends on the riskless principal definition.

“SIFMA believes that the bill is a good starting point for discussion,” Cohen said, adding that a trade is only riskless if a dealer has a firm customer order in hand before committing to the trade. Whatever definition of riskless principal the commission decides on, Cohen said, it has to be measurable so that it can be automated.

The MSRB had initial discussions at its board meeting last week on how it will approach the new mandate. White said in June that she wants a disclosure framework in place by the end of the year.

THE BOND BUYER
BY KYLE GLAZIER
AUG 4, 2014 4:07pm ET

Download the Report.

Remarks At The 2014 Municipal Finance Conference Presented By The Bond Buyer And Brandeis International Business Schooll, SEC Commissioner Michael S. Piwowar, Boston, Massachusetts, Aug. 1, 2014

___________________________________________________

Thank you, Erik [Sirri], for that kind introduction.

Before I begin I need to take an awkward pause and provide the standard disclaimer that the views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners.

With that out of the way, let me tell you how delighted I am to be here at this excellent conference. I have greatly enjoyed interacting with this wonderful group of academics, practitioners, regulators, and journalists all dedicated to examining the myriad of issues raised by the topic of municipal finance. In particular, it is great to see such a diverse mix of prominent academic researchers interested in this field. People like Dan Bergstresser and John Chalmers, who have made significant contributions to the academic literature on municipal finance over the past several years. People like Jess Cornaggia, who is bringing his expertise in credit ratings to municipal finance. People like Erik Sirri and Kim Cornaggia, who have given their time and talents to serve the public at the Securities and Exchange Commission (“SEC” or “Commission”).

On that note, I want to make a pitch to the academics participating in this event to seriously consider coming to the SEC as a visiting academic scholar or economic fellow in our Division of Economic and Risk Analysis (“DERA”).[1] The Commission has long benefitted from working with outside experts in academia and industry to strengthen the Commission’s foundation of market knowledge. By the end of my speech, I hope you will see that there are a number of exciting research opportunities in municipal finance to pursue at the Commission.

It has been twelve years, almost exactly to the day, since I was first introduced to the municipal securities market. It was my second day on the job as a visiting academic scholar at the SEC. I arrived at the Commission expecting to work on equity market structure issues. My PhD dissertation focused on equity market microstructure, my first published academic journal article focused on equity market microstructure, and my pipeline of market microstructure working papers all focused on the equity markets.

But, my research agenda took an unexpected and serendipitous turn after a brief conversation with SEC Chief Economist Larry Harris. I still remember him asking me: “Did you know that we have a database of every secondary market transaction in the municipal bond market over a one-year period?” “No,” I answered. He followed up: “Do you want to work in this area?” Of course, as a young academic with lots of motivation but little quality data, it did not take me long to answer, “Yes.” Luckily for me that turned out to be the correct response, because I got the strong impression that had I answered in the negative I might have been fired. Having passed that initial test, I soon found myself sifting not only through municipal bond data, but also gathering data and analyzing transparency initiatives in the corporate bond market. And so began my multi-year exploration of the municipal and corporate bond markets with Larry Harris and fellow SEC economist Amy Edwards.[2]

Our research yielded a number of somewhat surprising conclusions about the municipal bond market. First, municipal bonds do not trade very often. When analyzing trading activity of individual bonds, we needed to calculate the average number of trades per week, not perday. Second, municipal bonds are expensive for retail investors to trade. We found that effective spreads in municipal bonds averaged almost 2% of the price for representative retail-sized trades. In the Fed’s current near-zero-interest-rate policy environment, this represents several months of a bond’s total annual return. Third, retail-size municipal bond trades are more expensive than institutional-size trades. Unlike in equities, municipal bond transaction costs decrease with transaction size. Fourth, many municipal bonds have several complexity features – e.g., sinking funds, special redemption provisions, credit enhancements – that make valuation more difficult for investors. Secondary municipal bond transaction costs increase with instrument complexity, which suggests that investors and issuers might benefit if issuers could issue simpler bonds.

Each of these conclusions seems to raise more questions than it resolves, which is evidence of the complexity of the municipal securities market. This complexity is one of the reasons I have been fascinated by this market for so long, and continue to seek answers to the many unique questions it generates.

Given what I have just told you about my background and previous work related to the municipal bond market, it is probably not a surprise that one of my first actions as a Commissioner was to gather with SEC staff to discuss improvements for retail investors that could be made in this market. The timing was apt, because the Commission adopted a final municipal advisor definition, which occurred just weeks after I was sworn in.[3] Despite the attention paid to the municipal advisor definition and related efforts aimed at protecting issuers, I knew from my prior work in this space that there remained a number of basic reforms that could be enacted to better serve the retail investors that dominate this market.

As a result, I urged the Director of the SEC’s Office of Municipal Securities, John Cross, and his staff to shift their focus from the creation of the municipal advisor regime to potential reforms in the existing municipal securities market structure. As part of this dialogue I encouraged staff to identify areas of “low-hanging fruit” reflecting common sense improvements to the municipal bond market that the entire Commission could support.

While staff worked to develop a proposed set of reforms for the municipal securities market, I publicly advocated for incremental changes to fixed income market structure in a speech this January at the U.S. Chamber of Commerce.[4] As a minority Commissioner, these calls for reform can sometimes fall on deaf ears within the SEC. However, I am pleased that today, rather than continuing to beat the drum for changes that might never see the light of day, I am able to discuss with you concrete steps to improve the municipal bond market that are not only achievable, but are already gaining support. These steps have been thoughtfully developed by SEC staff and are consistent with the changes for which I have been advocating. And in key signs of progress, most of these reforms also recently received the support of Chair Mary Jo White and Commissioner Dan Gallagher.[5] I firmly believe that the common sense reforms I describe today have the momentum behind them to be enacted in the near-term for the benefit of retail investors and the market as a whole.

Riskless Principal Transactions

The first issue that must be addressed in the municipal bond market is the disclosure of markups on riskless principal transactions. This is an area that I specifically referenced in the January speech in which I called for changes in the fixed income market, and there are straightforward reforms that will provide substantial benefits to retail investors.

When retail investors enter into transactions with dealers to purchase municipal securities, those transactions may be executed by dealers either in an agency or a principal capacity. If a dealer completes a municipal security transaction in an agency capacity it must disclose to its customer the commission that it charges for the trade. Yet if the dealer instead chooses to complete the same transaction in a riskless principal capacity, it may disclose to the customer that zero commission was paid on the trade even if a markup or markdown was charged. Thus, under the existing rules, the information received by a customer concerning the compensation paid to a dealer for these two economically equivalent methods of executing the same transaction is vastly different. In effect, the current regulatory environment allows the dealer to hide its compensation from a customer merely by altering the method of execution used. As a result, customers may unknowingly be paying increased transaction costs while believing that their trades have not been subject to any commission payment.

The time has come to require dealers to disclose markups and markdowns on all riskless principal bond transactions on customer confirmations. Retail customers should have the information necessary to fully understand the costs associated with their transactions and to make informed decisions about how they trade municipal securities. In the past, limitations on the data reported for municipal securities transactions may have made it difficult to identify riskless principal transactions, for purposes of compliance with – and enforcement of – a rule requiring disclosure of markups or markdowns on such transactions. These limitations are no longer present in today’s market, as pricing data on municipal securities transactions is reported soon after execution. Thus, we already have the data necessary to identify riskless principal transactions. All that remains is to close the current disclosure loophole.

Of course, despite the sufficiency of our current data set for these purposes, the key question that will always arise when discussing the disclosure of riskless principal markups is what time frame should be used to identify relevant transactions? As an initial matter, staff in the SEC’s Office of Municipal Securities has indicated a belief that a same-day time frame to identify riskless principal transactions would be both consistent with natural break points in the data and workable for market participants. I look forward to seeing further analysis on this issue and hearing from market participants on their views as we move towards a rule in this area.

When I talk about moving forward on this issue, I am looking squarely in the direction of the Municipal Securities Rulemaking Board (“MSRB”) and Financial Industry Regulatory Authority (“FINRA”). The issue of riskless principal markups is common to both the municipal and corporate securities markets, and I strongly encourage both organizations to work together to publish proposed rules for public comment. There will certainly be those who object to such an undertaking, but the time has come for investors to understand the costs associated with their fixed income transactions, and I ask my colleagues at the MSRB and FINRA to push ahead in implementing this much needed reform.

Best Execution

Another part of the municipal securities market structure that is in need of improvement is the standard of execution to which dealers are held. For too long, we have seen a split in the execution standards in the fixed income markets between corporate and municipal bonds, with FINRA applying a best execution standard to corporates, and the MSRB requiring dealers in the municipal space to trade with customers at “fair and reasonable” prices and to exercise diligence.
Objections to the application of a best execution standard to municipal securities often cite the complexity of the market and its unique characteristics as reasons for not adopting such a standard. However, it is the inherent complexity of this market – combined with its highly retail customer base – that creates the need for this high standard. Dealers face a wide array of options for fulfilling customer orders in the municipal securities space, from using internal inventory, to seeking out transactions with other dealers, or tapping into the liquidity of an alternative trading system. Each of these methods of execution may at various times benefit a retail customer initiating a specific transaction with a dealer. However, with so many different methods of execution available, it is impossible to verify whether a dealer has executed a transaction based on the best interests of its customer. As a result, it is vital that dealers be subject to a standard of best execution in the municipal securities space in order to provide retail customers with the confidence that they are receiving the best execution available for each transaction into which they enter.

I am pleased that this is an area where we are already seeing positive developments. I commend the MSRB for taking thoughtful and deliberative steps over the past year towards a best execution standard. After first seeking comment on the question of whether to move forward with a proposed best execution rule in August 2013,[6] the MSRB appropriately chose to proceed with a proposed rule that was published for comment in February of this year.[7] I understand that the MSRB is in the process of reviewing the comments submitted and developing a final rule for submission to the Commission. I look forward to receiving such a submission and implementing an effective, workable rule in the near future.

While calling for steady movement towards a best execution standard in the municipal securities market, I am not ignoring the concerns that some market participants have expressed regarding the complexities involved with implementing such a standard, or the unique aspects of the municipal securities market that must be accounted for in any final rule. However, I am confident that these difficulties can be addressed through dialogue between the regulatory community and market participants. In particular, I recognize that many market participants are concerned that how to apply a best execution standard to fixed income markets is already subject to a significant amount of uncertainty in the corporate bond market, where the standard presently exists. These concerns are valid, and reflect the need for further guidance. I know that the MSRB and FINRA are already engaged in a dialogue aimed at providing clarity on this issue through the publication of practical guidance on how to apply a best execution standard in the context of illiquid securities such as certain municipal and corporate bonds. I encourage the MSRB and FINRA to complete this important work, and ask market participants to stay engaged on this issue by working with the MSRB and FINRA to identify key areas where guidance is needed.

Pre-Trade Transparency

A third area of the municipal securities market that stands ready for reform is pre-trade price transparency. Transparency in the fixed income markets is a particular interest of mine. My municipal bond research attributed much of the high cost of trading municipal securities to the lack of transparency in that market. My corporate bond research also addressed transparency by showing that investors benefitted significantly from public dissemination of prices.

The municipal securities market has long suffered from a lack of price transparency, and this deficiency is particularly acute for retail investors. In recent years, however, strides have been made to increase post-trade transparency for municipal securities through the MSRB’s Electronic Municipal Market Access (“EMMA”) system. This service now provides a wealth of historical pricing information in the municipal securities market in an easy to access format.

While the EMMA system reflects a significant advancement in the overall amount of transparency in the municipal securities market, there is still a significant need for publicly available information regarding pre-trade pricing for these financial products. Retail investors currently have little if any insight into the pricing of their transactions. The little pricing information that exists is typically found on alternative trading systems that provide indicative prices and requests-for-quotes to members, but not to the general public. As a result, the retail investors that make up a significant portion of the municipal securities market are left in the unenviable position of not knowing basic information about the prices at which their securities are likely to transact.

We can do better for retail investors. That is why I support efforts to incrementally increase pre-trade price transparency in the municipal securities market by amending Regulation ATS to mandate the public dissemination of pricing information for certain transactions on significant alternative trading systems.
I use the term “incrementally” in recognition of the difficulty of this task and the need to approach it with care. As with any transparency initiative, there is a risk that shining a light on one portion of the market will cause transaction volume to flee further into the dark. This type of movement could have severely negative impacts in a market like that for municipal securities, which already suffers from a lack of liquidity. However, after talking with relevant SEC staff I believe that we can develop an approach that will provide valuable pricing information to retail investors without over-burdening the market and pushing liquidity away from the trading venues that participate in a transparency initiative. This approach could start with requiring public dissemination of pricing information for smaller transactions typically entered into by retail investors. By focusing first on the disclosure of these transactions, we can provide retail investors with a wealth of valuable pricing information without harming the ability of other market participants to execute large transactions. This is undeniably a delicate task, but the potential benefit for retail investors is too great for us not to undertake meaningful reforms in this area.

Before leaving the topic of transparency, I would like to briefly circle back to the subject of municipal bond complexity that I mentioned earlier as one of the surprising conclusions from my research. This is an area that continues to puzzle me. Despite the potential benefits of increased standardization for both investors and issuers, municipalities continue to issue exceedingly complex bond offerings. The complexity of these offerings is frequently mentioned as one reason why municipal securities do not trade on exchanges, which would provide pre-trade price transparency to retail investors.

I recognize that municipal issuers face unique legal and tax considerations that can influence the design of municipal securities, and therefore may limit their ability to make offerings as simple as they might desire. At the same time, improvements to liquidity from issuing simpler bonds should result in higher valuations and lower issuance costs. These factors alone should help drive the municipal bond market towards greater standardization rather than into the complexity that we see in current issuances. This contradictory result merits further attention, particularly given the potential for decreased costs, increased liquidity, and increased transparency that could result from greater standardization in the municipal bond market. I look forward to receiving feedback from all interested parties regarding what should be done to address this challenging problem.

MSRB Efforts

It is clear by the nature of the market structure reforms I have outlined that much of the initial work must be undertaken by the MSRB. Given what I have seen of the MSRB during my time as a Commissioner, I have full faith that they are up to the task.

The Dodd-Frank Act ushered in a number of changes at the MSRB, including major changes to its board structure and new responsibilities related to the oversight of municipal advisors. I had the opportunity to meet with the revamped MSRB board in May, and I left impressed by the combined knowledge of its members and their willingness to get into the weeds on the many thorny issues present in the current municipal securities market.

In addition to its board, Lynette Kelly and her staff at the MSRB have done yeoman’s work during the past months producing an impressive number of rule proposals. Just this past week, the MSRB submitted a rule filing for approval that would establish supervisory and compliance obligations for municipal advisors.

This recent filing represents the first of many related rule filings to come as the MSRB seeks to get the municipal advisor regime up and running. That is why I am particularly pleased that the MSRB recently hired its first Chief Economist, David Saltiel, to help bolster the economic analysis contained in these rule filings. I look forward to future rule filings from the MSRB and to the positive impacts that will come from Mr. Saltiel’s involvement with these proposals.

One final comment I would like to make about the MSRB is to commend it for commissioning Erik Sirri to complete the recently published Report on Secondary Market Trading in the Municipal Securities Market.[8] Tapping into the expertise of outside academics is an excellent way to bring rigorous economic analysis to bear on regulatory issues that are all too often debated primarily on the basis of competing business models of market participants. Erik’s report provides an excellent baseline for further analysis by academics, regulators, and market participants of the secondary market trading practices in the municipal securities market, and it supports the type of data-driven approach to regulation that I believe is most effective in meeting the regulatory challenges of the day.

MCDC Program

I would be remiss if I failed to mention the topic that is probably the biggest cause of anxiety for municipal finance practitioners right now, the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (“MCDC Initiative”).[9] The stated intention of the MCDC Initiative is to address potentially widespread violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. The MCDC Initiative is designed to encourage self-reporting of possible violations by placing a cap on the civil penalties for issuers or underwriters that self-report by the September 10, 2014 deadline.

As most of you are probably aware, the Commission issued a press release yesterday announcing certain modifications to the MCDC Initiative. These modifications both extend the deadline for issuers to self-report from September 10, 2014 to December 1, 2014, and create a tiered penalty cap for small- and mid-sized underwriters.
Extending the deadline for issuers until December 1, 2014 is intended to address the difficulty of ensuring that the tens of thousands of issuers across the country – particularly the smaller issuers – are aware of the initiative and each have adequate time to consider whether they should self-report. In addition, the tiered penalty cap responds to feedback indicating that many underwriters may reach the current $500k cap, but that a penalty at that level would impair their ability to conduct business.

Finally, the press release also makes a statement related to the difficulties some market participants have encountered in accessing data from the Nationally Recognized Municipal Securities Information Repository (“NRMSIR”) system, which pre-dated EMMA. The press release indicated that enforcement staff would consider “reasonable, good faith, and documented efforts” to investigate potential violations in the NRMSIR, which should alleviate the concerns expressed by some that discrepancies in the NRMSIR might result in failures to properly self-report.
These important changes address many of the issues conveyed to me by market participants, and I applaud the SEC staff for developing tailored modifications based on widespread concerns in the market. The changes should serve as confirmation to market participants that our staff listens to the legitimate concerns expressed and responds in a reasonable manner. To the extent that you identify further issues of concern, I encourage you to continue to raise them with the staff, as they have assured me that they remain ready and willing to discuss your questions and provide clarity wherever possible.

Thank you for your attention.

[1] See Division of Economic and Risk Analysis Opportunities for Economists and Other Experts and Professionals with DERA, available athttp://www.sec.gov/divisions/riskfin/rfemployment.shtml.
[2] See Lawrence Harris & Michael Piwowar, “Secondary Trading Costs in the Municipal Bond Market,” Journal of Finance 61, 1361-1397 (2006), available athttp://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2006.00875.x/pdf; Amy Edwards, Lawrence Harris & Michael Piwowar, “Corporate Bond Market Transaction Costs and Transparency,” Journal of Finance 62, 1421-51 (2007), available athttp://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2007.01240.x/pdf.
[3] See Press Release, SEC Approves Registration Rules for Municipal Advisors (Sept. 18, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539817759.
[4] See Commissioner Michael S. Piwowar, Remarks before the U.S. Chamber of Commerce,Advancing and Defending the SEC’s Core Mission, (Jan. 27, 2014), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370540671978.
[5] See Chair Mary Jo White, Remarks before the Economic Club of New York, Intermediation in the Modern Securities Markets: Putting Technology and Competition to Work for Investors(June 20, 2014), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370542122012; Commissioner Daniel M. Gallagher, Remarks at Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit (May 29, 2014), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370541936387. Commissioner Gallagher also spoke about the need for additional steps to improve the transparency of the accounting for public pensions.
[6] See MSRB Notice 2013-16 – Request for Comment on Whether to Require Dealers to Adopt a “Best Execution” Standard for Municipal Securities Transactions (Aug. 6, 2013),available at http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2013/2013-16.aspx?n=1
[7] See MSRB Notice 2014-2 – Request for Comment on Draft Best-Execution Rule, Including Exception for Transactions with Sophisticated Municipal Market Professionals (Feb. 19, 2014),available at http://www.msrb.org/~/media/Files/Regulatory-Notices/RFCs/2014-02.ashx?n=1.
[8] See Report on Secondary Market Trading in the Municipal Securities Market (July 2014),available at http://www.msrb.org/msrb1/pdfs/MSRB-Report-on-Secondary-Market-Trading-in-the-Municipal-Securities-Market.pdf
[9] See Municipalities Continuing Disclosure Cooperation Initiative, Division of Enforcement, U.S. Securities and Exchange Commission, available at http://www.sec.gov/divisions/enforce/municipalities-continuing-disclosure-cooperation-initiative.shtml.

Alexandria, VA – In an effort to align municipal securities regulatory requirements with current business practices, the Municipal Securities Rulemaking Board (MSRB) is making certain technical changes to its professional qualification rules for municipal securities dealers.

Among the changes is a revision to MSRB Rule G-3, which establishes professional qualification requirements for dealers, that limits the scope of permitted activities of individuals classified as “limited representatives – investment company and variable contracts products” to include only sales to and purchases from customers of municipal fund securities. The revised rule also defines the term “sales” to include the solicitation of sales of municipal securities. Finally, the amended rule eliminates the Financial and Operations Principal (FINOP) classification and related requirements. Read more about the rule changes.

The changes to MSRB Rules G-3, G-7 and G-27 were approved on August 1, 2014 by the Securities and Exchange Commission and are effective September 30, 2014.

The changes are consistent with the MSRB’s ongoing effort to ensure that existing and new regulations function as efficiently as possible and are consistent with those of other regulators, when appropriate.

Date: August 4, 2014

WASHINGTON – The Securities and Exchange Commission’s changes to its disclosure violation self-reporting program are somewhat helpful to issuers but may create further problems in their relationships with underwriters, market participants said.

This was the reaction from lawyers, issuers, and dealer groups to the SEC’s July 31 announcement that it is altering its Municipalities Continuing Disclosure Cooperation Initiative to encourage more participation.

The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report, for any bonds issued in the last five years, any time they inaccurately claimed to be complying with continuing disclosure obligations. The modifications include pushing back the deadline to Dec. 1 from Sept. 10, 2014 for issuers and borrowers, but not for underwriters.

“I don’t think this is as helpful as the SEC thinks it is,” said Teri Guarnaccia, a partner at Ballard Spahr in Baltimore. “The extension is de facto just creating further tension.”

Guarnaccia explained that the SEC’s decision to alter the MCDC’s civil penalties cap for underwriters just further incentivizes the smallest dealers to participate. Originally all underwriters’ penalties would be capped at $500,000 under the program, but the new approach bases penalties on a dealer’s size. Civil penalties will now be capped at $500,000 for dealers who report total revenue of more than $100 million for fiscal 2013 on their annual audited report; $250,000 if they report fiscal 2013 revenue of between $20 million and $100 million; and $100,000 if they report fiscal 2013 revenues of less than $20 million.

The low caps are a major incentive for the smaller dealer firms, but the MCDC’s “prisoner’s dilemma” structure means that a dealer can “rat out” an issuer by reporting a misleading transaction, and vice versa. Both sides of the market have said issuers and underwriters need to have an open dialogue about how to proceed on deals they both participated in, but Guarnaccia said that all those conversations still need to take place by the original deadline despite the extension for issuers.

John Grugan, a partner in Ballard’s Philadelphia office whose practice focuses on securities litigation, said the changes will not affect the way underwriters analyze what to self-report. Grugan agreed that the change provides little help for potential MCDC participants.

“I think it’s a very marginal benefit,” he said.

Grugan has cautioned that SEC examinations under the MCDC could easily transform into other enforcement actions, and said potential self-reporters can still face “pretty significant consequences,” by voluntarily disclosing past violations.

Ballard issued a client alert pointing out that it is not clear whether issuers and borrowers will benefit from any cease and desist orders announced against underwriters prior to their new self-reporting deadline. The SEC, in its lone MCDC case to date, that charged Kings Canyon Joint Unified School District with misleading bond investors in a 2010 deal, frustrated some attorneys by not disclosing which missed filings resulted in the cease and desist order.

Ben Watkins, chairman of the Government Finance Officers Association’s debt committee and Florida’s bond finance director, said the issuer deadline extension is helpful but the failure to extend it for underwriters will result in erroneous reports. Watkins said it is “an extremely heavy lift” for underwriters to go through all their deals before the deadline, and their strong incentive to report will result in errors. Watkins said GFOA is still advising issuers to let underwriters comb the deals and then make a determination with the help of counsel about how to proceed.

Watkins added that it is helpful for the SEC to acknowledge the difficulty of searching the old Nationally Recognized Municipal Securities Information Repository [NRMSIR] system which pre-dated EMMA. The SEC said participants “may use reasonably available sources of information to make good faith efforts to identify potential violations” pre-EMMA.

John McNally, a partner at Hawkins Delafield & Wood in Washington, said the extension for issuers is welcome but that underwriting firms have much more review work to do, perhaps exceeding 1,000 official statements.

“So while some delay for issuers beyond the underwriter deadline is appropriate, it would be good to have seen a three- to six-month extension for the underwriters,” he said.

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at Bond Dealers of America, said the change “strains the relationship” between issuers and underwriters, because underwriters cannot be sure what issuers might do in the months after the underwriter deadline. Although that is a concern, BDA is encouraged that a change was made.

“They responded to the industry,” Giroux said. “That means something.”

THE BOND BUYER
BY KYLE GLAZIER
AUG 1, 2014 2:43pm ET

Aug 1 (Reuters) – Retail investors in the $3.7 trillion municipal bond market need better pricing information before trades are executed, a top U.S. securities regulator said on Friday in a speech calling for reforms for the lightly regulated market.

“The municipal securities market has long suffered from a lack of price transparency, and this deficiency is particularly acute for retail investors,” Securities and Exchange Commission Republican member Michael Piwowar said in prepared remarks for the Municipal Finance Conference in Boston.

“There is still a significant need for publicly available information regarding pre-trade pricing for these financial products,” he said.

Piwowar’s comments come as industry-funded regulators are working to craft rules to improve transparency and investor protections for the fixed income market.

The Municipal Securities Rulemaking Board, for instance, is pushing to finalize rules that will require municipal bond dealers to comply with best execution, something that is already required of dealers in the U.S. equities market.

The MSRB will also be taking up proposals first advocated by Piwowar in January. They would require dealers to disclose how much they are compensated for executing so-called riskless principal transactions, or buying securities from their customers and reselling them to other dealers.

Piwowar said Friday that pre-trade price transparency could improve through changes to federal rules governing “alternative trading systems,” an electronic marketplace where people can buy and sell securities.

ATS operators for both equities and bonds are not required to disclose pre-trade pricing data.

Piwowar said, however, that some “significant” ATS venues should be required to start publicly disseminating prices for some types of trades.

He added that he believed the rules could be drafted to help shine a light on the market without running the risk of drying up liquidity.

For instance, he said, the SEC could start by only requiring the disclosure of pricing data of small transactions by retail investors. Larger trades, by contrast, could still be protected from full disclosure.

“This is undeniably a delicate task, but the potential benefit for retail investors is too great for us not to undertake meaningful reforms in this area,” Piwowar said.

Piwowar, who joined the SEC last year, has been among the most vocal advocates for reforms in the municipal bond market.

Before becoming a commissioner, he once worked at the SEC as an economist studying the bond market. His research found that the high cost of trading in the market was linked to the lack of transparency.

In a June speech, SEC Chair Mary Jo White also threw her support behind numerous reforms for the bond market, saying she feared technology was being leveraged to make the “old, decentralized method of trading” better for dealers, but not for investors.

BY SARAH N. LYNCH

(Reporting by Sarah N. Lynch; Editing by Lisa Von Ahn)

On July 1, 2014, the SEC’s rule implementing Section 975 of Dodd-Frank, governing the conduct of all municipal advisors, finally became effective. This is almost four years after President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Congress could not possibly have envisioned that it would take seven years from the passage of Dodd-Frank to implement basic regulation over independent municipal advisors bringing fundamental protections to municipal issuers and investors. But that is the current time frame.

Yet some of the baseline rules that all other currently regulated parties are subject to are as long as two to three years away from being fully applied to the previously unregulated non-dealer advisors. These rules include such important standards as: professional qualifications and licensing; disclosure of employment and disciplinary history; limitations on and reporting of political contributions and bond ballot contributions; limitations on gifts and business entertainment; written baseline and supervisory policies and procedures; and role disclosure and conflict of interest disclosure.

In light of the MSRB’s dual mission to protect both municipal entities and investors, SIFMA urges the MSRB to interpret MSRB Rule G-17, effective immediately, to apply these specific baseline provisions to municipal advisors.

Moreover, we urge the MSRB to move quickly to adopt a testing regime applicable to non-dealer municipal advisors that is the same as the qualification requirements (the Series 52) currently applicable to dealer municipal securities representatives as defined in MSRB Rule G-3: those individuals whose activities include underwriting, trading or sales of municipal securities; financial advisory or consultant services for issuers in connection with the issuance of municipal securities; research or investment advice with respect to the issuance of municipal securities; and any other activity which involve communications with public investors in municipal securities. The Series 52 qualification examination is a basic competency test on municipal securities and has long covered topics applicable to providing advice to municipal issuers; there is no reason that there needs to be a different test for municipal advisors.

SIFMA and its members supported Section 975 as a means of protecting municipal issuers from unregulated municipal advisors. And while we have strong reservations to some of the provisions promulgated by the SEC in the final rule, we nonetheless believe there are a number of long overdue other important provisions that need to be implemented now. Many SIFMA member firms serve as municipal advisors and were already regulated, and we were in favor of this effort to level the regulatory playing field among dealer municipal advisors and non-dealer/independent municipal advisors.

Issuers, without a doubt, have a vested interest in the regulation of companies providing advice to them. Many municipalities have seen success through partnerships with banks and broker dealers. Each and every day, local financial institutions connect state and local governments with our capital markets to issue debt and secure funding for key projects. Municipal bonds have financed four million miles of roads, half a million bridges, 16,000 airports and 900,000 miles of water pipes. This year alone, state and local governments across the country have accessed over $88 billion in funding through the municipal bond markets.

For over 35 years, MSRB Rule G-17 has served as a minimum standard of fair conduct for dealers. It also contains what has been interpreted to be an antifraud prohibition: requiring regulated parties to “deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.”

Rule G-17 was expanded in 2011 to specifically apply the MSRB’s core fair dealing rule to municipal advisors in the same manner that it applied to dealers. The MSRB argued at the time to the SEC that “[t]he proposed rule change is necessary for the robust protection of investors against fraud”. The National Association of Independent Public Finance Advisors (NAIPFA) found these amendments to Rule G-17 to be “appropriate and consistent” with Dodd-Frank.

Seven years is far too long to wait for the establishment of a level regulatory playing field. In the absence of immediate regulatory action by the MSRB, SIFMA urges NAIPFA to adopt these principles as best practices for its members: disclosure of employment and disciplinary history; limitations on and reporting of political contributions and bond ballot contributions; limitations on gifts and business entertainment; written base line and supervisory policies and procedures; and role disclosure and conflict of interest disclosure. SIFMA also urges the MSRB to move quickly to adopt a testing regime applicable to non-dealer municipal advisors that is the same as the test currently applicable to dealer representatives, the Series 52. There is no reason that there needs to be a different test for municipal advisors.

BY KENNETH BENTSEN, JR.
JUL 31, 2014 8:02am ET

Kenneth E. Bentsen, Jr. is President and CEO of SIFMA.

WASHINGTON — Securities and Exchange Commission officials have modified their program for issuers and underwriters to voluntarily self-report continuing disclosure failures, saying they want to encourage as much participation in the program as possible.

The modifications to the SEC enforcement division’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative were announced late Thursday.

The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report, for any bonds issued in the last five years, any time they failed to make accurate continuing disclosures with regard to those bonds.

The modifications include pushing back the deadline to Dec. 1 from Sept. 10, 2014 for issuers and borrowers, but not for underwriters.

“The deadline for underwriters remains unchanged at Sept. 10,” the SEC said. Commission officials have pointed out that the deadline is actually, for practical purposes, the end of Sept. 9.

LeeAnn Gaunt, director of the SEC enforcement division’s municipal securities and public pensions unit, called the extension “modest but meaningful.” She said the division only extended the deadline for issuers and borrowers because they “are not as well positioned as underwriters to respond within the original amount of time allotted.” She said also that the division wanted to give issuers time to consult with their underwriters and then make their own decisions about what actions to take.

In addition, the SEC has put in place a tiered approach to capping the civil penalties for underwriters that recognizes smaller firms should have lower penalties. Originally all underwriters’ penalties would be capped at $500,000 under the MCDC.

But under this modified approach, penalties for underwriters that self-report disclosure failures would be capped at $500,000 if they report total revenue of more than $100 million for fiscal 2013 on their annual audited report; $250,000 if they report fiscal 2013 revenue of between $20 million and $100 million; and $100,000 if they report 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.

The SEC also said that if disclosure violations are identified by the enforcement division after the expiration of the initiative, the division “will consider reasonable, good faith and documented efforts in deciding whether to recommend enforcement action and, to the extent enforcement action is recommended, in determining relief.”

Some issuers and underwriters have complained that if they issued bonds five years back, they have to check their disclosures five years back from that — a total of 10 years ago — and bond documents cannot be easily found that far back. Under the SEC’s Rule 15c2-12, for an issuer’s bonds to be underwritten, it must disclose in bond offering documents any time during the past five years that it failed to file annual financial and operating information on a timely basis.

Bond Dealers of America said it is pleased that the SEC’s enforcement division has listened to its concerns, including about the need for a tired penalty approach. However it said it would have liked the SEC to extend the deadline for underwriters as well as issuers.

“It is very encouraging that the SEC did recognize industry concerns and we hope to continue to keep the working dialogue open between regulators and the industry.

The Securities Industry and Financial Markets Association said it was pleased the SEC extended the deadline for issuers and reduced the ` fines for smaller underwriters, but “disappointed” it did not extend the deadline for underwriters.

“Firms are facing a mammoth task of reviewing nearly 73,000 municipal securities transactions and some need extra time to fully research issuer compliance and discuss potential reports with their issuer and obligor clients.”

SIFMA urged the SEC to extend the deadline for underwriters as well.

But Gaunt said it is unlikely the SEC will make further changes to the MCDC initiative.

THE BOND BUYER
BY LYNN HUME
JUL 31, 2014 6:35pm ET

The Municipal Securities Rulemaking Board (MSRB) recently released a revised draft of Rule G-42 (Draft Rule G-42) following receipt of more than 40 comments on its Initial Draft Rule in January 2014. Rule G-42 regulates standards of conduct and duties of municipal advisors in non-solicitor roles. The deadline for comments on the revised draft is August 25, 2014.

In response to commenters, the MSRB has scaled back or eliminated certain prohibitions and requirements, which should allay concerns expressed about potential heavy-handedness on the part of the MSRB. The proposed rule provides more clarity and guidance regarding conduct of municipal advisors, and allows many to operate in a manner similar to current practice.

The following portions of Rule G-42 and its Supplementary Material were revised or added:

• Duty of Care and Duty of Loyalty
• Disclosure of Conflicts of Interest and Other Information
• Documentation of the Municipal Advisory Relationship
• Recommendations and the Review of Recommendations of Others
• Principal Transactions
• Specified Prohibitions
• Inadvertent Advice

A more detailed explanation of the revisions follows.

Duty of Care and Duty of Loyalty

To allow clients to determine the scope of services and control the engagement with municipal advisors, the MSRB removed the duty of care requirement to undertake a thorough review of the official statement. Additionally, the duty of loyalty requirement to investigate or consider other reasonably feasible alternatives to any recommended municipal securities transaction or financial product has been likewise removed.

Disclosure of Conflicts of Interest and Other Information

Draft Rule G-42 regarding disclosure of conflicts has been revised to require disclosure of material conflicts of interest if such conflicts arise due to compensation being contingent on the size or closing of a transaction. Previously, the Initial Draft Rule required a broader compensation disclosure requirement that many commenters believed would confuse clients. An affirmative disclosure that there are “no known” conflicts is now required.

The requirement to disclose the amount and scope of professional liability insurance has been removed, but such disclosure may still be provided voluntarily or upon request. The municipal advisor must also now disclose any material legal or disciplinary event, including a description of the event, where the client may access the advisor’s most recent Securities and Exchange Commission (SEC) forms on the event, and the date the last form was filed.

Documentation of the Municipal Advisory Relationship

A provision was added to detail the steps that may be taken if a party inadvertently engages in municipal advisory activities or enters into a municipal advisory relationship and does not intend to continue, but seeks a safe harbor to withdraw. See “Inadvertent Advice” below.

Revisions were made to simplify the documentation of compensation required under the Initial Draft Rule. Draft Rule G-42 requires that only the form and basis of any direct and indirect compensation be documented, but the parties may still agree to provide further information. The documentation of the advisory relationship must include any term relating to withdrawal from the relationship and can be amended only if there are material changes or additions.

Recommendations and the Review of Recommendations of Others

Draft Rule G-42 clarifies the provisions on recommendations by the municipal advisor and the municipal advisor’s review of recommendations from other parties. This draft states that if a municipal advisor makes a recommendation of a municipal securities transaction or financial product, or if review of a recommendation of another party is requested by the municipal entity or obligated person client, then the municipal advisor, using reasonable due diligence, must determine whether such action is suitable for the client.

Principal Transactions

The Initial Draft Rule prohibited municipal advisors from engaging in any transaction in a principal role in which the municipal entity or obligated person client is a counterparty. Draft Rule G-42 eliminates the prohibition concerning obligated persons and limits the prohibited principal transactions between a municipal advisor or its affiliates and a municipal entity client to those transactions directly related to the same municipal transaction or financial product on which the municipal advisor is providing advice.

Inadvertent Advice

The MSRB added a provision to Draft Rule G-42 covering municipal advisors who unintentionally engage in municipal advisory activities. Such advisors are not subject to Draft Rule G-42’s disclosure and documentation requirements if they promptly provide a disclaimer and other information to a municipal entity or obligated person following the provision of inadvertent advice. Draft Rule G-42 further requires a review of the municipal advisor’s supervisory and compliance policies and procedures to ensure they are reasonably designed to prevent such inadvertent advice.

Specified Prohibitions

In response to numerous comments criticizing the excessive fee provisions in the Initial Draft Rule, the Draft Rule G-42 added a list of factors relevant to excessive compensation. Factors include municipal advisor expertise, transaction complexity, types of contingent fees, and time spent on the closing of the transaction or product.

Lastly, various Initial Draft Rule definitions were modified to match those found in the SEC Municipal Advisor Final Rule, and the definition of when the municipal advisory relationship begins and ends was also clarified to require written documentation.

by Teri M. Guarnaccia, Bradley D. Patterson, Tesia N. Stanley, and Christopher A. Lemming

Ballard Spahr’s Municipal Securities Regulation and Enforcement Group advises its clients on the latest securities issues in their public finance transactions, including regulatory and enforcement matters of the SEC. We advise issuers in a broad range of public offerings and private placements of municipal securities in the primary and trading activity in the secondary market.

If you have questions about this or for more information, please contact Teri M. Guarnaccia at 410.528.5526 or guarnacciat@ballardspahr.com, Bradley D. Patterson at 801.531.3033 or patterson@ballardspahr.com, Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com, or Christopher A. Lemming at 202.661.7608 or lemmingc@ballardspahr.com.

Copyright © 2014 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.

In response to concerns raised by industry participants, the Securities and Exchange Commission (SEC) has made some modifications to its Municipalities Continuing Disclosure Cooperation Initiative (MCDC Initiative). The SEC hopes the MCDC Initiative, announced on March 10, 2014, will encourage self-reporting by municipal securities issuers and underwriters of possible securities law violations arising from misstatements in offering documents about an issuer’s prior compliance with its continuing disclosure obligations. A summary of the MCDC Initiative can be found here.

The SEC initially imposed a deadline of September 10, 2014, for all self-reporting under the MCDC Initiative. In view of the substantial burden of analyzing prior disclosures, numerous industry groups—including the Government Finance Officers Association, the Securities Industry and Financial Markets Association, Bond Dealers of America, and the National Association of Bond Lawyers—defense counsel, and U.S. Representative Steve Stivers, among others, raised concerns with the SEC, urging the agency to extend the deadline, limit the broad scope of the MCDC Initiative, and consider its unequal impact on smaller issuers, obligated persons, and underwriters.

Yesterday, the SEC responded in part by undertaking three key modifications. First, although the SEC publicly expressed reluctance to extend the MCDC Initiative deadline, issuers and obligated persons will now have until December 1, 2014 to self-report. The SEC declined to provide this extension to the prior deadline imposed upon underwriters to self-report.

Second, in an effort to encourage smaller underwriters to avail themselves of the MCDC Initiative, the SEC announced a tiered approach to civil penalties imposed on underwriters:

• For underwriters with 2013 reported total annual revenue of more than $100 million, a maximum fine of $500,000
• For underwriters with 2013 reported total annual revenue between $20 million and $100 million, a maximum fine of $250,000
• For underwriters with 2013 reported total annual revenue of less than $20 million, a maximum fine of $100,000

Finally, the SEC recognized the limitations in auditing continuing disclosure compliance prior to the Electronic Municipal Market Access (EMMA) system becoming the single, official repository for continuing disclosure information on July 1, 2009. The former Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) system was a decentralized and unreliable source of continuing disclosure information. If the SEC identifies securities law violations after the MCDC Initiative self-reporting deadline, it stated that it will consider good faith efforts to discover violations that occurred pre-EMMA in determining whether to recommend an enforcement action or the type of relief sought if an enforcement action is undertaken.

The SEC’s decision not to extend the deadline for underwriters will significantly impair the ability of underwriters and issuers or obligated persons to coordinate self-reporting, as underwriters will have to make their final materiality determinations far in advance of issuers and obligated persons. It is also unclear whether issuers and obligated persons will benefit from any cease and desist orders announced by the SEC against underwriters prior to their new self-reporting deadline. Such orders could provide guidance on the types of misstatements and omissions the SEC considers material under federal securities law. However, the SEC’s first MCDC Initiative cease and desist order included only a cursory materiality analysis and was vague on the facts underlying the order. A summary can be found here.

To assist market participants in understanding how materiality is proven under federal securities law through market analysis, Ballard Spahr will host a brief webinar on August 7, 2014, at 12:00 p.m. ET, featuring economist Vinita Juneja, Ph.D. Register for the webinar here.

by John C. Grugan, Bradley D. Patterson, William C. Rhodes, Teri M. Guarnaccia, 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 John C. Grugan at 215.864.8226 or gruganj@ballardspahr.com, Bradley D. Patterson at 801.531.3033 or patterson@ballardspahr.com, William C. Rhodes at 215.864.8534 or rhodes@ballardspahr.com, Teri M. Guarnaccia at 410.528.5526 or guarnacciat@ballardspahr.com, or Tesia N. Stanley at 801.517.6825 or stanleyt@ballardspahr.com.

Copyright © 2014 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.

The Securities and Exchange Commission today announced modifications to its Enforcement Division’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative that will provide greater opportunity for smaller municipal securities underwriter firms and municipal issuers to take advantage of the initiative.

To allow issuers and obligors more time to complete their reporting requirements, the division has extended the deadline to self-report potential violations from September 10, 2014 to December 1, 2014. The deadline for underwriters remains unchanged at September 10, 2014. With respect to underwriters, the division has determined that to implement a tiered approach to civil penalties based on the size of the firm would encourage smaller underwriters to participate in the initiative.

“It is clear that many underwriters and issuers are working diligently to take advantage of the initiative within its time period,” said Andrew Ceresney, director of the Enforcement Division. “These adjustments to the program are designed to encourage as much participation as possible, which we expect will ultimately benefit investors by encouraging improved compliance with continuing disclosures by the broadest group of industry participants.”

Under the initiative, announced on March 10, 2014, the division agreed to recommend standardized settlement terms for municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations under the Securities Exchange Act of 1934. In particular, the division will recommend that the Commission accept settlement terms for eligible underwriters that, among other things, include payment of civil penalties up to specified amounts.

The division’s tiered approach to the cap on civil penalties for eligible underwriters is as follows:

• For underwriters with 2013 reported total annual revenue of more than $100 million: $500,000
• For underwriters with 2013 reported total annual revenue between $20 million and $100 million: $250,000
• For underwriters with 2013 reported total annual revenue of less than $20 million: $100,000

Since announcing the initiative, the division has learned that some municipal underwriters and issuers have experienced difficulties in identifying potential violations for periods when filings were made in the Nationally Recognized Municipal Securities Information Repository (NRMSIR) system, which pre-dated the Electronic Municipal Market Access (EMMA) system. The division recognizes that parties may use reasonably available sources of information to make good faith efforts to identify potential violations but may not be able to identify certain violations during the period of the initiative due to the limitations of the pre-EMMA NRMSIR system. If violations are identified by the division after the expiration of the initiative, the division will consider reasonable, good faith, and documented efforts in deciding whether to recommend enforcement action and, to the extent enforcement action is recommended, in determining relief.

Questions regarding the initiative may be directed to MCDCinquiries@sec.gov.

Last year, the Securities Exchange Commission (SEC) adopted Rule 506(c) of the Securities Act of 1933 (Securities Act), which, in a major departure from prior securities practice, allowed the use of general solicitation and general advertising (referred to throughout this alert as general solicitation) in connection with unregistered offers and sales of securities; though it must be noted the SEC was compelled to take this step by legislative mandate. The new rule imposed three conditions to the application of the exemption: (1) the purchasers had to be accredited investors; (2) the issuer had to take “reasonable steps” to verify the accredited investor status of the purchasers; and (3) the terms of Securities Act Rules 501, 502(a) and 502(d) had to be observed. We discussed Rule 506(c) in a previous client alert.1

In a recent speech to the 2014 Angel Capital Association Summit, the Director of the SEC’s Division of Corporation Finance, Keith Higgins, remarked that “one wonders why the new Rule 506(c) exemption has not caught on more widely with issuers who have long clamored for the general solicitation ban to be lifted.”2 Although from September 2013, when Rule 506(c) became available, to March 2014, the SEC saw “almost 900 new offerings conducted in reliance on the exemption, raising more than $10 billion in new capital,” issuers still preferred to use “the old ‘private’ Rule 506 exemption (now called Rule 506(b)),” which, “during the same time period, was relied upon in over 9,200 new offerings that resulted in the sale of over $233 billion in securities.”3 He observed that some believe that issuers have shied away from the new Rule 506(c) exemption because of the requirement to take “reasonable steps to verify” accredited investor status. Expressing surprise that flexibility in verification approaches countenanced by the rule – which allowed a principles-based approach and provided specified methods for verification as safe harbor alternatives – did not find favor with issuers, he noted that the staff of the SEC’s Division of Corporation Finance (Staff) would not be receptive to entreaties to “provide guidance – presumably on a case-by-case basis – confirming that a specified principles-based verification method constitutes ‘reasonable steps’ for purposes of the rule’s requirement” because the “notion of the [S]taff reviewing and approving specific verification methods seems somewhat contrary to the very purpose of a principles-based rule” and because he remained unconvinced of the need for such Staff involvement.4

However, such entreaties have had some effect, for the Staff recently issued guidance related to (1) the “reasonable steps” safe harbors for verifying accredited investor status under Rule 506(c)5 and (2) the accredited investor definition in Regulation D.6 This guidance is further evidence that the Staff should be expected to issue ongoing interpretive guidance on Rule 506(c) as issuers continue to grapple with the rule’s requirements.7

The guidance illustrates that the Staff narrowly construes the Rule 506(c) accredited investor verification safe harbors. However, even where a safe harbor is not available, the guidance makes clear that issuers can satisfy the verification requirement under the principles-based verification method. However, under that approach issuers must consider all relevant facts and circumstances and additional verification steps may be necessary where reasonable doubt remains about a purchaser’s accredited investor status.

This client alert briefly summarizes the Staff’s guidance, which will be of interest to public and private companies and investment funds that seek to rely on Rule 506 for securities offerings, especially those issuers seeking to use general solicitation under Rule 506(c).

Rule 506(c) Accredited Investor Verification Safe Harbors

Background. Rule 506(c)(2)(ii) sets forth non-exclusive and non-mandatory accredited investor verification methods that, if satisfied, serve as safe harbors for issuers who will be deemed to have satisfied the “reasonable steps” verification requirement. The safe harbor verification methods include, among others:

• when verifying a purchaser under the accredited investor annual income test, reviewing any Internal Revenue Service (IRS) form reporting a purchaser’s income for the two most recent fiscal years and obtaining a written purchaser representation that he or she has a reasonable expectation of reaching the required income level during the current year (Rule 506(c)(2)(ii)(A)); and
• when verifying a purchaser under the accredited investor net worth test, reviewing specified documentation evidencing the purchaser’s assets and liabilities8 dated within the prior three months and obtaining a written purchaser representation that all liabilities necessary to make a determination of net worth have been disclosed (Rule 506(c)(2)(ii)(B)).

As what constitutes “reasonable steps” is a principles-based determination, an issuer that does not satisfy any of the verification safe harbors can still satisfy the reasonable steps requirement using other verification methods.9

The Rule 506(c)(2)(ii)(A) safe harbor is not available where IRS forms for the most recently completed year are not yet available (for example, the purchaser’s 2014 IRS forms in an early 2015 offering). However, the Staff believes that an issuer could, under the principles-based verification method, satisfy the verification requirement by:

• reviewing IRS forms that report income for the two years preceding the most recently completed year (in our example, 2013 and 2012); and
• obtaining written purchaser representations that (i) an IRS form reporting the purchaser’s income for the most recently completed year is unavailable, (ii) specify the purchaser’s income for the most recently completed year and that such amount satisfies the required accredited investor income level, and (iii) he or she has a reasonable expectation of satisfying the requisite income level for the current year.

The Rule 506(c)(2)(ii)(A) safe harbor is not available for a non-U.S. taxpayer. However, the Staff believes that an issuer could, under the principles-based verification method, satisfy the verification requirement by reviewing a purchaser’s filed foreign tax forms that report income where the foreign jurisdiction imposes penalties for falsely reported information comparable to the penalties imposed by the IRS.

The Rule 506(c)(2)(ii)(B) safe harbor is not available where an issuer reviews the most recent tax assessment that is available but that is not dated within the prior three months. However, the Staff believes that an issuer could, under the principles-based verification method, satisfy the verification requirement if it uses the most recently available tax assessment when determining whether the purchaser satisfies the net worth test. For example, if the most recent tax assessment shows a value that, after deducting liabilities, the purchaser’s net worth substantially exceeds $1 million, it may be sufficient verification that the purchaser has satisfied the net worth test.

The Rule 506(c)(2)(ii)(B) safe harbor is not available where an issuer reviews a consumer report from a non-U.S. consumer reporting agency. However, the Staff believes that an issuer could, under the principles-based verification method, satisfy the verification requirement by reviewing a consumer report from a non-U.S. consumer reporting agency that performs similar functions as a U.S. nationwide consumer reporting agency and taking any other steps necessary to determine the purchaser’s liabilities (such as a written purchaser representation that all liabilities have been disclosed).

Where reason for doubt exists, an issuer must take additional verification steps under the principles-based verification method. The Staff provides a cautionary reminder that, unlike under the verification safe harbors, where an issuer relies on the principles-based verification method and has reasonable doubt about a prospective purchaser’s accredited investor status after completing the diligence associated with its verification method, “it must take additional verification measures in order to establish that it has taken reasonable steps to verify that the purchaser is an accredited investor.” For example, if, in the Staff’s example above of an acceptable principles-based verification method based on a review of IRS forms and the purchaser’s representations, a purchaser’s income for the most recently completed year barely exceeds the threshold income requirement, the specified procedures may not satisfy the verification requirement and more diligence may be necessary.

Accredited Investor Definition

To qualify as an accredited investor, a purchaser must be one of the specified persons or entities set forth in Securities Act Rule 501(a). Purchasers that are natural persons typically qualify under the net worth test10 or the annual income test.11

Under the net worth test, an issuer may include a purchaser’s assets in an account or property held jointly with a person who is not the purchaser’s spouse. However, such assets may only be included in the net worth calculation to the extent of the purchaser’s percentage ownership of the account or property.

Where a purchaser’s income is not reported in U.S. dollars, issuers have a choice in the exchange rate they may use to determine if the annual income test is satisfied. Issuers may use either (1) the exchange rate in effect on the last day of the year for which income is being determined or (2) the average exchange rate for that year.

We note that Director Higgins has indicated that this “may be an opportune time for a thorough reexamination of [the accredited investor] definition. After all, it was the condition that only accredited investors would be permitted to purchase the securities offered through a general solicitation that gave many members of Congress the comfort needed to support the elimination of the decades-old ban. …Under the 2010 Dodd-Frank Act, the [SEC] is required to undertake a review of this part of the accredited investor definition four years after the enactment of the Act. The [S]taff is currently conducting this review, which will help inform the [SEC]’s consideration of whether or not to change the definition.”12 Issuers and their advisors can thus expect more guidance, if not more rulemaking, as to the accredited investor definition. Stay tuned.

Footnotes

1. Please see our client alert dated July 22, 2013, General Solicitation Permitted in Certain Rule 506 and Rule 144A Offerings; “Bad Actors” Disqualified from Rule 506 Offerings; Other Significant Amendments Proposed to Regulation D.

2. Keith F. Higgins, Director, SEC Div. of Corp. Fin., Keynote Address at the 2014 Angel Capital Association Summit (Mar. 28, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541320533.

3. Id.

4. See id.

5. See SEC Div. of Corp. Fin., Securities Act Rules Compliance and Disclosure Interpretations (C&DIs), Questions 260.35 – 260.38 (Jul. 3, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#260.35.

6. See SEC Div. of Corp. Fin., Securities Act Rules C&DIs, Questions 255.48 & 255.49 (Jul. 3, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#255.48.

7. Please see our client alert dated December 20, 2013, SEC Issues Guidance on General Solicitation and Rule 506 Bad Actor Rules.

8. For assets, an issuer must review one or more of the purchaser’s bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments or appraisal reports issued by independent third parties. For liabilities, an issuer must review a consumer report from at least one of the nationwide consumer reporting agencies.

9. In this regard, we note that in his address to the 2014 Angel Capital Association Summit, Director Higgins stated that the principles-based approach allowed “issuers and other market participants [to] have the flexibility to think about innovative approaches for complying with the verification requirement of the rule and use the methods that best suit their needs. While the [S]taff may not be in a position at this point to provide guidance on what constitutes ‘reasonable steps’ under particular circumstances, I also believe the [S]taff will not be quick to second guess decisions that issuers and their advisers make in good faith that appear to be reasonable under the circumstances.” Higgins, supra note 2.

10. Under the net worth test, a purchaser must have an individual net worth, or joint net worth with his or her spouse, of over $1 million, excluding the value of the purchaser’s primary residence.

11. Under the annual income test, a purchaser must have (1) in each of the two most recent years, individual income of over $200,000 or joint income with his or her spouse of over $300,000 and (2) a reasonable expectation of reaching the same income level in the current year.

12. Higgins, supra note 2.

Last Updated: July 28 2014
Article by Jeff C. Dodd, Alan Bickerstaff, William Cooper and Edward A. Gilman
Andrews Kurth 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.

Alexandria, VA – To facilitate access by municipal securities investors, state and local governments and others interested in the municipal market to free, objective educational resources, the Municipal Securities Rulemaking Board (MSRB) today unveiled an online education center on its website at msrb.org. The new MSRB Education Center consolidates videos, fact sheets and a significant library of educational resources previously available elsewhere on the MSRB website and on the Electronic Municipal Market Access (EMMA®) website.

“Education and outreach are fundamental elements of our mission to protect investors and state and local governments,” said MSRB Executive Director Lynnette Kelly. “Centralizing all of the MSRB’s valuable educational content in a single location will support our efforts to ensure investors and issuers have access to free and objective information they need to make informed decisions in the municipal market.”

The MSRB Education Center organizes resources by topic and target audience. It features content about the following topics, among others:

• Features and risks of municipal securities
• Lifecycle of a municipal bond
• 529 college savings plans
• Preparing to invest in bonds
• Buying and selling municipal bonds
• Monitoring municipal securities
• The process of issuing municipal securities
• Issuer disclosure to investors

Quick links to the MSRB Glossary of Municipal Securities Terms and past educational webinars are included in the MSRB Education Center. The MSRB also has added a video library and a fact sheet library to allow users to find all available educational material in a particular format.

In a related enhancement, resources to assist users with navigating the EMMA website and utilizing EMMA tools are now consolidated in a section called EMMA Help at emma.msrb.org. Both EMMA Help and the EMMA homepage offer direct links to the MSRB Education Center for users seeking municipal market education.

On the afternoon of July 14, a broker bought Illinois bonds for 96.3 cents on the dollar. A little over an hour later, the same bonds were sold to an investor for $1.01, a jump of almost 5 percent.

Did the buyer know how much the trader made? Probably not. Unlike stock brokers, who must report commissions, bond dealers aren’t required to disclose their markups. According to one estimate, investors may be overcharged to the tune of $1 billion a year.

That may change.

Securities and Exchange Commission Chairwoman Mary Jo White said last month her agency is working with regulators to require bond dealers to disclose markups when they buy securities to fill a customer’s order.

When the Municipal Securities Rulemaking Board meets from July 30 through Aug. 1, it will take a first step toward doing that. The regulator said it will discuss soliciting comments from banks and others on the subject. It’s a start, at least.

Would putting investors in the know save them money? It has in the past. Not until 2005 could investors even see where bond prices were trading on any given day. Once they could, they wound up paying less, according to a study released by the board.

***

Municipal bond prices rose last week, pushing 10-year (BVMB10Y) yields down 0.09 percentage point to 2.22 percent, according to data compiled by Bloomberg.

Prices have been held aloft by a dearth of supply that’s showing few signs of abating. This week, state and local governments are set to borrow $2.3 billion, down from $7.3 billion last week. The volume of deals set for the month is the smallest since February.

Among those borrowing this week: San Antonio, Texas, a city with the top credit rating from Standard & Poor’s and Moody’s Investors Service, which is raising $231 million. The New Jersey Turnpike Authority is set to offer $206 million of debt.

***

The Federal Open Market Committee, which decides the direction of interest-rates, releases the results of its two-day policy meeting July 30.

It’s not much of a cliffhanger. With the job market still on the mend, Federal Reserve Chair Janet Yellen told Congress this month that the central bank will keep interest-rates low for a “considerable period.” Watch the statement for more clues.

***

When unions set a Sunday, July 20, strike date for the Long Island Rail Road, the well-heeled lined up $3,500 helicopter rides home from the Hamptons while New York Mayor Bill de Blasio faced down a kerfuffle over his vacation in Italy.

To everyone but the chopper company’s benefit, a strike was averted. Today, the Metropolitan Transportation Authority, which runs the railroad, is meeting to discuss the financial impact of the settlement with its more than 5,000 workers.

Payroll is also on the agenda in Los Angeles today. A city’s employee relations board is considering a union effort to scuttle a 2012 law that raised the retirement age and capped post-employment benefits for some city workers. At stake: more than $4 billion the city hoped to save over the next 30 years.

By William Selway Jul 27, 2014 9:00 PM PT

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Schoifet

The National Association of Bond Lawyers (NABL), the Government Finance Officers Association (GFOA), the Securities Industry and Financial Markets Association (SIFMA) and the Bond Dealers of America (BDA) sent a letter on July 23 to the five SEC Commissioners voicing concerns about the SEC’s Municipal Continuing Disclosure Cooperative (MCDC) Initiative. The letter requests modifications to the scope and deadline of the initiative “in order to maximize the MCDC’s potential to improve disclosure compliance, to increase participation in the initiative, and to provide the most accurate set of responses to the SEC.”

The letter requests that the initiative adjust the time frame for the 5-10 year look-back period to cover only those annual filings made after 2009, when EMMA came online. The letter argues that, due to the flawed and unreliable Nationally Recognized Municipal Securities Information Repositories (NRMSIR), “[l]imiting MCDC to annual filings after 2009… will give issuers and underwriters a reliable database to identify instances of potentially material inaccurate statements.” “The best way to assess how the industry is meeting its disclosure obligations to investors currently,” the letter goes on to say, would be “to evaluate compliance since March 2012” because “the SEC did not notify dealers that maintaining records of due diligence activities is a best practice until March 2012.”

In addition to adjusting the scope of the initiative, the groups requested that the SEC extend the deadline from September 9, 2014, to March 10, 2015, arguing that “[t]he current deadline does not provide sufficient time for issuers and underwriters to communicate, coordinate, and compare findings from their separate compliance investigations.” The groups believe that “many of the 50,000 issuers around the country are not aware of the MCDC… and the current period of conduct reviews comes at a time when many state and local budget staff is involved with preparing budgets and closing out fiscal years.”

The letter to the SEC can be seen here.

WASHINGTON — The Municipal Securities Rulemaking Board sought approval Thursday for the first municipal advisor rule the muni industry’s self regulator has asked the Securities and Exchange Commission to approve since SEC adopted its final MA rule in September.

Proposed Rule G-44, first floated in February, would require MAs to establish, implement, maintain and enforce written supervisory procedures designed to ensure compliance with the federal securities laws and rules. The proposal also includes proposed revisions to Rules G-8 on books and records and G-9 on preservation of records, which would require MAs to keep and maintain records of their compliance policies for at least five years and records of those responsible for compliance for at least six years after they are no longer in charge of compliance. It would mark the first time non-dealer MAs have been subject to supervisory requirements under MSRB rules.

“With today’s rule filing, the MSRB is demonstrating its continued commitment to establish a comprehensive regulatory framework for those professionals who provide certain types of financial advice to state and local governments,” said MSRB executive director Lynnette Kelly. “We aim to ensure that municipal entities are protected by robust regulations that appropriately address practices and behaviors that are not consistent with a municipal advisor’s duties to its clients.”

The rule generated a wide range of responses from market participants, with non-dealer MAs seeking more flexibility for small firms and sole proprietorships and dealer-MAs seeking to implement a baseline standard for all advisors. The MSRB has said it believes the rule strikes an appropriate balance, and the proposed rule does allow firms to tailor their written policies and procedures to be appropriate to their sizes.

The MSRB is in the process of developing and proposing various rules stemming from the SEC’s MA rule, which imposes a fiduciary standard on those providing muni-related advice to state or local governments. The MSRB proposed a revised MA conduct rule Wednesday. The SEC must approve any proposal before it becomes final.

THE BOND BUYER
BY KYLE GLAZIER
JUL 24, 2014 5:14pm ET

WASHINGTON — Municipal bond issuers, dealers, and lawyers are making another push to alter the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative, asking the SEC to narrow the program’s scope and delay its deadline by several months.

The Government Finance Officers Association, National Association of Bond Lawyers, Securities Industry and Financial Markets Association, and Bond Dealers of America made their latest effort in a joint letter to all the members of the commission. It asks the SEC to restrict the scope of the controversial self-reporting program to bonds sold since March 2012, and to extend the program’s deadline from the end of September 9 to March 10. These represent more ambitious requests; BDA asked last month for an extension only until Dec. 15.

The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report any time in the last five years that they offered bonds without disclosing failures to meet their continuing disclosure agreements they set up under the SEC’s Rule 15c2-12. The new joint letter echoes a House floor speech earlier this month in which Rep. Steve Stivers, R-Ohio, hinted at legislative action if the SEC failed to tailor the MCDC more narrowly. All the groups who signed the letter have been pleading their cases to the SEC for months, but the commission has yet to budge.

The MCDC currently requires would-be participants to look back as far as 10 years, because determining if a bond sale five years ago had a misleading official statement could require looking at continuing disclosure for the five years prior to that. EMMA has been the sole central disclosure platform only since 2009, and both issuers and underwriters have said searching the old Nationally Recognized Municipal Securities Information Repositories, or NRMSIRs, is problematic due to the volume of inaccurate information stored there and a number of filings being lost.

“Limiting MCDC to annual filings after 2009, when EMMA came online, will give issuers and underwriters a reliable database to identify instances of potentially material inaccurate statements,” the latest letter states. “Further, the SEC did not notify dealers that maintaining records of due diligence activities is a best practice until March 2012. After that date the due diligence practices of the industry changed substantially. The best way to assess how the industry is meeting its disclosure obligations to investors currently is to evaluate compliance since March 2012.”

The deadline extension is necessary because the allotted time is not enough to perform time-consuming high-quality reviews, the groups told the SEC.

“Conducting reviews, even reviewing information prepared by underwriters, is resource intensive and the expense was not included in state and local budgets,” the letter states. “In addition, some underwriters have turned to outside vendors to conduct reviews, but there are only three such vendors and we understand they are no longer accepting clients because they have reached their capacity.”

The letter adds that some issuers would require board approval before participating, another process that could take time.

“Extending the deadline will produce better data on true instances of material noncompliance and provide issuers and underwriters with a meaningful opportunity to evaluate the merits of participating,” the letter argues.

There has been only one MCDC settlement so far. The SEC earlier this month charged Kings Canyon Joint Unified School District in California with misleading bond investors in a 2010 deal.

THE BOND BUYER
BY KYLE GLAZIER
JUL 24, 2014 2:26pm ET

WASHINGTON — The Municipal Securities Rulemaking Board proposed a revised draft rule to establish the core duties of municipal advisors, tweaking some of the provisions that generated the most controversy in January’s first draft.

The first draft’s prohibition on principal transactions has been revised to apply only to transactions with municipal entity clients, not with obligated persons. Most market participants interpreted the first draft as barring MAs from engaging in any non-fiduciary business relationship running concurrent to the municipal advisory agreement. The revised draft released Wednesday defines the banned principal transactions as limited to those directly related to the subject of the municipal advisor’s engagement with the municipal entity client.

It spells out that principal transactions are defined as “acting as a principal for one’s own account, selling to or purchasing from the municipal entity client any security or entering into any derivative, guaranteed investment contract, or other similar financial product with the municipal entity client.”

And it eliminates requirements that MAs review the official statement for a new bond issuance, disclose information about professional liability insurance, and estimate what they expect their total compensation to be. The new draft rule states that MAs don’t have to disclose conflicts of interest or document the advisory relationship if they inadvertently provide advice that would be considered municipal advisory activity. It doesn’t offer a “safe harbor” from potential violations of the requirement to register with the Securities and Exchange Commission and the MSRB.

The MSRB is seeking public comment on the revised G-42, and has set an Aug. 25 deadline for market participants to weigh in.

“As the foundation of the MSRB’s regulatory framework for municipal advisors, MSRB Rule G-42 will play a central role in achieving the MSRB’s mandate to protect municipal entities that engage the services of a municipal advisor,” said MSRB executive director Lynnette Kelly. “It is important to us and to the market that we develop a rule that effectively and appropriately provides guidance on the core responsibilities of municipal advisors to their clients. The comments we received on the previous draft have informed a number of changes to the text of the draft, and the MSRB wants to provide an opportunity for market stakeholders to review and comment on these changes.”

It wasn’t initially clear whether the MSRB would repropose the rule or choose to submit a revised draft for SEC approval, but Kelly confirmed earlier this month that a re-proposal was coming. Chuck Samuels, an attorney at Mintz Levin and counsel to the National Association of Health & Higher Education Facilities Authorities, said the MSRB made the right choice, even though it would have been preferable to get G-42 done before the SEC’s registration rule took effect July 1.

“Republishing the draft was inevitable and appropriate given the volume and quality of comments it received and the complexity of the issues,” Samuels said. “It’s unfortunate the process was not completed before the effective date of obligations, but better to get it right.”

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at the Bond Dealers of America, said the MSRB addressed some of their first draft concerns.

“The BDA appreciates that the MSRB has revised Draft Rule G-42 and that they have incorporated some of the suggested changes made by the BDA and other market participants,” Giroux said. “We are also encouraged that the MSRB is releasing the revised draft rule for a second round of comments, allowing the industry yet another opportunity to work pro-actively with the MSRB to ensure the rule is in its strongest form before it becomes final.”

While the MSRB addressed the BDA’s concerns about an overbroad principal transaction ban and the requirement the inadvertent advice documentation, for example, it didn’t address points BDA raised about other issues. BDA favored a requirement to disclose liability coverage and wanted the proposed fiduciary standard to “more appropriately mirror existing fiduciary standards utilized in the legal profession.”

Leslie Norwood, managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association, said SIFMA is initially pleased with several aspects of the revision.

“Upon first review, we are encouraged that the MSRB has clarified and narrowed the scope of the principal transaction prohibition,” Norwood said. “Further, we support the MSRB’s decision to limit the application of the fiduciary duty to municipal entities, and to exempt obligated parties, such as corporations, from this increased standard of protection. SIFMA will be reviewing the final rule in more detail with our members, and we look forward to commenting on the proposal.”

Nathan Howard, counsel to the National Association of Independent Public Finance Advisors, said the MSRB appeared to have taken public comments to heart, though the section on inadvertent advice needed closer scrutiny in the coming days.

The MSRB is in the midst of developing other MA regulations, including a competency exam. All of the board’s rule proposals are subject to SEC oversight.

THE BOND BUYER
BY KYLE GLAZIER
JUL 23, 2014 3:30pm ET

The SEC, by a vote of 3-2, finalized its rules governing money market funds. The rules impose a floating NAV for institutional prime money market funds and allow boards to impose fees and gates if a fund’s weekly liquidity level falls below a designated threshold. Government and retail funds are specifically exempted from the floating NAV requirement and will continue trading at a fixed asset value.

Municipal money market funds were not specifically exempted; however, the SEC staff noted that they believe many of these funds will meet the retail definition and therefore not be required to maintain a floating NAV.

The BDA’s Mike Nicholas was featured in a Bond Buyer commentary on the constructive manner that broker-dealers have worked with other industry participants to understand and ensure a smooth industry transition to meet the requirements of the the SEC’s Municipal Advisor Rule, which went into effect on July 1, 2014.

This commentary was produced with significant membership input and in response to an article published in the Bond Buyer on June 27 entitled, “The Truth About MA Rule Distorted, Said Lawyer Who Worked on it,”, which you can find linked here.

You can view the full commentary below.

Since the release of the Securities and Exchange Commission’s final municipal advisor registration rule in September 2013, the Bond Dealers of America and its members have dedicated significant efforts and resources to work with regulators, educate issuers and ultimately be prepared to make a successful implementation of the rule.

Given the scope of these efforts, it was frustrating to read the June 30 article in the Bond Buyer, in which a former SEC staffer questioned the role that dealers have played in working to interpret and implement the MA rule.

While much of the BDA’s efforts have been directed at clarifying and implementing the rule, the BDA strongly disagrees with comments made in this Bond Buyer article and with the SEC’s Office of Municipal Securities with regard to the interpretation of the Dodd-Frank Act.

The intent of Congress in adopting the MA provisions of the Dodd-Frank Act was to regulate unregulated financial advisors, which is why the Dodd-Frank Act clearly and categorically excluded dealers serving as underwriters.

In lieu of remaining consistent with the statutory approach, the SEC adopted an “activities based” rule that requires underwriters to scrutinize each kind of communication they have with issuers and borrowers to determine whether they will become municipal advisors – even in situations in which their clients know full well that they are not their advisors. Setting aside what was a clear categorical exclusion in the Dodd-Frank Act has resulted in a very complex rule and has caused unnecessary and costly confusion, delays in implementation, and financial and operating burdens on the entire municipal bond industry.

Despite this fundamental policy concern, since the adoption of the rule, the BDA and its members have worked, and will continue to work, to understand and implement the rule.

The MA rule represents a fundamental shift in how the municipal markets are regulated. In fact, it took the SEC 778 pages and a couple rounds of Frequently-Asked Questions to articulate and explain the rule.

It is in that vein that we believe that the efforts of the BDA, its members and the entire dealer community have enormously contributed to a smoother and clearer implementation of the MA rule. It is completely inaccurate to portray the dealer community as intentionally seeking to obfuscate the rule. The dealer community was as active as any in trying to understand the meaning of the rule and communicate with the Office of Municipal Securities regarding areas of uncertainty and practical obstacles in the implementation of the rule. BDA has assisted issuers, borrowers and others concerning how the rule would change the manner in which municipal market participants interact with one another. With the implementation of a rule this complex and significant that directly impacts dealers’ activities and communications with issuers, this is exactly what the dealer community must do.

We believe that the municipal marketplace and the implementation of the MA rule have been positively impacted as a result of dealers’ efforts.

The statements made in the Bond Buyer article stating that the dealer community had intentionally distorted the MA rule for its own interests are completely untrue. One particular statement in the article that some of the “individual dealer communications about the MA rule are so distorted …they could be G-17 violations in and of themselves” is both untrue, disappointing and does nothing to further the process of implementing the MA rule.

Just to list a few of the efforts that BDA and its members have contributed to a successful implementation of the MA rule:

We have met with the SEC’s Office of Municipal Securities multiple times and provided several written submissions to identify areas of potential uncertainty as to the application of the MA rule and offered proposed solutions to address those areas of confusion. A number of our suggestions were incorporated into the release by the Office of Municipal Securities of FAQs, which provided interpretative guidance concerning the MA rule.

We have coordinated multiple discussions with our members to allow for dealers to engage in real-world deliberations regarding the operation of the MA rule and to help them understand how their peers were planning to implement the rule. We believe these efforts have significantly helped dealers develop informed, effective and consistent approaches to the implementation of the MA rule.

We have worked with our members to develop guidance concerning how to implement policies and procedures to comply with the MA rule.

We have made efforts to assist issuers and borrowers understand how the MA rule will impact them and have helped our member firms develop communication plans for talking to issuers about the MA rule.

Ultimately the jury is still out on whether the added costs, confusion and complexity resulting from the MA rule, and the potential that issuers may obtain less information, will be matched or exceeded by the MA rule’s benefits in protecting issuers. In any case, the BDA and its members will do their best to comply with the rule and to continue to help make it as workable as possible for all market participants.

by Michael Nicholas

Alexandria, VA – In a major milestone in its development of a federal regulatory framework for municipal advisors, the Municipal Securities Rulemaking Board (MSRB) today sought approval from the Securities and Exchange Commission (SEC) of a rule to establish supervisory and compliance obligations for municipal advisors. Proposed MSRB Rule G-44 is the first municipal advisor rule for which the MSRB has sought SEC approval since the SEC’s adoption of a final definition of “municipal advisor” in September 2013.

“With today’s rule filing, the MSRB is demonstrating its continued commitment to establish a comprehensive regulatory framework for those professionals who provide certain types of financial advice to state and local governments,” said MSRB Executive Director Lynnette Kelly. “We aim to ensure that municipal entities are protected by robust regulations that appropriately address practices and behaviors that are not consistent with a municipal advisor’s duties to its clients.”

Proposed MSRB Rule G-44 is aimed at ensuring appropriate supervision of municipal advisor professionals and compliance with all applicable securities laws. These types of requirements are critical to the prevention and early detection of compliance issues before significant consequences occur. The MSRB has additional rules and professional qualification standards for municipal advisors in various stages of development. The MSRB currently is seeking public comment on a revised draft rule to establish core standards of conduct for municipal advisors. Later this week, the MSRB’s Board of Directors will consider comments received and next steps on a draft rule on professional qualifications and testing requirements for municipal advisors.

The Board also is considering draft amendments to the MSRB’s existing pay-to-play rule to address the potential for pay-to-play activities by municipal advisors, as well as draft amendments to the its existing gifts rule to establish limitations on gifts given by municipal advisors in their professional capacity. Market participants and other interested persons can stay up to date on the MSRB’s municipal advisor rulemaking, outreach and education initiatives by visiting the Resources for Municipal Advisors section of the MSRB’s website.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today released for public comment a revised draft rule to establish the core duties of municipal advisors when providing advice on municipal securities transactions and related products. The revised draft MSRB Rule G-42 addresses a number of issues raised by commenters on the initial draft rule published in January 2014.

“As the foundation of the MSRB’s regulatory framework for municipal advisors, MSRB Rule G-42 will play a central role in achieving the MSRB’s mandate to protect municipal entities that engage the services of a municipal advisor,” said MSRB Executive Director Lynnette Kelly. “It is important to us and to the market that we develop a rule that effectively and appropriately provides guidance on the core responsibilities of municipal advisors to their clients. The comments we received on the previous draft have informed a number of changes to the text of the draft, and the MSRB wants to provide an opportunity for market stakeholders to review and comment on these changes.”

Specifically, the initial draft prohibition on principal transactions has been revised to apply only to transactions with municipal entity clients, not with obligated persons. In addition, to clarify the narrow scope of the prohibition, the revised draft rule defines principal transactions as limited to those directly related to the subject of the municipal advisor’s engagement with the municipal entity client. The definition also specifies the types of transactions that are covered.

Among the other key changes to the draft rule is elimination of specified requirements that municipal advisors review the official statement in a new issue transaction, disclose information about professional liability insurance and estimate in relationship documentation their expected total compensation in dollars. These changes reflect commenter feedback, including the view that the client primarily should control the scope of the engagement with its municipal advisor.

The revised draft rule also clarifies a municipal advisor’s suitability and related obligations when making recommendations to municipal entity and obligated person clients or reviewing the recommendations of others.

To address potential practical and operational issues, the revised draft rule provides relief from certain disclosure and documentation requirements for anyone who inadvertently provides advice that would be considered municipal advisory activity. However, the new provision does not offer a safe harbor from potential violations of Securities and Exchange Commission (SEC) and MSRB registration requirements and other rules for those providing municipal advisory services.

The MSRB’s January 2014 request for comment solicited input on whether the federal fiduciary duty should be extended to apply to municipal advisors that work with obligated persons. The revised draft rule does not extend the fiduciary duty.

Comments are due no later than August 25, 2014. Read the full text of the revised draft rule to view all changes from the January 2014 draft. The MSRB is hosting an educational webinar on the revised core standards rule on August 14, 2014 at 3:30 p.m. ET. Register for the webinar.

The MSRB continues to develop additional rules for municipal advisors.

Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today filed a revised proposal with 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.

In December 2013, the MSRB requested public comment on draft changes to the “Firm Element Continuing Education” requirement in MSRB Rule G-3. The MSRB modified the proposed new requirement to remove the specified one-hour minimum amount of training. The MSRB also amended the proposal to apply only to registered personnel.

“The rule change we are filing today responds to issues raised during the public comment process while continuing to address the need for 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.

Currently, securities firms are required to offer continuing education to their staff based on the firm’s assessment of its overall needs, but there are no existing obligations under MSRB rules to ensure that training on municipal securities is provided to dealer personnel regularly engaged in such activities.

The MSRB requires competency of municipal market professionals and 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.

WASHINGTON — The Municipal Securities Rulemaking Board’s proposal to simplify and harmonize its rules on professional designations has drawn applause from a dealers group.

David Cohen, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, expressed support for the tweaks in a letter filed with the Securities and Exchange Commission Tuesday.

The MSRB’s proposal would alter its Rules G-3, on classification of principals and representatives, and would make corresponding changes to Rules G-7 on information concerning associated persons, and G-27 on supervision.

Under G-3, limited representatives are individuals whose activities, with respect to municipal fund securities, may include underwriting or sales; research or investment advice with regard to underwriting or sales; or any other activities that involve communication, with public investors with regard to underwriting or sales. The proposed change would limit the activities of limited representatives exclusively to sales to, and purchases from, customers of municipal fund securities. The MSRB has said this approach is consistent with the approach taken by the Financial Industry Regulatory Authority.

The MSRB is also seeking to eliminate its designation of “financial operations principal” under G-3, because FINRA has overlapping FINOP designation requirements, including an exam.

“The responsibilities and duties of FINOPs pertaining to municipal securities are not unique, and FINRA rules establish general responsibilities and duties for such individuals,” the MSRB said in its June filing with the SEC. Cohen said the proposed changes will simplify things for dealers.

“The MSRB is eliminating duplicative licensing requirements,” Cohen said in an interview. “It doesn’t lessen obligations.”

SIFMA was the only group to submit comments on the proposal to the SEC, which has oversight over the MSRB and must approve its rule changes.

The Bond Buyer
BY KYLE GLAZIER
JUL 16, 2014 1:15pm ET

WASHINGTON — A Republican congressman is pushing the Securities and Exchange Commission to limit the scope of its disclosure violations self-reporting program to the last two years, warning that if it does not he and other lawmakers may seek a legislative solution.

Rep. Steve Stivers, R-Ohio, fired the shot across the SEC’s bow during House lawmakers’ discussion of H.R. 5016, an appropriations bill for the Treasury on Wednesday.

Stivers had prepared an amendment to bill that would not fund the SEC’s MCDC’s efforts for more than two years. He did not formally offer it, but discussed his concerns about the program on the House floor with Rep. Ander Crenshaw, R-Fla., chair of the Appropriations Committee’s financial services panel.

The Municipalities Continuing Cooperation Disclosure initiative allows issuers and underwriters to get favorable settlement terms if they voluntarily report, by the end of Sept. 9, any time in the last five years they offered bonds without disclosing failures to meet their continuing disclosure agreements they set up under the SEC’s Rule 15c2-12. But Stivers’ amendment would have prevented MCDC settlements for deals taking place before March 19, 2012.

That date coincides with a risk alert issued by the SEC’s office of compliance inspections and examinations that detailed the commission’s view on an underwriter’s obligations under 15c2-12. Though that part of the rule was adopted in 1994, the SEC only began to take enforcement actions in this area since the risk alert.

Market groups including the Government Finance Officers Association, the Securities Industry and Financial Markets Association, and Bond Dealers of America have lobbied the SEC to extend the deadline for MCDC participation and restrict its scope to more recent deals, but the commission has refused to budge. House rules prevent legislating in appropriations bills, but Stivers’ amendment would have cut off MCDC funding for violations prior to March 2012.

The House has only 10 working days before the end of the MCDC period because the chamber is not scheduled for legislative business in August. But Stivers told colleagues that he is interested in working with them to make changes to the program if the SEC continues to stick to its guns.

“The states and localities that the SEC is trying to protect do not support this program, and feel it’s very punitive,” Stivers told Crenshaw, noting that the Government Finance Officers Association supported his amendment. Stivers thanked Crenshaw for being willing to work with him and the House Financial Services Committee on a solution “should the SEC not choose to curtail this program on their own.”

“We want to make sure it’s fair and equitable to our states and local municipalities,” Stivers said.

Crenshaw said making sure a large number of bond deals is in compliance is “a huge undertaking,” and told Stivers he looked forward to helping him “find some solutions.”

Michael Decker, a managing director and co-head of municipal securities at SIFMA, applauded the action.

“We thank Rep. Stivers for his attention to the issues raised by the MCDC Initiative,” Decker said. “We, too, believe it would be appropriate for the SEC to focus the program on transactions that were executed after the SEC’s Office of Compliance Inspections and Examinations issued their notice in March 2012 focusing the municipal market’s attention on compliance issues covered by the MCDC.”

There has been only one MCDC settlement so far. The SEC last week charged Kings Canyon Joint Unified School District in California with misleading bond investors in a 2010 deal. Some market participants have pointed out that Kings Canyon was already under investigation when it consented to participate in the MCDC, so it did not actually self-report.

Bond attorneys have also expressed frustration that the settlement does not specify what disclosure failures the SEC focused on. Muni groups have repeatedly sought SEC guidance on what threshold of failure warrants an MCDC confession, but the commission has been silent on that front.

Stivers has shown an interest in muni market issues before, previously sponsoring legislation and lobbying the SEC to narrowly tailor municipal advisor regulations.

The Bond Buyer
BY KYLE GLAZIER
JUL 17, 2014 4:01pm ET

After a 38-year debate on how to make trading costs for corporate and municipal debt transparent, regulators are making another attempt at forcing dealers to disclose how much they earn on the transactions.

The Municipal Securities Rulemaking Board will discuss a proposal at the end of the month, Executive Director Lynnette Kelly said yesterday, after U.S. Securities and Exchange Commission Chair Mary Jo White asked the regulator to come up with a plan by year end. The new rules would apply to so-called riskless trades, where firms fill client orders rather than use their own money to opportunistically buy.

Regulators are placing a greater emphasis on making sure smaller buyers don’t get fleeced when transacting in the corporate- and municipal-bond market that’s grown 36 percent since 2008. While stock brokers must tell investors how much they earn, bond dealers have profited from an opaque market where trades are still often completed over the telephone.

“You don’t know how many bites out of a yield are taken by the time you’re buying a bond,” said Marilyn Cohen, who manages $320 million of corporate and municipal bonds as founder of Envision Capital Management Inc. “Here we are in 2014 and we’re still talking about this.”

Increasing Prices

Individuals are especially in the dark about how much they’re paying brokers, Cohen said. Investors pay higher prices than securities firms when they trade U.S. state and local government bonds, according to a study of the $3.7 trillion municipal market released this week by the MSRB.

The price of a municipal bond increased by an average of 1.78 percent when a broker purchased a security from one investor and resold it to another, according to the MSRB analysis of trading from 2003 to 2010. Trades between securities firms, in comparison, increased in price by 0.5 percent.

Concern is mounting that the bond market’s antiquated infrastructure will exacerbate losses when sentiment reverses after more than five years of easy-money policies that have suppressed borrowing costs and spurred record demand for debt. Investors have funneled about $978.3 billion into long-term bond mutual funds since the end of 2008, an amount that’s greater than Turkey’s annual gross domestic product, according to the Investment Company Institute.

While yields are still close to all-time lows, analysts predict they’ll climb as the Federal Reserve ends its monthly purchases of Treasuries and mortgage debt later this year and prepares to raise benchmark interest rates.

Drafting Parameters

The SEC is “very focused” on making changes in the bond market’s structure in the “next year or two,” White said in a June 20 speech. She also said the SEC asked the MSRB and Financial Industry Regulatory Authority to draft parameters for how to force dealers to disclose their commissions.

“We look forward to working with the SEC on these important topics,” George Smaragdis, a Finra spokesman, said in an e-mailed statement.

MSRB’s Kelly said in a telephone interview yesterday that the two regulators are working together and that “it’s important for there to be regulatory consistency.”

The idea of requiring dealers to disclose commissions on certain bond trades isn’t new. The SEC has proposed rules on three separate occasions that would require dealers to reveal mark-ups on riskless principal trades, and failed to follow through each time.

Majority Support

The agency issued the most recent proposal in 1994, and didn’t adopt the rule in part because regulators were readying the bond-price reporting system now known as the Trade Reporting and Compliance Engine, or Trace, which went into effect in 2002.

Regulators are more confident they’ll follow through this time because a majority of the five-member commission — White and two Republican SEC commissioners, Daniel M. Gallagher and Michael S. Piwowar — have called for requiring disclosure.

In addition, a bipartisan Senate bill introduced in March, sponsored by Senator Mark Warner of Virginia and Senator Tom Coburn of Oklahoma, would require dealers to reveal their mark-ups on transactions with customers who placed an order to buy or sell.

“If you have a commission or a mark-up that is three or four percent, that is one year of interest on a bond in many cases,” Piwowar said in a phone interview. “You can burn your yield up on these transactions. Having it on their confirm would provide another level of transparency.”

Riskless Principal

The main issue of contention is how to determine which trades would be subject to the rule.

Regulators are considering rules that would be dependent on how much time it takes between when a dealer buys and sells a bond. Lobbyists from the securities-brokerage industry are opposed to those parameters, and argue regulations should target trades where firms have client orders in hand when they purchase debt.

“Whether we can get comfortable with this really depends on how the regulators define riskless principal,” said Michael Decker, managing director and co-head of municipal securities for the Securities Industry and Financial Markets Association.

“If they are thinking of riskless principal in terms of how long you as a dealer were exposed to market risk, if it’s less than an hour or less than a day, that in our view is not a riskless principal trade,” he said.

Declining Costs

The lack of information about brokers’ commissions is indicative of the antiquated nature of the $40 trillion U.S. bond market. Corporate-bond trading has been slow to move to electronic platforms, partly because there are thousands of individual bonds that trade relatively infrequently.

While transaction costs have declined after the advent of bond-price reporting systems, investors still typically pay more to transact in these markets than in equities. In the year after the Trace bond-price reporting system was introduced, a study found that $1 billion in commissions were wiped out.

Rules mandating more disclosure of commissions “will probably compress the spreads in terms of how much everyone is making,” Envision’s Cohen said.

By Lisa Abramowicz and Dave Michaels Jul 17, 2014 2:50 AM PT

To contact the reporters on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net; Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage, Faris Khan

WASHINGTON — Investors pay more for municipal securities than dealers, particularly when there is more time between trades, according to a long-awaited report commissioned by the Municipal Securities Rulemaking Board.

But market sources said that the report’s finding is not surprising and that the report is limited in its results.

Erik Sirri of Babson College in Massachusetts conducted the study, which he has been working on since January 2011. The work analyzed millions of municipal market trades and provides an analysis of the muni market’s structure, the price differential between two trades of the same security, and the impact of near real-time trade reporting.

MSRB director of research Marcelo Vieira said that the report provides the MSRB a clear picture of how municipal securities move through the market and the information about the impact of its Real-Time Transaction Reporting System reinforces the importance of price transparency. Many market participants have said for years that the many small, retail customers in the muni market typically pay more for the same securities than either institutional customers or dealers.

Fifty percent of all trades had a trade size at or below $25,000, the study reveals. But the study did not differentiate between institutional and retail customers.

Vieira said the MSRB did not pay Sirri, a former director of the division of trading and markets at the Securities and Exchange Commission, for the study. But the professor does retain the rights to the data and its use in future research.

“This report provides a highly detailed benchmark analysis on secondary market trading from the MSRB, an independent and objective source of information, and the key regulator of the municipal securities market,” MSRB executive director Lynnette Kelly said in a release Tuesday. “The MSRB supports the use of data in its oversight of the market and encourages further analysis by others into the intricacies of municipal market trading.”

The report examines the four types of “trade pairs” that exist in the market: a dealer purchase from a customer followed by a dealer sale to a customer; a dealer purchase from a customer followed by an inter-dealer trade; an interdealer trade followed by a dealer sale to a customer; and interdealer trade followed by an interdealer trade.

Sirri found that the average basis point spread from a dealer purchasing a muni from a customer and selling it to a customer was 178, compared to 146 for a dealer buying a muni from a dealer and selling it to a customer, 67 for a dealer purchasing a muni from a customer and selling it to another dealer, and 50 for a dealer purchasing a muni from a dealer and selling to a another dealer. The average increase for all transactions was 127 basis points.

“Paired-trade differentials are noticeably higher when trades involve a customer, as opposed to another dealer,” the report concludes. “Using an [interdealer-interdealer] trade pair as a starting point, replacing either side of the trade pair with a customer trade serves to increase the paired-trade differential relative to the [interdealer-interdealer] pair. This is perhaps not surprising if higher costs are associated with identifying and trading with a customer versus another dealer.”

The basis point differentials shrank when Sirri looked only at transactions that took thirty minutes or less between the first trade and second. The overall spread dropped to 80 basis points from 127, and fell to 76 for trades occurring within 14 minutes of each other.

The study also examines the impact of the RTRS. Beginning on Jan. 31, 2005, prices for most trades of municipal securities became available to the public on a near real-time basis, within 15 minutes after trade execution. Prior to that, prices became available the next day.

The study shows that the average basis point change in a trade dropped to 160 in 2006 from 213 in 2003, but had edged up to 208 by 2010. The report points to the 2007 financial crisis as a probable factor in the increase of basis points.

“It reflects the importance of transparency,” Vieira said. “From our perspective, it’s all about transparency.”

The study did not attempt to examine riskless principal trades, or purchases and sales of the same munis at almost the same time which do not expose dealers to market risks. SEC commissioners have said that dealers should be required their markups on these trades.

David Cohen, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said the report contains no surprises. The efforts of Sirri and the MSRB underscore the unique characteristics of the muni market, Cohen said, and the role of dealers in an environment that includes many small trades and some securities that trade very infrequently. Cohen added that the report deals with aggregated data, and that the facts and circumstances of individual trades differ considerably.

“There’s a story behind each trade,” Cohen said. “I think it’s important to take that into consideration.”

Joseph Fichera, chief executive officer of Saber Partners LLC., said the study has to be viewed with some qualifications noted in Sirri’s report. The price change data is not analagous to the formal concepts of “mark ups and mark downs,” and the report was never meant to be used as a measure of whether transactions are fair or not for regulatory purposes. It also doesn’t account for specific circumstances, such as changes in credit worthiness.

“Time is money, inventory is a cost, and dealers have a right to make a profit when making markets, especially over time,” Fichera said.

The Bond Buyer
BY KYLE GLAZIER
JUL 15, 2014 3:35pm ET

The SEC Staff recently provided further guidance on the provisions of Rule 506(c) of Regulation D which permit the use of general solicitation and general advertising when sales are made only to accredited investors and the issuer verifies the accredited investor status of the purchasers. The Staff has now clarified certain aspects of the verification process through a series of new Securities Act Rules Compliance and Disclosure Interpretations.

When a purchaser holds assets in an account jointly or holds property jointly with an individual that is not the person’s spouse, the Staff has said that the assets in the account or property held jointly can be taken into account for the net worth test set forth in Rule 501(a)(5), but only to the extent of the purchaser’s percentage ownership of the account or property (Question 255.49).

The Staff has indicated that in a situation where a purchaser’s annual income is not reported in U.S. dollars, the issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for the year (Question 255.48). If a purchaser is not a U.S. taxpayer and therefore cannot provide an IRS form to report income, the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) would not be available; however, the Staff has said that the principles-based verification method could be utilized where an issuer could reasonably conclude that a purchaser is an accredited investor based on a review of tax forms that report income in a foreign jurisdiction which imposes penalties for falsely-reported information that are comparable to those of the U.S (Question 260.36).

If an issuer is seeking to rely on the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) and thus wants to review the purchaser’s income as reported on IRS forms for the two most recent years, but the most recent year is not yet available, it would not necessarily be appropriate for the issuer to then review years prior to the two most recent years. However, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification approach by:

• reviewing the Internal Revenue Service forms that report income for the two years preceding the recently completed year; and
• obtaining written representations from the purchaser that (i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available, (ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and (iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year. (Question 260.35).

With respect to the review of tax assessments for the purposes of determining an accredited investor’s net worth under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff notes that reviewing a tax assessment that is more than three months old would not be appropriate when relying on the verification safe harbor. That said, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method, if the issuer uses the most recently available tax assessment when determining whether the purchaser has the requisite net worth (Question 260.37).

Lastly, in reviewing consumer reports for the purposes of determining a purchaser’s liabilities under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff indicates that while a consumer report from a non-U.S. entity would not work for the purposes of the safe harbor, an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification method by reviewing s foreign report report and taking any other steps necessary to determine the purchaser’s liabilities (such as a written representation from the purchaser that all liabilities have been disclosed) in determining whether the purchaser has the requisite net worth (Question 260.38).

In those interpretation where the Staff noted that an issuer could reasonably conclude that a purchaser is an accredited investor based on the principles-based verification method, the Staff further noted that when the issuer has reason to question the information that is being considered or, depending on the test, the purchaser’s net income or net worth, then additional verification measures may be necessary in order to verify that the purchaser is an accredited investor.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

July 14 2014
Article by David M. Lynn
Morrison & Foerster LLP

© Morrison & Foerster LLP. All rights reserved

On July 8, 2014, the SEC announced that it had settled charges that a school district in California misled bond investors about its failure to comply with its continuing disclosure obligations under Rule 15c2-12 of the Exchange Act. Pursuant to the Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative, Kings Canyon Joint Unified School District, without admitting or denying the SEC’s findings, agreed to entry of an Order (1) finding that it was in violation of Section 17(a)(2) of the Securities Act, (2) requiring it to cease and desist from violating Section 17(a)(2), (3) requiring it to establish written policies and procedures and to conduct periodic training regarding continuing disclosure obligations, and (4) requiring it to cooperate with the Enforcement Division in any subsequent investigation and to disclose the settlement in future bond offering materials. The SEC did not order any disgorgement or civil penalty.

Rule 15c2-12 requires that an underwriter obtain a written agreement from an issuer, for the benefit of bondholders, in which the issuer promises to submit certain financial information on an annual basis. This financial information is usually submitted to appropriate national and state repositories where it is available to the investing public. Notably, a broker-dealer must consider an issuer’s failure to disclose such financial information in determining whether to recommend a security and must disclose the failure to provide such financial information to customers. Rule 15c2-12 undertakings must be described in final Official Statements.

According to the SEC, Kings Canyon publicly offered $19 million of municipal bonds in December 2006, $4.5 million of municipal bonds in November 2007, and $6.7 million of municipal bonds in December 2007. The SEC found that Kings Canyon executed 15c2-12 agreements to affirm that it had made continuing disclosures of financial information. The SEC alleged, without specificity, that Kings Canyon failed to submit “some” of the disclosures required by that agreement.

According to the Order, in November 2010, Kings Canyon offered $6.8 million of municipal bonds. The Official Statement for the 2010 offering stated that Kings Canyon “has had no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation .…” Again, without providing specifics as to what information Kings Canyon did not disclose, the SEC found that statement to be “untrue.”

The SEC concluded that Kings Canyon’s inclusion of the “untrue statement” violated Section 17(a)(2). Section 17(a)(2) makes it unlawful “in the offer or sale of any securities … to obtain money or property by means of any untrue statement of material fact or omission to state a material fact necessary in order to make statements made, in light of the circumstances under which they were made, not misleading.” Section 17(a)(2) does not require that the SEC prove that a respondent acted with “scienter.” Rather, the SEC may establish such a violation by showing that the respondent acted negligently.

The SEC also did not provide significant details about Kings Canyon’s negligence. The SEC simply concluded that Kings Canyon reviewed drafts of the 2010 Official Statement that included summary descriptions of previous continuing disclosure agreements and that it subsequently approved the Official Statement. Moreover, the SEC, without discussion, concluded that investors would “attach importance” to Kings Canyon’s failure to comply with its continuing disclosure agreements and that the alleged “untrue” statement was therefore material.

The SEC does not refer to any individuals in the settled Order against Kings Canyon. The SEC Order also does not indicate what role the underwriter played in drafting or approving the 2010 Official Statement. Given that the MCDC Initiative was announced on March 10, 2014, it appears that the staff conducted a fairly swift investigation in order to resolve the matter four months later. The undertaking that Kings Canyon cooperate with any subsequent investigation by the Enforcement Division may suggest, as we pointed out in our April 22 post, that the SEC may use issuers’ cooperation to pursue individuals. Moreover, it is not out of the realm of reason that the SEC may extend its focus to other participants in municipal securities offerings, such as underwriters and broker-dealers.

Article By:
Mary P. Hansen
Drinker Biddle & Reath LLP
posted on: Friday, July 11, 2014

©2014 Drinker Biddle & Reath LLP. All Rights Reserved

On July 2, 2014, the MBFA Coalition held a “Municipal Bonds 101” seminar on Capitol Hill for congressional staff and interested parties focusing on the importance of preserving the present-law treatment of tax-exempt municipal bonds.

The seminar featured a distinguished panel of municipal finance experts from varying backgrounds who explained the benefits of the traditional municipal bond market to staff from key congressional personal and committee offices.

Panelists included:

Ron Bernardi, Principal, President and CEO, Bernardi Securities
Mayor Steve Benjamin, Columbia, South Carolina
Kevin Burke, President and CEO, Airports Council International – North America

The education seminar featured panel presentations, an interactive discussion and fostered a great learning environment for key hill staffers. This “Muni Bonds 101” seminar is the second we’ve hosted in two years and has proven to be a key component in an ongoing effort by the MBFA Coalition to educate policy makers and staff on the benefits of the municipal market and the negative implications of scaling back or eliminating the tax exemption on municipal debt.

Click here for handouts from the seminar.

For more information on the Municipal Bonds for America coalition, please visit our website: www.munibondsforamerica.org

WASHINGTON — The Government Finance Officers Association has issued an alert for issuer officials urging them to approach the Securities and Exchange Commission’s continuing disclosure self-reporting program cautiously, and advising the group’s members that attempts to lobby the SEC for changes to the initiative have been largely unsuccessful.

The GFOA alert released Monday came barely two months before the SEC’s Municipalities Continuing Disclosure Cooperation initiative is set to expire Sept. 10. The program allows issuers and underwriters to get lenient settlement terms if they voluntarily self-report their failures to ensure bond offering documents were not false or misleading about their compliance with their continuing disclosure obligations. Issuers would not face civil financial penalties if they participate, but individuals would not enjoy any immunity. Issuers need to take the MCDC “seriously, but exercise caution,” the alert states.

“The legal consequences of participating in the MCDC initiative are significant and should be thoroughly evaluated with the assistance of counsel,” it advises.

The alert also explains that issuers need not worry about the MCDC if they have not issued bonds in the past five years, the time period covered by the initiative. For issuers who have offered debt in that time period and who are unsure if their official statements might have been inaccurate, the GFOA recommends a review of those offerings with transaction participants in addition to scrutinizing internal files and EMMA filings. If an OS admits to past noncompliance, it is probably not problematic, the GFOA alert states.

“If the information in the official statement describes any instances of prior non-compliance (including instances that may be immaterial), the issuer can probably conclude that it has not misstated compliance and no further investigation is necessary,” it explains.

If an issuer official does discover potentially problematic official statements, it should consult counsel about the materiality of the lapse and about the potential advantages and disadvantages of participating in the MCDC, GFOA’s alert concludes. Issuers in that situation should also adopt or enhance policies and procedures to prevent future lapses in addition to correcting noncompliance as quickly as possible.

The MCDC has been controversial since it was announced earlier this year, and GFOA debt committee chairman Ben Watkins has publicly expressed strong distaste for the SEC’s approach. GFOA is among several industry groups, including the Bond Dealers of America, National Association of Bond Lawyers, and Securities Industry and Financial Markets Association, who have pushed the SEC to make changes to the MCDC.

Many market participants want the deadline extended to December or beyond. GFOA is also seeking clarification on what the SEC would consider to be material for the sake of the MCDC, a term courts have ruled means information a “reasonable investor” would want to know.

SEC officials have indicated that they are unlikely to alter the MCDC, although they have expressed some sympathy for the struggles that both issuers and underwriters have reported experiencing while attempting to find documents on deals that happened before the EMMA system became the muni market’s sole transparency database in 2009.

“The initial feedback from the SEC indicated an unwillingness to streamline the MCDC Initiative to improve the efficiency and effectiveness and reduce the uncertainties and burdens being imposed on issuers,” the GFOA alert states. “GFOA will continue to press for common-sense changes to modify the MCDC Initiative and focus on constructive ways to improve continuing disclosure compliance.”

The Bond Buyer
BY KYLE GLAZIER
JUL 7, 2014 2:02pm ET

Settlement Is First Under Initiative Targeting Municipal Disclosure

Washington D.C., July 8, 2014 — The Securities and Exchange Commission today charged a school district in California with misleading bond investors about its failure to provide contractually required financial information and notices. The case is the first to be resolved under a new SEC initiative to address materially inaccurate statements in municipal bond offering documents.

The SEC found that in the course of a 2010 bond offering, Kings Canyon Joint Unified School District affirmed to investors that it had complied with its prior continuing disclosure obligations. The statement was inaccurate because between at least 2008 and 2010, the school district had failed to submit some required disclosures. The California school district agreed to settle the charges without admitting to or denying the findings.

Under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC’s Enforcement Division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The 2014 initiative, launched on March 10, expires on September 10.

“The integrity of the municipal securities market requires that issuers carefully comply with all of their disclosure obligations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “Our MCDC initiative is one piece of our efforts to ensure that issuers meet their obligations going forward.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit added, “An important component of the MCDC program is that it provides issuers who were already under investigation the opportunity to accept the standard terms and resolve their enforcement matters in a fair and efficient manner. We are pleased that King’s Canyon has taken advantage of the program and we continue to encourage all eligible issuers and underwriters to do so while the MCDC terms are still available.”

The SEC’s order instituting settled administrative proceedings finds that in three bond offerings between 2006 and 2007, Kings Canyon contractually agreed to disclose annual financial information and notices of certain events pertaining to those bonds. When it conducted a $6.8 million bond offering in November 2010, Kings Canyon was required to describe any instances where it had failed to materially comply with its prior disclosure obligations. In the 2010 offering document, Kings Canyon inaccurately affirmed that there was “no instance in the previous five years in which it failed to comply in all material respects with any previous continuing disclosure obligation.” Because Kings Canyon failed to submit some of the contractually required disclosures relating to the 2006 and 2007 offerings, the November 2010 bond offering document contained an untrue statement of a material fact.

Without admitting or denying the SEC’s findings, Kings Canyon consented to an order to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act. It also agreed to adopt written policies for its continuing disclosure obligations, comply with its existing continuing disclosure obligations, cooperate with any subsequent investigation by the Enforcement Division, and disclose the terms of its settlement with the SEC in future bond offering materials.

The SEC’s investigation was conducted by Monique C. Winkler and was supervised by Cary Robnett. Both are in the SEC’s San Francisco Regional Office and are members of the Enforcement Division’s Municipal Securities and Public Pensions Unit.

Kings Canyon Joint Unified School District Allegedly Failed to Provide Some Required Financial Disclosures

The Securities and Exchange Commission said Tuesday it reached a settlement with a California school district on claims the district failed to provide some required financial disclosures during a 2010 bond offering.

The case is the first to be resolved under a SEC initiative to address materially inaccurate statements in municipal bond offering documents, the agency said.

According to the SEC, the Kings Canyon Joint Unified School District had affirmed to investors that it had complied with previous disclosure requirements in the course of a 2010 bond offering. However, the SEC said the school district had failed to submit some required disclosures between at least 2008 to 2010.

The California school district agreed to settle the charges without admitting to or denying the findings. Terms of the settlement include consenting to a cease-and-desist order, adopting written policies related to continuing disclosure obligations and disclosure of the terms of its settlement with the SEC in future bond offering materials.

“The school district is glad they were able to resolve the matter amicably with the SEC,” said Jeffrey Kuhn, defense counsel for the district.

Mr. Kuhn said there were “inadvertent errors in the way they handled things” that have been acknowledged and the district is in the process of adopting policies and procedures so that it won’t happen again.

Under an initiative that began in March, the SEC’s enforcement division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or who were already under investigation for violations involving continuing disclosure obligations. The initiative is set to expire Sept. 10.

By TESS STYNES
July 8, 2014 2:31 p.m. ET

As many state and local governments across the country begin their July 1 fiscal year, a new federal law going into effect is of particular interest to municipal governments that issue bonds. The new law defines the scope of activities of municipal advisory professionals and establishes new requirements for those that provide advice on matters of public finance.

Each of the various financial professionals that work with state and local governments plays a different role and may have relationships that could affect any recommendations they make. The definition of a municipal advisor, established by the Securities and Exchange Commission, together with an associated regulatory regime for municipal advisors, will provide needed oversight of these financial professionals. The Municipal Securities Rulemaking Board is charged with developing a regulatory framework that clarifies and establishes requirements for these roles, responsibilities and relationships of municipal advisors. These “three Rs” are fundamental to understanding why we are here.

First, a bit of history. Congress mandated the creation of a regulatory framework for municipal advisors with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The goal of this framework is to protect state and local governments from the potentially costly consequences of relying on the financial advice of unregulated professionals that may lack sufficient expertise and accountability. Dodd-Frank imposed a federal fiduciary duty on municipal advisors to put the interests of their state and local government clients first, and a comprehensive regulatory framework will establish basic standards for the roles, responsibilities and relationships of municipal advisors.

Dodd-Frank broadly defined the term “municipal advisor” and left it to the SEC to provide additional clarity and guidance on who ultimately is a municipal advisor and must comply with any existing or future regulatory requirements. The SEC provided that guidance in its final registration rule released in September 2013 and effective today.

With certain exceptions, financial professionals who provide advice about municipal financial products or the issuance of municipal securities for an issuer must register with both the SEC and the MSRB and must comply with a broad MSRB requirement to deal fairly with all persons. The MSRB is developing additional rules to govern the conduct and professional qualifications of municipal advisors. The MSRB seeks to ensure that all municipal market participants understand the role of a municipal advisor, an advisor’s responsibilities to its client and the relationships among the various participants in a transaction.

To date, the MSRB has focused on establishing core standards of conduct for municipal advisors, setting supervision and compliance obligations for municipal advisor firms, and creating a professional qualification exam to require municipal advisors to demonstrate a minimum level of competency. The MSRB also plans to revise its rules on pay-to-play practices. Current rules that prohibit pay-to-play by municipal securities dealers will be extended to include municipal advisors.

The MSRB invites extensive participation in the development of its regulatory framework and hosts a number of outreach events and webinars to ensure stakeholders understand developing rules and how to comment. As the municipal advisor regulatory structure continues to evolve, the July 1 effectiveness of the SEC’s registration rule signifies a major step forward in bringing all municipal advisors under the regulatory oversight of the SEC and the MSRB. Follow the current status of municipal advisor rulemaking and access free educational resources on the MSRB’s website (MSRB.org) in the “Resources for Municipal Advisors” section.

BY DAN HEIMOWITZ
JUN 30, 2014 9:57pm ET

Daniel Heimowitz is Chair of the Municipal Securities Rulemaking Board.

A new rule about who can give governments financial advice goes into effect Tuesday, but how to apply it is far from resolved.

It’s been a confusing road for the creation of a new category of financial advisors who will be regulated by the federal government. So confusing, in fact that the feds delayed implementating the Municipal Advisor Rule by half a year to July 1.

A municipal advisor is a qualified financial professional (such as a banker or financial consultant) who give municipalities advice on financial deals like bond offerings. That person must be registered through the SEC as a municipal advisor and cannot have any other interest in the deal.

Historically, it was common for those orchestrating the transaction to also dish out advice and counsel to the municipality entering. The problem with this model was that while most underwriters or brokers are fair and reasonable, entrusting a financial professional to give advice to a municipality when that professional could potentially benefit a great deal if the municipality enters into the deal creates an inherent conflict interest.

Reaction from bankers and underwriters on how best to cope with the new restrictions on what they can and can’t say to their government clients has been varied. (The rule technically goes into effect this week but many institutions have already been operating under its restrictions ahead of time.) An exception does exist that allows underwriters and bankers on a deal to talk with the government about options so long as the government presents in writing that it already has a municipal advisor and it is relying on its advisor’s advice. Still, said Mark-David Adams, a bond counsel at Edwards Wildman law firm, some have effectively instituted a gag order.

“Some banks are telling their officers … to absolutely not give any advice flat-out, whatsoever,” he said. “It’s just set a term sheet, [that says] ‘this is what we want, this is what we’ll pay for it, have a nice day and good bye.’”

There are gray areas in which those who conduct financial deals for governments can work and issuers can expect most of the underwriters they deal with to operate in this realm. Some additional key exceptions offered by the Municipal Market Advisors include:

1) Underwriters may include recommendations and advice when responding to an issuer’s request for proposal if the RFP is about a specific financing and has been advertised either to three reasonably competitive firms or via posting on the issuer’s website. The response timeframe off the RFP must also be less than 6 months.

2) While underwriters and other professionals may not provide recommendations or advice to issuers unless an exemption is met, underwriters may talk with the issuer about “general market information.” This does not mean underwriters can “express subjective assumptions, opinions, or views [that] constitute a recommendation.” But it does mean they can talk about available products and even “information regarding a municipal entity’s particular outstanding bonds, such as current market prices and yields, without this information constituting a recommendation.”

Adams said many governments are considering whether to retain a municipal advisor on an ongoing basis so as to make it easier for underwriters or bankers to approach a government with a deal that might be good for them (like refinancing debt at a lower interest rate). But that’s not a solution that will work for everyone as many governments are used to seeking advice from different people depending on their expertise and the type of deal.

Adams predicted a 6-month growing pains period before governments and financial institutions settle in to the new routine.

“It’s probably going to be a little clumsy,” he said. “Like someone going out on their first date – it’s going to be awkward for a while.”

GOVERNING.COM
BY LIZ FARMER | JULY 1, 2014

WASHINGTON — The Bond Dealers of America is making another push for changes to the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation initiative after the SEC rejected BDA’s earlier requests to narrow the scope of the program and extend its deadline.

The BDA renewed its efforts in a four-page June 30 letter signed by chief executive officer Mike Nicholas and sent to SEC chairman Mary Jo White. The letter repeats an earlier BDA request that the program be extended to Dec. 15 from its current deadline of Sept. 10. The program allows issuers and underwriters to get lenient settlement terms if they voluntarily self-report their failures to ensure bond offering documents were not false or misleading about their compliance with their continuing disclosure obligations,

The letter also reiterates a proposal from the BDA’s June 9 letter that issuers and underwriters only have to review bond documents on the Municipal Securities Rulemaking Board’s EMMA website to determine their past compliance history, rather than going back into the much less user-friendly Nationally Recognized Municipal Securities Information Repository or NRMSIR system that existed prior to 2009. The letter includes a new request that the civil penalty cap of $500,000 included in the MCDC should be lowered and tiered according to the firm’s size. The penalty size is currently pegged to the size of the deal, not the firm, and maxes out at $500,000 for the largest totals.

“The BDA wants our member firms to be able to take advantage of the amnesty program, but in doing so at the $500,000 cap, we fear that it will cause them to face an unduly burdensome financial challenge and should therefore be tiered accordingly,” Nicholas wrote. “We believe that the intent of the commission was to place a reasonable cap on an underwriter’s exposure; however, the $500,000 cap places a disproportionate burden on smaller firms with no associated tangible benefit connected to the initiative.”

The total cost for a dealer who hires an outside vendor to come through the potentially decade-long list of deals searching for potentially misleading official statements could reach $600,000, a penalty a cost that could be staggering for a smaller firm, according to the BDA letter.

A June 30 letter to BDA from LeeAnn Ghazil Gaunt, head of the municipal securities and public pensions unit at the SEC’s Division of Enforcement declined to offer the BDA any relief on either the NRMSIR issue or the time limit. While the SEC struck a sympathetic tone about the increased challenges of searching the NRMSIR system compared to EMMA, the commission appears unwilling to go as far as BDA would like. The latest letter expands on the group’s concerns.

“When dealers review the transactions in which they were involved, they are encountering numerous practical problems with the NRMSIR system that render any review with respect to filings under the NRMSIRs essentially impossible to conduct in a meaningful and reliable way,” the BDA letter states.

These problems include systems that are no longer operational, and one that supplies unreliable information.. Further, Nicholas argues, it is unreasonable for the SEC to make market participants wade through a system that everyone agreed was broken before it was replaced by EMMA.

“The whole point of the EMMA system was to fix what was broken with the NRMSIR system,” the BDA letter states.

The letter closes with a final appeal for a time extension, arguing that the short current deadline will limit the abilities of underwriters and issuers to huddle on their past deals and decide which ones might be eligible under the MCDC. SEC officials have signaled that a deadline extension is unlikely and said that the “modified prisoner’s dilemma” structure of the initiative that pits the interests of underwriters against those of issuers is an important aspect of the MCDC. The BDA also asks for a face-to-face meeting with White or her staff.

The Bond Buyer
BY KYLE GLAZIER
JUL 1, 2014 12:16pm ET

The Municipal Securities Rulemaking Board (MSRB) today marked the fifth anniversary of a pivotal milestone in the transparency of the municipal securities market. On July 1, 2009, the MSRB’s Electronic Municipal Market Access (EMMA®) website became the official, centralized public access point for financial and other continuing disclosures from state and local governments that issue municipal securities, making these documents freely available to investors and the general public for the first time. View a graphic that highlights key events in the evolution of municipal market transparency.

View the full press release.

The Securities and Exchange Commission’s (SEC) final municipal advisor registration rule takes effect today, July 1, 2014. Before engaging in municipal advisory activities, municipal advisors must register with the SEC and the Municipal Securities Rulemaking Board (MSRB). To assist municipal advisors in staying apprised of developing regulatory initiatives, the MSRB regularly updates a dedicated page on its website and provides numerous resources for municipal advisors. Access News and Resources for Municipal Advisors.

Municipal advisors can also sign up to receive regulatory notices and other information from the MSRB. Please note that the primary regulatory contact at each MSRB-registered municipal advisor firm automatically receives regulatory notices from the MSRB.

WASHINGTON — Dozens of firms have withdrawn their registrations as municipal advisors under the new regulatory regime that takes full effect Tuesday, citing a myriad of reasons for avoiding participation in a new era of muni advising.

Beginning July 1, individuals and firms providing advice to state and local governments about the issuance of muni bonds or the investment of muni proceeds or escrows must begin registering under the Securities and Exchange Commission’s permanent MA regime. More than 1,100 MAs temporarily registered with the commission, including major broker-dealer firms, single-proprietor advisory firms, lawyers, and other professionals. But by the eve of the rule’s final effective date, many of those temporary registrants had decided not to remain registered as MAs.

“I haven’t really been doing municipal advisory work, said Alexis Jackson, president of A.A. Jackson & Associates in Stone Mountain, Ga. Jackson, a lawyer and finance consultant, said she registered as an MA early in the regime because she had a client that wanted to do a tax-exempt deal. She said a subsequent change in the lending market led her to withdraw her registration in 2011, before the SEC’s final rules were unveiled, because that one deal she registered for was scuttled.

Other market participants also indicated that they are no longer active in markets that would require them to be registered MAs. Peter Kvam, manager of investments and compliance at Healthcare Community Securities Corporation in New York, said his firm was one which decided to play it safe by registering rather than risk the consequences of practicing as an unregistered MA. Although the final rules have not been effective, MAs have already been required to register under a temporary regime and have been subject to a fiduciary duty and fair play rules.

“We took the conservative approach,” Kvam said.

The company decided to withdraw earlier this year because it no longer carries 529 college savings plans, the only aspect of its business that it felt might trigger any obligation under the MA regime.

Other market participants said they simply decided not to get into the municipal advisory game after all.

“Not something I wanted to do right now,” said Mallory Factor, a manager at Caelus Consulting, which solicits business for investment firms.

Nathan Howard, an attorney who works with municipal advisors, said the many withdrawals are the result of guidance that has made it more clear who is likely to be an MA in the view of the SEC staff. In recent months, the SEC has published two sets of interpretive guidance in the form of “frequently asked questions.” That guidance explained that firms could be exempted from having to register as MAs under some circumstances, including if an issuer had retained its own independent MA, if the firms were responding to a legitimate request for proposals, or if they were offering certain types of advice permissible for their professions. Bond lawyers, for example, would not have to register as MAs as long as they do not cross the line from providing traditional legal services to providing professional financial advice or holding themselves out to be financial experts.

The recent withdrawals are reflective of the broad registration exemptions granted by the SEC that are set to take effect on July 1, which will allow many firms to provide advice without triggering any fiduciary duty obligations,” Howard said. “The withdrawals are also resulting from the growing number of firms who have determined to cease their municipal advisory business either due to prospective costly regulation or an increase in acquisition activity.”

Some market observers continue to predict that large numbers of MAs, particularly smaller sole proprietorships, are likely to fold up shop rather than deal with the fees, tests, and other requirements imposed by the still-growing MA regulatory regime. Although the MA rule is ultimately just one small piece of the 2010 Dodd Frank Act and the SEC rule is now final, the Municipal Securities Rulemaking Board is still in the process of writing rules which will dictate the behavior of muni advisors. Of central concern to dealer and non-dealer MAs alike is the MSRB’s proposed Rule G-42 on the duties of non-solicitor municipal advisors, which is undergoing revision. While the law says that MAs have a fiduciary duty to put their municipality clients ahead of their own, it is up to the MSRB to create a regulatory framework that defines precisely what that means.

SEC Muni Chief John Cross has said previously that he expects the number of registered MAs under the final regime to be similar to that under the temporary one.

The Bond Buyer
BY KYLE GLAZIER
JUN 30, 2014 3:00pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers that a revised MSRB Rule G-30, which consolidates dealers’ existing fair-pricing obligations to facilitate compliance with a fundamental investor protection regulation, becomes effective on July 7, 2014.

View the new rule or the May 12, 2014 MSRB Regulatory Notice.

WASHINGTON — The Securities and Exchange Commission’s enforcement action against Harvey, Ill., and its comptroller may give issuers pause about participating in the SEC’s self-reporting program, a top municipal bond lawyer said.

John Grugan, a partner in Ballard Spahr’s Philadelphia office, said the SEC’s most recent muni enforcement action is a perfect illustration of why it’s unrealistic to expect all issuers to participate in the commission’s Municipalities Continuing Disclosure Cooperation initiative. In a civil suit filed earlier this week in the U.S. District Court for the Northern District of Illinois,, the SEC accused the city and comptroller Joseph Letke of misusing bond proceeds and misrepresenting investment risks and Letke’s own financial interests in connection with bond offerings in 2008, 2009, and 2010. A federal judge blocked an imminent sale of the Chicago suburbs bonds at the request of SEC lawyers, an almost unheard-of step in the municipal market.

Grugan, who is co-leader of Ballard’s municipal securities regulation and enforcement group, said that the case is a straightforward misuse of bond funds action on its face, not much different from many others the SEC has charged over the years. But this case came to light during the MCDC period, and was brought by the Chicago office where MCDC architect Peter Chan works, Grugan pointed out. The MCDC allows issuers, other borrowers and underwriters to get lenient settlement terms if they voluntarily self-report certain disclosure failures to the SEC by Sept. 10, but the commission has been clear that the settlement will not apply to individuals and will not cover violations other than offering documents that paint a false picture of the issuer’s continuing disclosure record.

“This case illustrates how the SEC, once it begins its investigation, can go in different directions,” Grugan said. “It can mushroom into something that’s not controllable by the issuer.”

There is no indication that Harvey attempted to participate in the MCDC, Grugan said, adding that the kind of activity alleged in the case could be easily discoverable by SEC investigators and would not fall under the MCDC’s lenient terms, which include immunity from civil penalty for muni issuers. Some securities lawyers have said publicly that participation in the initiative is a slam dunk for all underwriters and most issuers.

Robert Feyer, senior counsel at Orrick, Herrington & Sutcliffe in San Francisco, said the case represents another exclamation point on the SEC’s increasingly vocal vows to be tough on muni securities lawbreakers.

“It’s certainly a significant action,” Feyer said.

Lawyers said it was unclear if the SEC could pursue action against Letke under the municipal advisor regime. According to court documents, Letke ran two companies which both were registered municipal advisors and provided financial advisor services regarding the issuance of municipal bonds to Harvey and other municipalities. Most of the MA regulatory regime remains in effect and most of the conduct mentioned in the complaint pre-dates the 2010 Dodd-Frank Act, after which all MAs have been subject to fair dealing rules.

The case does have some parallels with a 2001 enforcement action against Pacific Genesis Group, Inc., a municipal securities underwriting firm based in Alameda, Calif., and its former lead underwriter, David Fitzgerald. In that case, filed in late 2000, a judge ordered all proceeds of a recent bond offering be returned to investors when the SEC accused the firm of raising money for residential developments via misleading offering documents. Fitzgerald went on to lose his broker’s license.

The Bond Buyer
BY KYLE GLAZIER
JUN 26, 2014 5:25pm ET

The U.S. Securities and Exchange Commission (SEC) announced its first enforcement action under “pay-to-play” rules for investment advisers since those rules were adopted nearly four years ago. TL Ventures Inc., a Philadelphia-area private equity firm, has agreed to pay nearly $300,000 in disgorgement and penalties to settle the charges that it continued to receive advisory fees from city and state pension funds after making mayoral and gubernatorial campaign contributions.

Continue reading.

June 24, 2014

by M. Norman Goldberger, John C. Grugan, Christine O’Neil, and Tesia N. Stanley

Federal regulators went to court on Wednesday to keep a city in Illinois from bringing its bonds to market, an unprecedented step they called necessary to halt a widening securities fraud.

The Securities and Exchange Commission, in a complaint filed in United States District Court for the Northern District of Illinois, said that Harvey, an impoverished city of 25,000 south of Chicago, had sold $14 million in municipal bonds under false pretenses since 2008 and was planning to bring more of them to market this week.

Harvey issued bonds three times from 2008 to 2010, telling investors it was using the proceeds to rebuild a large Holiday Inn near a busy stretch of Interstate highway, something that was supposed to create jobs and bolster the city’s fortunes. It used a legal provision that allows cities to share the value of their bonds’ tax exemption with commercial companies for such projects.

Harvey said it would repay the debt from a dedicated stream of taxes it was counting on, including taxes collected from the travelers who would stay at the hotel. But the prospectus also called the securities “general obligation bonds.”

Instead of renovating the hotel, the S.E.C. said, Harvey was using some of the money to meet its payroll and for other general operations. The developer who received most of the bond money moved to India, leaving a half-gutted hotel building standing empty “with dangling wires and exposed studs,” the S.E.C. said. Work on the derelict site is at a standstill, and no one can stay at the hotel, much less pay the occupancy taxes pledged to bondholders.

Despite these many setbacks, the S.E.C. said, Harvey planned to bring a new batch of tax-exempt bonds to market as soon as this week — this time to build a supermarket — and its draft prospectus failed to tell prospective buyers about its previous bond disaster, which is still unresolved.

In addition to the city, the S.E.C.’s complaint named Harvey’s comptroller, Joseph T. Letke. It said that Mr. Letke, an accountant, had worked at the same time for the city and for the developer who was given the bond proceeds to rebuild the hotel. He received $269,000 of the proceeds without disclosing the payments, as required, it said.

Mr. Letke’s lawyer, Dean Polales, declined to comment.

In its complaint, the S.E.C. asked the court to prohibit Harvey and its officials from offering any municipal bonds for five years unless it retained a court-appointed independent consultant to make the offering legal. It also asked the court to make Mr. Letke forfeit ill-gotten gains and pay unspecified civil penalties.

The action against Harvey was the first time the S.E.C. sought an emergency court order to keep a municipality’s bonds off the market, according to a person briefed on the case, who spoke on the condition of anonymity because the investigation was continuing.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” Andrew J. Ceresney, director of the S.E.C.’s enforcement division, said in a statement. “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

Throughout its existence, the S.E.C. has had only limited authority to police the municipal bond market. The law assumes that cities are under the control of the states, which are sovereigns. But in recent years, as municipal bankruptcies and bond defaults have become more common, the commission has been finding ways to step up its activities in the $3.7 trillion municipal bond market.

It has censured two states, New Jersey and Illinois, for misleading investors about their pension systems, for example, saying they papered over the risk that investors might find themselves competing with pensioners for the same limited pool of dollars — something that has happened in the bankruptcy of Detroit.

Bondholders have expressed surprise and anger at the way Detroit proposes to settle its debts, prompting market participants to look more carefully at city finances in general and the quality of the resources pledged to secure bonded debt.

By MARY WILLIAMS WALSH JUNE 25, 2014

A Chicago suburb is under investigation for allegedly diverting at least $1.7 million in bond proceeds meant for a new hotel to instead pay for the municipality’s operating costs including wages, the Securities and Exchange Commission announced Wednesday.

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and its comptroller, Joseph Letke, who the SEC says received approximately $269,000 in undisclosed payments from the bond proceeds. The commission also halted a planned bond offering by the city this week via an emergency court order.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in an issued statement. “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

In 2008, 2009 and 2010, Harvey issued limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax or incremental tax from the Tax Increment Financing District created for the planned Holiday Inn development. The payback structure meant that it was vitally important to bond investors that the money raised in the bond offering was actually used to fund the hotel development. That’s because the amount of funds available to repay the bonds were derived from tax revenues collected by the project — and those revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were misled about the purpose and risks of the bonds they purchased from the city. The SEC’s release cited news reports that described the Holiday Inn hotel and conference center as “a decrepit shell” with a façade pocketed with holes and a gutted interior with dangling wires and exposed studs.

“As Harvey and Letke perpetrated the scheme to divert bond-related proceeds,” the commission said, “the hotel redevelopment project turned into a fiasco for bond investors and city residents.”

The SEC action comes as part of increased enforcement by the commission on municipalities and states. Last year, the commission reached independent settlements with the Illinois and Harrisburg, Pa. The commission had accused both governments of securites fraud. It said Illinois had misled investors about the poorly funded state of its pensions while accusing Harrisburg of misleading investors by not reporting important city financial data. Both governments reached financial settlements with the SEC and did not have to admit to wrongdoing.

This is the first fraud charge by the SEC this year against a government. The commission has hinted at more to come. This spring, the Enforcement Division announced a self-reporting offer, encouraging “issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.” In exchange, the SEC is promising “standardized, favorable settlement terms,” but did not specify what those terms could be. The offer stands until Sept. 10.

BY LIZ FARMER | JUNE 25, 2014

Moves by Head of the Agency’s Office of Credit Ratings Signal Potential Flurry of Regulatory Activity

The government’s top credit-rating watchdog has kept a low profile since taking the job two years ago to help prevent another financial crisis. That may be about to change.

Thomas J. Butler, head of the Securities and Exchange Commission’s Office of Credit Ratings, said he has referred multiple cases to the agency’s enforcement division and is helping complete several industry regulations to address quality and transparency in how big debt deals are rated.

Those moves signal a potential flurry of regulatory activity involving ratings firms, which have been largely untouched as government oversight has increased in most other financial sectors in recent years.

Mr. Butler, a 56-year-old former Citigroup Inc. C -0.19% executive, has been relatively quiet since launching the office in 2012 to oversee firms including Standard & Poor’s Ratings Services and Moody’s Investors Service. MCO +1.06% The creation of the office was mandated in the Dodd-Frank financial-overhaul law.

His office has produced annual reports summarizing industry activity and monitored ratings firms to make sure they comply with existing rules that dictate how criteria are developed for evaluating bonds and whether internal protocols are followed, among other things. Mr. Butler’s office doesn’t have direct enforcement powers over firms, but monitors their activities and can make referrals to the unit headed by Andrew Ceresney, the SEC’s top enforcement chief, for potential action. Mr. Butler declined to say how many referrals he has made or what firms are involved.

Some critics have questioned whether the office has moved quickly enough to bring substantive changes to an industry widely blamed for helping trigger the financial crisis, largely by giving top ratings to mortgage bonds that later soured and left investors with billions in losses.

They point out the three biggest firms—S&P, Moody’s and Fitch Ratings—still dominate the industry, despite lawmakers saying they hoped to attract new entrants. Momentum to adopt major revisions, such as changing the business model or standardizing ratings across asset classes, also has petered out.

“While we’ve made some progress, I’m frustrated that key reforms still aren’t fully implemented,” said Sen. Al Franken (D., Minn.), who wrote a Dodd-Frank amendment in 2010 that would have overhauled the credit-rating business model but hasn’t been adopted. Issuers of bond deals pay ratings firms to grade their deals, a model that Sen. Franken and others have said gives firms an incentive to compromise their criteria in order to win business.

In an interview, Mr. Butler acknowledged his office has work left to do, but said, “I couldn’t be happier with what we’ve accomplished.” He added that he is seeing “real results” from the firms responding to the findings in the annual reports and recommendations from his staff in routine examinations.

Other SEC officials have similarly indicated the ratings world is increasingly in focus.

Chairman Mary Jo White told Congress in late April that rules improving transparency and rating integrity “are a priority for the commission in 2014.” Mr. Ceresney, the enforcement chief, at a Wall Street Journal event last week in Washington said, “You’ll see a lot of activity” with credit-rating firms in the near future.

Since the financial crisis, the SEC has taken action against one ratings firm, Egan-Jones Ratings Co. The small firm was barred from rating certain bonds for 18 months, starting in January 2013, for allegedly overstating the number of ratings it had done. “We are glad the matter is behind us,” said Alan S. Futerfas, a lawyer for Egan-Jones President Sean Egan.

Mr. Butler is a ratings-world outsider. A Rutgers University law graduate, he spent 14 years at what became Morgan Stanley Smith Barney, Citigroup’s former wealth-management joint venture with Morgan Stanley. His roughly 40-person staff represents less than 1% of the SEC’s total workforce. Mr. Butler spends most of his time in lower Manhattan, working out of a sparse office with little more than government-issued furniture and a few photos of his dogs.

Mr. Butler said his staff is developing rule recommendations for Chairman White that clarify what disclosures should be made and how best to separate analysts from sales staff. Those recommendations, done with the SEC’s Division of Trading and Markets, will be completed versions of regulations that were first proposed in 2011 but not yet implemented.

Rating firms have largely embraced regulation and Mr. Butler’s team, saying they give investors added insight into how ratings are determined. Moody’s shares the SEC’s goals of making the ratings process easier to understand and effective, said a Moody’s spokesman.

Adam H. Schuman, chief legal officer for Standard & Poor’s Ratings Services, which is owned by McGraw Hill Financial Inc., MHFI +0.59% said Mr. Butler’s annual reports have given useful guidance on what the firm should be doing for compliance.

Many smaller firms say some of the regulations and compliance requirements disproportionally affect them, making it harder for new players to emerge. “It’s expensive and far easier for the bigger firms to absorb those costs” around email retention, recordkeeping and compliance, said Joseph Petro, chief operating officer at Morningstar Credit Ratings LLC.

By TIMOTHY W. MARTIN
Updated June 25, 2014 1:29 p.m. ET

Write to Timothy W. Martin at timothy.martin@wsj.com

SEATTLE – Small issuers and firms will be most impacted by the imminent regulatory changes that the municipal industry will soon undergo, according to issuers, underwriters, and financial advisors speaking at The Bond Buyer’s Pacific Northwest Municipal Market Symposium on Tuesday.

With just one week left before the municipal advisor rule takes full effect, market participants anticipated how the rule will impact the market.

“I’ve been a financial advisor for 28 years and there’s no question that this is the biggest change I’ve witnessed in these years,” Chip Pierce, a partner at Western Financial Group, LLC, said during the conference.

Once the rule takes effect July 1, firms providing advice on the issuance of muni bonds or the management of muni proceeds or escrows will be required to register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board.

The SEC has made clear that absent a firm’s ability to utilize one of several exclusions or exemption available in the rule, providing muni advice bars a firm from underwriting a bond issuance on the same transaction.

The amount of time and money needed to comply with the regulations is significant, panelists said.

“There’s no question this is going to disadvantage smaller firms,” Pierce said.

Small advisory firms will likely take the biggest hit from rule’s implementation, having to consolidate or lose staff in order to deal with the greater costs of compliance, according to Pierce.

That will particularly disadvantage less-frequent issuers, because small firms have historically sought their business and large firms may not see it as worth their while for an issuer that issues every three years or so, he said.

Bob Lamb, president of Lamont Financial Services Corporation, said his firm will likely end up spending 20% of its effort complying with new rule, adding 0% to its productivity.

Firms will take different strategies to deal with the greater need for compliance, whether they staff current employees or hire third parties.

Pierce likened his firm’s deliberation on how to deal with increased compliance to a game of “hot potato”—whoever was left holding the potato will have had to be chief compliance officer.

He said they ended up deciding to pay someone else to “hold the potato,” which will cost Western Financial an estimated $10,000 to $15,000 extra a year.

“This is a new landscape,” he said. “It is what it is, but it’s taking away from things we pride ourselves on.”

Another possible outcome from the rule’s implementation is a continued shift among issuers away from the tax-exempt bond market and toward the banking and direct loan market.

Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said there has already been some movement, but she wouldn’t be surprised if the new rule further contributed to the shift.

Market participants also discussed the implications of the SEC’s Municipalities Continuing Disclosure Cooperation Initiative, which aims to come down on municipal and underwriters that have violated federal securities laws.

Specifically, the MCDC initiative will address violations of Rule 15c2-12, which prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security an issuer.

It also requires that official statements contain a description of any instances in the previous five years in which the issuer failed to comply with any previous commitment to provide such continuing disclosure.

Under MCDC, underwriters and issuers have until September 10 to voluntarily fill out a questionnaire to report any type of material misstatement in return for receiving favorable settlement terms.

Smaller issuers are less likely to have the resources needed to understand and comply with the initiative, said Robert Feyer, senior counsel at Orrick, Herrington & Sutcliffe LLP, and moderator for the panel.

He added that legal counsel can help guide issuers on what might be considered material statements, but it’s up to each issuer to determine its own risk tolerance and whether it’s in their best interest to self-report.

Laura Lockwood-McCall, director of debt management division at the Oregon State Treasury, said she has thought long and hard about whether or not to cooperate with the initiative and self-report.

Since there’s the possibility that the underwriter might report on any violations of the issuer, it’s a huge risk not to report.

However, Lockwood-McCall said that before deciding whether or not to report, issuers should first go over all of their municipal bond issuances in the past ten years to see if they have, in fact, any materially inaccurate statements.

Lockwood-McCall herself created a database of all Oregon’s issuances in the past ten years, and mailed a list to the bankers on each issue to ask them to notify the state if they planned to report on anything.

“We are relying on the word ‘cooperation’ in the MCDC Initiative’s title,” she said.

Brian Hellberg, an RBC Capital Markets director for municipal finance policy and procedure, also said that there will need to be a significant amount of cooperation, especially since much of the information is in the hands of the issuer.

He referred to the situation as a “prisoner’s dilemma,” because of the possibility underwriters will self-report a problem under the MCDC program that an issuer has decided not to.

“The next two months will be about working through the process,” Hellberg said. “Not until all the cards on the table will we be able to decide about material statements.”

The consequences for an issuer that does not participate in the MCDC self-reporting program and subsequently faces SEC charges for what it didn’t report are serious, Feyer said. And underwriters have an incentive to report as much as possible, he said, because they can reduce potential future liability while there is a cap on their total financial penalties under the program.

BY TONYA CHIN
JUN 24, 2014 6:21pm ET

The Municipal Securities Rulemaking Board (MSRB) reminds municipal securities dealers that consolidated fair-dealing obligations, contained in revised MSRB Rule G-19 on suitability of recommendations and transactions, new MSRB Rule G-47 on time of trade disclosure obligations, and new MSRB Rules G-48 and D-15 on sophisticated municipal market professionals, as well as related changes to MSRB Rule G-8, become effective on July 5, 2014.

Read the March 12, 2014 MSRB Regulatory Notice.

The MSRB will host a free educational webinar about upcoming rule changes to consolidated fair-dealing obligations for dealers on Thursday, June 26 from 3 p.m. to 4 p.m. ET. Register for the webinar.

Major government associations are chastising the Securities and Exchange Commission’s Daniel Gallagher for his public slamming of pension fund management during a speech he gave last month at a Municipal Securities Rulemaking Board summit. You may recall that Gallagher took a hard line on the way that public pension fund liabilities are calculated, chiming in on the side of conservative-minded economists who say that funds hide their true liabilities. In particular, he pointed to the now familiar argument about which discount rate to use in calculating a pension’s liability (the higher the discount, or investment rate of return, the lower the assumed liability).

Gallagher accused plans of not being transparent and for playing numbers games. This week, in response, 11 government associations including the National Governor’s Association and the National Association of State Retirement Administrators, called him out for highlighting a few bad apples. “We understand the SEC’s interest in appropriate disclosure of state and local government pension obligations,” the June 16 letter said. “However, your comments could lead many to believe that the disclosure issues are systemic, rather than individualized problems.”

Almost snidely, the letter adds that the commissioner “may not be aware of” governments’ actions in this arena and goes on to list the many types of pension reforms that they have implemented in recent years to manage their liabilities, in addition to establishing a pension funding task force that made recommendations to elected officials. The letter concludes by offering to discuss these reforms and upcoming disclosures changes further with the commissioner.

Liz Farmer |
lfarmer@governing.com | @LizFarmerTweets | Google+

The Securities and Exchange Commission is seeking to shine a light on trades in the relatively opaque markets for corporate and municipal bonds.

Mary Jo White, the head of the S.E.C., said in a speech on Friday that she had asked the agency to pursue an effort to make information about bond prices more widely available. The initiative, which would require the public dissemination of price quotes generated in alternative trading systems and other electronic markets, could enhance transparency in a sector of Wall Street where middlemen may now have an advantage over investors, Ms. White said.

Just weeks after unveiling sweeping proposals for the stock market, Ms. White signaled a renewed commitment by the S.E.C. to treat oversight of bond trading as a priority. The agency in 2012 released several recommendations related to municipal bonds, but that report did not produce the changes that many in the market had expected.

The market for municipal bonds is highly fragmented, with tens of thousands of issuers and nothing resembling a centralized exchange. Even the market for corporate bonds, while more centralized and consistent than the municipal market, lacks an easy way for average investors to find information about price quotes. Bonds, in general, trade far less frequently than stocks.

A requirement to make more information public could eat into the profits of Wall Street brokerage houses, which can use the market’s opacity to their advantage.

Ms. White, in the remarks delivered to the Economic Club of New York, indicated that the S.E.C. would support other regulatory bodies as they complete separate efforts to enhance oversight of the bond markets. She said the agency would work with the Municipal Securities Rulemaking Board, a self-regulatory body, as it finalizes a rule to make sure that investors in municipal bonds have their orders executed on the best available terms.

The agency would also collaborate with the Financial Industry Regulatory Authority, Wall Street’s self-regulator, and the municipal board to help them provide guidance on how brokerage firms can follow the best-execution requirement, Ms. White said.

In addition, Ms. White said the S.E.C. would work with the two self-regulatory bodies as they write rules governing the disclosure of mark-ups in “risk-less principal” transactions. In that type of transaction, a brokerage firm executes a client’s order by simultaneously executing an identical order in the market, with the intention of eliminating its own risk. Brokerage firms can charge a markup for this service.

Ms. White contrasted the bond market with the stock market, which she said had largely benefited from advances in technology. In the bond market, also known as the fixed-income market, it is an open question whether “the transformative power” of technology and competition has “been allowed to operate to the extent it should to benefit investors,” Ms. White said.

“I am therefore 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, and its potential to achieve more widespread benefits for investors, including the broad availability of pre-trade pricing information, lower search costs and greater price competition, especially for retail investors, is not being realized,” Ms. White said.

The S.E.C. chief’s assessment of the bond markets followed her recommendations earlier this month for new rules in stocks, aimed at strengthening the structure of the stock market and improving disclosures for investors.

Her recommendations for the bond market were similarly aimed at improving disclosure.

“Properly implemented, rules providing for better pre-trade pricing transparency have the potential to transform the fixed income markets by promoting price competition, improving market efficiency and facilitating best execution,” Ms. White said.

By WILLIAM ALDEN JUNE 20, 2014 1:17 PM

WASHINGTON — The Securities Industry and Financial Markets Association has sent a letter to numerous federal regulators arguing that the joint venture structure used for the first time last week to sell tender option bonds is compliant with the Volcker rule.

The five-page letter was signed by David Cohen and Matthew Nevins, managing directors and associate general counsel for SIFMA’s municipal securities division and the asset management group, respectively. It was addressed to the regulators responsible for implementing the Volcker rule, including the Securities and Exchange Commission, Federal Reserve, Federal Deposit Insurance Corporation, Comptroller of the Currency, and Commodity Futures Trading Commission. The letter seeks to communicate to the regulators that the joint venture trust structure laid out in an accompanying term sheet is a legal solution for the TOB market, the SIFMA lawyers said.

TOB programs have traditionally provided a supply of short-term tax-exempt bonds to money market funds, and have generally accounted for approximately 25%-30% of the assets of muni MMFs, according to Fitch Ratings. In a traditional 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 sold to a money market fund and a residual certificate which may be sold to a mutual or closed-end fund or held by a bank. 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.

But the Volcker Rule, finalized late last year, prevents banks and their affiliates from sponsoring a TOB program, owning a residual certificate issued by a TOB trust, or providing credit enhancement, liquidity, or remarketing services to these programs.

The joint venture solution, first used by Merrill Lynch, Pierce Fenner & Smith in an $8.5 million deal last week, relies on an exemption in the rule. Joint ventures that exist between banks or their affiliates and unaffiliated parties, and are exempt from the rule as long as they have no more than 10 unaffiliated co-venturers and only engage in activities permitted of banking entities. Under the new structure, banking entities will provide liquidity while a co-venturer holds the floating note and another holds the residual note.

Some experts have warned that regulators might view the JVTs as a re-definition of an existing structure to get around the rules, but Cohen and Nevins said in an interview that the structure represents months of work by “various SIFMA stakeholders” and the letter is intended to inform the regulators of the group’s reasoning.

“We wanted to inform the regulators of our solution,” Cohen said. “It allows the market to move forward in an orderly fashion.”

Nevins said the various attorneys and market experts who worked on the project came to the consensus that the JVT structure complies with Volcker and is the most logical way forward.

“I think what we’ve done is in the spirit of what the regulators have done under the Volcker rule,” he said.

The JVT structure is likely to be the way the TOB market is going to operate going forward, said Cohen. Some market participants have floated a second idea, which would swap the bank sponsor out for a non-banking entity such as a mutual fund or a dealer. That option would not work for banks.

Rating agencies had previously said that the TOB market would “unwind” in the months following the final Volcker Rule, but have since dubbed the emergence of the JVT structure a positive development that can keep the market functioning.

BY KYLE GLAZIER
JUN 16, 2014 1:39pm ET

The Bond Dealers of America sent a letter to the SEC, urging limitations to the scope of its Municipal Continuing Disclosure Cooperation (MCDC) Initiative.

The letter, sent to the SEC Chairman and Commissioners states that the MCDC initiative has caused a financial and personnel investment by issuers and underwriters that goes beyond what is needed to achieve the goals of the SEC because its scope relies upon the now defunct NRMSIR system.

Specifically, the asks that the deadline be extended until December 15 and that the scope of the initiative is limited to access to information on the MSRB’s EMMA website, which dates back to 2009.

You can view the full letter here.

The self-regulatory organization overseeing municipal bonds introduced on Monday a new way for investors to analyze prices in the often opaque market.

The Municipal Securities Rulemaking Board launched a tool on its Electronic Municipal Markets Access website designed to enable users to more easily find and compare prices for municipal securities with similar characteristics, such as geography, interest rates and maturity.

The tool will provide side-by-side comparisons of price and yield for up to five bonds at a time. It also can produce a graph of a bond’s historical pricing.

“It’s another tool to allow retail investors to better understand the value of bonds that they own or are considering purchasing,” Lynnette Kelly, MSRB executive director, said. “They’re better able to have access to information so that they can have more constructive conversations with their investment professionals.”

Investment advisers said that the web tool would help them and their clients.

“It’s a really good step forward, and it’s long overdue,” said Richard Goldman, principal at Conscient Capital. “The municipal securities market has been a backwater in terms of price transparency.”

As advisers switch from putting their clients in bond funds to placing them in individual bonds, the MSRB tool will assist them in making recommendations, according to Michael Kitces, a partner and director of research at Pinnacle Advisory Group.

“Anything that provides greater transparency so that advisers can get prices for bonds is good,” Mr. Kitces said. “More transparency allows us as advisers to understand if we’re getting good execution and to hold accountable our trading and brokerage arrangements that we use.”

The EMMA tool will help investors, but it won’t be able to tell them precisely how much they should be paying for a bond because markups are still hidden, according to Bradford Pine, president of Bradford Pine Wealth Group.

“That’s where it need to be more transparent – [the price] where the adviser is buying it and where, ultimately, the client purchases it,” Mr. Pine said. “You need to work with an adviser you trust and feel comfortable with. It’s still a very fragmented market that needs be corrected.”

In another move to strengthen pricing fairness, the MSRB at its meeting in early May agreed to send a rule to the Securities and Exchange Commission that would require bond dealers to use “reasonable diligence” in obtaining the best execution price for retail investors.

The SEC must approve MSRB rules and will ask for public comment on the best-execution rule.

Without a benchmark, such as a 10-year U.S. Treasury bond, the municipal market can be difficult to navigate among 50 states and hundreds of local governments that offer debt instruments to finance construction and other projects.

Recently, Detroit, New Jersey and Puerto Rico have been embroiled in controversies over bonds.

“The MSRB needs to put pressure on issuers to update their financial positions and make that information available to investors,” Mr. Goldman said.

The biggest boon to market transparency is technology, such as the MSRB’s EMMA site, according to Ms. Kelly.

“Technology has fundamentally changed the market,” Ms. Kelly said. “The ability for retail investors to access information about pricing is better than it ever has been.”

By Mark Schoeff Jr.
Jun 9, 2014 @ 2:08 pm (Updated 3:27 pm) EST

Mark Schoeff Jr. Email @twitter LinkedIn Google
Mark Schoeff Jr. covers legislation and regulations affecting investment advisers and brokers and wants to hear from you about how Washington policymakers are influencing your business.

(Reuters) – Municipal and corporate bond dealers would have to tell investors how much they charge to cover their compensation under bipartisan legislation currently in the U.S. Senate to end secret price markups.

The proposal, quietly introduced earlier this year by Virginia Democratic Senator Mark Warner and Oklahoma Republican Senator Tom Coburn, comes as momentum is growing among U.S. securities regulators to bring more transparency to the combined $13 trillion-plus municipal and corporate bond markets.

This week, executives from Charles Schwab met with federal lawmakers, Securities and Exchange Commission officials and other regulators to advocate for requiring disclosure on municipal bond markups.

“It’s very opaque and somewhat confusing to investors,” said Peter Crawford, a senior vice president at Charles Schwab.

“One of the things we have found in this over-the-counter market is the degree of price difference from one dealer to the next can be significant.”

Most individual investors, the $3.7 trillion municipal bond market’s backbone, are in the dark about how much dealers add to prices in trades.

Complicating matters, regulation on compensation is hazy. Currently, dealers must disclose if they act as agents facilitating trades but not if they act as principals in the trades. For most trades in the municipal market, then, dealers are “riskless principals,” purchasing securities from their customers and immediately reselling them to other dealers.

Crawford, whose firm levies a flat charge of $1 per bond transaction to customers, said Charles Schwab has studied the lack of disclosure for about seven years.

The brokerage analyzed a California general obligation bond with a 5.25 percent coupon bond offered by five different dealers on its trading platform. It found the prices ran from $120.938 to $124.10, which meant on a $10,000 trade there was a $316.40 difference in prices.

The current federal push on dealer compensation in the municipal market began two years ago, when a comprehensive SEC report found individual investors pay more for bonds than institutions because they lack information, specifically about markups and markdowns.

In recent months the call for change has grown louder, with SEC Republican Commissioner Michael Piwowar saying in January retail investors must be given a better sense of markups.

Last month, his fellow SEC Republican Commissioner Daniel Gallagher said “‘riskless principal’ is basically just a fancy name for ‘agency,'” and disclosing markups and markdowns “would enable customers to assess the fairness of the execution prices.”

Meanwhile, the two self-regulatory organizations helping the SEC oversee the bond markets are focusing on the issue.

The Municipal Securities Rulemaking Board is currently taking steps that may lead to new rules on riskless principal transactions. At the same time the Financial Industry Regulatory Authority is “reviewing” the issue for corporate bonds, Richard Ketchum, its head, told reporters last month.

Crawford said this was the firm’s first visit to Washington policymakers about markups, which was inspired by Piwowar’s comments.

Thu Jun 5, 2014 3:24pm EDT
By Lisa Lambert and Sarah N. Lynch

This publication was written by members of Ballard Spahr’s Municipal Securities Regulation and Enforcement Group.

The U.S. Securities and Exchange Commission recently charged a Chicago charter school operator with defrauding investors in a $37.5 million bond offering by failing to disclose transactions that presented conflicts of interest. According to the SEC’s complaint, UNO Charter School Network, Inc. (UNO) failed to disclose a multimillion-dollar construction subcontract with a company owned by a brother of UNO’s Chief Operations Officer, as well as the potential impact of this transaction on UNO’s ability to repay its bond obligations. This announcement is notable both in itself and for what may be forthcoming: SEC officials have stated that the agency may bring charges against individuals in the ongoing investigation.

UNO has settled the complaint without admitting to or denying the charges. The settlement can be instructive for issuers and underwriters determining whether to self-report under the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC).

The MCDC, spearheaded and publicized by the SEC’s Chicago Regional Office, which is handling the case against UNO, allows issuers and underwriters to voluntarily report materially inaccurate statements made in offering documents regarding prior continuing disclosure obligations in exchange for lesser sanctions. When determining whether to self-report, however, an issuer or underwriter must determine whether its prior disclosure lapses were material—a determination that can be difficult to make, particularly in a realm involving mostly settled actions.

In announcing its charges against UNO, however, the Chicago Regional Office demonstrated that there is a category of disclosures that it considers material—those relating to the issuer’s ability to repay the bonds. As the SEC noted, “[i]nvestors had a right to know that UNO’s transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.” Determinations of whether to self-report under to the MCDC still must be made on a case-by-case basis, but this case may provide a guidepost regarding the SEC’s view on materiality.

A more detailed analysis of the complaint is available here.

June 4, 2014

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 John C. Grugan at 215.864.8226 or gruganj@ballardspahr.com or Christine O’Neil at 215.864.8228 or oneilc@ballarspahr.com.

The Municipal Securities Rulemaking Board (MSRB) today requested approval from the Securities and Exchange Commission of a proposal to amend MSRB Rule G-3(a) to: (1) limit the scope of permitted activities for a limited representative – investment company and variable contracts products to sales to and purchases from customers of municipal fund securities; (2) eliminate the FINOP classification, qualification and numerical requirements in MSRB Rule G-3(d); (3) clarify in Supplementary Material .01 to Rule G-3 that references to sales includes the solicitation of sales of municipal securities; and (4) make certain technical and clarifying amendments to Rule G-3.

These amendments will affect MSRB Rules G-3 (classifications of principals and representatives; numerical requirements; testing; continuing education), G-7 (information concerning associated persons) and G-27 (supervision).

View the rule filing.

Effective May 12, 2014, MSRB Rule A-12 was amended to consolidate MSRB registration requirements into a single rule and to create a simplified electronic registration form. Municipal advisor firms that are currently registered with the MSRB under the previous requirements must verify, update and complete their registration information in the new form by August 10, 2014. The MSRB provides a number of educational resources below to assist municipal advisors with submitting their first Form A-12.

• MSRB Registration Manual
• Checklist on Preparing to Submit MSRB Form A-12
• FAQs on MSRB Registration
• Guidance on the MSRB Municipal Advisor Registration Process
• Webinar on the New Registration Rule and Form (June 12, 2014)

The head of the U.S. Securities and Exchange Commission’s unit overseeing municipal bonds and pensions is urging local governments to come clean if they failed to keep investors informed about the state of their finances.

If they do: Localities can escape fines, while Wall Street firms that sold their bonds would see them capped at $500,000. If not: “They absolutely should be expecting harsher sanctions.”

Gaunt took over in November, policing a $3.7 trillion market coping with record bankruptcies, depleted pension funds and new rules aimed at protecting localities from banks and once-unregulated financial advisory firms.

The unit has charged New Jersey, Illinois, and Harrisburg, Pennsylvania, with fraud for misleading investors about deteriorating finances. In November, it took a new tack, fining a Washington authority that defaulted on hockey-rink bonds after hiding misgivings, marking the first financial penalty against an municipal issuer.

Following is condensed from a recent telephone interview about her priorities as the market’s top enforcement official:

Q: In March, the SEC offered leniency to municipalities and underwriters in cases where buyers were told that a borrower had been providing adequate updates on their financial affairs, even when they weren’t. They have until September to report violations. What has the response been?

A: On the one hand, it’s a little disturbing that they don’t know whether they have been in compliance. On the other hand, it’s great that people are trying to get their houses in order. We certainly hope that if they find problems, they take advantage of the initiative. They absolutely should be expecting harsher sanctions if they elect not to.

Q: Since last year the agency has been scrutinizing the disclosures of distressed borrowers. Can we expect enforcement actions to result?

A: We certainly are seeing situations where issuers would have strong incentives to be less than fully candid. We’re going to be prepared to bring enforcement actions when we find the right kind of cases. We are actively monitoring distressed issuers, including whether they are continuing to comply with their disclosure obligations. Our Harrisburg case was particularly instructive. Harrisburg had not been complying, creating a kind of information vacuum, which is particularly dangerous for an issuer that’s in distress.

Q: During the financial crisis, municipalities were hurt by complex transactions. Since Dodd-Frank, the Municipal Securities Rulemaking Board has updated its rules to put added requirements on underwriters’ dealings with municipalities. What is the agency’s approach toward enforcing regulations aimed at protecting issuers?

A: We’re looking at the conduct of banks as it relates both to issuers and investors. What you sometimes see is that conduct that hurts issuers also hurts investors. We’re investigating cases where the posture is issuer as victim, as distinct from issuer as perpetrator. Are they being dealt with fairly? Are they getting competent advice from their advisers? Are these sensible structures? Are they getting the lowest possible borrowing costs? What are the risks? Are they getting unconflicted advice? That’s a very high priority for us. That’s a core focus.

Q: Are there areas of the municipal market where you feel there aren’t sufficient regulations?

A: There’s a lot of work to be done around issues associated with markups in the secondary market, just in terms of ensuring there’s adequate disclosure to investors about what markups they’re paying.

Q: Your division also oversees pensions. What is the agency’s focus there?

A: There’s a substantial intersection between underfunded pension funds and municipal securities issuers. Accurately reporting the extent of the underfunding is important, and the failure to do so could be materially misleading to investors.

Separately, we’re focused on instances where pension funds have been victimized by bad behavior by other participants. We always have a very healthy stable of pay-to-play investigations. As we’re seeing more pensions investing in alternative investments, we’re interested in fee disclosures. Many pension funds are sophisticated. Many are not — and we’re interested in whether they’re receiving adequate disclosure about the fees associated with those types of investments.

By William Selway Jun 4, 2014

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Schoifet

Alexandria, VA – To inform the development of a professional qualification exam for municipal advisors, the Municipal Securities Rulemaking Board (MSRB) will conduct a survey of registered municipal advisors later this month. The confidential electronic survey will assess the business activities of municipal advisory professionals.

An independent survey administrator will distribute the survey to those individuals at registered municipal advisor firms who are designated as a regulatory contact for the MSRB. Survey recipients are invited to distribute it to other appropriate professionals within the firm. Municipal advisors who have previously indicated a willingness to complete the survey will also receive the survey, which will run from the week of June 16, 2014 until early July 2014.

“The MSRB hopes to collect survey information from as many municipal advisor professionals as possible,” said MSRB Executive Director Lynnette Kelly. “Because of the diversity of the industry, responses from variety of firms will play a central role in guiding the MSRB’s work to develop a professional qualifications program that makes sense for all municipal advisors.”

The MSRB will host a webinar to provide detailed instructions for completing the survey on Wednesday, June 18, 2014 at 4:00 p.m. EDT. Registered municipal advisors will receive a registration link to the webinar from the MSRB.

NABL this week sent a letter offering Treasury officials alternative proposals to the current practice of suspending the sales of State and Local Government Securities (SLGS) subscriptions when the federal debt approaches the statutory limit. In the letter, NABL recommended several non-exclusive alternatives. One was that Treasury should “only suspend subscriptions for larger SLGS purchases,” making the cutoff at $10,000,000. “Since purchases of smaller quantities of SLGS have the most difficulty with alternative adjustments, suspensions of SLGS subscriptions over [the $10,000,000 limit] would solve the problems for many local government units.”

The letter also suggests that, if necessary, Treasury should “consider an increase of the advance subscription period when extraordinary measures are in effect.” NABL went on to explain that “small issuers could in extraordinary times adjust to a longer subscription period of… 10 days,” understanding that a longer period would make it easier to adjust treasury auctions in response to subscriptions for SLGS.

NABL also suggested that SLGS terms could be limited to a “relatively short period,” as short-term treasuries “are the most difficult to bid as an alternative to SLGS. The final recommendation from NABL was to “allow subscriptions for 0% SLGS during periods of extraordinary measures.”

The NABL letter can be seen here.

Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.

Brokers who acquire bonds to fill an immediate customer order should be required to disclose how much they mark up the securities at sale, SEC Commissioner Daniel M. Gallagher said in a speech in Washington on May 29. Rules only require the broker to trade with customers at a “fair and reasonable” price, Gallagher said.

His comments underscore how regulators are focusing on the $3.7 trillion municipal-bond market, where retail investors constitute a majority of participants. The Municipal Securities Rulemaking Board is weighing a proposal to require that brokers seek the most favorable prices for clients in the municipal-bond market, which lacks a centralized exchange.

“It is still common for investors to place corporate- and municipal-bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price,” Gallagher told the rulemaking board’s annual regulatory summit.

Meanwhile, the Municipal Securities Rule Making Board said today it will be making gauging the fair price for infrequently traded municipal securities easier next week with a new Web tool allowing investors to compare prices of similar bonds.

Gallagher also criticized state and local governments for understating the risk of their bonds by undervaluing pension liabilities. Lax accounting practices used to estimate those future payments “can amount to a fraud on municipal bond investors,” Gallagher said.

“In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games,” he said.

JUNE 2, 2014 • BLOOMBERG NEWS

(Reuters) – A Chicago charter school operator lied to holders of $37.5 million of municipal bonds about conflicts of interest and risked having to liquidate its schools, the U.S. Securities and Exchange Commission said on Monday in charging the operator with defrauding investors.

The SEC said UNO Charter School Network Inc did not admit or deny the charges, but agreed to a settlement where it would improve its internal procedures, including appointing an independent monitor. The commission’s enforcement division is continuing to investigate, as well. The attorney for UNO did not respond to requests for comment.

The charges and settlement stem from a spending scandal that led the state of Illinois to suspend grants to UNO, which operates 16 charter schools. The scandal also prompted the resignation of UNO’s long-serving Chief Executive Officer Juan Rangel in December, according to the Chicago Sun-Times.

According to a complaint filed in federal court in Chicago, UNO breached a conflict of interest provision in grants it received from the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three schools. It contracted with two companies owned by its chief operating officer’s brothers, with one company installing windows for $11 million and the other acting as an owner’s representative during construction. One of the brothers was a former UNO board member, as well, the SEC said.

The bond offering document had a specific section assuring investors of a “robust” policy against conflicts of interest, the SEC said. UNO also failed to tell investors that the commerce department could take back all of its grant money if the provision was violated.

“Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools – the very revenue-producing assets essential for repayment of the bonds,” the SEC said in a statement.

For more than a year the SEC has cracked down on the $3.7 trillion U.S. municipal bond market, often using its greatest regulatory power over tax-exempt debt – citing issuers for not disclosing information important to bond buyers.

When it comes to charter schools, though, credit rating agencies have led the charge. Last July Fitch Ratings said the average charter school it rates had speculative-grade credit as the schools, which receive charters from their local districts to operate independently, had burdensome debt levels and “breakeven” margins.

Over the course of five years, UNO received $280 million in public money but had very little oversight from Chicago’s educational agencies, according to a profile published in Chicago Magazine in February.

WASHINGTON Mon Jun 2, 2014 2:41pm EDT

Read the Advisory.

Retail investors buying municipal bonds may overpay for their trades because brokers aren’t always required to disclose their commissions, according to a member of the U.S. Securities and Exchange Commission.

Brokers who acquire bonds to fill an immediate customer order should be required to disclose how much they mark up the securities at sale, SEC Commissioner Daniel M. Gallagher said in a speech in Washington yesterday. Rules only require the broker to trade with customers at a “fair and reasonable” price, Gallagher said.

His comments underscore how regulators are focusing on the $3.7 trillion municipal-bond market, where retail investors constitute a majority of participants. The Municipal Securities Rulemaking Board is weighing a proposal to require that brokers seek the most favorable prices for clients in the municipal-bond market, which lacks a centralized exchange.

“It is still common for investors to place corporate- and municipal-bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price,” Gallagher told the rulemaking board’s annual regulatory summit.

Gallagher also criticized state and local governments for understating the risk of their bonds by undervaluing pension liabilities. Lax accounting practices used to estimate those future payments “can amount to a fraud on municipal bond investors,” Gallagher said.

“In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games,” he said.

By Dave Michaels May 29, 2014

To contact the reporter on this story: Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo, Gregory Mott

WASHINGTON — Issuers are disclosing more failures to comply with their continuing disclosure agreements than in past months — a development some market participants said stems from a Securities and Exchange Commission’s program encouraging them and their underwriters to self-report instances in which bond documents falsely stated the issuer was in compliance with its CDA.

Event notices of failures to comply with CDAs posted by issuers to the Municipal Securities Rulemaking Board’s EMMA website in April and May far exceeded those in any of the previous several months before the announcement of the SEC’s Municipalities Continuing Disclosure Cooperation initiative on March 10.

Searches for such event notices reveal almost 300 were posted in both April and May, compared with less than 100 in February.

The MCDC focuses only on OS’ that omitted past disclosure failures. Correcting past mistakes does not shield an issuer from SEC action, but some market participants said the controversial program’s existence has spurred a much more detailed look at whether any disclosure failures have remained unacknowledged.

“We’re taking a second look to make sure,” said Anthony Inverso, a senior managing director at municipal advisor firm Phoenix Advisors in Downingtown, Pa.

Phoenix filed a May 27 notice on behalf of one of its clients, Hamilton Township, N.J., indicating that the municipality failed to file its annual financial information in a timely manner in 2008, 2009, and 2010. Under a provision of the SEC’s Rule 15c2-12 on disclosure, an OS must disclose anytime within the last five years that the issuer failed to meet its self-imposed deadline for filing annual financial and operating information filing. But in 2010, Hamilton sold more than $24 million of general obligation bonds and said in the official statement that its filings were late only in 2002, 2003, 2006, and 2007.

The MCDC allows issuers and underwriters to get favorable settlement terms if they voluntarily report their own CDA violations by Sept. 10, when the initiative expires. The program creates what SEC enforcement officials have termed a “modified prisoner’s dilemma,” in that it creates tension between issuers and underwriters who can effectively turn one another in to the SEC.

Dealer groups have said most firms will probably participate in the MCDC, tempted by the promise of relatively low financial penalties, which cannot exceed $500,000. Issuers face no financial penalties if they participate, but would effectively be pleading guilty to securities fraud and would be it with an order to cease and desist from further such violations.

Inverso said he is very aware of the MCDC and the SEC’s increased scrutiny of continuing disclosure in general. The SEC issued a risk alert in March 2012 warning that underwriters can be exposed to enforcement action if they do not have policies and procedures in place that allow them to reasonably determine that issuers will comply with their continuing disclosure obligations.

In November, the SEC collected the first ever financial penalty from a muni issuer when it fined both an issuer in Wenatchee, Wash. and its underwriter Piper Jaffray & Co., in connection with misleading investors with false information in an official statement.

“It’s important to make sure everything is done to a ‘t,'” Inverso said. “You could get the wrath of the SEC on you.” Inverso added that the SEC’s intense focus on this issue will probably result in many issuers making corrections to their filings on EMMA.

Some issuer officials have questioned whether the MCDC initiative is an SEC scare tactic, but the commission has maintained that the purpose of the entire effort is to improve the disclosure behavior of market participants.

“You may see a flood,” Inverso said of the corrected filings and past failure notices. “I think you’ll see quite a few.”

Issuers who participate in the MCDC will have to take remedial action to correct their failings, including filing any necessary notices, annual financial reports, or other obligated information to EMMA. They would have 180 days after the SEC files the MCDC case to correct delinquent filings. Securities lawyers said it is unlikely that any issuers have concluded an MCDC agreement yet, but that many are aware of the program and are taking it seriously.

Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, said he does not know if issuer notices of disclosure failures are connected to the MCDC program, but acknowledged that it has “magnified” awareness of 15c2-12 obligations. Many dealer firms are still in the process of looking back over the last five years’ worth of their transactions to see if they have any problematic ones that might warrant self-reporting, he said.

Some issuers said their recent corrections had nothing to do with SEC activity. Rockland County, N.Y. disclosed in an event notice filed on May 27 that it had not filed notices of its rating changes in a timely fashion several times from 2009 to 2012, during which time both Standard and Poor’s and Moody’s Investors Service cut the county’s rating multiple notches. Stephen DeGroat, deputy commissioner of finance for Rockland County, said the notice wasn’t inspired by any looming SEC threat, but is instead part of the county’s continuing effort to recover from recent hardship.

Cindy Epperson, finance and budget director for Yakima, Wash., said she has heard of the MCDC and knows the SEC is becoming more serious about preventing disclosure-based fraud. But she said that Yakima’s recent admission that it failed to disclose bond insurer downgrades and was late filing some financial operating data was prompted by a new bond offering and the past mistakes were detected either by the underwriter or by bond counsel.

Securities lawyers said issuers should be making an effort to correct past mistakes on EMMA, but added that there is no “one size fits all” advice for issuers considering whether or not to participate in the MCDC if they find themselves eligible.

“We’re trying to encourage issuers to review their records,” said Teri Guarnaccia, a partner at Ballard Spahr in Baltimore. “We think that if they found a failure, they should correct it.”

Guarnaccia said the key issue for participation in the MCDC is whether an issuer’s claim in its OS that it was in compliance with its CDA, when it wasn’t, is materially misleading. The SEC has said it is highly unlikely to offer any guidance on what it would consider material, despite calls from issuers, underwriters, and many attorneys to do so. Materiality has generally been defined in Supreme Court cases as whether an investor would want to know the information in question before making an investment decision.

Guarnaccia said underwriters are probably more likely to have a tendency to report more failures as material than issuers. She added that, while making corrections or new disclosures on EMMA will not save an issuer from SEC scrutiny if a past bond sale had a misleading OS, it will at least prevent future OS’ from containing false statements.

Kenneth Artin, a shareholder in Bryant Miller Olive’s Orlando office, said his firm is getting calls from issuers asking them what to do. “It’s a case-by-case situation,” he said. “It has heightened the awareness of continuing disclosure.”

Orrick, Herrington, & Sutcliffe has put together a national task force of its lawyers to work on the MCDC, said Roger Davis, a partner in the firm’s San Francisco office and chair of its public finance practice. That task force includes former SEC muni enforcement leader Elaine Greenberg, who joined Orrick’s Washington, D.C. office last year. Davis said there is no generic advice to be offered to potential MCDC participants, and called counseling such clients a “tricky exercise.”

“This is occupying a lot of people’s time and attention,” he said.

Market participants have expressed a desire to see the MCDC extended beyond its current expiration date, to include the remainder of 2014 or possibly beyond. SEC officials have downplayed that possibility.

BY KYLE GLAZIER
MAY 30, 2014

WASHINGTON — Two members of Congress are urging federal regulators to reevaluate a proposal to exclude municipal bonds from qualifying as high quality liquid assets under banking rules designed to ensure banks are equipped to handle severe financial and economic stress.

Reps. Gwen Moore, D- Wis. and Terri Sewell, D- Ala., made the request in a two-page letter sent to Federal Reserve chairman Janet Yellen, Federal Deposit Insurance Corporation chair Martin Gruenberg, and Comptroller of the Currency Thomas Curry on Wednesday. Both women are members of the House Committee on Financial Services, which has jurisdiction over banks and capital markets.

The two lawmakers are the latest to question the decision not to classify munis as HQLA in the rule that the Fed, FDIC, and Comptroller’s office proposed in October.

The proposed rule would require large banks to maintain a minimum liquidity coverage ratio, defined as the ratio of HQLA to total net cash outflows. Assets would qualify as HQLA if they could be easily and immediately convertible to cash with little or no loss of value during a period of liquidity stress.

The rules could be finalized as soon as this summer, and become effective Jan. 1. Local government groups, banks, and others have already argued that a failure to include munis will hurt the market by making tax-exempt securities a less attractive investment for banks.

Moore and Sewell wrote that they are “concerned” about the rule as proposed. Including munis as HQLA would actually make the rule stronger by diversifying investments and therefore reducing systemic risk, they argued in the letter argues.

“In fact, during the 2008 financial crises, classes of municipal bonds, specifically highly-rated dollar-denominated general obligation and revenue bonds, exhibited greater price stability than comparably rated corporate bonds,” they told the banking regulators. “Presumably, this is due to the low default rate of these securities.”

The lawmakers also wrote that munis have a lot in common with the securities already classified as HQLA under the proposal, such as corporate bonds. Munis trade over a real-time reporting system and the muni market includes a diverse range of participants, the letter noted, adding, the Fed already accepts municipal bonds as collateral for overnight lending.

Regulators said that they did not include munis as HQLA because “these assets are not liquid and readily-marketable in U.S and thus do not exhibit liquidity characteristics necessary to be included in HQLA under this proposed rule.”

Moore and Sewell urged Yellen, Gruenberg, and Curry to collaborate with the Securities and Exchange Commission and Municipal Securities Rulemaking Board to “further evaluate” the proposal and reach “additional findings.”

BY KYLE GLAZIER
MAY 28, 2014

The Municipal Securities Rulemaking Board (MSRB) next week will introduce a new tool to allow investors and others to more quickly and easily gauge the trade price of a municipal bond on the Electronic Municipal Market Access (EMMA®) website. EMMA’s price discovery tool will enable users to find trade prices of municipal securities with similar characteristics, which can be helpful in assessing the potential value of a security that has not traded recently. Additional enhancements to the display of trade data on EMMA will help users visualize trends in municipal bond trade prices over time.

Read about EMMA’s price discovery tool.

Register for a webinar tour of the new tool on Thursday, June 19, 2014.

WASHINGTON – Securities and Exchange Commission member Daniel Gallagher said Thursday that pension and other post-employment benefit liabilities need to be made more transparent for investors, and argued for a universal “disclosure baseline” that all cities should use.

Gallagher, who has been outspoken on his interest in the muni market and who told The Bond Buyer last year that he had taken a “blood oath” to keep the SEC’s attention on munis, made the remarks at the Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit here. The summit was a non-public event open to regulatory officials and staff from the SEC, MSRB, Financial Industry Regulatory Authority, and others, an MSRB spokeswoman said.

Recent accounting standard reforms undertaken by the Governmental Accounting Standards Board have improved transparency for investors in municipal securities, Gallagher said, but take a step back by doing away with the annual required contribution and a need for more OPEB transparency remains.

“The ARC was the amount plan sponsors had to pay to amortize unfunded liabilities over a maximum 30-year period,” Gallagher said. “Every plan was required to disclose the ARC, and so it was a well-defined, easy-to-use measuring stick to determine whether plan sponsors were meeting their funding obligations. While I understand the need to divorce the technical nature of accounting for pension promises from the political nature of funding those pension promises through the state budgetary process, removing the ARC will diminish transparency on this important issue.”

Gallagher said he hopes GASB will revisit its standards again in time, but added that supplemental disclosure could be a help for investors more immediately. Municipalities should value and disclose their total liabilities using a risk-free discount rate such as the treasury yield curve, Gallagher suggested. They should then calculate and disclose a baseline plan contribution equal to the amount actuarially necessary to fully fund the plan.

“Investors would then be able to readily compare financials calculated using GASB standards and disclosures about the current level of plan funding against this common baseline,” he said. “Entities would be free to explain to investors why the differences exist.”

Gallagher also spoke about three steps muni regulators can take in the near future to improve the secondary market — requiring disclosure of riskless principal markups, improving post-trade price transparency, and adopting a best execution rule.

Commissioner Michael Piwowar has also made public comments recently about plucking some of this “low hanging fruit” that would not require radical overhauling of the market or legislative action.

Riskless principal transactions occur when a dealer almost simultaneously buys and sells securities, thereby taking on little or no risk that the market will move against the firm during that short time. The SEC’s comprehensive 2012 report on the municipal market recommends the MSRB consider requiring dealers to disclose to customers any markups or markdowns on these transactions.

“Given that ‘riskless principal’ is basically just a fancy name for ‘agency,’ there is no real reason to perpetuate this dichotomy,” Gallagher said. “Disclosure of the markup or markdown in riskless principal transactions would enable customers to assess the fairness of the execution prices.”

The MSRB should consider amending its Rule G-15 on confirmation to require this disclosure, he said.

Gallagher said the fixed income markets are a mystery to most investors, and drew a Hollywood comparison to what the bond market looks like.

“Maybe a good approximation of today’s debt markets are the scenes from the equity markets of 25 years ago as portrayed in ‘The Wolf of Wall Street,’ he said. “Although I do hope there is a lot less fraud, and at least a little less debauchery, than what was depicted in that film. It is still common for investors to place corporate and municipal bond trades by calling their broker for a quote, without much insight as to whether they are receiving best execution and a fair price.”

The MSRB has already proposed a best execution rule that would require broker-dealers to use “reasonable diligence” to obtain the best price for a customer based on prevailing market conditions, and is also exploring options for improving both pre and post-trade transparency on its EMMA website.

BY KYLE GLAZIER
MAY 29, 2014

Minneapolis, MN, May 20, 2014 – SIFMA today issued the following statement from Kenneth E. Bentsen, Jr., SIFMA president and CEO, after his luncheon remarks at the Government Finance Officers Association (GFOA) Annual Meeting taking place May 18-21, 2014 in Minneapolis:

“SIFMA is committed to promoting efficient municipal markets that facilitate capital formation, investor opportunity and economic growth. The municipal bond markets fuel local economies through infrastructure investment and job creation – in fact, state and local governments have already accessed over $88 billion in capital this year. It is vital to the prosperity of U.S. communities that this public-private partnership remain strong and not be constricted by unnecessary regulatory reform. Specifically, SIFMA is concerned that in more than one occasion, regulators have taken actions that work to the detriment of the municipal bond markets and state and local government issuers.

“For instance, in the case of the recently approved municipal advisor rule, the SEC incorrectly interpreted legislative history to create new burdens for both underwriters and issuers, as opposed to establishing a much needed, industry supported, regulatory framework for otherwise unregulated financial advisors. We are also concerned that the SEC’s Municipal Continuing Disclosure Cooperation Initiative (MCDC Initiative) creates a prisoner’s dilemma by trying to incentivize underwriters to report on their clients under the threat of penalty by the SEC. Instead, the SEC should be focusing on helping issuers comply with their obligations in an efficient manner and ensure investors have the information they need going forward. In the tax arena, we are closely monitoring the threat to end the tax-exemption for municipal bond interest, which would lead to higher capital costs and decreased municipal investment.

“SIFMA is dedicated to working with regulators and market participants to help craft well thought out rules and business practices that strike the appropriate balance between investor protection, safety and soundness and market efficiency. We are also working to stay ahead of future threats including systemic cyber attacks or other emergency scenarios that could impact the municipal markets and the industry’s broad ability to fulfill its role of intermediating capital and credit between investors and end users. We remain steadfast in our goal of promoting efficient, resilient municipal markets that can facilitate economic growth across the country.”

Release Date: May 20, 2014
Contact: Liz Pierce, 212.313.1173, lpierce@sifma.org

This month, Standard & Poor’s Ratings Services (“S&P”) sent letters to all issuers of the bonds it rates advising the issuers to provide all relevant documentation related to any private debt, including bank loan financing, that the issuer enters into.

What Type of Debt Does S&P Want Disclosed?

• Direct Bank/Private Loans
• Private Placements
• Private Debt
• S&P is looking to be notified of all such debt, regardless of whether or not such additional debt is rated by S&P.

What Documentation Is S&P Looking For?

• All relevant documentation
• Form of Note or Bond
• Loan or Financing Agreement
• Covenant Agreement
• Security Documentation (mortgages, security agreements, etc.)

When Does S&P Want the Information?

No later than promptly following the closing of the transaction, though preferably before closing.

What Is the Consequence of Not Disclosing?

Risk suspension or withdrawal of your S&P rating.

While S&P is requiring direct disclosure of the referenced debt to it, bondholders and their representatives have also encouraged issuers to voluntarily post information about such bank loans and private debt on the Electronic Municipal Market Access (“EMMA”) website, which is maintained by the Municipal Securities Rulemaking Board (“MSRB”). In 2012, the MSRB published a notice in which it encouraged, but did not mandate, issuers to post such information in order to provide timely access to investors and other market participants to allow them to make informed investment decisions. The MSRB encouraged the filing of either a PDF of the appropriate loan documents or a summary of the transaction, including the name of the lender, payment dates, maturity and amortization, prepayment provisions, purpose, security, tax status, guarantees, events of default, and remedies, among other information.

Any issuer considering voluntary disclosure on EMMA or with questions on when and what to send to S&P may wish to consult with counsel prior to any disclosure. The attorneys in Day Pitney’s Municipal Finance Group routinely counsel clients on such matters. Please feel free to contact any of the attorneys listed to the right of this alert if you would like to discuss this alert or your disclosure obligations.

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.

Last Updated: May 22 2014
Article by Namita Tripathi Shah
Day Pitney LLP

 

 

The SEC Office of Municipal Securities today issued an updated set of Frequently Asked Questions concerning municipal advisors. The updated FAQs are available here. The updated FAQs include questions concerning obligated persons, investment strategies and proceeds of municipal securities (including pension obligation bonds), the engineering exclusion, the bank exemption and the attorney exclusion. The original FAQs, which were issued on January 10, 2014, are included in the document released today. The date of each FAQ is at the end of the answer.

 

 

 

The BDA filed a comment letter with the SEC asking for them to summarily suspend the MSRB’s proposed rule change consisting of new rule A-11, on $300 assessments for municipal advisor professionals.

Specifically, the BDA asked the SEC to suspend the implementation of the new rule because the assessment is unduly burdensome for broker-dealers and would affect middle-market dealers disproportionately. Additionally, we asked that the MSRB perform a calculation as to how much money they anticipate collecting from the $300 assessment for municipal advisor professionals so that the MSRB can make a direct correlation between the money it collects and the money it spends on the costs and expenses of operating this wholly new municipal advisor regime. We believe that since MSRB will be using the additional monies from these assessments to create the municipal advisor regulatory regime, it should outline just how expensive this regulatory activity will be so that it correlates with the monies it collects from municipal advisors and would not take from the underwriter assessment fees it already collects from broker-dealer firms.

You can find the final letter here.

05-22-2014

 

Today, the BDA submitted a comment letter addressing MSRB Draft Rule G-3 on professional qualification requirements for municipal advisors.

Specifically, the letter addresses the following:

• All municipal finance professionals should have the same training;
• BDA suggested alternatives to the MSRB’s approach so as to alleviate some of our anticipated concerns;
• The rule, as proposed, would be prohibitively costly to the industry; and
• A suggested delay in implementation.

You can find the final comment letter here.

The NFMA Advanced Seminar Co-Chairs, Dan Berger and Chris Mauro, are forming their steering committee to plan the Fall 2014 Advanced Seminar on Municipal High Yield. The event will be held in Chicago, Illinois at The InterContinental Chicago Magnificent Mile from Thursday, October 23 through Friday, October 24, 2014.

Steering committee responsibilities include participating on regular conference calls (two or three times per month), reviewing panel ideas, and seeking qualified moderators and panelists. Each steering committee member will be responsible for organizing one panel. Participation on the steering committee neither guarantees nor requires participation as a speaker or moderator.

Interested parties should contact Dan Berger at daniel.berger@thomsonreuters.com or Chris Mauro at chris.mauro@rbccm.com by Friday, May 30th. Please also include information on the sectors you cover or any relevant expertise relating to Municipal High Yield. Dan and Chris also invite all members to submit ideas for panel topics and/or speakers.

At the recent May meeting, the NABL Board of Directors selected the following members to participate on the 2014 Nominating Committee to select the nominees for the 2014-2015 Executive Committee and Board of Directors: Scott Lilienthal, Chair, Allen Robertson, Vice Chair, Antonio Martini, Carol McCoog, Deanna Gregory, Stefano Taverna, and Stephen Weyl.

 

 

NABL members are encouraged to submit nominees for Board positions to Linda Wyman, NABL COO, no later than Monday, June 16, 2014. Submissions should include a description of the nominee’s qualifications and past and current NABL committee and project participation. The Committee will consider all qualified nominations from the membership. The list of the current Board of Directors can be found here.

 

 

The candidates selected by the Nominating Committee for the 2014-2015 Executive Committee and Board of Directors will be sent to the membership by August 15, 2014, thirty days prior to the Annual Membership Meeting, in accordance with the NABL By-Laws. (Additional nominations from the floor are accepted only if provided in writing to the Chief Operating Officer and the President, not less than 14 days prior to the Annual Meeting.) The election will take place on Wednesday, September 17 during the 39th Bond Attorneys’ Workshop at the Fairmont Chicago.