Rapidly developing AI-powered technology is making it easier to appropriate the public sector’s financial information for proprietary uses. Businesses that slice and dice this data should be renters, not owners.

Earlier this year, I explained how a new federal law, the Financial Data Transparency Act (FDTA), will require states and localities to prepare financial information in machine-readable forms. Since then, there has been a lot of back-and-forth between the FDTA bill’s sponsors and some of the professional associations about implementation, the role of the federal agencies assigned to receive this information, the implementation timetable, and the scope of what’s to be covered. Critics call it a Procrustean solution in search of a problem.

While all that’s been going on, however, a tectonic shift in information technology has taken place featuring generative artificial intelligence systems, machine learning and rapidly evolving large language models that surpass the buzzy ChatGPT facility that is now so familiar to many. It’s now a sprint for these AI systems to develop superior capabilities to ingest information of all kinds, including images, and to create and manipulate databases, compile information in user-friendly formats for analysts and decision-makers, and deliver actionable analytics that are increasingly faster, cheaper and more insightful. Literally billions of dollars will be invested in this new AI technology in coming years.

The ownership of databases, analyses and related intellectual property scarfed up and refabricated by these systems is a burning issue that will spill into the governmental finance arena in short time. There is a non-trivial risk of concentrated monopoly or oligopoly control over powerfully AI-curated versions of what starts out as public information but quickly becomes private intellectual property when compiled, dissected, analyzed and commercialized by a proprietary machine learning system.

Continue reading.

governing.com

by Girard Miller

Nov. 14, 2023

Resilient and liquid: Moody’s annual report offers an overall picture of strength and stability for munis. We explore the key findings.

Toward the end of July, Moody’s Investors Service released its annual municipal bond market snapshot, US municipal bond defaults and recoveries, 1970-2022, with updates through 2022. In addition to noting that the muni sector remained resilient and strongly liquid in 2022, the report continued to affirm two hallmark benefits muni bonds offer. First, defaults and bankruptcies remain rare overall: just one in 2022. Second, municipal credits continue to be highly rated compared to corporates, and, indeed, in 2022, in general, the sector saw ratings continue to “drift up,” and global corporates’ ratings drift down. And according to Moody’s: “The five-year average defaulter position was 97% for municipals and 84% for global corporates.”

An important observation, noted, once again, in this year’s report, was that over the 53-year study period: “Any one default may only reflect the idiosyncrasies of that individual credit, and may not represent a general sector trend.”

Continuing a theme noted in the previous year’s report, in relation to the effects of the pandemic, Moody’s observed that, in addition to “lingering effects with downstream credit consequences including escalating inflation” and the acceleration of remote learning and work, there are not only “potential longer-term effects for K-12, higher education and the mass transit sector…”, but also changes “in municipal revenue structures from shifts in commercial real estate or other consumer preferences.” An eye should be kept on all of these in the context of the municipal bond market.

Muni Bond Defaults Remain Rare

The report illustrated the fundamental difference between municipal and corporate credits and drew attention to the sector’s “infrequent rated defaults” and its “extraordinary stability.”

While the average five-year municipal default rate since 2013 has been 0.08%, this figure also matches that for the entire 53-year study period from 1970 to 2022. In contrast, the comparable figures for global corporates were 7.8% since 2013 and 6.9% since 1970, respectively.

Puerto Rico remains “ … a reminder of the power of credit fundamentals, such as leverage, operational balance, and economic capacity, over ostensible security features written on paper. While legal security will influence recovery, credit fundamentals drive defaults.”

This year’s report once again notes that “ … we have yet to see a rated default due to natural disasters.” And that, although the small town of Paradise in California was nearly destroyed, it has continued to make its bond payments.

Continuing Stability for Muni Bonds

In 2022, in addition to rating upgrades outnumbering rating downgrades, there was less rating volatility and were fewer rating changes than in prior years. And, when compared to that of global corporate bonds, rating volatility has been “significantly lower.” (The stability and strength of the municipal sector’s credit quality in the last 10 years has benefited from “ … accelerated economic recovery and growth across many parts of the US over the two years leading into 2020” and after that from a combination of federal stimulus support and an influx of liquidity.)

According to the report, municipal credits remain, typically, very strong, and “their rating distribution is substantially skewed toward the investment-grade, where ratings tend to be more stable.”

The report added that the municipal sector overall remained highly rated, with approximately 91% of all Moody’s-rated municipal credits falling into the A category or higher as of the end of 2022, the same as in both 2020 and 2021. Further, at the end of 2022 (as in 2021 and 2020), the median rating for U.S. municipal credits remained at Aa3. This continued to stand in stark contrast to the median rating for global corporates, which was, once again, at Baa3 (2021: Baa3).

Muni Bond Market Exhibits Soundness and Resilience

As we mentioned last year, while we continue to argue that municipal bonds still offer a fiscally sound vehicle for generating an income stream free from federal and some state taxes, it remains challenging to obtain the same level of timely disclosure from issuers as one sees in other asset classes. Despite this, the muni market’s behavior not only during the COVID crisis in 2020 and 2021 but also after that is prima facie evidence of both its (and muni bonds’) solidity and resilience.

According to Moody’s report, there were only 115 distinct Moody’s-rated defaults, representing a little over $72 billion, across the whole universe of more than 50,000 different state, local, and other issuing authorities between 1970 and 2022.

As Moody’s states, while the U.S. public finance sector remains remarkably stable and experiences infrequent rated defaults, there remain caveats, especially as a result of how it has evolved. In the first instance: “There is a growing evidence that legal security, while important in recovery, is a weak shield against default when credit fundamentals are poor.”

In the second, as noted last year, the challenges associated with demographic shifts (aging and relocating populations—affecting tax receipts), substantial increases in pension and retirement healthcare leverage, and “the associated heightened exposures to equity markets.”

Finally, it is important to note that, with reference to both this study and Moody’s ratings in general, its rated universe is, actually, exceeded by that of the U.S. municipal debt market: the company estimates it covers around a third of municipal bond issuers, “but a substantially larger proportion of outstanding debt.”

Looking at the rated and unrated market together, Moody’s noted that: “Disclosures reveal that much of the risk in the US municipal debt market after Puerto Rico’s defaults lurks in two sectors: senior living and local government special districts. These two sectors represented nearly 60% of the 191 missed payments we observed in 2022, with Puerto Rico representing much of the remainder.” Going forward, therefore, it will be interesting to monitor both these sectors.

Despite this, we still believe that municipal bonds remain important to the core strategy of constructing an individual portfolio.

VANECK

By Tom Butcher
Director of ESG

NOVEMBER 19, 2023

As the timeline for implementing the Financial Data Transparency Act grows shorter, the Securities and Exchange Commission is teaming up with other federal regulators in an attempt to allay fears about implementation.

“There’s no new disclosure requirements, standards or timelines, it’s just about structured data,” said Dave Sanchez, director of the SEC’s Office of Municipal Securities.

The comments came during a panel discussion produced by XBRL US on Thursday. The FDTA was passed last year as a remedy for providing more transparency to the financial markets by introducing machine-readable formats into the Municipal Securities Rulemaking Board’s EMMA system, which tracks the muni market.

The SEC is in charge of developing the standards for how the data will be submitted to the MSRB. The upcoming deadlines include publishing proposed rules by June 2024, which will kick off the public comment period. Determining the standards is set for December 2024, with specific rulemaking to be in place by 2026.

Sanchez is especially interested in hearing from industry stakeholders. “We’re happy to hear from anybody who thinks they have a good idea about how this should work,” he said. “We really encourage people to come in and talk. We’ve had a lot of conversations with various stakeholders, and we really appreciated the input.”

Detractors to the mandated changeover point to the widely divergent nature of the muni market, a point not lost on the MSRB. “Creating a unified database of all the issuers, all the obligors in the muni market, is much harder than it sounds,” said Liz Sweeney, president of Nutshell Associates, and board member of the MSRB. “There are roughly 40,000 issuers.”

Sweeney revealed that the current system has limitations on accuracy. “Everybody in the muni market who does research knows exactly what I’m talking about. Having a unified database that says, ‘nope, all these fourteen iterations of the same entity is one entity’ is really important.”

Issuer representatives have largely been opposed to the FDTA including the Government Finance Officers Association which believes the implementation will impose financial hardship and require additional labor to implement the system while not offering any new data.

Emily Brock, director of the GFOA’s federal liaison center, was cheered by the call for input by the regulators.

“Both Joel Black, chair Government Accounting Standards Board, and Dave Sanchez said several times, ‘you need to send in your comments’ and I don’t think that was necessarily aimed at the technology providers. I think they are saying it especially to the issuers,” she said.

The regulators are wrestling with a number of issues including which machine-readable language will replace the PDFs currently serving as EMMA’s backbone. Which data gets converted is another sticking point. “The muni market has thousands of nonprofit issuers, hospitals, charter schools, and universities,” said Sweeney. “It’s a very large, heterogenous market so you really want to think about that breadth of information submitted to the MSRB.”

Entities that do not follow Generally Accepted Accounting Principles, including the state of New Jersey, provide another wrinkle to the plan. “We know there are a number of non-GAAP accounting states,” said Sanchez. “To figure out exactly what portion of those are actually issuers is something that’s actually useful to do.”

The tech industry is already jockeying for support positions, but the SEC is advising patience.

“A lot of messaging for us has been ‘Wait until the standards are out,’ because unfortunately a lot of people will be scared into spending money and taking steps that were way too soon,” said Sanchez.

By Scott Sowers

BY SOURCEMEDIA | MUNICIPAL | 11/10/23

The November issue of the Municipal Analysts Bulletin is available.

Click here to read about NFMA and Constituent Society activities.

On October 30, 2023, the Securities and Exchange Commission issued an order (the “Order”) that grants exemptive relief under Rule 15c2-11 under the Securities Exchange Act of 1934 to brokers and dealers that publish quotations with respect to fixed income securities sold in compliance with Rule 144A. This order is the latest attempt to quell the fixed income market distress created in 2021, when the SEC staff took the position that Rule 15c2-11 is applicable to quotations published with respect to fixed income securities. During the five decade period prior to that point, the markets, as well as FINRA, understood the rule to apply only in the context of the equity securities markets.

The first attempt to calm the market came on December 16, 2021, when the SEC staff issued a no-action letter making clear that the rule does not apply to exempted securities (such as securities issued by Freddie Mac and Fannie Mae), municipal securities and SEC-registered fixed income securities and providing a phased-in implementation schedule for other types of fixed income securities. Under that phased-in approach, quotations relating to Rule 144A securities could be published without regard to Rule 15c2-11 until January 3, 2023. However, beginning on that date, brokers and dealers seeking to publish quotations with respect to Rule 144A securities would have been required to assure that certain “current” and “publicly available” information was available with respect to those securities.1 In response to market participant concerns regarding the need to make that sort of information publicly available, the staff of the SEC staff granted no-action relief pursuant to a letter dated November 22, 2022 (the “November Letter”) for Rule 144A securities, among other securities However, that no-action relief was set to expire on January 4, 2025.

All of the relief provided to date includes asset-backed securities sold in compliance with Rule 144A. The Order does not appear to affect the November Letter to the extent it relates to non-Rule 144A fixed income securities. We also note that the Order by its terms is subject to modification or revocation at any time by the SEC “but will be in effect unless and until the Commission determines that modification or revocation is necessary or appropriate in furtherance of the purposes of the Exchange Act, or the relief is otherwise superseded by future Commission action such as a rulemaking addressing the Rule 144A safe harbor or issues pertaining to the fixed income markets more generally.”

1 Subsequent to January 4, 2024, hyperlinks relating to the required information also would have been required.

_____________________________________

Cadwalader Wickersham & Taft LLP – Michael S. Gambro and Maurine Bartlett

November 01, 2023

View the MSRB Notice.

11/2/23

Read the MSRB Report.

10/31/23

Amid ongoing federal government shutdown risks and the close of its fiscal year, the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations (Exams) recently announced its fiscal year (FY) 2024 priorities. According to Exams, “this year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.” In addition to key focus areas outlined based on the types of entities subject to examination, Exams identified the following risks to various market participants as FY 2024 priorities:

• Information Security and Operational Resiliency: Firms need to have systems, policies and people in place to maintain service during volatile events.
• Crypto Assets and Emerging Financial Technology (FinTech): Firms must ensure rigorous compliance with applicable professional standards, statutes, and rules even as their business models involve cutting edge products and technology.
• Regulation Systems Compliance and Integrity (Reg SCI): Firms must ensure they invest in and maintain systems that adequately support key market functions and improve resiliency.
• Anti-Money Laundering (AML): Firms must understand and adhere to the Bank Secrecy Act and tailor programs to meet their particular risk profiles.

Of note, although Exams identified environmental, social and corporate governance (ESG) as a key priority in FY 2022 and FY 2023, it did not explicitly identify it as a priority for FY 2024.

Continue reading.

Holland & Knight LLP – Jessica B. Magee and Scott Mascianica

October 26 2023

On October 16, 2023, the U.S. Securities and Exchange Commission (SEC) Division of Examinations (EXAMS or Division) issued its annual examination priorities, which, for the first time, was published at the start of the SEC’s fiscal year to “better inform investors and registrants of key risks, trends, and examination topics” the Division intends to focus on in the coming year.1

Our Take

The October 16 publication of the priorities represents the earliest publication to date in the 10-year history of the publication of examination priorities, which will help registrants better prepare for upcoming exams. EXAMS acknowledged that the short time period since publication of the 2023 priorities, only eight months ago2, means that “several initiatives and focus areas from last year remain” priorities for 2024. Against that backdrop, the Division focused on the need to demonstrate compliance with all of its new regulations, and we note that many of the areas of examination priorities also align with areas in which additional or amended regulations have been proposed or may be under consideration.

The priorities for the upcoming year underscore that investment advisers are fiduciaries and, therefore, EXAMS will focus on the identification and disclosure of conflicts of interest. Broker-dealers are especially reminded of their obligations under Regulation Best Interest (Reg BI). While EXAMS has focused for several years on duties owed to clients and investors, the fact that next year’s priorities lead with a discussion of EXAMS’ focus on duties owed to clients and investors suggests that registrants should expect even greater focus on this aspect of an examination. Further, as demonstrated by recent enforcement actions for marketing rule and custody rule violations, the SEC staff is providing little, if any, “grace period” for the implementation of new rules; that is, rather than giving registrants an opportunity to correct deficiencies, the SEC is proceeding (at least in some cases) directly to enforcement.3 For both investment advisers and broker-dealers, the Division is also focused on complex, costly, and illiquid products, such as derivatives, leveraged exchange traded funds (ETFs), variable annuities, and nontraded real estate investment trusts (REITs).

In addition, the Division highlighted its general focus on crypto assets and new technology, the need for security, resilience, and systems integrity for registrants and markets, and anti-money-laundering (AML) for broker-dealers and other financial institutions, specifically including compliance with Office of Foreign Asset Control (OFAC) sanctions (including for advisers). Notably missing from the specifically identified risk areas were environmental, social, and governance (ESG)–related issues.

This Sidley Update provides a summary of upcoming examination priorities and perennial issues registrants can anticipate in this year’s examinations. Based on the full scope of EXAMS priorities, registrants should note the following themes for 2024:

i) The Division’s core priorities remain the same as in prior years.

ii) Registrants should be ready to show how they have implemented compliance controls for new rules.

iii) ESG remains a challenging area to both regulate and examine, with ESG not only slipping down, but off, the priority list (although registrants should continue to be mindful of the overlap between the Division’s priorities and ESG-related products and services).

Continue reading.

Sidley Austin LLP – W. Hardy Callcott, Kevin J. Campion, Stephen L. Cohen, Ranah Esmaili, Elizabeth Shea Fries, David M. Katz, Laurin Blumenthal Kleiman and John I. Sakhleh

October 26 2023

The SEC’s Division of Examinations got a head start this fiscal year, announcing its 2024 Examination Priorities (2024 Priorities) at the beginning of the fiscal year for the first time. This novel approach likely signifies the Division’s intent to be very active over the next 12 months and a desire to give registrants and other market participants more time to shore up areas of concern.

Not surprisingly, the 2024 Priorities emphasize that conflicts of interest will remain a priority for the Division’s examiners. For investment advisers, that means examiners will scrutinize not only how advisers identify and disclose conflicts to clients, but also their processes for mitigating or eliminating those conflicts where appropriate. Key areas of focus will include:

• The adviser’s processes and practices for allocating investments to accounts where clients have multiple accounts (e.g., allocating between accounts that are adviser fee-based, brokerage commission-based, and wrap fee, and between taxable and non-taxable accounts)
• Investment advice regarding complex products (derivatives and leveraged ETFs), high-cost and illiquid products (such as variable annuities and non-traded REITs), and unconventional strategies (including ones purporting to address rising interest rates)
• The economic incentives an adviser and its professionals may have to recommend certain products, services, or accounts over others; and
• The adviser’s disclosures of all material facts relating to conflicts of interest.

Continue reading.

Venable LLP – Adrienne Dawn Gurley, Daniel J. Hayes, George Kostolampros, Eric R. Smith and Xochitl S. Strohbehn

October 24 2023

Read the Mayer Brown Legal Update.

Mayer Brown – Leslie S. Cruz , Steffen Hemmerich, Adam D. Kanter, Marc Leong, Timothy B. Nagy and Anna T. Pinedo

October 23 2023

On October 13, 2023, the Securities and Exchange Commission (the “SEC”) adopted new Rule 10c-1a (the “Securities Lending Rule”), requiring the reporting of certain securities lending transactions. Certain material terms of securities lending transactions relating to “reportable securities” are required to be reported to a registered national securities association (“RNSA”) by the end of the day on which the loan is agreed or modified. The RNSA is required to make the information – other than that deemed confidential as defined below – public on the morning of the next business day. The amount of the loan is to be made public on the 20th business day following submission of the report. Of note, currently the Financial Industry Regulatory Authority (“FINRA”) is the only registered RNSA and is expected to accept the securities lending reports once the Securities Lending Rule is effective.

The SEC states that the purpose of the new rule is to increase the transparency and efficiency of the securities lending market. The Securities Lending Rule will provide market participants with access to pricing and other material information in a timely manner, as well as aid regulators in their oversight of the securities lending market.

What Securities Are Covered by the New Rule?

All loans of “reportable securities” (with a few exceptions noted below) are required to be reported to an RNSA. Reportable securities is defined as any security or class of an issuer’s securities for which information is reported or required to be reported to the consolidated audit trail (CAT) as required by Rule 613 and the CAT National Market System Plan, FINRA’s Trade Reporting and Compliance Engine (TRACE), the Municipal Securities Rulemaking Board Real-Time Transaction Reporting System, [emphasis added] or any reporting system that replaces one of these systems. Reportable securities include equity securities (both exchange traded and those traded OTC), debt securities subject to TRACE reporting, and digital asset securities that meet the definition of “reportable security” (each a “Reportable Security”). It is important to note that the definition of Reportable Securities is not limited to U.S. exchange traded securities or securities issued by U.S. public companies, and there may be overlap with EU or UK SFTR reporting requirements.

Continue reading.

Proskauer Rose LLP – Elanit Snow, Frank Zarb and Louis Rambo

October 26 2023

The SEC has adopted new Rule 10c-1a, which will require disclosure to a registered national securities association (“RNSA”)[1] of specified details regarding securities loans on a same day basis. The RNSA will then publish certain information regarding such loans. Rule 10c-1a will become effective 60 days after its publication in the Federal Register, and disclosure will be required on the first business day 24 months after Rule 10c-1a becomes effective.

Who will be required to disclose share lending activity?

Under new Rule 10c-1a, securities loan intermediaries, or, where there are none, lenders themselves, and brokers and dealers where borrowing fully paid or excess margin securities, must disclose any loan of “reportable securities.” “Reportable securities” are defined as any security or class of an issuer’s securities for which information is reported or required to be reported to the consolidated audit trail pursuant to the CAT NMS Plan, the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine or the Municipal Securities Rulemaking Board’s Real-Time Transaction Reporting System (or any reporting system that replaces one of these systems). The disclosure requirements do not attach to the use of margin securities by a broker or dealer unless the broker or dealer lends such margin securities to another person.

There are no reporting thresholds – all loans will trigger the disclosure requirement.

What information must be provided?

The following information must be disclosed, and will, as noted below, be mostly subject to publication by the RNSA:

Modifications to any of these terms will also need to be communicated on a same day basis.

When must the information be reported?

Loan participants must provide this information on a same day basis to the RNSA. The RNSA must publicize the required information (see above) by morning of the following business day, except for the amount of the loan, which must be publicized by the 20th business day. The RNSA must also publicize aggregate transaction activity and distribution of loan rates for those securities it determines appropriate.

When will these disclosure requirements become effective?

Rule 10c-1a will become effective 60 days after the release is published in the Federal Register. Rules to implement Rule 10c-1a must be proposed by the RNSA within four months of the effective date of Rule 10c-1a and must become effective no later than 12 months after the effective date of Rule 10c-1a. Disclosure will be required starting on the first business day 24 months after the effective date of Rule 10c-1a (the “reporting date”); and the RNSA must make specified information publicly available within 90 calendar days of the reporting date.

Paul, Weiss, Rifkind, Wharton & Garrison LLP – Christopher J. Cummings, Manuel S. Frey, David S. Huntington, Brian M. Janson, Luke Jennings, Christodoulos Kaoutzanis and John C. Kennedy

October 23 2023

On October 13, 2023, the SEC issued a release (the “Release”) adopting new Rule 10c-1(a) (the “Rule”) under the Exchange Act “to increase the transparency and efficiency of the securities lending market” by requiring certain persons to report information about securities loans to a registered national securities association (an “RNSA”). In addition, the Rule requires (i) certain confidential information to be reported to an RNSA to enhance its oversight and enforcement functions and (ii) an RNSA to make certain information it receives, including daily information pertaining to aggregate transaction activity and the distribution of loan rates for each reportable security, available to the public. Currently, FINRA is the only RNSA.

Summary Rule Requirements

• For each “covered securities loan,” the Rule requires a “covered person” to provide to an RNSA the material terms of the transaction – in the format and manner required by the RNSA – by the end of the day on which the securities loan is effected or the terms of the loan are modified.
• Covered persons may rely on reporting agents to provide the required information to an RNSA.
• An RNSA is required to make publicly available certain information about reported securities loans, either on a transaction-by-transaction basis or an aggregate basis.

Continue reading.

October 20 2023

Meeting Notice.

10/27/23

Meeting Notice.

10/27/23

The NFMA established the FDTA Working Group to make initial recommendations to the SEC on the process of creating and implementing the taxonomy required by the FDTA. A letter was prepared by the Working Group, with input from our Executive Committee and review by the full NFMA Board of Governors.

To read the letter, click here.

Enhance your skills in governmental accounting, auditing, and financial reporting with our new GAAFR Plus subscription. Get peer support and guidance through an exclusive online forum, access to free webinars, Blue Book supplements, and helpful templates and guides. Take advantage of this enhanced approach to governmental finance today!

SUBSCRIBE

The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met in Washington, D.C. on October 25-26, 2023, for its first quarterly meeting of fiscal year 2024. The Board voted to approve the 2024 rate card to adjust rates for the three market activity fees assessed on municipal securities dealers and the municipal advisor professional fee. The Board also discussed the regulatory and technology initiatives underway to enhance market transparency.

2024 Rate Card

Under a new rate-setting process adopted last year, the MSRB annually adjusts fees to ensure a timelier return of any excess revenue to regulated entities and to better manage the organization’s revenue needs and reserve funds. The 2024 rate card will be filed with the Securities and Exchange Commission (SEC) next month, and the new rates will be operative January 1, 2024.

“The annual rate card is designed to fund the organization with the revenue needed to deliver value to the municipal market through our regulatory protections, technology infrastructure and data services,” said MSRB Chair Meredith L. Hathorn. “Importantly, any surplus beyond those funding needs is promptly returned to fee-payers in the form of reduced rates rather than accumulating in the MSRB’s coffers. For 2024, the MSRB will be returning over $3 million in excess revenue collected from dealers as a result of record-high trading volume in 2023.”

The MSRB provides a detailed explanation of the rate card and its funding philosophy in the FY 2024 budget, which provides transparency about projected revenues, expenses and reserve funds. As projected in the MSRB’s budget, the formulaic rate-setting process will result in an increase to underwriting fees and municipal advisor professional fees to reflect less revenue assessed in FY 2023 relative to budget, and significant decreases in the transaction and trade count fees to return the surplus to regulated entities.

Market Regulation and Market Structure

The Board discussed progress toward filing proposed amendments to shorten the timeframe for trades to be reported to the MSRB from 15 minutes to as soon as practicable, but no later than one minute, subject to certain exceptions. The Board previously approved seeking SEC approval of the proposed amendments to MSRB Rule G-14 at its July 2023 meeting.

“The MSRB continues to closely coordinate with our fellow regulators on this impactful enhancement to post-trade transparency, with the goal of making a filing in the coming months,” said MSRB CEO Mark Kim.

The Board also discussed comments received in response to the request for comment on MSRB Rule G-47, on time of trade disclosure, and approved submitting a rule filing with the SEC for approval. The Rule G-47 request for comment included a number of questions about potential amendments to Rule D-15, defining “sophisticated municipal market professionals,” and the MSRB plans to seek additional information from stakeholders before determining next steps in this area.

Market Transparency Products and Services

The Board received an update regarding work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems, including user personalization and improvements to search and the disclosure submission process.

Date: October 27, 2023

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

This excel file contains two examples illustrating the effects of full or partial prepayments that had been made on preexisting subscription arrangements, when initially implementing GASB 96, Subscription-Based Information Technology Arrangements.

DOWNLOAD

On October 13, 2023, the SEC issued a release (the “Release”) adopting new Rule 10c-1(a) (the “Rule”) under the Exchange Act “to increase the transparency and efficiency of the securities lending market” by requiring certain persons to report information about securities loans to a registered national securities association (an “RNSA”). In addition, the Rule requires (i) certain confidential information to be reported to an RNSA to enhance its oversight and enforcement functions and (ii) an RNSA to make certain information it receives, including daily information pertaining to aggregate transaction activity and the distribution of loan rates for each reportable security, available to the public. Currently, FINRA is the only RNSA.

Summary Rule Requirements

• For each “covered securities loan,” the Rule requires a “covered person” to provide to an RNSA the material terms of the transaction – in the format and manner required by the RNSA – by the end of the day on which the securities loan is effected or the terms of the loan are modified.
• Covered persons may rely on reporting agents to provide the required information to an RNSA.
• An RNSA is required to make publicly available certain information about reported securities loans, either on a transaction-by-transaction basis or an aggregate basis.

Reporting Requirements for Covered Persons

In General. The Rule requires any “covered person” who agrees to or modifies a “covered securities loan” on behalf of itself or another person to provide to an RNSA the information specified in the Rule. This information (the “Rule 10c-1a information”) must be provided in the format and manner required by the RNSA’s rules no later than the end of the day on which a covered securities loan is effected or modified.

A covered person may rely on a “reporting agent” to satisfy its obligation to provide Rule 10c-1a information if the covered person (i) enters into a written agreement in which the reporting agent agrees to provide Rule 10c-1a information to an RNSA on behalf of the covered person in accordance with the reporting agent requirements specified within the Rule, and (ii) provides the reporting agent with timely access to Rule 10c-1a information.

Covered Person and Reporting Agent. A “covered person” is any of the following:

1. An entity that agrees to a “covered securities loan” on behalf of a lender (an “intermediary”);1
2. A lender that agrees to a covered securities loan when an intermediary is not used; or
3. A broker-dealer when borrowing fully paid or excess margin securities pursuant to Rule 15c3-3(b)(3) of the Exchange Act.3

A “reporting agent” is any broker-dealer or registered clearing agency that enters into a written agreement with a covered person that satisfies the conditions described above.

• The Release states that the Rule “does not prohibit the use of third-party vendors by covered persons.” However, a covered person’s use of a third-party vendor that is not a reporting agent does “not relieve a covered person of its obligation to report Rule 10c-1a information to an RNSA, as reliance on a reporting agent would.”
• The Rule requires a reporting agent to establish, maintain and enforce written policies and procedures that are reasonably designed to provide Rule 10c-1a information to an RNSA as specified in the Rule.
• A reporting agent is required to provide an RNSA with a list naming each covered person on whose behalf it is providing Rule 10c-1a information, as well as providing that RNSA with an update to that list by the end of each day that the list changes. In addition, a reporting agent is required to maintain records of (i) Rule 10c-1a information obtained by the reporting agent from a covered person with the time of receipt and the time of transmission to an RNSA of that information and (ii) its written agreements with covered persons.

Reportable Security and Covered Security Loan. A “reportable security” is “any security or class of an issuer’s securities for which information is reported or required to be reported to the consolidated audit trail as required by [Rule 613 under] the Exchange Act and the [Rule 613-mandated] CAT NMS Plan (“CAT”), [FINRA’s] Trade Reporting and Compliance Engine (“TRACE”), or the Municipal Securities Rulemaking Board’s Real Time Reporting System (“RTRS”), or any reporting system that replaces one of these systems.”

• The Release notes that the Rule’s definition of reportable security aligns with “securities for which transactions are currently being reported to existing reporting regimes” (i.e., CAT, TRACE, and RTRS).

A “covered securities loan” is a “transaction in which any person on behalf of itself or one or more other persons, lends a reportable security to another person.”3

Rule 10c-1a Information and Reporting Deadlines

Rule 10c-1a information falls into one of the following three categories.

Data Elements. For each covered securities loan, Rule 10c-1a information includes 12 specific “data elements,” including the name and LEI of the security issuer, the amount of the reportable securities loaned and collateral to secure the loan, and information relating to fees and charges associated with the loans. The complete list of the 12 data elements that must be provided by a covered person or its reporting agent to an RNSA is reproduced in Appendix A.

Loan Modification Data Elements. Rule 10c-1a information also includes any modification to any of the 12 data elements that occurs after the original data elements are provided to an RNSA. The reportable loan modification data elements include each “specific modification and the specific data element” modified. The Release notes that the actual modification (not a description of the modification) must be reported.

Confidential Data Elements. The Release notes that making certain information publicly available “could be detrimental because it could identify specific market participants or reveal confidential information about the internal operations or investment decisions of specific market participants.” Accordingly, the Rule categorizes certain Rule 10c-1a information as “confidential data elements.” Rule 10c-1a information within this category includes (i) the legal name or certain other identifiers of each party to the covered securities loan, (ii) if the person lending securities is a broker-dealer and the borrower is its customer, whether such person is the lender, the borrower, or an intermediary between the lender and the borrower, and (iii) whether the covered securities loan is being used to close out a “fail to deliver.”

RNSA Collection and Public Distribution of Rule 10c-1a Information

An RNSA is required to establish rules regarding the format and manner of its collection of Rule 10c-1a information. An RNSA also must make certain Rule 10c-1a information publicly available according to a specified schedule. Some of this information is required to be made publicly available on a transaction-by-transaction basis, while other information is made available publicly on an aggregate basis only.

Transaction-By-Transaction Information. With respect to a covered securities loan’s 12 data elements, the Rule requires an RNSA to make 11 of these data elements publicly available “not later than the morning of the business day after the covered securities loan is effected.” The excepted data element is #6, the “amount, such as size, volume, or both, of the reportable securities loaned.” An RNSA is required to make this excepted information publicly available 20 business days after the covered securities loan is effected. The same disclosure schedule applies to loan modification data elements (i.e., the morning of the next business day for modifications of 11 of the 12 items and 20 business days for modifications of #6 information).

An RNSA is required to maintain the confidentiality of each of a covered securities loan’s confidential data elements. To prevent an RNSA from releasing confidential data elements, the Rule mandates that an RNSA must maintain and enforce reasonably designed written policies and procedures to maintain the security and confidentiality of the confidential data elements of Rule 10c-1a information.

Aggregate Transaction Activity and Distribution of Loan Rates. The Rule requires an RNSA, “not later than the morning of the business day after covered securities loans are effected or modified” to make publicly available “information pertaining to the aggregate transaction activity and distribution of loan rates for each reportable security.”

• Aggregate Transaction Activity. The Release states that the term “aggregate transaction activity” is intended to help ensure that only aggregate information, rather than individualized information, is provided to the public. This is a response to “commenters’ concerns about the potential exposure of proprietary information, while still providing volume transparency to market participants.”
• Distribution of Loan Rates. The Release states that providing information about the distribution of loan rates for each security “recognizes that the cost-to-borrow for loans of securities is influenced by a number of factors (e.g., counterparty-creditworthiness).” Consequently, information about loan rates on a transaction-by-transaction basis would be an imperfect comparison of such rates between loans of the same security. Nonetheless, information regarding the distribution of loan rates for a given security “can give market participants information to help market participants compare the pricing of their covered securities loan against the pricing of other covered securities loans.” In turn, the Release notes, the ability to compare “can facilitate conversations between beneficial owners and their lending agents or end borrowers with their brokers or dealers regarding the terms of their loan.”

Compliance Date

The Rule’s effective date is 60 days after publication of the Release in the Federal Register. As of the date of this Alert, the Release has not been published therein. Covered persons will be required to report Rule 10c-1a information to an RNSA starting on the first business day that is 24 months after the effective date the Rule. An RNSA must begin publicly reporting Rule 10c-1a information within 90 calendar days following the 24-month period.

Observations

The Release states that the Rule “will result in the public availability of new information for investors and other market participants to consider in the mix of information about the securities lending market . . . to better inform their decisions.”

Funds that engage in covered securities loans will presumably need to enter into written agreements with one or more reporting agents or plan to rely on third-party vendors that are not reporting agents. Each fund complex will need to consider whether there are reasons to rely on third-party vendors that are not reporting agents. The ultimate decision will impact the scope of required written policies and procedures covering reporting of Rule 10c-1a information for the funds’ covered securities loans.

____________________________

1. The following are not deemed intermediaries under the Rule: a clearing agency when providing only the functions of a central counterparty pursuant to Rule 17Ad-22(a)(2) under the Exchange Act or a central securities depository pursuant to Rule 17Ad-22(a)(3) under the Exchange Act.
2. Rule 15c3-3 addresses a broker-dealer’s borrowing of fully paid or excess margin securities of a customer.
3. There are two exclusions from the definition of covered securities loan: (i) a position at a clearing agency that results from central counterparty services pursuant to Rule 17Ad-22(a)(2) under the Exchange Act or central securities depository services pursuant to Rule 17Ad-22(a)(3) under the Exchange Act and (ii) the use of margin securities, as defined in Rule 15c3-3(a)(4) under the Exchange Act, by a broker-dealer (provided, however, if a broker-dealer lends the margin securities to another person, the loan to the other person is a covered securities loan under the Rule).

Washington, DC –The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet in Washington, D.C. on October 25-26, 2023, holding the first quarterly board meeting of fiscal year 2024 to advance its FY 2022-2025 Strategic Plan.

Market Regulation and Market Structure

The Board will receive an update on progress toward filing proposed amendments to MSRB Rule G-14, which the Board had previously approved, to shorten the timeframe for trades to be reported to the MSRB from 15 minutes to as soon as practicable, but no later than one minute, subject to certain exceptions. The Board also will discuss comments received in response to the request for comment on MSRB Rule G-47, on time of trade disclosure, and consider potential next steps.

Market Transparency Products and Services

The Board will receive an update regarding work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems, including user personalization and improvements to search and the disclosure submission process.

Annual Rate Card

The Board will discuss and vote to approve the 2024 rate card to adjust rates for the three market activity fees and the municipal advisor professional fee. The MSRB’s new rate card process annually adjusts rates assessed on regulated entities to ensure a timelier return of any excess revenue (i.e., surplus) to regulated entities and to better manage the organization’s reserve funds.

Date: October 18, 2023

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

Recent Securities and Exchange Commission enforcement actions signal that regulators are widening their net to charge more types of municipal market participants as so-called gatekeepers against misconduct.

So said panelists Thursday at the National Association of Bond Lawyer’s annual conference in Chicago.

The SEC’s enforcement division and Public Finance Abuse Unit activities are “reaching all participants in the municipal market,” said Drew Kintzinger with Hunton Andrews Kurth LLP. “Under the current chairman [Gary Gensler], they’re taking an aggressive approach.”

The SEC has made headlines recently for a number of audit-related charges, including a recent settlement with a Louisiana-based auditor for violating antifraud provisions in connection with a Louisiana school board’s 2019 audit.

The enforcement actions show how the SEC is focusing on gatekeeper accountability for professionals such as auditors and lawyers, who regulators see as first lines of defense against misconduct.

“We’ve brought several cases in the recent past involving [auditors], and we consider them gatekeepers, so it’s an important area for us to look at,” said Brian Fagel, assistant director of the SEC’s Public Finance Abuse Unit.

The notion of gatekeepers also applies to lawyers, said Fagel, echoing comments made Wednesday by David Sanchez, director of the SEC’s Office of Municipal Securities.

“We definitely would consider, as a whole, lawyers to be gatekeepers and it’s certainly something to think about,” he said.

“Nothing is off the table in terms of looking at who we can potentially charge.”

Gensler emphasized the commission’s focus on the role that securities lawyers play as gatekeepers in a November 2022 speech to the Practising Law Institute, said Kintzinger.

Gensler said that the SEC “views lawyers as positions of trust in our process and if you have a client who’s taking a course of action that brings them up to the line, keep them back from the line,” Kintzinger said.

“It helps us understand over the past year how enforcement has been focused on gatekeeper activity, auditors in particular,” Kintzinger said.

The Louisiana auditor settlement featured a broad injunction against participating on audits of any documents that may be posted to EMMA, Kintzinger noted. “It’s a key auditor gatekeeper type of action, but it’s very interesting to me that they really upped the ante on auditor behavior to include negligence and fraud,” he said.

Fagel said the case illustrated a “parade of bad activity” and that the auditor’s actions were “egregious.”

Another trend Kintzinger is tracking is the public finance abuse agency’s “more aggressive use” of Section 17(a)(2) and (3) – as in the Louisiana case – to “charge fraud on municipal market participants,” he said.

“It’s a distinct trend” that illustrates an “aggressive use of enforcement,” he said.

The SEC’s case against the city of Rochester marks a case in point, in which the SEC, after settling with the school district’s CFO, is going after the city and the city finance director, which regulators argue either knew or should have known about the district’s underlying financial problems that brought the case in the first place.

“It’s a fascinating case,” Kintzinger said. “It’s a case on the responsibility the city has for the school district” when issuing bonds on its behalf.

By Caitlin Devitt

BY SOURCEMEDIA | MUNICIPAL | 10/20/23 01:33 PM EDT

Municipal market participants have had to get creative to manage the current market but should not get creative on the regulatory front, warned one of the market’s key Washington regulators.

“Regulators often talk about when there is reduced issuance, this is where a lot of problematic deals come up,” said David Sanchez, head of the Securities and Exchange Commission’s Office of Municipal Securities, speaking Wednesday at the National Association of Bond Lawyers’ conference in Chicago.

“That’s not a surprise. People are trying to get creative, push the envelope to keep deal flow going on,” said Sanchez. But participants should keep in mind that for regulators, “it boils down to the question: does this deal even need to be done?”

As gatekeepers, bond attorneys should always be asking themselves that question, Sanchez said.

From bespoke deals like tenders, which have grown in popularity with rising rates, and often-tricky limited offerings to “potentially questionable” affordable housing deals, regulators are keeping a close eye on transactions as well as broader evergreen issues like disclosure and pricing.

On the disclosure front, the emerging issue of climate change-related risk should be fairly straightforward, Sanchez said.

“When there is a weather event and damage to a city and people are saying ‘What did the issuer say before?’ [sometimes] the answer is not good,” he said.

“It’s not hard,” he added. “If you’re a city within L.A. County and L.A. County is disclosing a particular issue, you should seriously consider whether you also should disclose it,” he said. “You have to look at your neighbors.”

“There’s very public information about flood risks, sea levels rising that affect specific areas,” he said. “It’s very well known so you can’t stick your head in the sand.”

He warned that climate risk disclosure is “very easy for us to check on – very easy.”

“I thought the market had done a better job but I think in the last year, after digging around, I have to hedge that a little bit,” Sanchez said.

Rising interest rates and the elimination of tax-exempt advance refundings have prompted a resurgence of tender offers as well as so-called creeping tenders, deals that are may be unfamiliar to some in the market.

“You have something that might have been more popular 15 or 20 years ago, it dies off, and comes back to life, people forget the rules that apply and forget to pay attention to what has changed in law have happened in the interim,” Sanchez said.

Like with all transactions, the key question for the issuer should be if it’s a good deal.

On the investor side, the SEC’s “sensitivity” is whether the investor is “getting a fair shake,” Sanchez said.

With creeping tenders, in which an issuer is buying back their debt on the secondary market, regulators want to see that the issuer is not “stepping over the line into a tender offer,” Sanchez said.

Private litigation such as class-action lawsuits over variable-rate demand bonds is another area that the SEC watches, and wants to see “people changing behavior,” he said. “If we don’t see the change happening to comply with applicable rules you can be sure the SEC will step in.”

“A lot of the rule infrastructure came about in Dodd-Frank,” he said. “These rules are in place and it’s very important that people take them seriously.”

By Caitlin Devitt

BY SOURCEMEDIA | MUNICIPAL | 10/19/23 02:28 PM EDT

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published its annual budget to report on the allocation of the resources necessary to advance its mission of protecting investors and issuers and promoting the fairness and efficiency of the $4 trillion market that ensures access to capital for communities across the country.

For FY 2024, the Board approved a $47 million budget, which represents a 4.8% increase over the prior fiscal year. Since 2018, the MSRB has published an annual budget report to provide greater insight into its projected revenues, expenses and reserve funds. This year’s report includes new sections spotlighting the MSRB’s funding philosophy, market transparency and technology expenses, and the new rate-setting process for regulated entities.

“This FY 2024 report provides a closer look at the stewardship of our reserve funds and how we plan to allocate technology resources in the year ahead to deliver value to our stakeholders,” wrote MSRB Chair Meredith Hathorn and MSRB CEO Mark Kim in a letter to stakeholders. “All of the key initiatives described in this report are aligned with the strategic goals we outlined in the long-term strategic plan we adopted two years ago. Now at the midpoint of that plan, we continue to make progress on our investment in modernizing municipal market regulation, providing transparency through technology, fueling innovation through data and upholding the public trust.”

Modernizing Market Regulation

In the area of modernizing market regulation, the MSRB expects to move forward with an important change to its trade reporting rule, Rule G-14, to increase price transparency for investors while carving out exceptions that recognize the role of small firms and manual trades in the municipal securities market. The MSRB continues to review the entire body of interpretive guidance in the MSRB rule book and has completed or is in the process of proposing the codification or retirement of approximately 20% of the MSRB’s interpretive guidance pieces since launching its rulebook modernization initiative in February 2021.

Providing Transparency Through Technology

As in prior years, technology remains a significant expense for the MSRB. The organization is in the midst of the largest investment in technology in the MSRB’s history, starting with a migration to cloud computing, which began in 2018 and was completed without any system downtime or market disruption. In 2021, the MSRB launched the second and final phase of its journey to the cloud, which is to modernize its systems to leverage the power of cloud computing and provide greater availability, reliability and security to all market participants. The MSRB is on track to complete the system modernization initiative in 2025.

“In response to stakeholder comments, we are providing a more detailed breakdown of our investment in the technology systems that power our market and enable investors, issuers and market participants to make more informed decisions,” wrote Hathorn and Kim, noting that the majority of the MSRB’s technology-related expenses are dedicated to maintaining and continuously improving the public’s access to real-time price transparency and hundreds of thousands of disclosure documents on its free Electronic Municipal Market Access (EMMA®) website.

New Fee-Setting Process

The MSRB’s new fee-setting process, implemented in FY 2023, will automatically adjust rates to ensure a more timely return of any excess revenue (i.e., surplus) to regulated entities and to better manage the organization’s reserve funds. “Following an 18-month, 40% fee reduction that returned over $19 million to the industry, we have achieved our goal to reduce excess reserve levels that had accumulated over the years,” said Hathorn and Kim. The MSRB is projecting to end the year with a reserves balance near its current target of $35 million, down from a high of $67 million in 2018. A detailed explanation of the MSRB’s reserves and fee-setting process are included in the MSRB’s budget report.

Read the budget.

Date: October 02, 2023

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

Norwalk, CT, September 28, 2023 — The Governmental Accounting Standards Board (GASB) today issued a proposal that would establish requirements for certain types of capital assets to be disclosed separately for purposes of note disclosures.

The Exposure Draft, Disclosure and Classification of Certain Capital Assets, also establishes requirements for certain capital assets to be classified as “held for sale.”

Recent GASB pronouncements like Statement Nos. 87, Leases, and 96, Subscription-Based Information Technology Arrangements, created certain types of capital assets, which are described as “right-to-use” assets. In light of the recognition of those new types of assets, the Board decided to consider the effectiveness of existing classifications.

Based on input from financial statement users during the research phase of the project, GASB is proposing that certain types of assets be disclosed separately in the note disclosures about capital assets. This would allow users to make informed decisions about these and to evaluate accountability.

Four Types of Capital Assets Would Be Disclosed Separately

The Exposure Draft addresses four types capital assets that would be disclosed separately in the notes:

1. Capital assets held for sale, by major class of asset;
2. Lease assets reported under Statement 87, by major class of underlying asset;
3. Subscription assets reported under Statement 96; and
4. Intangible assets other than leases assets and subscription assets, by major class of assets.

Capital assets held for sale is a new classification proposed in this Exposure Draft. Under the proposal, a capital asset would be classified as held for sale if: (a) the government has decided to sell the asset, and (b) it is probable the sale will be finalized within a year of the financial statement date. Capital assets classified as held for sale would be evaluated each reporting period.

Stakeholders are asked to review the proposal and share their input with the Board by January 5, 2024. Comments may be submitted in writing or through an electronic input form. More information about providing comment in both ways can be found in the document, which is available on the GASB website, www.gasb.org.

Washington, D.C. – The Securities and Exchange Commission (SEC), Municipal Securities Rulemaking Board (MSRB), and Financial Industry Regulatory Authority (FINRA) today announced that registration is open for a virtual Compliance Outreach Program for municipal market professionals. The free webcast is open to the public and will take place on Thursday, December 7, 2023, from 10:30 a.m. to 4:30 p.m. ET.

The program will provide municipal market participants an opportunity to hear from SEC, MSRB and FINRA staff on timely regulatory and compliance matters for municipal advisors and dealers. Panel topics will include a discussion of compliance concerns of small dealer and municipal advisor firms; credit rating agency compliance concerns including rules of the road for municipal market participants; unregistered municipal advisory and dealer activity; pricing compliance; and a forward look at regulatory and enforcement priorities.

“This year marks the 10th anniversary of the final municipal advisor registration rule and the 13th year since the passage of Dodd-Frank, and I think it is a great opportunity for the SEC, MSRB, and FINRA to expand the compliance conference to all municipal market participants,” said Dave Sanchez, Director of the SEC’s Office of Municipal Securities. “The conference allows the SEC, MSRB, and FINRA a chance to speak jointly to the municipal market on where the examination, enforcement, and regulatory framework currently stands and where we see it going in the future. It will be a great program, and I am really looking forward to the new expanded scope.”

MSRB Chief Regulatory and Policy Officer Ernesto Lanza said, “Open dialogue among regulators and market professionals is critical to achieving a shared understanding of the rules in place to protect municipal securities investors and issuers. We are pleased to coordinate with the SEC and FINRA to create this opportunity for municipal advisors and dealers to hear directly from regulators about matters top of mind. Importantly, our program this year devotes time to the unique compliance concerns of small firms, which is a priority for the MSRB following a series of discussions the MSRB and FINRA held with minority-and-women owned and veteran-owned firms in the municipal market.”

Yolanda Trottman-Adewumi, FINRA Vice President of Specialist Programs and Exams said, “We are pleased to partner with the SEC and the MSRB to offer this substantive program designed to help market participants better understand their compliance obligations.”

Registration is being administered by FINRA and is available here: Personal Information – 2023 Compliance Outreach Program For Municipal Advisors | VIRTUAL (cvent.com). The program is free and open to all. For those who cannot attend the live virtual program, the recording will be archived on the SEC’s Office of Municipal Securities’ webpage at https://www.sec.gov/municipal/municipal-sec-conferences, for later viewing. To submit questions in advance of the event, please email: [email protected].

Date: September 29, 2023

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

Initiative Part of the MSRB’s Rule Book Modernization Efforts

Washington, D.C. – The Municipal Securities Rulemaking Board (MSRB) today issued a Request for Comment (RFC) on draft amendments to MSRB Rule G-12, on uniform practice, to codify, retire and reorganize approximately 40 pieces of interpretive guidance related to interdealer confirmations, some of which date back more than 40 years. With this proposal, the MSRB will have advanced efforts to codify or retire approximately 20% of its body of interpretive guidance since launching the modernization initiative in February 2021.

“As part of our efforts to modernize municipal market regulation, we are seeking to streamline the MSRB rule book by retiring outdated or superfluous guidance and codifying the relevant investor and issuer protections established over decades of interpretive guidance directly into the rule text,” said MSRB Chief Regulatory and Policy Officer Ernesto Lanza. “Our goal is to ensure our rules are reflective of current market practices, have not become overly burdensome, and are harmonized with the rules of other regulators, among other things.”

Rule G-12(c) sets forth the confirmation disclosure requirements for interdealer municipal securities transactions that are ineligible for automated comparison in a system operated by a registered clearing agency (i.e., the Depository Trust & Clearing Corporation).

“The draft amendments to Rule G-12 do not seek to impose any new burdens on regulated entities. Rather, they seek to facilitate compliance and reduce unnecessary burdens while ensuring the rule continues to achieve its goals consistent with current market practices,” said Lanza.

Comments should be submitted no later than December 15, 2023.

Read the request for comment.

Date: September 28, 2023

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

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today enhanced the free daily yield curves and indices available on its Electronic Municipal Market Access (EMMA®) website with hourly updates from Bloomberg’s BVAL AAA Municipal Curve.

“The launch of this enhanced yield curve on EMMA represents a significant improvement in market transparency for investors, issuers and all market participants who now have free access to intra-day price movements in the $4 trillion municipal securities market for the very first time,” said MSRB CEO Mark Kim.

MSRB Chief Market Structure Officer John Bagley said, “The MSRB’s EMMA website brings together data, documents and tools to facilitate decision-making in the municipal market. Previously, yield curves available on EMMA reflected data from the day before. With EMMA’s new enhancements, the website now displays timelier pricing from BVAL’s AAA Municipal Curve.”

The enhanced website now shows curve updates hourly between 9:00 a.m. and 4:00 p.m. Eastern Time. Tables displaying monthly data points from BVAL’s AAA Municipal Curve have also been added, providing users with more information to guide their investment decisions. View the BVAL curve here.

The MSRB first added yield curves and indices to its suite of free tools on EMMA in 2017. These market indicators and tools help investors to evaluate bond prices and yields, measure market direction and performance, and determine pricing on new bond issues. Read more about understanding yield curves and indices in the MSRB Education Center.

The MSRB’s EMMA website serves as the free official source for municipal securities data and documents. The MSRB continues to enhance the EMMA website to bring greater transparency to the $4 trillion municipal market.

Date: September 19, 2023

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

Baltimore, Philadelphia and San Diego allege eight big banks conspired to raise the rates on more than 12,000 variable-rate demand obligations from 2008 to 2016.

A federal judge Thursday denied a request from eight major banks to dismiss class-action claims filed by cities alleging the banks conspired to increase the interest rates on a commonly used municipal bond, Reuters reported.

In a nearly decade-long dispute, Judge Jesse Furman of the U.S. District Court for the Southern District of New York granted the request for class certification instead of pursuing claims individually — a likely reason for reducing potential recoveries, according to the wire service.

Bank of America, Barclays, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Wells Fargo were accused of conspiring to raise rates on over 12,000 variable-rate demand obligations between 2008 and 2016.

Cities led by Baltimore, Philadelphia and San Diego claim the collusion reduced the available funding for hospitals, transportation, schools, power and water supplies, possibly leading to billions of dollars in damage.

The municipalities are seeking damages of $6.5 billion, said Elliott Stein, senior litigation analyst at Bloomberg Intelligence.

“This is an additional milestone that will push this case to settle eventually,” Stein told Bloomberg after the ruling was issued. He said he expects the case to go to trial next year with settlements amounting to roughly $600 million across the eight defendants.

The first class-action lawsuit was filed in February 2019 by Philadelphia, followed by Baltimore a month later and finally by the San Diego Regional Transportation Commission. The lawsuits have been combined.

The variable-rate demand obligations are long-term bonds with short-term rates that usually reset every week. Banks remarket the VRDOs that investors redeem at the lowest possible rates, Reuters noted. But the lawsuit alleges the banks, which acted as the remarketing agents, missed out on getting the best rates for the issuers.

However, the banks opposed the class certification, arguing that the differences among the bonds would necessitate numerous separate investigations into whether rate inflation occurred. This would make a single class-action lawsuit difficult to manage.

But Furman, in his decision, said the two financial market specialists whom the cities appointed to investigate found that the alleged conspiracy would have a broader impact on the class.

“Of course, it remains an open question whether, assuming plaintiffs paid supra-competitive interest, that payment was caused by defendants’ allegedly anti-competitive behavior,” Furman wrote. “Whatever the answer to this question may be, however, it is a common question.”

A lawyer for the cities, Dan Brockett, said they were pleased with the decision, according to Reuters.

Barclays, Citi and JPMorgan declined to comment to the wire service. The other banks and lawyers did not immediately respond to a request for comment.

The VRDOs market, which used to be more than $400 billion, declined to $72 billion by the end of last year, according to the Municipal Securities Rulemaking Board.

Banking Dive

by Rajashree Chakravarty

Published Sept. 22, 2023

• Municipalities seek $6.5 billion in pre-trebled damages
• Illinois settled False Claims Act suit in July for $68 million

An almost decade long dispute over price-fixing in the municipal bond market is one-step closer to a settlement after three municipalities secured a small win Thursday.

Judge Jesse M. Furman of the US District Court for the Southern District of New York granted the request for class certification from two cities and one transportation commission suing eight banks — including Bank of America Corp. and Goldman Sachs — for conspiring to fix the rates on variable rate demand obligation bonds.

The municipalities are seeking pre-trebled damages of $6.5 billion, and the case could head to trial next year, according to Elliott Stein, senior litigation analyst at Bloomberg Intelligence.

“This is an additional milestone that will push this case to settle eventually,” Stein said in an email after the court denied the banks’ motions to bar plaintiffs’ experts, and granted plaintiffs’ motion for class certification, as expected.

Stein has been expecting settlements to amount to about $600 million across the 8 defendant banks which also include Barclays, Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, the Royal Bank of Canada and Wells Fargo.

The first of the class action lawsuits was filed by the city of Philadelphia in February of 2019, followed by the city of Baltimore in March of that year, and later by the San Diego Regional Transportation Commission. The lawsuits have since been consolidated.

These lawsuits followed a series of state False Claims Act lawsuits filed under seal in 2014 and unsealed in 2018, by a Minnesota financial adviser named Johan Rosenberg.

In July, the state of Illinois settled its lawsuit for $68 million, saying the case filed on its behalf “almost certainly” would have resulted in a loss, according to a filing by Attorney General Kwame Raoul.

The so-called VRDOs are long-term bonds that have their rates periodically reset and offer investors the opportunity to return the securities for cash if they think the yields are reset too low. The lawsuits alleged that the banks — acting as remarketing agents on the securities — failed to get the best rates for issuers.

The only bank that has responded to Bloomberg’s requests for comment on the ruling, JPMorgan, declined to comment.

Bloomberg Markets

By Joseph Mysak Jr

September 21, 2023

A federal judge on Thursday said San Diego and other U.S. cities may pursue class-action claims accusing large banks of driving up interest rates on a popular municipal bond.

U.S. District Judge Jesse Furman in Manhattan rejected efforts by eight banks – Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Wells Fargo – to require cities to pursue claims individually, likely reducing potential recoveries.

In addition to San Diego, cities led by Baltimore and Philadelphia accused the banks of colluding to raise rates on more than 12,000 variable-rate demand obligations (VRDOs) from 2008 to 2016.

They said this reduced available funding for hospitals, power and water supplies, schools and transportation, and likely caused billions of dollars in damages.

Once a more than $400-billion market, VRDOs are long-term bonds with short-term rates that typically reset weekly. Banks must remarket VRDOs that investors redeem at the lowest possible rates.

Cities accused the banks of conspiring not to compete for re-marketing services, and artificially inflating rates by sharing information about bond inventories and planned rate changes.

In opposing class certification, the banks said differences among the bonds would require many thousands of individualized examinations into whether rate inflation occurred, making a single class-action lawsuit unwieldy.

But in a 33-page decision, Furman said two financial market specialists who the cities hired as expert witnesses established that the alleged collusion could have a class-wide impact.

“Of course, it remains an open question whether, assuming plaintiffs paid supra-competitive interest, that payment was caused by defendants’ allegedly anti-competitive behavior,” Furman wrote. “Whatever the answer to this question may be, however, it is a common question.”

Barclays, Citigroup and JPMorgan declined to comment. The other banks and their lawyers did not immediately respond to requests for comment.

Dan Brockett, a lawyer for the cities, said they were gratified by the decision.

The VRDOs market shrank to $72 billion by the end of 2022, according to the Municipal Securities Rulemaking Board.

The case is Philadelphia et al v Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 19-01608.

by Reuters

(Reporting by Jonathan Stempel in New York; editing by Marguerita Choy)

Read the MSRB Notice.

If you are a Regular Member of the NFMA (this excludes Associate Members and Student/Faculty Members) you are eligible to apply for one of three At-Large Seats opening for two-year terms beginning January 1, 2024. NFMA Board members are asked to attend three in-person meeting per year on the days preceding Advanced Seminars and the Annual Conference.

To apply for an At-Large seat, click here. The deadline for applications is midnight, September 30.

Norwalk, CT, September 7, 2023 — The Governmental Accounting Standards Board (GASB) recently added a project on accounting and financial reporting issues for subsequent events to the Board’s current technical agenda.

The project will reexamine existing requirements in GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, and evaluate ways to improve the accounting and financial reporting for subsequent events.

The reexamination will address issues that were identified in pre-agenda research, including:

1. Confusion about and challenges associated with applying the existing standards for subsequent events,
2. Inconsistency in practice in the information provided about subsequent events, and
3. The usefulness of the information provided about subsequent events, with a focus on clarifying how subsequent events are defined and what information should be provided.

The project will also consider relationships with other existing GASB standards and projects as they relate to transactions or other events that occur subsequent to the date of the financial statements.

Pre-agenda research conducted by the GASB staff found that subsequent events are generally prevalent among governments and related issues are relevant to a broad number of governments. Research indicated the presence of inconsistencies and misreporting in practice in the accounting and financial reporting for subsequent events. Guidance on subsequent events in Statement 56 dates back to audit literature from 1972 and has not been fully evaluated for its effectiveness or consistency with the GASB’s conceptual framework.

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

State and local governments increasingly are becoming targets of cybersecurity attacks. According to CloudSEK, cyberattacks targeting the government sector increased by 95% worldwide in the second half of 2022, compared to the same period in 2021. With the rise of cybersecurity threats, S&P Global Ratings, a leading rating agency, noted that cyberattacks pose a growing credit risk to municipal bond issuers and warned that weak cybersecurity could lead to credit downgrades over the next 12 months.

With the increased scrutiny on cybersecurity by S&P and the growing threat of cyberattacks, disclosure about cybersecurity risk has become increasingly common for municipal bond issuers. To date, there is no official guidance from the U.S. Securities and Exchange Commission (SEC) about inclusion of information on cybersecurity risks for municipal bond issuers.

This lack of official guidance is due in part to the SEC’s limited ability to directly regulate municipal bond transactions. The SEC has indicated that many principles applicable to the registered market can be applied to the municipal market. Many municipal issuers also rely on guidance from the registered market when analyzing disclosure issues. Recent SEC rulemaking on cybersecurity disclosure is one instance where municipal issuers can apply these principles.

On July 26, 2023, the SEC adopted a final rule standardizing cybersecurity disclosure practices for public companies that offers guideposts for municipal issuers on disclosure about cybersecurity. Beginning in December 2023, public companies will have to make a timely materiality determination about cybersecurity incidents and, if an incident is determined to be material, disclose the same within four business days of such determination. Importantly, the SEC provided that an item is material if there is a “substantial likelihood that a reasonable shareholder” would deem the information meaningful to make an investment decision. Once a material cybersecurity incident determination is made, the company must disclose within four business days: (1) the nature, scope and timing of the cybersecurity incident; and (2) the incident’s qualitative and quantitative impact (or the reasonably likely impact) on the company, including, but not limited to, its financial condition, operations, reputation and relationships.

Additionally, beginning with its annual report for the fiscal year ending on or after Dec. 15, 2023, public companies will be required to provide annual disclosures related to the companies’ processes for the management and governance of cybersecurity threats. In the annual disclosure, companies must describe (1) the process for the assessment, identification and management of risks for cybersecurity threats; (2) whether any risks related to cybersecurity have materially affected (or are reasonably likely to materially affect) their business strategy, operations or financial conditions; and (3) the board’s oversight and management of cybersecurity risks.

Although municipal bond issuers will not be required to comply with the new SEC rules, the rules provide valuable guidance for issuers on how to address cybersecurity risks in their disclosure documents and through cyberattack policies. In applying the principles found in the new rules, municipal bond issuers should make the following key considerations:

Implement and regularly reassess cybersecurity policies.

Municipalities are vulnerable to cybersecurity attacks without the proper assessment, response and management policies. An issuer that does not have a formal cybersecurity policy should consider developing a framework related to cybersecurity preparedness to institute centralized responsibilities and a transparent strategy on how to proceed if cybersecurity incidents occur. Even issuers that have formal policies should regularly reassess their policies to ensure the practices are up to date.

To create a workable policy, municipal bond issuers should consider the risks unique to their particular infrastructure and how to best protect their financial condition, operations, reputation and relationships. Municipalities also should consider whether cybersecurity insurance could be managed through an insurance policy as part of their overall risk management system.

For all issuers, ongoing management of cybersecurity risks through regular weakness testing will ensure that municipalities have an action plan in the event of a real cybersecurity attack.

Prepare a disclosure that addresses cybersecurity policy and procedures and material prior attacks.

Including cybersecurity attacks as a risk factor in offering document disclosure has become a best practice to address rating agency and investor questions. In preparing disclosures, issuers should consider their current risk posture, including policies and procedures for cybersecurity risk management, any past cybersecurity attacks and to what degree the board oversees this or delegates to management the day-to-day risk management. Issuers should work closely with legal counsel to craft disclosures on these points.

Disclosures still should be guided by materiality.

While the SEC has been reluctant to define “materiality,” the new rules for the registered market demonstrate that disclosures regarding cybersecurity (as with most disclosure issues) should revolve around materiality. In response to comments from the market during the rulemaking process, the final rule requires disclosure of “management’s role in assessing and managing the registrant’s material risks from cybersecurity threats.”

Further, the adopting release notes that certain actions are material by virtue of the level of attention provided by the board of directors and management. The final rule does not contain a materiality qualifier related to the requirement that registrants describe the oversight undertaken by their board of directors and any applicable committee responsible for this oversight because, by virtue of the board or a committee taking an active role in oversight, the SEC deemed that material to investors.

McGuireWoods LLP – Anna C. Horevay, Thomas William Bruno and Camille A. Pappy

September 6 2023

Prior to departing for the August recess, Chairman Patrick McHenry (R-NC) wrapped up the month-long series of hearings considering digital assets and environmental, social, and governance (ESG) legislation. In tandem markups held on 26 July and 27 July, HFSC advanced several bills on these issues, both on a bipartisan basis (digital assets and stablecoin) and along party lines (anti-ESG bills). Prior to the ESG markup, HFSC Republicans had released 18 bills that would be under consideration. However, these bills were then bundled into a few larger packages, which was done in a way that largely precluded Democratic support, as they were then tied to provisions that only Republicans would support.

More information on the legislation advanced during the 27 July ESG-related markup, as well as the vote outcomes, is detailed below.

Continue reading.

K&L Gates LLP – Daniel F. C. Crowley, Karishma Shah Page, Bruce J. Heiman, Ryan T.Carney, William A. Kirk, Lauren M. Flynn and Lauren E. Hamma

September 5 2023

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today enhanced the free daily yield curves and indices available on its Electronic Municipal Market Access (EMMA®) website with hourly updates for the Bloomberg® valuation (BVAL) curves.

“Investors, issuers and market participants will benefit from the free availability of timelier data to inform their assessment of bond pricing,” said MSRB Chief Market Structure Officer John Bagley.

Previously, BVAL curves and other yield curves available on EMMA reflected the previous day’s data. The enhanced BVAL curve will update hourly between 9:00 a.m. and 4:00 p.m. Eastern Time. Tables displaying monthly data points have also been added.

The MSRB first added yield curves and indices to the free tools available on EMMA in 2017. These market indicators can be useful for understanding the general level and direction of municipal bond interest rates and comparing the relative yields of specific municipal securities. Read more about understanding yield curves and indices.

The MSRB’s EMMA website serves as the free official source for municipal securities data and documents. The MSRB continues to enhance the EMMA website to bring greater transparency to the $4 trillion municipal market.

Washington, D.C. — The Municipal Securities Rulemaking Board (MSRB) today published a new research report that indicates a rise in customer transaction costs for municipal securities since early 2022, particularly for individual investor-sized trades.

“This increase in transaction costs is likely due to the steep decline in bond prices triggered by rising interest rates and market volatility starting in 2022, as those factors are often associated with higher effective spread,” said Simon Wu, MSRB Chief Economist and lead author of the report. “Tax implications associated with buying discount bonds tend to make them less liquid, which in turn impacts the costs of trading these securities. Moreover, since dealers may be inclined to charge relatively fixed markups for customer trades, when bond prices decline, transaction costs as a percentage of the purchase price generally increase.”

As previous MSRB research has shown, other than a sharp but brief spike in 2020 attributable to the COVID-19 crisis, transaction costs (as measured by effective spread) in the municipal market declined steadily between early 2009 and late 2021. However, starting in early 2022, that trend reversed. Bond prices suffered a steep decline as interest rates began to rise due to rising inflation, and market volatility increased. Declining bond prices resulted in more trading of discount bonds, which become less liquid the greater the discount from par value. This is because of the Internal Revenue Service’s Market Discount Rule, which sets the threshold at which a discount municipal bond should be taxed as a capital gain rather than as ordinary income, making bonds with deeper discounts less attractive.

During this time, the average effective spread for municipal securities trades began to rise. Since the effective spread is calculated as the difference between customer purchase price and customer sale price and expressed as a percentage of bond price, declining bond prices with a relatively fixed markup would make the effective spread on a customer purchase higher.

The rise in effective spread was especially pronounced for individual investor-sized trades. As of March 2023, the effective spread for the sub-$100,000 par value trades, a proxy for individual investors, was three times as large as the effective spread for the over $1,000,000 par value trades that are generally attributed to institutional investors. Whereas, as recently as 2021, the effective spread for individual-sized customer trades was only 1.7 times the effective spread for institutional-sized customer trades. Additionally, the authors found that customer trades flagged with non-transaction-based compensation typically tied to a fee-based customer account, such as separately managed accounts, received a 30-basis point lower effective spread than customer trades from a regular non-fee-based customer account.

“While we do not tell dealers how much markup they can charge a customer, we do have rules to ensure that they charge fair and reasonable prices and clearly disclose markups on customer confirmations,” said John Bagley, MSRB Chief Market Structure Officer. “In addition to writing rules designed to protect investors and ensure a fair and efficient market, monitoring market trends and publishing research reports is another way the MSRB supports market transparency and empowers investors to make informed decisions.”

Read the report.

Date: August 22, 2023

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

• MSRB report says spreads surged as securities’ prices dropped
• Effective spread widened to 54.5 basis points from 40 in 2021

Transaction costs for retail investors buying municipal bonds in the secondary market have jumped since 2021 as falling bond prices have made the securities riskier for dealers to hold, according to a study released on Tuesday.

The gap between the yield where dealers buy or sell a security, known as the effective spread, has widened to 0.545 percentage point, or 54.5 basis points as of March. That’s up from 52.9 bps in 2022 and 40.1 bps in 2021, according to the report from the Municipal Securities Rulemaking Board, an industry regulatory body.

The steady rise in interest rates since last year has broadly eroded the value of fixed-income securities. The Federal Reserve started increasing the so-called federal funds rate in March 2022 to combat inflation. After 11 increases, the top of the range for the rate stands at 5.50%.

That’s pushed down the price of bonds, with longer-term debt generally hit the hardest. Municipal bonds that trade at below their face value are often harder for dealers to sell, because any gains on the principal can be taxable, making the debt less attractive to the wealthy investors that often focus on tax-free bonds.

Dealers finding it harder to sell the bonds can translate to wider gaps between the prices at which brokerages will buy and sell securities, according to the MSRB. Also, brokers often charge fixed markups on securities, so when bond prices fall, transaction costs as a percentage of the purchase price will rise.

The report focused on trading costs for transactions in about the $25,000 to $100,000 range, often viewed as a proxy for retail trades. For institutional investors, trading costs moved much less. The effective spread on trades over $1 million rose from 17.4 basis points in 2019 to 17.9 in 2021 and 18.1 in 2023.

The kind of customers who engage in transactions of $1 million and above probably agree upon a price with their dealers before a trade goes through, said Simon Wu, MSRB chief economist and lead author of the report.

Bloomberg Markets

By Joseph Mysak Jr

August 22, 2023

• ESG risks have dragged down shares of TUI, UPS this month
• GOP attacks are leading bankers to avoid talking about ‘ESG’

As the label “ESG” ends up among the most hated on Wall Street, the financial cost of ignoring it is making headlines.

In just the past few weeks, a string of textbook environmental, social and governance issues — spanning workers’ rights to extreme weather — erupted in a number of major stocks.

The world’s biggest publicly traded package courier, United Parcel Service Inc., was forced to issue a profit warning that drove down its shares, after it said a tentative labor agreement will add to its costs. The firm agreed to raise wages for some workers, bump up the amount of paid vacation and improve working conditions. That includes installing air conditioning in new vehicles rendered unbearably hot by extreme heat.

Continue reading.

Bloomberg Markets

By Saijel Kishan

August 16, 2023

A bevy of city, state and public finance advocates is urging the U.S. Supreme Court to take up a case challenging the subjection of Build America Bond subsidies to federal budget sequestration.

The amicus brief, filed by groups including the Government Finance Officers Association, the National Association of Bond Lawyers, the National League of Cities and the American Public Transportation Association, argues that allowing the BABs decision to stand would have “grave ramifications” for federalism and “significant and adverse practical consequences” for states and local government finances.

“It’s frustrating that this has to go through the courts,” said John Godfrey, senior director of government relations for the American Public Power Association, which is filing its own amicus brief in the case. “I think we have a strong legal case and the bottom line is, if we prevail in court, all the money stays in the communities and it’s the communities where the bonds were issued that will benefit.”

The case stems from a three-year-old lawsuit brought against the United States by six Midwestern public power agencies, led by the Indiana Municipal Power Agency. The agencies, which together had floated $4 billion in direct-pay Build America Bonds before 2011, argued that the federal government’s reductions of the 35% direct-pay subsidies – under Office of Management and Budget’s sequestration calculations – violated the American Recovery and Reinvestment Act and represented a breach of contract. The group was seeking the full 35% subsidy on interest payments from 2013 through 2030.

The Court of Federal Claims sided with the U.S. when it ruled that no statutory claim existed because sequestration applied to the payments and that ARRA did not create a contract.

The agencies appealed to the U.S. Court of Appeals for the Federal Circuit, which on Feb. 17 ruled that the BABs subsidies are subject to federal budget sequestration, and that the public power agencies are not eligible for refunds.

The power agencies on July 13 filed a petition asking SCOTUS to take up the case, saying it arises from a “multi-billion-dollar broken promise by the federal government.” The questions presented are whether a payment obligation imposed by Congress can be reduced without congressional repeal by agencies and whether a statutory provision creates a contractual obligation.

For the issuer groups, the stakes are both constitutional and financial, according to its amicus brief.

“The import of this case extends far beyond the group of public power providers that have sued,” the brief says. “If this court permits the Federal Circuit’s reasoning to stand, it will have adverse long-term implications for state and local governance in the United States.”

Allowing a federal agency like the Internal Revenue Service to interpret generic statutory language “raises constitutional alarm bells,” the issuers argue.

The decision will undermine federal policies and programs that the federal government relies on locals to implement, the issuers said.

“This case is of acute concern not only to the thousands of state and local governmental entities that issued Build America Bonds but to the 40,000 state and local governments in the United States cooperating with the federal government to implement critical programs and deliver essential services.”

The GFOA’s federal liaison Emily Brock notes that SCOTUS opts to review only a small number of the volume of requests it receives.

“That said, GFOA and our fellow Amici have a good feeling about this one due to the variety and expanse of interest here,” Brock said. “Although preemption has been on the docket quite a bit in the last several years, it’s been a while since it’s been in the muni context, so fingers crossed.”

By Caitlin Devitt

BY SOURCEMEDIA | MUNICIPAL | 08/16/23 02:27 PM EDT

Husch Blackwell prepared and filed an amicus curiae brief on behalf of 11 major state and local government organizations, including the International Municipal Lawyers Association, Government Finance Officers Association, and the National League of Cities, urging the U.S. Supreme Court to grant certiorari in Indiana Municipal Power Agency v. United States. The case addresses whether the federal government can renege on its binding commitments to state and local governmental entities under the Build America Bonds program—the first-ever direct federal subsidy program for general-purpose state and local borrowing.

In 2009, the Build America Bonds program was created by the American Recovery and Reinvestment Act (ARRA), a stimulus package in response to the Global Financial Crisis that began in 2007. The program was an unprecedented federal intervention in the municipal bond market that induced thousands of state and local entities to issue taxable bonds, giving up the considerable advantages of tax-exempt bonds. State and local issuers made this election in reliance on Congress’s promise to refund 35% of the interest payments on the bonds.

The petitioners—Indiana Municipal Power Agency, Missouri Joint Municipal Electric Utility Commission, Northern Illinois Municipal Power Agency, American Municipal Power, Illinois Municipal Electric Agency, and Kentucky Municipal Power Agency—were among the 2,275 state and local governmental entities that issued over $181 billion in Build America Bonds in 2009 and 2010. These entities used the proceeds to invest in capital infrastructure projects that created thousands of new jobs, just as Congress intended.

In 2013, Congress had not repealed the ARRA, but federal agencies—specifically, the Office of Management of Budget, the Department of the Treasury, and the Internal Revenue Service—decided to stop making direct cash payments to issuers to cover the full 35% of interest payments, maintaining that these payments qualified as direct spending subject to sequestration under the Balanced Budget and Emergency Deficit Control Act of 1985, Budget Control Act, and American Taxpayer Relief Act of 2012.

The Petitioners appealed to the Federal Circuit, which affirmed the trial court’s ruling that the IRS did not improperly decrease the payments for sequestration.

Husch Blackwell’s brief was written by attorneys Danny Solomon, Kate David, Sebastian Waisman, Ben Stephens, and Spencer Tolson. The petition for writ of certiorari was filed on August 16, and the justices are scheduled to consider the petition shortly after returning from their summer recess next month.

August 18, 2023

In a world where deadly heat waves, droughts, storms, wildfires and floods are becoming more widespread and more frequent every year, investors want to know about environmental, social and governance (ESG) risks when buying securities. To ensure transparency, the U.S. Securities and Exchange Commission (SEC) has proposed rules on ESG disclosure for corporate securities. And, where the private sector goes, public finance is usually close behind.

The investment community’s push for guidance on ESG came from two fronts: the desire to invest in ventures with a focus on environmental, social and governing sustainability, and a need to understand risks that these factors pose to the overall security of any investment. In 2021, the SEC announced priorities addressing climate-related risks, and proposed rules in 2022 regarding the corporate disclosure of environmental, social and governing risks and the impact on publicly traded securities.

The Government Finance Officers Association (GFOA), ), a membership organization of government finance professionals, which provides resources, education and best practices, followed suit by releasing voluntary ESG disclosure guidelines in 2021, and we recommend that officers responsible for municipal debt disclosures take note to avoid the potential litigation risks of non-disclosure. It will only be a matter of time before the SEC issues ESG disclosure rules for the municipal sector. Public agency officers should review what’s happening on the corporate side now to be ahead of the game. See “The Evolving Word of ESG Disclosure,” webinar presented by Best Best & Krieger here.

What environmental risks municipal issuers should disclose

Environmental risks have significant material impact on municipal securities. If a community is located in a fire-risk area and the property taxes secure bonds, casualty loss of a group of houses in a wildfire could reduce the community’s ability to collect sufficient property taxes to pay that debt. Investors want to know that risk.

A discussion of risks can be complex, but public entities would be wise to take the time to assess them during the early stages of planning public issuances. Such a discussion may appease investors, reduce the likelihood of claims that such risks were undisclosed in the event of some unforeseen event and ensure success of the agency in its ongoing communications with investors.

Issuers should identify physical risks that could impact a debt-financed project. Are there risks of wildfire, tornados, flooding, wind damage or coastal erosion? Could natural disasters wipe out the project itself, or the tax base that services the debt?

Some questions to address are: Could higher temperatures, changing climate, or the increased frequency and intensity of natural disasters disrupt power generation or farming? Could climate-related changes, such as the rise of sea level, change the consumer or tax base that will service the debt? Could these changes impact prices for real estate in the area? Will current residents leave as a result of the climate related change? How might these risks impact business operations or services?

Additionally, a discussion of resolution might be needed. How will the agency mitigate climate-related risks? Is there technology investment needed to offset such risk? What would be the cost of researching and developing these offsets? Has the agency implemented prevention measures, such as wildfire cameras or detection systems?

Comprehensive disclosure could also involve discussions about greenhouse gas emissions. The SEC’s proposed rules identify three scopes of emissions. For example, if you have a toy factory in your city, Scope 1 includes direct emissions out of the factory’s smokestack; Scope 2 includes indirect emissions, such as for purchasing energy to run the plant; and Scope 3 includes downstream emissions, such as those from transporting the toys to retailers.

Finally, for environmental risks, the GFOA recommends including cautionary language similar to what issuers include on financial projections in official statements for bond issuances. This language should reflect the importance that no one knows what the actual impacts of climate change will be, and these disclosures are forward-looking projections based on facts available to date. The issuer cannot guarantee any results from mitigation measures or impacts as assumed.

Recommendations for disclosure on social and governance risks

The GFOA recommends disclosing information about demographics, income level and wealth disparity, housing availability and affordability, the availability and affordability of services, access to and quality of education, and other resources. Investors want to know about employment statistics, labor relations and challenges for public entities, and the long-term costs related to labor such as pension and other post-employment benefit liabilities.

For example, investors want to know about social risks that could impact service to general obligation bonds, such as a sudden decline in population. Or, if a school district issues debt, investors want to know if a drop in enrollment will impact the ability to service bonds for a new facility.

Governance is the ESG factor that is already widely discussed in most offering documents. Issuers should include a description of the entity’s organizational structure and offer transparency about debt management policies and how financial policies are implemented. Investors want to know when a budget is adopted each year and when financial reports are issued. They also want to know about budget controls and how an entity generates revenue assumptions.

Issuers should also disclose any governance instability that poses risk. For example, continuity in administration is important. Investors want to know the composition and term of board or council membership, and they want to know if there have been departures in executive management or significant turnover in operating staff.

Naturally, issuers should always be transparent about any lawsuits, federal or state investigations or other actions against the agency.

Increased investor scrutiny of ESG factors will force governmental agencies to improve their own due diligence for bond-financed projects. Public officials have a variety of resources at their disposal, such as regional climate change impact studies, local developers, real estate appraisers and economists, who can help evaluate the risks. Analyzing risk will help municipal issuers better plan their future projects and manage their finances over time. Environmental, social and governance factors impact everyone, and before long, issuers will need to provide comprehensive disclosure regarding these risks.

Reuters

Best Best & Krieger LLP

By Mrunal M. Shah and Kimberly A. Byrens

August 17, 2023

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today debuted its third entry on EMMA Labs – the MSRB’s free innovation sandbox for transparency enhancements to the municipal securities market – with a new lab aimed at demystifying structured data. The lab explains what structured data is, features case studies from municipal issuers who have prepared their financial statements in a machine-readable format and illustrates potential future capabilities of the Electronic Municipal Market Access (EMMA®) website.

“Our goal with this Lab is first and foremost education,” said Chief Product Officer Brian Anthony. “Issuers and other market participants need a common understanding of structured data as technology continues to evolve and new legislation is being implemented to require the greater use of structured data in regulatory filings with the MSRB.”

The Lab features case studies from two early adopters of structured data for financial management: the City of Flint and the College of DuPage. The Lab also illustrates how the EMMA website could be enhanced with dynamic comparison tools leveraging structured data.

“Since EMMA Labs launched in 2022, it has served as a place for market participants to collaborate on innovative prototypes and ideas that have the power to improve transparency in our market,” Anthony said.

EMMA Labs is free to use. The structured data lab is one of three “Active Labs” that serve as a proving ground for functional prototypes that could eventually be deployed on the EMMA website. The first Lab is a powerful search engine that the MSRB plans to bring to future-state EMMA to enable keyword searches across the hundreds of thousands of disclosure documents submitted to EMMA as unstructured PDFs. The second Lab is a dynamic dashboard for market data analysis that empowers users to discover and visualize market trends. An additional Idea Labs section provides a forum for users to submit and provide feedback on ideas for potential future Active Labs.

Date: August 07, 2023

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

In the first half of 2023, several rule changes have been proposed by the Municipal Securities Rulemaking Board (MSRB) and the U.S. Securities and Exchange Commission (SEC), including changes to “Best Execution” requirements and new data transparency requirements. The SEC’s “Regulation Best Execution” proposal has been met with particularly strong pushback, with many in the municipal market encouraging that it be dropped altogether.

View the Ballard Spahr Mid-Year Review.

August 1, 2023

View the pdf.

Dechert LLP – Brenden P.Carroll, Nicholas Carroll, Stephen T. Cohen , Jonathan Blaha , Kathleen Hyer, Austin G. McComb, Devon Roberson and Ashley N. Rodriguez

August 2 2023

Today, the Bond Dealers of America – Washington DC’s only dedicated Fixed Income Advocate – is pleased to announce the creation of the Fixed Income Technology Clearinghouse intended to help US focused bond dealers navigate their technology and back-office options including costs and deliverables.

The Fixed Income Technology Clearinghouse will bring together professionals at BDA full member firms with responsibility for and focus on technology decisions and adoption.

This group will be managed by BDA staff working alongside outside consultant Stephen Winterstein of SP Winterstein & Associates LLC, a long-time municipal market leader, previously as Head of Capital Markets at Alphaledger and as the Head of Municipal Fixed Income at MarketAxess.

Mission

To bring together fixed-income market leaders to address the most pressing fixed income technology issues of the day. Providing a platform to help facilitate solutions to technology and back office or operational challenges being faced by securities firms and banks active in the US bond markets.

Whether having a conversation with a vendor about issues with an existing product, or proposing a new idea, this group provides BDA members a forum to discuss issues, while working with industry professionals to identify and implement proper solutions.

The Fixed Income Technology Clearinghouse will also work with regulators where the membership sees fit, providing additional opportunities with dialogue with the MSRB, FINRA, and SEC to help direct and better inform the respective staffs.

The main objectives of the Clearinghouse include:

• To collaborate and develop ideas to improve existing vendor products, or present new ideas
• Provide a unified voice and solutions to regulators on key issues such as the Financial Data Transparency Act and one-minute trade reporting
• Hold an annual Roundtable to discuss key technology topics and assist in drafting the agenda for key BDA events such as the NFIC to ensure proper topics are incorporated.

Membership

The BDA’s Fixed Income Technology Clearinghouse will have cross-product representation from all BDA full member firms that wish to participate. Each full member interested in participating would select a delegate to represent them within the group.

We will also work to ensure BDA associate members are engaged while finding parity in representation from both the municipal and taxable markets and in sizes of firms.

If you or your firm is interested in participating in the BDA Fixed Income Technology Clearinghouse, please contact Mike Nicholas at [email protected].

Bond Dealers of America

August 3, 2023

Meeting Notice

07/28/23

Meeting Notice

07/28/23

WPFN is a voluntary association of women, elected and appointed officials, and other women finance professionals, formed within GFOA to develop a core network of women GFOA members to coordinate communications and to encourage participation in GFOA and WPFN. The purpose of the network is to foster the careers of women in public finance through education, networking, and mentoring opportunities. Membership in WPFN is free.

JOIN TODAY

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) announced today that it has elected Fiscal Year 2024 officers and five new members who will join the Board on October 1, 2023. The MSRB also announced that Ernesto A. Lanza would join the senior staff of the MSRB to lead the Market Regulation department.

Board Leadership

The Board re-elected public member Meredith L. Hathorn, Managing Partner, Foley & Judell, L.L.P. in Baton Rouge, LA, to serve a second one-year term as Chair of the Board.

Angelia Schmidt, a bank dealer representative on the Board, will serve as FY 2024 Vice Chair. Schmidt is Managing Director and Head of Underwriting at UBS.

“I am grateful for the opportunity to continue working alongside my fellow Board members to advance long-term initiatives that will profoundly shape the future of our market,” said MSRB Chair Hathorn. “As we approach the midpoint of the organization’s four-year strategic plan, we are making great strides toward modernizing our rule book, our technology systems and our data capabilities to better serve investors, issuers and the public interest.”

Hathorn’s and Schmidt’s terms were set to end on September 30, 2023, but the Board tapped them, along with public member Thalia Meehan, to serve one additional year in the final phase of its transition plan to reduce the size of the Board from 21 members to its current size of 15 members.

Board Members

The Board includes eight independent public members and seven members from MSRB-regulated broker-dealers, banks and municipal advisors. Four new members will join the Board to serve four-year terms that will begin October 1, 2023. One new municipal advisor will join the Board on October 1 to serve the remaining three years of a vacancy created by the departure of a municipal advisor representative on the Board.

“Thanks to the tremendous efforts of the Nominating Committee, we have the pleasure of welcoming five individuals who will refresh our Board with new perspectives, relevant experience and a shared commitment to serving our market,” Hathorn said.

New public members joining the MSRB Board in FY 2024 are Michael Craft, Senior Credit Analyst at Genworth Financial Inc. in Stamford, Connecticut; and Pamela M. Frederick, Chief Financial Officer and Treasurer for New York City’s Battery Park City Authority. New regulated representatives are Alexander Chilton, Managing Director, Head of Municipal Securities, at Morgan Stanley’s Municipal Bond Division in New York; and Christopher A. Kendall, Managing Director, Fixed Income Trading, at Charles Schwab and Company, Inc. in Denver, Colorado. Wendell G. Gaertner of Public Resources Advisory Group, Inc. in St. Petersburg, Florida is the municipal advisor representative joining the Board for a three-year term.

The new Board members were selected from more than 50 applicants this year.

MSRB Leadership

Ernie Lanza returns to the MSRB this month to serve as Chief Regulatory and Policy Officer. His career as a securities regulatory and public finance attorney includes more than 15 years in leadership roles at the MSRB, serving as acting director of the SEC’s Office of Municipal Securities, and private practice.

“I am delighted to welcome Ernie back to the MSRB, and I am confident that he is the right person at the right time to advance our regulatory agenda,” said MSRB CEO Mark Kim.

The MSRB also said today that it has named John Toye, a 13-year veteran of the MSRB who has held several IT leadership roles, to serve in the new role of Chief Information Officer. Brian Anthony, who originated the role of Chief Data Officer at the MSRB, will transition to the new role of Chief Product Officer.

About the New MSRB Board Members

Alexander Chilton is Managing Director, Head of Municipal Securities at Morgan Stanley’s municipal bond division based in New York, NY, where he oversees municipal public finance, capital solutions, capital markets, and various sales and trading initiatives. Prior to joining Morgan Stanley in 2015, Chilton was a Partner at Whitehaven Asset Management working on an investment fund in the municipal market. Alexander began his career at Citigroup in the Municipal Bond Department. He holds bachelor’s degrees in both economics and engineering, and a master’s degree in engineering from the University of Pennsylvania.

Michael Craft evaluates and recommends municipal bond investments as Senior Credit Analyst at Genworth Financial, Inc., which provides guidance, products, and services that help people understand their caregiving options and fund their long-term care needs, and parent company of Enact, a leading U.S. mortgage insurance provider. Prior to joining Genworth Financial in 2017, Craft was Managing Director, Credit at Lumesis, Inc., and held several positions at Fidelity Investments. He began his career at Lehman Brothers researching and analyzing the municipal market. He holds a bachelor’s degree in Economics and Russian Studies from Amherst College and an MBA from NYU Stern School of Business. He is a Chartered Financial Analyst.

Pamela M. Frederick is the Chief Financial Officer and Treasurer of the Battery Park City Authority in New York, NY, where she is responsible for all financial aspects, including directing a $1 billion investment portfolio, as well as structuring and negotiating $1 billion senior lien and junior lien tax exempt municipal bonds. Prior to Battery Park City Authority, Frederick’s 30 years as an experienced financial executive includes positions at Citigroup, GE Capital, Fieldstone Private Capital, Overseas Private Investment Corp. and Chase Manhattan Bank. She holds a bachelor’s degree in economics and an MBA in finance from the University of Michigan and a Certificat Scolarité from Hautes Etudes Commerciales (France).

Wendell G. Gaertner is Senior Managing Director of Public Resources Advisory Group, Inc. (PRAG) in St. Petersburg, FL, where he provides municipal advisory services to clients including cities, counties, states, utilities, transportation agencies, and special districts. Prior to joining PRAG in 2013, Gaertner served as Director, Public Finance at Bank of America Merrill Lynch and Vice President, Public Finance at Raymond James & Associates, Inc. He began his finance career at Barnett Bank of Tampa. Gaertner holds a bachelor’s degree in chemistry from the University of Miami and an MBA from Stetson University.

Christopher A. Kendall is Managing Director, Fixed Income Trading at Charles Schwab & Company, Inc. in Denver, CO, where he is responsible for all trading related activity related to fixed income products. In addition, he leads regulatory and compliance requirements that affect fixed-income products as well as development of electronic trading systems, including algorithmic pricing tools. Kendall has more than 30 years’ financial experience, including serving on the MSRB’s Retail Investor Advisory Group from 2018-2019 and Market Transparency Advisory Group in 2020. He began his career at Shawmut Bank. He holds a bachelor’s degree in economics and psychology from St. Lawrence University.

Date: August 03, 2023

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

Supposed free-market champions are limiting the freedom of investment managers, leading to lower returns and higher interest rates on bonds.

In the face of fires, record heat, floods and other extreme weather events across the country, House Republicans are using much of July to oppose financial transparency related to climate risks and to attack investor freedoms. Their reckless course endangers not just the planet but also the financial stability of Americans’ retirement savings and pensions. One Republican went so far as to say consideration of climate risk by asset managers is “Satan’s plan.”

On July 12, leaders of the House Financial Services Committee launched hearings to attack environmental, social and governmental (ESG) practices by financial firms. They are also crafting legislation that would outlaw long-standing risk assessment practices. Just as dangerously, House Republicans intend to restrict shareholders’ ability to hold corporate executives accountable by restricting rights to vote proxies and curbing shareholder resolutions related to corporate governance.

It’s hardly surprising that oil companies and other fossil fuel businesses have poured tens of millions of dollars into the campaign coffers of committee members and other anti-ESG politicians across the country.

Continue reading.

Bloomberg Opinion

By Brian Frosh and Nancy Kopp

July 25, 2023

The NFMA’s Disclosure Committee is pleased to release the following draft best practices in disclosure for comment.

• Recommended Best Practices in Disclosure for State Revolving Fund Revenue Bonds, Draft Dated July 25, 2023. Comments due September 30, 2023
• Press Release, Dated July 25, 2023

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) approved shortening the timeframe for trades to be reported to the MSRB at its July 26-27, 2023 quarterly meeting. The Board also approved the FY 2024 budget and discussed priorities for the next fiscal year, among other business.

Market Regulation

The Board approved seeking Securities and Exchange Commission (SEC) approval of amendments to MSRB Rule G-14 to shorten the timeframe for trades to be reported to the MSRB from 15 minutes to as soon as practicable, but no later than one minute, subject to certain exceptions for firms with limited trading volume in municipal securities and for manual trades.

“Moving to a one-minute standard for trade data reported to the MSRB will achieve greater price transparency for investors who rely on this information to make informed decisions when buying or selling municipal bonds,” said MSRB CEO Mark Kim. “The proposal we plan to file with the SEC recognizes the role that small firms and manual trades play in the municipal securities market.”

As a further step in its ongoing rulebook modernization, the Board approved seeking SEC approval of a proposal to amend Rule G-12, on uniform practice, to adopt requirements for the completion of allocations, confirmations and affirmations related to municipal securities transactions. The proposed amendments are consistent with those applicable to broker-dealers for other securities under newly adopted SEC Rule 15c6-2, which facilitates compliance with the transition to T+1 settlement.

Public Trust

The Board approved a $47 million budget to fund the activities of the MSRB for FY 2024, beginning October 1, 2023. A budget summary detailing the MSRB’s projected expenses, revenues and reserve levels will be published at the beginning of the fiscal year. The Board also approved designating an additional $3.5 million of reserves for the Board’s system modernization fund.

“The MSRB’s FY 2024 budget effectively manages costs in an inflationary environment and reduces organizational reserves to within target levels, all while continuing to make the necessary investment in modernizing our rule book, our technology systems and our data capabilities to serve the market of the future,” said MSRB Chair Meredith Hathorn. “Under the leadership of the Finance Committee and Committee Chair Angelia Schmidt, the Board has demonstrated the highest commitment to fiscal discipline and stewardship of industry dollars.”

The annual budget is a factor in the MSRB’s new fee-setting process, which is designed to ensure the MSRB’s fees on regulated entities result in the collection of only the revenue needed to fund its activities without accumulating excess reserves. The Board plans to file a new rate card in the first quarter of FY 2024 to establish rates effective January 1, 2024.

The Board also held FY 2024 officer elections and considered candidates to fill a vacancy on the Board. Board leadership and the incoming class of new Board members will be announced in the coming weeks.

Market Transparency

The Board received an update regarding work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems to implement user-driven enhancements to the website and to the disclosure submission process.

Market Structure and Data

The Board received a demonstration of a Structured Data Lab to be added to the EMMA Labs platform next month. Anyone who creates a free EMMA Labs account will be able to explore and provide feedback on the new Lab, which highlights the experiences of municipal issuers that have adopted structured data and features a prototype of what EMMA might be able to do in the future with additional structured data. The Lab also includes educational content to support market participants’ common understanding of structured data.

Date: July 28, 2023

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

Meeting Notice

[07/28/23]

Meeting Notice

[07/28/23]

As demand for public finance officers grows, local governments are facing challenges in recruiting and retaining top talent. In this current environment, the use of virtual CFOs and just-in-time talent are becoming increasingly popular options.

LEARN MORE.

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet in Washington, D.C. on July 26-27, 2023 for its final quarterly meeting of the fiscal year. The Board will discuss its priorities for the next fiscal year and approve the FY 2024 budget to advance its FY 2022-2025 Strategic Plan.

Market Regulation

The Board will discuss proposed amendments to MSRB Rule G-14 to shorten the timeframe for trades to be reported to the MSRB from 15 minutes to as soon as practicable, but no later than one minute, subject to certain exceptions. The Board also will discuss a proposal to amend Rule G-12, on uniform practice, to adopt requirements for the completion of allocations, confirmations and affirmations related to municipal securities transactions that are consistent with those applicable to broker-dealers for other securities under newly adopted SEC Rule 15c6-2.

Market Transparency

The Board will receive an update regarding work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems, including user personalization and improvements to search and the disclosure submission process.

Market Structure and Data

The Board will receive a demonstration of a Structured Data Lab to be added to the EMMA Labs platform. The forthcoming Lab provides educational content on structured data, highlights the experiences of municipal issuers that have adopted structured data, and features a prototype of what EMMA might be able to do in the future with additional structured data.

Public Trust

The MSRB publishes its budget at the beginning of every fiscal year to report on the planned allocation of resources to advance the organization’s multi-year Strategic Plan. The Board will discuss the FY 2024 budget proposal and its priorities for the next fiscal year, which begins October 1, 2023. The Board also will hold FY 2024 officer elections and consider candidates to fill a vacancy on the Board.

Date: July 19, 2023

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

According to a recently-released meeting agenda, the Securities and Exchange Commission’s (“SEC”) upcoming July 26, 2023 meeting will include consideration of adopting rules to enhance disclosures regarding cybersecurity risk management, governance, and incidents by publicly traded companies.

The SEC initially proposed these rules in March 2022. If adopted as proposed, the new rules would require publicly traded companies to publicly disclose a cybersecurity incident within four business days of determining that the incident is material, and to provide disclosure in periodic reports about certain cybersecurity governance practices. The proposed rule has been subject to two comment periods; after the original comment period ended in May 2022, the SEC re-opened the comment period between October-November 2022. The SEC is considering additional rules that implicate cybersecurity considerations and are in various phases of comment and revision for investment advisors, broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board, national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents.

Covington & Burling LLP – Micaela R.H. McMurrough, Ashden Fein, David H. Engvall, Caleb Skeath, Kerry Burke and Shayan Karbassi

July 20, 2023

The MSRB proposed amendments to MSRB Rule G-3 (“Professional Qualification Requirements”) to provide a one-time exemption for municipal advisors who allowed their qualification to lapse.

The MSRB proposed:

• creating a “one-time, criteria-based exemption” for former municipal advisor representatives who allowed their qualification to lapse; the exemption allows the advisor to requalify, without examination, no later than one year after a two-year lapse;
• removing language that allows the MSRB to waive the reexamination requirements under “extraordinary cases” for municipal advisor representatives and principals;
• clarifying an interpretive question regarding the lapse in qualification for individuals associated with dually registered broker-dealers and advisors; and
• specifying the means for electronic delivery of a requisite MSRB notice regarding satisfaction of the criteria-based exemption.

In addition, the MSRB proposed amending MSRB Rule G-8 (“Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors”) to require municipal advisors to keep books and records regarding the exemption.

The MSRB stated that it is proposing amendments to MSRB Rules G-3 and G-8 as part of its rule book modernization initiative and an “industry-wide continuing education (CE) initiative.”

The MSRB requested a compliance date of no more than 30 days following the SEC’s approval of the amendments.

Fried Frank Harris Shriver & Jacobson LLP

July 18, 2023

Norwalk, CT, July 17, 2023 — In April 2022, the Government Accounting Standards Board issued Statement No. 99, Omnibus 2022, which stated that for purposes of applying paragraphs 35–38 of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, the London Interbank Offered Rate (LIBOR) is no longer an appropriate benchmark interest rate for a derivative instrument that hedges the interest rate risk of taxable debt when LIBOR ceases to be determined by the ICE Benchmark Administration using the methodology in place as of December 31, 2021.

As of July 1, 2023, the ICE Benchmark Administration ceased publishing any LIBOR setting using the methodology in place as of December 31, 2021. As a result, as of July 1, 2023, LIBOR is no longer an appropriate benchmark interest rate for a derivative instrument that hedges the interest rate risk of taxable debt for purposes of Statement 53.

More information on LIBOR is available on the ICE Benchmark Administration’s website here.

Statements 53 and 99 are available on the GASB website, www.gasb.org.

Norwalk, CT, July 12, 2023 — The Financial Accounting Foundation (FAF) today posted its 2022 Annual Report to its website. The report is available as a printable PDF file and as an enhanced digital version.

The annual report theme is “Standards That Work from Main Street to Wall Street,” and it commemorates the 50th anniversary of the creation of the Financial Accounting Standards Board (FASB). The report provides a snapshot of the major milestones over the last 50 years of its Board and staff as they have worked to earn the responsibility entrusted to them: to develop and improve accounting and reporting standards that provide useful information to investors and other allocators of capital.

While much has changed since then, one thing that hasn’t is the importance of stakeholder engagement in the independent standard-setting processes of both the FASB and the Governmental Accounting Standards Board (GASB). The 2022 Annual Report includes:

• Letters from FASB, GASB, and FAF leaders
• Milestones of the FASB’s 50-year history
• Highlights of 2022 FASB and GASB standards and Exposure Drafts
• Complete 2022 management’s discussion and analysis and audited financial statements (MD&A).

The annual report is available online as a downloadable PDF file, along with a mobile-friendly version at accountingfoundation.org.

About the Financial Accounting Foundation

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

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

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

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet in Washington, D.C. on July 26-27, 2023 for its final quarterly meeting of the fiscal year. The Board will discuss its priorities for the next fiscal year and approve the FY 2024 budget to advance its FY 2022-2025 Strategic Plan.

Market Regulation

The Board will discuss proposed amendments to MSRB Rule G-14 to shorten the timeframe for trades to be reported to the MSRB from 15 minutes to as soon as practicable, but no later than one minute, subject to certain exceptions. The Board also will discuss a proposal to amend Rule G-12, on uniform practice, to adopt requirements for the completion of allocations, confirmations and affirmations related to municipal securities transactions that are consistent with those applicable to broker-dealers for other securities under newly adopted SEC Rule 15c6-2.

Market Transparency

The Board will receive an update regarding work to modernize the Electronic Municipal Market Access (EMMA®) website and related market transparency systems, including user personalization and improvements to search and the disclosure submission process.

Market Structure and Data

The Board will receive a demonstration of a Structured Data Lab to be added to the EMMA Labs platform. The forthcoming Lab provides educational content on structured data, highlights the experiences of municipal issuers that have adopted structured data, and features a prototype of what EMMA might be able to do in the future with additional structured data.

Public Trust

The MSRB publishes its budget at the beginning of every fiscal year to report on the planned allocation of resources to advance the organization’s multi-year Strategic Plan. The Board will discuss the FY 2024 budget proposal and its priorities for the next fiscal year, which begins October 1, 2023. The Board also will hold FY 2024 officer elections and consider candidates to fill a vacancy on the Board.

Date: July 19, 2023

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

Norwalk, CT, July 10, 2023 — The Governmental Accounting Standards Board has issued implementation guidance in the form of questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements.

Implementation Guide No. 2023-1, Implementation Guidance Update—2023, contains new questions and answers that address application of GASB standards on leases, subscription-based information technology arrangements, and accounting changes. The guide also includes amendments to previously issued implementation guidance on leases.

The GASB periodically issues new and updated guidance to assist state and local governments in applying generally accepted accounting principles (GAAP) to specific facts and circumstances that they encounter. The GASB develops the guidance based on:

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

The guidance in Implementation Guides is cleared by the Board and constitutes Category B GAAP. The guide is available to download free of charge on the GASB website, www.gasb.org.

The United States is in the process of transitioning ESG disclosure from voluntary, market-led reporting to a regulatory-driven scheme, principally led by the US Securities and Exchange Commission’s (SEC) anticipated (but delayed) disclosure requirements for public companies and investment advisers/companies, as well as evolving and divergent state legislation primarily aimed at those managing state assets.

This article recaps and provides an update for certain of the SEC’s proposed rule-makings and Congressional actions, as well as outlining the varying (and politicized) approaches adopted by state legislatures or administrative bodies to either restrict or encourage ESG measures.

Proposal to Enhance and Standardize Climate-Related Disclosures for Investors

On March 21, 2022, the SEC announced a proposed rule1 called “The Enhancement and Standardization of Climate-Related Disclosures for Investors” that would require public companies to provide certain climate-related financial data and greenhouse gas (GHG) emissions insights in public disclosure filings. These proposed SEC rules are intended to make US corporate ESG reporting more standardized and consistent with similar markets such as the European Union (EU).

The SEC final rules, which were initially anticipated to be released in April, are expected to require large filers to disclose material information about their climate risks, risk management approach, corporate ESG governance, and GHG emissions.2 Since publication, the SEC has received approximately 50,000 comments during an extended comment period.

Continue reading.

Eversheds Sutherland (US) LLP – Ed Winters and Ethan D. Corey

July 7 2023

• BofA, JPMorgan, Citigroup among banks named in lawsuits
• Banks may settle FCA suits for about $1.5 billion, BI’s Stein

After almost a decade and untold millions of dollars in legal fees, some of Wall Street’s biggest banks will finally get their day in court on allegations of price-fixing in the municipal bond market — that is if they don’t settle first.

Bank of America, Barclays Capital Inc., BMO Financial Corp., William Blair & Co. LLC, Citigroup Inc., Fifth Third Bancorp, JP Morgan Chase & Co. and Morgan Stanley are expected to go to trial in Illinois next month to face allegations they inflated interest rates on bonds to finance public works to discourage investors from returning them for cash and colluded in setting the rates.

It is the first of four such cases originally filed under seal in 2014 by a Minnesota financial adviser, B.J. Rosenberg, saying that the banks caused a collective $1.5 billion in damages and seeking restitution for triple that amount. Another $6.5 billion in damages hangs in the balance in antitrust litigation in New York.

Continue reading.

Bloomberg Markets

By Joseph Mysak Jr

July 10, 2023

• Lawsuit claimed bank inflated muni investors’ taxable income
• Hundreds of clients could qualify for payment under agreement

UBS Financial Services agreed to pay $2.5 million to settle a class-action lawsuit claiming the bank provided inaccurate tax information to holders of taxable municipal bonds.

A federal judge in New Jersey gave preliminary approval to the deal Wednesday and scheduled a hearing in December to iron out details and make a final determination, according to a court filing.

Richard Goodman sued in 2021 on behalf of himself and other customers who bought taxable municipal bonds in accounts maintained by UBS. He claimed the bank, which was overseeing more than $90 billion of municipal bonds, didn’t report amortizable bond premiums on forms clients used to prepare tax returns, resulting in overstatement of income and tax payments.

Continue reading.

Bloomberg Markets

by Madlin Mekelburg

Fri, July 14, 2023

Illinois reached a tentative deal to settle a nearly decade-long lawsuit that alleged about a dozen of the biggest US banks engaged in price fixing in the municipal bond market.

The banks have offered to pay the state $68 million, according to Todd Schneider, an attorney who is representing plaintiff side. The proposal comes as Bank of America, Barclays Capital Inc., BMO Financial Corp., William Blair & Co. LLC, Citigroup Inc., Fifth Third Bancorp, JPMorgan Chase & Co. and Morgan Stanley were expected to go to trial in Illinois next month to face allegations they inflated the interest rates on certain types of municipal bonds to discourage investors from returning them for cash and colluded in setting the rates.

Barclays, Citigroup, JPMorgan and Morgan Stanley all declined to comment on the proposed settlement. Representatives from Bank of America, BMO, William Blair and Fifth Third didn’t respond to email requests for comment. A spokesperson for the Illinois Attorney General’s Office declined to comment.

Continue reading.

Bloomberg Markets

By Joseph Mysak Jr

July 12, 2023

The Florida Division of Bond Finance published a notice (the Notice) on June 29, 2023, providing guidance on Florida House Bill 3 (HB 3), which was signed into law on May 2, 2023, by Gov. Ron DeSantis. HB 3, in part, restricts the use of environmental, social and corporate governance (ESG) factors in connection with municipal debt issuances within the state of Florida. For a more general look at HB 3, see Holland & Knight’s alert, “New Florida Law Prohibits Use of ESG Factors in Government Investment and Procurement Decisions,” June 30, 2023.

Florida’s Prohibitions Against ESG

Pursuant to HB 3, issuers are prohibited from contracting with “any rating agency whose ESG scores for such issuer will have a direct, negative impact on the issuer’s bond rating.” The Notice clarifies that “current rating agency criteria indicates ESG scores are an output of a general credit analysis and do not independently influence the credit rating of issuers.” According to the Notice, HB 3 “institutes taxpayer protections against government issuers contracting with rating agencies that attempt to transition to a paradigm that maps ESG scores directly to an issuer’s credit rating.” The Notice further provides that HB 3 does not prevent rating agencies from analyzing and discussing “credit risks they believe are relevant, such as providing feedback on potential risks from natural disasters, such as hurricanes, or other risks that are relevant or may potentially be relevant to an issuer’s credit rating.” Furthermore, the Notice states that any rating change following a natural disaster such as a hurricane is not considered an ESG metric under HB 3 and therefore such events or factors “independently do not trigger the contracting prohibition.”

HB 3 also prohibits issuers from issuing ESG Bonds. ESG Bonds are defined as “bonds that have been designated or labeled as bonds that will be used to finance a project with an ESG purpose, including, but not limited to, green bonds, Certified Climate Bonds, GreenStar designated bonds, and other environmental bonds marketed as promoting a generalized or global environmental objective; social bonds marketed as promoting a social objective; and sustainability bonds and sustainable development goal bonds marketed as promoting both environmental and social objectives.” HB 3 also prohibits the expenditure of public funds or bond proceeds to pay for the services of any third-party verifier related to the designation or labeling of bonds as ESG Bonds.

The Notice provides that bonds routinely issued for a specific purpose such as resiliency are not prohibited by HB 3. The Notice encourages issuers within the state to continue to disclose material risk factors.

The Notice also clarifies that HB 3 does not prevent financial institutions from underwriting bonds issued within the state.

We Can Help

Holland & Knight attorneys are working with issuers, borrowers, underwriters and lenders to address the impact of HB 3. If you have any questions regarding this alert, please contact the authors or another member of Holland & Knight’s Public Finance Team.

Holland & Knight

by Vlad Popik | Michael L. Wiener

July 5, 2023

The Municipal Securities Rulemaking Board (“MSRB”) is implementing changes to login accounts for its Electronic Municipal Market Access System (“EMMA”) that may affect issuers and other obligors making continuing disclosure submissions to EMMA. The MSRB has announced that “individual accounts” will be deactivated on July 13, 2023. Thereafter, an “organization account” will be required for issuers and other obligors to make continuing disclosure submissions through the EMMA Dataport.

Instructions on how to determine whether a current account is an individual account or an organizational account, how to upgrade an individual account to an organizational account, and how to consolidate individual accounts into an organization account is available on the MSRB’s website here.

Foster Garvey PC

June 23, 2023

This project aims to revolutionize the way financial data is extracted from financial reports and used to support decisions.

GFOA and Rutgers University are pleased to announce a groundbreaking joint project that leverages the power of artificial intelligence (AI) to extract select financial data from local government financial reports.

Download Full Press Release.

Publication date: June 2023

On May 2, 2023, Florida Governor Ron DeSantis signed into law HB 3, also known as “An Act Relating to Government and Corporate Activism (the “Act”). The Act amends Florida Statute provisions relating to (i) deposits and investments of state money, (ii) state retirement systems and plans, (iii) state public funds, (iv) state bonds, (v) public deposits, (vi) government contracts, (vii) financial institutions, (viii) consumer finance companies, (viii) money services businesses, and (ix) deceptive and unfair trade practices.

Below is a summary of the provisions of the Act and its impact on the investment of public funds and the new legislative provisions affecting financial institutions in Florida.

Investment Decisions

The Act prohibits applicable parties from taking into consideration “non-pecuniary” factors, including environmental, social and governance (“ESG”) factors, when making investment decisions. Such investment decisions must be based solely on “pecuniary factors.” A “pecuniary factor” is defined in the Act as “a factor that… is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy. The term does not include the consideration of the furtherance of any social, political, or ideological interests.” This requirement applies to the investment of public funds made by (i) the Chief Financial Officer, or other party authorized to invest on his or her behalf, (ii) a citizen support organization or a direct support organization on behalf of an agency, (iii) the plan administrator, named fiduciary, board, or board of trustees of the retirement system or plans, and (iv) the State Board Administration of the System Trust Fund or other trust funds administered thereby.

Continue reading.

by Tala Woods

June 13, 2023

Shutts & Bowen LLP

Earlier this week, the Securities and Exchange Commission (“SEC”) published an update to its rulemaking agenda indicating that it does not plan to approve two proposed cyber rules until at least October 2023 (the agenda’s timeframe is an estimate). The proposed rules in question address disclosure requirements regarding cybersecurity governance and cybersecurity incidents at publicly traded companies and registered investment advisers and funds.

• Cybersecurity Risk Governance Rule for Public Companies: Proposed in March 2022, this proposed rule would require publicly traded companies to publicly disclose material cyber incidents within four business days and to provide disclosure in periodic reports about certain cybersecurity governance practices. The proposed rule has been subject to two comment periods; after the original comment period ended in May 2022, the SEC re-opened the comment period between October-November 2022.
• Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies: Proposed in February 2022, this proposed rule would require registered investment advisers and investment companies to adopt and implement “written cybersecurity policies and procedures reasonably designed to address cybersecurity risks.” The rule would also require advisers to “report significant cybersecurity incidents affecting the adviser, or its fund or private fund clients” to the SEC as well as to implement certain recordkeeping practices. The proposed rule has also been subject to two comment periods; after the original comment period ended in April 2022, the SEC re-opened the comment period between March-May 2023.The SEC is also considering multiple other rules that implicate cybersecurity considerations and are in various phases of comment and revision for broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board, national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents.

Covington & Burling LLP – Micaela R.H. McMurrough, Ashden Fein, Caleb Skeath and Shayan Karbass

June 15 2023

The legislation mirrors anti-“industry boycott” legislation introduced or passed in other US states and provides more explicit rubrics of prohibited factors.

On May 5, 2023, Florida Governor Ron DeSantis signed into law House Bill 3, a comprehensive antiESG bill that restricts consideration of environmental, social, and governance (ESG) factors in various contexts (HB 3). The law, scheduled to take effect on July 1, 2023, builds on the State Board of Administration’s August 2022 resolution providing that its own investment decisions must be based only on pecuniary factors that do not include “the consideration of the furtherance of social, political, or ideological interests.” HB 3 amends a variety of Florida statutes relating to: (i) retirement plans and investments of funds; (ii) financial institutions, including qualified public depositories; (iii) money services businesses; (iv) consumer finance companies; (v) trust fund assets and public funds; (vi) government contracts; (vii) government bonds; and (viii) deceptive and unfair trade practices.

HB 3 fulfills the promises of a 19-state alliance formed on March 16, 2023, by Governor DeSantis and the governors of Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, and Wyoming to push back against what they believe to be President Biden’s ESG agenda. Pursuant to the alliance’s policy statement, the governors have agreed to lead their respective state-level efforts to:

• protect taxpayers from ESG influences across state systems, such as by blocking the use of ESG in all investment decisions at the state and local level, so that only “financial factors are considered to maximize the return on investment … [and] eliminating consideration of ESG factors by state and local governments when issuing bonds or prohibiting state fund managers from considering ESG factors when investing taxpayer money”; and
  protect citizens from ESG influences in the financial sector, including “banning the sector from considering so-called “Social
• Credit Scores” in banking and lending practices … [as well as] including stopping financial institutions from discriminating against customers for their religious, political, or social beliefs, such as owning a firearm, securing the border, or increasing [America’s] energy independence.”

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Latham & Watkins LLP – Lawrence E. Buterman, Sarah E. Fortt, Joshua N. Holian, Betty M. Huber, Arthur S. Long, Andrea J. Schwartzman, Pia Naib, Charlie Beller, Karmpreet “Preeti” Grewal, Austin J. Pierce and Deric M. Behar

June 8 2023

WASHINGTON, DC – The Municipal Securities Rulemaking Board (MSRB) announced today that municipal advisor Jerry W. Ford joined the Board of Directors and will serve through September 30, 2023. Ford will temporarily fill the position vacated by Jill Jaworski, who left earlier this month to assume the role of Chief Financial Officer for the City of Chicago.

To fill the remaining three years of Jaworski’s term, the Board is seeking applications from non-dealer municipal advisors through June 16, 2023, via the MSRB’s Board of Directors Application Portal. Additional details on the Board application process, information about Board service requirements and FAQs are available on the MSRB’s website.

“We’re grateful to welcome Jerry back to the Board at this pivotal time as we consider and adopt priorities and a supporting budget for the 2024 fiscal year,” said MSRB Chair Meredith Hathorn. Ford previously served on the Board FY 2017-2020 and chaired the Board’s Finance and Stakeholder Engagement Committees, among other responsibilities. For the remainder of FY 2023, Ford will serve on both the Audit and Risk Committee and Finance Committee.

Ford is president of Ford & Associates, where he advises clients on credit, structure, and sale of new-money and refunding issues, direct placement of bank loans, use and structure of interest rate swaps, and termination of existing swaps. Prior to founding Ford & Associates, Inc., Ford worked as a public finance underwriter/banker and financial advisor for a major southeast regional bank. Before entering investment banking, Mr. Ford was a senior consultant with Booz Allen Hamilton in Washington D.C. and worked in the Office of the Secretary at the U.S. Department of Health, Education, and Welfare. He has a bachelor’s degree from California State University at Los Angeles and a master’s in public administration from the University of Southern California.

Date: June 15, 2023

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

View the MSRB Notice.

5/30/23

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

Under amended Exchange Act Rule 15c6-1 (“Settlement Cycle”), the regular settlement cycle for most broker-dealer transactions was shortened from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”).

The effective date for the amendments is June 1, 2023 and the compliance date is May 28, 2024, which is consistent with the implementation date for amended Exchange Act Rule 15c6-1 (“Settlement Cycle”).

May 31 2023

Fried Frank Harris Shriver & Jacobson LLP

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

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

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

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

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

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

May 22 2023

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

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

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

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

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

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

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

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

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

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

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

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

Read the report.

Date: May 24, 2023

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

View the MSRB notice.

May 15, 2023

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

View the MSRB publication.

May 15, 2023

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

May 18 2023

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

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

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

May 17 2023

Fried Frank Harris Shriver & Jacobson LLP

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

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

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

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

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

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

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

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

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

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

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

By Scott Sowers

BY SOURCEMEDIA | MUNICIPAL | 09:06 AM EDT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Connor Hussey

BY SOURCEMEDIA | MUNICIPAL | 09:04 AM EDT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Neal Pandozzi

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

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

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

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

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

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

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

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

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

Date: May 15, 2023

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

May 8 2023

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

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

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

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

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

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

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

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

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

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

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

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

May 10, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you.

_______________________________________________

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

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

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

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

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

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

May 10, 2023

SUMMARY

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

View the SIFMA comments.

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

READ ONLINE

A “Must-Have” For Publication Every Government

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

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

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

PURCHASE

View the MSRB Notice.

Notice 2023-04 – Informational Notice

Publication date: 04/27/2023

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

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

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

One-Minute Trade Reporting

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

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

Interpretive Guidance Review

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

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

Professional Qualification

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

Time of Trade Disclosure

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

Date: April 28, 2023

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

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

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

Key Features

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

Commentary

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

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

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

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

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

April 28 2023

View the Meeting Notice.

[04/26/23]

View the News Release.

[04/26/23]

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

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

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

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

Bond Dealers of America

April 17, 2023

SUMMARY

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

Read the Comment Letter.

April 17, 2023

Meeting Notice.

[04/17/23]

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

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

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

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

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

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

Date: April 18, 2023

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

April 12 2023

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

April 11 2023

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

April 11 2023

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

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

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

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

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

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

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

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

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

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

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

by Peter D. Hutcheon

April 3, 2023

Norris McLaughlin P.A.

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

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

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

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

Bond Dealers of America

March 31, 2023

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

LEARN MORE

View the Request for Research.

03/10/23

SUMMARY

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

View the SIFMA Comment Letter.

March 31, 2023

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

March 29 2023

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

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

March 31 2023

Read the MSRB Notice.

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

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

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

SEC Proposed Rule 10

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

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

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

Amendments to Regulation SCI

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

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

Amendments to Regulation S-P

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

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

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

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

Paul Hastings LLP – Aaron Charfoos and Jacqueline Cooney

March 27 2023

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

The press release can be viewed here.

The legislative text can be viewed here.

Original Co-sponsors:

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

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

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

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

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

Bond Dealers of America

March 28, 2023

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

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

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

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

Regulatory Obligations and Related Considerations

Regulatory Obligations

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

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

Related Considerations

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

Findings and Effective Practices

Findings

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

Effective Practices

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

Additional Resources

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

___________________________________

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

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

Fraudulent La. Bond Offering to Improve a City Sewer System

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

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

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

By Peter D. Hutcheon

Monday, March 20, 2023

Norris McLaughlin P.A.

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

LEARN MORE

View Publication.

SUMMARY

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

Read the SIFMA Comment Letter.

SUMMARY

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

View the SIFMA Comment Letter.

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

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

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

The proposal would:

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

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

Fried Frank Harris Shriver & Jacobson LLP

February 1 2023

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

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

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

Public comments are due by March 31, 2023.

Regulation Best Execution at a Glance

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

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

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

Continue reading.

Goodwin Procter LLP

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

MARCH 3, 2023

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

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

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

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

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

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

Download the 2022 Fact Book.

Date: March 01, 2023

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

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

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

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

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

The URLs to access the updated websites are:

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

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

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

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

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

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

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

LEARN MORE

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

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

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

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

Continue reading.

ROUTE FIFTY

by KERY MURAKAMI

FEBRUARY 22, 2023

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

Key Takeaways

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

Continue reading.

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

February 21 2023

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

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Dear Secretary Yellen and Chairman Gensler:

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

VIEW FULL LETTER

Publication date: February 2023

Initiative Part of the MSRB’s Rule Book Modernization Efforts

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

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

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

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

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

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

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

Read the request for comment.

Date: February 16, 2023

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

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

Mutual Areas of Focus for Advisers and BDs

Standards of Conduct

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

Continue reading.

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

February 16 2023

Lowenstein Sandler LLP

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

Rule Proposals

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

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

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

FOIA Request

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

Extension Request

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

Commentary

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

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

Fried Frank Harris Shriver & Jacobson LLP – Steven Lofchie

February 9 2023

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

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

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

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

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

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

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

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

Continue reading.

Route Fifty

By Michael Granof and Martin J. Luby

FEBRUARY 8, 2023

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

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

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

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

February 7 2023

Fried Frank Harris Shriver & Jacobson LLP

SUMMARY

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

View the SIFMA Comment Letter.

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

The proposal would:

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

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

February 1 2023

Fried Frank Harris Shriver & Jacobson LLP

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

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

Fried Frank Harris Shriver & Jacobson LLP

January 31 2023

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

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

Fried Frank Harris Shriver & Jacobson LLP

January 31 2023

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

January 30 2023

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

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

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

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

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

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

Meeting Notice.

02/01/23

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

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

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

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

Actions To Take

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

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

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

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

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

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

Forbes

by Marilyn Cohen

Feb 3, 2023

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

TAKEAWAYS

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

Continue reading.

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

Feb 2, 2023

Pillsbury Winthrop Shaw Pittman LLP

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

View the Hawkins Advisory.

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

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

I. Financial Crimes

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

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

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

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

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

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

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

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

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

II. Market Integrity

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

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

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

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

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

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

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

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

January 24 2023

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

View the Ballard Spahr publication.

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

January 25, 2023

Ballard Spahr LLP

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

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

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

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

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

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

Market Regulation

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

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

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

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

Market Transparency and Technology

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

Market Structure and Data

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

Public Trust

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

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

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

Date: January 27, 2023

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

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

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

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

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

Bond Dealers of America

January 17, 2023

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

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

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

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

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

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

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

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

January 19 2023

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

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

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

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

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

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

January 20 2023

In Brief

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

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

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

Continue reading.

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

January 18 2023

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

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

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

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

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

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

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

Bowditch & Dewey LLP – Neal R. Pandozzi

January 18 2023

View the article.

Morgan, Lewis & Bockius LLP

January 17 2023

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

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

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

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

Continue reading.

governing.com

by Girard Miller

Jan. 17, 2023

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

Market Regulation

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

Market Transparency

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

Market Structure and Data

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

Public Trust

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

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

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

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

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

Continue reading.

Route Fifty

By Bill Lucia

JAN 9, 2023

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

View the MSRB report.

Publication date: 01/12/2023

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

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

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

Progress on the MSRB’s four Strategic Plan goals:

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

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

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

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

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

Read the report.

Date: January 13, 2023

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

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

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

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

Treasury Regulation Facilitates Transition From LIBOR

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Allison Schwartzman & William Tonkin

January 5, 2023

Foster Garvey PC

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

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

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

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

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

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

Client Alert | January 4, 2023

Kutak Rock LLP

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

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

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

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

But this concern is easily addressed during implementation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Marc Joffe

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

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

Please see Publication below for more information.

by Teri Guarnaccia, Ernesto Lanza, Kimberly Magrini

January 6, 2023

Ballard Spahr LLP

View the MSRB Informational Notice.

Notice 2023-01 – Informational Notice

Publication date: 01/05/2023

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

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

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

Key Takeaways

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

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

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

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

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

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

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

Background

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

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

Regulation Best Execution

Best Execution Standard

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

Policies and Procedures

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

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

Conflicted Transactions

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

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

Regular Review of Execution Quality

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

Introducing Brokers

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

Annual Report

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

_____________________________________________________

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

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

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

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

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

6 Proposal at 9.

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

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

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

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

11 Proposal at 7.

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

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

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

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

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

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

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

December 29, 2022

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

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

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

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

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

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

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

Partridge Snow & Hahn LLP

by Eugene Bernardo II, David DiSegna

December 30, 2022

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

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

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

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

Continue reading.

Route Fifty

By Liz Farmer | DEC 20, 2022

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

December 23 2022

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

Here’s what you need to know:

What Happened?

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

What Will the Law Change for Affected Issuers and Obligors?

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

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

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

Who Does the Law Most Affect?

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

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

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

What Happens Next?

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

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

_______________________________________________

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

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

[3] Id.

[4] Id.

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

[6] Id.

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

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

[9] Id.

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

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

_________________________________________________

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

December 27, 2022

Orrick, Herrington & Sutcliffe LLP

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

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

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

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

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

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

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

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

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

PNC did not immediately respond to a request for comment.

By Connor Hussey

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

December 22 2022

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

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

The GASB periodically issues new and updated guidance to assist state and local governments in applying generally accepted accounting principles (GAAP) to specific facts and circumstances that they encounter. The GASB develops the guidance based on:

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

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

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

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

View the MSRB notice.

12/13/2022

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

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

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

December 14 2022

Fried Frank Harris Shriver & Jacobson LLP

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

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

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

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

Continue reading.

Route Fifty

By Kery Murakami

DECEMBER 15, 2022

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

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

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

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

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

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

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

Board Composition

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

Application Details

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

Date: December 14, 2022

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

The Municipal Securities Rulemaking Board (MSRB) protects and strengthens the municipal bond market, enabling access to capital, economic growth, and societal progress in tens of thousands of communities across the country. The MSRB fulfills this mission by creating trust in our market through informed regulation of dealers and municipal advisors that protects investors, issuers and the public interest; building technology systems that power our market and provide transparency for issuers, institutions, and the investing public; and serving as the steward of market data that empowers better decisions and fuels innovation for the future. The MSRB is a self-regulatory organization governed by a board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.

View the MSRB press release.

December 12, 2022

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

Overview

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

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

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

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

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

Substantive Areas of Focus

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

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

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

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

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

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

Other Areas of Emphasis

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

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

Looking Ahead to 2023

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

Conclusion

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

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

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

December 12 2022

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

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

What You Need to Know About SEC Enforcement

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

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

Rule 15c-12’s Disclosure Requirements and Exemption

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

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

SEC Comments and Guidance

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

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

MSRB Rule Violations

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

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

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

December 9 2022

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

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

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

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

Continue reading.

governing.com

by Stephanie Leiser and Robert J.F. Widigan

Dec. 7, 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Caitlin Devitt

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

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

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

From NACo:

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

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

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

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

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

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

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

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

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

National Association of Counties

by Michael Sanderson

December 8, 2022

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

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

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

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

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

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

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

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

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

Download.

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

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

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

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

Continue reading.

The Wall Street Journal

By Heather Gillers

Nov. 26, 2022

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

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

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

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

All Updated Best Practices

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

View the MSRB Proposed Rule Change.

SEC Filing SR-MSRB-2022-09

11/16/2022

View the MSRB Proposed Rule Change.

SEC Filing SR-MSRB-2022-08

11/16/2022

View the MSRB notice.

Notice 2022-12 – Informational Notice

11/16/2022

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

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

The GASB periodically issues new and updated guidance to assist state and local governments in applying generally accepted accounting principles (GAAP) to specific facts and circumstances that they encounter. The GASB develops the guidance based on:

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

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

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

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

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

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

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

About the Financial Accounting Foundation

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

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

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

About the Governmental Accounting Standards Board

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

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

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

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

Fried Frank Harris Shriver & Jacobson LLP

November 11 2022