The city of Philadelphia filed a lawsuit Wednesday accusing Bank of America Corp, Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Royal Bank of Canada and Wells Fargo & Co of defrauding the city and public entities out of millions of dollars. The antitrust action claims the banks conspired to inflate the interest rates of tax exempt bonds known as Variable Rate Demand Obligations (VRDOs).

VDROs are issued by public entities as fundraisers for infrastructure and public services like water, public education and transportation. With VDROs, investors receive long term borrowing for short term rates. The banks then “remarket” the bonds to investors and charge the municipality for that service. The city accuses the banks of conspiring to not compete with each other by keeping rates artificially high and not remarketing the bonds. Philadelphia has issued $1.6 billion of VRDOs, therefore the banks may have profited significantly from the accused scheme.

The Antitrust Division of the US Department of Justice has an ongoing a preliminary criminal investigation into defendants’ remarketing practices in connection with VRDOs.

jurist.org

by Brianna Bell

FEBRUARY 21, 2019

The city says seven big banks conspired to inflate rates on VRDO bonds so they could “continue to collect re-marketing fees for doing nothing.”

The City of Philadelphia has accused seven of the largest U.S. banks of conspiring to “substantially inflate” interest rates on floating-rate municipal bonds to benefit themselves and money market funds they managed at the expense of issuers.

The harm inflicted by the banks, including JPMorgan Chase and Bank of America, “likely amounts to billions of dollars,” the city said in a class-action lawsuit that focuses on the market for bonds known as “variable rate demand obligations.”

VRDOs offer a built-in “put” feature that allows investors to redeem the bond at any periodic reset date, making them a low-risk and high-liquidity investment.

According to the city’s antitrust complaint, the banks, which acted as “re-marketing agents” (RMAs) for VRDOs, agreed as far back as February 2008 not to compete against each other, and instead to keep VRDO rates artificially high, “to maximize the likelihood that existing holders of VRDOs would not put their bonds back” to them.

“This allowed defendants to continue to collect re-marketing fees for doing, essentially, nothing,” the city said, in part because they did not have to spend time and resources to re-market tendered bonds to new investors.

RMAs typically pocket high annual fees amounting to an average of 10 basis points of the VRDO debt balance. In 2008, issuers sold more than $115 billion in VRDO paper.

Allegations of collusion among RMAs first came to light through a whistleblower who filed a complaint with the U.S. Securities and Exchange Commission in 2015. The city said its own investigation found evidence of direct communications between competing banks, with RMA staff calling each other on the phone before setting rates.

“According to former senior RMA personnel at JPMorgan, it was a ‘dirty little secret’ that RMAs would talk to each other about rates,” the city’s complaint said.

The suit alleges the banks also benefited from the artificially high rates because if an RMA “fails to find a buyer for the tendered VRDO, the RMA is obligated to repurchase the bond and assume the risk that the issuer will default on its payments.”

by Matthew Heller

February 22, 2019 | CFO.com

MSRB Retrospective Rule Review Overview.

The municipal bond market is often seen as a safe-haven among investors. After all, the bonds are issued by governments and are often backed by taxpayer dollars. Investors may be aware of default risks in rare cases, but for the most part, they remain unaware of the rampant securities fraud taking place.

In recent years, it has become increasingly apparent that fraud is commonplace in the $3.7 trillion muni bond market. The Securities and Exchange Commission (SEC) described the market as “too opaque” in a 2012 report and has taken action against large and small governments to curb the problem.

Let’s take a look at some common types of fraud in the muni bond market and how the proper due diligence can avoid it.

Continue reading.

municipalbonds.com

Justin Kuepper

Feb 06, 2019

Read the Newsletter.

The BDA recently released the results of its Index of Fixed Income Activity covering the period June 2018 through December 2018, as compared to the previous six months of activity in 2018. As a result of this survey, we were able to produce a report comparing such activity from two dozen BDA member firms.

The survey results can be found here.

Bond Dealers of America

February 15, 2019

While public corporations are required to file an annual audit within 60 days after the close of the year, municipal bond borrowers often take close to triple that time or longer.

Although this issue has been lingering for decades, the time it takes to complete and sign an audit after the close of the fiscal year hasn’t changed much over the last 10 years. The county, state and city sectors are the poorest performers even amid an improvement since 2015.

While investors need the audit documents for credit evaluation and securities pricing purposes, they are not the only stakeholders that have a need to see timely audited financial reports.

Governing boards associated with public bodies and not-for-profit organizations need to review the audits in order to fulfill their duty for proper oversight. Like municipal bond analysts and investors, they are better able to respond to issues disclosed in an audit if the documents are timelier.

Audit timeliness is a simple, common sense principle based on the expectation that accountability and transparency are best achieved if audited financial reporting is swiftly dispatched. That should hold true not only as a standard for responsible government but also for investors and taxpayers.

There’s an added fiduciary responsibility for municipal bondholders in that late or stale audits inhibit accurate bond pricing and cloud assessments of risk. The absence of significant improvement in the overall speed in which are audits are signed and delivered begs the question as to why the market is not imposing a greater penalty on those that consistently are late to report.

Merritt Research Services, LLC, an independent municipal bond credit data and research company based in Hiawatha, Iowa and Chicago has been tracking the time it takes municipal bond borrowers to complete their audits since Merritt Research released its first report in 2010. Its latest findings looked at more than 10,500 Fiscal Year 2017 audits by credit sector and over 110,000 audits since 2008.

Latest Results

The latest analysis focused on 2017 audits found a modicum of good news in that there was a modest improvement in completion time rates over the past two years as governmental audits have made the adjustments to more detailed pension reporting in line with changes in GASB rules 67 and 68 that occurred mostly in the 2015 audits. Audits from non-governmental municipal bond borrowers, such as power agencies, hospitals and private universities, finished much faster than those for governments.

As has been the case in other years, the median completion time for reports related to governmental type municipal bonds still hovers between 170 and 180 days. That’s still a long way from the target reporting times in the corporate bond market and well below what the municipal bond industry considers to be a muni guideline of 120 days.

Merritt Research’s latest report continues to show that certain types of municipal bond borrowers, mostly associated with corporate like enterprise entities and not-for–profit organizations (issued under the IRS 501c-3 code), are consistently faster to finish their audits than the governmental state and local governmental sectors. These non-governmental issuer sectors have median times which range from 99 days to 161 days.

Consistently placing fastest on the list of all municipal bond credit sectors are (1) public power wholesale electric agencies (also known as joint action agencies and quasi-government enterprises), (2) hospitals, (3) private higher education institutions and (4) Tollroads. Each of these sectors show a median audit completion time of 120 days or less, meeting the unofficial municipal bond guideline most frequently cited as best practice.

Fastest Reporting Sectors for Fiscal Year 2017

Public Power Wholesale electric audits achieved the best sector reporting time, boasting a median completion time of 99 days after the close of the fiscal year.

Hospitals, which often carry higher interest rates since many consider them as one of the riskier major credit sectors in the muni market, annually place nearly as well as wholesale electric entities in the audit time contest. As a group, they recorded a median audit completion time of 111 days, the same as the prior year.

The Private Higher Education sector took the third best sector finish for fiscal year 2017 with a median audit time of 115 days. Again, this sector has consistently completed its audits in a narrow range of between 107 and 115 days since 2008.

The Tollroads sector showed the best gain of any of the categories by improving its median from its already good audit time level of 126 days to 120 days. Fifty-one percent of the sector completed their audits in 120 days.

Slowest Reporting Sectors in Fiscal Year

On the other side of the speed continuum were the main governmental sectors – counties, states and cities.

Despite their absolutely disappointing finish times, each of these sectors showed a modest improvement and reduction in their median audit times from last year and further progress since 2015.

That’s the year in which governments were required to apply more detailed pension accounting information in line with the new Governmental Accounting Standards Board (GASB) 67 and 68 rules concerning pension accounting that went into effect.

The County Sector showed the slowest financial reporting as a group. The median sector audit time came in at 179 days, several days better than two years ago and one day better than last year, but still nothing to boast.

States & Territories, which was the second slowest sector in 2017 and the tardiest of all sectors in the previous two years, inched up a notch with a median audit time of 175 days. Only 5.7% of this sector was able to have their audits signed for completion within 120 days.

The City Sector was the third slowest sector, albeit the best, among the major governmental categories. Its median audit time was 173 days. Like states and counties, it has fallen among the bottom three in each of the last 10 years. It tied states for having the same 5.7% of signed audits within 120 days of the end of the fiscal year.

By Richard Ciccarone

BY SOURCEMEDIA | MUNICIPAL | 02/14/19 09:00 AM EST

AUSTIN, TEXAS – A Securities and Exchange Commission Official tried Tuesday to provide some clarity on disclosure issues in the municipal market, as the effective date of a major amendment to the disclosure requirements looms in two weeks.

Ahmed Abonamah, senior counsel to the director in the SEC’s Office of Municipal Securities, discussed the soon-to-be effective amendments to the SEC’s Rule 15c2-12 and other disclosure topics during a panel discussion at The Bond Buyer’s Texas Public Finance Conference being held here this week. The amendments, which add two new material events to the list which issuers must agree to disclose on a continuing basis, take effect Feb. 27.

Abonamah, who arrived at the SEC in 2016 after several years in the private sector, told conference attendees that the SEC does not endorse any particular way for underwriters to fulfill their duties to reasonably determine that issuers for whom they underwrite bonds will comply with the new material events in their continuing disclosure agreements. Event 15 says issuers have to disclose when they incur material financial obligations, while event 16 says that issuers have to disclose events connected to those obligations which “reflect financial difficulties,” such as a default or modification of terms.

One bright line rule is that underwriters can’t rely solely on an issuer’s reputation to determine whether the representations in the offering document are accurate, Abonamah said, though he allowed that the determination includes an element of judgment on the underwriter’s part.

Abonamah said the commission has received a lot of requests to clarify what sort of “non-debt debt” might qualify as requiring disclosure under event 15. The key determination is whether there is a borrowing in the transaction such as in those that involve a lease development corporation. The rule was not intended to capture more straightforward leases, such as those of city vehicles, he said.

Other panelists also weighed in on disclosure topics. Bill Oliver, a spokesman for the National Federation of Municipal Analysts, said the SEC could be helpful by providing the market with clarity on how comfortable the commission is with issuers disclosing unaudited financial information. The industry is wrestling with how to overcome the stale nature of the numbers in issuers’ comprehensive annual financial reports, and Oliver said unaudited data could be useful to analysts. Such information is already routinely disclosed in certain sectors, such as healthcare, he noted.

The SEC could further offer issuers some reassurance on the permissibility of talking to investors, when investor-issuer communication is “at an all-time low,” Oliver said. Some buy-side analysts have said they believe issuers are hesitant to speak to them in any detail because they are afraid of “selectively disclosing” non-public information over the phone.

Panel member Gregg Bienstock, the CEO and a Co-Founder of Lumesis, said that whatever regulators might do to try to improve the timeliness of issuer disclosure, including technological investments, they have to keep in mind that disclosure is only as good as the data provided. Many of documents posted to EMMA aren’t actually word-searchable, Bienstock said.

“Data has to be useful to the market participants,” said Bienstock.

Abonamah said the SEC is studying those disclosure issues, but did not commit to any commission action.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 02/12/19 03:45 PM EST

Read the notice.

Whistleblower Edelweiss LLC and its team of attorneys, led by attorney Michael Behn, scored an early victory in this False Claims Act lawsuit filed on behalf of the State of Illinois.

The whistleblower suit against multiple Wall Street banks, including JPMorgan Chase, Citibank, and Bank of America, cleared a major hurdle after an Illinois court rejected the defendants’ motion to dismiss the case. The suit was filed by Edelweiss LLC under the Illinois False Claims Act, by Chicago attorney Michael Behn of Behn & Wyetzner, Chartered. (State of Illinois ex rel. Edelweiss LLC (Case No. 2017 L 000289).

Judge Diane Shelley of the Illinois state court in Chicago stated after reviewing the arguments, that Edelweiss’ whistleblower “complaint articulates in myriad detail how false claims could have been presented to the State of Illinois.”

Judge Shelley’s decision means the case against the banks will move forward. If successful, the State of Illinois could recover hundreds of millions of dollars in fines and damages from the defendants.

Behn described the ruling as “a major victory for Illinois tax payers and municipalities.”

“We welcome Judge Shelley’s decision, and intend to prove that defendants defrauded the government as alleged,” added Dan Hergott, also of Behn & Wyetzner and another of Edelweiss’ attorneys.

The banks will now have to answer Edelweiss’ complaint, which alleges that the defendants engaged in a deliberate scheme to overcharge government entities while providing financial services relating to municipal bonds.

Behn founded the law firm Behn & Wyetzner to represent whistleblowers under the False Claims Act. Behn was formerly a federal prosecutor with the U.S. Attorney’s Office in the Southern District of New York (Securities and Futures Fraud Unit) and with the Commodity Futures Trading Commission.

Behn & Wyetzner has achieved extensive recoveries for state and federal taxpayers on behalf of the firm’s whistleblower clients. The firm is of counsel to Siprut PC and based out of Chicago, Illinois.

CHICAGO (PRWEB) FEBRUARY 06, 2019

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) convened on January 29–31, 2019, to discuss its market oversight activities and fiscal year 2019 strategic initiatives that support the MSRB’s mission to protect municipal securities investors, issuers and obligated persons and promote a fair and efficient municipal market.

This year, the Board has renewed its commitment to stakeholder engagement to further inform its retrospective rule review, compliance support and other initiatives. In an outreach effort unprecedented in its scope, Board members this year are meeting with municipal securities dealers and municipal advisor firms around the country. At the Board’s meeting last week, the full Board met with leadership of the Securities Industry and Financial Markets Association (SIFMA) Municipal Securities Division, the National Association of Municipal Advisors (NAMA) and the Government Finance Officers Association (GFOA) Debt Committee. “These meetings were a tremendous advancement in our stakeholder engagement efforts,” said Board Chair Gary Hall. “The conversations we are having both with industry representatives and critical market participants allow for a necessary and valuable exchange of information about municipal market oversight.”

Retrospective Rule Review

Another strategic MSRB initiative is the prioritization of its retrospective rule review. Since 2012, the MSRB has been conducting a retrospective rule review to ensure MSRB rules are up-to-date, effective and reflective of the current reality of the municipal market. Chair Hall in October 2018 elevated the retrospective rule review initiative to a strategic priority and at last week’s meeting, the Board agreed on a formal approach and the highest priority rules to review in 2019. “The municipal market is evolving, and we recognize—and indeed are acting on—the imperative to keep our rules current,” he said.

The Board has prioritized an analysis of MSRB Rule G-23, on activities of financial advisors, MSRB Rule G-34, on CUSIP numbers, new issue, and market information requirements and MSRB Rule G-29, on availability of Board rules. The retrospective rule review plan also includes a goal to eliminate outdated information and references in the full rule book. The MSRB will publish a notice this week with details of the 2019 retrospective rule review plan designed to achieve its objectives while obtaining critical feedback from stakeholders in a way that respects their competing priorities.

As part of the MSRB’s ongoing retrospective rule review, it has been evaluating whether interpretive guidance concerning the application of MSRB Rule G-17 to underwriters of municipal securities to ensure and promote fair dealing practices by underwriters with issuers should be amended. The Board discussed feedback received on a second request for comment on draft amended interpretive guidance and plans to further review possible amendments to the guidance.

The MSRB is also working to clarify existing guidance on its rule on best execution of municipal securities trades. At its meeting, the Board discussed comments received on draft amendments to the guidance and, as a result of feedback received, agreed to clarify guidance that dealers’ do not need to post bid-wanteds on or through multiple alternative trading systems (ATSs) or broker’s brokers to satisfy their best-execution requirements. The MSRB expects to publish this guidance this week.

The Board discussed comments received on its November 2018 notice on draft interpretive guidance about the potential harms of “pennying.” This practice involves a dealer’s purchase of bonds for its own account from a customer seeking to sell a municipal security—after the dealer has reviewed other dealers’ bids—by matching a high bid or purchasing the bond at a price that is nominally higher than the highest bid. The Board directed staff to conduct additional analysis before considering next steps.

Market Transparency

The Board discussed the topic of the timeliness of financial disclosures by municipal securities issuers and agreed to begin a project to improve the form (MSRB Form G-32) through which underwriters provide information about the expected availability of annual financial information to the Electronic Municipal Market Access (EMMA®) website. The improvements will be aimed at helping underwriters fulfill their existing regulatory requirements and provide accurate data. The Board also agreed to continue to evaluate how to leverage the EMMA website and the MSRB’s ability to educate investors to enhance understanding about the timeframes for municipal financial disclosures. “This is an important and complex issue,” Chair Hall said. “The MSRB is committed to working within its Congressional authority to ensure that investors have the information they need regarding financial disclosures.”

The Board also discussed adding third-party evaluated pricing services to the EMMA website. These services, used to estimate the value of individual bonds and to price fixed income portfolios including mutual fund holdings, would provide investors with an additional set of market data and enhance EMMA’s existing tools and resources. The Board directed staff to continue to explore adding evaluated pricing services on EMMA.

As a result of outreach efforts and the MSRB’s request for information on municipal market benchmarks, the Board directed staff to continue to engage with market participants on ways to promote transparency and availability of benchmarks.

Financial Oversight

As part of its commitment to long-term financial sustainability, the Board continued its ongoing discussion of the MSRB’s reserve levels, which as previously communicated, are above the organizational target. The Board will continue its evaluation of reserve levels—incorporating input from an outside expert’s reserves analysis—and determine additional steps to responsibly manage reserves to appropriate target levels. “The level of MSRB reserves is a high priority for the Board,” said Chair Hall. “We are getting close to addressing this important issue.”

Date: February 4, 2019

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

On January 28, the Financial Industry Regulatory Authority (FINRA) issued a Regulatory Notice announcing the 529 Plan Share Class Initiative, a self-reporting initiative to promptly compensate harmed investors and promote firms’ compliance with the rules governing the recommendation of 529 savings plans (“529 Plans”) (the “Initiative”).1 Under the Initiative, broker-dealers are encouraged to review their supervisory systems and procedures governing 529 plan share-class recommendations, self-report supervisory violations and provide FINRA with a plan to remediate harmed customers. In response, FINRA’s Department of Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact on affected customers and a censure, but no fine, consistent with one of FINRA’s principal aims—investor protection.

With the publication of the Notice, FINRA also issued a video interview with Susan Schroeder, Enforcement Chief, titled “A Few Minutes With FINRA: 529 Plan Share Class Initiative.”2 Together, the Notice and the interview introduce this new type of self-reporting program. To be eligible for the Initiative, firms must self-report by providing written notification to FINRA Enforcement by April 1 and submit required information by May 3.

Background and Discussion

529 Plans are tax-advantaged municipal securities designed to encourage saving for the future educational expenses of a designated beneficiary. As municipal securities, the sale of 529 Plans are governed by the rules of the Municipal Securities Rulemaking Board (MSRB), including MSRB Rule G-19 (Suitability of Recommendations and Transactions)3 and MSRB Rule G-27 (Supervision).4

As Schroeder explained in the interview, FINRA learned through its examination process that 529 Plans can be a “blind-spot” for some firms. Given the importance of 529 Plans to the investing public and the importance of expedited restitution, FINRA designed this Initiative to inform member firms of its concerns, and ask the firms to be proactive about assessing, correcting and reporting its processes.

529 Plans are commonly sold in different classes with varying fee structures. Class A shares typically impose a front-end sales charge but with lower annual fees comparative to other classes, whereas Class C shares typically impose no front-end sales charge but have higher annual fees than Class A shares. The recommendation of suitable share classes of 529 Plans were made more complex upon amendments made to the Internal Revenue Code (the “Code”) in January 2018, that expanded the use of 529 Plans for tuition for grades K-12, subject to certain limitations. Instead of a “one-size fits all” approach to 529 Plan share classes, the changes to the Code underscore the importance of recommending a share class that is uniquely tailored and suited to the needs of the individual customer and beneficiary, in addition to the importance of supervising these recommendations.

The 529 Plan Share Class Initiative

Firms are encouraged to review their supervisory systems and procedures, including the failure to:

• provide training regarding the costs and benefits of different 529 Plan share classes;
• understand and assess the different costs of share classes for individual transactions;
• receive or review data reflecting 529 Plan share classes sold; and
• review share-class information, including potential breakpoint discounts or sales charge waivers, when reviewing the suitability of 529 Plan recommendations.

Further, firms are encouraged to assess and self-report the potential impact of such supervisory failures.

Eligibility for the Initiative

To qualify for the Initiative, firms must self-report by providing written notification to FINRA Enforcement on April 1 and provide additional, specified information by May 3.

The Notice explains that if a firm is deemed to meet the requirements of the Initiative, and FINRA Enforcement decides to recommend formal action based on the firm’s compliance with the self-reporting obligations encouraged by the Initiative, FINRA Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact of affected customers and a censure, but no fine. Schroeder explains in the interview that a settlement under this Initiative would be to supervisory violations and would not trigger a statutory disqualification.5

It is worth noting that FINRA intends to continue to examine and investigate firms’ supervision of these issues. If a firm does not self-report under the Initiative and FINRA uncovers supervisory failures by that firm, any resulting disciplinary action and sanctions imposed in connection therewith are likely to exceed those contemplated by the Initiative. Further, FINRA does not offer the same initiative to individuals associated with member firms who sold 529 Plans to customers in violation of MSRB rules, or violated any state or federal securities laws. Individual liability will be assessed on a case-by-case analysis of the facts and circumstances.

Conclusion

The Initiative presents a unique and limited opportunity for firms to assess their supervisory systems and procedures governing 529 Plan share-class recommendations, to identify and remediate any defects, and to compensate any investors harmed by supervisory failures, while possibly avoiding fines for such conduct. As the deadline to take advantage of this program approaches, we recommend working with legal counsel to review and assess eligibility for the Initiative and for preparing the FINRA submission.

_____________________________________________

1 FINRA Regulatory Notice 19-04.

2 FINRA video: “Video: A Few Minutes With FINRA – 529 Plan Share Class Initiative.”

3 MSRB Rule G-19.

4 MSRB Rule G-27.

5 Section 3(a)(39) of the Securities Exchange Act of 1934

——————————————————————————

by Leonard Licht, Susan Light, and James Normile

February 7, 2019

Katten Muchin Rosenman LLP

As reported in our October 10, 2018 alert, the Securities and Exchange Commission has amended Rule 15c2-12 (the “Rule”), which governs continuing disclosure by state and local governmental borrowers to add two new material events requiring disclosure within 10 business days after they occur. Unlike the other 14 material event notice requirements, application of these two new requirements may be less obvious and requires more careful analysis.

The two new events are:

(15) Incurrence of a financial obligation of the issuer or obligated person[1], if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

(16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

With the February 27, 2019 compliance date approaching, and with many underwriters and municipal advisors focusing more closely on the new requirements, this alert offers more detailed analysis of steps governmental borrowers can take to facilitate compliance when they are required to do so.

When Will Issuers Need to Comply?

The amendments apply to continuing disclosure undertakings (CDU’s) for publicly offered bonds or notes which are delivered on or after February 27, 2019. Until an issuer sells debt obligations with a CDU containing the new material events, the amendments have no effect on that issuer’s continuing disclosure obligations.

What Are The New Material Events?

While the existing 14 events (including payment defaults, draws on reserves, unscheduled draws on credit enhancement, or changes in credit enhancement, adverse tax actions or opinions, material changes to bondholder rights, refundings, bond calls, rating changes, changes in trustee, mergers or bankruptcy) which continue to apply are fairly straightforward, the new requirements require disclosure within 10 business days of:

• “material” new financial obligations (or agreements concerning covenants, events of default, remedies, property rights or similar terms) incurred by the borrower for which there is no CDU and which could materially affect bondholders’ interests [event (15)]
• events occurring in connection with a financial obligation which reflect financial difficulties for the borrower [event (16)]

What Is A “Financial Obligation?”

A financial obligation does not include any debt obligation for which the borrower posted an official statement and provided a CDU, or ordinary operating liabilities.

A financial obligation does include:

• a debt obligation
• a derivative instrument, such as a swap, entered into in connection with a debt obligation
• a guarantee of either a debt obligation or a derivative.

“Debt Obligations” include:

• privately placed bank or state authority purchases of bonds or notes or lines of credit
• installment contracts or lease purchase agreements
• energy conservation improvement financing contracts
• emergency loans from the State
• judgments
• any other obligation that is “debt-like”

What Information Must Be Filed?

The answer to this question is a bit open-ended, involves the exercise of judgment and depends on the facts and circumstances in the broader context.

Under event (15), only “material” financial obligations must be disclosed. The SEC release does not define “material.” In addition, borrowers must provide certain information about the financial obligation, where material. While guidance on this question is likely to evolve, a rule of thumb may be that if a holder of a security for which the borrower has provided a CDU would find financial obligation terms relevant to a decision to buy or sell the security, and the price at which to do so, the name of the financial obligation and relevant terms should be included in the event filing.

Examples of terms to be disclosed include:

• amount financed and term and interest rate
• security and source of payment, including priority of payment
• defaults and events of defaults
• remedies, including acceleration, penalties and default rates
• modifications of terms and triggers for modifications
• key covenants, such as maintenance of ratings, most favored nations provisions, coverage and additional debt tests

Under event (16), the occurrence of an event under a financial obligation creates an obligation to disclose if that event reflects financial difficulties. In this circumstance, default (even if not yet an event of default triggering remedies), acceleration, termination events which obligate the borrower to pay a penalty, modification of terms and the imposition of remedies may each trigger a disclosure obligation. In this case, the relevant financial obligation may be one the borrower incurred before or after it executed a CDU which included new events (15) and (16), if the triggering event occurs after delivery of the new CDU.

Whether a disclosure obligation arises will depend on the context – the size of the borrower, the magnitude of the financial obligation relative to the size of the borrower and the impact or potential impact of the covenant or covenant breach on the borrower generally and on the bondholders to be benefitted by the CDU. An event which by itself may be immaterial may become material or reflect financial difficulty if it occurs in the context of multiple other events.

Managing Compliance with the New CDU Requirements

While borrowers have no obligation with respect to the new material events until they issue publicly offered securities on or after February 27, 2019 pursuant to an official statement, it wouldn’t hurt to take an inventory of any outstanding financial obligations to identify those which may be material and to catalog material terms of those obligations. Underwriters have a responsibility under the amended rule not only to obtain a CDU satisfying the Rule from the borrower, but also to determine the ability and willingness of the issuers whose bonds they buy to comply with the Rule and as part of their due diligence may request the details of those obligations.

Borrowers will need to develop a system (which may or may not rise to the level of a formal policy or procedure) for identifying, cataloging and tracking these obligations so they can have confidence they will be able to post, within 10 business days, both (i) notice that a material financial obligation has been incurred together with material terms of such obligations or agreements and (ii) the occurrence of events arising in connection with any financial obligation or agreement which reflect financial difficulties.

Many borrowers will have very few obligations to track while others may have several, with many material terms.

How Do You Post?

The Municipal Securities Rulemaking Board has updated EMMA to include the new material events. Once a borrower has identified a material financial obligation, the borrower or its agent may post the details of the financial obligation or identify the financial obligation with and attach the entire document. If a borrower chooses to post the full document, certain types of sensitive information, such as account numbers and signatures, should be carefully redacted, while material terms should remain viewable.

For events which reflect financial difficulties, a description of the event and/or notice from the holder of the related obligation, should be disclosed.

[1] An “obligated person” is an entity, other than the nominal issuer or credit enhancer, which is legally committed to support all or a material portion of the payment of the obligation. Materiality here also depends on the context, but generally is regarded as translating to a commitment to support payment of at least 20% of the financial obligation

January 29, 2019

Miller Canfield

Since 1995, states and local governments have been subject to Rule 15c2-12 (the “Rule”), promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Under the Rule, governmental entities that issued securities (and persons obligated under those securities (“obligated persons”)) were required to enter into continuing disclosure agreements (generally referred to as “undertakings”). These undertakings obligated the governmental entity to make regular annual filings of financial information and also to file notices whenever certain “listed events” occurred. The undertakings remained in effect for the entire life of the bond issue or defeasance of the bonds.

In August 2018, the SEC announced an amendment to the Rule. This amendment will take effect on February 27, 2019. These amendments have been the topic of substantial public discussion in seminars and written releases in the press and numerous law firm blogs. Regardless of what you have read or heard, however, this amendment may or may not increase your future financial reporting obligations or otherwise affect your community. Before you spend a lot of time in seminars or meetings learning about the Rule, consider whether it will have an impact on your public entity/community.

In general, a public entity will not be affected by the changes in the Rule, if:

1. The public entity has no outstanding debt;
2. The public entity’s only outstanding debt is in the form of bank loans; or
3. The public entity does have outstanding bond issues (issued prior to February 27, 2019) and the public entity has no expectation of going to the public market with new bond issues in the foreseeable future.

If, however, your community does expect to issue publicly offered bonds in the foreseeable future, then you should understand more about the Rule.

The discussion below provides information to help you understand more about the Rule and the changes incorporated under the Rule’s recent amendment and includes information about Government Accounting Standards Board (“GASB”) Statement No. 88:

The SEC has indirectly regulated the obligations of states and local governments in the financial markets through its ability to regulate the activities of brokers/dealers in the municipal industry. [1] The Rule was originally promulgated in 1989 by the SEC under authority of the Securities Exchange Act of 1934. The original Rule required that dealers acting as Participating Underwriters in Offerings (an offering of municipal securities by a municipal issuer with an aggregate principal amount of $1,000,000) obtain, review, and distribute to potential customers copies of the issuer’s official statement. The Rule was amended in 1994, and this amendment accomplished, albeit indirectly, what the SEC could not do directly. When the SEC adopted paragraph (b)(5) of the Rule, Participating Underwriters could no longer purchase or sell municipal securities unless the issuer had adopted an undertaking for the issue. With that change, the Rule now imposed regulations on states and their local governments. [2]

Paragraph (b)(5) of the Rule prohibits a Participating Underwriter from purchasing or selling municipal securities covered by the Rule in an Offering unless the Participating Underwriter has reasonably determined that an issuer or obligated person of those municipal securities has undertaken in a continuing disclosure agreement (an “undertaking”) to provide specified information to the Municipal Securities Rulemaking Board (MSRB) in an electronic form as prescribed by the MSRB. [3] The information to be provided consists of: (i) certain annual financial and operating information and audited financial statements, if available (“annual filings”) [4]; (ii) timely notices of the occurrence of certain events (“event notices”) [5]; and (iii) timely notices of the failure of an issuer obligated person to provide required annual financial information on or before the date specified in the continuing disclosure agreement (“failure to file notices”). Event notices are required to be filed within 10 business days of the occurrence of the listed event. [6]

The SEC has been considering expanding the list of the disclosure events for some time. In particular, there has been a focus on the increased number of private placements of bonds and bank loans, as they have not been not subject to the Rule. On August 20, 2018, the SEC released adopted amendments to the Rule. [7] These amendments apply to all undertakings entered into on and after February 27, 2019. From this February date and after, all new undertakings are required to comply with the amended Rule. The amendments added two additional events, expanding the list from 14 to 16 events, in a continuing disclosure undertaking. Future undertakings are required to include the following event notices:

(15) Incurrence of a material financial obligation of the issuer or obligated person or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

(16) Default, event of acceleration, termination event, modification of terms or other similar events under the terms of a financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The amendments define the term “financial obligation” as a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term “financial obligation” does not include any obligation for which a final official statement has been provided to the MSRB. In other words, the issuer does not need to file an event notice for the incurrence of any security that is already disclosed to the market through a final official statement.

Key considerations for the amended Rule include:

1. The amendments are not retroactive.
The amendments do not add any new requirements to issuers’ current undertakings. Accordingly, issuers may continue to comply with their existing undertakings in the same manner as they have been filing and posting with EMMA.

2. If a governmental entity enters into an undertaking in the future, that undertaking will include the two additional event notice requirements.
With respect to those new event requirements:

1. The additional disclosure requirement identified in (15) above applies to debt or “debt-like” obligations.  The issuer is not required to disclose ordinary operating liabilities.
2. The disclosure requirement identified in (15) only applies to those debt obligations that are “material.” The amendments do not define the term “material,” and issuers are permitted to make their own determination of what debt obligations are material. On a going-forward basis, issuers may consider developing procedures or protocols for identifying which debt or “debt-like” obligations are material.
3. If an issuer determines that the incurrence of a debt or “debt-like” obligation is material, the notice of the event should include the material terms of the financial obligation. The SEC provided examples of “material terms” as: (i) date of the incurrence, (ii) principal amount, maturity, and amortization; (iii) interest rate (if fixed) or method of computation (if variable) plus any default rates and other depending on the circumstances. Accordingly, the disclosure may be satisfied by filing a term sheet or by filing the entire document.
4. If the issuer enters into a derivative instrument (e.g., swaps and hedges) relating to a municipal security, that transaction must always be disclosed.
5. The additional disclosure requirement identified in (16) above is limited to those occurrences that reflect financial difficulties. For example, if the issuer enters into a loan modification agreement with respect to a loan (regardless of whether the original obligation has previously been disclosed on EMMA), that event would be required to be disclosed in an event notice.

3. GASB Statement No. 88.
The GASB recently issued its Statement No. 88 — Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placement (March 2018), requiring that additional information related to debt be included in audited financial statements. [8]

This requirement is in effect for reporting periods beginning after June 15, 2018. Accordingly, many issuers are likely developing protocols for identifying the types of information that are now required be disclosed under the amendments to the Rule.

Inclusion of this information in an issuer’s financial statement will not, however, satisfy the requirements of the Rule, because the Rule will now require that a separate event notice be filed on a timely basis upon the incurrence of each new the debt or “debt-like” obligation (within 10 business days).

Notes

[1] The SEC directly regulates the issuers of corporate securities, primarily to prevent disclosure-related abuses in the corporate securities market, under the authority of the Securities Act of 1933 and the Securities and Exchange Act of 1934 (together, the “Securities Act”). Municipal securities are exempt from registration under Section 3(a)(2) of the Securities Act, but are subject to the Securities Act’s anti-fraud provisions. Municipal securities brokers and dealers are also regulated by the SEC and by the MSRB. When drafting the Securities Act, Congress did not have concerns about abuse in the municipal securities market. Since then, perception of abuses in the municipal securities market have increased with the complexity and volume of the market. The Securities Act’s provisions are broadly written, and so federal securities anti-fraud law has evolved primarily through the courts. Court decisions have found the anti-fraud provisions applicable in a number of municipal securities transactions, leading to the development of a framework for municipal disclosure responsibilities, driven as well by the MSRB and the Dodd-Frank Act provisions. The SEC’s Office of Municipal Securities has initiated enforcement actions against municipal issuers, municipal employees, and other market participants.

[2] See Exchange Act Release No. 34-26985 (June 28, 1989), 54 FR 28799 (July 10, 1989) (“1989 Adopting Release). For additional information relating to the history of the Rule, see Exchange Act Release No. 34-34961 (Nov. 10, 1994), 59 FR 59590 (Nov. 17, 1994) (“1994 Amendments Adopting Release”), Exchange Act Release No. 34-59062 (Dec. 5, 2008), 73 FR 76104 (Dec. 15, 2008) (“2008 Amendments Adopting Release”), and Exchange Act Release No. 34-62184A (May 27, 2010), 75 FR 33100 (June 10, 2010) (“2010 Amendments Adopting Release”).

[3] On December 5, 2008, the SEC adopted amendments to the Rule to provide for the Electronic Municipal Market Access (“EMMA”) system. EMMA is established and maintained by the MSRB and provides free public access to disclosure documents. The 2008 Amendments designated the EMMA system as the single centralized repository for the electronic collection and availability of continuing disclosure information about municipal securities. The 2008 Amendments require the Participating Underwriter to reasonably determine that the issuer or obligated person has undertaken in its continuing disclosure agreement to provide continuing disclosure documents: (i) solely to the MSRB; and (ii) in an electronic format and accompanied by identifying information, as prescribed by the MSRB. See 2008 Amendments Adopting Release; see also Exchange Act Release No. 34-58255 (July 30, 2008), 73 FR 46138 (Aug. 7, 2008) (“2008 Proposing Release”). The 2008 Amendments became effective on July 1, 2009.

[4] See 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).

[5] See 17 CFR 240.15c2-12(b)(5)(i)(C). Under the Rule prior to these amendments, the following events require notice in a timely manner not in excess of ten business days after the occurrence of the event: (1) principal and interest payment delinquencies; (2) nonpayment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security; (7) modifications to the rights of security holders, if material; (8) bond calls, if material and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the obligated person; (13) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into an agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material. In addition, Rule 15c2-12(d) provides full and limited exemptions from the requirements of Rule 15c2-12. See 17 CFR 240.15c2-12(d).

[6] See 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event notices and failure to file notices are referred to collectively as “continuing disclosure documents.”

[7] See the SEC Report on the Municipal Securities Market, (July 31, 2012) (“2012 Municipal Report”), available at: https://www.sec.gov/news/studies/2012/munireport073112.pdf.

[8] GASB Statement No. 88 is available at: http://www.gasb.org/jsp/GASB/Document_C/Documentage?cid=1176170308047&acceptedDisclaimer=true.

by Scott McJannet & Cynthia Weed

January 29, 2019

K&L Gates LLP

WASHINGTON — With Rule 15c2-12 amendments set to take effect at the end of February, issuers at the Government Finance Officers Association meeting aired out their confusion over how the changes will affect their continuing disclosure responsibilities.

Issuer officials discussed their concerns during a meeting of the GFOA’s Committee on Governmental Debt Management at the group’s winter meeting here Monday. The angst is fueled by the Securities and Exchange Commission’s August 2018 decision to add two new material events to the list of occurrences that issuers will have to agree to disclose within ten business days of their happening.

Event 15 says issuers have to disclose when they incur financial obligations, if material, as well as agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer that could affect security holders.

Event 16 says that in connection with those financial obligations, issuers have to disclose events which “reflect financial difficulties,” such as a default or modification of terms.

Members of the debt committee said they’re having trouble pinning down the requirements. It can be hard to determine when financial difficulties start, and the rule doesn’t specify it, they said.

Without knowing, issuers will have to turn to their lawyers to figure it out, said Kenton Tsoodle, Oklahoma City’s finance director.

“It’s thinking through and making that list of what are all the things that have to be included in these two new filings, but also then when,” said Tsoodle, who will speak at The Bond Buyer’s upcoming Texas Public Finance conference.

The SEC lacks the authority to directly regulate issuers except through the antifraud provisions in the securities laws, so the rule requires underwriters of new issues of $1 million or more to “reasonably determine” that the issuer has entered into a written agreement to provide such disclosures to bondholders.

State revolving fund loans, wherein states make loans to cities for water utilities, may have to be disclosed starting Feb. 27 because they likely fall under Event 15.

Guarantees of lower-rated credits could also be disclosed, committee members said. Tsoodle said he would disclose guarantees.

“It’s somewhat broad and it’s going to be a lot more work and a lot more things for issuers to monitor, Tsoodle said. “It will remain to be seen if it’s a good thing for investors.”

A partial government shutdown caused some hiccups for issuers looking for the SEC to answer questions, and Tsoodle said for areas where they don’t get clarification, issuers will turn to their bond counsel for answers.

Cindy Harris, chief financial officer at the Iowa Finance Authority said she plans to spend more time with her bond counsel to get more guidance if she doesn’t receive more from the SEC.

At the meeting, issuers debated whether or not they would disclose a bank loan document in its entirety, terms and all, on EMMA.

“I think the issue is that you could disclose the entire agreement, so if you have a bank loan, the agreement would have all of the terms of the loan,” Harris said. “Sometimes the person you have the agreement with, may not want all of that information for the public to see like the terms, or the rate at which you’re borrowing.”

Harris worries that at the end of the day, the SEC could take enforcement action against an issuer who comes up short in its disclosure obligations, so wants to cover all bases.

“I think muni issuers are probably struggling with these new amendments,” she added.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/28/19 02:38 PM EST

Read the Newsletter.

The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations published its 2019 examination priorities on Dec. 20, 2018. Since this occurred just prior to the implementation of a partial government shutdown, OCIE has had little chance to demonstrate how it will execute on these priorities.

With furloughed staff back in place, however, registered investment advisers, registered funds and broker-dealers can be certain that OCIE staff will quickly begin examinations focused on these identified priorities.

Please see full Issue for more information.

by Kelley A. Howes

February 1, 2019

Morrison & Foerster LLP

On January 22, 2019, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released its annual priorities letter highlighting its regulatory program’s points of emphasis for the coming year. The most immediately recognizable difference between this year’s edition and previous ones is that its traditional title, “Examination Priorities,” has been updated to include “Risk Monitoring,” the process by which the self-regulatory organization initially identifies problem areas through surveillance, firm reporting, surveys, questionnaires, and examination findings.

FINRA’s 2019 “Risk Monitoring and Examination Priorities Letter” (the “Letter”) also discusses three entirely new priorities: online distribution platforms, fixed income mark-up disclosure, and regulatory technology. Finally, the Letter lists ongoing areas of focus, and alerts firms that it will continue to assess protocols to handle the risks posed by “bad actors” with problematic regulatory histories.

New Priorities

Online Distribution Platforms

FINRA expressed concern that member firms increasingly engage with online platforms that distribute securities through Rule 506(c) of Regulation D and Regulation A under the Securities Act of 1933, yet incorrectly fail to treat such engagements as the sale or recommendation of securities that would trigger FINRA’s rules.

An online platform is a web-based marketplace for securities that automatically displays orders, executes trades, and provides transaction data. If a platform meets the definition of an “exchange” under the federal securities laws, it must register as a “national securities exchange” or operate under an exemption, such as the one available in Regulation ATS requiring registration as a broker-dealer. Although some platform operators are not broker-dealers, many FINRA members support these platforms by acting as selling agents or brokers of record, or performing custodial, escrow, back-office, or financial technology-related functions.

FINRA made clear that even when its members do not act as operators, such support constitutes the sale or recommendation of securities and falls within the scope of FINRA’s jurisdiction. Accordingly, FINRA intends to evaluate how firms conduct reasonable basis and customer-specific suitability analyses, supervise communications with the public, and meet AML requirements with respect to this business. In addition, as these platforms are often widely accessible to the public via the internet, FINRA will evaluate how firms address the risks of offering documents or other communications that omit material information, contain false or misleading statements, or promise high returns.

Regulations D and A set forth exemptions to the 1933 Act’s requirement that all offerings of securities be registered with the Securities and Exchange Commission (“SEC”). Rule 506(c) of Regulation D permits broadly-advertised private offerings, but only if all investors qualify as “accredited investors” under Rule 501 (i.e., high net worth individuals, banks, insurance companies, brokers, and trusts). As such, FINRA will look closely at how member firms involved with online platforms distributing these offerings verify that all investors are accredited.

Regulation A exempts registration of public offerings that do not exceed $50 million in any one-year period, as long as issuers file offering statements with the SEC and provide investors documentation called offering circulars, similar to prospectuses (more information on offering circulars available here). Crucially, such offerings need not be limited to accredited investors, and increasingly take place via online platforms. When member firms assist with such offerings online, FINRA will evaluate the risk of excessive or undisclosed compensation arrangements between members and issuers.

Fixed Income Mark-Up Disclosure

This year, FINRA will also focus on ensuring compliance with the newest version of FINRA Rule 2232, “Customer Confirmations.” Amended in May 2018, Rule 2232 now requires a member to disclose the amount of mark-up or mark-down applied to a trade in fixed income securities with a retail customer, if the member also executes an “offsetting” principal trade in the same security on the same trading day. “Offsetting” occurs when the customer’s order must be satisfied out of the member’s prior inventory, rather than securities that the member gained through principal transactions that day. The purpose of the amendment is to ensure disclosure of transaction cost information with respect to bond trades to parallel the existing, comparable requirement set forth in Exchange Act Rule 10b-10 for equity trades. FINRA has further encouraged consistent disclosure regarding bond trades by working with the Municipal Securities Rulemaking Board to establish similar requirements through Rule G-15. In light of these goals, FINRA has pledged to monitor any changes in firms’ behavior to avoid triggering these mark-up and mark-down obligations altogether.

Regulatory Technology

Lastly, FINRA will monitor firms’ use of technological tools meant to streamline compliance with the securities laws, to catch any risks arising from supervision and governance systems, third-party vendor management, safeguarding customer data, and cyber security.

Ongoing Priorities

In addition to these three new areas, the Letter also discussed ongoing areas of focus. These include Sales Practice Risks, Operational Risks, Market Risks, and Financial Risks. Although these areas have long held FINRA’s attention, the Letter emphasized aspects of these topics that will be particularly important in 2019.

Sales Practice Risks

Within Sales Practice Risks, FINRA highlighted the importance of monitoring protection of senior investors, as well as controls related to outside business activities and private securities transactions. In light of the increasing number of “baby boomer” customers who are seniors, FINRA will assess firms’ supervisory systems to ensure that they exercise heightened scrutiny over these types of accounts to prevent conflicts of interest and financial exploitation. In particular, FINRA will examine how firms stop representatives who act as fiduciaries to elderly clients outside of their employment—i.e., by holding power of attorney or acting as trustee—from using their broker roles to direct funds to themselves. FINRA will also review controls instilled to meet the requirements of new FINRA Rule 2165, which permits a member to temporarily hold disbursements of funds or securities from the account of a “specialized adult” if the member believes that the client is being exploited.

FINRA continues to keep eye on outside business activities and private securities transactions, and particularly cited situations in which associated persons raise funds from their customers for outside entities beyond the reach of their firms’ supervision. The Letter emphasized this scenario is especially concerning when an associated person controls or has an interest in such outside entity, and when the entity has a potentially misleading name similar to the name of an established issuer. FINRA also pointed readers towards proposed FINRA Rule 3290, which would replace its current rules regarding outside business activities and private securities transactions. FINRA is currently considering public comments to this proposal.

Operational Risks

Among Operational Risks, FINRA will focus on customer due diligence and supervision of digital assets. FINRA plans to monitor compliance with FinCEN’s Customer Due Diligence Rule, which became effective last year, requiring firms to identify the beneficial owners of customers that are legal entities, and monitor their accounts to recognize and report suspicious activity.

As digital assets are increasingly transacted in the securities marketplace, FINRA is particularly focused on how member firms handle these assets in compliance with the securities laws. The Letter prioritizes review of the approach firms use to determine whether a particular digital asset is a security, and whether firms have appropriate protocols in place to mitigate the risks of these transactions. FINRA pledged to pursue these goals in close coordination with the SEC.

Market Risks

One prominent market risk FINRA continues to monitor is market manipulation. This year, FINRA will do so with attention to correlated exchange-traded products and correlated options that track broad market indices. FINRA will use pattern exploration to better identify the exploitation of unique characteristics of these products through machine learning.

Financial Risks

Finally, FINRA will continue to evaluate firms’ business models, particularly with respect to liquidity funding and plans in place to address potential financial crisis. The Letter specified that firms may need to update their stress test assumptions, in light of increased volatility in the market last year. Additionally, as the government securities repurchase agreement (“repo”) market experienced significant rate spikes in 2018, FINRA will check whether firms whose liquidity plans rely on government repo funding have established protocols to account for similar disruptions in the future.

In Step with the SEC

Some of FINRA’s concerns overlap with the SEC’s priorities for the coming year, which were released in December by the Office of Compliance Inspections and Examinations (“OCIE”). OCIE is a department within the SEC that examines market participants to ensure compliance with the securities laws and monitor risk.

Like OCIE’s letter, FINRA’s Letter flagged digital assets and potential conflicts of interest arising from an advisor’s fiduciary status as critical areas for regulatory focus. Given the recent uptick in use of digital assets in the securities space, for the first time, OCIE considered digital assets important enough to be its own prioritized category in the coming year. FINRA also echoed OCIE’s attention to potential abuse when an advisor acts as a fiduciary to a client.

Conclusion

As the foregoing reflects, FINRA’s 2019 regulatory slate is a mix of the old and new, reflecting the Wall Street watchdog’s intent to remain true to its core regulatory mission while simultaneously staking out fresh ground. FINRA’s three new priorities represent an effort to keep pace with today’s ever-evolving technological landscape, and to warn its member firms this landscape is not without regulatory risk.

by Jeff Kern & Kate Ross

January 31, 2019

Sheppard Mullin Richter & Hampton LLP

Jacob assisted Babylon Town with annual bonding by acting as a “liaison between the town, the brokerage firms, and bond counsel,” according to a town spokesman.

The U.S. Securities and Exchange Commission has concluded its investigation into Babylon Town’s former municipal finance adviser and is taking no further action.

Sheldon Pollock, assistant regional director for the SEC’s Division of Enforcement, sent a letter to the town in November that stated the SEC had finished its investigation of Doug Jacob, a subcontractor for the town. “Based on the information we have as of this date, we do not intend to recommend any enforcement action by the Commission against the Town,” the letter stated.

However, according to SEC guidelines, the notice “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation,” Pollock noted. An SEC spokeswoman declined to comment to Newsday.

On June 30, 2017, the SEC sent a letter to the town asking employees to preserve documents related to municipal bonding work by Jacob because the SEC believed the information was “relevant to an ongoing investigation.” For more than a decade, Jacob assisted the town with annual bonding by acting as a “liaison between the town, the brokerage firms, and bond counsel,” according to town spokesman Kevin Bonner.

The SEC’s letters did not detail the nature of the investigation but town Supervisor Rich Schaffer has said they were looking into whether Jacob’s dual roles as finance adviser and subcontractor with the town had violated the federal Dodd-Frank Act by not putting the municipality’s interests ahead of his own. Jacob did not respond to a request for comment.

Jacob owns Red Hill, a general services company founded in 2007 that provides more than two dozen nonunion workers for various departments through a contract the town has with Herbert L. Greene, a solid waste consultant who lives in Williamsburg, Virginia. In the town’s latest contract with Greene, which took effect in December, Greene earns $85 per hour, while Jacob, listed as a subconsultant, earns $93.50 per hour.

After the SEC announced the investigation, Jacob, who lives in Pelham in Westchester County, stepped down as finance adviser, in what the town called a temporary move pending the outcome of the investigation. Since 2017 the town has been using Capital Markets Advisors LLC of Great Neck for its annual bonding. Bonner said yesterday that the town will continue to use the company.

In a statement, Schaffer said the investigation result did not surprise him. “Doug Jacob always does what is best for the Town of Babylon,” he wrote. “He has spent the last three decades helping improve the town’s finances and is a big reason for our Triple-A bond rating.”

Newsday

By Denise M. Bonilla
denise.bonilla@newsday.com @denisebonilla

Updated January 29, 2019 9:59 PM

With heightened attention to investment and depository rules as well as increased enforcement of federal and state pay-to-play rules, registered investment advisers (RIAs) and broker-dealers should address the unique legal considerations that may arise when a firm provides or seeks to provide services to U.S. state and local government entities.

Investment Rules

Jurisdiction- and government entity-specific rules apply to firms that manage, hold or invest money for the government. A government entity with significant funds will often adopt a policy specifying how the funds may be invested or what securities may be purchased — delineating the types of investments that are permissible (e.g., prohibitions on swaps, equities, or investments in certain countries and industries), how the government entity views risk, how a portfolio must be diversified and the standard of care required for managers. Agreements with investment advisers or broker-dealers may even incorporate these policies by reference. Additionally, similar restrictions contained in a jurisdiction’s statutes or ordinances may apply to the investments of a particular government entity or to all government funds in the jurisdiction.

Similar restrictions contained in a jurisdiction’s statutes or ordinances may apply to the investments of a particular government entity or to all government funds in the jurisdiction.

How restrictive they are often depends on whether the money is designated for investment, held by a retirement system or dedicated for some other particular purpose. Although government entities are less diligent about alerting investment advisers and broker-dealers to these restrictions, they can in some cases impose direct liability on the firm if it invests government funds in a manner that is not permitted by the applicable rules.

Depository Rules

The laws of many jurisdictions specify custodial requirements, such as that all government funds be maintained with approved depositories. In some jurisdictions, this means all funds must be held in banks rather than brokerage accounts. Moreover, firms typically need to go through a formal application and review process to become approved depositories.

Federal Pay-to-Play Rules

Under these rules, political contributions made by a company or its covered donors prohibit a covered company from engaging in, or receiving compensation for, certain business with state or local government entities. Importantly, federal pay-to-play rules are strict liability in nature, meaning criminal intent is not needed to trigger their prohibitions. Current federal pay-to-play rules are:

• The Municipal Securities Rulemaking Board’s Rule G-37, which covers broker-dealers that underwrite municipal securities and municipal advisers who solicit investment advisory business for third parties, or provide advice to or on behalf of a government entity or obligated person with respect to municipal financial products or the issuance of municipal securities.
• The Securities and Exchange Commission’s (SEC) Rule 206(4)-5, which covers registered investment advisers and exempt reporting advisers that provide investment advisory services to state or local government entities either directly (e.g., via a separate managed account) or through a covered investment pool. Covered investment pools include unregistered investment funds in which a government entity invests directly, as well as registered mutual funds that are selected as an option for a participant-directed plan sponsored by a government entity.
• The Commodity Futures Trading Commission’s Rule 23.451, which covers swap dealers that offer or engage in commodities-based swaps with state or local governmental counterparties.
• The Financial Industry Regulatory Authority’s (FINRA) Rule 2030, which covers FINRA members engaged in soliciting investment advisory services covered by the SEC rule from state or local government entities.

State and Local Pay-to-Play Rules

Certain states and localities have laws that automatically prohibit a company from having government contracts if a covered donor makes a political contribution or solicits one for a covered official or political committee. Common categories of covered donors include:

• the firm itself;
• any affiliate or the affiliate’s political action committee;
• senior officers of the firm (e.g., management committee);
• members of the firm’s board of directors;
• employees who solicit or manage state or local contracts; and
• in some cases, the spouses and dependent children of the individuals listed above.

These bans on business can, in some cases, last for more than five years. These laws also may impose disclosure requirements regarding political contributions. It is very common for government contracts and requests for proposals (RFP) in these jurisdictions to require a company to certify its compliance with these laws.

Lobby Laws, Placement Agent Policies and Contingent Fee Restrictions

What Triggers Lobbyist Registration

In 31 states and many localities, attempting to obtain the award of government business meets the definition of lobbying and may give rise to an obligation to register as a lobbyist. These laws vary, and many contain useful exemptions, such as for formally responding to an RFP or for in-house employees of the company who act as salespersons. In addition, some lobby laws have a threshold for triggering registration that may be based on the amount of time spent lobbying in the jurisdiction (e.g., North Carolina’s threshold is 5 percent of one’s working time in a month), the compensation received for lobbying in the jurisdiction (e.g., Indiana’s threshold for executive branch lobbying is $1,000 per year) or number of contacts with covered officials (e.g., San Francisco’s threshold is five lobbying contacts in a month). In some jurisdictions, registration may be triggered when gifts and entertainment are provided to public officials and employees. Importantly, some jurisdictions aggregate all firm activity for these thresholds, so while a single action may not give rise to an obligation to register, it could when combined with other activities at the firm.

Requirements Once Registration Is Triggered

If registration is triggered, the individual lobbyist and/or company will need to register and report on a periodic basis. These reports typically require the disclosure of gifts and entertainment provided to public officials in the jurisdiction, compensation for lobbying and the issues lobbied. Some jurisdictions impose training requirements and special gift and political contribution restrictions on lobbyists.

Placement Agent Policies

Separate from lobby laws, government entities (particularly public pension funds) have increasingly adopted policies with respect to the use of placement agents by external investment managers. The policies range from requiring investment managers to disclose who is soliciting business to imposing outright prohibitions on investment managers’ use of third-party solicitors. The rules may apply even when a firm is using in-house marketing employees to solicit business.

Contingent Fee Prohibitions

Some lobby laws prohibit the payment of contingent fees — any payment (such as a commission or formulaic bonus) that is in whole or in part attributable to a government decision (such as the decision to engage the firm). In addition, some jurisdictions (e.g., Illinois, South Carolina) prohibit contingent fees paid for soliciting certain government business, even if the solicitor does not trigger lobbyist registration. Placement agent policies also can prohibit contingent fees.

Gift Laws

When providing a thing of personal value to an official or employee of a government entity, one must consider the gift rules of that jurisdiction. These restrictions apply to personal benefits such as meals, entertainment, travel and gift items as opposed to political contributions, which may be subject to pay-to-play restrictions as described above. Most jurisdictions have some restriction on gifts and entertainment for public officials, whether it be an absolute ban regardless of value, a fixed dollar limit per occasion or per month or year, or a prohibition on providing gifts that might reasonably tend to influence an official. These gift laws often extend to things of value provided to the official’s spouse or dependent children. In some instances, state and local gift laws, such as those in the state of New York, can include gifts given to a third party, such as a charity, at the request or behest of a public official. As noted above, lobbyists and companies employing lobbyists often need to report the gifts or entertainment they provide. Government entities also may have policies requiring vendors or contractors to disclose gifts they provide to their officials.

Legal liability for a violation of these laws can attach to the donor, donee or both, depending on the law. This is especially important to keep in mind in light of the fact that government entities increasingly require certifications of compliance with applicable gift laws. For example, the New York City comptroller requires firms managing city pension fund money to certify they have not given anything of value to employees of the comptroller’s office.

Conflicts of Interest

Dual-Hatted Situations

To the extent employees also hold positions with a government entity (such as serving on an unpaid government board), government conflict-of-interest restrictions may apply. Conflict rules frequently prohibit a government official from participating in a decision (such as that to award a contract) involving his or her private employer. In some rare cases, prohibitions can apply to contracts with that government entity even if the official fully recuses. Although legal liability for violations of these laws is typically limited to the official or former official, contracts that are entered into in violation of these conflict laws may be void or voidable by the government entity.

Post-Employment Rules

State and local laws typically restrict former public officials from appearing before their former agency for a period of time (often one or two years) after leaving government office and permanently restrict someone from working on a particular matter (such as a contract or procurement) that he or she personally worked on while in government. Thus, when vetting a prospective or new hire who is a former government official, a firm may want to consider whether the firm does or may seek to do government business in the jurisdiction where the official serves or served.

Takeaways

In addition to the ever-increasing risk of an enforcement action, potential legal violations can bring negative media attention. As such, broker-dealers and RIAs must continue to develop and refine compliance programs to address laws regulating government procurement activities. Common elements among these programs include implementing tailored policies, preclearing certain activities, providing protocols to ensure that registration and ongoing reporting requirements are met, offering training programs for certain officers and employees, and establishing procedures for keeping abreast of the latest developments in this area of law.

by Ki Hong and Tyler Rosen

January 23, 2019

Skadden, Arps, Slate, Meagher & Flom LLP

WASHINGTON — The organizers of The Municipal Finance Conference are seeking research papers on a broad variety of topics related to state and local fiscal policy and finance in advance of the conference this summer, they announced Wednesday.

The 8th annual Municipal Finance Conference is slated to take place July 15-16 at the Brookings Institution in the nation’s capital. It is a joint venture of Brookings, Brandeis University, Washington University in St. Louis, and The University of Chicago. The conference “aims to bring together academics, practitioners, and state and local government officials to discuss recent research on municipal finance,” and frequently draws prominent members of the muni research community.

The deadline for proposals is March 1, and papers that have been presented elsewhere are eligible. Last year’s conference featured, among many works, a paper examining municipal advisors in the wake of the Dodd-Frank Act by Brandeis Professor Dan Bergstresser and another examining life without advance refundings by Andrew Kalotay of Kalotay Analytics.

Papers will be chosen for inclusion by April 5, and drafts of the selected papers will be due by June 7, the organizers announced.

The conference agenda has not been announced. Registration will open in April.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 01/24/19 07:02 PM EST

WASHINGTON — The Municipal Securities Rulemaking Board will begin preliminary conversations to address Securities and Exchange Commission Chair Jay Clayton’s comments about improving the timeliness of issuer disclosures at the board’s quarterly meeting next week.

The MSRB announced the meeting’s agenda Thursday in advance of the meeting, which will be held Jan. 29-31 at the board’s Washington headquarters.

The impetus for the discussion comes at least in part from Clayton’s statement at a December 2018 SEC conference that the SEC may be interested in taking additional regulatory action to improve municipal market disclosure.

Clayton said in prepared remarks that he has asked the commission’s Office of Municipal Securities to work with the MSRB to improve transparency and improve the timeliness of the filing of issuer financial information under continuing disclosure agreements.

The SEC does not have the authority to force issuers to file annual financial information or other continuing disclosure documents more quickly, but Clayton has said he believes there are steps the SEC can take to at least make investors aware that information filed on EMMA might be stale.

“The first step in improving it is to make sure that investors understand that the financial statements they are looking at in some cases are 18 months old,” Clayton told a Senate panel last month.

The quarterly meeting will be the first time the board will have met with the SEC since December.

“There’s a lot of conversation around the best way to bring more transparency to this issue,” said Lynnette Kelly, MSRB CEO and president. “There’s certainly a lot of very interested constituencies in the municipal market who care a lot about this issue, so very preliminary discussions at this point.”

At the meeting, Kelly said MSRB staff will present data to the board illustrating the difference between when issuers promise to file their financial statements on EMMA to when they’re actually filed.

The board will also discuss next steps on the issue of pennying. Pennying occurs when a dealer places a retail client’s bid-wanted out to the market and determines the winning bid, but rather than executing the trade with the winning bidder marginally outbids the high bid and buys the bonds for its own account.

The board has expressed concern that widespread pennying could disincentive participating in the bid-wanted process, discourage bidders from giving their best price in a bid-wanted and “may impact the efficiency of the market.” The board last year requested comment on interpretive guidance that stated that using the bid-wanted process solely for the purposes of price discovery, whether via a brokers’ broker or an alternative trading system, could be a violation of the board’s Rule G-17 on fair dealing.

The board could decide not to take next steps or could direct staff to get more information, do more economic analysis or decide to move and issue guidance, Kelly said.

As for Rule G-17, the board will address comment letters received earlier this month regarding proposed amendments to the 2012 interpretive guidance of the rule.

That 2012 guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

The MSRB has proposed amending the guidance to among other things require dealers to disclose only actual rather than potential conflicts of interest. Dealers said in comment letters to the board that they supported that idea. But the MSRB hasn’t had much time to mull all the comments, as market groups submitted them fewer than two weeks ago.

“We’ve not had the sufficient time to do an in-depth analysis of the comment letters, we’ve had no time to go back to the commentators so that we really understand what their concerns are,” Kelly said.

She added more outreach needs to happen and afterwards expects to go back to the board in the next three to four months with a firmer recommendation on next steps.

At the meeting, the board will meet with members of the Securities Industry and Financial Markets Association, National Association of Municipal Advisors and Government Finance Officers Association to discuss engagement and future outreach events in 2019. This is part of a new initiative to expand the board’s stakeholder engagement efforts.

Other items on the agenda include the board’s ongoing retrospective review of its existing rules, an update on the MSRB’s data plan, and a discussion of the MSRB’s financial management.

Also this week, the board released its Series 54 Examination Guide for municipal advisor principals, who must eventually pass the exam to be qualified. The 13-page guide has sample multiple choice questions and a “road map” with links to rules and concepts.

The permanent exam will be available in the fall, and at that time municipal advisor principals will have a one-year grace period to become qualified. Municipal advisor principals can take a voluntary Series 54 pilot, offered from March to July 2019.

By Sarah Wynn

BY SOURCEMEDIA | MUNICIPAL | 01/24/19 07:02 PM EST

Learn more.

In the first month following the end of a unified Republican Congress and presidency, the federal government continues in what is now the longest shutdown in U.S. history. A new Democratic majority in the House is trying to gain traction on major issues like infrastructure, GSE reform, healthcare and technical corrections to the 2017 tax reform bill, but as the shutdown grows longer, will hopes of bipartisan legislation dwindle?

Below is the BDA’s 116th Congressional outlook, including information on committee leadership and new members of the committees of jurisdiction to BDA’s interests – as well as a policy outlook.

You can find a combined House and Senate calendar for 2019 here.

Continue reading.

Bond Dealers of America

January 23, 2019

In the past few years of massive regulatory change, the BDA has remained focused on the highest priority issues impacting the U.S. fixed income markets and provided its members with valuable opportunities to engage directly with regulators. The BDA also provides its members with in-person access to key Capitol Hill policymakers on the Senate Finance Committee, the Senate Banking Committee, the House Financial Services Committee and the House Ways and Means Committee. The legislation developed by these committees directly impacts the fixed income markets.

Through a truly engaging partnership with hundreds of industry leaders at BDA member firms, below are the 2018 regulatory and legislative accomplishments of the BDA.
Thank you for your ongoing support.

Continue reading.

Bond Dealers of America

January 24, 2019

Listen to what a current regulated representative enjoys about his tenure and how to apply.

SUMMARY

SIFMA sent comments to the MSRB responding to Notice 2018-29 in which the MSRB seeks comment on draft amendments to the Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters of Municipal Securities. SIFMA supports the MSRB’s retrospective review of the 2012 Guidance, and their comments seek to ensure that the purpose of the review is fully realized.

They appreciate that the MSRB has proposed adopting some of the suggestions made to the MSRB’s Initial Request for Comment, including: 1) incorporating the practical considerations of MSRB Notice 2012-38 (July 18, 2012) (the “Implementation Guidance”) and MSRB Notice 2013-08 (Mar. 25, 2013) (the “FAQs”) into the Amended Guidance; 2) clarifying the applicability of MSRB Rule G-42’s two-prong analysis to a recommendation for complex municipal financings; and 3) allowing for an automatic email return receipt as a means to evidence receipt of the underwriter disclosures.

Read the Comment Letter.

After consultation with various Committees and members, the BDA drafted and submitted a comment letter on the MSRB’s request for public comment on draft amendments to the interpretive guidance it issued in 2012 on the application of MSRB Rule G-17 on conduct of municipal securities and municipal advisory activities, to underwriters of municipal securities.

The comment letter can be viewed here.

Key issues highlighted in the comment letter are as follows:

• The BDA believes that the Draft Amendments contain several unnecessary inclusions, which can make compliance with the Draft Amendments more burdensome; and
• The BDA believes that the MSRB should re-phrase some new language; and
• The BDA does not believe that the MSRB’s approach to disclosures by comanager will materially reduce the number of disclosures; and
• The BDA believes that the MSRB should clarify the timing of a syndicate manager’s delivery of disclosures.

Bond Dealers of America

January 15, 2019

Trying to understand the new SEC Rule 15c2-12 requirements?

The MSRB today published a new educational resource to help issuers prepare for upcoming changes.

Read the Update.

Bond Dealers of America

January 9, 2019

The NFMA is pleased to announce the new officers for 2019. Congratulations to Scott Andreson, 2019 NFMA Chair!

To read the press release, click here.

Future GFOA Conference Locations

To help you plan ahead, upcoming conferences will be held as follows:

• New Orleans, Louisiana, May 17-20, 2020
  Ernest N. Morial Convention Center
• Chicago, Illinois, June 27 – 30, 2021
  Hyatt Regency & Swiss Hotel Chicago
• Austin, Texas, June 5-8, 2022
  Neal Kocurek Memorial Austin Convention Center

Questions? E-mail Future Conference Location Inquiries.

Submit a Bid to Host a Future GFOA Conference

GFOA is accepting bids from cities interested in hosting GFOA’s 2023, 2024, and 2025 annual conferences.

If your city is interested in bidding to host GFOA’s annual conference, your can submit an application. Please review the minimum requirements listed in the application.

If you have any questions, please e-mail Future Conference Location Inquiries.

Norwalk, CT, January 3, 2019 — The Governmental Accounting Standards Board (GASB) has issued a proposed Implementation Guide that contains questions and answers about the GASB’s new standards on accounting and financial reporting for fiduciary activities.

The Exposure Draft proposes answers to dozens of questions about GASB Statement No. 84, Fiduciary Activities. GASB Implementation Guides are intended to clarify, explain, or elaborate on the requirements of Board pronouncements.

This Exposure Draft of a proposed Implementation Guide, Fiduciary Activities, is available for download at no charge on the GASB website, www.gasb.org. Stakeholders are encouraged to review and provide comments by February 28, 2019.

On December 6, 2018, the Securities and Exchange Commission hosted an inaugural one-day conference on municipal securities disclosure. The conference, which the SEC intends to host annually, featured various panels comprising SEC staff as well as a broad array of industry participants. Topics included discussion of developments and current trends in disclosure, the amendments to Rule 15c2-12 of the Securities Exchange Act of 1934 that become effective on February 27, 2019, and potential opportunities for regulatory and industry improvement.

The conference comes just months after the SEC adopted amendments (the Amendments) to Rule 15c2-12 of the Securities Exchange Act of 1934 (the Rule), which is the SEC’s principal regime governing periodic disclosure by issuers and obligated persons with respect to municipal securities (including securities issued for the benefit of tax-exempt hospitals and healthcare organizations). The Rule requires that notice filings be provided to the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system within 10 business days after the occurrence of certain triggering events. The Amendments add the following two new triggering events:

• Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
• Default, event of acceleration, termination event, modification of terms or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

In anticipation of the February 27, 2019, compliance date of the Amendments, the conference provided an opportunity for market participants to discuss areas of concern around disclosure, both under the current version of the Rule as well as in light of the Amendments. One such area of concern is the tension between timely reporting and uniformity of information. The Amendments reflect the SEC’s view that there may be events that are material to bond owners but that may not be reported through EMMA until annual audited financial statements are filed for the periods in which the events took place. The SEC has noted that as borrowers increasingly incur debt in private-placement transactions where no official statement is issued, EMMA disclosure of new indebtedness may be delayed. Industry panelists emphasized the quality and uniformity of financial information disclosed through an audit, and hence the concerns issuers and obligated persons may have in providing unaudited information.

When the Amendments become effective, issuers and obligated persons will need to determine how to comply with the requirement to provide disclosure with respect to material terms of newly incurred indebtedness. On the one hand, issuers and obligated persons may be tempted to file full debt documents to avoid claims of under-disclosure. On the other hand, investors may prefer a clear and concise summary of material terms rather than voluminous disclosure of actual debt documents.

Industry panelists drew attention to certain areas related to disclosure enforcement where further guidance from the SEC would provide clarification of the disclosure requirements under the Rule:

• Disclosure of interim financial information — Many issuers have some form of this information available to the public, and there would be value if issuers were provided with comfort that sharing this type of information would not potentially create a risk of liability.
• Underwriter due diligence — It is unclear to what extent municipal underwriters are expected to perform diligence on unaudited figures. Further SEC guidance concerning the required due diligence under the Amendments would be helpful to underwriters.
• Liability exposure of municipal advisors — Municipal advisors continue to play a central role in advising issuers on municipal offerings, and guidance on their antifraud liability exposure would be helpful to the industry.

The following emerging issues in disclosure were also discussed:

• Issuers should consider providing specific disclosure in risk factors on emerging issues such as cybersecurity and climate change risk, especially if issuers have commissioned studies that help analyze the costs of addressing these issues. While there is uncertainty about the costs that issuers and obligated persons will incur in addressing cybersecurity and climate change, it is important to note that thoughtful disclosure on these challenges does provide benefit to the market—describing how an issuer will respond to these challenges can demonstrate the quality of management and its planning effort.
• In light of the gradual phasing out of LIBOR, issuers will need to consider how to provide disclosure on the phase-out when it occurs in 2021. Investors will want to see volatility analyses of the new rate alternatives. For transactions still using LIBOR, issuers should expressly state how the phase-out of LIBOR will be addressed.

The SEC emphasized the value of disclosure in the market, while also acknowledging that it is important to strike a balance between providing disclosure that is material to investor decisions and recognizing that it is inefficient and costly for issuers to provide extraneous disclosure.

The role of technology in municipal securities disclosure was also discussed. While technology increases access to information, it is important to consider all impacts of adopting new technology. For instance, while most participants in the municipal market are supportive of concepts like eXtensive Business Reporting Language (XBRL), which improves data aggregation and data analytics, unique external dynamics, such as regulatory factors, that affect issuers must not be forgotten. Further, there is also a concern that technology can create an uneven playing field in the market, with issuers who have the funds to implement technology solutions having an upper hand as compared with issuers who do not readily have the capital needed to implement certain technology.

January 3, 2019

Manatt, Phelps & Phillips, LLP

Read the report.

The MSRB has published its compliance resource regarding the application of content standards under Rule G-40, on advertising by municipal advisors.

The compliance resource notice can be viewed here.

The compliance resource was developed through the MSRB’s notice-and-comment process, to which the BDA submitted comments in October and November 2018. The revised compliance resource reflects some recommendations and clarifications requested by the BDA.

MSRB Rule G-40 will become effective on February 7, 2019.

Bond Dealers of America

December 20, 2018

A new report from the Data Foundation and Workiva makes a case for Comprehensive Annual Financial Reports (CAFR) as the preferred method of publicizing state and local government financial info.

As an increasing number of state and local governments across the country make more of their financial data available to the public online, a new report makes a case for the best way to do that.

The report, dubbed Transparent State and Local Financial Reporting: The Case for an Open Data CAFR, suggests that public agencies should embrace Comprehensive Annual Financial Reports (CAFR), a method that has already been put into place in Florida. Florida has gone as far as to enact legislation that requires the conversion of all local and state government financial reporting to CAFR.

CAFR, for the unfamiliar, is essentially all financial reporting for a state, local or other governmental entity. It’s not exactly a budget, which is essentially a plan for what a state will spend in a fiscal year and how its tax revenue will be allocated. It’s more of a summation of financial activities over some years. As the report notes in its introduction, these days, roughly 30,000 state and local government agencies now publish audited financial statements annual, but not all of them use the “extensive and highly detailed” CAFR format.

Dean Ritz, the senior director for digital reporting at the enterprise software company Workiva, co-authored the report with Jim Harper, former senior fellow and director of information policy studies at the Cato Institute, a libertarian think tank located in Washington, D.C. Ritz said the report was in part an effort to provide guidance to the public sector as efforts to be transparent about funding accelerate. There has been, in recent years, a rise in expectations when it comes to the quality of data that government agencies are publishing, and the authors hope their report can help organizations meet that.

The expectations among residents, businesses, activists and even many public servants themselves is that the public should be able to not only access governmental finances, but also access it in a format that allows for easy searching, unlike basic methods such as PDF.

“We sort of jokingly say PDF is where data goes to die,” Ritz said. “PDF describes the layout of the page, not the information.”

Another benefit of all state and local governments working to embrace CAFR is that it would lead to one standardized format for such finances. If everyone used the same format, the content would then become format neutral, so that a person accessing one town or state’s data would not be at a disadvantage when compared to a person accessing the data of another. Other benefits cited by the authors of the report include a reduced cost of financing; a reduction in reporting burden; increased accountability; and a greater capacity for evidence-based decision-making in government.

Ritz noted that the report does address potential obstacles, including the difficult change processes inherent to government and, as always, initial cost of setting up a new system. Although, Ritz also said that the latter may be changing.

“It’s different than it has been historically, but we think the benefits of this have now been realized on the private side,” Ritz said, “and there’s enough of them that there’s now a wide number of technology and solution providers, as well as service providers, that can provide modernization.”

There has certainly been an increased commitment to financial transparency in state and local government, if not yet to CAFR itself. Ohio, for example, has launched a website called OhioCheckbook.com, which doesn’t adhere to the exact parameters of the CAFR format but does make the state’s spending public down to the actual penny. In some cases, users can not only see line items for purchases, but also the actual check that public organizations used to make a purchase with taxpayer money.

Josh Mandel, outgoing Ohio treasurer, led the creation of the site, which launched in 2014 and was at the forefront of state financial transparency efforts.

“We took everything from two bucks for a pack of pencils to millions of dollars for contracts to everything in between,” Mandel said, “and gave that information to the taxpayer. One of the best ways to hold politicians feet to the fire is to arm them with financial information.”

Mandel said analytics for the site at first were slow. Over time, however, word spread and it has now welcomed more than 1 million searches.

Greg Jordan-Detamore, the Open Cities product lead with the government transparency advocacy group Sunlight Foundation, praised Ohiocheckbook.com and other efforts to bolster the type of financial data released to the public. Jordan-Detamore said that an ideal format for doing this is one like CAFR that enables easy searches and machine reading, unlike PDFs.

The main idea behind the CAFR report is that more governments should emulate Florida’s adoption of the format. Indeed, government is without question a sector that shares ideas. Baton Rouge, La., for example, has created its own version of OhioCheckbook.com with Open Checkbook BR, which essentially does the same thing. Time, of course, will tell if the same spread starts to happen with CAFR formatting.

GOVTECH.COM

BY ZACK QUAINTANCE / DECEMBER 21, 2018

Read about the MSRB’s commitment to supporting regulatory compliance, a recent enforcement action related to MSRB Rule G-27, an upcoming Series 54 pilot exam and more in the latest Compliance Corner.

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced it is establishing a formal Academic Program as part of its mission to support academic and other researchers. The program includes a new Visiting Scholar position and the ongoing provision of multiple municipal market data sets to universities and other research institutions looking to conduct research about the municipal securities market.

To expand municipal securities data research, the MSRB seeks a candidate to join the organization as a Visiting Scholar. The scholar will conduct in-depth analyses on municipal market data collected by the MSRB and from other sources. Learn more about the Visiting Scholar position.

“We are committed to supporting the academic community and its ability to explore municipal market data that may enhance the understanding of trading activity and market transparency,” said MSRB President and CEO Lynnette Kelly. “The work of the Visiting Scholar position will help influence additional insight about the municipal securities market.”

The MSRB recognizes that the research community is in a position to generate additional insights and conclusions about the municipal securities market. For several years, the MSRB has provided the academic and research community access to several data products from the MSRB, including historical sets of trade data, primary market and continuing disclosures, and information related to variable rate securities. Learn about data sets available from the MSRB and how to make data requests.

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 addition of a Visiting Scholar to the MSRB’s academic program further enhances support for the academic community.

Date: December 17, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Read the E-Newsletter.

Read the News Release.

A midwestern UBS Financial Services broker who helped customers pose as retail investors in order to receive new-issue muni bond allocations agreed to an industry bar and payment of $374,000 to regulators, the Securities and Exchange Commission said on Tuesday.

Chris D. Rosenthal, who worked at a UBS retail branch in Pepper Pike, Ohio for more than 17 years, helped the firm’s traders obtain new muni bonds when they were not in the distribution syndicate by participating in subterfuge and by establishing “parking” arrangements with the phony retail customers, the regulator said.

Rosenthal, 54, who began his brokerage career in 1990 at Lehman Brothers, did not immediately return a call for comment at his current trading firm, Municipal Portfolio Managers. His website lists him as president and a related video promotes his “amazing leadership skills and collaboration abilities.”

From the beginning of 2012 to May 2016, Rosenthal worked with two firms of unregistered brokers to commit the fraud, according to the SEC’s settlement order. They exploited order priority rules that give customers higher priority over broker-dealers in the allocation of new issue municipal bonds, and the firms then flipped the bonds in sales to broker-dealers and to UBS traders.

Rosenthal’s customers—Core Performance Management in Boca Raton, Florida and RMR Asset Management Co. in Chula Vista, California—maintained 41 accounts at UBS under fictitious business names, according to the settlement order. “Rosenthal knew that these parties were in the business of flipping new issue municipal bonds,” the order said.

In addition to placing more than 1,100 fraudulent retail orders for CPM and RMR with UBS’s syndicate desk, Rosenthal placed UBS muni traders’ indications of interest for new-issue bonds with the unregistered brokers who would then place retail or institutional customer orders with members of the underwriting group, who would then sell the bonds back to UBS based on Rosenthal’s orders, the SEC said.

The SEC in August barred or suspended five employees of CPM, which was dissolved in July 2016, and ordered them to pay disgorgement and/or civil penalties. It reached similar settlements with 11 out of 13 RMR employees.

As part of the fraud, Rosenthal often included incorrect zip codes for his customers to indicate that were residents of the bond issuers’ zip codes. He also helped UBS’s own traders refill their inventory by repurchasing bonds from CPM and RMR at $1-per-bond above the offering price immediately after they bought them, the SEC said in explaining the “parking” violations.

The SEC ordered the former broker to disgorge $284,080 plus $15,128 of interest to the government and to pay a $75,000 civil penalty, $15,000 of which will be paid to the Municipal Securities Rulemaking Board. The order said he can re-apply to work in the securities industry after five years.

Rosenthal voluntarily resigned from UBS in September 2016 as it was “investigating whether certain clients….obtained allotments during the retail order periods of negotiated new issue municipal offerings to which they may not have been entitled,” the firm reported to regulators. Rosenthal has no other disclosures on his BrokerCheck record.

by AdvisorHub Staff

December 18, 2018

The SEC finds that Rosenthal engaged in fraudulent trading practices that helped unregistered brokers, known in the industry as “flippers”.

The United States Securities and Exchange Commission (SEC) today announces that it instituted settled proceedings against Chris D. Rosenthal. From February 1999 to September 2016, Rosenthal, served as a financial adviser and Senior Vice President at UBS, buying and selling securities for his brokerage customers’ accounts.

The SEC’s order finds that Rosenthal engaged in fraudulent trading practices that helped unregistered brokers, known in the industry as “flippers,” deceptively posing as retail investors to obtain municipal bonds in primary offerings.

According to the SEC’s order, from 2012 to 2016, Rosenthal engaged in deceptive practices designed to circumvent the priority that is given to retail investors in new issue municipal bond offerings. For instance, the SEC’s order found that, when placing orders for unregistered brokers in new issue municipal bond offerings distributed by UBS, Rosenthal falsified zip codes associated with the brokers’ accounts. This made it appear as though the orders had been placed by retail clients.

Furthermore, the SEC’s order finds that Rosenthal helped UBS municipal bond traders obtain new issue municipal bonds by placing dealer stock orders – which would ordinarily get lower priority in a new issue allocation – through the unregistered brokers, giving the impression that the orders were for customers rather than for UBS’s trading inventory. Also, the SEC’s order finds that Rosenthal engaged in a parking scheme with the unregistered brokers by arranging for them to purchase new issue bonds in offerings distributed by UBS, with the agreement that they would sell them back to UBS at a prearranged price. The parking scheme made it more likely that UBS traders could obtain new issue bonds for UBS’s trading inventory.

Rosenthal has been found to have willfully violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, as well as disclosure and fair dealing provisions of Rules G-11(b), G-11(k) and G-17 of the Municipal Securities Rulemaking Board. The order also found that he caused the unregistered brokers’ violations of Section 15(a)(1) of the Exchange Act.

Rosenthal did not admit or deny the SEC’s findings. However, he consented to a cease-and-desist order barring him from association with various regulated entities with the right to apply for reentry after five years. The order also imposes payments of $284,080 in disgorgement, $15,128 in prejudgment interest, and a $75,000 civil penalty.

The merits of the SEC Enforcement program cannot be assessed by numbers and statistics chronicling events like how many cases were filed or the total amount of dollars ordered in judgments. At least that is the claim frequently repeated by the agency and the Division of Enforcement. Yet various sources publish numbers about Division of Enforcement ranging from the newly minted Annual Report (started last fiscal year) of the Division to various consulting firms and universities. Many who practice in the area, or closely follow the agency, discuss metrics and numbers tied to the work of the Enforcement Division. The question thus becomes “What, if anything, do SEC Enforcement statistics tell us?”

The New York University Pollack Center for Law and Business is one source of statistics about the work of SEC Enforcement that is outside the agency. The Center teams with Cornerstone Research to publish its data. The most recent compilation from this team is: Cornerstone Research, SEC Enforcement Activity: Public Companies and Subsidiaries (December 2018), available here (Cornerstone Report).

Number of Enforcement cases: Many of the metrics highlighted in the Report are familiar, echoing the earlier Enforcement Annual Report, published in October 2018 (here). The top line key metric is always the number of cases filed by the Division. Both reports agree that 490 standalone enforcement actions were filed FY 2018. The Division likes to add an asterisk to the number, noting that the MCDC (Municipalities Continuing Disclosure Cooperation initiative) skews the trend analysis over time. The Cornerstone Report faithfully footnotes the claim (here). The Division offers little explanation for this claim. The Cornerstone Report offers none. While there is no doubt that MCDC added a number of cases to the totals, the same might be said of the current Enforcement efforts regarding the share class selection initiative which is not mentioned.

Perhaps the most significant point about the 490 FY 2018 total is not whether an asterisk is added by but how the Division was able to file that many cases. In the first half of FY 2018 the Division only filed 159 standalone cases. In the second half of the year over twice as many cases were brought – 331. The tables included in the Cornerstone Report demonstrate that this is the largest number of actions brought in any six-month period in the last several years with or without the asterisk. While it is typical to see the numbers go up in the waning months of the fiscal year as the Division empties its pipeline and looks to enhance its year end statistics for the fall Congressional budget hearings, more than doubling the first half output is a significant achievement. That number becomes even more remarkable in view of the Cornerstone Report’s statement that 44% of the FY 2018 independent SEC actions were filed in the fourth quarter. Unfortunately there is no discussion regarding these achievements in the Cornerstone Report or the Division’s Annual Report.

Public company cases:  The focus of Cornerstone Report is cases involving public companies and/or their subsidiaries. Here the numbers can be difficult to square with those from the Enforcement Annual Report. For example, according to the Cornerstone Report the SEC filed 71 new enforcement actions against public companies and subsidiaries in FY 2018. The bulk of those cases – 46 – were filed in the last quarter of the fiscal year. That number represents a record for this decade.

Again, there is no discussion of the numbers revealing how the Division accomplished this feat. Perhaps more importantly, the numbers here do not precisely track those from the Enforcement Annual Report. The Division’s Annual Report says that 16% of its cases involved issuer reporting, accounting and auditing issues. That calculates to 78 cases (the number is not in the report). Whether the category described by the SEC is the same as that used by Cornerstone is unclear. Neither report offers definitions which could clarify the question.

Venue selection: Venue selection is another key question about SEC Enforcement as reflected in the series of cases that resulted in the Supreme Court’s decision in Lucia v. SEC, 138 U.S. 2044 (2018) which held that SEC ALJs are not properly appointed in accord with the Constitution’s Appointments Clause (which of course has nothing to do with the real question raised by the case which was venue selection – federal court or administrative proceeding). The statistics here are even murkier. The Cornerstone Report states that 85% of the public company and subsidiary actions were filed as administrative proceedings. A year by year chart that traces back to 2010 reflects this point. It also shows slightly fewer administrative proceedings being filed last year compared to the prior three years but far more that in any year from 2010 through 2014.

The meaning of the venue statistics is unclear. The Cornerstone Report does not disclose the percentage of those cases were settled. Most public companies and their subsidiaries settle actions at the time of filing, a fact not mentioned in the Cornerstone Report. If, for example, all or almost all of the cases filed as administrative proceeding have been settled by the time of filing the number could suggest that SEC Enforcement is no longer shifting its contested enforcement actions to the administrative forum rather than bringing them in federal district court – the trend that spawned Lucia.

Statistics presented at the December 5, 2018 Fifth Annual Dorsey Federal Enforcement Forum by Urska Velikorja, a professor at Georgetown Law School who specializes in SEC Enforcement (here), demonstrate that virtually all of those cases were settled. Indeed, Professor Velikorja noted that every SEC enforcement action filed as an administrative proceeding since May 2018 has been settled. Whether this is a new, but unannounced enforcement policy, or just the by-product of the glut of cases on the administrative docket following Lucia as the Commission sought to implement the Court’s mandate is unclear.

Monetary sanctions: Similar difficulties arise regarding two other key metrics – dollars in judgments and case selection. In FY 2018 a record setting $2.4 billion is reflected in the settlements from 89% of the actions according to the Cornerstone Report. This is another milestone number that traces back to the beginning of the decade.

The Cornerstone Report also notes that the percentage of firms cooperating with the staff investigations was about 61%, relatively consist with other years. Juxtaposing the two numbers, the question becomes what if anything the cooperators got for their efforts? Stated differently, did the large amount dollar amount result from giving less credit for cooperation? The Cornerstone Report does not specify if the dollars are disgorgement, prejudgment interest or penalties, which is important since SEC Enforcement tends to reward cooperation by discounting penalties but not disgorgement.

The only discussion of the monetary sanctions is a sentence stating that 74% of the total came from one huge, record setting settlement of $1.8 billion in an FCPA case. Since portions of those dollars go to other actions as the Cornerstone Report states, just how much cash the SEC garnered from enforcement is unclear. And, it cannot be determined how the total in the Cornerstone Report squares with that in the Division’s Annual Report which puts the total at $3.945 billion without touting the amount as a record.

Case type: Finally, the Cornerstone Report and the Enforcement Annual Report both present statistics regarding the types of cases brought in FY 2018. The Cornerstone Report claims the top category is issuer reporting at 34% followed by broker-dealers at 27%. In contrast the Enforcement Annual Report states that the largest category of cases was offerings at 25% while 22% involved investment advisers and investment companies. Issuer reporting and disclosure cases accounted for 16% of the total number of cases (or 78 cases compared to 122). As in other parts of the two reports there are no definitions to aid the user. There is little to no discussion to elucidate the statistics.

Some clarity is added by the numbers presented at the Dorsey Federal Enforcement program cited above. There it was noted that in the fourth quarter of FY 2018 over 50 actions were brought against investment advisers, a total which seems to support the statistics offered by the staff in its Annual Report.

Conclusion: One point which is clear from considering the Cornerstone Report and the Enforcement Annual Report: SEC Enforcement brought 490 standalone enforcement actions in F 2018, a significant number of cases. It is also clear that large sums of money were included in the settlements.

Finally, there is also a suggestion that the Enforcement Division may be moving away from the pre-Lucia days of bringing contested actions as administrative proceeds – at least for now. Perhaps in the future Cornerstone Research and the Division of Enforcement will shed additional sunlight these trends.

Dorsey & Whitney LLP

by Thomas Gorman

December 17, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced it will update its Electronic Municipal Market Access (EMMA®) website to accept and display two new required municipal securities disclosure types under amended U.S. Securities and Exchange Commission (SEC) Rule 15c2-12. As of February 27, 2019, municipal bond issuers will be able to use the EMMA website to comply with the additional obligation. These obligations will require issuers to disclose the incurrence of, or amendment to, financial obligations, if material and the occurrence of certain events reflecting financial difficulties related to an existing financial obligation. Read the SEC’s adopting release amending Rule 15c2-12.

“An effective municipal securities market is enhanced by robust and complete disclosure by municipal bond issuers,” said MSRB President and CEO Lynnette Kelly. “We are committed to supporting the issuer community and its ability to comply with ongoing disclosure requirements.” Read about submitting disclosures to EMMA.

To provide the issuer community with additional information about the upcoming amendments to Rule 15c2-12 and discuss related changes to the EMMA system, representatives of the MSRB, along with the SEC, National Association of Bond Lawyers (NABL) and Government Finance Officers Association (GFOA) will be hosting a free webinar on January 17, 2019, at 3:00 p.m. EST. The webinar will also be available on-demand. To submit questions in advance of the webinar, email MSRBEvents@msrb.org no later than January 7, 2019. Register to attend the webinar.

Currently most issuers of municipal securities are contractually obligated to make financial and other disclosures throughout the life of an issuance, including the bond issuer’s latest annual financial and operating information, as well as certain current financial events, including bond calls, rating changes or bankruptcy, among others. When amendments to Rule 15c2-12 take effect late February, issuers of new municipal bonds may be required to agree to disclose to investors significant information about the incurrence of bank loans and similar borrowings, as well as events reflecting financial difficulties related to its existing financial obligations. The new disclosure requirements will apply if a community issues a bond on or after February 27, 2019, for which it enters into a new continuing disclosure agreement.

Date: December 4, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

While at a public finance conference recently, a colleague from another firm gave me some good-natured chiding about my comments regarding the need for standardized digital disclosure for the municipal bond market.

She mentioned what many others have: the muni bond market is just too disorganized with too many distinct borrowers, sectors, unique terms and security structures to ever have anything about it standardized. I quipped back that if science can digitally map the human genome, I was fairly confident municipal bond financial disclosures could be digitally mapped as well.

In fact, there are other securities exchanges far more complex than the municipal bond market that transitioned to standardized digital reporting to assure more fair, efficient and transparent capital markets. In the U.S., from the New York Stock Exchange to Nasdaq, there are roughly 4,300 exchange-listed public companies—each tagged with one or more of the 1,057 North American Industry Classifications—with a total market capitalization of around $30 trillion. These companies file annual, quarterly and other disclosures using standardized digital templates.

Continue reading.

Forbes

by Barnet Sherman

Dec 4, 2018

Muni bond defaults are rare.

To the tune of less than one-tenth of one percent.

But you’re probably careful when you walk under scaffolding even though the risk of a construction worker falling on top of your head is slight too.

There are a number of things you and the Securities and Exchange Commission and muni bond issuers can do to protect yourself against the possibility of losing significant amounts of money on the municipal bonds you buy and hold.

The safeguards you can take, and dangers surfaced at an SEC roundtable on muni bond disclosures Thursday.

Municipal bond prospectuses can be too lengthy, ponderous and yes, boring, to read in full.

Like with any lengthy financial document, such as an SEC filing, there are nuggets you can find quickly by doing key word searches.

SEC Commissioner Robert Jackson suggested looking up “repayment,” which will tell you where the city, state or other local government is getting to repay the money you are lending it through a muni bond purchase and “unfunded liabilities,”—other demands on the governmental unit on the pot of money it is using to pay bondholders.

The biggest danger a retail investor who owns munis can avoid is to sell them immediately when bad news comes out because things inevitably get better, advised Jim Spiotto, managing partner of Chapman Strategic Partners.

One of the reasons problems with a muni bond issuer quickly improve, said Spiotto, is just as doctors bury their mistakes, finance officers finance theirs.

Spiotto’s firm is an outgrowth of Chapman and Cutler one of the top law firms in the municipal bond arena for over half of a century.

Speaking to the potential for a wave of new muni bonds hitting the market if Congress passes a major infrastructure bill, Spiotto acknowledged when anyone (including local governments) does anything fast, it is important short cuts aren’t taken.

“When muni bond issuers make multiple issues in a short period of time, they will have to make sure tax revenues to support the bonds are sustainable and affordable,” the consultant said.

At the same time, Spiotto said infrastructure improvements could ease the financial stress on muni bond issuers because they stimulate local economies.

The expert said if a muni bond issuer tells one investor about changes in their financial condition to tell all.

“Disclosure allows all to understand the situation including those who would constructively help if they knew the accurate situation,” said Spiotto.

He added issuers who expand disclosures can be better market credibility and better credit ratings.

When it comes to developments have put an issuer under financial distress, Spiotto said investor panic can be reduced or eliminated by full and prompt disclosure of the evolving situation.

Retail investors need better and faster information from muni bond government creators to help make better buy and hold decisions, SEC Chair Jay Clayton told the gathering.

“Without it, it is challenging to evaluate the condition of issuers,” said Clayton.

He complained some issuers don’t release their financial statements until significantly after the end of their fiscal years.

He noted mom and pop investors hold about $2.66 trillion in muni bonds directly or indirectly, two-thirds of the entire value of the market.

With the heavy reliance of retail investors on muni bonds and of society as a whole since they account for two-thirds of the infrastructure in the country, Clayton said there should be a close regulatory focus on the municipal bond market.

He said the SEC and the Municipal Securities Rulemaking Board are studying ideas to improve the speed and completeness of muni bond disclosures.

Timeliness needs to be improved, asserted SEC Investor Advocate Rick Fleming.

“Financials are stale by the time they are disclosed, that has been an investor issue for a long time,” said Fleming.

Democratic SEC Commissioner Kara Stein added her voice to the calls for better information for muni bond issuers to investors: “More work needs to be done on disclosures.”

She added there are no shortage of issues that need to be looked at for their potential impact on muni bonds including public pension shortages and interest rate changes.

Republican Hester Peirce said she is all in favor of clear English in muni bond disclosures because while retail investors might not read them, third parties that distill the highlights and feed them to individual investors do.

She explained the disclosures can be important in muni bond pricing.

In terms of what information the SEC should mandate from the issuers, Peirce said: “I don’t want to give people a sense there is a lower bar for materiality than there is.”

Fidelity Research Analyst Amy Johonnett protested disclosure is inconsistent everywhere in municipal securities.

With the calls for more disclosures, there are worries they could further strain the budgets of already financially strapped local governments, said SEC Office of Municipal Securities Attorney-Advisor Adam Windell.

During the session, S&P Global Ratings Managing Director Robin Prunty called the 2019 economic forecast for state and local governments “troubling.”

“There will be a much more strained budget climate,” she said.

She added, though, economists are not predicting a recession and many state and local governments are in good financial shape.

Forbes

by Ted Knutson

Dec 7, 2018

Ted Knutson is one of the most experienced financial regulatory reporters in Washington. For years, he has covered the SEC, CFTC, the bank regulators and the key Congressional committees.

Norwalk, CT, November 27, 2018 — The Governmental Accounting Standards Board (GASB) today proposed implementation guidance containing questions and answers intended to clarify, explain, or elaborate on certain GASB pronouncements.

The Exposure Draft, Implementation Guidance Update—2019, proposes new questions and answers to address application of the Board’s standards on cash flows reporting, postemployment benefits, derivative instruments, irrevocable split-interest agreements, tax abatement disclosures, and other topics. The Exposure Draft also proposes amendments to previously issued implementation guidance.

Stakeholders are encouraged to review the proposal and provide comments by January 31, 2019.

WASHINGTON — The transparency of some market benchmarks used to price new municipal bonds needs improvement, dealer groups told the Municipal Securities Rulemaking Board this week.

The Securities Industry and Financial Markets Association and the Bond Dealers of America made that point to the board in responses to a previous MSRB request for information on how market participants use curves and benchmarks.

“Some of the benchmarks used in our market are sufficiently transparent, but not all,” wrote Michael Decker, a managing director and co-head of munis at SIFMA.

“For the most widely used benchmark, the MMD scale, the market is missing some key information,” he said, referring to a curve produced by Municipal Market Data. “For example, while we know that MMD uses some third-party information in calculating their scale, we do not know how much data come from third parties, what is the nature of that information, who the third-party providers are, whether those providers may have conflicts of interest with respect to the scale, how those data are used in the calculation, and other key information. Greater transparency would help market participants better understand how MMD is calculated and how MMD behaves under different market conditions.”

BDA CEO Mike Nicholas told the MSRB that all member firms who responded reported that benchmarks were used for new issue pricing, and that a majority used them for block-size dealer bids and for institutional investor bids and offers in the secondary market. Retail use was less common, Nicholas said.

BDA members were in some disagreement about transparency, Nicholas told the board.

“Some members believe that the benchmarks currently available in the municipal market are sufficiently transparent,” he wrote. “One member noted that unique disclosures and credit ratings make it challenging for transparency benchmarks and can render them not viable for a one size fits all approach. Having better access to EMMA data could be a solution for better transparency.”

The MSRB has been studying the methodologies, mechanics and functions of market indices, yield curves and other benchmarks since 2012, and began making some available on its EMMA website for free in July 2017. Such indices provide information about muni bond interest rates, potentially allowing investors and issuers to make more informed decisions on investments and issuances. The MSRB said when it made the request for comment in August that it was primarily informational in nature.

Decker said that there may be an opportunity to provide input to providers of market benchmarks.

“Talking with some of our market’s benchmark sponsors, there may be interest in forming a diverse, market-wide advisory group of stakeholders to provide feedback and advice to municipal benchmark providers on their methodologies and processes,” Decker wrote.

The groups were mixed on the MSRB’s question regarding whether the International Organization of Securities Commissions’ Principles for Financial Benchmarks are appropriate for benchmarks in the municipal securities market. IOSCO describes itself as “the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector.”

Decker told the board that many of the IOSCO principles make sense for the muni market, such as the recommendation that benchmark administrators establish and publish guidelines regarding the sources of data and information they use.

“There were differing opinions across membership on whether IOSCO Principles are appropriate for benchmarks in the municipal securities market,” Nicholas wrote. “Some agreed that they are appropriate while others were unfamiliar and cautious of the efficacy of an international benchmark application to the US municipal securities market.”

While the MSRB has indicated that its request for information was more informational than a prelude to rulemaking, Decker told The Bond Buyer that it was appropriate for the MSRB to raise these questions and that the board doing so might hopefully spur additional transparency from benchmark providers.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 11/28/18 07:00 PM EST

As a member of the Alternative Reference Rates Committee of the Federal Reserve Bank of New York, GFOA has strong interest in ensuring that governmental issuers have comprehensive guidance as protocol as you are presented with choices as the market nears the end of LIBOR and transitions to SOFR. This exercise is especially important in the public markets where we promote transparency to ensure that investors have appropriate material information about municipal securities.

This week, GFOA filed comments in response to the ARRC consultation for fallback language for floating rate notes (“FRN”). GFOA supports efforts to ensure that robust fallback provisions are in place and are accessible to all issuers in preparation for the cessation of LIBOR in 2021. Our evaluation is based on the premise that the market will prefer as much clarity at the time of issuance of any new LIBOR based FRN as possible.

Download GFOA Response

November 28, 2018

A detailed summary of our conference is below. Please reach out with any questions or comments. We need your feedback to ensure we continue building a tangibly beneficial conference with the right topics and speakers — all focused on the U.S. fixed income markets.

On October 25th & 26th, the BDA held its 10th Annual National Fixed Income Conference at the Four Seasons Hotel in Washington, D.C.

Continue reading.

Bond Dealers of America

November 26, 2018

New rules adopted by federal banking regulators will affect many electric power, natural gas, and other contracts between banks or their affiliates and their utility counterparties, including public power, cooperative, and investor-owned utilities. While the regulations are complex and cover a variety of arrangements and scenarios, this Alert highlights those regulations that are likely relevant to most U.S. utilities.

Key regulations affecting bank-counterparty contracts include:

• Requiring contract amendments to incorporate Dodd-Frank legislation enacted in 2010, which blocked the exercise of contract termination and related rights if the bank or bank affiliate faces insolvency at a time when U.S. regulators deem it a global systemically important banking institution (G-SIB) and thus put the bank’s insolvency in a special bankruptcy proceeding.
• Extending regulations beyond Dodd-Frank to block a counterparty (e.g., a utility) from exercising certain cross-default rights when an affiliate of the contracting party (i.e., bank or bank affiliate) enters into ordinary bankruptcy proceedings.

Utility contracts affected include:

• Qualified Financial Contracts (QFCs) with a bank or an affiliate of a bank regulated by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), or the Comptroller of the Currency.
• QFCs as defined under Dodd-Frank, which includes but is not limited to forward contracts (e.g., ISDAs, EEIs, NAESBs power purchase agreements) and certain swaps, hedges, and commodity contracts that allow termination, liquidation, etc., upon insolvency.

Contract amendment deadlines and obligations include:

• Counterparties must amend contracts by January 1, 2019 (the first compliance date), if they want to enter into new transactions with the bank or bank affiliate after that date.
• Otherwise, affected banks and their affiliates are expected to contact nonfinancial counterparties, such as utilities, to obtain amendments prior to January 1, 2020 (the later compliance date).

Because it is possible that affected banks and their affiliates may inadvertently overlook some contracts or fail to persuade some counterparties to amend their QFCs, regulators have set up other provisions.

• If regulators determine after the compliance deadlines that the levels of noncompliant QFCs held by banks continue to pose a risk to the financial system, they have suggested that they may consider additional rules to address those remaining QFCs.

To amend contracts, regulators have set forth two methods: (1) Send $500 and a letter to ISDA acknowledging adherence to the ISDA Stay Protocol, which is capable of amending any type of QFC (whether it was an ISDA document or not), or (2) Bilaterally amend the actual QFC. The first method is easiest and may offer other advantages over amending bilaterally.

McCarter & English, LLP

November 28, 2018

WASHINGTON — The disclosures underwriters provide to issuers at the beginning of a deal could become shorter under a proposal to revise interpretive guidance on the Municipal Securities Rulemaking Board’s fair dealing rule.

The MSRB on Friday asked the market for comment on proposed amendments to interpretive guidance it issued in 2012 on the application of its Rule G-17.

The MSRB asked for comment on the guidance back in June, and market participants subsequently provided it. That 2012 guidance established obligations for underwriters to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. But those disclosures have in many cases become too lengthy and boilerplate to be as useful as intended, according to many in the market.

The MSRB’s proposal is part of an ongoing retrospective review of its rules and their interpretations, and in this case is aimed at making the so-called “G-17 letters” more useful to issuers and less burdensome for underwriters.

The proposal would make several key changes, both in what disclosures are provided and in who must provide them. The current interpretive guidance requires that underwriters provide disclosure of both actual and potential conflicts of interest, but under the new proposal they would need to disclose only actual conflicts. Potential conflicts would be disclosable only if the dealer believed it likely that they would become actual conflicts during the term of the transaction.

Another change would shift responsibility for providing disclosures on behalf of an underwriting syndicate onto the shoulders of the syndicate manager. Under the current guidance, a syndicate manager may provide the disclosures on behalf of the group. Under the new proposal, the syndicate manager would be responsible for providing both standard and transaction-specific disclosures on behalf of the syndicate.

The MSRB is also proposing to allow an alternate method for providing the standard disclosures that do not vary from transaction to transaction. Under the proposal, once the standard disclosures have been made in a transaction the syndicate manager could simply reference and reconfirm those prior standard disclosures for subsequent deals with that issuer.

This means that a firm that participated in the previous syndicate and is now manager on a new transaction would could benefit from the disclosures made by the manager on the previous issuance. Further, that syndicate manager could reference back to the disclosures on behalf of new members of the syndicate which did not participate in the prior one.

Issuers could choose, however, to require the standard disclosures be provided to them again. In either case, the transaction-specific disclosures would need to be made anew each time.

The MSRB’s proposal would also allow an email receipt to serve as confirmation that the disclosures had been provided to the issuer. Some underwriters have complained that obtaining confirmation of receipt as provided by the 2012 guidance is sometimes challenging because issuers are not responsive.

The MSRB chose not to touch some possibilities raised in comments, such as allowing issuers to opt out of receiving the disclosures or creating a system of disclosure “tiers” based on the size or other aspects of the issuer.

“The concepts covered in our G-17 interpretive guidance are fundamental to the underwriter/issuer relationship,” said MSRB Chair Gary Hall. “We think the proposed changes will enhance operational fairness and efficiency in the market, and our effort to solicit comments is connected with our retrospective rule review, which is a key focus for the MSRB this year.”

The board is asking for comments by Jan. 15.

After the comment period the board could choose to alter the proposal or could ask the Securities and Exchange Commission to approve it.

The Bond Buyer

By Kyle Glazier

November 16 2018, 4:31pm EST

On September 25, 2018, the Bond Dealers of America (BDA) announced the formation of a Fixed Income Market Structure Working Group. The group is co-chaired by Brad Winges, Head of Fixed Income Services at Piper Jaffray and Kevin Giddis, Head of Fixed Income Capital Markets at Raymond James, and will focus on all aspects of fixed income market structure with retail, institutional, taxable and muni-focused participants.

The BDA is convening this group to proactively address the challenges and opportunities that changing business practices, technology, regulation and market forces have on fixed income management. The working group brings together a seasoned and diverse group of industry professionals. As a ‘Main Street’ thought leader on fixed income market structure, the BDA’s new working group anticipates direct engagement with the SEC, Capitol Hill, federal regulators and other market participants.

“Underneath the cyclical gyrations in the fixed income marketplace, there are serious secular changes taking place. By virtue of its membership, this working group will provide a unique perspective about the critical issues faced by the fixed income industry. Our collective voice will play a critical role in helping policymakers ensure that tomorrow’s investors will be fairly served in the fixed income markets,” said co-chairs Brad Winges and Kevin Giddis.

Topics of interest to the working group include:

• Federal regulation and the impact on fixed income liquidity;
• Technology, execution and the impact on trading and sales;
• Electronic execution in the taxable primary markets; and
• Evolving buy-side capabilities and expectations

BDA’s Fixed Income Market Structure Working Group includes the following members:

Brad Winges (Co-chair)
Head of Fixed Income Services and Piper Jaffray Firm Investments and Trading
Piper Jaffray Companies

Kevin Giddis (Co-chair)
Executive Vice President and Head of Fixed Income Capital Markets
Raymond James Financial, Inc.

Matt Boardman
Managing Director and Head of US Wealth Management Fixed Income
RBC Wealth Management

Larry Bowden
Executive Vice President and Director of Fixed Income Sales and Trading
Stephens, Inc.

Brian Brennan
Head of Fixed Income
KeyBanc Capital Markets

Tom Dannenberg
President and CEO
Hutchinson, Shockey, Erley & Co.

Mark Evans
Executive Vice President, Director of Trading
Vining Sparks

Kenneth Friedrich
Senior Managing Director, Head of Fixed Income Capital Markets
Hilltop Securities, Inc.

Michael Haire
Vice President of Fixed Income
LPL Financial

Kelly Martin
Managing Director, Head of Leveraged Finance
William Blair & Company, LLC

Eric Needleman
Head of Fixed Income Capital Markets
Stifel Financial Corporation

Randy Nelson
Co-Founder, Executive Vice President and Managing Director
Wells Nelson & Associates

John Reilly
Managing Director, Capital Markets Trading Business and Strategy
Wells Fargo Advisors

Tim Romanow
Executive Vice President and Director of Trading
FTN Financial

Jack Schlifer
President of Debt Capital Markets
Duncan-Williams, Inc.

Pete Sirbu
Vice President, Head of Fixed Income Capital Markets Trading and Strategies
Ameriprise Financial

Tom Wammack
Managing Director, Fixed Income Capital Markets
Robert W. Baird & Co.

Don Winton
Chief Operating Officer
Crews & Associates

SUMMARY

SIFMA responded with comments to Notice 2018-22 issued by the Municipal Securities Rulemaking Board in which the MSRB requested comment on draft interpretive guidance related to pennying and draft amendments to existing guidance on best execution relating to the posting of bid-wanteds on multiple trading platforms.

Read the SIFMA Comment Letter.

The NFMA publishes its newsletter, the Municipal Analysts Bulletin, three times per year. The current issue, Vol. 28, No. 3, is now available. The newsletter provides members with the opportunity to hear from NFMA officers and committees, as well as constituent societies, with news about past and upcoming initiatives and events. You can find past newsletters under Resources on the navigation bar on the NFMA home page.

On October 23, NASACT, through the Uniform Guidance Workgroup, sent a letter to the U.S. Office of Management and Budget regarding an instance where the Uniform Guidance references generally accepted accounting principles and the GAAP is changing as a result of a recently issued standard from the Governmental Accounting Standards Board.

GASB recently issued Statement No. 87, Leases. This standard eliminated the distinction between operating and capital leases and adopted the classification referred to as a “lease asset,” which is defined as an intangible right-to-use asset. This change in GAAP has raised several questions about how federal awarding agencies will interpret and apply the UG as a result of the new lease standard. Read the full comment letter.

NASACT previously sent a letter to OMB on another outstanding issue pertaining to the interpretation of the UG because of its reference to GAAP for pension costs in section 200.432(g)(3).

The BDA has submitted a letter in response to the MSRB Report entitled, “Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline?”

The final letter can be viewed here.

Bond Dealers of America

November 9, 2018

Monthly, quarterly or annual trading volumes for the U.S. fixed income markets. Data Visualization Explore Bond Markets Trends An immersive experience on the bond markets, our interactive data visualization…

Download.

Nov. 8, 2018

In a review of a FINRA disciplinary proceeding, the Securities and Exchange Commission (the “Commission”) recently issued an opinion (the “Opinion”) that provides important guidance on liability standards relating to Chief Compliance Officers (“CCO”). Significantly, the Opinion also goes out of its way to state that CEOs of brokerage firms have a duty of “follow-up and review” with respect to the fulfillment by CCOs of their responsibilities and to advance the position that brokerage firms should be held responsible for regulatory failures by employees and other firm representatives in the absence of “effective staffing, sufficient resources and a system of follow-up and review.” See In the Matter of the Application of Thaddeus J. North for Review of Disciplinary Action Taken by FINRA, Release 34-84500 (Oct. 29, 2018) (available here). While the Opinion is focused on activity involving the CCO of a brokerage firm, the Opinion’s liability analysis would seem equally applicable to registered investment advisers and municipal advisors and their CCOs and, possibly, their CEOs.

The Opinion involved the Commission’s review of a FINRA disciplinary action against Thaddeus J. North (“Mr. North”), the CCO of brokerage firm Southridge Investment Group LLC (“Southridge”). FINRA had found that Mr. North violated a number of FINRA, NASD, and MSRB rules on account of his failure (i) to establish and maintain a reasonable supervisory system for the review of electronic correspondence and to reasonably review that correspondence and (ii) to report a representative’s ongoing business relationship with a statutorily disqualified individual. In reviewing and ultimately upholding FINRA’s findings, the Commission had an opportunity to discuss principles applicable to CCO liability determinations, the CEO’s duty to “follow-up and review” Mr. North’s exercise of his authority, and Southridge’s responsibilities.

The Opinion begins its discussion of the principles applicable to CCO liability by characterizing compliance officers as playing “a vital role” in the Commission’s regulatory framework while also acknowledging that the CCO role has “increased in complexity” and may present “difficult challenges.” The Opinion then referenced two principles as uppermost in the Commission’s CCO liability determinations. These principles consist of “the protection of investors and the public interests” together with the “principles of fairness and equity.”

The Opinion next referenced a number of Commission cases that provided guidance favorable to compliance officers and, presumably, served as examples of the principle of fairness and equity in this context. These include:

• the fact that legal and compliance personnel “do not become ‘supervisors’ . . . solely because they occupy those positions” – citing John H. Gutfruend, Release 34-31554, 1992 WL 362753, at *15 (Dec. 3, 1992);
• the fact that proceedings alleging supervisory failures by a compliance official have been dismissed where “the respondent conducted his own independent investigation in response to indications of wrongdoing and recommended responsive action” – citing James Arthur Huff, Release 34029017, 19091 WL 296561, at *4 (Mar. 28, 1991);
• similarly, the dismissal of proceedings against “an individual with compliance responsibilities” for causing a firm’s securities laws violations “where another official at the firm had responsibility for overseeing the relevant activities and the respondent was never asked to evaluate the relevant regulatory issues” – citing Scott G. Monson, IA-28323, 2008 WL 2574441, at *5 (June 30, 2008); and
• a finding that “a compliance director’s failure to respond to a regulator’s request for information was mitigated by the ‘extraordinary demands on the compliance group’ during the relevant time” – citing Richard J. Rouse, Exchange Act Release No. 32658, 1993 WL 276149, at *5 (July 19, 1993).

The Opinion characterized the forgoing decisions as reflecting “the principle that, in general, good faith judgements of CCOs made after reasonable inquiry and analysis should not be second guessed.” The Opinion also stated that “indicia of good faith or lack of good faith are important factors in assessing reasonableness, fairness and equity in the application of CCO liability.”

Next, the Opinion listed a number of “matter types” that generally made determinations of individual liability “straightforward.” Pointing towards liability, these included, “when a CCO engages in wrongdoing, attempts to cover up wrongdoing, crossing a clearly established line, or fails meaningfully to implement compliance programs, policies, and procedures for which he or she has direct responsibility.” Pointing away from liability, the Opinion stated that “disciplinary action against individuals generally should not be based on an isolated circumstance where a CCO, using good faith judgment makes a decision, after reasonable inquiry, that with hindsight, proves to be problematic.”

Turning to the facts at hand, the Opinion found that Mr. North’s failure to fulfill his own responsibilities was “egregious” and that he “ignored red flags and repeatedly failed to perform compliance functions for which he was directly responsible.” Under those facts and circumstances, the Opinion found that FINRA’s disciplinary action “was clearly appropriate.”

Having reached a finding upholding FINRA’s disciplinary action, the Opinion continued into a discussion of the duty of a CEO to oversee the compliance function and an inquiry into why FINRA did not bring charges against Southridge. Significantly, the Commission’s discussion of these points can be characterized as what is known in the legal profession as dicta, that is, text in an opinion that does not directly address the specifics of the case at hand, i.e., Mr. North’s possible liability, but rather serves some other purpose, which in this case would appear to be both a notice to CEOs as to the Commission’s expectations with respect to their oversight of the compliance function and a public “suggestion” to FINRA that it should, as a matter of course, also consider the firm’s liability where the firm’s agents have failed to perform their delegated functions.

In discussing the Commission’s expectations regarding CEOs, the Opinion begins by stating that the Commission has “held repeatedly” that the “chief executive officer of a brokerage firm is responsible for compliance with all of the requirements imposed on his firm ‘unless and until he reasonably delegates particular functions to another person in the firm and neither knows nor has reason to know’ that a problem has arisen.” Citation omitted. While the foregoing standard may not appear to place any duty on the CEO to make inquiry or follow-up regarding a CCO’s fulfilment of his or her delegated responsibilities, allowing the CEO to rest in blissful ignorance until he or she actually “knows [or] has reason to know” that a problem has arisen, the Opinion makes it clear that, to the contrary, CEO’s have “the additional duty to follow-up and review that delegated authority to ensure that it is being properly exercised.” Citing Castle Sec. Corp., Release 34-39523, 1998 WL 3456, at *4 (Jan, 7, 1998). The Opinion then states that the record before the Commission did not indicate whether the CEO took steps to monitor the CCO’s compliance with the responsibilities that the CCO failed to perform and that the Commission was “troubled by the possibility that Mr. North could have abdicated his own responsibilities” without the CEO knowing.

The Commission’s discussion of the CEO’s duty to “follow-up and review” the CCO’s exercise of his or her delegated authority strongly suggests that brokerage firm CEOs can be held liable for failure to supervise where there are ongoing compliance failures that could have been identified by a reasonable system of follow-up and review. Moreover, and of perhaps of more significance, the inclusion of this discussion strongly suggests that the Commission expects its enforcement program, as well as those of FINRA and the other self-regulatory organizations, to inquire, in appropriate cases, as to whether the CEO fulfilled his or her duty and, if not, to bring failure to supervise charges against the CEO.

An increased focus on brokerage firm CEOs would be consistent with the Commission’s stated goal of prioritizing actions against “individuals” and, in particular, senior officers. As Steven Peikin, Co-Director of Enforcement, in his Keynote Address to the UJA Federation (May 15, 2018) (available here) stated, he viewed “individual accountability as perhaps the most effective general deterrent tool in [the Commission’s] arsenal, because it can have a broad effect on corporate culture in a way that immeasurably benefits individual investors, preventing misconduct before it starts.” Indeed, a “focus on individual accountability” was one of five core principles listed by the Co-Directors of Enforcement in their testimony before the United States House of Representatives, Committee on Financial Services, Subcommittee on Capital Markets, Securities and Investments (May 16, 2018) (available here).

The Opinion also stated that it was “not clear from the record why FINRA did not charge Southridge” and then emphasized the importance of holding firms responsible in order to make “it clear to firms . . . that it is in their interest to have effective, diligent compliance officers to help them remain in compliance with their obligations.” The Opinion also stated that broker-dealers must “provide effective staffing and sufficient resources and,” similar to what was said with respect to CEOs, must have “a system of follow up and review to determine that any responsibility to supervise delegated to compliance officers, branch managers and other personnel is being diligently exercised.” Citing Stuart K. Patrick, Release 34-32314, 1993 WL 172847, at *3 (May 17, 1993).

The Commission’s pointing to both the CEO and the firm as having a duty to “follow up and review” the CCO raises questions as to the necessary scope and frequency of any such follow-up and review. While the Opinion offers no guidance on this point, the answer in any particular case is likely to be highly dependent upon the relevant facts and circumstances. Expectations regarding the review and follow-up with regard to an established CCO is likely to be less than when the CCO is new and unproven. Similarly, the expected review and follow-up are likely to be less with respect to a program that has operated without problem for several years, as opposed to a program that seems to lurch from problem to problem. In any event, it is recommended that firms and their CEOs be able to document a “reasonable review” of compliance staffing needs and effectiveness and whether compliance responsibilities are being met. At a minimum, while such review should include any required compliance reviews and reports, e.g., in the case of a broker-dealer, the annual compliance reports required under FINRA Rules 3110, 3120, and 3130, it is suggested that firms and CEOs consider means of obtaining more frequent and detailed status reports, particularly as to problem areas, areas of high risk, or that raise other, significant concerns. Firms and CEOs may also consider use of internal or external resources to audit or test whether compliance is meeting its objectives.

While the Opinion’s analysis arises out of activities involving a brokerage firm, its analysis with respect to the liability of the CCO and the firm would seem to be equally applicable to investment advisers and municipal advisors as well as their CCOs. As to CEOs, an argument can be made that the Opinion’s reliance on a delegation theory for CEO liability means that the Opinion’s analysis as to CEO liability should not apply to CEOs of investment advisers on account of the fact that the designation required under Investment Adviser Act Rule 206(4)-7(c), which requires investment advisers to designate a CCO that is “responsible for administering” an adviser’s compliance policies and procedure, is, in substance, not a delegation by the CEO. Without addressing the merits of this view, at the very least, the Opinion’s analysis regarding CEO liability should be understood to reflect a heightened interest on the part of the Commission in holding CEOs of registered financial service companies to a higher standard than may previously have been the case.

by Glen P. Barrentine

November 6 2018

Winston & Strawn LLP

The MSRB has released third quarter trading stats. Read about the #muniland quarterly highlights, most actively traded securities and more.

Read about fiscal year 2019 priorities and new educational resources in the latest MSRB Update newsletter.

In August, the Securities and Exchange Commission approved new Amendments to Rule 15c2-12. This Rule governs disclosure requirements associated with municipal securities.

The new Amendments, effective February 27, 2019, are an effort to provide additional financial information to investors where an issuer may have material financial obligations that could impact bond holders. Governments will have to state in continuing disclosure agreements entered on or after the effective date that they will disclose to the market any new and material financial obligations and notify the market when an outstanding or new financial obligation reflects material financial difficulties.

Material financial obligations are related to debt and debt type products and not normal business operations. The types of financial obligations that are captured under the Amendments include: bank loans, capital leases, swaps, variable rate obligations, and other types of financial products that “operate as vehicles to borrow money.”

Issuers of municipal debt should start preparing now for the changes that will need to be in place by February 27. The most important first step would be to talk with bond and/or disclosure counsel about how these changes specifically relate to your debt program and future bond issuance and other financial transactions. Issuers should also review their debt management and disclosure policies and consider adding new provisions to address the Amendments, including:

• creating a master list of all current financial obligations including, but not limited to, bank loans, capital leases, derivatives, as well as any guarantees of these types of obligations,
• developing a system to track any financial difficulties related to these obligations,
• having a process in place to add new financial obligations, and
• working with counsel to determine materiality of your financial obligations and when financial difficulties may arise.

The GFOA will be developing additional resources to help issuers prepare for these new responsibilities. This includes a webinar about the new Amendments and what they mean for issuers that will be held on Wednesday, January 9 (additional details forthcoming). Also, the SEC will be hosting a conference on December 6, that will be available via webcast, on Municipal Securities Disclosure in an Evolving Market.

Governments should also review resources available from the GFOA, NABL, and law firms about issuer debt management programs and the new 15c2-12 Amendments.

On October 25 – 26, 2018, the BDA held its 10th Annual National Fixed Income Conference in Washington, D.C.

Key highlights from the event include:

• Over 220 attendees – fixed income leadership representing all aspects of the markets
• Over 75 firms represented from coast-to-coast
• Dozens of exhibitors and sponsors whose support helped to make this event possible
• View the recap here

Thank you to all attendees, sponsors, and exhibitors for helping to make our 10th Annual National Fixed Income Conference our strongest yet!

WASHINGTON – The financial crisis of 2007 and 2008 led to sweeping changes in the municipal securities market, many of which were prompted by new regulations and legislation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in part to address issues that arose during the financial crisis, subjected non-dealer municipal advisors to a first-time federal regulatory regime and imposed on all MAs a fiduciary duty to put clients’ interests first before their own. It expanded the definition of MAs and also set up a first-time regulatory regime for interest rate swaps and other derivatives.

Dodd-Frank expanded the Municipal Securities Rulemaking Board’s mission and resources as well as reoriented its board away from the entities it regulates. The act made dealers rather than issuers responsible for funding the Governmental Standards Accounting Board and it led to the restructuring of the tender option bond market.

Auction rate securities froze, then virtually disappeared. Bank liquidity facilities became unaffordable for variable rate demand obligations, diminishing that market. As a result, the MSRB created transparency systems for ARS and VRDOs to provide investors with more information about these markets. Also, money market funds underwent major regulatory reforms.

The Securities and Exchange Commission began playing a stronger enforcement hand, as evidenced by its Municipalities Continuing Disclosure Cooperation initiative, best known as MCDC.

The American Recovery and Reinvestment Act, designed to help stimulate the economy, eased tax requirements for munis and created taxable Build America Bonds, at least for a while.

Some market participants think the financial crisis and the aftermath had a positive effect on the municipal securities market.

“It had a pretty significant impact on the municipal market,” said Ernie Lanza, senior counsel at Clark Hill who was MSRB general counsel during that time. “But I think the market did ride it out better than people had expected,” and it led to more transparency and behavioral changes such as an increased focus on suitability of products and compliance, he said.

Others, especially those at banks and broker-dealers, say it led to too many costly and burdensome regulations and restrictions that caused small and regional firms to either drop out of the market or consolidate.

“There were various aspects of Dodd-Frank that fundamentally changed how the municipal market operates and how dealers interact with their clients,” said David Cohen, senior legal counsel at RBC Capital Markets who was executive director and regulatory compliance business manager at UBS Investment Bank in 2008 and SIFMA managing director and associate general counsel from June 2011 through September 2015.

“A lot of these new rules require expensive systems and the regulators also have a much higher expectation of what supervisory systems look like,” said Cohen.

“No one likes increased costs. The larger firms have a capacity to absorb it better …. Smaller firms closing results in less competition, which doesn’t necessarily benefit retail investors,” he said.

“The federal regulatory environment since the 2008 credit crisis has contributed to thousands of regional and small broker dealers merging, paring back lines of business or closing shop all together,” said Mike Nicholas, chief executive officer of Bond Dealers of America. “Since 2008, securities regulators have implemented the municipal advisor rule, a new best execution rule for municipal securities, and retail confirm disclosure rules for all of fixed income securities — to just name three — which have forced dealers to significantly ramp up their legal and compliance costs.”

Nicholas also said “the SEC essentially forced all municipal underwriters to self-report under MCDC, which imposed enormous costs on those dealers” and pointed to other rules.

“Cumulatively, these regulatory changes have had dramatically negative impacts on the US fixed income business impacting not only the dealers but their clients and overall market liquidity — which will most certainly be felt at the next market downturn. While BDA members stepped up to provide much needed liquidity during the darkest hours of the credit crisis, the reward since then has been an avalanche of regulation simply resulting in a consolidation of power among a handful of firms and thousands fewer firms to serve Main Street clients coast to coast.”

An MSRB report published on June 19 said that the number of registered dealers has fallen by almost 32% over the past nine years to 1,346 in 2017 from 1,967 in 2009.

AUCTION RATE SECURITIES

Auction rate securities, which were first developed in 1984 and had grown into a $330 billion market of which muni ARS were a major part, were one of the early casualties of the financial crisis.

Downgrades of muni bond insurers scared customers away from investing in ARS, long-term securities with short-term interest rates reset periodically through auctions run by dealers. The ARS market froze in mid-February 2008 after banks and dealers, grappling with subprime mortgages and the credit crisis, stopped propping up ARS auctions with their own capital. The largest ARS market participants at the time were Citigroup and UBS, according to the Securities and Exchange Commission.

In a report issued in December 2017, SIFMA found that outstanding ARS were $14.3 billion as of that month, compared to $95.7 billion in January 2009.

Variable rate demand obligations also ran into trouble after banks stopped providing affordable letters of credit, standby bond purchase agreements and other liquidity facilities.

The SIFMA report showed that outstanding VRDOs were $142.4 billion in June 2018, compared to almost $421 billion in July 2009.

These developments led the MSRB to create transparency programs for ARS and VRDO, under which it collects information about these securities from broker-dealers and makes it public for free through its Short-Term Obligation Rate Transparency (SHORT) System over its EMMA website.

The SEC and some state attorneys general investigated ARS after that market froze. They took enforcement action against banks and broker-dealers that underwrote offerings or managed the auctions for misrepresenting to investors that ARS were safe, highly liquid investments equivalent to cash or money market funds. They forced these firms to buy back billions of dollars of ARS, especially from retail investors.

MONEY MARKET FUNDS

On Sept. 16, 2008 the Reserve Primary Fund, a large money market fund that had a lot of exposure to Lehman corporate debt securities when Lehman fell into bankruptcy, “broke the buck,” when its net asset value fell below $1 per share. This led to a run on institutional prime MMFs.

Treasury Department officials scrambled to put together a program to stem the outflows from MMFs, but initially only focused on corporate debt. Muni market participants warned Treasury officials that if they didn’t include munis, investors would shift from muni to corporate MMFs. On Sept. 19, Treasury announced the creation of a program to temporarily guarantee muni and corporate MMF account balances.

After Mary Schapiro became chair of the Securities and Exchange Commission in January 2009, she made it a priority to adopt MMF reforms that would prevent or minimize the possibility of such runs in the future, which would threaten the day-to-day functioning of the financial system. The changes the SEC made to its Rule 2a-7 on money market funds through 2016 caused significant changes in the MMF industry.

Under these rule changes, only retail and government MMFs can have stable net asset values (NAVs) of $1 per share. Because of the fears that institutional investors can pull out of MMFs quickly, those investors can only invest in either MMFs with floating rate NAVs, where the per-share value fluctuates according to the current price of the securities, or MMFs of government or government-sponsored securities.

The rule changes also imposed fees and gates to discourage redemptions. They required increased diversification in both issuers and letter of credit providers of MMF securities. They also increased transparency for MMFs, including added disclosures of daily and weekly liquid asset levels and disclosures of material events such as portfolio security defaults.

The SEC also adopted rule changes to remove all references to credit ratings in Rule 2a-7, which had been used to determine if securities were eligible for MMFs. Lawmakers and regulators became skeptical of ratings because the rating agencies failed to adjust ratings downward to reflect troubled securities and financial institutions leading up to the financial crisis. Removal of ratings from 2a-7 meant MMF portfolio managers had to rely even more on their analyses of the creditworthiness of the securities in their portfolios.

BUILD AMERICA BONDS

In an effort to provide stimulus to the U.S. economy, President Barack Obama pushed for, and signed into law the ARRA on Feb. 17, 2009.

The act temporarily eased a number of tax law restrictions for munis and created Build America Bonds, a ground-breaking new municipal taxable product that created a stir in the muni market. Administration officials hoped BABs would expand demand for municipal securities and give issuers access to the market during a time of stress. In lieu of an issuer’s providing tax-free interest to bondholders, Treasury would provide subsidy payments to BAB issuers equal to 35% of their interest costs.

Muni issuers were at first suspicious that BABs were a ploy to get rid of tax-exempt bonds. But BABs took hold and more than $180 billion of them were issued in 2009 and 2010, the two years during which ARRA was effective.

The Hiring Incentives to Restore Employment (HIRE) Act, enacted on March 18, 2010 to provide incentives to businesses to hire unemployed, allowed most types of tax credit bonds to also temporarily be issued as direct-pay bonds, similar to BABs, but at different subsidy levels.

Republicans criticized BABs, which they viewed as a Democratic Party policy, for having too rich of a federal subsidy, creating huge profits for underwriters, and causing issuers with a lot of debt to issue even more.

Muni issuers, who had been repeatedly promised the federal government would never back away from agreement to make subsidy payments, became disillusioned about BABs and other direct-pay bonds when sequestration cut into those payments in 2012.

DODD-FRANK

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010 to address some of the causes and problems stemming from the financial crisis and it even went beyond that. The act was responsible for extensive changes in the municipal market.

Dodd-Frank brought non-dealer, non-bank municipal advisors under a federal regulatory regime for the first time and subjected all MAs, including those at banks and dealers, to a fiduciary duty under which they had to put clients’ interests first before their own. It also subjected them to new exams and professional standards.

Basically, dealers and non-dealers became subject to the same Securities and Exchange Commission and MRSB MA rules.

The legislation and the SEC’s MA registration rule included a broad definition of municipal advisor as anyone or entity that provides advice to, or on behalf of, a municipal issuer or borrower with respect to financial products or the issuance of munis. It also picked up anyone who undertakes a solicitation on behalf of an issuer. In addition, the MA definition includes financial advisors, guaranteed investment contract brokers, solicitors, finders, third party marketers and placement agents, as well as certain swap advisers.

Dodd-Frank also set up a regulatory regime for swaps, with most muni interest rate swaps falling under the purview of the Commodity Futures Trading Commission.

The act expanded the MSRB’s mission to protect state and local government issuers as well as investors. It authorized the MSRB to assist the SEC and Financial Industry Regulatory Authority with their exams and enforcement actions and permitted the board to obtain half the penalties they collected for muni rule violations. The MSRB writes muni rules, while the SEC and FINRA enforce them.

The act also mandated that the MSRB have a majority of public members on its board. Prior to the act, the self-regulator had a board of 15 members — five from broker-dealers, five from banks and five from the public. After Dodd-Frank was enacted, the board grew to 21 members — 11 from the public and 10 from regulated entities, including municipal advisory firms as well as banks and broker-dealers.

“There are different voices and views around the table and that impacted the nuances of the rules,” said Cohen.

TENDER OPTION BONDS

Dodd-Frank also led to the complete restructuring of tender option bond programs because of its so-called Volcker Rule, which prohibited banks from conducting certain investment activities with their own accounts and limiting their dealings with hedge funds and private equity funds, called “covered funds.”

In a traditional TOB program, the “sponsor” will deposit a fixed-rate bond or note into a trust, which will then issue two new certificates — a floating rate certificate sold to a money market fund and a residual certificate which may be sold to a mutual fund or closed-end fund or held by a bank. The floating rate certificate will have a tender option, supported by a liquidity facility to cover the purchase price of the tender receipts not remarketed. That shortens the maturity of the bond or note so it that it becomes eligible for purchase by a tax-exempt money market fund.

But the Volcker Rule prevented banks and their affiliates from sponsoring a TOB program, owning a residual certificate issued by a TOB trust, or providing credit enhancement, liquidity, or remarketing services to these programs.

“Tender option bond programs are a big consumer of municipal bonds and everyone had to redo their programs,” said Cohen.

HQLA

More traditional munis took a hit when bank regulators, as a result of the financial crisis, adopted liquidity coverage ratio rules that required banks with at least $250 billion of total assets or consolidated on-balance-sheet foreign exposures of at least $10 billion to have a high enough liquidity coverage ratio — the amount of high-quality liquid assets (HQLA) to total net cash outflows — to deal with periods of financial stress.

The rules did not count any munis as HQLA because bank regulators thought they were illiquid. The stance drew loud protests from muni market groups that claimed the rules would dampen demand for munis by banks. After a long debate, in May of this year Congress passed a bill with a provision directing investment-grade munis to be designated as Level 2B under the bank liquidity rules, the same level as for mortgage-backed securities.

But the tax law changes enacted last December and the drastic lowering of the corporate rate to 21% has already dampened bank demand for munis. Rising interest rates will compound that because as a bank’s cost of funding goes up, so will the tax penalty associated with holding munis.

The Bond Buyer

By Lynn Hume

October 22 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced the members of its new and continuing advisory groups that will advise the MSRB Board of Directors during the current fiscal year. The MSRB previously announced the addition of advisory groups focused on retail investors and municipal fund securities, and the second year of a regulatory compliance-focused advisory group, to provide the Board with focused, expert input on MSRB initiatives and to enhance stakeholder engagement.

“The MSRB is grateful for the commitment advisory group members are making to help enhance oversight of the municipal securities market,” said Gary Hall, Chair of the MSRB Board of Directors. “We value their perspective, and look forward to benefiting from their expertise in real-time.”

Twenty-nine market professionals representing diverse market perspectives and organizations are serving on the MSRB’s Compliance Advisory Group, Retail Investor Advisory Group and Municipal Fund Securities Advisory Group. The groups will meet periodically with Board member liaisons throughout fiscal year 2019 to facilitate Board-member access to additional market knowledge from a variety of professionals and other experts.

The Compliance Advisory Group will provide input to the Board to inform the MSRB’s long-term strategic goal to facilitate industry understanding of and compliance with MSRB rules. The Retail Investor Advisory Group will provide input to the Board on rules, market practices, transparency and education related to retail investor protection issues. The Municipal Fund Securities Advisory Group will provide input to the Board on municipal market rules, practices, transparency and education related to municipal fund securities, including 529 savings plans and ABLE programs. Advisory group members for the current fiscal year are listed below.

Compliance Advisory Group

Kathy Aho, President, Springsted Incorporated
Jonas Biery, Business Services Manager, Bureau of Environmental Services, City of Portland
Mark Borrelli, General Counsel, Hutchinson, Shockey, Erley & Co.
Joey Frebes, Senior Vice President, KeyBanc Capital Markets
George Hinchcliff, Director, FIC Compliance Advisory, RBC Capital Markets
Phil Jerome, Managing Director, Compliance, Charles Schwab & Co., Inc.
Ben Juergens, Executive Director, Morgan Stanley
Leo Karwejna, Managing Director and Chief Compliance Officer, PFM Financial Advisors
Jessica LeBlanc, Senior Compliance Manager, Edward Jones
Kathy Weatherholt, Vice President, Compliance, George K. Baum & Company
Mark Young, Managing Director, KNN Public Finance, LLC

Retail Investor Advisory Group

Jack Blumenthal
Matthew Boardman, Managing Director and Head, US Wealth Management Fixed Income, RBC Wealth Management
Joseph Brady, Executive Director, North American Securities Administrators Association
Chris Kendall, Vice President, Fixed Income Trading, Charles Schwab & Co., Inc.
Wesley Ringo, Senior Advisor, Legal and Regulatory, Capital Forensics, Inc.
Anne Ross, Muni Credit & Compliance Advisors LLC
Joseph Spivack, Angel Investor, Spivack & Company
Stephen Winterstein, Managing Director of Research and Head of Municipal Strategy, Wilmington Trust Investment Advisors, Inc.

Municipal Fund Securities Advisory Group

Mary Anne Busse, Managing Director, Great Disclosure LLC
James Canup, Partner, Hirschler Fleischer
Paul Curley, Director of College Savings Research, Strategic Insight
Andrea Feirstein, Managing Director, AKF Consulting Group
Nathan Groff, Owner and Senior Executive Officer, Intuition LLC
John Heywood
Mary Lehman, Senior Director, Tuition Financing, 529 College Savings Program Manager, TIAA
Sandy Madden, General Counsel, Ascensus Government Spending
Christopher T. McGee, General Counsel, Virginia 529 | ABLEnow
Jennifer Selliers, Director of Internal Compliance, State of Tennessee Department of Treasury

Date: October 30, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Read the Notice.

10/30/18

Treasury Releases Proposed Regulations on Opportunity Zones Designed to Incentivize Investment in Distressed American Communities

The U.S. Department of the Treasury (Treasury) issued proposed guidance related to the new Opportunity Zone investment tax incentive created by the 2017 Tax Cuts and Jobs Act. The Opportunity Zone investment incentive offers capital gains tax relief to investors for new investment in designated distressed areas.

According to a press release from Treasury, the proposed regulations clarify what gains qualify for deferral, which taxpayers and investments are eligible, the parameters for Opportunity Funds, and other guidance. The Treasury Department plans on issuing additional guidance before the end of the year.

Comments are due 60 days after publication in the Federal Register and a public hearing has been scheduled for January 10, 2019 at 10:00AM EST.

You can view the guidance here.

MSRB Webinar on SEC Rule 15c2-12 Amendments

The Municipal Securities Rulemaking Board (MSRB) will host a webinar on amended SEC Rule 15c2-12 on Thursday, January 17, 2019 from 3:00 p.m. – 4:30 p.m. EST in coordination with the Securities and Exchange Commission (SEC), Government Finance Officers Association (GFOA), and the National Association of Bond Lawyers (NABL).

During this free webinar, panelists will discuss the amendments to SEC Rule 15c2-12 on municipal securities disclosure and related changes to the Electronic Municipal Market Access (EMMA®) website.

The compliance date for these changes to the SEC rule is Wednesday, February 27, 2019 and the MSRB’s EMMA® submission interface will be able to accept the additional disclosures on that date.

You may register for the webinar here.

WASHINGTON, DC – Market structure experts at the Municipal Securities Rulemaking Board (MSRB) today shared their analysis of pre-trade quote data for municipal securities available to market participants on alternative trading systems (ATSs), adding to the literature on pre-trade price transparency.

In recent years, financial economists, regulators and policymakers have been exploring whether pre-trade quote data contributes to price transparency in the municipal securities market. Pre-trade transparency typically refers to broad public dissemination of information, including quote data (bid- and offer-side) signaling trading interests available on electronic or proprietary trading systems, as well as new issue pricing information, yield curves, evaluated prices and other material information. However, unlike other pre-trade information, pre-trade quote data is normally available only to market participants. Today’s report, Analysis of Municipal Securities Pre-Trade Data from Alternative Trading Systems, suggests that posted quote information may be useful to a broader audience when it comes to price discovery purposes but that more study is necessary to make any definitive conclusions.

“Potentially, pre-trade information could provide investors and all other market participants with important information that is currently only accessible to select market participants,” said MSRB Chief Economist Simon Wu, one of the authors of the report. “This information could improve pricing efficiency, investor confidence and market liquidity in the municipal market, but additional analysis and feedback from stakeholders is needed.”

The MSRB obtained quote data from two ATSs predominant in the municipal securities market. Both platforms voluntarily provided pre- and post-trade data, including Request-for-Quote (RFQ) data (bids and offers wanted), live quotes and associated transaction data. Prices for executed customer trades, as well as inter-dealer trades on and off the platforms seemed to be correlated to the best offer quotes on the platform at the time of a trade, suggesting that posted offer quotes could provide a useful market indicator of municipal securities. According to the analysis, most live quotes, which are available to participants on an ATS, are offer quotes, as opposed to bid quotes. On the other hand, most of the RFQ data are for bid responses rather than offers. Further, RFQ data may only be viewable by participants involved in the request process, which presents possible pricing information discrepancies, depending on the level of participation.

Key findings in the report include:

• Almost 70% of the trades reported to the MSRB had a live offer quote on at least one of the two ATSs at the time of a trade execution;
• Over 90% of the quoted municipal bonds had only one or two offer quotes on each ATS at any given time;
• The median difference in price between customer buy trades and the best offer quote at the time of trade was 75 basis points ($7.50);
• The median difference in price between customer sell trades and the best offer quote at the time of trade was 73 basis points ($7.30);
• On average inter-dealer trades occurred at the best offer price;
• RFQs received a median of three responses;
• As the number of respondents to an RFQ rises, there is an increased likelihood that an RFQ will result in a trade.
• 75 percent of RFQs did not result in a trade.

Wu will present the findings of the report at the upcoming U.S. Securities and Exchange Commission’s (SEC) Fixed Income Market Structure Advisory Committee meeting on October 29, 2018.

The MSRB studies market structure issues related to municipal securities as part of its mission to promote a fair and efficient market. It welcomes input from stakeholders on additional research ideas that would contribute to a better understanding of municipal market dynamics. Access MSRB data reports and analysis.

Date: October 25, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

GFOA’s Executive Board recently approved 14 best practices and advisories in the areas of accounting, governmental budgeting, treasury and investment management, retirement and benefits, economic development, and municipal debt.

Click here for a presentation that summarizes the best practices.

Click here to watch the October 23 webinar.

WASHINGTON — A challenge to the constitutionality of the municipal advisor regulatory regime could be a last stand defense for MAs facing career-ending enforcement actions.

The theory of is the brainchild of Rick Weber, who is of counsel at Norton Rose Fulbright in Houston. The bond lawyer published a piece on the subject in the spring issue of The Bond Lawyer, the newsletter of the National Association of Bond Lawyers. In that piece and in a separate interview with The Bond Buyer, Weber explained that he believes that the Supreme Court’s May decision in Murphy v. National Collegiate Athletic Association could pave the way for an argument against the muni advisor rules.

Weber said most public finance lawyers are interested in constitutional law, though they typically encounter it in the context of state constitutions.

“I’ve always had an interest in constitutional issues,” Weber said.

The Murphy decision overturned a federal law, the Professional and Amateur Sports Protection Act, which banned states from sanctioning gambling on competitive sporting events. The court held that the law violated the “anti-commandeering” principle derived in part from the Tenth Amendment to the U.S. Constitution, which states that rights not given to the federal government in the Constitution are reserved to the states and to the people.

“The Court held that the act unconstitutionally `commandeered’ state governments to serve the federal government,” Weber wrote in his published piece. “Applying the same anti-commandeering principle, the Supreme Court had previously struck federal laws that compelled states to act, unless the laws applied to non-state actors as well. For the first time, Murphy v. NCAA applied the principle to strike a law that merely forbade the states to act. This extension of the anti-commandeering principle raises credible doubts about whether the federal government may lawfully regulate municipal advisors.”

Weber told The Bond Buyer that the implication of the NCAA decision is that the federal government could not, for example, stop a state from hiring a municipal financial advisor who was not licensed by the federal government, unless it applied the same restriction to nongovernmental corporate issuers.

“That now is absolutely clear,” he said.

Weber said the most likely avenue for a challenge along these lines would be in an enforcement context, probably raised by a muni advisor facing a bar from the industry unless he or she could convince the SEC or a court that the municipal advisor regulations are invalid.

The constitutionality of part of the muni advisor regime was previously challenged by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee. The groups claimed in a lawsuit that the Municipal Securities Rulemaking Board’s Rule G-37 on political contributions, amended in 2016 to apply to municipal advisors as well as broker-dealers, unconstitutionally forces MA and dealer employees to choose between doing their jobs and exercising their right to support political candidates.

A federal appeals court dismissed the challenge last year, saying the groups lacked standing to bring the case.

Jason Torchinsky, a partner at Holtzman Vogel Josefiak Torchinsky who represented the Republican groups, said Weber’s theory is an interesting consideration for members of the public finance community, though he said it touched upon areas beyond the scope of his practice. Torchinsky said it was not clear to him that a muni advisor would have standing to challenge the constitutionality of the MA regime on the anti-commandeering grounds because they are not state and local governments. Converesely, Torchinsky said, state and local governments might be hesitant to expend the resources needed to bring such a challenge on this issue.

“I could see someone facing an enforcement action raising it as a defense,” said Torchinsky.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 10/22/18 07:05 PM EDT

Tracking a specific municipal bond?

Check out the security details page for that bond on EMMA.

Summary

SIFMA provides comments to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) on the interaction between the Volcker Rule and municipal Tender Option Bonds (TOBs). The proposing release poses several questions about TOBs and Volcker addressed in our letter. SIFMA asks the agencies to exempt TOBs from the covered funds provisions of the Volcker Rule.

Read the Comment Letter.

Summary

SIFMA provides comments to the Municipal Securities Rulemaking Board (MSRB) on the application of the content standards under MSRB Rule G-40 on advertising by municipal advisors. SIFMA and its members appreciate the MSRB’s efforts to provide further guidance on the advertising rules. The mock advertisements generally are helpful and add to the understanding of Rule G-40.

Read the Comment Letter.

October 17, 2018, the BDA submitted a comment letter to the MSRB on a draft compliance resource regarding application of content standards under Rule G-40. The final comment letter can be viewed here.

The comment letter focuses on the following topics:

• The BDA believes that a number of the mock advertisement examples in the Notice are too general or simple to provide meaningful guidance;
• Following each mock advertisement, the BDA believes the MSRB should provide examples of acceptable content for each concern listed within the advertisement; and
• The BDA believes that Rule G-40 requires the municipal advisor to have a “sound basis” for the claim. But the MSRB’s interpretation goes beyond the requirements of Rule G-40.

The MSRB notice can be viewed here.

Bond Dealers of America

October 17, 2018

The MSRB proposal to amend Rule G-3 to establish additional qualification requirements for municipal advisor principals was published in the Federal Register. Comments on the proposal must be submitted by October 30, 2018.

As previously covered, the proposed amendments would (i) establish the Municipal Advisor Principal Qualification Examination (the “Series 54 examination”) and (ii) require those persons who meet the definition of a municipal advisor principal to pass the Series 54 examination prior to becoming municipal advisor principals.

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

Cadwalader, Wickersham & Taft LLP

October 18 2018

Enforcement Forecast

Each September brings a flood of Securities and Exchange Commission announcements of enforcement actions as it approaches the September 30 end of its fiscal year. The announcements include Orders Instituting Administrative Proceedings (including Cease and Desist Proceedings and Notice of Hearing), settled Administrative Proceedings and accompanying Orders, and complaints filed in federal court, some announcing settlements, others initiating litigation in federal court. Looking back at such announcements over the past year, it is fair to say that the days of the “broken windows enforcement” policy of former Chair Mary Jo White are past. For the municipal securities market, this policy played out in the form of the Municipalities Continuing Disclosure Cooperation Initiative, or MCDC, in which the SEC filed and settled actions against 72 municipal underwriting firms and an equal number of issuers and obligated persons of municipal securities. So what can issuers, obligated persons, municipal advisors, underwriters and other municipal market participants expect from the SEC?

SEC Chairs set Commission priorities and under SEC Chairman Jay Clayton, SEC enforcement resources now have turned to “bad actors,” protection of retail investors (including the elderly and “Mr. and Mrs. 401K”), and cybersecurity as stated in his Senate nomination hearing and in a later speech by his appointed Co-Directors of the SEC’s Enforcement Division. In the new paradigm, the SEC continues to focus on individual officials as well as the municipalities, corporations, or firms releasing materially misleading disclosure. Likewise the Department of Justice continues the policy of holding individuals responsible for corporate wrongdoing. However, the focus appears to be less on putting numbers of enforcement actions up on the board and more upon the significance of cases brought with regard to Commission priorities. Along with policy direction, the SEC requires staff to carry out its mission, particularly in enforcement. Staff resources available to address Commission priorities have been limited by a hiring freeze in effect in place since mid-2016 and the SEC’s Division of Enforcement has replaced only of its 37 departures since 2017.5 In such a context, quality matters more than quantity, and efficient use of all available resources is necessary. For the SEC, this means increased coordination with FINRA, the Financial Industry Regulatory Authority, and its own Office of Compliance Inspections and Examinations, or OCIE. So how is this playing out?

What we are seeing in our Municipal Securities Regulatory Investigations and Enforcement Defense practice reflects these adjustments. For example, we are familiar with non-public ongoing enforcement matters in areas relating to issuer disclosure and potential corruption affecting financial reporting, interest in pricing and allocation matters by underwriters in offerings as well as interest in sales involving potential “flipping,” and municipal advisor conflict of interest and fiduciary duty breach, as well as basic record-keeping concerns. OCIE and FINRA are more active and aggressive on municipal securities related matters, resulting in some instances with referrals for enforcement to either the SEC’s Enforcement Division or FINRA Enforcement, with subsequent opening of an enforcement investigation. Municipal advisors, brokers, dealers, and municipal securities dealers are registered and subject to inspection and examination by OCIE, FINRA and certain banking regulators, while municipal issuers are only subject to investigation in the context of an antifraud investigation by the SEC’s Enforcement Division. As a result, investigations with a focus on municipal advisors or brokers, dealers and municipal securities dealers may likely exceed those focused on issuers. However, once an investigation begins, all parties involved in a transaction may be required to produce emails and other documents and may be required to provide testimony. What remains to be seen as a factor generating enforcement inquiries is whether the combination of extensive municipal advisor record keeping requirements and the periodic inspection of those records leads to inquiries of the conduct of a municipal advisor’s client as well as the municipal advisor.

Recently, we successfully concluded representation of a city in the Southwest in a post MCDC enforcement investigation of its offering disclosures and compliance with its continuing disclosure agreements, or CDAs, including purported amendment of its CDAs. While MCDC is now in the past, potentially misleading offering disclosure about continuing disclosure compliance may still attract the interest of the SEC and potentially lead to allegations of securities law violations by parties other than the issuer or underwriter.

Overall, under the new paradigm, we anticipate an increase in municipal market investigations and enforcement actions emanating from OCIE and FINRA examinations of municipal advisors and brokers, dealers, and municipal securities dealers, while investigations of municipal securities issuers and their officials arising from instances of alleged issuer official misconduct or corruption affecting issuer financial reporting and disclosure will continue. In some instances, such as described below, the investigations may be joint or parallel efforts by the SEC and the Department of Justice and FBI.

Recent Noteworthy Enforcement Activity

Issuers

The SEC and Department of Justice worked in tandem in a recent investigation, with the SEC bringing securities fraud charges against the Town of Oyster Bay, N.Y. and several of its officials while the DOJ brought charges including multiple counts of wire fraud related to securities offerings against the town supervisor. We previously published advisories on these actions.6 Likewise working in tandem with DOJ, the SEC recently brought antifraud charges against the former mayor of Markham, Illinois relating to an undisclosed pay-to-play scheme in which he allegedly solicited bribes from a construction contractor. Simultaneously, the mayor pleaded guilty to criminal charges for the pay-to-play scheme. We previously published an advisory on this matter as well.

In April, 2016, the DOJ unsealed an indictment of the Town Supervisor of Ramapo, N.Y. and the former Executive Director of the Ramapo Local Development Corporation (RLDC) with criminal charges alleging the officials had “lied about the Town’s and RLDC’s financial conditions in order to ensure successful sales of municipal bonds issued by the Town and the RLDC and to get better ratings on those bonds so that the Town and the RLDC would have to pay less interest on the bonds.”8 Prior to trial, the former Executive Director pleaded guilty to one count of conspiracy and one count of securities fraud. At trial, the jury found the former Town Supervisor guilty of 20 counts of conspiracy, securities fraud, and wire fraud. The SEC charged the Town, the RLDC, the Town Supervisor, the former RLDC Executive Director, the Town Attorney, and the town’s Deputy Finance Director with fraud charges involving the use of inflated general fund balances were used in offering materials for 16 municipal bond offerings by Ramapo or the RLDC to investors. All parties other than the Town Supervisor settled with the SEC. The SEC’s litigation against the Town Supervisor continues. The federal trial judge issued lifetime bars prohibiting the former RLDC Executive Director, the Town Attorney, and the Town’s Deputy Finance Director from participating in municipal bond offerings, permanent injunctions from violating the antifraud provisions of federal securities law, fined the Deputy Finance Director $10,000 and the Town Attorney $25,000 and required their resignations from the Town and barred future employment by the Town for five and seven years respectively.9 The accounting firm and a senior partner at the firm agreed to settle charges that they issued fraudulent audit reports in connection with the municipal bond offerings by the Town and the RLDC. Without admitting or denying the findings, under an SEC Order, the firm agreed to forfeit approximately $380,000 in audit fees and interest and, pay a $100,000 penalty and engage an independent consultant. The order finds the partner violated the scienter based antifraud provisions and the negligence based prohibitions of federal securities law. The partner agreed to pay a $75,000 penalty and suspension from practicing public company accounting, and is prohibited from acting as the engagement partner or engagement quality control reviewer on any municipal audit for five years.10 The Town and the RLDC were permanently enjoined from violating the antifraud provisions of federal securities law and required to retain an independent consultant, independent auditor, and independent disclosure counsel not unacceptable to the SEC staff and unaffiliated with bond counsel.

Municipal Advisors

Whatever grace period municipal advisors enjoyed has ended, particularly for unregistered advisors contacted by the SEC regarding their failure to register. That would be the clear message from In the Matter of Eric Hall & Associates, LLC and Eric Hall,12 a Cease and Desist Order issued in a settled administrative proceeding in which the respondents, without admitting or denying the findings, consented to the order finding the firm willfully violated Securities Exchange Act Section 15B(a)(1))(B) by failing to register as a municipal advisor and that Hall was a cause of that violation, and by failing to disclose unregistered status to a client school district, each willfully violated their fiduciary duty under Exchange Act Section 15B(c)(1) as well as that same section by not dealing fairly with their school district client in violation of Municipal Securities Rulemaking Board Rule G-17. As a consequence, the firm was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15B(a)(1)(B), 15B(c)(1) of the Exchange Act, and MSRB Rule G-17; censured; ordered to pay jointly and severally with Hall, disgorgement of $35,520 together with interest of $4,241.38; and ordered to pay, jointly and severally, a civil monetary penalty of $15,000. Hall was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15B(a)(1)(B), 15B(c)(1) of the Exchange Act, and MSRB Rule G-17; barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; and ordered to pay, jointly with the firm, the amounts described above.

On June 13, 2016, the SEC accepted the settlement offers made by two firms and three executives charged with using deceptive business practices in dealing with five school districts. As part of their settlements, School Business Consulting, Inc. (SBCI), SBCI’s principal Terrance Bradley, Keygent LLC, and Keygent’s associated individuals Anthony Hsieh and Chet Wang agreed to cease and desist from any further commission or facilitation of violations of certain provisions of the Securities Exchange Act and MSRB Rule G-17, censure, issue notices of the order to all existing clients and prospective clients, and pay monetary penalties. Further, Bradley was barred from association with any SEC-regulated entity. All respondents settled without admitting or denying the SEC’s allegations.

SBCI is a consulting group for school districts on financial and budget matters, often providing them with guidance when they seek to hire municipal advisors. Keygent is a registered municipal advisor that focuses on advising school districts and community colleges that issue bonds. Keygent analyzes outstanding bond and debt information to identify prospective school district clients and traditionally submitted unsolicited proposals aiming to refinance school district debt in order to attract new business. At issue in the case were five contracts for municipal advisor services between Keygent and California school districts, which SBCI assisted Keygent in obtaining.

After investigation, the SEC accepted offers of settlement from the entities and associated individuals under the municipal advisor antifraud provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Section 15B(a)(5) of the Exchange Act. This action marks the first time the SEC has enforced that provision. The SEC also alleged violations of Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17. Further, the SEC alleged that SBCI violated Section 15B(a)(1)(B) by failing to register as a municipal advisor, and that Bradley caused SBCI’s violation.13

On June 29, 2018, judgments were entered in federal district court against Malachi Financial Products, Inc., and its president and sole shareholder, Porter B. Bingham, for alleged violations of the Exchange Act and MSRB Rule G-17. The judgments were entered in accordance with a consent agreement signed by the SEC, Bingham, and Malachi. Without confirming or denying the allegations, Bingham and Malachi agreed to being permanently enjoined from further violations of Sections 15B(a)(5) and 15B(c)(1) of the Exchange Act and MSRB Rule G-17; pay a joint and several disgorgement of $33,000 plus $2,858 of prejudgment interest; and pay civil penalties of $50,000 for Malachi and $25,000 for Bingham. On July 9, 2018 the SEC cited the final judgments in revoking Malachi’s registration as a municipal advisor and barring Bingham from association with any “broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization,” effectively prohibiting Malachi from engaging in municipal advisory activities and barring Bingham from engaging in activities that are regulated by the SEC.

On May 9, 2018, the SEC announced it charged a registered municipal advisor (the “MA Firm”) and its owner (the “MA Owner”) with defrauding their client, a Texas school district, in connection with multiple municipal bond offerings. This enforcement action brings attention to the obligations and duties that municipal advisors have to their clients.

The SEC’s Order states that in connection with three municipal bond offerings the MA Owner and his wholly-owned MA Firm misrepresented their municipal advisory experience and failed to disclose to the school district that the MA Owner was employed by the attorneys who served as bond counsel for all three bond offerings. Specifically, the SEC stated that, in an attempt to gain municipal advisory clients, the MA Owner drafted and circulated a brochure to the school district and municipalities to market the MA Firm’s municipal advisor experience. The SEC order states that the brochure created the misleading impression that the MA Owner and MA Firm had served as a municipal advisor on numerous municipal bond issuances and failed to disclose that the MA Owner had a financial interest in the school district’s offerings.

By misrepresenting their municipal finance experience and failing to disclose the conflict of interest, the SEC concluded that:

• The MA Firm violated and the MA Owner willfully violated Section 15B(a)(5) of the Securities Exchange Act of 1934, which prohibits any fraudulent, deceptive, or manipulative act or practice while providing advice to a municipal entity with respect to municipal financial products [or] the issuance of municipal securities;
• The MA Firm breached and the MA Owner willfully breached their respective fiduciary duty to the school district, as set forth in Section 15B(c)(1) of the Exchange Act; and
• The MA Firm and the MA Owner failed to deal fairly with the school district in violation of Municipal Securities Rulemaking Board Rule G-17.

The MA Firm and the MA Owner consented to the order and are jointly and severally liable for paying $362,606 in disgorgement and $19,514 in prejudgment interest. The MA Firm was also assessed a civil penalty of $160,000 while the MA Owner was assessed a civil penalty of $20,000. The MA Owner was also barred from association with various regulated entities, including municipal advisors.

On August 24, 2017, a municipal advisor, its president, and its vice-president were charged by the SEC with breach of their fiduciary duty to a client. According to the SEC’s administrative summary,16 Municipal Finance Services Inc. (“MFSOK”) served as municipal advisor to the client on a municipal bond offering in 2013, and as part of its advisory services, agreed to review legal documents related to the issuance of the bonds and to assist the client in complying with its continuing disclosure agreement requirements. According to the order, the continuing disclosure agreement for the 2013 offering contained an improper amendment to the client’s prior continuing disclosure agreements for bond offerings in 2005, 2008 and 2012, unilaterally extending the deadline by which the client was to provide annual reports to investors for those prior offerings. The order states that MFSOK president Rick A. Smith and vice-president Jon G. Wolff each had concerns about the amendment, which was drafted by a now-retired bond counsel, but took no action. According to the order, Smith and Wolff did not advise the client of their concerns, did not comment on the draft amendment provisions, did not conduct further investigation, and did not seek further information from bond counsel or otherwise attempt to determine whether the amendment complied with the terms of the client’s prior continuing disclosure agreements. The order found that Smith and Wolff also failed to advise the client of its obligation to notify prior bondholders of the amendment in a timely manner, as required by the client’s prior continuing disclosure agreements. As a result, some investors in the earlier bonds engaged in transactions without the benefit of the updated financial information contained in the annual reports that had been promised in the continuing disclosure agreements for those bonds.

The SEC’s order instituting settled cease-and-desist and administrative proceedings found that MFSOK willfully violated Section 15B(c)(1) of the Securities Exchange Act of 1934 and that Smith and Wolff caused MFSOK’s violation. Without admitting or denying the SEC’s findings, MFSOK agreed to a censure, to cease and desist from committing or causing further violations of Section 15B(c)(1) of the Exchange Act, and to pay a $50,000 penalty. Smith and Wolff agreed to cease and desist from committing or causing further violations of Section 15B(c)(1) of the Exchange Act and each agreed to pay an $8,000 penalty. Under the order, MFSOK is required to establish appropriate written policies and procedures and periodic training regarding the fiduciary duty owed by municipal advisors under the federal securities laws, including the provision of advice concerning an issuer’s continuing disclosure obligations.

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

Bracewell LLP

by Britt Cass Steckman, Paul S. Maco, Laura Prebeck Hang and Edward Fierro

October 16, 2018

SEC Office of Municipal Securities Director Rebecca Olsen discussed the importance of adequate disclosures in the municipal securities market for retail investors.

In a speech at the Municipal Finance Leadership Conference, Ms. Olsen stated that it is “essential” for regulators and market participants to ensure that investors are provided with “clear and understandable” information about the issuers of municipal securities in a timely manner. Ms. Olsen outlined, among other things:

• the role of the SEC Office of Municipal Securities;
• the importance of the municipal securities market for retail investors;
• the regulatory framework governing disclosure requirements in the municipal securities market;
• the responsibility of market participants to adopt best practices for municipal securities disclosures; and
• the importance of accessibility and clarity of information for retail investors.

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

Cadwalader, Wickersham & Taft LLP

October 17 2018

A recent report by Truth in Accounting (TIA), a nonprofit organization that monitors municipal finances, serves as a sober reminder that state governments need to take action now to address the rising cost of healthcare promises made to retirees — or risk credit downgrades.

While the U.S. economy and stock market have recovered dramatically since the Great Recession, the costs of paying for other post-employment benefits (OPEB) – primarily state obligations to pay for retiree healthcare coverage – have outstripped those gains and put pressure on state balance sheets. In its ninth annual “Financial State of the States” report, TIA says state unfunded OPEB obligations increased 7.8% to $663.1 billion for fiscal year 2017. (The most recent year data was available.) In comparison, unfunded pension costs were essentially flat (up a scant 0.6%) at $837.5 billion.

The main culprit for the continuing rise in OPEB obligations is that most states pay for retiree healthcare benefits on a pay-as-you-go basis, meaning they’re paying the minimum amount owed each year and not whittling down the balance. In other words, they’re kicking the can down the road.

Public reporting of those liabilities is about to become more transparent. Under Governmental Accounting Standards Board (GASB) Statement 75, state and local governments must report their entire unfunded OPEB liability on their financial statements for reporting periods beginning after June 15, 2017. While most state and local governments have been reporting OPEB liabilities on their financial statements, some haven’t and, per older GASB standards, reported the liability in the footnotes to the financials.

The credit ratings agencies will be watching closely when the fiscal year 2018 financial statements are released. “Our analysis of these OPEB liabilities is fundamentally unchanged solely due to accounting changes; however, we anticipate that the increased transparency the new statements provide could inform our evaluation of a government’s relative burden and management of these long-term liabilities,” said S&P Global in a March 14 report about the effect of GASB 74 and 75 on financial reporting.

For now, rising OPEB costs haven’t led to an increase in credit downgrades, although in April S&P Global Ratings did drop Connecticut’s general obligation debt rating to ‘A’ from ‘A-plus’. Nonetheless, ratings agencies are paying close attention to OPEB liabilities. In its annual survey of the country’s largest 15 cities, published on Sept. 5, S&P Global noted, “With retirees living longer and pay-as-you-go OPEB spending in many places ramping up in tandem with rapidly rising healthcare costs, fixed costs for pension and OPEB obligations appear poised to remain a front-and-center credit issue across the municipal sector for the foreseeable future.”

A growing number of state and local government finance officials say it’s time to take action. In a May 2 opinion editorial in the Houston Chronicle, Houston Controller Chris Brown summed up the feeling of many government finance officers, saying the city’s pay-as-you-go “approach to funding its OPEB obligation is unsustainable” and that “it’s clear something must be done.” Brown wrote that the city, based on a five-year average, “is adding more than $160 million per year to the unfunded OPEB liability.” In California, controller Betty Yee said the state has made “significant progress” in addressing OPEB liabilities, but that it “will be unpredictable and will remain a paramount fiscal challenge over the next three decades.”

To combat the OPEB challenge, many municipalities have turned to creating OPEB trusts to fund the liabilities. One of the primary benefits of an OPEB trust is that it provides greater flexibility in how the fund’s assets are managed. Funds in an OPEB trust can be invested more like a state pension plan, which allows for a more aggressive asset allocation strategy and a longer investment time horizon. Conversely, pay-as-you-go payments typically are made from government general funds, which usually have strict limits on investment options (such as only being able to purchase risk-free securities like U.S. Treasuries) and which generate minimal returns.

A second benefit of an OPEB trust is that states and local governments can use a higher discount rate when computing future OPEB payments. Higher discount rates, as everyone knows, can result in lower liabilities on the balance sheet.

Lastly, creating a trust to pay for OPEB costs will reassure the credit rating agencies that state and local governments are working to manage rising liabilities. Plus, OPEB trust assets are legally protected from outside creditors.

Creating a pre-funded OPEB trust isn’t without challenges. Government budgets are under pressure to fund everything from building new schools and hiring more police officers to fixing potholes and giving raises to employees. It will take a certain amount of political courage for legislators to approve a budget that reallocates funds from other projects to fund a trust. But government officials need to tackle the issue now — and an OPEB trust is the best option to help ensure funds will always be available to pay for the benefits promised to retirees.

The Bond Buyer

By Lucius McGeHee

October 18 2018, 11:19am EDT

During FINRA’s September Board Meeting, the FINRA Board of Governors approved revisions to the Covered Agency Transaction margin requirements that would:

(1) Eliminate the 2-percent maintenance margin requirement;

(2) Allow firms to take a capital charge in lieu of collecting margin for mark to market losses, subject to specified limitations and conditions; and

(3) Streamline the rule language

As noted in this memo from FINRA President and CEO Robert Cook, these revisions are due to competitive impact concerns raised by BDA member firms.

BDA is appreciative of the feedback and analytical data many of our member firms provided to FINRA in regard to these amendments. Additionally, BDA is appreciative of the outreach from our allies in Congress, who contacted FINRA, the Federal Reserve and the SEC on behalf of BDA’s membership.

BDA expects the SEC to review FINRA’s recommendations shortly. BDA will provide more information as it becomes available.

Bond Dealers of America

October 10, 2018

Norwalk, CT, October 9, 2018 — The Governmental Accounting Standards Board (GASB) has convened a working group to identify viable alternatives for addressing accounting and reporting issues for tribal governments.

Members of the working group are:

• Heather Acker, Partner, Baker Tilly Virchow Krause, LLP
• Lacey Horn, Treasurer, Cherokee Nation
• Christopher Lee, Vice President—Head of Government Credit, Key Bank
• J. Paul Mansour, Managing Director and Head of Municipal Research, Conning
• Hattie Mitchell, Director of Finance, AMERIND Risk (member of the Prairie Band of Potawatomi Nation)
• Clark Partridge, State Comptroller, Arizona General Accounting Office
• Jacqueline Reck, Professor and Associate Dean, University of South Florida
• Tasha Repp, National Practice Leader Tribal and Gaming, Moss Adams (member of the Samish Indian Nation)
• Alan Skelton, State Accounting Officer, Georgia State Accounting Office

Ex-Officio Members:

• Morgan Aronson
• Mary Foelster, Director of Governmental Auditing and Accounting, AICPA
• Russ Golden, Chairman, Financial Accounting Standards Board
• Scott Showalter, Chairman, Federal Accounting Standards Advisory Board.

About GASB Working Groups

The GASB assembles working groups at the discretion of the GASB chairman for issues that would benefit from being addressed by a broad and diverse range of GASB stakeholders with particular expertise in the matter at hand.

Working groups are officially appointed by the GASB chairman. Their members typically have expertise or experience with the issue and can articulate the views of other, similar stakeholders. The GASB attempts to maintain an appropriate balance of financial statement preparers, auditors, and users on each working group.

Timetable

Initial TGAWG meeting – October 29, 2018 (educational session – closed to public)

Additional in-person meetings (open to public) scheduled for:

• April 15, 2019
• October 21, 2019
• April 13, 2020
• June 22, 2020 (teleconference).

The NFMA Summary of the SEC Rule 15c2-12 Amendments issued on August 20, 2018 is available online.

To read/download the summary, click here.

SIFMA provided comments to the Federal Reserve, the OCC and the FDIC on their interim final rule providing Level 2B HQLA treatment for certain municipal securities.

Read the SIFMA comment letter.

NASACT has been monitoring the Grant Reporting Efficiency and Agreements Transparency Act (GREAT Act, or H.R. 4887) for potential impacts on state and local governments as it makes its way through the legislative process. The GREAT Act is a continuation of the vision enmeshed in the Digital Accountability and Transparency Act (DATA Act), which required the federal government to utilize data standards for spending information. The GREAT Act essentially directs the executive branch to adopt a standardized data structure for the information grantees must report to agencies.

The companion measure (S. 3484) was introduced in the Senate on September 24 by Senators James Lankford (R-OK) and Michael Enzi (R-WY). On September 26, the bill moved out of the Homeland and Governmental Affairs Committee and now awaits a vote by the full Senate.

The bill’s requirements align nicely with the efforts already underway to streamline grant reporting under the President’s Management Agenda. The eventual impact on state and local governments is unclear as the legislation directs the Office of Management and Budget to implement the requirements in consultation with stakeholders including state and local governments.

SUMMARY

The GREAT Act directs the executive branch to adopt a standardized data structure for the information grantees must report to agencies by:

• Requiring the creation of a comprehensive and standardized data structure, or “taxonomy,” covering all data elements reported by recipients of federal awards, including both grant and cooperative agreements.
• Tasking the director of the U.S. Office of Management and Budget to designate a standard setting agency with implementation.

1. Within one year: Establish government-wide data standards for information related to federal awards reported by recipients of federal awards.
2. Within two years: Issue guidance to grantmaking agencies on how to leverage new technologies and implement the new data standards into existing reporting practices with minimum disruption.

• Requiring the adoption of unique and non-proprietary identifiers for federal awards and entities receiving federal awards.
• Amending the Single Audit Act to provide for grantee audits to be reported in an electronic format consistent with the data standards.
• Requiring the data standards to:

1. Render grant reports fully searchable, machine readable and non-proprietary.
2. Align with standards maintained by voluntary consensus bodies.
3. Be consistent with applicable accounting principles.
4. Incorporate the data standards already established for federal spending information under the Digital Accountability and Transparency Act (P.L. 101-133).

• Publish grant reporting information, once transformed into open data, on a government-wide website, such as the existing grants.gov portal.
• Providing exceptions and restrictions:

1. No personally-identifiable or otherwise sensitive information will be published.
2. Information not subject to disclosure under the Freedom of Information Act (Title 5, Section 552) will not be publicly disclosed.
3. The OMB director to permit exceptions on a case-by-case basis.

• Requiring each grantmaking agency to begin collecting grant reports using the new data standards within three years.”

Should you have any questions or comments on this legislation, please feel free to contact NASACT’s Washington office at (202) 624-5351 or email Cornelia Chebinou.

PROVIDENCE, R.I. – “Over-disclosure” of apparently minor violations of issuers’ continuing disclosure obligations — a legacy of the Municipalities Continuing Disclosure Cooperation Initiative — isn’t a problem in the eyes of the Securities and Exchange Commission, two SEC officials said Thursday.

The remarks came from LeeAnn Gaunt, chief of the Enforcement Division’s Public Finance Abuse Unit and Rebecca Olsen, director of the Office of Municipal Securities.

The two officials provided updates on their work as part of a panel at the National Association of Municipal Advisors’ annual conference here. During the course of that discussion, Gaunt was pressed on whether the legacy of the MCDC has been excessive disclosure.

The MCDC, launched in March 2014 and wrapped up in late 2016, promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the previous five years of issuers falsely saying in official statements that they were in compliance with their continuing disclosure agreements.

The initiative led to SEC settlements with 72 underwriters representing 96% of the underwriting market as well as 72 issuers. It also led to hand-wringing over whether so-called “foot fault” violations, such as filing an annual financial statement a day or two late, needed to be disclosed in an official statement.

Gaunt said that her unit’s experience with the MCDC has given SEC attorneys expertise in looking for these kinds of violations. While Gaunt agreed that voluminous disclosure has the potential to decrease the usefulness of disclosure, she was skeptical that it has been a problem so far.

“It’s part of our DNA now, to look for it,” Gaunt said of that kind of conduct. “I’m not that concerned with over-disclosure.”

“Disclosure is your friend,” Gaunt told the audience of primarily municipal advisors, who are sometimes involved in helping issuers make decisions about disclosure.

Gaunt said she has not personally encountered instances of disclosures about issuers missing filing deadlines by mere hours. Olsen said that over-disclosure concerns her far less than the state of the market prior to the MCDC.

“MCDC shined a big spotlight on that topic,” Olsen said.

Gaunt also provided an overview of recent SEC enforcement actions against municipal advisors, which have made up a large chunk of her unit’s cases lately. She said she viewed this as a natural evolution of the relatively new MA regulatory regime, which was mandated by the Dodd-Frank Act and continues to be worked on by the Municipal Securities Rulemaking Board.

Gaunt highlighted the case against an Oklahoma-based MA Municipal Finance Services and two of its principals. The SEC brought charges against the firm late last year alleging that it breached its fiduciary duty to its issuer client when it became concerned, but stayed silent about, the legality of unilaterally amending existing continuing disclosure agreements.

Gaunt was hesitant to say how heavily the circumstances weighed on the decision to bring charges, but said the SEC was informed by the fact that the firm had agreed to assist in disclosure compliance as part of its engagement as MA.

Gaunt warned, however, that MAs can’t simply “scope out” their obligations under the law or under MSRB rules by writing an agreement with the issuer. She added that she has not been aware of this being a problem to date.

MSRB President and chief Executive Officer Lynnette Kelly also addressed the conference, providing an update on MSRB activity. She said the MSRB had “redoubled its efforts” to provide an “environment of no surprises” in its ongoing dialogue with industry stakeholders, a stated priority of the board for its new fiscal year, which began on Oct. 1.

The NAMA conference continues Friday.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 10/04/18 07:07 PM EDT

WASHINGTON – Financial institutions are getting a jump on moving away from a longtime key benchmark index and into a new one, a move that could cause problems for some municipal interest rate swaps and other derivatives.

Bank officials, investors, and other experts weighed in Tuesday on the need to move quickly away from using the London Interbank Offered Rate, or Libor as a benchmark and migrating to the SOFR, the Secured Overnight Financing Rate. Speaking on a panel at the Securities Industry and Financial Markets Association’s annual meeting, these experts stressed the increasing inevitability of the loss of Libor and the need to begin moving away from it before it is actually retired in about three years.

Libor is the average rate at which major banks can obtain unsecured funding from each other. It has been used in trillions of dollars of derivatives transactions globally and was at the center of a series of scandals in which banks and bankers were charged with manipulating it for financial gain. The Financial Conduct Authority in London, announced last year that it will abandon Libor by the end of 2021.

Libor has been widely used in the tax-exempt bond market. Examples include bank loans involving floating rate notes or bonds that have rate resets based on Libor and interest rate swaps tied to muni bonds that have been publicly offered.

SOFR is published by the Federal Reserve Bank of New York, which describes it as “a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.”

New York’s Metropolitan Transportation Authority issued the municipal market’s first tax-exempt transaction linked to SOFR last month.

Libor “is no longer a viable reference,” said Christian Rasmussen, global head of liability creation structuring & flow management and global co-head of repo trading at UBS.

Jason Manske, senior managing director and head of global derivatives and liquid markets at MetLife (MET), stressed superiority of SOFR as a transaction-based rate rather than one like Libor which is set artificially.

“Do you want a rate that’s based on actual transactions, or do you want a made-up rate?” Manske asked. “You can’t put this off. You have to start the baby steps now.”

The panel particularly discussed the need to include “fallback language” in the contracts governing transactions tied to a reference rate, so that there will be clarity about what happens to those deals in a post-Libor world.

Ann Battle, assistant general counsel at the International Swaps and Derivatives Association, said ISDA is working to help its member institutions move toward SOFR.

“We’re doing a lot to facilitate adoption of SOFR going forward,” she said.

Absent regulatory relief, a switch from Libor to SOFR could create tax issues for municipal debt, such as reissuance. If floating rate bonds based on Libor switch to another benchmark rate, the switch may be considered a material change to the bonds that causes them to be considered newly reissued. A reissuance would make the bonds subject to the latest tax laws and rules and could even make them taxable. A Treasury Department official announced last month that Treasury and the Internal Revenue Service will try to provide some relief with regard to this issue, but could not say when that project will be done.

By Kyle Glazier

BY SOURCEMEDIA | ECONOMIC | 10/02/18 07:08 PM EDT

The Securities and Exchange Commission (“SEC”) recently charged a firm registered with the SEC as both a broker-dealer and an investment adviser in connection with a cyber-intrusion that compromised the personal information of thousands of customers. This case is significant both because cyber security is an area of heightened concern for the SEC and because this is one of the first cases to bring charges against a registered broker-dealer or investment adviser in connection with a cyber-intrusion.

The current chairman of the SEC has identified cybersecurity as a significant concern and stated that the “Commission is focused on identifying and managing cybersecurity risks and ensuring that market participants—including issuers, intermediaries, investors and government authorities—are actively and effectively engaged in this effort and are appropriately informing investors and other market participants of these risks.” See Statement on Cybersecurity, Chairman Jay Clayton (Sept. 20, 2017) available here. Moreover, the Commission’s Office of Compliance Inspections and Examinations (“OCIE”) has identified cybersecurity as a priority and has stated that “[e]ach of OCIE’s examination programs will prioritize cybersecurity with an emphasis on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.” See SEC Office of Compliance Inspections and Examinations Announces 2018 Examination Priorities (SEC Press Release 2018-12) (Feb. 7, 2018) available here.

The SEC charged the firm with violating Rule 30(a) of Regulation S-P (17 C.F.R. §248.30(a); the “Safeguards Rule”) and Rule 201 of Regulation S-ID (17 C.F.R. §248.201; the “Identity Theft Red Flags Rule”).These rules, respectively, require broker-dealers and investment advisers registered with the SEC to adopt written policies and procedures that are reasonably designed to safeguard customer records and information and require broker-dealers and investment advisers that offer or maintain covered accounts to develop and implement a written Identify Theft Prevention Program that is designed to detect, prevent, and mitigate identify theft in connection with the opening of a covered account or any existing covered account.

This case is the first SEC enforcement action charging violation of the Identity Theft Red Flags Rule and appears to be just the second case, and the first since 2015, charging a registered broker-dealer or investment adviser in connection with a cyber-intrusion. For the earlier case, see SEC Charges Investment Adviser with Failing to Adopt Proper Cybersecurity Policies and Procedures Prior to Breach (SEC Press Release 2015-202)(Sept. 22, 2015) available here.

In its press release announcing this action, available here, the SEC referenced both weaknesses in the firm’s cybersecurity procedures and the firm’s failure to apply its procedures to systems used by the greater part of its workforce. The firm agreed to pay a $1 million fine. The firm also agreed to retain a compliance consultant to conduct a comprehensive review of the firm’s policies and procedures and to implement the recommendations resulting from such review. A copy of the underlying order is available here.

The firm offered investment and brokerage services to its customers through a national network of registered representatives. A significant majority of these representatives worked out of their own offices with a majority of these representatives consisting of independent contractors. These independent-contractor representatives typically used their own IT equipment and their own networks to access customer information, including personally identifiable information (“PII”) through a web portal that was proprietary to the firm. This is in contrast to employee representatives who used IT equipment and IT systems provided by the firm.

The firm’s procedures allowed independent-contractor representatives who could not remember their passwords to reset their passwords by calling firm support centers, which were authorized to provide temporary passwords by phone after the requesting representative provided at least two pieces of his or her own PII. Significantly, these procedures were left unchanged after the firm was aware of prior fraudulent attempts to impersonate contractor representatives using their PII. While the firm did keep a “monitoring list” of phone numbers that were previously used in connection with fraudulent activity, there was no written policy or procedure that required the support centers to consult the monitoring list when responding to password-reset calls.

The firm’s procedures also provided for the personal computers of the independent-contractor representatives to be scanned for antivirus software, encryption, and certain software updates, but as stated in the SEC’s order, these scans were scheduled to occur “only” three times a year. Often the scan, which required action by the contractor representative before it could occur, did not occur at all, and even though approximately 30% of the scans that did occur revealed critical failures such as a lack of encryption and antivirus software, the firm conducted no review or follow up of such scans to ensure these failures were remedied. The order also stated that the firm’s policies and procedures with respect to customers’ profiles were not reasonably designed as no notice was provided to a customer when an initial profile was created or when contact information and document-delivery preferences were changed.

The order also highlighted weaknesses in the firm’s incident-response policies and procedures. While these procedures generally required that potentially compromised user accounts be disabled and relevant applications shut down to prevent additional compromises, the incident-response team did not receive adequate training regarding the system used by the independent-contractor representatives and mistakenly believed that resetting a password for a user would terminate the user’s existing session. As a result, cyber-intruders were able to continue to access firm systems even after the incident-response team had taken steps to deny such access. Moreover, the firm’s procedures did not require informing the support centers about an ongoing intrusion. In addition, the firm’s procedures for designating compromised representatives’ and customers’ accounts as requiring additional security measures, which were meant to alert the support centers to the need to take additional measures, were ineffective, as the flags placed to identify such representatives and accounts were erased periodically in connection with unrelated automated system activities. The order also states that the firm had not updated its Identity Theft Prevention Program after 2009, notwithstanding significant changes in external cybersecurity risks since then.

This case should serve as a warning that the SEC is prepared to use its enforcement powers where it believes broker-dealers or advisers have put their customers at an unreasonable risk of cyber-intrusion. Accordingly, broker-dealers, investment advisers, and municipal advisors should take steps to protect themselves from possible enforcement actions by ensuring that they have reasonable and comprehensive cybersecurity policies and procedures in place. Firms that allow multiple-access systems must ensure that their policies and procedures are appropriate for each system used by the firm. Firms must also keep their policies and procedures up to date by responding not only to changes in their own systems and technologies but also by keeping current with respect to best practices in the rapidly advancing world of cybersecurity. At a minimum, firms should review their cybersecurity programs on an annual basis as well as whenever changes to the firm’s systems or technology warrant. Firms should also ensure, and document, that cybersecurity-related red flags and other concerns receive prompt attention and, as necessary, that policies and procedures are revised to respond to such concerns. Firms should also ensure that persons charged with critical aspects of cybersecurity, including those who respond to cyber intrusions, receive the training they need to successfully perform their functions and that such training covers all relevant systems.

by Glen P. Barrentine

USA October 3 2018

Winston & Strawn LLP

WASHINGTON — Three organizations are commending the Governmental Accounting Standards Board’s proposal to establish a single method for issuers to report conduit debt obligations.

GASB is accepting comments through Nov. 2 on its proposal to clarify the definition of a conduit debt obligation and eliminate the option for government issuers rather than borrowers to recognize conduit debt obligations, thereby providing a single method of reporting. It has only received comments from four organizations so far.

The proposal also will clarify accounting and financial reporting guidance for additional commitments extended by government issuers and arrangements, which are often characterized as leases associated with conduit debt obligations.

Another goal is to enhance note disclosures.

“The reason the board wanted to address this area was to bring about more consistency,” said GASB spokesman Kip Betz. “Some governments that were involved in conduit debt arrangements with third parties would record the assets and the liabilities. And then other governments would just make disclosures. So different governments were doing different things and we really wanted to get everybody on the same page.”

Betz said the board has concluded that in the vast majority of cases disclosure is the way to go. Under the exceptions outlined in the proposal, governments should follow GASB Statement 70 covering Accounting and Financial Reporting for Nonexchange Financial Guarantees.

The four public comments filed through Oct. 3 either complimented GASB for the proposal, discussed technical issues, or raised a question about reporting requirements.

Tim Fisher, manager of government affairs for the Council of Development Finance Agencies, said in an email Thursday that his organization is “largely supportive of regulatory actions that would improve both the clarity and uniformity of conduit issuance reporting.”

“On the surface the GASB proposal seems like a step in the right direction, and we’re interested to see how this process plays out,” Fisher wrote.

Emily Brock, director of the federal liaison office of the Government Finance Officers Association said in an interview that her organization is “pleased that the proposed standards attempt to provide direction to preparers in order to organize and convey a complex transaction.”

“And we will be commenting once we have more fully vetted all of the aspects of the exposure draft,” Brock said.

GASB announced the proposed revised guidance on Aug. 2. It would take effect for reporting periods after Dec. 15, 2020.

“Third parties sometimes seek this kind of financing for projects such as not-for-profit hospitals and universities and qualifying private businesses,” GASB said in its announcement.

The proposal defines a conduit debt obligation as having six characteristics:

• There are at least three parties involved who include an issuer, a third-party obligator, and a debt holder or debt trustee.
• The issuer and third-party obligator are not within the same financial reporting entity.
• The debt obligation is not a parity bond of the issuer, not is it cross-collateralized with other debt of the issuer.
• The third party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance.
• The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with debt service payments.
• The issuer’s commitment related to the debt service payments if limited.

In addition, an issuer would not recognize a conduit debt obligation as a liability.

“We concur with the proposed statement and guidance,” Cynthia Bergvall, chair of the GASB subcommittee of the Pennsylvania Institute of Certified Public Accountants wrote in an Oct. 2 letter.

Tamar A. Lewis, board president of the Michigan Government Finance Officers Association, wrote that her organization in general “supports the concept that conduit debt obligations should be disclosed rather than recognized in the issuer’s financial statements.”

“We similarly support following the basic approach introduced in GASB 70 to recognize a liability and expense when the issuer government determines it is more likely than not that it will support debt payments for a conduit debt obligation,” Lewis wrote.

The Michigan GFOA suggested six improvements to the GASB proposal.

Bill Spivey, executive director of the Florida Development Finance Corporation, offered seven suggestions for changes in the wording of the GASB guidance.

“All-in-all the revisions are well done!” Spivey concluded in his letter.

Anne Pruneda, chief fiscal officer of the Kansas Development Finance Authority, asked in her letter if the current reporting practice of her agency is appropriate in GASB’s opinion.

“Currently, the debt is recognized on the financial statements of the state of Kansas,” Pruneda wrote. “KDFA does not recognize the debt on its own separate financial statements as a component unit. However, KDFA does disclose all its outstanding conduit debt obligations in the notes section to the financial statements.”

Pruneda’s letter also said that “principal and interest on the bonds are special limited obligations of KDFA payable solely and secured by a trust estate. The third-party obligor pledges a revenue stream as security for the debt service requirements. KDFA does not guarantee the debt.”

By Brian Tumulty

BY SOURCEMEDIA | MUNICIPAL | 10/04/18 07:07 PM EDT

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced strategic initiatives and published an associated budget summary for its 2019 fiscal year, beginning October 1, 2018. The strategic initiatives, which are approved by the MSRB Board of Directors, are the organization’s highest priorities and support its role protecting investors and municipal entities in the $3.8 trillion municipal securities market.

This year, the Board is focused on enhancing the ways the MSRB receives industry feedback. In addition, the MSRB will prioritize exploring “big data” and cloud computing with a strategic $5 million investment to position the organization’s information technology (IT) infrastructure for the future. The organization plans to conduct a feasibility assessment of the benefit of transitioning to the cloud and explore ways to leverage the power of cloud computing to analyze unstructured market data.

“Our investment will fund the exploration and potential transition to cloud computing, if we determine doing so would serve our long-term interest in operating resilient and secure IT infrastructure and data systems,” said Board Chair Gary Hall. “It also will help determine whether we can gain additional insight from the vast amount of data that the MSRB collects on behalf of the market.”

Stakeholder feedback will continue to feature prominently this year in many of the MSRB’s activities. New advisory groups will add greater insight to policy questions for the MRSB and its Board, and other activities will expand the MSRB’s access to balanced, expert market knowledge from a variety of professionals in the municipal securities market. This year, MSRB Board members, not just staff, will have multiple touchpoints with stakeholders through formal meetings, Town Halls and firm visits.

In FY 2019, market regulation resources will support an initiative focused on ensuring MSRB rules are up-to-date, effective and reflective of current market practices, and, that they are consistently interpreted. An ongoing retrospective rule review will continue, and staff will work to ensure that MSRB rules and interpretive guidance are streamlined, appropriately tailored, function efficiently and are consistent with those of other regulators, when possible.

As part of its focus on data, the MSRB will make improvements for municipal entities that submit bond disclosure information to the MSRB’s Electronic Municipal Market Access (EMMA®) website, which has been a repository for all data and disclosure documents on more than a million outstanding municipal securities for over the past decade. The submission improvements are responsive to stakeholder feedback gathered through focus groups and other engagement and will improve the quality of indexing data for disclosure documents and integrate relevant tools and resources for issuers throughout the submission process.

The budget summary aligns with the MSRB’s commitment to transparent and responsible financial management. This year, the Board of Directors, which develops the budget with senior management, is communicating steps to reduce the organization’s reserve funds. The Board recently approved a temporary three-month reduction in the organization’s underwriting, transaction and technology fees to take place at the start of the 2019 fiscal year. “This temporary fee relief is estimated to reduce our excess reserves by $2.6 million, advancing our goal of fair and equitable fees across regulated entities,” said Hall.

Given the transition the industry is experiencing following the recent federal tax reform, the Board kept the MSRB’s FY 2019 expense budget flat with last year. The planned revenue reduction, together with a flat expense budget, resulted in an operating deficit of $1.7 million, and a total FY 2019 budget deficit of $4.3 million.

Date: October 1, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

WASHINGTON — The Bond Dealers of America has formed a Fixed Income Market Structure Working Group to advise regulators, lawmakers and market participants on structural changes in the fixed income industry and marketplace.

The regulators will include the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the Financial Industry Regulatory Authority.

The working group will consist of representatives of 20 BDA-member firms in the retail, taxable and municipal bond markets and will be led by Brad Winges, managing director and head of fixed-income services of Piper Jaffray Firm Investments and Trading, and Kevin Giddis, head of fixed income at Raymond James Investment Services.

Its first meeting will take place via conference call on Monday, Oct. 15, and working group members plan to hold discussions at least once every quarter, according to BDA Chief Executive Officer Mike Nicholas.

Nicholas said the reasons for creating the group were two-fold.

First, in the aftermath of the financial/credit crisis firms have faced tremendous challenges that include tightening spreads and increased regulatory and technology costs. This has led some firms to shut down, drop out of the muni market or realign their business, presenting some opportunities.

And separately, the SEC has “a deep-dive focus on fixed income market structure and what it should look like,” Nicholas said.

There are a handful of major Wall Street firms in New York City and about 4,000 other firms located around the country, he said.

“The BDA is being very proactive,” Nicholas said. “We want to ensure that those 4,000 firms have a voice during this discussion of market structure. We think of ourselves as a thought-leader on this issue, just as we’ve been on infrastructure and how munis will be impacted and play a role in infrastructure next year.”

Nicholas pointed to Chicago-based William Blair as an example of the challenges faced by firms.

Viewed primarily as a municipal securities firm for more than five decades, William Blair announced in July that it was exiting the municipal securities business, after making an effort four years earlier to expand its public finance practice to new regions.

During the past few years, the firm saw steady revenue growth approaching $1 billion and client assets at $90 billion. But its municipal business contributed less than 3% to overall revenue in 2016, the firm’s President and Chief Executive Officer John Ettelson said in a release.

Meanwhile, the SEC late last year created a 23-member Fixed Income Market Structure Advisory Committee (FIMSAC), on which Winges sits, that held meetings in January, April, and July of this year.

The July meeting focused in part on the current state of pre-trade transparency in the muni market and on recommendations for electronic trading.

In his remarks at the inaugural meeting of FIMSAC, SEC Chairman Jay Clayton said the fixed income markets are massive, growing, and play a significant role for the American economy and the investing public.

The municipal bond market, by the end of 2016, had a total of 31,000 different issuers with roughly $3.8 trillion of munis outstanding, up 17% since the end of 2006, he said.

The fixed income markets directly and indirectly significantly impact other markets such as the derivatives market. They are particularly important to retail investors and they are critical to the nation’s infrastructure and companies, he said.

The SEC plans to work with “to ensure that our regulatory approach to these markets is sound and continues to meet the needs of retail investors as well as American companies and state and local governments,” Clayton told the group.

Bond Dealers of America

By Lynn Hume

October 3, 2018

Earlier this week, the BDA-led Municipal Bonds for America (MBFA) Coalition increased its advocacy efforts for the support of municipal finance and the tax exemption through multiple events on Capitol Hill over two days. Below is a recap of the events.

Educational Seminar and Lobby Day

On Monday, September 24th, the MBFA Coalition held two educational seminars on Capitol Hill for House and Senate staff, and other interested parties on the importance of preserving the tax-exemption for municipal bonds. MBFA Executive Chair Steve Benjamin, Mayor of Columbia, S.C., and current president of the U.S. Conference of Mayors presided over the events to highlight the benefits of the municipal bond market, the tax-exemption, and the importance to restore advance refundings.

The seminar featured a panel of executives and practitioners that the BDA recruited, including:

• Alex Wallace, Head of Public Finance – U.S. Bank
• Steve Winterstein, Managing Director & Chief Municipal Fixed Income Strategist – Wilmington Trust
• Pat Luby, Senior Municipal Strategist – CreditSites
• Matt Posner, CEO – Impact Coalition

The panelists focused on the impact that municipal bonds play in our daily lives, the economic efficiency of the municipal exemption, and the important role that private activity bonds (PABs) and advance refundings play in America’s infrastructure investment.

In addition to holding the educational seminars, the MBFA coalition held over 40 meetings on Tuesday, September 25th, with key members of Congress and their staffs that have influential voices on tax and infrastructure issues.

Meeting with the National Economic Council

The BDA organized a meeting with Andrew Olmem, the Deputy Assistant to the President for Financial Policy at the National Economic Council (NEC). In the meeting, members of the MBFA’s Executive Committee and legislative task force advocated to maintain the current law status of the municipal bond tax-exemption and to restore advance refundings.

Fundraiser for Richard Neal (D-MA) – Ranking Member of the House Ways & Means Committee

The BDA also organized and attended the MBFA fundraiser for Congressman Richard Neal who is projected to become the next Chairman of the Ways & Means Committee (the body that has authority and jurisdiction over tax issues) if his party recaptures majority control of the House this fall. A strong advocate for municipal bonds, the former mayor of Springfield, MA, reaffirmed his support of MBFA priorities for protecting the tax-exempt status of municipal bonds and the reinstatement of advance refundings.

Additional Information

Handouts from the seminar and Hill day featured the BDA’s recent release of the primer on municipal bond finance: The Municipal Bond Market: Building America’s Infrastructure.

You can view a copy of it online here.

Bond Dealers of America

rcrodriguez

October 2, 2018

Read the FAQs.

Norwalk, CT, September 28, 2018 — The Governmental Accounting Standards Board (GASB) today issued a Preliminary Views proposing improvements to key components of the financial reporting model. In a separate, related document, the Board also proposed new concepts intended to guide the Board in developing standards on recognition in financial statements.

GASB Chairman David A. Vaudt said: “What the Board ultimately is trying to do through these companion projects is provide better information to financial statement users. These proposals are designed to enhance both the value and clarity of the information reported in financial statements,” he added.

Stakeholders are asked to review and provide input on the proposals contained in the two Preliminary Views by February 15, 2019.

Financial Reporting Model Improvements

The Preliminary Views, Financial Reporting Model Improvements, presents the Board’s current thinking on targeted improvements to the financial reporting model—the blueprint for the annual audited financial report. The proposals are designed to improve the model’s effectiveness in providing information essential to decision making and assessing a government’s accountability.

The proposed improvements include:

• A short-term financial resources measurement focus for governmental funds that recognizes short-term transactions and other events when incurred and long-term transactions and other events when due
• A format for governmental fund financial statements that distinguishes between current and long-term resource flows
• Clarified explanations of operating and nonoperating revenues and expenses
• An additional subtotal in proprietary fund financial statements for operating income (loss) and noncapital subsidies
• Presentation of all budgetary comparison information as required supplementary information and required presentation of two variance columns
• Communication of major component unit information either in the government-wide statements or in combining financial statements
• A new schedule of government-wide expenses by natural classification as supplementary information in comprehensive annual financial reports.

The Preliminary Views considers improvements in selected areas of the existing financial reporting model. The Board plans to address enhancement of other areas of the model in a subsequent proposal.

Recognition of Elements of Financial Statements

The Preliminary Views, Recognition of Elements of Financial Statements, presents the Board’s current views on concepts related to recognition of elements of financial statements, such as assets and liabilities.

Recognition concepts encompass two aspects of state and local government financial statements:

• The measurement focus of a specific financial statement determines what items should be reported.
• The related basis of accounting determines when those items should be reported.

The Preliminary Views proposes that an item being considered for recognition in financial statements would be evaluated using a hierarchy for recognition of elements. The hierarchy would require the Board follow a specific order of elements when considering if an item should be recognized and as what element (for example, as an asset, deferred outflows of resources, or expense).

The Preliminary Views also proposes a recognition framework for both the short-term financial resources measurement focus (proposed for use in governmental fund financial statements in the companion Preliminary Views) and the economic resources measurement focus (used in government-wide, proprietary fund, and fiduciary fund financial statements).

Issuing the two documents concurrently is intended to provide stakeholders with a conceptual context for how elements of financial statements would be recognized and then to see how those elements would be presented within the financial reporting model.

Alternative Views

The documents also contain alternative views to some of the proposals.

Share Your Comments

Written comments should be addressed to the Director of Research and Technical Activities, Project No. 3-25 (Financial Reporting Model Improvements) or Project No. 3-20 (Recognition of Elements of Financial Statements), and emailed to director@gasb.org.

A series of public hearings and user forums on the Preliminary Views documents are scheduled as follows:

Public Hearings
March 5, 2019, Rosemont, IL
March 12, 2019, Atlanta, GA
March 14, 2019, Flushing, NY

User Forums
March 6, 2019, Rosemont, IL
March 14, 2019, Flushing, NY.

The deadline for written notice of intent to participate is February 15, 2019. Additional information is available in each of the Preliminary Views.

The BDA submitted a comment letter in response to the MSRB Request for Comment on Draft Amendments to Primary Offering Rules. The notice can be viewed here.

The final comment letter can be viewed here.

The comment letter focuses on the following topics:

G-11 Primary Offering Practies

• Free-to-Trade Wire; and
• Alignment of the time frame for the payment of group net sales credits with the payment of net designation sales credits.

G-32 Disclosures in Connection with Primary Offerings

• Equal access to the disclosure of the CUSIP numbers refunded and the percentages thereto; and
• Whether non-dealer Municipal Advisors should make the official statement available to the managing or sole underwriter after the issuer approves it for distribution.

Bond Dealers of America

September 17, 2018

Municipal advisors are required to manage carefully, as pivotal issues, conflicts of interest and their disclosure to municipal entity and obligated person clients.

The fiduciary duty of loyalty and MSRB Rule G-17’s fair dealing mandate require that conflicts be disclosed and that advisors obtain clients’ fully-informed consents to significant conflicts.

The fiduciary duties of municipal advisors arise under both federal and state common law. Dodd-Frank does not override state law. Numerous historical actions have applied state law against non-disclosing advisors.

The MSRB states regarding Rule G-42: “Municipal advisors may be subject to fiduciary … duties under state … laws. Nothing contained in this rule shall be deemed to supersede any more restrictive provision of state … laws applicable to municipal advisory activities.”

Under state law, municipal advisors must act solely in their clients’ best interests. Tamar Frankel states in Legal Duties of Fiduciaries: “The legal duty of loyalty takes two forms. One form is a requirement that fiduciaries act for the sole benefit of the entrustors. The other form is a prohibition on fiduciaries from acting in conflict of interests with the interests of the entrustors.” Comment to Restatement of Agency §8.01 states: “the general fiduciary principle requires that the agent subordinate the agent’s interests to those of the principal and place the principal’s interests first as to matters connected with the agency relationship.”

Under federal law, the MSRB stated, contrasting municipal advisors with underwriters: “unlike a municipal advisor, the underwriter does not have a fiduciary duty to the issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of the issuer without regard to its own financial or other interests …” MSRB Notice 2012-25.

Some advisors may not be sensitive, however, to certain conflicts. This Commentary identifies multiple simultaneous potential conflicts, especially in, but not limited to, certain voted bond issues.

In voted bond issues, it is possible to identify three periods—the pre-election period (when issuers’ governing bodies make important decisions), the election period (when voters decide), and the post-election period (when issuers, with professionals, make more detailed decisions and close transactions).

This Commentary, drawn from experience, describes a hypothetical advisor’s work.

Contingent Closing Fees

Our hypothetical highly-active advisor has charged contingent closing fees in all of its bond issues for many hundreds of projects.

Contingent closing fees are recognized by many market participants as detrimental to issuers. This fee structure has tended to dominate the discussion of conflicts, although there are other significant advisory conflicts. Some issuers, especially smaller, less sophisticated ones, may be served only by professional teams who will not be paid without a closing. Those issuers may not receive input from a single professional without an eye on closing compensation.

Most bond issues require months of hard work. Risky or difficult issues commonly require additional time. Professionals paid contingent fees place those months of hard work at risk, if they provide advice delaying or discouraging closings. Professionals working directly on bond issues may experience pressures to complete transactions from supervisors or partners. Nevertheless, it may be in issuers’ best interests not to close. I have seen numerous examples of imprudent bond issues.

The National Federation of Municipal Analysts’ White Paper on the Disclosure of Potential Conflicts of Interest in Municipal Finance Transactions states: “Historically, compensation arrangements in municipal finance transactions that hinged on transactional completion have been associated with poorly structured bond issues …, to the detriment of municipal investors, as well as issuers and obligors.”

While some may argue that other fee structures also involve conflicts — professionals paid hourly fees may charge additional time — the relative risks to issuers are not identical. The risk to issuers from additional time charged as hourly fees is dwarfed in contrast to potential seven figure costs to issuer from unwise closings.

In my 40-plus years in the municipal market, I found that non-contingent fees tended to be lower than contingent fees. Indeed, the “contingency” often is cited as a risk by professionals in justifying higher fees. Our advisor does not disclose this information.

Further, additional time charged as hourly fees may be exactly what is necessary for extra care that protects issuers—time that advisors paid contingent fees may avoid to minimize their own costs and delays.

The Government Finance Officers Association’s Best Practice—Selecting and Managing Municipal Advisors discourages the payment of contingent fees, stating a preference for non-contingent fees “to remove the potential incentive for the municipal advisor to provide advice that might unnecessarily lead to the issuance of bonds.”

GFOA opines that “this may be difficult given the financial constraints of many issuers.” GFOA adds, however, that issuers paying contingent fees should “undertake ongoing due diligence to ensure that the financing plan remains appropriate for the issuer’s needs.” GFOA does not indicate how tens of thousands of small, unsophisticated issuers heavily dependent upon their municipal advisors are able to discharge additional oversight responsibility effectively.

Non-contingent fees are rarely burdensome. Even financially-limited issuers routinely pay non-contingent fees to a wide variety of professionals. In completed transactions, non-contingent fees are recoverable from bond proceeds. Moreover, if financially-limited issuers pay non-contingent fees in uncompleted transactions, it may be for the best advice issuers possibly could have received.

In practice, some advisors act directly counter to GFOA’s expressed opposition to contingent fees. What GFOA presents as an exception to the general rule of avoiding contingent fees instead is applied by some advisors on a vastly broader basis, destroying issuer choice. Those municipal advisors charge contingent closing fees in every bond issue and never offer issuers fee alternatives.

Our hypothetical advisor always proposes contingent fees to issuers without disclosing risks, without offering alternative fees, without informing issuers of the pros and cons of alternative fees, without informing issuers that non-contingent fees are recoverable from bond proceeds, and without obtaining issuer consents. Yet, our advisor advertises itself misleadingly as “independent.” NFMA states: “Contingent compensation is especially undesirable for … for municipal advisors … who are expected to be independent in the provision of advice …”

Consequently, some issuers have never been offered non-contingent fees and have never received disclosure identifying fee alternatives or relative merits.

Unfortunately, the additional burden the conflicts place upon issuers severely weakens the issuers’ important intended Dodd-Frank Act protections.

Notably, Tamar Frankel states: “When fiduciaries wish to engage in conflict of interest transactions and seek their entrustors’ consent, the entrustors must fend for themselves. Their right to rely on their fiduciaries must be eliminated. In fact, during the bargaining, the entire fiduciary relationship must be terminated and replaced by the relationship of contract.” Our advisor does not disclose this information.

Multiple Contingent Closing Fees

A related conflict is that, during the pre-election period, our hypothetical advisor encourages an issuer’s board to propose to voters a tax-supported bond plan that cannot be executed completely on the basis of existing property values and estimated tax rates. The advisor encourages the issuer to add projects extending beyond the issuer’s immediate intentions. The recommended plan relies in part upon a second future issuance assuming property values inflate.

Our hypothetical advisor anticipates multiple closings and multiple contingent fees pursuant to its recommended bond plan. Work on a future issue will duplicate much of the disclosure and bond documentation. Hourly fees would be based only on actual time.

Fees Contingent on Board Action and Election Results

Our hypothetical advisor describes the pre-election period as the “marketing phase.”

The advisor charges, in the pre-election period, a fee contingent upon approval by the issuer’s board of the advisor’s recommended bond plan and upon voter bond authorization. This contingent fee motivates the advisor to promote bond issuance.

Our advisor assures the issuer’s board that the advisor’s recommended bond plan for multiple bond issues refunding outstanding obligations and funding additional projects is based upon “conservative” modeling. Actually, the advisor does not (and lacks skills to) prepare financial analysis supporting the recommendation. Ultimately, the advisor’s recommended tax rate and bond principal prove inadequate even to refund the issuer’s outstanding obligations.

Election Consulting Conflicts

Our advisor anticipates that favorable bond election results will lead to the hypothetical advisor’s collection of its pre-election contingent fee and of multiple post-election contingent fees.

The advisor works on the bond election pursuant to an election committee contract for a fee drastically below the advisor’s typical compensation. The advisor sends multiple officers to a distant community for several days to work in the bond election for a hypothetical fee and reimbursement of $1,500, while anticipating receipt of aggregate contingent compensation of $160,000.

In effect, our hypothetical advisor works on the bond election as an undisclosed “loss leader.”

To recover its losses, the advisor must convince voters to authorize the bonds. In our hypothetical, taxpayer advocates supporting bond issuance object to assertions in campaign literature prepared by the advisor and threaten to withdraw support until retraction.

Dependence on Underwriters

Our hypothetical advisor not only cannot prepare bond structuring analyses, but depends on underwriters to do so—a serious conflict. This is why our advisor recommends negotiated bond issues even for highly-rated commoditized bonds with a common security structure.

Assistance by the advisor in the underwriters’ retention enhances the conflict’s severity, as does the advisor’s negotiations on behalf of the issuer with the underwriters of compensation, bond terms, and yields—an agency role.

Disclosure and Consents

Requirements for disclosure of conflicts and for obtaining client consents arise under MSRB Rules G-42 and G-17, as well as the Dodd-Frank Act’s statutory fiduciary duty and state common law.

MSRB Rule G-42(b) requires disclosure of municipal advisor conflicts arising from certain relationships, stating: “A municipal advisor must… provide to the municipal entity or obligated person client full and fair disclosure in writing of: … “(E) any conflicts of interest arising from compensation for municipal advisory activities to be performed that is contingent on the size or closing of any transaction …; and (F) any other actual or potential conflicts of interest, of which the municipal advisor is aware after reasonable inquiry, that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice .. .”

In Supplementary Material, Rule G-42 provides that “Disclosures of conflicts of interest by a municipal advisor to its municipal entity or obligated person client must be sufficiently detailed to inform the client of the nature, implications and potential consequences of each conflict.”

Describing state law, Tamar Frankel states: “Fiduciaries must provide … material information necessary for the entrustors to make an informed decision. … In reality, entrustors can seldom perform [a cost-benefit] analysis because they lack accurate information … ,” adding “the burden of proving” fairness and reasonableness “is usually on the fiduciaries.”

Tax regulations

The Restatement of Agency §8.06, speaks to how agents, such as municipal advisors, are able to obtain effective state law consents. Agents must “act[] in good faith,” “disclose[] all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal’s judgment,” and “otherwise deal[] fairly.” The Restatement adds that the agent has the burden of proving informed consent.

Conclusion

Municipal advisors to municipal entities and obligated persons may be subject simultaneously to multiple conflicts of interest that should be fully disclosed, with client consents, under both federal and state law. It is essential for advisors to be sensitive to these significant issues.

The Bond Buyer

By Robert Doty

Published September 25 2018

CHICAGO – A Securities and Exchange Commission official announced the commission will host a muni disclosure conference at its headquarters on Dec. 6 during a bond lawyers’ meeting here where regulatory officials got some backlash on recent rules and advisories.

Rebecca Olsen, director of the SEC’s Office of Municipal Securities, announced the commission conference during a Thursday panel at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop.

The conference will be a one-day affair and will feature opening remarks from SEC Chairman Jay Clayton, Olsen said. The conference stems from a recommendation in the SEC’s 2012 Report on the Municipal Securities Market that the SEC hold such an event.

Olsen noted that the SEC has not provided formal written interpretive guidance on both primary and continuing disclosure since a 1994 interpretive release which explored those obligations with respect to the antifraud provisions in the federal securities laws. She said the commission hopes the conference will provide it with market perspectives to inform its decisions, including on whether to issue new guidance.

“We’re very much focused on disclosure,” Olsen said.

The panel, titled “Hot Topics in Securities Law,” was held twice Thursday with the same participants. Besides Olsen’s announcement, the discussion also included the SEC’s recent amendments to its Rule 15c2-12, the Municipal Securities Rulemaking Board’s controversial 2017 market advisory on selective disclosure, and an overview of the SEC’s recent enforcement efforts.

The commission’s amendments to 15c2-12, effective Feb. 27 of next year after their August approval, adds two new events to the list issuers must agree to disclose through the MSRB’s EMMA system. One of those new events is the incurrence by the issuer of a new material financial obligation, as well as details about that obligation. The other new requirement is that issuers file an event notice for certain actions or events related to their financial obligations that “reflect financial difficulties” such as a default, event of acceleration, termination event, or modification of terms.

Though the new requirements are narrower than those originally proposed, they still have met with some backlash from the market. Panelist Ernesto Lanza, senior counsel at Clark Hill in Washington, said that he believes there are many issuers who have not been fully advised of what their new responsibilities will be.

Specifically, Lanza said, issuers need to be prepared to report any indications of “financial difficulty” related to their debts and obligations as soon as the rule is effective.

Rebecca Lawrence, chief counsel for public finance and fixed income sales and trading at broker-dealer Piper Jaffray (PJC), said underwriters and issuers are already butting heads over what is material and therefore needs to be disclosed.

Courts have said that materiality means information a reasonable investor would consider important in making an investment decision.

Underwriters generally want a lot of issuer disclosure due to the legacy SEC’s Municipalities Continuing Disclosure Cooperation initiative, which in 2016 resulted in 72 underwriters being fined by the SEC.

But issuers are already saying they don’t feel they should have to disclose certain obligations and covenants, Lawrence said.

“I doubt there’s going to be a lot of agreement on these concepts,” Lawrence said.

Olsen and Mark Zehner, deputy chief at the SEC enforcement division’s public finance abuse unit, pushed back against criticism of the amendments and complaints about a lack of guidance on the concept of materiality.

“These amendments very strategically focused on an information gap,” Olsen said.
Zehner suggested recording or otherwise documenting the materiality discussion so that enforcement officials who might investigate would be able to see a good faith effort to comply.

MSRB Chief Regulatory Officer Lanny Schwartz responded to criticism of the MSRB’s 2017 advisory warning against the “selective disclosure” by issuers of information to only a few potential investors. The “market advisory” triggered criticism because the topic is outside the scope of the MSRB’s regulatory authority.

“We have heard that criticism and we are very mindful of that criticism,” Schwartz said.

Schwartz, who joined the MSRB four months ago, said the MSRB will make an even greater effort to be clear that such market commentaries do not have regulatory implications. They are meant as educational, Schwartz explained, and the MSRB is confident in its legal right to make such commentary when it sees fit.

Dave Sanchez, a senior counsel at Norton rose Fulbright in San Francisco who moderated the panel, told Schwartz that nobody has a problem with education but that market participants are unsure what to make of “extraneous statements.” Zehner said that enforcement lawyers would not be guided by such commentary and that he had not read the selective disclosure advisory until recently.

The NABL conference concluded Friday. The group will convene again March 19-20, 2019, at its Tax & Securities Law Institute conference in San Diego.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 09/28/18 07:06 PM EDT

Increased Transparency to Continuing Disclosure Requirements

In an effort to increase transparency and protect holders of municipal securities, on August 20, 2018, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) added two new requirements to the continuing disclosure requirements of Rule 15c2-12 of the Securities Exchange Act (the “Rule”).

The Rule requires underwriters in certain offerings of municipal securities to reasonably determine that the issuer or obligated person, such as a borrower of the proceeds from the sale of such securities, has agreed pursuant to a written agreement to provide to the Municipal Securities Rulemaking Board annual financial information, certain operating data and timely notice of certain listed events.

The following two requirements were added to the Rule (the “Amendment”):

– Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and

– Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.

The term “financial obligation” means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term “financial obligation” shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with this rule.

Debt, Debt-Like and Debt-Related Obligations of Issuers and Obligated Persons

The Commission stated that the additional requirements to the Rule focus on “material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights.” In particular, the focus of the Amendment is on “debt, debt-like and debt-related obligations,” such as private placements and bank loans.

In addition, the Commission stated that “a financial obligation generally should be considered to be incurred when it is enforceable against an issuer or obligated person.” For example, if an issuer enters into an agreement regarding a draw-down bond, the issuer or the obligated person should, according to the Commission, “provide notice at the time the terms of the obligation are legally enforceable against the issuer or obligated person, instead of each time a draw is made.”

Form of Notice

The Commission did not prescribe a form of event notice for the Amendment. Instead, the Commission believes that market participants should consider developing best practices regarding the form of notice. However, the Commission stated that the event notices should generally include a description of the material terms of the financial obligation, including the date of the agreement, principal amounts, maturity dates, interest rates, default rates, method of computation for variable rates and acceleration provisions. Under the Rule, issuers and obligated persons will be required to file the new notices no later than ten business days following the occurrence of the event.

Compliance Date

The Amendment is effective as of February 27, 2019. This Amendment will only affect those continuing disclosure agreements entered into on or after February 27, 2019.

The new requirements added to the Rule are complex, and whether an event notice will need to be filed in connection with a financial obligation in accordance with a continuing disclosure obligation will depend on the specific facts and circumstances at hand. We recommend that you stay in touch with your counsel to discuss how the new requirements may affect your continuing disclosure obligations. It will be important to review and revise your continuing disclosure policies and procedures to incorporate the Amendment for any new bonds issued on or after February 27, 2019.

by Sarah C. Smith

September 18, 2018

McCarter & English LLP

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) is charged by Congress with establishing competency standards for municipal advisor professionals. Today, the MSRB filed with the Securities and Exchange Commission (SEC) a proposed rule change to amend MSRB Rule G-3, on professional qualification requirements, to enhance the professional qualification standards for municipal advisor professionals who act in a principal capacity at their firms.

The proposed amendments to Rule G-3, in part, will require municipal advisor principals to pass both the existing MSRB Municipal Advisor Representative Qualification Examination (Series 50) and a new Municipal Advisor Principal Qualification Examination (Series 54) to be appropriately qualified as a municipal advisor principal. Read the notice.

The establishment of a principal-level examination for municipal advisor professionals by the MSRB ensures that individuals who engage in the management, direction or supervision of the municipal advisory activities of a municipal advisor firm and its associated persons demonstrate a specified level of competence in order to promote compliance with the rules and regulations governing such activities.

The MSRB anticipates offering a pilot version of the Series 54 examination from February 2019 through June 2019. Any municipal advisor principal will be able to take the pilot exam during the pilot period. Thereafter, when the permanent version of the Series 54 examination becomes available, all municipal advisor principals will have one year to become appropriately qualified by taking and passing the exam.

Date: September 19, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

The MSRB is committed to facilitating industry understanding of, and compliance with, MSRB rules. The MSRB welcomes inquiries by regulated entities, including brokers, dealers and municipal securities dealers and municipal advisors, as well as issuers, attorneys, investors and other market participants relating to MSRB rules. To help ensure that requesters receive meaningful, effective and responsive assistance, the information below is provided to assist requesters in understanding the process and guidelines for asking for assistance from the MSRB.

Oral Interpretive Requests
A requester may contact the MSRB by telephone at 202-838-1330 to seek assistance in understanding an MSRB rule. MSRB Staff often can resolve many inquiries over the telephone by referring the caller to the specific rule language, any associated interpretive guidance, along with compliance resources and educational material that can be found on the MSRB’s website at msrb.org.

In addition, the MSRB may receive inquiries from regulated entities on existing MSRB rules and interpretations that relate to a pending regulatory examination. To promote regulatory certainty essential to an effective regulatory framework, the MSRB staff may address, as appropriate to safeguard the integrity of the examining and disciplinary processes, an inquiry directly with the regulated entity or directly or jointly with the applicable examining authority (U.S. Securities and Exchange Commission, Financial Industry Regulatory Authority, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation or Office of the Comptroller of the Currency).

As telephone inquiries are often, by their nature, informal and lack supporting documentation, responses will not necessarily contain a discussion of all material considerations, address the applicability of all MSRB rules or interpretations or all the possible regulatory and legal issues that may be involved. Information provided by MSRB staff in response to a telephone inquiry is intended as general information based on the facts as described by the requester, does not express any legal conclusion on the questions presented and should not be relied on as a definitive legal position of the MSRB.

Written Interpretive Requests
If a requester is seeking a more formal response to an inquiry, they may submit a written request for interpretive guidance to the MSRB at: MSRB Market Regulation, 1300 I Street NW, Suite 1000, Washington, DC 20005 or via email at: legalmail@msrb.org.

The written request should reflect any prior communications with MSRB staff relating to the issues presented; it is generally beneficial to speak with MSRB staff in advance of submitting a written interpretive request to discuss the request and allow staff to raise any additional questions that may help facilitate the interpretive guidance. The written request should include a description of the facts relating to the interpretive question, the MSRB rule(s) to which the facts relate and a description of the scenario under which those facts could arise. Upon receipt of a written interpretive request, MSRB staff will send an acknowledgement letter to the requester. The amount of time to provide a response to a written request for interpretive guidance varies depending on the facts and circumstances raised.

Depending on the specific facts and circumstances raised, MSRB staff may respond to the request orally or in writing or conclude that it is not appropriate to respond to the request. Additionally, in some circumstances, a written response to a request for interpretive guidance may necessitate formal Board action and could require SEC approval. MSRB staff will inform the requester of the internal process and provide opportunities throughout the process to supplement or withdraw the initial request.

The Role of the MSRB in Providing Interpretive Assistance
MSRB staff can only provide guidance on matters that raise questions of interpretation under the MSRB’s rules and such guidance does not provide an exemption, safe harbor or no-action relief from compliance with MSRB rules. In responding to requests, the MSRB is not acting as the requester’s attorney and communications are not subject to an attorney-client privilege.

SIFMA provided comments to the Federal Reserve, the OCC and the FDIC on their interim final rule providing Level 2B HQLA treatment for certain municipal securities.

Read the comment letter.

WASHINGTON – The disclosure of some variable-rate demand obligation information on EMMA shouldn’t be used to dismiss a lawsuit alleging fraud in VRDO remarketing because the whistleblower involved is providing non-public information gleaned from an independent investigation, lawyers for the plaintiff told an Illinois court.

Attorney Michael Behn of the Chicago law firm of Behn and Wyetzner made that argument along with others late last week, in urging a Cook County, Ill., Circuit Court judge to allow the suit to go forward.

The defendants, banks who provided remarketing services for Illinois VRDOs, had previously argued that the law requires the suit be dismissed in part because it is based on information that is available to the public through the Municipal Securities Rulemaking Board’s EMMA website.

The outcome of the suit has wide-ranging implications because a victory for the plaintiff (relator) could set the table for more actions in other states.

The suit, filed as a False Claims Act action, charges that the remarketing firms set VRDO rates artificially high in order to be paid for remarketing services without having to remarket the securities, in violation of remarketing circulars and agreements that generally commit remarketing agents to try their best to set the rates at the level necessary to market the bonds at par.

A major point of contention is whether the claims of the relator, Edelweiss Fund LLC, which filed the suit on behalf of Illinois, are subject to a “public disclosure bar” under the law. That bar is intended to prevent whistleblower lawsuits brought on the basis of information available to the wider public.

The banks vigorously denied the fraud and other charges. In July, lawyers for the banks told the court that the suit is based entirely on publicly available VRDO reset information, including information posted on the MSRB’s EMMA website. EMMA and other publicly-available websites are effectively news media, the defendants argued.

But in a Sept. 14 filing in response to the defendants’ request to dismiss the suit, Behn told the court that the information disclosed on EMMA and elsewhere does not meet the threshold for dismissal under the disclosure bar.

“The EMMA website, which is the primary outlet through which the banks say Edelweiss’ allegations were disclosed, does not qualify as ‘news media’ or an ‘administrative’ report,” Behn said. “Any claimed disclosures on the EMMA website are inapplicable to the public disclosure bar.”

Even if EMMA and the other websites the banks cite qualify as “news media,” they do not disclose the alleged fraud, Behn added. The interest rates and information laid out in official statements reveal nothing of the alleged robo-resetting scheme, or of the collusion, of which Edelweiss claims to have direct knowledge.

“If the EMMA data constitutes disclosure of the misrepresented state of facts, where was the true state of facts publicly disclosed?” asked Behn.

Edelweiss brought the suit on the basis of non-public knowledge and data gleaned from Edelweiss’ own investigation, Behn said, meaning that the banks’ efforts to dismiss the suit on the basis of the public disclosure bar must fail.

Edelweiss is a Delaware-registered limited liability company formed specifically to pursue the litigation but is not identified beyond that in the suit. An expert consulting witness for Edelweiss is Michael Lissack, the former Smith Barney banker who helped the government win hundreds of millions of dollars — and reaped tens of millions of dollars himself in the process — from filing whistleblower lawsuits against Wall Street and other firms in 1995 over charges they engaged in yield-burning.

Behn’s filing also attacked the several other points on which the banks sought to have the suit dismissed, including claims that Edelweiss has not properly alleged false claims or a conspiracy. The complaint lays out specific false statements, Behn wrote, namely the language in the remarketing agreements that pledges to remarket the bonds at the lowest rate permitting them to be sold at par.

The banks also attempted to have the court throw out the claims pertaining to conduit issuances, since Illinois is not on the hook for the conduit bonds and could not have paid the allegedly inflated remarketing fees. But the law does not require financial damage to Illinois for those claims to be upheld, Behn said, and courts have previously imposed False Claims Act liability when government interests were harmed regardless of direct financial loss to that government.

Scrutiny of the VRDO market appears to have grown in the months since the Edelweiss suit was unsealed in April. Sources told The Bond Buyer earlier this month that the Securities and Exchange Commission is conducting a sweep of the 12 top banks and broker-dealers that remarket VRDOs and has sent them letters seeking information and documents on their remarketing and rate resetting practices.

Other VRDO whistleblower and class action suits have been filed in courts in other states and the Justice Department’s antitrust division is conducting a criminal investigation of VRDO remarketing practices of a number of banks and broker-dealers, some of the sources said.

But even if the court sides with Edelweiss and allows the suit to continue, it may be many months before it is decided.

“Cook County courts like to try cases before juries and so do we,” Behn said. “We hope to get discovery done and this case to a jury within a year or two after we win this motion.”

By Kyle Glazier

SOURCEMEDIA | MUNICIPAL | 09/17/18 07:10 PM EDT

Read the Request for Comment.

An Interview with David Vaudt, Chairman of the GASB

Article from the October 2018 Risk Management Association Journal

Read the interview.

[09/05/18]

Norwalk, CT, September 4, 2018 — The Governmental Accounting Standards Board (GASB) has issued guidance clarifying the accounting and financial reporting requirements for a state or local government’s majority equity interest in an organization that remains legally separate after acquisition.

A public hospital’s acquisition of a rehabilitation center that remains legally separate after acquisition is an example of the type of transaction the new guidance addresses.

Under Statement No. 90, Majority Equity Interests, a government’s majority equity interest in a legally separate organization should be reported as an investment if that equity interest meets the GASB’s definition of an investment. In many instances, a majority equity interest that meets the definition of an investment should be measured using the equity method.

Statement No. 72, Fair Value Measurement and Application, defines an investment as “a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.”

For a majority equity interest in a legally separate entity that does not meet the definition of an investment, Statement 90 requires a government to report the legally separate entity as a component unit.

Statement 90 also establishes guidance for remeasuring assets and liabilities of wholly acquired governmental organizations that remain legally separate. That guidance brings the reporting of those acquisitions in line now with existing standards that apply to acquisitions that do not remain legally separate.

Statement 90 is available on the GASB website, www.gasb.org.

To keep a sense of perspective during the ongoing contentious priority-of-liens fight in the Puerto Rico bankruptcy proceedings, consider the case of Eric Joelner, Fish, Inc. d/b/a XXXtreme Entertainment v. Village of Washington Park, Illinois. In the annals of municipal bankruptcy, this is a very small footnote, for sure, but still relevant.

Back in 2003, Washington Park was having a hard time paying its bills. The usual economic suspects were making it tough on this 2.5 square mile town of 5,300 residents with a 42% poverty rate—manufacturing jobs were gone, there were cuts to state aid, and people were leaving. By its own admission, it was “in the red” on its $3.8 million budget.

To make ends-meet, the town raised licensing fees on its highest revenue generating businesses: “adult entertainment” establishments. Those businesses within the city limits saw their licensing fees jump ten-fold, from $3,000 to $30,000.

Mr. Joelner, a long-time proprietor of such a “public service” business (the court’s words, not mine) took exception on First Amendment grounds, sued and prevailed. Washington Park didn’t get the revenues. The Village ultimately filed for bankruptcy protection, in part due to, among other things, yes, monies owed to the owner of a certain topless bar—Mr. Joelner, to be exact.

Priorities

That put the judge in the case in the rather thankless role of determining the priority of unsecured liens that, in addition to the bar’s claim, included fees to lawyers, the police pension and one Johnny “Chico” Matt, the town’s former public safety director. While the jokes write themselves about how to weigh the priority of lawyers against adult entertainment owners in the Washington Park case, the judge handling Puerto Rico’s case faces the same issue of prioritization, just without any of the humor.

For example, look at the recent intricate proposal by the bondholders of Puerto Rico’s sales-tax backed COFINA (Puerto Rico Urgent Interest Fund Corporation) debt seeking court approval in an upcoming hearing. It includes, in addition to a bond swap, a provision to pay themselves the $1.2 billion in Trustee-held funds. In justifying the plan, COFINA bondholders point to Act 91-2006 as the statutory security for their senior priority of lien claim.

The general obligation bondholders disagree vehemently. In their view, the plan gives COFINA investors, senior and subordinate, priority over what they see as their constitutionally protected priority lien. They point to Article VI, Section 8 of the Puerto Rico’s Constitution.

Let the legal fisticuffs ensue.

Practitioner’s Perspective

This problem of prioritizing and resolving conflicting claims falls to the job of the U.S. District Court magistrate. When it comes to municipal bankruptcies, one former judge on that court has given this a great deal of thought. Drawing from his considerable experience on the bench, most notably overseeing the $3 billion bankruptcy filing by Jefferson County, Alabama, the Honorable Thomas B. Bennett (Ret.) (now of Counsel with Bailey & Glasser) reflected on the problem of unsecured or conflicting liens when a municipality files under Chapter 9.

A Quick History Of The General Obligation Pledge

Since the general obligation (GO) security pledge backs the vast majority of debt issued by municipalities, the Counselor offered some key legal history as to how it came to pass. A democratic government is by and of the people; government entities cannot offer a lien on those things owned by the people. Hence the “general obligation” pledge: a promise to pay but not a lien on any specific public assets.

That left governments seeking to borrow with a problem. They lacked traditional hard assets to offer as a lien to secure payment. A promise to pay is not a lien. To make up for that, some states established a statutory mandate to back the GO pledge. Often local governments added unlimited taxes to the pledge as further, tangible security.

An Unsecured Security

But as the Detroit bankruptcy demonstrated, even the “unlimited tax” pledge has limitations. Bondholders found themselves fighting not only other unsecured creditors but also pensioners who claimed, well, a superior claim. Bondholders discovered, to their chagrin, that court can only rule on the GO pledge’s priority in the pantheon of liens and claims; it cannot impose nor raise “unlimited taxes” by judicial decree. The “unlimited tax” bondholders took a cut that left them with 74 cents on the dollar.

James E Spiotto, retired partner of Chapman and Cutler LLP and now Managing Director Chapman Strategic Advisors LLC framed the problem succinctly: a paper right might not exist in reality. He too comes from a practitioner’s perspective. A published author in the field of Chapter 9 bankruptcies, Spiotto not only practiced bankruptcy law but also provided testimony and written statements to the U.S. House of Representatives and Senate on the 1988 Amendments to Chapter 9 legislation.

A More Secured Security

Unsecured creditors are but one lien issue the court has to vet through. As government and its services expanded, politicians got “cutesy”— Bennett’s words exactly. To avoid taking on more municipal debt on their balance sheet and having to go to the voters to raise taxes to support it, they created new financing authorities and agencies to fill the need. This begat types of security other than the GO pledge to back those bonds. Correspondingly, a cascade of varying liens and carve-outs developed as revenues from fees, sales taxes, taxes on incremental property values, tolls, fuel taxes and structured settlements—to list a few—were codified in bond documents as secured liens to repay debt holders.

Liening On The Law

As these liens developed, the law did not keep pace. This created a problem for the U.S. District Court judge adjudicating a Chapter 9 proceeding. Bennett observed that in a municipal bankruptcy, the law hasn’t been fully fleshed out and the issues haven’t been worked. Because municipal bankruptcy is rare and the causes unique, the Bench has limited guidance from which to draw when looking to apply legal criterion to determine priority among unsecured creditors. To misapply the words from Tolstoy’s Anna Karenina, happy bondholders are all alike; every unhappy bankruptcy participant is unhappy in their own way. Stockton, Vallejo, Harrisburg and Central Falls make for good headlines; they leave little in terms of precedent in the case law for the courts to cite. The plethora of other liens, as the Puerto Rico example highlights, only complicates matters.

Statutory Direction

Bennet offered that, in the courtroom, the judge can only rely on the facts presented and make a determination based on the law. Here is where turning to the actual statute should offer direction. The Chapter 9 legislation establishing the municipal bankruptcy framework was drafted to offer guidance but also to be flexible. Since experience and case law didn’t offer much, legislators had limited experience from which to draw. Additionally, there was the tacit acknowledgement of the varying circumstances in each bankruptcy. No law can be so comprehensive as to cover every situation, nor should it be. The courts need some leeway to find direction in working the law. Additionally, the drafters had to consider the varied state statutes governing bankruptcy; there are state by state laws as to whether or not a municipality can file and under what terms they can file if so permitted. Consequently, to take all these factors into account, the statute was crafted to offer guideposts as to process and procedure, but not dictate outcomes.

Spiotto contends that there is one aspect of the law that is clear. The U.S. Bankruptcy Court is bound to adhere to the Tenth Amendment of the U.S. Constitution and co-sovereignty the states. State laws and mandates cannot be rewritten from the bench. Equally, his view was that a municipality not only must pay any revenues dedicated to creditors but also those dedicated revenues cannot be used for other purposes until creditors are paid. Moreover, the municipality cannot be compelled by the court to not pay that which the state, by statute or otherwise, has mandated to be paid—which was the rationale behind the 1988 amendments to the federal statute.

Ultimately, that is the legal root of the dispute that continues to this day in Puerto Rico.

Academic Thinking

Discerning and prioritizing claims in municipal bankruptcies is on the minds of legal scholars as well. David Schleicher, professor of law, Yale Law School and fellow authors Adam J. Levitin, professor of law Georgetown University Law Center and Yale Law School graduate Aurelia Chaudhury, in their upcoming article Junk Cities: Resolving Insolvency Crises in Overlapping Municipalities (California Law Journal) take up the central question of conflicting security interests in Chapter 9 bankruptcy.

In this thoroughly researched and well-written piece, the authors contend that conflicts between bondholders as seen in Puerto Rico are just the tip of the iceberg and are likely to get more intractable. For example, one count had residents of Chicago paying taxes to 21 different districts, entities and authorities with separate levies on essentially the same underlying taxable boundary. It is not difficult to imagine the troubles one or more bankruptcy filings could create.

Seeing the emerging problem and noting that “Chapter 9 does not currently address the problems of overlapping local debt crises” and that the “statutory language is sufficiently capacious and indeterminate,” Schleicher, et alia view that as an opportunity. They advocate that the vagueness leaves room for “both courts and state legislatures [to] develop tools to stop local governments from acting in ways that are collectively harmful, even if individually rational, during insolvency crises.” Given the events in Puerto Rico, the authors may be both current and prescient.

What Guides The Final Plan

If plan approval were solely a matter of clean-cut law, the dispute would be over and done with in Puerto Rico, as some contend it should be.

But the fact that it hasn’t been clean cut summons the issue that the law is conjoined by another factor the court must weigh—public policy. Municipal bonds fund essential public purposes. It is the core of their strength as an asset class. Businesses may come and go as public tastes change and technologies evolve. Municipal services—good schools, paved roads, clean water, green parks, lit streetlights and such—are necessary regardless. The law can say whatever it says but, if at the end of the day, a plan leaving a municipality bereft of resources to provide its citizens basic services yet still pays bondholders in full is dead before the ink dries on the brief.

This critical factor weighs on the mind of every justice overseeing a Chapter 9 proceeding and likely, in particular, the judge overseeing the case in cash-strapped and economically destitute Puerto Rico.

So what guides the court through the fog of litigation to address both the law and public policy so a plan can be approved? Spiotto presented three simple and to the point questions:

1. Is the plan feasible both economically and by implementation?
2. Is it in the best interest of the creditors?
3. Is it fair and just?

For a plan to be approved, the answer to each of these questions must be an unequivocal “yes.”

There is a lesson for the municipal bond investor. When sorting through the seemingly overwhelming number of debt issues, their jumble of security liens and unduly complex documents, keep in mind that good economics and an essential public purpose will do more than any carefully drafted legal protections. Otherwise, be ready to face the risk of joining the unhappy bankruptcy family.

Forbes

by Barnet Sherman

Sept 6, 2018

Barnet Sherman has over 30 years of investment experience in the fixed income markets in credit analysis and portfolio management.

Barnet Sherman. Portfolio Manager, Credit Analyst, Published Author, and Speaker has over 30 years of investment experience in the fixed income markets.

Read the Request for Comment.

WASHINGTON – The Municipal Securities Rulemaking Board is requesting comment on draft guidance regarding “pennying” and best execution, giving the market the chance to weigh in before publishing information that could be influential in industry practices.

The MSRB released the request Friday, about five months after suggesting earlier this year that it would seek comment on the subject of pennying.

The request for comments on both sets of guidance is part of a formal process that could lead up to the formal adoption of that guidance.

The best execution rule guidance would actually be amendments to existing guidance on the relatively new rule, which took effect in March 2016.

The MSRB is seeking comments by Nov. 6.

Pennying, which is sometimes called “last look,” occurs when a dealer places a retail client’s bid-wanted out to the market and determines the winning bid, but then rather than executing the trade with the winning bidder marginally outbids the high bid and buys the bonds for its own account. The MSRB raised concerns about pennying in a letter to the Securities and Exchange Commission in October, and said following its April board meeting this year that it would request comment on the issue.

While the practice can appear beneficial in isolation because the dealer technically provides the customer a price equal to or better than the best bid, the MSRB is concerned that widespread pennying disincentivizes participation in the bid-wanted process, discourages bidders from giving their best price in a bid-wanted and “may impact the efficiency of the market.”

A recent study of similar behavior in the equity market demonstrated an impaired market quality, the MSRB said.

The draft interpretive guidance states that using the bid-wanted process, whether via a brokers’ broker or an alternative trading system solely for the purposes of price discovery could be a violation of the board’s Rule G-17 on fair dealing.

The MSRB wants to know about the prevalence of pennying, whether dealers would bid more aggressively if they were confident pennying was not widespread, and how often dealers post the same bid-wanted simultaneously on multiple trading platforms.

The draft amendments to Rule G-18 on best execution provided a clarification that dealers need not necessarily put a bid-wanted out on multiple ATSs to fulfill their obligations to use “reasonable diligence” in seeking the best deal for their customer.

The amended language states that use of ATSs and brokers’ brokers can create exposure to multiple dealers, each of which can constitute a separate market. However, the amendments state, if a dealer uses only one ATS or brokers’ broker then its policies and procedures should be clear about the facts and circumstances that make that one venue sufficient to comply with the firm’s obligations under the rule.

Securities Industry and Financial Markets Managing Director, Associate General Counsel, and Co-head of Municipals Leslie Norwood said SIFMA would be responding to the requests and appreciates the amendments on best execution.

“SIFMA and its members believe it is important for all market participants to be able to rely on fair and efficient markets,” Norwood said. “With that in mind, SIFMA is reviewing the request for comment in anticipation of submitting a comment letter. Further, SIFMA believes that an unintended consequence of the best execution rule was an increase in firms believing it was necessary to put the same bond offering out to multiple ATSs and broker’s brokers to comply with that rule. We appreciate the clarification that a single ATS or broker’s broker captures offers/bids from multiple dealers, each of which can constitute a separate market.”

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 09/07/18 07:07 PM EDT

WASHINGTON – Activities like the flipping and kickback scheme regulators brought to light in California last month could undermine the integrity of municipal offerings, though one market participant suggests such conduct may be an unintended consequence of efforts to police priority order periods.

The Securities and Exchange Commission took administrative actions earlier this week to bar or suspend several more employees of RMR Asset Management, a California-based firm that allegedly participated in a years-long scheme that the SEC is continuing to investigate.

It is unclear how pervasive such conduct is in the muni market, but the Municipal Securities Rulemaking Board is concerned enough with what it calls “pre-arranged” trading that it plans to issue a request for comment regarding the practice.

The actions announced late Tuesday included orders against RMR and seven individuals charged with posing as retail investors in order to gain priority access to new-issue munis that were then “flipped” for profit to their own customers as well as the customers of other broker-dealers. In addition to sanctioning the firm, the SEC barred or suspended RMR owner Ralph Riccardi as well as “independent contractors” David Luttbeg, Philip Weiner, David Frost, Timothy McAloon, Douglas Derryberry, and Dewey Tran.

Taken together with previous actions, nearly the entirety of RMR has now settled with the Commission following separate judgments levied against them in federal court, while neither admitting nor denying the SEC’s findings. Others continue to face litigation.

According to the SEC’s complaint, the men operated as unregistered brokers from 2009-2016 when they used fake business names linked to local zip codes in order to fool issuers of muni bonds into thinking they were local retail investors. This alleged ruse gave them priority to purchase bonds, which they then sold to customers who had indicated interest in them. This was usually “at a price of one dollar above the initial offering price, without negotiation and irrespective of market value,” the SEC said in its complaint.

The case also involved another firm allegedly operating as an unlicensed broker-dealer, Core Performance Management, and the former head of municipal underwriting, sales and trading at registered New Jersey-based broker-dealer NW Capital Markets Inc.

LeeAnn Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit said last month that the conduct alleged in the complaints “prevented true retail investors from receiving priority in municipal bond offerings.”

The SEC is not alone in its concerns, according to MSRB Chief Regulatory Officer Lanny Schwartz and MSRB General Counsel Michael Post. The two men noted that the MSRB amended its Rule G-11 on primary offering practices in 2013 to require dealers to report to underwriters whether orders they received in a retail order period met the issuer’s requirements for that order period.

MSRB rulemaking over the years has aimed to give the issuer considerable power to make determinations about retail order periods and other preferences, Schwartz and Post said, and conduct undermining those efforts troubles the board.

“Yes, we are concerned,” Schwartz said Wednesday.

The MSRB had been planning to ask the market to weigh in on whether it should issue new guidance under Rule G-17 on fair dealing that would address so-called “pre-arranged trading” that in some cases can look like the conduct alleged in the SEC’s complaints against RMR and Core Performance Management. But because the SEC has brought this enforcement action and is continuing to investigate, Schwartz said, the MSRB is now “waiting for the dust to settle” before returning to the idea in the future.

According to a document circulated by the MSRB, the board is concerned about situations in which a dealer contractually agrees to buy bonds from an investor at a markup in order to have a better chance of getting those bonds into its inventory. The dealer compensates the investor with that mark-up because it believes it will be able to sell those bonds at an even higher price in the secondary market. The MSRB said in that document it has concerns about customer orders being given less priority because orders appearing to be for an investor but which in reality are dealer stock orders get priority.

Such arrangements are often made through institutional investors, rather than retail investors, although some sources said retail investors can also figure into such arrangements.

The MSRB wanted to know, according to the document, whether such conduct was fair and whether or not the MSRB’s concerns were valid. A lawyer who asked not to be identified said there appears to be a roughly equal split on those questions.

Dee Wisor, an attorney at Butler Snow in Denver, said he was not aware of any pervasive problem with “flipping” or pre-arranged trading. But he said issuers would probably care if retail order periods were being flouted.

“That’s where they’d be concerned,” Wisor said. “If somehow bonds weren’t ending up with people in their local communities, if that’s what they want.”

Another lawyer said that pre-arranged trading and flipping are incentivized by the MSRB’s efforts to crack down on the historically more loosely-regulated area of retail and other priority order periods. While the lawyer agreed that colluding to subvert the issuer’s stated criteria for orders was wrong, he said he thought an investor could legitimately purchase bonds to sell to an interested dealer at a profit so long as such activity was not frequent enough to become his or her “business,” as they might then become an unregistered broker dealer because the law defines a dealer as one “engaged in the business” of buying and selling securities.

“How tightly one should define and enforce retail order periods is a question in itself,” the lawyer said. “Are we just going to be chasing our tails for years?”

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 09/06/18 07:05 PM EDT

On June 29, 2017 the Task Force released three key documents that serve as building blocks to describe and support implementation of the Task Force’s recommendations.

Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures
Provides context, background, and the general framework for climate-related financial disclosures and is intended for broad audiences.

Annex: Implementing the Recommendations of the TCFD
Provides the next level of detail to help companies implement the recommendations and is a “living” document that will likely be refined as companies gain more experience preparing climate-related financial disclosures. Includes information on applying the recommendations, guidance for all sectors, and supplemental guidance for select financial sectors and non-financial groups.

Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities
Provides a further level of detail that can be helpful for companies in considering scenario analysis. It describes key publicly available scenarios and resources on scenario analysis.

Task Force on Climate-Related Financial Disclosures

As California’s climate warms, residents increasingly endure extreme heat events that adversely impact public health. This exacerbates existing risks and will bring new challenges for different regions in the state, threatening the efficacy of traditional intervention strategies. Current thresholds for heat alerts are based on temperatures that exceed historical statistical thresholds, rather than temperatures that cause public health impacts. These ‘health-neutral’ thresholds may underestimate the health risks for the most sensitive populations. The new California Heat Assessment Tool (CHAT) is based on research that establishes local, health-based thresholds for extreme heat that help public officials, health professionals and residents understand what changing conditions mean for them. CHAT is part of California’s Fourth Climate Change Assessment, a state-mandated research program to assess climate change impacts in California, and was developed by Four Twenty Seven, Argos Analytics, the Public Health Institute and Habitat 7 with technical support from the California Department of Public Health.

FourTwentySeven

by Nik Steinberg
Director of Analytics

August 27, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published a request for information on the accessibility, methodology and utility of the yield curves and other benchmarks currently available in the municipal market.

Market indicators can provide sector-specific or broad market information about the general level of municipal interest rates. The MSRB is seeking information to help support its long-term vision to enhance the Electronic Municipal Market Access (EMMA®) website and provide increased access to information and tools that help municipal bond investors, issuers and others make more informed decisions. The MSRB is not seeking information as a precursor to any rulemaking proposal.

“This request for information is designed to help the MSRB better understand the current landscape of municipal market indicators,” said MSRB Executive Director Lynnette Kelly. “We hope to learn more about how these important benchmarking tools are developed and used by the diverse participants in our market, including issuers, retail investors, institutional investors and market professionals.”

Answers to questions posed in the request for information and any supporting data should be submitted to the MSRB no later than November 27, 2018. Read the request for information.

Since 2012, the MSRB has worked to enhance understanding of the methodologies, mechanics and functions of municipal market indices, yield curves and other benchmarks by providing educational resources for investors and state and local governments. It has also made benchmarks more widely available by incorporating several third-party yield curves and indices into the MSRB’s Electronic Municipal Market Access (EMMA®) website.

Date: August 27, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

The SEC’s amendments to the municipal securities disclosure rule 15c2-12, announced Aug. 20, will improve disclosure of risks associated with many bank loan structures.

Continue reading.

Aug. 28, 2018

On August 20, 2018, the Securities and Exchange Commission adopted amendments to Rule 15c2-12 of the Securities Exchange Act in order to enhance transparency in the municipal securities market. The adopted changes focus on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness or an existing security holder’s rights. The amendments add two new events to Rule 15c2-12 of the Securities Exchange Act, which requires brokers, dealers and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board timely notice of certain events.

Press Release.

Final Rule.

August 30, 2018

The U.S. Board of Governors of the Federal Reserve System, U.S. Office of the Comptroller of the Currency and U.S. Federal Deposit Insurance Corporation jointly issued an interim final rule and request for comment to treat “liquid and readily-marketable,” investment grade municipal obligations as level 2B high-quality liquid assets (HQLAs) for purposes of the liquidity coverage ratio rule. The interim final rule implements Section 403 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Section 18 of the Federal Deposit Insurance Act and requires the Federal Reserve Board, OCC and FDIC to treat qualifying municipal obligations as high-quality liquid assets (i.e., level 2B liquid assets) for purposes of the LCR rule and any other regulation that incorporates the definition of “high-quality liquid asset” or similar term. For purposes of the LCR rule, the term “municipal obligation” is defined to mean “an obligation of a state or any political subdivision thereof or any agency or instrumentality of a state or any political subdivision thereof. In order for a municipal obligation to qualify as a HQLA, it must be liquid and readily-marketable and investment grade at the time of calculation. With respect to the definition of liquid and readily-marketable, the interim final rule harmonizes the definition across the three agencies and adopts the Federal Reserve Board’s definition, which defines the term as a security that is traded in an active secondary market with: (i) more than two committed market makers; (ii) a large number of non-market maker participants on both the buying and selling sides of transactions; (iii) timely and observable market prices; and (iv) a high trading volume. Section 403 also provides that the term “investment grade” has the meaning given in 12 C.F.R. Part 1, which requires that the issuer of a security has adequate capacity to meet financial commitments (meaning that the risk of default is low and full and timely repayment is likely) under the security for the projected life of the asset or exposure. In addition, consistent with the EGRRCPA, the Federal Reserve Board is rescinding its 2016 amendments to the LCR rule, which treated a narrower range of municipal obligations as HQLAs. With respect to FDIC- and OCC-regulated financial institutions, municipal obligations were not previously permitted to be treated as HQLAs. The interim final rule will take effect upon its publication in the Federal Register, with comments due within 30 days of publication.

View full text of the interim final rule.

Shearman & Sterling LLP

August 30, 2018

Michigan municipalities’ statewide have turned the corner since the 2008 recession. According to the Center for Michigan, since 2009 the state has the nation’s seventh fastest growing economy. Investment is flowing back into the state including Metro Detroit where the economy accounts for over half of the state’s GDP.

Recently State Treasurer Nick Khouri announced that for the first time in nearly two decades, no Michigan municipality or school district was under state financial oversight. This feat is an incredible accomplishment by issuers in the state and demonstrates most issuers across Michigan are quite capable of managing their finances prudently.

As cities continue to build upon their fiscally stable condition, a Michigan Senate bill was introduced that could hamper the continued growth and force residents – all taxpayers – to pay more for daily services and infrastructure, while limiting the ability of municipalities to finance vital capital infrastructure including roads, bridges, schools and more.

Senate Bill No. 1054, the Revised Municipal Finance Act, would be detrimental to this recovery. This bill will create unintended consequences by increasing debt costs for municipalities, school and water districts, extending timely access to the capital markets, and isolating municipalities from much of the municipal securities market.

If passed, the bill would prohibit issuers from negotiated underwritings of municipal bonds, limiting their choice and forcing issuers of public debt to sell their debt in competitive underwritings in nearly all cases, removing a critical issuance option and isolating municipal issuers in Michigan.

What is the difference between competitive and negotiated underwritings you may ask? The Bond Dealers of America is the trade association in Washington, DC representing the U.S. bond markets and while the BDA is not advocating in favor of one or the other, it is essential to understand the difference and the important role each can play for municipalities.

In a competitive sale of municipal bonds, an issuer publishes a notice of sale and seeks bids on its bonds from underwriters across the marketplace. Issue size and structure is predetermined, and the bond issue is awarded to the bidder offering the lowest interest cost. In a negotiated sale, an issuer selects an underwriter or group of underwriters to purchase its bond issue. The selected underwriter works closely with the issuer to structure and market the bonds, and the terms of the issue are tailored to the needs of the issuer and the demands of investors.

Many observers of the municipal marketplace have debated whether competitive or negotiated underwritings are more cost-effective for municipal issuers, and the BDA is not taking a position in that debate. However, what is beyond debate is that categorically eliminating the ability of Michigan municipalities to access the marketplace through negotiated underwriting will limit their ability to respond to market conditions, create unnecessary hurdles to market access, and diminish the cost-effectiveness of their bond issuances. The end result will be increased costs to the taxpayer, especially for those constituents of issuers whose bond offerings are more complex, whose credit quality is less than ideal, or who sell public debt in distressed or volatile market environments.

Municipal bond financing is working well for local governments in Michigan, so why limit the tools available to issuers by prohibiting one of the ways in which bond issuances are transacted?

We call on the Senate to reject Senate Bill No. 1054 and allow municipalities to be able to continue to issue debt in the manner that works best for them, and not to force a one-size-fits-all methodology that will cost taxpayers more of their hard-earned money.

Bond Dealers of America

August 31, 2018

By Michael Nicholas

Washington, DC — The Municipal Securities Rulemaking Board (MSRB) today said it supports a decision by the Securities and Exchange Commission (SEC) that will result in issuers of municipal securities and obligated persons publicly disclosing additional information about bank loans and other material financial obligations, certain material terms in connection with financial obligations, and specified events that reflect financial difficulties.

“The MSRB believes this SEC action is a major step to ensure investors have a better understanding of the financial status of municipal securities issuers and conditions that could affect the repayment of bonds,” said MSRB President and CEO Lynnette Kelly.

The SEC decision to amend its Rule 15c2-12, designed to ensure the public availability of certain disclosures about municipal securities, means that additional information about bond issuers will be available on the MSRB’s Electronic Municipal Market Access (EMMA®) website. EMMA provides public access to municipal bond trade price, disclosure and other information.

Under Rule 15c2-12, municipal securities underwriters generally must secure an agreement from issuers and obligated persons to make publicly available certain ongoing information about the security. Examples include annual financial statements and the occurrence of certain material events. The new disclosures required by the SEC’s action must be included in continuing disclosure agreements in connection with offerings that occur after the compliance date specified in the SEC’s order (180 days following publication of the order in the Federal Register).

The MSRB is in the process of updating the EMMA website to accept and display the new disclosures. EMMA currently accepts and displays bank loan and alternative financing disclosures on a voluntary basis.

Date: August 21, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

In about six months, municipal bond issuers and obligated persons will see additions to their continuing disclosure undertakings related to SEC Rule 15c2-12, and broker-dealers will need to have systems in place to ensure compliance with those new undertakings.

On Aug. 20, the Securities and Exchange Commission released adopted amendments to Rule 15c2-12, adding two events to the list of events needed to be included in continuing disclosure undertakings related to Rule 15c2-12. The amendments also add to Rule 15c2-12 a corresponding definition and make a technical amendment.

Pursuant to these amendments, future continuing disclosure undertakings must include the following notice events:

(a) Incurrence of a material financial obligation of the issuer or obligated person, or agreement to covenants, events of default, remedies, priority rights or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and

(b) Default, event of acceleration, termination event, modification of terms or other similar events under the terms of a financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The amendments define “financial obligation” as a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The definition does not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board (MSRB), consistent with Rule 15c2-12.

In addition to issuers and obligated persons updating the form of a continuing disclosure agreement (and their disclosure policies), and broker-dealers updating their 15c2-12 compliance procedures, below are seven notable takeaways from the adopting release (Exchange Act Release No. 34-83885):

1. Existing continuing disclosure undertakings are unaffected.  The amendments apply only to “primary offerings” that close on or after the compliance date, which is 180 days after publication of the amendments in the Federal Register. A “primary offering” is an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities, including any remarketing of municipal securities (i) that is accompanied by a change in the authorized denomination of such securities from $100,000 or more to less than $100,000; or (ii) that is accompanied by a change in the period during which such securities may be tendered to an issuer of such securities or its designated agent for redemption or purchase from a period of nine months or less to a period of more than nine months.In other words, after the amendments become effective, existing continuing disclosure undertakings will be unaffected by the amendments. However, existing undertakings related to securities that are remarketed as part of a primary offering under 15c2-12 (where the remarketing closes after the compliance date), will need to be revised to comply with the amendments.
2. The definition of “financial obligation” includes only debt, debt-like and debt-related obligations, but it does not include ordinary liabilities.  In the adopting release, the SEC notes that ordinary financial and operating liabilities are not included in the definition of financial obligation. When earlier proposed, the amendments included a broader definition of financial obligation. However, based on public comments received, the SEC elected to narrow the definition of financial obligation to transactions that are debt, debt-like or debt-related because those transactions are more likely to affect liquidity, overall creditworthiness or an existing security holder’s rights. (See Section III(A)(2)(i) of the adopting release.)
3. Event notices must be filed upon the occurrence of any of the events that reflect financial difficulties, regardless of whether the related financial obligation was incurred before the effective date of the amendments.  Unlike the impact of the amendments on existing continuing disclosure undertakings described in (1) above, if a default or other event reflecting financial difficulties under any financial obligation occurs (regardless of when that financial obligation was incurred), an event notice would be required under an undertaking that includes the notice events added by the amendments. (See Section III(A)(3)(v) of the adopting release.)
4. Broker-dealers will not need to perform diligence on an issuer’s or obligated person’s past compliance with the events added by the amendments unless the issuer or obligated person has a continuing disclosure undertaking that includes the added events.  The SEC recognized that for continuing disclosure agreements entered into before the compliance date, the recommending dealer would receive notice solely of those events covered by such continuing disclosure undertaking, which would likely not include any of the events added by the amendments. Consequently, the adopting release states that for municipal securities issued prior to the compliance date, broker-dealers will not need to have procedures in place that provide reasonable assurance that they will receive prompt notice of the events added by the amendments. However, a dealer cannot recommend the purchase or sale of a municipal security unless the dealer has procedures in place that provide reasonable assurance that it will receive prompt notice of any event disclosed pursuant to paragraphs (b)(5)(i)(C) and (D) and paragraph (d)(2)(ii)(B) of Rule 15c2-12 with respect to the security.
5. Leases are not included in the definition of financial obligation, except when they are debt or debt-like.  The proposed definition of financial obligation included leases, but the SEC deleted lease from the definition in the adopted version because it considered the term too broad. However, any lease that operates as a vehicle to borrow money, such as an equipment financing lease, is included in the definition. (See Section III(A)(2)(i) of the adopting release.)
6. A notice of the incurrence of a material financial obligation generally should include a description of the material terms of the financial obligation.  However, the SEC provided little guidance on its interpretation of materiality, leaving the determination to the reporting entity. The SEC provided the following examples of material terms: date of incurrence, principal amount, maturity and amortization, interest rate (if fixed) or method of computation (if variable) plus any default rates, and other terms, depending on the circumstances. The SEC acknowledges that this requirement may, depending on the facts, be achieved by submitting a summary of the terms, the term sheet or the applicable transaction documents, like a continuing covenant agreement.
7. Derivative instruments of the type described in the definition of financial obligation must always be disclosed on EMMA, even if the underlying debt would be exempt from disclosure under the amendments because the underlying debt is the subject of a final official statement that was provided to the MSRB.  Such exemption from disclosure extends only to securities for which a final official statement is required to be provided to the MSRB under Rule 15c2-12. It does not extend to the derivative instrument related to those securities. In addition, the exemption does not extend to securities for which the final official statement was provided to the MSRB voluntarily. Only securities in a primary offering that is subject to Rule 15c2-12 are exempt under the amendments.

McGuireWoods LLP

August 24 2018

On August 20, 2018, the US Securities and Exchange Commission (SEC) adopted amendments to Rule 15c2-12 under the Securities Exchange Act of 1934. These amendments require additional disclosure related to the material financial obligations of municipal issuers and conduit borrowers.

Through Rule 15c2-12, the SEC indirectly imposes disclosure obligations on municipal issuers and obligated persons by requiring that underwriters in primary offerings of municipal securities reasonably determine that the issuer or obligated person has agreed to provide certain annual financial and operating information, audited financial statements and timely notice of certain events to the Municipal Securities Rulemaking Board (MSRB). Previously, notice event obligations were largely tied to events affecting the securities issued in that particular offering—for example, payment defaults, changes to credit or liquidity providers, or adverse tax opinions to the extent that any of the foregoing affected those securities. These amendments represent a shift toward more timely and comprehensive disclosure about the issuer or obligated person’s financial health.

The SEC has become more active in regulating the municipal securities markets in recent years. An increase in direct placements of debt obligations with banks or investors in lieu of public offerings has led regulators to focus more on general disclosure of financial obligations. The MSRB and other industry organizations had encouraged voluntary disclosure with respect to financial obligations. However, after these efforts elicited only limited participation, the SEC determined that amending Rule 15c2-12 was appropriate to “improve [investors’] ability to analyze their investments and, ultimately, make more informed investment decisions.” Consequently, the amendments add the following two notice events:

• “Incurrence of a financial obligation of the obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the obligated person, any of which affect security holders, if material; and
• “Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligation of the obligated person, any of which reflect financial difficulties.”

These notice events are consistent with the SEC’s March 2017 proposed rule. In response to several commenters’ concerns about the broad definition of “financial obligation” in the proposed rule, the SEC narrowed the definition of “financial obligation” in the final rule to mean a “(i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, and existing or planned debt obligation; or (iii) a guarantee of (i) or (ii).”

While there are substantive differences, these additional notice events will remind conduit borrowers that are also SEC registrants of the Form 8-K events relating to material definitive agreements, material financial obligations and triggering events that accelerate or increase a financial obligation.

The compliance date for these amendments will occur 180 days after the amendments are published in the Federal Register. Beginning on that date, municipal issuers and obligated persons entering into continuing disclosure agreements required by Rule 15c2-12 will need to include the new notice events. Continuing disclosure agreements entered into prior to the compliance date will not be affected.

For the SEC’s press release regarding the amendments, see https://www.sec.gov/news/press-release/2018-158.

Eversheds Sutherland (US) LLP

by Herbert J. Short, Jr., Darryl F. Smith and Will Pickens

August 23 2018

On August 20, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced it adopted amendments to Rule 15c2-12 of the Securities Exchange Act (“Rule 15c2-12”). Rule 15c2-12 requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities to reasonably determine that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (“MSRB”) timely notice of certain events.

The adopted amendments add two new events to the list included in the rule:

(15) Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
(16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The amendments define the term “financial obligation” to mean a: (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) guarantee of (i) or (ii). The term financial obligation does not include municipal securities as to which a final official statement has been provided to the MSRB consistent with Rule 15c2-12.

While the amendments address some of the concerns raised by market participants, the amendments do not address all of the concerns. For example, numerous commenters asked the SEC to provide guidance on how to determine the materiality of a financial obligation. The SEC responds by stating that an issuer may consider a number of factors when assessing the materiality of a particular financial obligation, however, at this time, the SEC does not believe it is necessary to provide additional guidance.

The compliance date for the amendments is 180 days after the amendments are published in the Federal Register (the “Compliance Date”). The amendments will only affect those continuing disclosure agreements entered into on or after the Compliance Date. However, an event under the terms of a financial obligation pursuant to (b)(5)(i)(C)(16) that occurs on or after the Compliance Date must be disclosed regardless of whether such obligation was incurred before or after the Compliance Date.

A copy of the SEC’s adopting release may be found here.

It is important that market participants understand the impact of the amendments on their current obligations, including under the federal securities laws and MSRB rules.

Bracewell LLP

by Paul S. Maco, Edward Fierro and Britt Cass Steckman

August 20 2018

WASHINGTON — The Securities and Exchange Commission has released a final set of more narrowly tailored amendments to its Rule 15c2-12, which will create new disclosure obligations for issuers who incur debt outside of the municipal bond market.

The SEC said that the final rules, which were approved in writing by commissioners on Aug. 15 without a meeting, “will focus on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights.”

The compliance date for the rules will be 180 days after they are published in the Federal Register.

Reaction to the final rules was mixed, with some groups saying the revisions are helpful and others suggesting more changes should have been made.

The SEC’s initial proposal last year to add two new event notices to the list of events issuers must agree to disclose through the Municipal Securities Rulemaking Board’s EMMA system met with backlash for what many issuers thought was an overly broad definition of a “financial obligation.”

“Our municipal securities market is a $3.844 trillion dollar market, with new issuances of approximately $448.1 billion in 2017,” SEC chairman Jay Clayton said in a statement on the final rules. “Our Main Street investors are exposed to this market through many channels, including through mutual funds, money market funds, closed-end funds, and exchange-traded funds. Disclosures required by these rule amendments will better equip investors and intermediaries to make informed investment decisions about municipal securities.”

The final rules will require disclosure of the incurrence of a financial obligation of the issuer or obligated person, if material, as well as any agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, if these are material.

Under the new rules, “financial obligation” means a debt obligation or derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation or a guarantee of a debt obligation or derivative.

Gone from the rules is the broader language that included leases and “a monetary obligation resulting from a judicial, administrative or arbitration proceeding.”

That change is in line with what many bond lawyers had expected, as the SEC received close to 100 comments on the proposal and a large many of those arguing for a more narrow definition of “financial obligation.”

The rules also will require an event notice to be filed for certain actions or events related to the financial obligation that “reflect financial difficulties” such as a default, event of acceleration, termination event, or modification of terms.

Underwriters will have to reasonably determine that an issuer or borrower has agreed to provide notice of such events in order to be able to underwrite the bonds.

The SEC approved the final rules in an effort to better reflect the reality that many issuers have been incurring debt outside of the traditional bond market, particularly through private transactions with banks.

The SEC cited the Federal Deposit Insurance Corp.’s Consolidated Reports of Condition and Income filed by financial institutions, which show that the dollar amount of commercial bank loans to state and local governments has tripled since the financial crisis, increasing to $190.5 billion by the end of the first quarter 2018 from $66.5 billion as of the end of 2010.

Reaction to the SEC’s move varied.

Securities Industry and Financial Markets Association Managing Director and Associate General Counsel Leslie Norwood said the group is disappointed that the SEC did not incorporate into the revised rule any of SIFMA’s suggestions from its 2016 white paper on Rule 15c2-12. In that paper, SIFMA suggested various changes, including asking that rating changes no longer be event notices since the MSRB’s EMMA website now provides live ratings information.

“SIFMA’s broker-dealer members are disappointed that the SEC did not take this opportunity to adopt any of the suggestions in SIFMA’s Rule 15c2-12 white paper to streamline, update, and minimize unnecessary burdens of Rule 15c2-12,” Norwood said. “We hope that the SEC will address these issues in the future.”

Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America said BDA will be working to digest the changes.

“The lack of transparency of bank loans within the municipal securities market has created concerns among investors for many years,” Bolton said.

Emily Brock, director of the Government Finance Officers Association’s federal liaison center, said GFOA will be focused on how to help issuers make materiality determinations for these new event notices.

“While we are pleased to see a narrowing of the definition of financial obligations to be only related to debt obligations and derivative instruments, and not ordinary financial and operating liabilities nor judicial, administrative or arbitration proceedings, our focus will need to be on helping communities understand how to address these issues and discuss with counsel and their financing team how to determine and make such material event filings,” she said.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 08/20/18 07:16 PM EDT

On August 15, the Securities and Exchange Commission (SEC) adopted amendments to the Securities Exchange Act Rule 15c2-12 (the “Rule”) intended to better inform investors and others about the current financial condition of issuers of municipal securities and obligated persons. In its press release announcing the amendments to the Rule, the SEC noted as background that “[d]irect placements by issuers and obligated persons as financing alternatives to public offerings of municipal securities have increased since 2009, demonstrating the need for more timely disclosure.”

The Amendments

The Rule governs continuing disclosure by prohibiting an underwriter in a primary offering from underwriting most municipal securities unless the underwriter has reasonably determined that the issuer of such securities, or an obligated person, has agreed in writing (e.g., pursuant to a Continuing Disclosure Agreement) to make the required post-issuance disclosures. The amendments add additional events to the list of event notices that an issuer or obligated person needs to provide to the Municipal Securities Rulemaking Board via its electronic platform “EMMA” within 10 business days of the event’s occurrence. The two new events are:

• incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
• default, event of acceleration, termination event, modification of terms or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The term “financial obligation” is defined as a (i) debt obligation, (ii) derivative instrument entered into in connection with or pledged as security or a source of payment for an existing or planned debt obligation, or (iii) guarantee of (i) or (ii). The term financial obligation does not include municipal securities for which a final official statement has been filed with EMMA pursuant to the Rule.

The Effective Date

The compliance date is 180 days after the final rule is published in the Federal Register.

The attorneys in Day Pitney’s Municipal Finance Group routinely counsel clients on addressing compliance with their disclosure obligations. Please feel free to contact any of the attorneys listed to the right of this alert if you would like to discuss this alert or your disclosure obligations.

Day Pitney Alert

August 21, 2018

by Namita Tripathi Shah Judith A. Blank Douglas W. Gillette

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today sought comment from regulated entities and other stakeholders about draft answers to frequently asked questions (FAQs) addressing the use of social media in advertising by municipal advisors and municipal securities dealers and their associated persons.

“As social media becomes a more common communication tool, developing effective compliance policies and procedures for digital interactions is increasingly important for municipal market participants,” said MSRB President and CEO Lynnette Kelly. “The MSRB recognizes that municipal advisors, in particular, need guidance as they prepare to comply with newly established advertising regulations.”

New MSRB Rule G-40, on advertising by municipal advisors – together with amendments to MSRB Rule G-21, on advertising by municipal securities dealers – becomes effective on February 7, 2019. The MSRB has committed to providing guidance in advance of the effective date to assist regulated entities as they develop their compliance policies and procedures. In addition to today’s draft guidance on social media, the MSRB has sought feedback on draft FAQs on the use of municipal advisory client lists and case studies under Rule G-40. Next month, the MSRB plans to seek input on draft guidance related to Rule G-40’s content standards.

The MSRB developed today’s draft FAQs to enhance market participants’ understanding of permissible and impermissible uses of social media in the context of MSRB advertising regulations and certain other MSRB rules. The draft guidance was crafted with the purpose of maintaining consistency with the guidance of other regulators under comparable advertising regulations.

Read the request for comment. Comments should be submitted no later than September 14, 2018.

Date: August 14, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

The MSRB is seeking public comment on a draft set of frequently asked questions (FAQs) related to the use of social media in advertising by municipal advisors and municipal securities dealers applicable under Rule G-21 and Rule G-40.

The draft FAQs can be viewed here.

In May, the SEC approved the MSRB’s proposed Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities, despite opposition from almost all broker-dealer groups. Both new Rule G-40 and amendments to G-21 are set to be effective on February 7, 2019.

In July, the BDA submitted a comment letter to the MSRB concerning a draft set of frequently asked questions (FAQs) related to the use of municipal advisory client lists and case studies under Rule G-40. The final comment letter can be viewed here.

Bond Dealers of America

August 14, 2018

WASHINGTON – Municipal bond market players in Michigan are at odds over a bill pending in the state Senate would require localities to sell municipal bond issues over $500,000 on a competitive or public basis to the underwriter offering the lowest interest cost. The municipalities also would have to publish a notice of sale at least seven days before the sale under amendments to the Revised Municipal Finance Act (Senate Bill No. 1054), which was drafted by John Axe, senior counsel at Clark Hill in Detroit. The measure was introduced on June 7 by Senate Finance Committee Chair Jack Brandenburg, a Republican from the eighth district in Harrison Township.

Axe, who said his clients include the Detroit Legal News, said the bill is an attempt to go back almost 20 years ago when the Municipal Finance Act required local governments to sell bonds competitively with public notices of the sales. In 2001, he said, the Michigan Legislature revised the Municipal Finance Act to allow municipalities to sell bonds on a negotiated or a competitive basis. At the time, state lawmakers promised to revise the new law if it didn’t work, Axe said. During the last four years, fewer than 10% to 15% of bond issues have been sold on a competitive basis, which saves issuers money, Axe said, adding, “We even require competitive bidding for a garbage truck.” “It’s changed dramatically,” said Axe. “But there’s no way of tracking it because there’s no public sale notice requirement.” But Patrick McGow, a principal at Miller Canfield and head of its public finance group, said the earlier bill, which dated back to the 1940s, only required certain bond issues to be sold competitively and contained many exceptions. The Revised Municipal Finance Law was passed in 2001 to allow local governments to decide how to sell their bonds, he said. The pending bill would amend that law. “From my perspective, we oppose [the bill] because the legislation would restrict the ability of local governments and school districts to select the best method to sell bonds at the lowest rate and cost to the taxpayer,” he said. “There are many issuers, credits, financial structures, and programs where a competitive sale is not the best choice.” McGow also noted the bill would treat state and local issuers differently.

Mike Nicholas, chief executive officer of the Bond Dealers of America, warned the bill “would create unintended consequences by increasing debt cost for municipalities and schools, reducing timely access to the capital markets, and isolating municipalities from much of the municipal securities market and advisors in that market.” Nicholas stressed that BDA is not taking a position in the long-standing debate over whether competitive or negotiated underwritings are more cost-effective for municipal issuers. “However, what is beyond debate is that categorically eliminating the ability of Michigan municipalities to access the marketplace through negotiated underwritings will limit their ability to respond to market conditions, create unnecessary hurdles to market access, and diminish the cost-effectiveness of their bond issuances,” Nicholas said. “The end result will be increased costs to the taxpayer, especially for those constituents of issuers whose bond offerings are more complex, whose credit quality is less than ideal, or who sell public debt in distressed or volatile market environments.”

“We call on the Senate to reject Senate Bill No. 1054 and allow municipalities to be able to continue to issue debt in the manner that works best for them, and not to force a one-size-fits-all methodology that will cost taxpayers more of their hard-earned money,” he said. Some legislative observers in Michigan said the bill doesn’t have much of a chance of passage because the Legislature is currently out on summer recess and there are not many legislative days left in the session.

“At this point I don’t think it has much legs,” said one source who did not want to be identified. But Axe said, “I think we’ve got a good chance of getting it passed.” Brandenburg is term-limited and must leave the Michigan Senate at the end of the session. State senators are limited to two four-year terms, sources said. Brandenburg would like this bill to be part of his legacy, they said.

Bond Dealers of America

August 15, 2018

By Lynn Hume

Today, August 13, 2018, the BDA submitted a comment letter to the Commodities Futures Trading Commission (CFTC) in response to its request for comment on proposed amendments to the de minimis exception within the swap dealer definition. You can review a copy of the BDA’s draft letter here.

BDA Comment Letter Summary–Primary Areas of Focus:

• The aggregate gross notional amount threshold for the de minimis exception should be set at $8 billion in swap dealing activity or an amount in excess of $8 billion
• An exception should exist for swaps entered into by insured depository institutions in connection with originating loans
• An exclusion should exist for swaps entered into to hedge financial risk
• Wholesale changes to the calculations of notional amounts should be subject to market comment and review
• The CFTC should clarify Risk Participation Agreements as “swaps” or to be excluded as “dealing activity”

Additional Documents:

You can read more of the proposed changes from the CFTC here.

Bond Dealers of America

August 13, 2018

Summary

SIFMA and ISDA provided comments to the CFTC on the Notice of Proposed Rulemaking regarding the De Minimis Exception to the Swap Dealer Definition published by the U.S. Commodity Futures Trading Commission. The Associations support the Proposal to set the aggregate gross notional amount threshold (“AGNA”) at $8 billion in swap dealing activity. Maintaining the de minmis threshold is the right outcome to ensure that banks and dealers can continue meeting their clients’ risk management needs. As we have stated in the past, decreasing the size of the de minimis threshold would lead to a reduction in the number of swap market participants willing to engage in swap dealing activity with commercial end-users for fear of going above a lower threshold and triggering the SD registration requirement.

See also:

De Minimis Exception to the Swap Dealer Definition

A Boca Raton company improperly diverted municipal bonds at the expense of retail investors, the Securities and Exchange Commission said Tuesday.

The SEC alleges that from 2009 to 2016, two agents of Core Performance Management LLC of Boca Raton lied about their identities to cut in line in bond allocations.

The SEC says Core Performance Management’s representatives bought new-issue muni bonds by posing as retail investors to gain priority in bond allocations. The defendants then flipped the bonds to broker-dealers for a fee. The SEC also alleged a municipal underwriter took kickbacks from one of the flippers.

The SEC names as defendants James Scherr of Boca Raton, the owner of Core Performance Management, and Deborah Dora of Lighthouse Point and Sharlene Mesite of Port St. Lucie, who are accused of using phony identities.

Also named in the SEC’s suit is James O’Neil of Jupiter, who’s accused of acting as an unregistered broker.

“My clients cooperated cooperated fully with the SEC investigation, and they’re happy to put this behind them without protracted litigation,” said James Sallah, the defendants’ attorney.

As part of the scheme, the defendants lied about their Zip codes, because investors who live in the jurisdiction issuing the bonds often can move to the front of the line. The defendants also used phony business names to disguise their true intentions, the SEC said.

“By improperly placing retail orders on behalf of broker-dealers, we allege the flippers prevented true retail investors from receiving priority in municipal bond offerings,” said LeeAnn G. Gaunt, chief of the SEC Division of Enforcement’s Public Finance Abuse Unit.

Core Performance Management ceased operations in 2016, the SEC said.

Palm Beach Post

By Jeff Ostrowski

August 14, 2018

• Two investment firms, 18 people charged in bond trading case
• Related SEC case targets former employee of underwriting firm

The U.S. Securities and Exchange Commission said two investment firms and an underwriter settled charges of conspiring to make quick profits by trading newly issued municipal bonds, a practice known as flipping.

The agency Tuesday said that Core Performance Management LLC, based in Boca Raton, Florida, and Chula Vista, California-based RMR Asset Management Co. used fictitious business names and posed as individual investors to get newly offered securities that were then immediately resold at higher prices. The SEC said the former head of municipal underwriting for NW Capital Markets purchased securities from Core Performance at above-market prices in exchange for a cut of the profits.

“More than a dozen of the individuals charged today are alleged to have engaged in plainly deceptive conduct,” said Stephanie Avakian, co-director of the enforcement division. “We are committed to investigating and charging individuals, especially where, as here, the alleged misconduct by many of these industry professionals harmed retail investors.”

The case provides a window into how professional investors may seek to game the $3.8 trillion state and local-government bond market to make short term profits, not unlike those that can be reaped by getting in on initial stock offerings. It is part of a broader push by the SEC to crack down on fraud in the state and local government debt market and marks a departure from recent cases that largely focused on misleading disclosures by borrowers.

The SEC said the investigation is ongoing, indicating that it may bring more cases.

“We are continuing our investigation to determine whether other market professionals had a role in these improper practices,” said LeeAnn Gaunt, the head of the agency’s Public Finance Abuse Unit.

While prices of municipal bonds are far less volatile than newly issued stocks, the debt offerings can be heavily sought after because many governments seek to ensure that some of them are sold to individuals, rather than just investment firms. Those small buyers are often given special priority.

The SEC said that Core Performance and RMR posed as so-called retail investors to purchase the newly issued bonds that were then resold to other firms at a profit.

They did that by using fictitious business names, falsely linking their orders to zip codes in the area where the bonds were being issued and dividing up its orders among dozens of accounts. Once the bonds were purchased, they were typically resold to dealers at a pre-arranged price, according to the SEC. The agency said 18 individuals were involved.

Core Performance and managing director James Scherr, RMR and its president, Ralph Riccardi, and 13 of their associates settled the SEC’s charges without admitting or denying the allegations, the SEC said in a statement. NW Capital and its former underwriting head, Charles Kerry Morris, also settled without admitting or denying the charges.

A phone number listed for Core Performance in Boca Raton was disconnected. Loren Washburn, a lawyer for RMR, said the firm fully cooperated with the SEC and is glad to have resolved the matter. A message left with NW Capital’s James Fagan, who supervised Morris and agreed to the settlement, wasn’t immediately returned.

Bloomberg Markets

By William Selway

August 14, 2018

• Step aimed at addressing concerns bondholders left in dark
• Loans to states, localities have nearly tripled since 2010

The U.S. Securities and Exchange Commission moved to require states and local governments to disclose bank loans and privately placed debt, seeking to address concerns that bondholders are being left in the dark about a fast-growing segment of public finance.

The SEC adopted amendments to a rule, known as 15c2-12, that obligates securities dealers to ensure that municipalities report updated financial information and material events to bondholders. The amendments will force the disclosure of loans incurred by municipalities, loan defaults and changes to financial covenants that affect bondholders within 10 business days.

“Disclosures required by these rule amendments will better equip investors and intermediaries to make informed investment decisions about municipal securities,” SEC Chairman Jay Clayton said Monday in a statement.

Direct lending by banks has proliferated since the financial crisis as states, local governments and non-profits found they could borrow at rates comparable to those on bonds, without the fees or disclosure requirements associated with public-debt offerings. Commercial bank loans to municipalities nearly tripled to $190.5 billion by the first quarter of 2018 from $66.5 billion at the end of 2010, according to the Federal Deposit Insurance Corp.

While investors may eventually learn about a locality’s loans through annual financial reports, the obligations often aren’t reported to regulators or made public immediately. The lag has meant that investors have had to wait months before finding out about new debt. The loan terms can favor banks over other investors and add to a borrower’s financial risk.

The compliance date for the amendments to rule 15c2-12 is 180 days after they are published in the Federal Register.

Bloomberg News

By Martin Z Braun

August 20, 2018, 10:49 AM PDT

— With assistance by Benjamin Bain

WASHINGTON — The Governmental Accounting Standards Board is proposing to standardize the way issuers of municipal bonds report conduit debt that is repaid by a third-party borrower.

The proposal, released last week by GASB, which is seeking comments, seeks to create uniformity in the way conduit issuers report information. There has been confusion over what constitutes a conduit debt obligation and GASB hopes to improve the quality of disclosure by clarifying that definition and making clear that such obligations are the responsibility of the conduit borrower rather than the issuer.

Bonds sold by issuers for borrowers in conduit transactions often support such revenue-producing infrastructure such as higher educational facilities and hospitals. The bonds are issued to allow such projects to access capital more affordably than would otherwise be possible.

The draft would define a conduit debt instrument as one that includes an issuer, an obligor, and a trustee, where the obligor receives the proceeds of the bonds and is responsible for their repayment, among other things.

The issuer would not recognize such an issuance as a liability, but would recognize related liabilities and expenses if it appears “more likely than not” that the issuer will support debt service payments.

The draft provides a list of factors that could be involved in such an analysis, including litigation that would negatively affect the project being financed or the conduit borrower entering into bankruptcy.

GASB first dealt with conduit obligations in Interpretation 2 in 1995. Under Interpretation 2, issuers were permitted to report conduit issuances as their own liabilities if they chose to do so. The new draft would improve disclosure by ending “significant diversity in practice.” The proposal would not only provide better information, according to GASB, but also would allow for better apples-to-apples comparisons of different government financial statements.

“The clarified definition would resolve stakeholders’ uncertainty as to whether a given financing is, in fact, a conduit debt obligation,” GASB said in the draft.

The National Association of Health and Educational Facilities Finance Authorities, which represents conduit issuers, suggested it would submit comments to GASB.

“NAHEFFA will take a careful look at this draft and respond to GASB as required,” the group’s counsel and Mintz Levin member Charles Samuels told The Bond Buyer. “We will consider whether any real problem is being solved and new regulatory burdens are being imposed without justification.”

Samuels said that while his group would be reviewing the proposal, it is not clear to him that it would apply to NAHEFFA members.

GASB standards are not binding on state and local governments but they must be adhered to in order for governments to receive clean opinions on audits of financial statements. The board periodically publishes updates to its reporting standards, and did so earlier this year with respect to reporting of bank loans and private placements of municipal debt.

Comments on the proposed statement governing reporting of conduit obligations are due by Nov. 2. If approved, it would take effect for reporting periods.

The Bond Buyer

By Kyle Glazier

August 07 2018

SUMMARY

SIFMA provided comments to the MSRB on existing interpretive guidance that addresses the application of the MSRB’s fair-dealing rule to underwriters of municipal securities. The guidance, adopted in 2012, established obligations for underwriters, including requirements to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information. Some market participants have indicated that underwriters’ disclosures are duplicative, often boilerplate and burdensome for issuers to review.

View the comments.

See also: MSRB Notice

Norwalk, CT, August 6, 2018 — The Governmental Accounting Standards Board (GASB) has proposed revised guidance that would provide a single method for government issuers to report conduit debt obligations and related obligations. This proposed guidance would eliminate diversity in practice associated with these issues.

Conduit debt obligations are debt instruments issued by a state or local government to provide financing for a specific third party that is primarily liable for repaying the debt instrument. Third parties sometimes seek this kind of financing for projects such as not-for-profit hospitals and universities and qualifying private businesses.

The GASB’s review of the existing standards—Interpretation No. 2, Disclosure of Conduit Debt Obligations—found variation in practice among governments that issue conduit debt obligations, which adversely affects the comparability of financial statement information. The variation arose from (1) the option in the standards that allowed government issuers to recognize conduit debt obligations as their own debt or just disclose the transactions and (2) diversity in how additional commitments associated with these transaction are reported by governments..

The GASB is proposing in the Exposure Draft, Conduit Debt Obligations, to address the variation in practice by:

• Clarifying what is a conduit debt obligation
• Eliminating the option for government issuers to recognize conduit debt obligations, thereby providing a single method of reporting
• Clarifying accounting and financial reporting guidance for (1) additional commitments extended by government issuers and (2) arrangements—often characterized in practice as leases—associated with conduit debt obligations
• Enhancing note disclosures.

The Exposure Draft is available on the GASB website, www.gasb.org. The GASB invites stakeholders to review the proposal and provide comments by November 2, 2018.

Today, August 6, 2018, the BDA submitted a comment letter in response to the MSRB’s request for public comment on existing interpretive guidance on the application of MSRB Rule G-17.

The letter can be viewed here.

The comment letter requests that the 2012 Guidance:

• Should be modified to allow for the timing of some of the Rule G-17 Disclosures to vary depending on the circumstances; and to
• Allow for the timing of some of the Rule G-17 Disclosures to vary depending on the circumstances; and to
• Clarify that only material, actual conflicts of interests should be disclosed; and to
• Clarify that co-managers usually have no requirement to deliver Rule G-17 Disclosures.

The MSRB issued a notice requesting comment on existing interpretive guidance on the application of MSRB Rule G-17 that addresses the application of the MSRB’s fair-dealing rule to underwriters of municipal securities. The guidance, adopted in 2012, established obligations for underwriters, including requirements to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information.

August 6, 2018

Read the Priorities.

Bond Dealers of America

August 9, 2018

Recently, the Municipal Securities Rulemaking Board (MSRB) noted in its quarterly compliance newsletter dated June 8, 2018 that it has “compliance concerns” regarding issuer-solicited charitable donations. The MSRB’s quarterly newsletter does not have the force of formal agency guidance, however, it does offer insight into how the MSRB may view issuer-solicited charitable donations.

Though charitable donations do not implicate the MSRB’s pay-to-play Rule G-37, the MSRB notes that the donations may have implications under other rules, as described below.

• Rule G-17: This rule requires dealers acting as underwriters in a negotiated underwriting to disclose actual or potential material conflicts of interest with respect to the issuance. The MSRB noted in its newsletter that it would be a violation of Rule G-17 for an underwriter to compensate any undisclosed third party in order to secure municipal securities business. Thus, if an underwriter makes a charitable donation for these purposes, the underwriter must disclose the donation to the issuer as a conflict of interest.
• Rule G-42: This rule generally prohibits municipal advisors from making payments for the purpose of obtaining or retaining an engagement. The MSRB noted that if a municipal advisor makes a charitable donation for these purposes, it would violate Rule G-42.
• Rule G-20: This rule prohibits, with some exceptions, any regulated entity or its associated persons from directly or indirectly giving any thing or service with value in excess of $100 to a person if such payments or services are in relation to the municipal securities or municipal advisory activities of the recipient’s employer. The MSRB noted that, where a regulated entity makes a directed donation to a charity that is closely aligned with the third party requesting the donation, it may be deemed an indirect gift or gratuity under Rule G-20. Therefore, if that person is an official of an issuer and the donation is in excess of $100, the regulated entity may be in violation of Rule G-20.

Please note that the Financial Industry Regulatory Authority (FINRA, then known as the National Association of Securities Dealers), issued a similar cautionary notice to its members in 2006. However, FINRA expressed these concerns only to prevent a conflict of interest. The new MSRB guidance is notable in that it, for the first time, indicates that an issuer-solicited charitable donation also may be considered a gift under Rule G-20.

In light of this new guidance, it is more important than ever for municipal securities dealers and municipal advisors to have a robust company policy concerning charitable donations. For assistance in developing such a policy, please reach out to your usual Skadden contact.

The newsletter is available here.

Skadden Arps Slate Meagher & Flom LLP

by Kenneth A. Gross, Ki P. Hong, Matthew Bobys, Melissa L. Miles, Charles M. Ricciardelli, Samuel Levor, Shayla K. Parker, Jeremy F. Regan and Tyler Rosen

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today released a Report Card on Investor Protection Initiatives outlining how it has met policy recommendations contained in the 2012 U.S. Securities and Exchange Commission’s (SEC) Report on the Municipal Securities Market. Over the last six years, the MSRB has further safeguarded the municipal market for investors through additional regulatory protections, improved access to disclosure information, and new tools and resources.

“Six years ago, the MSRB dedicated itself to addressing the investor protection recommendations put forth by the SEC in its report,” said MSRB President and CEO Lynnette Kelly. “Our report card outlines the MSRB’s substantial progress in this endeavor, summarizing initiatives that have enhanced market structure, improved disclosure practices and the efficiency of retail transactions.”

Over the past two years in particular the MSRB has implemented reforms addressing the structure of the municipal market. The creation of a best-execution rule in 2016 and a mark-up disclosure rule in 2018 were designed to enhance the transparency of costs associated with municipal security transactions for retail investors and to provide them with valuable access to pricing and related information about their municipal securities. Former SEC Chairman Michael Piwowar said earlier this year that the MSRB’s mark-up rule will “provide investors with clear disclosure about how much they are paying for their fixed income transactions.”

The MSRB recently improved the Electronic Municipal Market Access (EMMA®) website to make it easier for investors to use, and has incorporated third-party tools into EMMA® allowing investors and municipal market participants to take advantage of market yield curves and indices, a new issue calendar and an economic calendar.

Date: July 31, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met on July 18-19, 2018, and addressed financial and fee issues, and its strategic focus on information technology and data assets, among other topics.

The Board approved a $40-million budget and an associated operating plan for the fiscal year that begins October 1, 2018. The flat, year-over-year expense budget reflects the MSRB’s continuing strategic priorities. A summary of the budget will be made publicly available at the start of the fiscal year.

In conjunction with the FY2019 budget, and consistent with the Board’s stated approach to monitor and manage organizational reserve levels, the Board agreed to temporarily reduce the rate of assessment for municipal securities dealers’ underwriting, transaction and technology fees related to market activity during the last three months of calendar 2018.

“Temporarily reducing assessments is intended to be sensitive to the financial impact on the industry and to reduce excess reserves by approximately $2.6 million,” said MSRB President and CEO Lynnette Kelly. The MSRB previously rebated over $9 million to dealers since 2014.

As part of the MSRB’s continued efforts to optimize the use and dissemination of municipal market data, the Board approved a data strategy. The strategy establishes goals to advance the MSRB’s mission through data governance, quality and analytics.

“The MSRB plays a recognized and critical role in ensuring fair and efficient access to municipal market data,” said Kelly. “Our new data strategy provides the necessary foundation to ensure and enhance the quality and value of our data.”

The Board also approved a $5 million budget designation that positions the MSRB’s information technology infrastructure for the future. The investment will fund exploration and potential transition to cloud computing, which would support resilient and secure IT infrastructure and data systems. Relatedly, the Board agreed to continue to evaluate the MSRB’s data subscription pricing model as part of its effort to diversify funding sources and promote the organization’s financial sustainability.

At its meeting, the Board also discussed the MSRB’s role in providing guidance and assistance to regulatory authorities in the examination for compliance with, and enforcement of, MSRB rules. It directed staff to advance the important goal of ensuring that MSRB rules are consistently interpreted as intended and enforcement activities are aligned to promote regulatory certainty.

The Board discussed stakeholder reactions to and observations on the MSRB’s 2017 advisory on selective disclosure. While the Board appreciates feedback from regulated entities, issuers and investors on this and other MSRB publications, it continues to believe that selective disclosure is an important issue in the municipal securities market and that the advisory is serving its intended purpose of increasing awareness of this topic among market participants and the potential for issuers to use the EMMA website for broad dissemination of information.

Finally, the Board discussed implementation of the MSRB’s mark-up disclosure requirements and related guidance on prevailing market price noting that there has been no material market disruption as a result of the new transparency rules.

Date: July 23, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

SIFMA, together with the Government Finance Officers Association (GFOA), National Association of State Treasurers, sent a letter to the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) on the treatment of municipal securities under the agencies’ Liquidity Coverage Ratio (LCR) rules. Congress recently enacted legislation that will require the agencies to amend their LCR rules to provide High Quality Liquid Asset treatment of municipal securities that are investment grade and liquid and readily marketable.

Read the Letter.

Kennedy of Louisiana says ex-industry leaders have the ‘public’ seats

Sen. John Kennedy, a Republican of Louisiana, on Tuesday slammed the self-regulatory body that oversees the $3.8 trillion muni-market “an incestuous…little club” that needs to be overhauled.

Kennedy called for reform of the Municipal Securities Rulemaking Board during comments at a Senate Banking confirmation hearing for Elad Roisman to be a member of the Securities and Exchange Commission. The SEC has oversight responsibilities for the MSRB.

Kennedy noted that the Dodd Frank Act required the MSRB board to have 11 public members and 10 representatives of regulated entities.

Kennedy said he didn’t think that anyone on the board represented consumers. He noted that some of the public seats are taken by former industry executives, including JP Morgan JPM, +1.03% .

According to the MSRB website, Donna Simonetti, a former executive director at JP Morgan, is on the MSRB board for a term that expires in 2021. Ronald Dieckman, a former senior vice president and director of the public finance and municipal bond trading and underwriting department at J.J.B. Hilliard, is also a board member.

“They’re insiders. The whole thing is incestuous,” Kennedy said.

“Do you know how the board is picked? I’m glad you asked,” he said to Roisman, who did not ask. “They pick themselves. It is a little club,” he added.

A spokesman for the senator said he was working on legislation to address his concerns.

Roisman, currently the chief counsel of the Senate Banking Committee and also previously an aide to former SEC Commissioner Dan Gallagher, said it was important for self-regulatory organization to have transparency.

Michael Post, the MSRB’s general counsel, defended the board’s makeup in a phone interview.

He said the agency’s standard on who can be a public member of the agency’s board was approved by the SEC.

“We have standards set out in federal law and approved by the SEC and we consistently apply them,” he said.

Under the by-laws, public members must have had no association with a municipal securities broker, municipal securities dealer or municipal adviser for two years, he said. Of the 11 public members, one slot is reserved for a representative of institutional or retail investors, one slot for a representative of municipal entities and one slot for a member of the public with knowledge or experience in the municipal industry, Post noted.

MARKETWATCH

By GREG ROBB
SENIOR ECONOMICS REPORTER

July 24, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today requested comment on draft amendments to MSRB rules on syndicate practices and disclosure of information related to primary offerings.

“Today’s proposed rule changes are grounded in input we received in response to a retrospective review of primary offering practices in fall 2017,” said MSRB President and CEO Lynnette Kelly. “In light of evolving market practices, the MSRB seeks feedback on how these proposed changes might improve the exchange of information among members of the syndicate, and increase transparency for issuers and investors.”

The request for comment includes several potential amendments to MSRB Rule G-11 regarding syndicate practices, including requiring senior syndicate managers to provide specified information to issuers and standardizing the process for issuing a “free-to-trade wire” to communicate to all syndicate members at the same time that the new issue is free to trade. The MSRB’s request for comment also includes potential changes to MSRB Rule G-32 to, among other things, collect additional information on Form G-32 to support municipal market transparency efforts.

“We are cognizant of the benefits of enhanced information sharing among industry participants and streamlined mechanisms for reporting of data. For example, our proposed changes to Form G-32 seek to leverage data already being submitted by underwriters during the new issuance process,” Kelly said.

Comments should be submitted no later than September 17, 2018. Read the request for comment.

Following the public comment period, the MSRB will carefully consider the comments received and may amend the proposal, seek additional input or take no further action at this time. Should the MSRB determine to advance the proposal in the current or amended form, the MSRB would likely be required to submit some or all of the proposal, as amended, to the Securities and Exchange Commission (SEC) for its consideration and approval, in which case there would be a further public comment period. Read more about the rulemaking process.

Date: July 19, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

SUMMARY

SIFMA provided comments to the Municipal Securities Rulemaking Board (MSRB) in response to MSRB Notice 2018-09; request for comment on draft MSRB Rule G-36, on discretionary transactions in customer accounts, and related draft amendments.

Read the SIFMA Comment Letter.

WASHINGTON – Federal financial reforms designed to reduce the less favorable treatment by rating agencies of municipal bonds compared to corporate bonds have resulted in higher ratings, fewer downgrades and lower bond yields, according to a just-released research paper.

The paper, titled “The Impact of Dodd-Frank on Credit Ratings and Bond Yields: The Municipal Securities’ Case,” is among those featured at the Brookings Institution’s 7th annual Municipal Finance Conference. The paper’s lead author is Craig Johnson, a professor at Indiana University’s School of Public and Environmental Affairs. His co-authors are Yulianti Abbas and Chantalle LaFontant.

The analysis, which focuses on S&P Global Ratings’ muni ratings from 2004 to 2014, stems from Johnson’s interest in determining whether the Dodd-Frank Act affected munis differently than corporates.

Johnson was starting from some conclusions established by previous work on the corporate market, which found that Dodd-Frank caused credit rating agencies (CRAs) to issue lower ratings in the municipal market.

In academic literature this effect has been termed the “reputational hypothesis,” the idea that tighter regulation will cause credit rating agencies to issue more pessimistic ratings in order to protect their reputations.

Johnson and his fellow researchers found the opposite case or “disciplining hypothesis” to be true in the muni market. The disciplining hypothesis states that rating agencies react to new regulation by trying to improve their methodologies to avoid running afoul of the new rules. That’s the effect new laws and regulations intend to achieve.

Former Congressman Barney Frank, the Massachusetts Democrat for whom Dodd-Frank was partly named, was particularly interested in trying to get rating agencies to represent risk in the muni market the same way they did for corporates, which would result in higher muni ratings.

Muni market participants have griped for years that this has not been the case, as munis have defaulted at lower rates than similarly rated corporate bonds. While Johnson’s study did not analyze the differences in default rates between munis and corporates, he said the question of whether Dodd-Frank was working to level the playing field was central to his work.

“Was this going to put the risk/reward between municipals and other sectors on par?” he asked.

Johnson said his study used S&P ratings because S&P was the only one of the three largest agencies to have not publicly announced a change to its methodology following Dodd-Frank.

Johnson found that the probability a state general obligation bond will be rated higher after Dodd-Frank is 2.7 times greater than before Dodd-Frank. Further, the study revealed that total S&P actions (including rating changes, outlook changes, and watches) decreased by 17.3% and negative actions decreased by about 11.6%. Rating downgrades decreased by 9.51%, while rating upgrades increased by 8.29%.

“Our results provide evidence of greater rating stability after Dodd-Frank and are consistent with the disciplining hypothesis,” the researchers wrote.

The study also looked at bond yields and found that they were lower across all asset classes after Dodd-Frank. It found no change among unrated bonds, suggesting that the ratings were affecting the yields rather than other market forces.

Johnson and his colleagues concluded that their results highlighted “the consequences of the gaping holes in the patchwork system of municipal disclosure.”

Unlike in the more tightly regulated corporate market, he told The Bond Buyer, credit rating agencies may play an outsize role in providing information to municipal investors.

“Even though the municipal market in general, and state government GO bonds in particular, represent a low-risk sector of the fixed income market, CRAs not only certify to the interpretation of publicly available information, but they may also reduce the uncertainty associated with a system lacking complete and timely disclosure,” Johnson wrote.

Johnson, who has his PhD from the State University of New York at Albany, has been researching municipal finance topics for many years. He previously published work on tobacco bonds, government borrowing costs, and the impact of Dodd-Frank on the fiscal management of state and local governments. Before that, he worked as a budget analyst for the state of New York and as a legislative policy analyst at the New York State Assembly.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 07/16/18 07:04 PM EDT

July 16 (Reuters) – The U.S. Securities and Exchange Commission should form a working group with two of its regulatory counterparts to review and harmonize the rules they use to police electronic corporate and municipal bond-trading platforms, an SEC subcommittee said on Monday.

The regulation of electronic fixed income trading venues varies depending on the business models and trading protocols of the venues, increasing the potential for investor harm, systemic risk and unfair competition, said a subgroup of the SEC’s Fixed Income Market Structure Advisory Committee.

The group of industry professionals recommended that the SEC, the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board consider creating a unified regulatory framework for all fixed income electronic trading platforms.

Some bond trading venues are regulated as alternative trading systems (ATSs), some are regulated as broker-dealers, while other major platforms operating similar models are not regulated at all, the group said.

“Without a unifying regulatory framework for all fixed income electronic trading platforms, market structures will likely fragment further as regulators adopt new regulations that apply to only one type of platform,” they said in a statement.

For example, the regulation of ATSs largely reflects how trading occurs in the equity markets, and excludes electronic platforms that use a “request for quote” model, which are regulated as broker dealers. There is also at least one major municipal and corporate bond trading platform that does not fall under any U.S. regulatory oversight, the subcommittee said in its recommendation.

“These distinctions in regulatory oversight complicate efforts to improve the efficiency and resiliency of the fixed income electronic trading markets,” the group said.

(Reporting by John McCrank in New York Editing by Marguerita Choy)

Washington, D.C. – The Chief Economist of the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that oversees the municipal securities market, today shared his analysis on the steady decline of the effective spreads for customer trades in the municipal bond market. Dealer-to-customer spreads (also known as “mark-up”), which measure costs paid by investors to execute a trade, dropped by 51 percent to 73 basis points between 2005 and early 2018, signaling a more efficient market.

“Our analysis shows that effective spreads have fallen substantially since 2005 for customer trades of less than $1 million par,” said MSRB Chief Economist Simon Wu. “We found that while bond characteristics, such as percentage of insured bonds, average yield and average trade size, had an impact on the declining spreads, it was likely MSRB regulatory activities, transparency initiatives and advancements in trading technology that drove more than half of these changes.”

Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline? summarizes previous research on spreads and emerging issues regarding municipal market liquidity and municipal bond transaction costs. Using transaction data between January 2005 and April 2018, and methodologies to control for idiosyncratic municipal bond characteristics, Wu confirmed the results of previous studies. His research affirmed that dealers earn lower average mark-ups on trades over $1 million, while also showing that these high par trade spreads have remained relatively consistent since 2005.

The report also proposes considerations for future research to evaluate the post-dealer compensation disclosure environment arising from MSRB Rule G-15 mark-up changes that went into effect on May 14, 2018.

The MSRB studies market structure issues related to municipal securities as part of its mission to promote a fair and efficient market. It welcomes input from stakeholders on additional research ideas that would contribute to a better understanding of market dynamics. Access MSRB data reports and analysis.

Wu is responsible for economic analysis of MSRB rulemaking and municipal market transparency initiatives and leads related economic analysis of the financial markets. His previous report, Municipal Bond ETFs: Liquidity Impact on the Municipal Bond Market, explores the growth of exchange-traded funds in the municipal securities market.

Date: July 18, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Check ’em out here.

Here she is.

MSRB adds a AAA callable yield curve from IHS Markit to the free tools and resources on its EMMA website for understanding muni market trends.

On Thursday, July 12, BDA members participated in a Capitol Hill fly-in, and hosted a fundraiser for Representative Bill Huizenga (R-MI), Chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, Securities and Investment. The primary focus of the meetings was amendments to FINRA Rule 4210.

BDA members in attendance:

• Brian Brennan, KeyBanc Capital Markets
• Lana Calton, Hilltop Securities
• David Medanich, Hilltop Securities
• Demetri Patikas, Vining Sparks
• Guy Yandel, George K. Baum & Co.
• Don Winton, Crews & Associates
• Ron Bernardi, Bernardi Securities

BDA members met with the following congressional offices:

• Rep. French Hill – Arkansas
• Rep. Steve Stivers – Ohio
• Rep. David Kustoff – Tennessee
• Rep. Jeb Hensarling – Texas (Chairman, House Committee on Financial Services)
• Sen. Tom Cotton – Arkansas
• Sen. Rob Portman – Ohio
• Sen. John Cornyn – Texas
• Policy discussion:

In April, FINRA asked the SEC to delay Rule 4210 amendments to March 2019, indicating that many market participants have requested that FINRA reconsider the potential impact of amended Rule 4210 on smaller and medium-sized broker-dealers. BDA and its members are supportive of this delay and would like FINRA and the SEC to reconsider these amendments.

BDA believes that the 4210 amendments represent a regulatory overreach by FINRA:

FINRA is using a broad statutory authority of the Securities and Exchange Act in an attempt to adopt a systemic risk rule, potentially violating congressional intent.

BDA believes that the 4210 amendments are anti-competitive to BDA members:

The margin requirements will push small- to medium-sized dealers out of the trading of these securities with larger buy-side institutions. BDA expects large buy-side institutions to halt trading these securities with BDA members due to practical demands.

The amendments could actually create systemic risk as they may consolidate the trading of these securities into a fewer number of counterparties instead of the broad number and kind of counterparties who currently trade these securities.

BDA expects large buy-side institutions to manage their exposure with smaller dealers by reducing trading and outstanding volumes to below the Rule’s gross open position limit of $10 million, making the required movement of margin unlikely.

BDA has also asked FINRA to consider allowing dealers to take a capital charge instead of requiring them to enter into margining agreements with customers:

A capital charge would allow dealers to remain competitive with money manager accounts and still manage any systemic risk.

Next steps:

BDA staff will continue to engage Capitol Hill on Rule 4210, and are working to gather further congressional support for a letter to regulators expressing the concerns of small and mid-sized broker-dealers with Rule 4210.

Specifically, BDA is working towards a rescission of the 4210 amendments, but is also engaging regulators on a capital charge, which would make the rule and amendments more tenable for BDA members.

Bond Dealers of America
July 17, 2018

NEW YORK–(BUSINESS WIRE)–IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions, today announced that its benchmark yield curve for AAA-rated municipal bonds is now available to investors through the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA®) platform.

The free EMMA website is designated by the Securities and Exchange Commission as the official repository for data and disclosures on more than one million municipal securities.

“MSRB’s EMMA website is now in its 10th year of providing free public access to municipal market data, documents and tools that support a fair and efficient market,” said Lynnette Kelly, MSRB president and CEO. “We are excited to further enhance investor access to benchmarking and analytical tools with the addition of the IHS Markit yield curve to the EMMA website.”

“Investors rely upon yield curves to measure market performance, and we are proud to join forces with MSRB to make IHS Markit data available to the public,” said Frank Dos Santos, executive director and Americas head of business strategy for fixed income pricing at IHS Markit. “As a leading provider of municipal bond pricing data, IHS Markit strongly supports the MSRB mission in promoting market transparency and providing investors with a wealth of historical data.”

The IHS Markit municipal bond yield curve consists of tax-exempt general obligation bonds with a 5 percent coupon and 10-year call date from AAA-rated state governments. IHS Markit has broad expertise across U.S. municipal markets and prices more than 1.1 million municipal bonds daily.

In addition, IHS Markit provides independent fixed income pricing and liquidity data for risk management, price verification, compliance and trading workflows. The firm’s 100-plus fixed income evaluators and best-in-class pricing solution cover more than 2.5 million corporate and sovereign bonds, municipal bonds, securitized products, bank loans and CDS.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates. All other company and product names may be trademarks of their respective owners © 2018 IHS Markit Ltd. All rights reserved.

Contacts

IHS Markit
Timothy Barello, +1 646-679-3463
timothy.barello@ihsmarkit.com

or

Press Team, +1 303-305-8021
press@ihsmarkit.com
Follow @IHS_News

July 19, 2018 12:40 PM Eastern Daylight Time

In a vain attempt to be like the trendy media outlets that use odd-numbered lists and slightly misleading headlines as clickbait, we present answers to seven commonly asked questions about the continuing disclosure requirements of SEC Rule 15c2-12.

As anyone who would be interested enough to click on this post surely knows, Rule 15c2-12 generally requires underwriters of municipal securities to (1) review an official statement before an offering and (2) determine that an obligated person has promised to provide certain ongoing information to investors after the offering. In the years following the end of the SEC’s Municipalities Continuing Disclosure Cooperation initiative in 2014, many in the industry have been revisiting the continuing disclosure component of the rule. The members of the Gilmore & Bell securities group frequently receive some version of the following questions.

Continue reading.

By: Bill Burns

Posted: July 5, 2018

Gilmore Bell

Summary

• The bond market lacks price transparency.
• A new rule requires disclosure of mark-ups and mark-downs.
• Investors need to do due diligence on bond pricing.

When a customer shops at a used car lot to purchase a previously owned vehicle, she can usually check the dealer markup by comparing the offering price to the book value in the Kelley Blue Book, a well-respected pricing guide.

That way, the consumer can tell if she is about to get ripped off and walk away from a bad deal.

Unbelievably, an investor could not do the same with the bonds bought or sold by her Wall Street broker until two months ago.

Bond pricing is confusing for investors, as a recent Reuters article noted. That’s why new, additional disclosure rules should benefit investors.

However, even though the new industry rules require brokerage firms to disclose the bond-pricing information to clients, it may come too late or never be seen.

Let’s back up a moment. In the past, brokers were not required to disclose to customers the “markup” or “markdown” on corporate and municipal bonds bought in the secondary market.

“Unlike with stocks, investors don’t pay a commission when they buy a bond,” according to Reuters. “Instead, they pay a markup, or the difference between the broker’s cost and the price charged to the investor. Many brokers don’t disclose their markups, meaning investors can’t easily compare transaction costs.”

“In a 2012 report, the SEC said the lack of price transparency undermined the fairness of the $3.8 trillion municipal-bond market,” according to the article. “In addition to markups, brokers will also have to disclose markdowns, the haircuts investors have to take when selling bonds prior to their maturity.”

In the past, many brokers fraudulently told investors that they did not receive commissions on the purchase or sale of bonds. In fact, the brokers in Puerto Rico never disclosed the exorbitant markups or markdowns they charged their customers. This evidence has come to light in numerous investment fraud cases brought against Puerto Rico brokerage firms, including UBS and Santander.

Under the new industry rule that took effect in May, Mom and Pop investors will now learn how much their brokers made selling them bonds. While an improvement for the brokerage industry, some problems remain.

“The disclosures are aimed at addressing long-standing concerns that individual investors who buy bonds don’t know how much they are paying in fees, known as markups, that can eat into returns,” according to the Reuters article. “Retail investors pay a variety of different prices for the same securities.”

The article notes that investors may suffer “sticker shock” when they see the exorbitant charges firms take for purchasing corporate and municipal bonds right off the shelf. For example, if an investor purchased a $500,000 Puerto Rico municipal bond during the Puerto Rico bond market heyday of 2010 to 2013, an investor would be charged a markup in the tens of thousands of dollars, without any disclosure by the firm.

Nevertheless, most investors will likely still not realize how much they are paying for bonds even with the new rule. The new rule only requires dealers to include the markup on confirmation slips that are sent to investors by the post and do not require a discussion between the broker and customer when the transaction is made.

“The rule only requires dealers to include the markup on slips of paper they already send to investors confirming the details of the transaction,” as Reuters noted. “Though dealers are allowed to electronically confirm customer trades, the vast majority of these confirmations are still snail mailed to customers—meaning they might end up in a pile of junk mail and never be read.”

That means Mom and Pop investors will need to do their due diligence in reviewing confirmation slips when they buy bonds. The new rule is an improvement for bond investors, but unfortunately falls short. There is still no Kelley Blue Book for bonds.

Seeking Alpha

by Jake Zamansky
Zamansky LLC

Jul. 10, 2018

On June 29, 2018 Judge Halil Suleyman Ozerden of the Southern District of Mississippi entered judgments against Malachi Financial Products, Inc., and its president and sole shareholder, Porter B. Bingham, for alleged violations of the Securities Exchange Act of 1934 (“Exchange Act”) and Municipal Securities Rulemaking Board (“MSRB”) Rule G-17. The judgments were entered in accordance with a consent agreement signed by the Securities and Exchange Commission (“SEC”), Bingham, and Malachi. Without confirming or denying the allegations, Bingham and Malachi agreed to: (1) being permanently enjoined from further violations of Sections 15B(a)(5) and 15B(c)(1) of the Exchange Act and MSRB Rule G-17, (2) pay a joint and several disgorgement of $33,000 plus $2,858 of prejudgment interest, and (3) pay civil penalties of $50,000 for Malachi and $25,000 for Bingham.

Subsequently, and citing to these final judgments, the SEC acted on July 9, 2018 to revoke Malachi’s registration as a municipal advisor and to bar Bingham from association with any “broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.” This agency action effectively prohibits Malachi from engaging in municipal advisory activities and bars Bingham from engaging in activities that are regulated by the SEC. The combination of penalties sought and ultimately enforced by the SEC highlights its continuing focus on enforcing federal securities laws as they relate to municipal advisors.

According to the complaint filed by the SEC on January 2, 2018, these violations arise out of actions relating to Rolling Fork, Mississippi’s (the “City”) municipal bond offering in 2015 to fund certain improvement projects, such as paving streets and constructing a municipal swimming pool. In January 2015, the City hired Malachi as the municipal advisor for the proposed bond offering under an “Agreement for Professional Financial Advisory Services” (“MA Agreement”). Bingham, as Malachi’s president and sole principal, signed the MA Agreement on behalf of Malachi.

The complaint alleges that in May 2015, Bingham accepted two payments totaling $2,500 from a registered representative who was associated with a broker-dealer and municipal securities dealer. Approximately two weeks after receiving those payments, a Malachi employee recommended that the City hire the registered representative and his firm to underwrite the bond offering. Neither Bingham nor the registered representative disclosed the payments or the resulting conflicts of interest to the City. Under the terms of the MA Agreement, Malachi was to be paid an amount not to exceed 2% of the debt issuance. While the City’s Offering was originally contemplated to be for $2 million, statutory offering limits required reduction of the offering to $1.1 million and, pursuant to the 2% cap, Malachi’s compensation was reduced from $40,000 to $22,000.

As alleged, Malachi and Bingham attempted to recoup this lost revenue by fraudulently charging the City for purported “additional services” that they did not actually provide. The day after the Offering closed, Bingham directed Malachi’s employee to prepare and send two invoices totaling $55,000 to the bond trustee for payment. One invoice was for $22,000, which was Malachi’s contractual fee for the municipal advisory services provided to Rolling Fork (2% of the $1.1 million issuance). The other invoice was for $33,000 and, according to the invoice, was purportedly for services related to the “investment of bond proceeds.” This invoice, the complaint states, was false and fraudulent and was not authorized or agreed to by the City. Although addressed to the City’s Mayor, Malachi only transmitted them to the bond trustee and never sent them to the Mayor or the City. As a result, the bond trustee paid the full $55,000 to Malachi before the City became aware of the invoices.

Malachi allegedly provided no services relating to the investment of bond proceeds to the City and the bond proceeds had not, in fact, been invested by the time of the second invoice. Neither Bingham nor Malachi had any documentation reflecting any investment services they purportedly provided the City in connection with the proceeds from the Offering. Although Malachi and Bingham may have also created some post-bond issuance compliance policies for the City and examined the City tax rolls to determine the City’s legal lending limit, the complaint asserts neither of those services, even if provided, justified the $33,000 invoice. Rather, the post-issuance compliance policies purportedly created for the City contained nothing but standard boilerplate language, much of which can be found by doing a cursory internet search. As such, it would have been unreasonable to bill the City $33,000 for preparing these policies. More importantly, as the complaint notes, Malachi and Bingham never provided those written policies to the City.

The SEC orders barring Bingham and revoking Malachi’s registration as a municipal advisor can be found here and here.

July 12, 2018

Bracewell LLP

It’s an exciting time to be in the municipal bond market after the U.S. Senate passed new legislation that reclassifies municipal debt as a High-Quality Liquid Asset (HQLA). For investors, this means municipal securities will fall under bank liquidity rules, making them instantly more attractive.

The House of Representatives last month passed the Economic Growth, Regulatory Relief, and Consumer Protection Act by a vote of 258 to 159 after the Senate approved the bill in March. The bill, which was sponsored by Senate Banking Committee Chairman Mike Crapo, will roll back some key provisions of President Obama’s landmark 2010 Dodd-Frank Act. Once approved, the new legislation will make fewer banks systemically important by raising the amount of assets to $250 billion from $50 billion. By raising the threshold five times, fewer banks would be deemed “too big to fail” under the new guidelines.

In addition to the above, the new legislation will ease the impact of the so-called Volcker Rule, which had restricted U.S. banks from making certain speculative investments.

Under the new legislation, banks will be able to treat some municipal bonds as level 2B HQLAs, which proponents say will help ensure steady financing for state and local governments. The level 2B classification, which also applies to mortgage-backed securities, is a step down from 2A HQLAs. The market was hoping that munis would be placed into the 2A HQLA bracket, which would have put them on the same level as sovereign debt.

Continue reading.

municipalbonds.com

by Sam Bourgi

Jun 28, 2018

House Municipal Finance Caucus Chairman Randy Hultgren (R-IL) last week wrote a letter to the SEC and FINRA, in favor of the BDA “Capital Charge” proposal and warns of regulatory overreach by FINRA.

The letter highlights the potential effects of implementation of the rule on small and medium sized dealers in Illinois. The Congressman is strongly in support of the Capital Charge proposal stating, ” These margin requirements will push small-to-medium sized dealers nationwide out of the trading of these securities with large buy-side-institutions.” Further he added concern about competition, “A capital charge would allow these dealers to remain competitive and still manage any systematic risk.”

In addition to strong support of the BDA proposal, the Congressman raised concerns of FINRA overreach stating, ” FINRA may be overstepping Congressional intent by attempting to regulate credit markets, this authority has been traditionally reserved for the Federal Reserve Board.” He concluded by saying, “I again urge the Commission to carefully reconsider the potential impacts and statutory limitations of this proposal. “

BDA Leading Advocacy

The BDA continues to work with partners on the House Financial Services Committee and Senate Banking Committee to pressure the SEC and FINRA to rethink the rule. This includes both advocating for the “Capital Charge” proposal as well for outright termination of the amendment due to its anti-competitive nature before implementation on March 25, 2019.

The strategy also includes direct engagement with the regulators. Last week, the BDA submitted a letter of support of the “Capital Charge” proposal to FINRA. The letter featured two smaller firms, Duncan-Williams and NatAlliance, and how the proposal would better the rule without creating a “race to the bottom.”

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

Bond Dealers of America

June 28, 2018

Read the Column.

06/28/18

The NFMA publishes its newsletter, the Municipal Analysts Bulletin, three times per year. The current issue, Vol. 28, No. 2, is now available and includes photos and news from the 35th Annual Conference. The newsletter also provides members with the opportunity to hear from NFMA officers and committees, as well as constituent societies, with news about past and upcoming initiatives and events. You can find past newsletters under Resources on the navigation bar on the NFMA home page.

The MSRB is seeking comment on a draft set of frequently asked questions (FAQs) related to the application of Rule G-40, on advertising by municipal advisors, to the use of municipal advisory client lists and case studies by municipal advisors.

• Comments on the draft FAQs are due by July 27, 2018.
• The draft FAQs can be viewed here.

In May, the SEC approved the MSRB’s proposed Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities, despite opposition from almost all broker-dealer groups.

As part of our advocacy efforts:

• BDA met with senior staff of the SEC’s Office of Municipal Securities prior to the approval of the rules to reiterate our opposition to the proposed changes.
• In May, BDA, along with the National Association of Municipal Advisors and the Securities Industry and Financial Markets Association, sent a letter to the SEC requesting that they institute disapproval proceedings with respect to the MSRB’s proposed amendments to Rule G-21 and new Rule G-40 until the MSRB further clarifies and addresses key issues within the text of the rules themselves. A copy of the letter can be viewed here.
• In February, the BDA submitted a comment letter to the SEC in response to the MSRB’s proposed new advertising rule change. You can view BDA’s final comment letter here.

Bond Dealers of America

June 27, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today sought input from municipal advisors and other market participants about draft guidance to support understanding of the application of new advertising standards to the use of municipal advisory client lists and case studies.

MSRB Rule G-40, on advertising by municipal advisors, becomes effective February 7, 2019.  The MSRB has committed to providing guidance in advance of the effective date to assist municipal advisors as they develop their compliance policies and procedures. In addition to today’s draft guidance on client lists and case studies, the MSRB plans to seek input on draft guidance related to social media and Rule G-40’s content standards. Although the MSRB intends to provide stakeholders a 60-day comment period whenever possible, the comment periods for advertising guidance will be shortened to 30 days to ensure guidance on all three topics is finalized and made available to municipal advisors as they are developing compliance policies and procedures for the new rule.

Today’s draft guidance, which takes the form of answers to frequently asked questions (FAQs), addresses potential permissible and impermissible uses of municipal advisory client lists and case studies in light of the prohibition on the use of testimonials in advertising under the new rule. The FAQs also illustrate the potential application of certain other MSRB rules to municipal advisors’ use of municipal advisory client lists and case studies.

“Recognizing the diversity of the municipal advisor industry, the MSRB welcomes insight from a variety of perspectives to help ensure that the FAQs provide practical compliance assistance and speak to relevant scenarios,” said MSRB President and CEO Lynnette Kelly.

Read the request for comment. Comments should be submitted no later than July 27, 2018.

Date: June 27, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

WASHINGTON – Pending legislation that would partially roll back regulations on money market mutual funds would be good for issuers of municipal bonds, issuer groups told a Senate panel Tuesday.

The Government Finance Officers Association and National Association of Health and Educational Facilities Finance Authorities both provided testimony in support of S.1117: The Consumer Financial Choice and Capital Markets Protection Act of 2017. The bill, introduced more than a year ago by Sen. Pat Toomey, R-Pa., would allow institutional money market funds to return to a fixed net asset value after a 2014 SEC rule change required those MMFs to use a floating NAV.

The SEC rule, which took effect in 2016, allows funds investing in federal government securities, as well as “retail” funds that have policies and procedures in place designed to limit investors to “natural persons,” to use a stable NAV. Natural persons means human beings, rather than business entities. Other MMFs were required to “float” their NAVs, meaning that the value of a share can fluctuate rather than remain at a fixed $1. The change was designed to prevent investors from causing a “run” on MMFs by pulling out of them in a scenario similar to one that occurred during the financial crisis in 2008.

Muni groups have said requiring a floating NAV for so many MMFs would hurt issuers by both reducing demand for their short-term debt and locking them out of the funds they use as vehicles for short-term cash flow. The result, then-GFOA president Pat McCoy told lawmakers in 2017, is that issuers pay more to finance their infrastructure.

Christopher Daniel, chief investment officer of Albuquerque, New Mexico, testified for the GFOA Tuesday, telling members of the Senate Committee on Banking, Housing, and Urban Affairs that most local governments have policies or even state or local laws on the books requiring them to invest only in funds with a stable NAV. This is to ensure that public money is properly safeguarded, he said. With the effectiveness of the SEC’s floating NAV requirement, Daniel said, local governments have been forced to use lower-yielding funds investing in U.S. government securities.

“By allowing all MMFs — prime, tax-exempt and government funds accessible to both retail and institutional investors — to offer a stable NAV, S. 1117 would allow state and local governments to once again utilize suitable investments as defined by state and local elected officials, rather than by the SEC,” Daniel testified.

Chuck Samuels, general counsel to NAHEFFA, submitted written testimony. He said MMFs are among the largest purchasers of the short-term notes the authorities he represents issue, and that the rule has damaged that market.

“Unfortunately, funds that purchase the variable rate notes of the institutions we serve have experienced a nearly 50% decline as a result of the SEC’s floating NAV rule, thereby driving up the cost of borrowing for investments aimed at improving the quality of health care and education in our country,” Samuels wrote.

Mercer Bullard, a professor at the University of Mississippi School of Law, told the committee that he didn’t believe the SEC’s rule change was necessary to reduce systemic risk, but that he recommended against passage of S. 1117.

Bullard said he had four reasons for opposing the bill. First, he said that there has not been enough study on the impact of undoing the rule and that passing the bill now would risk rushing into a mistake the same way the SEC did in passing the floating NAV rule. Instead, Congress should instruct the SEC to analyze what effect the bill would have, said Bullard. Next, he said he does not have faith that the SEC is equipped to manage fund risk in the absence of the rule. Bullard’s third point was that banking regulators might use any future MMF failure as an excuse to impose crippling restrictions on all funds.

Lastly, the Dodd-Frank Act stripped banking regulators of the emergency powers they would need to handle another “severe liquidity event,” Bullard said, explaining that Dodd-Frank restricted banking regulators’ authority to extend credit to non-banking institutions. As such, he told the committee, he couldn’t recommend reviving the risks that existed under the old rules.

S. 1117 has an identical companion bill in the House: H.R. 2319. Like the Senate bill, it remains pending before committee.

By Kyle Glazier

BY SOURCEMEDIA | MUNICIPAL | 06/26/18 07:10 PM EDT

The claimant’s broker at UBS has 183 disclosures on his BrokerCheck report

UBS Financial Services Inc. has lost another multi-million-dollar Finra arbitration award stemming from the sale of individual Puerto Rico bonds and closed-end funds.

According to the arbitration award, which was decided last Friday by a three-person Financial Industry Regulatory Authority Inc. dispute resolution panel, the claimants, the family and relatives of Jacobo and Raquel Bender, were awarded close to $4.3 million in compensatory damages and costs.

Mr. Bender and his wife alleged negligence, negligent supervision, fraud and other charges in their claim. The family invested in Puerto Rico bonds, including those underwritten by UBS, according to the award, as well as proprietary closed-end funds that invested predominately in Puerto Rico bonds.

The family’s broker was Ramon Almonte, said the family’s lawyer, Jeffrey Erez.  According to his BrokerCheck report, Mr. Almonte has 183 “disclosures” in his work history, the overwhelming majority of which stem from sales of Puerto Rico bonds.

The market for Puerto Rico’s $70 billion in muni debt bottomed out over the summer of 2013 after Detroit filed for bankruptcy that July. Puerto Rico has been struggling to stave off a widespread default ever since.

The Bender family sought between $1 million and $5 million in damages, according to the award.

“For all intents and purposes, the $4.2 million in damages and almost $100,000 in costs represents the complete return of the family’s loss of capital,” Mr. Erez said. “This was a great award. When an arbitration panel gives the claimants an award like this, they basically are rejecting every argument made by UBS during the hearings.”

Mr. Almonte, a managing director at UBS Financial Services Inc. of Puerto Rico, did not return a call Wednesday to comment.

“While we respectfully disagree with this decision, it is important to note that the claimants were awarded less than they sought, perhaps because for over twenty years Puerto Rico bonds provided steady and substantial returns also coupled with extraordinary tax advantages available only to Puerto Rico residents,” UBS spokesperson Maya Dillon wrote in an email.

UBS Financial Services has lost a handful of large arbitration claims stemming from losses in Puerto Rico bonds and closed-end funds, including investor claims of $4.4 million and $9 million in 2017.

Investment News

By Bruce Kelly

Jun 27, 2018 @ 4:25 pm

UBS Financial Services must pay $4.3 million more to claimants who lost money in Puerto Rico bonds, InvestmentNews writes.

In an arbitration award decided Friday a Finra dispute resolution panel ruled UBS must pay compensatory damages and costs to the family and relatives of Jacobo and Raquel Bender, according to the publication. The Benders, who allege negligent supervision and fraud, among other charges, had bought Puerto Rico bonds, some of which were underwritten by UBS, as well as proprietary closed-end funds whose investment focus were also Puerto Rico bonds, according to the award cited by InvestmentNews.

The market for Puerto Rico’s municipal bonds collapsed in 2013, the publication writes. UBS has since lost several arbitration claims arising from the losses in the bonds and closed-end funds brought by investors, according to InvestmentNews.

Last year, UBS lost a $4.4 million claim and another worth $9 million, the publication writes.

Just how many claims there are out there related to the Puerto Rico bonds is perhaps best demonstrated by the BrokerCheck record of the Benders’ broker at UBS.

The family’s lawyer tells InvestmentNews that its broker was Ramon Almonte — who has 183 disclosures on his record, most of which are tied to the sales of the bonds, according to the publication.

The Benders were seeking $1 million to $5 million in damages, and the $4.3 million award “represents the complete return of the family’s loss of capital,” Jeffrey Erez, the family’s lawyer, tells InvestmentNews.

“This was a great award,” he says, according to the publication. “When an arbitration panel gives the claimants an award like this, they basically are rejecting every argument made by UBS during the hearings.”

A UBS spokeswoman tells the publication in an email that the firm disagrees with the decision but considers it important to note that the Benders were awarded less than they sought. Almonte, who’s currently a managing director UBS Financial Services Inc. of Puerto Rico, didn’t return InvestmentNews’ call for comment.

To read the InvestmentNews article cited in this story, click here.

Financial Advisor

By Alex Padalka

June 28, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published a report that shows—despite sharp declines in dealer inventories of municipal securities and the number of dealers—municipal securities trading activity on behalf of investors has remained relatively stable over the past several years, with robust dealer participation and less concentration among top dealers.

Today’s report is the first-ever to analyze changes and trends in the customer trading activity of municipal securities dealers. The report notes the steady decline in the number of municipal securities dealers since 2006 but finds that most dealers that have exited the market were infrequent traders of municipal securities.

“Our analysis shows that most dealers that have exited the market provided little liquidity and participated in very few trades—typically fewer than 10 trades in a year,” said MSRB Director of Research Marcelo Vieira. “Meanwhile, the number of dealers with substantial municipal business—those executing more than 25,000 trades per year—has increased.”

The MSRB’s Dealer Participation and Concentration in Municipal Securities Trading report also examines dealer concentration, or the dealer market share of municipal customer trades. Market share of top dealers has declined since 2006, when the top five dealers accounted for 42.2 percent of municipal customer trades. In 2017, the top five dealers accounted for 34.6 percent of all municipal customer trades. The report includes detailed tables and statistics on dealer participation and concentration, aggregated by bands of trade volume and most-active dealers.

The MSRB evaluates municipal market trends as part of its mission to promote a fair and efficient market and plans to continue studying dealer data. Public and industry input on additional topics, including trends in the inter-dealer market, is welcome and should be referred to Marcelo Vieira at mvieira@msrb.org.

Date: June 19, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Read the BDA Priorities.

Bond Dealers of America

June 20, 2018

In October 2017, the Financial Industry Regulatory Authority (FINRA) announced, through Regulatory Notice 17-30 (the “Notice”),[1] that the U.S. Securities and Exchange Commission (SEC) approved a proposed rule change, which, (i) consolidates FINRA’s registration rules; (ii) makes a number of technical changes to permissible registration categories and related rules; and (iii) restructures the representative-level qualification examinations. Each of these is discussed in greater detail below. The Proposed Rules (as defined below) take effect on October 1, 2018.

Consolidated Registration Rules

Summary of the Proposed Rules

The proposed rules, FINRA Rules 1210-1240 (the “Proposed Rules”), will adopt and consolidate, with amendment, certain National Association of Securities Dealers (NASD) and New York Stock Exchange (NYSE) rules related to registration and qualification of individual persons associated with FINRA member firms. The Notice explains that while the legacy NASD rules generally apply to all FINRA members, the existing incorporated NYSE rules only apply to FINRA members that are also members of the NYSE. The proposed rules, however, will generally apply to all FINRA members. The Notice further posits that while there are certain key differences, as discussed below, the Proposed Rules are substantially similar to the NASD and NYSE rules that are being consolidated. The Proposed Rules are:

• FINRA Rule 1210. Requires that each person engaged in investment banking or securities business of a FINRA member firm be appropriately registered commensurate with the individual’s job functions and responsibilities, unless exempt from registration. FINRA Rule 1210 also discusses: (1) the requirement to have a minimum number of registered principals at each member firm; (2) the ability to maintain permissive registrations for associated persons; (3) the requirement to pass an appropriate qualification examination and the process for obtaining a waiver of a qualification examination; (4) the requirements applicable to registered persons functioning as principals prior to passing an appropriate principal qualification examination; (5) rules of conduct for taking examinations and confidentiality of examinations; (6) waiting periods for retaking a failed examination; (7) the requirement that registered persons satisfy continuing education (“CE”) requirements; (8) lapse of registration and expiration of the Securities Industry Essentials (“SIE”) exam; (9) the waiver program for individuals working for a financial services industry affiliate of a member firm; (10) the status of persons serving in the Armed Forces of the United States; and (11) impermissible registrations.[2]
• FINRA Rule 1220. Defines “principal” and “representative” and sets forth the qualification and registration requirements for these categories. FINRA Rule 1220 also provides a number of additional registration-related rules and clarifications, including with respect to certain eliminated registration categories.
• FINRA Rule 1230. Sets forth the associated persons for whom FINRA registration is not required.
• FINRA Rule 1240. Sets forth the CE requirements for member firms, including the Firm and Regulatory Elements.

Accepting Orders from Customers

Once the Proposed Rules take effect, unregistered persons will not be allowed to accept an order from a customer under any circumstances.[3] In the event that a registered person is unavailable, an unregistered person will be permitted to transcribe order details if a customer contacts a firm to place an unsolicited order for the purchase or sale of securities. A registered person, however, will be required to subsequently contact the customer to confirm the order details prior to the order being accepted.

Financial Services Affiliate Waiver Program

Under the Proposed Rules, FINRA will be establishing a waiver program, effective October 1, 2018, for individuals who terminate their representative or principal registrations with a member firm in order to work for a non-U.S. or U.S. financial services industry affiliate of a member firm (the “Waiver Program”). The term “financial services industry affiliate of a member” is defined as “a legal entity that controls, is controlled by or is under common control with a member firm and is regulated by the SEC, CFTC, state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent [non-U.S.] regulatory authorities.”[4] Individuals who are eligible for the Waiver Program would be granted a single seven-year waiver period beginning on the date that they are initially designated as eligible for the Waiver Program. This waiver period is fixed and cannot be tolled or renewed. During this time period, individuals will be responsible for timely completion of Regulatory Element CE programs based upon their most recent registration category. Failure to complete the Regulatory Element within the prescribed 120-day window will result in an individual losing his or her eligibility for the Waiver Program.

The Waiver Program will allow for an individual to re-apply with FINRA for registration as a representative or principal, provided that the following conditions have been met:

• the individual must have been registered as a representative or principal for a total of five years within the most recent ten-year period prior to his or her initial designation under the Waiver Program;
• the individual must have been registered as a representative or principal for at least one year prior to his or her initial designation under the Waiver Program with the member firm that is designating him or her;
• all waiver requests under the program must be made within seven years of the individual’s initial designation;
• the individual’s initial designation and any subsequent designation must be made concurrently with the filing of the individual’s related Form U5;
• the individual must have continuously worked for a financial services industry affiliate of a member firm since his or her last Form U5 filing;
• the individual must have complied with the Regulatory Element of CE; and
• the individual must not have any pending or adverse regulatory matters, or terminations, that are reportable on Form U4, and must not have been subject to a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934 while eligible under the program.

The Waiver Program will not require that individuals return to the same member firm that designated them as eligible for a waiver, and during the seven-year window individuals may move between member firms, between a member firm and a financial services affiliate of the member firm or another member firm, and between financial services affiliates of member firms; provided that the individual continuously works for a financial services affiliate of a member firm since the filing of the individual’s last Form U5. An individual participating in the Waiver Program cannot, however, be working for a member firm while also working for a financial services affiliate of a member firm.

Member firms will be required to designate individuals as eligible for the Waiver Program by notifying FINRA concurrently with the filing of an individual’s Form U5. Member firms will also be responsible for requesting waivers when registering individuals who have been eligible participants in the Waiver Program. FINRA will rely on representations made by the member firm at the time a waiver is requested under the Waiver Program, and also may independently verify that the conditions under the Waiver Program have been met. FINRA will review and determine whether to grant any waiver requests under the Waiver Program within 30 calendar days of receipt of the request.

Registration Changes

Principal Financial Officer and Principal Operations Officer Designations

Under the Proposed Rules, firms will be required to designate a:

• Principal Financial Officer with primary responsibility for financial filings and the related books and records; and
• Principal Operations Officer with primary responsibility for the day-to-day operations of the business, including overseeing the receipt and delivery of securities and funds, safeguarding customer and firm assets, calculation and collection of margin from customers and processing dividend receivables and payables and reorganization redemptions and those books and records related to such activities.

While the day-to-day duties of these positions may be delegated to other principals of the firm, the ultimate responsibility for the functions must remain with the Principal Financial Officer and the Principal Operations Officer.

These designations will replace the existing requirement that all member firms designate a Chief Financial Officer, and that FINRA and NYSE dual-member firms also designate a Chief Operations Officer, and will apply to all firms, regardless of whether the firm is exempt from the requirement to have a Financial and Operations Principal (“FinOp”) or an Introducing Broker-Dealer FinOp. Principal Financial Officers and Principal Operations Officers will be required to be registered as either a FinOp or Introducing Broker-Dealer FinOp, as applicable, and must be registered in the CRD system as Operations Professionals. With respect to these requirements, because Principal Financial Officers and Principal Operations Officers must also be registered as either FinOps or Introducing Broker-Dealer FinOps, they will not be required to pass the Operations Professional (Series 99) examination in order to register as Operations Professionals, as they already hold a qualifying registration.

Firms that are not self-clearing or do not provide clearing services are not required to designate separate individuals to serve as the Principal Financial Officer, Principal Operations Officer, and FinOp or Introducing Broker-Dealer FinOp. Firms that self-clear or provide clearing services, unless granted a limited-size waiver from FINRA, must designate separate individuals to serve as Principal Financial Officer and Principal Operations Officer. Such individuals, however, may also carry out FinOp responsibilities. A firm may designate multiple Principal Operations Officers in accordance with the Proposed Rules, but may not designate multiple Principal Financial Officers.

Additional Principal Registration Categories

The Proposed Rules establish three new principal registration categories: (a) Compliance Officer; (b) Investment Banking Principal; and (c) Private Securities Offerings Principal.

• Compliance Officer. Under the Proposed Rules, individuals designated on Form BD as Chief Compliance Officer, with the exception of firms engaged in limited investment banking or securities business, must register as a Compliance Officer. Individuals who are currently registered as both General Securities Representatives and as General Securities Principals and maintain those registrations on or after October 1, 2018, will be able to register as a Compliance Officers without having to pass any additional examinations. An individual who meets these requirements and is also designated on Form BD as Chief Compliance Officer as of October 1, 2018, will automatically be granted registration as a Compliance Officer. On or after October 1, 2018, individuals who do not meet an exemption from the examination requirements will be required to either pass the General Securities Representative examination (including passing the SIE) and pass the General Securities Principal examination, or pass the Compliance Official examination (Series 14).
• Investment Banking Principal. Under the Proposed Rules, principals who are responsible for supervising certain investment banking activities[5] are required to register as Investment Banking Principals. Individuals who are currently registered as both Investment Banking Representatives and as General Securities Principals and maintain those registrations on or after October 1, 2018, will automatically be granted registration as Investment Banking Principals on October 1, 2018. On or after October 1, 2018, individuals who do not meet an exemption from the examination requirements will be required to pass both the Investment Banking Representative examination (including passing the SIE) and pass the General Securities Principal examination.
• Private Securities Offerings Principal. Under the Proposed Rules, principals who are solely responsible for supervising specified activities relating to private securities offerings may register as Private Securities Offerings Principals, instead of registering as General Securities Principals. Individuals who are currently registered as both Private Securities Offerings Representatives and as General Securities Principals and maintain those registrations on or after October 1, 2018, will automatically be granted registration as Private Securities Offerings Principals on October 1, 2018. On or after October 1, 2018, individuals who do not meet an exemption from the examination requirements will be required to pass both the Private Securities Offerings Representative examination (including passing the SIE) and pass the General Securities Principal examination.

Under the Proposed Rules, an individual is not eligible to register as an Investment Banking Principal or Private Securities Offerings Principal solely by virtue of being registered as a General Securities Representative and General Securities Principal.

Permissive Registrations

FINRA member firms will be permitted under the Proposed Rules to permissively register or maintain the registration of any associated person or any individual engaged in the investment banking or securities business of a non-U.S. securities affiliate or subsidiary of the member.[6] This expands the current categories of permissive registrations, which include individuals performing legal, compliance, internal audit, back-office operations, or similar responsibilities for a firm; individuals engaged in the investment banking or securities business of a non-U.S. securities affiliate or subsidiary of a firm; and individuals performing administrative support functions for registered persons of a firm. Permissively registered individuals will be considered registered persons of the member firm and subject to all FINRA rules relevant to their activities.

Firms must have adequate supervisory systems and procedures in place to ensure that individuals who are permissively registered do not act outside of their registered function. A permissively registered individual does not need to be directly supervised by a registered person, although the member firm must assign a supervisor registered with the firm who is responsible for periodically verifying that the permissively registered individual is not acting outside the scope of his or her registered function. This registered supervisor must have at least the same level of registration as the permissively registered individual (i.e., if the individual is permissively registered as a principal, the registered supervisor must also be a principal), although the registered supervisor does not need to be registered in the same representative or principal registration category as the permissively registered individual.

Registered Persons Functioning as Principals

Under the Proposed Rules, registered representatives will now be permitted to function as principals of a firm for a period of 120 calendar days—an increase from the current 90-day period—before being required to pass the appropriate principal-level qualification examination. Firms will also be able to designate current principals to serve in another principal category (e.g., a current General Securities Principal can be designated to serve as a Municipal Securities Principal) for the same 120-day period. Registered representatives who are designated as principals in this manner, however, including with respect to principal categories that do not have pre-requisite representative-level registration requirements, must have at least 18 months of experience functioning as a registered representative within the immediately preceding 5 years.

Examination Changes

The Proposed Rules make a number of changes to the representative-level qualification examinations, which are designed primarily to eliminate redundancies in the testing of general securities knowledge across the representative-level examinations, and also retire a number of existing representative-level registration categories. These changes are described in further detail below, and summarized in chart-form in Appendix A.

Securities Industry Essentials Examination (SIE)

In connection with the Proposed Rules, FINRA will be restructuring its representative-level qualification examinations. Effective October 1, 2018, individuals seeking representative-level registration will be required to pass the SIE examination, as well as a revised function-specific qualification examination (e.g., General Securities Representative (Series 7)). Certain current and former registered representatives will be given credit for passing the SIE without having to sit for the exam. The SIE is designed to eliminate redundant testing of general securities knowledge across the representative-level examinations, including knowledge of basic products, the structure and function of the securities industry, the regulatory agencies and their functions, and regulated and prohibited practices. The revised function-specific examinations will focus on knowledge relevant to the day-to-day activities, responsibilities, and job functions of representatives. Individuals will be able to schedule the SIE and any function-specific examination(s) on the same day, subject to testing center availability. The SIE will be subject to a four-year expiration period, unlike the two-year registration lapse period that will continue to be applicable for representative- and principal-level registrations.

Individuals may continue to apply to become registered representatives prior to October 1, 2018. Such individuals will sit for the existing representative-level examinations, regardless of whether the examination takes place prior to October 1, 2018 (i.e., an individual who applies for registration on September 29, 2018, could sit for an existing representative-level examination in November of 2018). Individuals who attempt and fail an existing representative-level examination, and are precluded from sitting for the same exam until after October 1, 2018, will be required to take and pass the SIE and function-specific examination on his or her next attempt. If this occurs, however, the individual will not have to wait the typical 30-day period before sitting for the SIE and function-specific examination (e.g., an individual who fails the current Series 7 examination on September 29, 2018 could sit for the SIE and revised Series 7 examination on October 5, 2018).

All associated persons will be eligible to sit for the SIE. In addition, individuals not associated with a member firm, such as the general public, will be permitted to sit for the SIE, although passing the SIE alone will not qualify an individual for registration with FINRA. Associated persons who sit for the SIE will be subject to the SIE Rules of Conduct, which, among other things, requires individuals to attest that mere passage of the SIE does not qualify an individual to engage in investment banking or securities business. Individuals not associated with a member firm will be required to agree to be subject to the SIE Rules of Conduct. Firms will be able to register associated persons for the SIE through CRD, and FINRA is developing a separate system to allow associated persons not seeking registration as a representative and individuals not associated with a firm to enroll and pay the SIE examination fee.

Eliminated Representative Level Registration Categories

In connection with the Proposed Rules, the following registration categories and examinations are being retired:

• Assistant Representative – Order Processing (Series 11);
• United Kingdom Securities Representative (Series 17);
• Canada Securities Representative – with options (Series 37);
• Canada Securities Representative – no options (Series 38);
• Registered Options Representative (Series 42);
• Corporate Securities Representative (Series 62); and
• Government Securities Limited Representative (Series 72).

An individual currently registered in one of these categories will be grandfathered by FINRA and may maintain his or her registrations until the individual is terminated and remains terminated for a period of two years.

Research Analyst and Principal and Supervisory Analyst Qualification Requirements

Under the proposed rules, individuals seeking registration as a Research Analyst will no longer be required to pass the General Securities Representative examination. Instead, individuals will be required to pass the SIE and revised Research Analyst qualification examinations (Series 86 and 87). In addition, individuals seeking registration as a Research Principal may now either pass the Research Analyst and General Supervisory Principal qualification examinations, or, alternatively, qualify and register as a Supervisory Analyst (Series 16) and pass the General Supervisory Principal qualification examination. In connection with these changes, FINRA is eliminating the experience prerequisite for individuals seeking registration as a Supervisory Analyst, which required that individuals seeking registration have at least three years of experience involving securities or financial analysis in the immediately preceding six years.

Conclusion

With the Proposed Rules, FINRA seeks to streamline the examination and registration process by establishing the SIE and revising many of the current qualification examinations. The Proposed Rules also introduce additional principal registration categories and requirements, while also retiring a number of existing representative-level registration categories and qualification examinations. Finally, through implementation of the Waiver Program, FINRA seeks to provide flexibility to allow individuals to move between member firms and their non-U.S. or U.S. financial services industry affiliates without having to re-take qualification examinations upon their return to a member firm, provided that certain conditions are met. While the Proposed Rules are substantially similar to the NASD and NYSE rules that are being consolidated, there are certain key differences, such as those outlined above, which should be considered and understood before the October 1, 2018 implementation date.

Appendix A

Examination and Registration Changes under the Proposed Rules

The below chart captures the principal- and representative-level examination and registration changes under the Proposed Rules, as well as the addition of the Principal Financial Officer and Principal Operations Officer designations.[7] For more information please see the discussion above.

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

Shearman & Sterling LLP

Russell D. Sacks, Jennifer D. Morton, Steven Blau, Jenny Ding Jordan and P. Sean Kelly

June 25, 2018

June 21, 2018, the BDA sent letters to the Senate Banking and House and Financial Services Committees requesting their support of The Small Business Audit Correction Act. The Senate letter can be viewed here and the House letter can viewed here.

S. 3004 & H.R. 6021 would exempt privately held, small non-custodial brokers and dealers in good standing from the requirements to hire a Public Company Accounting Oversight Board (PCAOB) registered audit firm to meet their annual SEA Rule 17a-5 reporting obligation and that the audit firm perform the audit in accordance with PCAOB standards.

Passage of the legislation would allow eligible firms to conduct their annual audits in a less costly and burdensome manner. Many BDA members listed this issue as one of their top legislative priorities for the year.

In related news, the Senate Banking Committee will consider The Small Business Audit Correction Act (S. 3004) next Tuesday at a hearing. S. 3004 will be part of a package of bills that is being reviewed by the Committee. BDA staff will attend the hearing. For more information, please click here.

Call to Action

Now is the time to reach out to your Members of Congress and urge them to support and co-sponsor onto The Small Business Audit Correction Act! Members and their staff need to hear from you.

All Members of Congress are important in this effort, however House Financial Services and Senate Banking Committees are particularly important! The Small Business Audit Correction Act is expected to be rolled into a package of capital markets bills considered by the House Financial Services Committee soon.

• Financial Services Comm. Members and contact information can be viewed here.
• Senate Banking Comm. Members and contact information can be viewed here.
• Suggested talking points can be viewed here.
• Draft letter can be viewed here.
• Summary of the bill can be viewed here.
• House bill can be viewed here. Senate bill can be viewed here.

Bond Dealers of America

June 21, 2018

In bond transactions, investors are often curious to know the price that they pay for their securities and the markup that their brokers charge them. It becomes especially important for muni bond transactions wherein, because of the large number of issues and liquidity concerns, retail investors rely on their brokers to a large extent on pricing their securities.

In this regard, on September 2, 2016, the Municipal Securities Regulatory Board (MSRB) filed a proposed amendment to the Securities and Exchange Commission (SEC) regarding rules G-15, G-30 and FINRA Rule 2232. This change was to increase the transparency of the municipal bond market and to help further clarify the distinction between a bond’s actual price and the markup the broker receives.

The amendment was finally approved and became effective on May 14, 2018, and is expected to raise a lot of discussions in the industry.

Let us go over some of the broader implications of these recently implemented rules.

Continue reading.

municipalbonds.com

Brian Mathews

Jun 21, 2018

SIFMA provided comments to the SEC on recommendations of the Market Structure Subcommittee of the SEC Investor Advisory Committee on Municipal and Corporate Bonds.

Read Comments.

Read about charitable donations and MSRB Rule G-37, among other tips and info in the latest Compliance Corner.

Washington, DC – As part of its commitment to ongoing review of its rules and published interpretations, the Municipal Securities Rulemaking Board (MSRB) is seeking comment on existing interpretive guidance that addresses the application of the MSRB’s fair-dealing rule to underwriters of municipal securities. The guidance, adopted in 2012, established obligations for underwriters, including requirements to disclose information to issuers about the nature of their relationship and risks of transactions recommended by the underwriters, among other information.

“The MSRB has received informal feedback from market participants that the disclosure requirements adopted in 2012 could more effectively and efficiently achieve their intended purpose of assisting issuers in making informed decisions when engaging the services of an underwriter,” said MSRB President and CEO Lynnette Kelly.

For example, Kelly said, some market participants have indicated that underwriters’ disclosures are duplicative, often boilerplate and burdensome for issuers to review. In addition, dealers have observed that in some cases the burdens on them of requiring certain disclosures may not be fully justified by the informational value to issuers.

“Soliciting formal public comment will help us consider whether and how to amend the guidance to improve its effectiveness and efficiency,” Kelly said.

Read the request for comment. Comments should be submitted no later than August 6, 2018.

Date: June 5, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

On June 7, 2018, the BDA continued leading the advocacy push opposing FINRA Rule 4210 by submitting a letter in support of a “Capital Charge” provision in lieu of the proposed margin requirements. The letter, which comes on the heels of a 9 month delay of implementation of the rule by the SEC last month, showcases BDA firms and how the requested change would positively impact these firms.

Highlighted points include:

• These firms do not believe that the Capital Charge Proposal will have any anti-competitive impact on their businesses.
• These firms expect that the existing covered agency transaction rules will cause some erosion in their businesses.
• These firms strongly support the Capital Charge Proposal.

BDA Continues Advocacy on Capitol Hill

The BDA continues to work with partners on the House Financial Services Committee and Senate Banking Committee to pressure the SEC and FINRA to rethink the rule. This includes both advocating for the “Capital Charge” proposal as well for outright termination of the amendment due to its anti-competative nature before implementation on March 25, 2019.

In the coming weeks, it is expected that multiple Members of Congress will reach out to both FINRA and the SEC. We will provide an update once this occurs

Bond Dealers of America

June 8, 2018

Company Known for Low Fees Supports Amendments Requiring Brokers to Increase Transparency

GREENWICH, Conn.–(BUSINESS WIRE)–Interactive Brokers Group, Inc. (NASDAQ GS: IBKR) an automated global electronic broker, today announced its support for a new rule implemented by the Securities and Exchange Commission (SEC) on May 14th requiring brokers to disclose the fees they make on corporate, municipal, and agency bond transactions.

The amendments to FINRA Rule 2232 and MSRB Rule G-15 regarding Customer Confirmations requires SEC member firms to disclose the amount of mark-up or mark-downs applied to trades made for retail clients if the firm executes an offsetting trade in the same security on the same trading day. The amendments also require firms to provide clients with trading data for the security traded and the exact execution time of the transaction.

“Interactive Brokers welcomes the new rule requiring brokers to be transparent about their fees. In the past, many brokers claimed they did not charge commission, but hid fees in their spreads. Unlike most other brokers, our firm offers low, transparent pricing and does not charge spread mark-ups,” said Thomas Peterffy, CEO of Interactive Brokers.

The company, which was ranked Number One in Barron’s 2018 Best Online Brokers Ranking and the “Lowest Cost Online Broker” by Barron’s five years on a row*, is known for its advanced technology, breadth of offerings, and low costs.

The company’s bond commissions are:

US Treasuries .002% on the first $1,000,000 of face value and .0001% of the face value after the initial $1,000,000.

Municipal Bonds .05% on the first $10,000 of the face value and .0125% of the face value after the initial $10,000.

Corporate Bonds 0.1% on the first $10,000 of face value and 0.025% of the face value after the initial $10,000.

More details on IBKR’s bond pricing can be viewed here.

“IBKR is committed to lowering clients’ costs to help them maximize their returns. We provide online access to a broad range of bonds and sophisticated cash management tools for everyone from corporate treasurers to individual investors. We encourage our clients to enter their own bids and offers and negotiate instead of acting on the quotes of others,” Mr. Peterffy noted.

In May, IBKR added mobile trading for both Municipal and Corporate bonds. Its Trader Workstation (TWS) trading platform provides Corporate Bond and Muni Bond Market Scanners that let clients quickly and easily scan global markets for the top performing bonds across instrument types and metrics.

About Interactive Brokers Group, Inc.:

Interactive Brokers Group affiliates provide automated trade execution and custody of securities, commodities and foreign exchange around the clock on over 120 markets in numerous countries and currencies, from a single IB Universal Account® to clients worldwide. We service individual investors, hedge funds, proprietary trading groups, financial advisors and introducing brokers. Focusing on technology and automation for over 41 years has enabled us to equip our clients with a uniquely sophisticated platform to manage their investment portfolios at the lowest cost. Due to our range of services, low costs and technology, IBKR is ranked the “Top Online Broker”, according to Barron’s Best Online Brokers review, March 24, 2018. We strive to provide our clients with advantageous execution prices and trading, risk and portfolio management tools, research facilities and investment products, all at low prices, positioning them to achieve superior returns on investments.

* Lowest Cost Rated by Barron’s 5 Years Straight – Lowest cost broker 2014 through 2018 according to Barron’s online broker review. Interactive Brokers earned a 4.6 star ranking in the March 26, 2018 Barron’s Annual Best Online Brokers – “All Together Now”. Criteria included Trade Experience and Technology, Usability, Mobile, Range of Offerings, Research Amenities, Portfolio Analysis & Reports, Customer Service, Education and Security, and Costs. Barron’s is a registered trademark of Dow Jones & Co. Inc.

Contacts

For Interactive Brokers Group, Inc.

Investors: Nancy Stuebe, 203-618-4070
or
Media: Kalen Holliday, 203-913- 1369

June 05, 2018

This Advisory describes recent developments regarding disclosure of cybersecurity risks and incidents and their import for municipal disclosure.

Read the Advisory.

Washington, DC – After an intensive three-year effort to re-engineer the underlying technology of the trade reporting system that supports one of the country’s key capital markets, the Municipal Securities Rulemaking Board (MSRB) is now accepting and disseminating municipal securities trade information through a modernized Real-Time Transaction Reporting System (RTRS).

“Investment in technology is critical to the MSRB’s ability to ensure a fair, transparent and efficient municipal market,” said MSRB President and CEO Lynnette Kelly. “Modernizing our 13-year-old trade reporting system will contribute to improved data quality and enhance the MSRB’s ability to prevent and respond to significant service disruptions in this vital market transparency system.”

The MSRB created RTRS in January 2005, transforming price transparency in the municipal market by requiring municipal securities dealers to report information about most trades in municipal securities within 15 minutes. This real-time trade data was made publicly available on the MSRB’s Electronic Municipal Market Access (EMMA®) website in 2008. The MSRB now processes approximately 39,000 trade reports each day for transactions in the more than 1 million outstanding municipal securities. Read more about the development of the MSRB’s market transparency systems.

“RTRS is now better equipped to respond to an evolving municipal market and adapt as needed to future regulatory requirements,” Kelly said.

The re-engineered RTRS will continue to accept computer-to-computer trade reports from dealers in the same manner but with some improvements to the way errors are detected and assigned. Dealers that report trades or monitor compliance with trade reporting requirements through the RTRS Web user interface will notice streamlined navigation and enhanced display of information. The MSRB Transaction Subscription Service has also been re-engineered to improve data quality and strengthen system security and reliability. Questions about the RTRS system may be directed to MSRB Support.

Date: May 30, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

The Economic Growth, Regulatory Relief and Consumer Protection Act – good for counties – moves on to the White House for president’s signature

On May 22, the U.S. House of Representatives passed S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, which is now headed to the president’s desk for his signature.

A provision in the bill — Section 403 — is particularly beneficial to counties because it reclassifies municipal debt as a High-Quality Liquid Asset (HQLA). Under current law, banks are required to meet a Liquidity Coverage Ratio (LCR) to ensure each bank has enough liquid assets in the event of financial stress. By classifying municipal securities as a Level 2B asset, required to account for at least 15 percent of a bank’s total stock, banks will be further incentivized to invest in these bonds. This change Muni bonds measure heads to White House would make municipal debt more attractive to investors and banks, keeping the demand for municipal bonds high and interest costs of issuance low for counties and other issuers.

Tax-exempt municipal bonds are used to finance the construction of and repairs to infrastructure important to counties, including roads and bridges, public transportation, seaports and airports, water and wastewater facilities, electric power and natural gas facilities.

Classifying investment grade municipal securities as HQLA will help ensure low-cost infrastructure financing remains available as municipal issuers continue building the local infrastructure on which our communities and the national economy rely.

National Association of Counties

May 28, 2018

MARK NIESSE WAS one of two reporters in a conference room inside a government building in downtown Atlanta in June 2017, listening to a presentation about an obscure accounting rule change. For the first time ever, governments were required to release detailed information about tax breaks given to companies. Niesse, a reporter at the Atlanta-Journal Constitution, hoped to answer a question that had long nagged him: Are tax incentives worth it?

In Fulton County, the largest of nine counties in the Atlanta metro area, officials were trying to comply with the new disclosures and had hired Ernst & Young to help. As the accountants spoke, Niesse peppered them with questions. At one point, the accountants left the room to discuss the accuracy of their numbers. “When they came back out, they agreed they needed to present the information in a clearer way,” Niesse recalls. That’s when Niesse noticed an extensive spreadsheet on an accountant’s laptop, open on the conference room table. Unlike the PowerPoint, the spreadsheet was crystal clear: it showed the parcel IDs and property taxes not paid on every recent development in Fulton County.

Niesse made a verbal FOIA request to the public relations officials in attendance. “They weren’t counting on that,” he recalls. Back in the newsroom, he followed up with a written request, and by late June, the spreadsheet—with its 56 columns and 77 rows of data—was open on his computer. “It was a lot of good information,” he recalls. “I would have had a hard time doing that myself.”

Continue reading.

Columbia Journalism Review

By Mya Frazier

MAY 29, 2018

The Fight to Re-generate Access to Advanced Refundings Continues

Discussions around the ongoing fight to recreate access to advanced refundings through new legislation have been in the news. Steve Benjamin, Mayor of Columbia, S.C., Chair of Municipal Bonds for America (a non-partisan coalition of municipal bond issuers and state and local government officials), and the incoming President of the Conference of Mayors, has been particularly vocal in his defense of advanced refundings.

There are three main components to understand and consider in this discussion:

Continue reading.

by George Friedlander

Posted 05/23/2018

Neighborly Insights

These Insights are brought to you by Court Street Group Research.

This week the House of Representatives passed Senate legislation addressing a rule approved by the Federal Reserve Board, Federal Depository Insurance Commission and the Comptroller of Currency in September of 2014, which established new liquidity standards for banks. The new standards, which went into effect in January of 2015, require financial institutions with at least $250 billion in total assets to maintain prescribed levels of liquid assets that can quickly be converted into cash in times of national economic stress. These asset classes included foreign sovereign debt, but failed to classify municipal securities as High Quality Liquid Assets.

S. 2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act (Closed Rule, One Hour of Debate) (Sponsored by Sen. Mike Crapo / Financial Services Committee) is now headed to the President’s desk. Included in the bill is a provision that will mend an oversight of the Liquidity Coverage Ratio rule to include municipal securities as High Quality Liquid Assets. The core features of investment grade municipal securities are consistent with all of the criteria characterized as HQLA, including limited price volatility, high trading volumes and deep and stable funding markets, as described below.

The municipal securities market is a large, deep pool of capital representing a $3.85 trillion market. Institutional investors dedicate capital to the municipal market because muni securities are a secure investment. Municipal bonds are traded by a large number of committed retail participants in high trading volumes with timely and observable market prices through the MSRB’s reporting system, EMMA.

After US Treasuries, municipal securities are the safest available investment, with state and local governments having nearly a zero default rate. Some municipal bonds (such as the GO bonds of nine states) are more highly rated that US treasury securities.

Classifying investment grade municipal securities as HQLA helps ensure that low-cost infrastructure financing remains available for state and local governments to continue to build the infrastructure for commerce, public safety, job creation and the development of an educated workforce. We applaud Leadership’s recognition that the ability of banks to invest in municipal securities for infrastructure projects is critically important and should not be impaired and Congress’ dedication to ensuring the municipal bond remains the cornerstone of a healthy and productive economy.

On May 22, 2018, the US House of Representatives passed by a vote of 258-159 the Senate’s bank regulatory reform bill, The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). With the bill’s passage in both Chambers, the President is expected to sign it into law before the start of the weekend.

A legislative success for BDA members in the bill is a provision (Section 403) that directs the FDIC, the Federal Reserve, and the OCC to classify qualifying investment-grade, liquid and readily-marketable municipal securities as level 2B liquid assets under the agencies’ liquidity coverage ratio (LCR) rules. This classification ensures that municipal bonds remain an attractive and low-cost financing tool for public infrastructure.

Working in tandem with state, local, and issuer groups, BDA has supported and advocated for the high-quality liquid asset (HQLA) provision in the bill. BDA’s work on this issue can be viewed here.

Next Steps

The BDA will be tracking and updating members as the federal banking agencies amend LCR regulations to reflect the change in law.

Section 403 directs all the banking agencies to amend their LCR rules and any other regulation that incorporates similar liquidity definitions within 90 days after the date of enactment of the legislation.

Bond Dealers of America

May 23, 2018

The banking bill President Trump signed into law on Thursday promises to help reduce state and local borrowing costs, public finance officials and experts said.

A section in the bill would reclassify investment grade municipal bonds as “high-quality liquid assets,” referred to as HQLA for short.

This change opens the door for the nation’s biggest banks to use the bonds to meet federal liquidity requirements. Liquidity is a measure of how swiftly assets can be converted to cash to meet financial obligations.

Enabling banks to count the bonds as liquid assets is expected to drive up demand for the bonds and, in turn, push down interest rates for state and local borrowers.

“HQLA is huge for us,” said Emily S. Brock, who leads the Government Finance Officers Association’s federal liaison center. “We’ve been working it for about four years.”

The Federal Reserve, Federal Deposit Insurance Corporation and the Comptroller of the Currency approved liquidity rules in 2014 for banks with over $250 billion in assets, setting guidelines for the high-quality liquid assets that they need to maintain. But “muni” bonds didn’t qualify as an HQLA asset under those rules.

Vermont Treasurer Beth Pearce is the current president of the National Association of State Treasurers.

“For me as a treasurer, and treasurers across the country, we’re concerned about the cost for our taxpayers and we see this as an important improvement,” Pearce said.

“It’s a very big deal,” she added.

State and local governments commonly borrow to pay for infrastructure like roads, schools and water systems. The municipal debt market in the U.S. totals about $3.8 trillion.

It’s too early to know how much the HQLA designation could save states and localities, according to Brock and Pearce.

But Brock anticipates no shortage of interest among banks in municipal debt. “Banks love safety, they love liquidity and they love yield,” she said. “Municipal securities do it for them.”

The bipartisan legislation the president signed Thursday is dubbed the Economic Growth, Regulatory Relief, and Consumer Protection Act.

It rolls back rules for small- and medium-sized banks that were imposed as part of the 2010 Dodd-Frank law, which lawmakers passed in the wake of the nation’s 2008 financial crisis.

Route Fifty

By Bill Lucia,
Senior Reporter

MAY 24, 2018

As the treasurer for the country’s fourth-largest school district, Tony Vu says his goal is to lower borrowing costs for a voter-approved $1.2 billion general obligation construction program in south Florida.

Vu said his Miami-Dade County School District is “a Fortune 500-sized organization” that is limited by legislation and faces shrinking resources, growing mandates and tighter regulations.

A priority since becoming the treasurer 10 months ago, he said, was to create a new investor community website to augment the district’s use of Digital Assurance Certification and the Municipal Securities Rulemaking Board’s EMMA filing system.

The Miami-Dade County School District has $3.73 billion of outstanding debt.

As he considered a new platform, Vu said he was approached by representatives of BondLink, a Boston-based financial technology company that provides investor outreach to municipal issuers. Vu liked what he saw.

“I think from the investor’s standpoint we can reach a larger group and a larger pool,” he said. “I think one thing we’ll definitely be able to do is have a more localized outreach effort.”

Vu said he expects BondLink to give him with the ability to get the district’s “story out there as effectively as possible,” and to conduct targeted and proactive outreach to new retail investors and existing bondholders.

“Higher transparency typically means lower borrowing costs,” he said.

Studies have supported the notion that issuers with good disclosure practices tend to elicit lower interest rates.

That was the conclusion of “When transparency pays: The moderating effect of disclosure quality on changes in the cost of debt,” a paper by Christine Cuny and Svenja Dube of New York University’s Stern School of Business.

In their research, presented at Brooking’s July 2017 Municipal Finance Conference, Cuny and Dube examined the relation between disclosure choice, changes in issuer credit ratings, and adverse local housing conditions.

The “results suggest that disclosure quality can lower the cost of debt by attenuating the impact of negative economic outcomes,” they said.

Vu said he hopes improved disclosure will help the district lower borrowing costs as it completes its $1.2 billion 21st Century GO Bond Program approved by voters in 2012. To date, the district has issued $929 million of GOs, leaving $271 million in bonding capacity to be sold.

The district’s bond advisory committee reported that $546 million has been spent on new and renovated schools and technology upgrades as of Dec. 31.

The Miami-Dade School District also has $2.37 billion of certificates of participation lease-revenue debt outstanding, secured by its capital millage rate, impact fees, and other legally available funds.

The ability of Florida school districts to issue COPs in the future is in question as a result of the Legislature’s passage of House Bill 7069 in 2017.

The sweeping education bill required districts for the first time to share with charter schools a portion of their optional 1.5 millage rate dedicated to capital funding. One mill equals $1,000 of the assessed taxable property value.

HB 7069 “won’t impact already issued debt,” Vu said. The bill requires outstanding debt service of the districts to be paid first before funds are shared with charter schools.

The State Board of Education is continuing to implement the bill, and has yet to determine how the law will impact the ability of Florida school districts to issue COPs in the future.

More than a dozen districts have filed a law suit challenging HB 7069.

The Miami-Dade County School District, which operates 342 traditional public schools and must share a portion of its capital millage with 130 charter schools in the county, is not participating in the HB 7069 suit.

S&P Global Ratings raised its rating on the district’s GO bonds to AA-minus from A-plus and its rating on the district’s COPs to A-plus from A in April 2017. Moody’s Investors Service (MCO) assigns an Aa3 rating to the GOs and an A1 to the COPs. Both have stable outlooks.

BY SOURCEMEDIA | MUNICIPAL | 05/14/18 07:03 PM EDT

By Shelly Sigo

WASHINGTON – The Financial Industry Regulatory Authority is going to immediately begin examinations of firms’ compliance with markup disclosure rules, with early returns indicating minor speed bumps in the implementation of those landmark requirements, regulatory officials said Tuesday.

Cindy Friedlander, the senior director of fixed income regulation within FINRA’s Regulatory Operations group, said during a panel at FINRA’s annual conference that the regulator will not wait to begin examining firms’ compliance with the markup disclosure requirements that took effect less than two weeks ago.

Amendments to Municipal Securities Rulemaking Board rules G-15 on confirmation and G-30 on prices and commissions require dealers as of May 14 to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers. Dealers had hoped for a compliance extension, but didn’t get it.

Under the rules, dealers initially must look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. If that data is unavailable, they must make a series of other successive considerations.

They must look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms. Further down the waterfall, dealers can look at contemporaneous trades of similar securities.

Markup disclosures must be given as a total dollar amount and a percentage of the prevailing market price.

“We will be examining firms immediately,” Friedlander said. “We are going to be very careful to take into account firms’ good faith efforts to comply with the rules.”

Michael Post, MSRB general counsel, said the board has been discussing how compliance with the markup rule has gone over the first week or so.

“What we’ve heard is that things have gone relatively smoothly,” Post said, acknowledging that there have been reports of some hiccups. “It’s a relief that the issues that people are encountering are things that they think that they can address.”

Post reserved some measure of caution about his remarks, realizing that a firm experiencing a significant compliance failure might be hesitant to admit that to the MSRB.

Peg Henry, a deputy general counsel at Stifel Financial (SF) in St. Louis, said she has spent a lot of time on the trading floor recently and has asked traders in the past couple of days how things are going with markup disclosure.

“The responses I got ranged from ‘not bad’ to ‘so far so good’ to ‘it is what it is,’” she said.

Henry said her firm has experienced some issues, such as the fact that it works with several vendors in its day-to-day business that don’t standardize how they report information. She also added that the size of the markup that needs to be reported on a trade could seemingly be affected by a trade of the same security that occurs later in the day.

“There are situations that have arisen just in the first week that have created problems for us,” she said. “We’ve developed workarounds, but the workarounds are very labor intensive.”

Post said that firms can choose to calculate the prevailing market price of a security earlier in the day if it chooses, so it can disclose the markup before another transaction occurs that could muddy the waters.

Ivonia Slade, an assistant director in the Securities and Exchange Commission’s Public Finance Abuse Unit, said her group is going to remain focused on topics it has acted on over the past several years, such as offering fraud that occurs when issuers make misleading statements in their bond documents. She highlighted the SEC’s focus on enforcing the fiduciary duty requirements of municipal advisors.

“Our focus has been on making sure that they’re meeting those obligations,” she said.

The FINRA conference began May 21 and concludes May 23.

BY SOURCEMEDIA | MUNICIPAL | 05/22/18 07:04 PM EDT

By Kyle Glazier

NEW YORK (Reuters) – Pennsylvania Governor Tom Wolf’s administration on Monday sued an array of financial, legal and other professional firms over their involvement in a 15-year-old incinerator upgrade project that nearly bankrupted the state capital, Harrisburg.

The state sued RBC Capital Markets, Buchanan Ingersoll & Rooney PC, Public Financial Management Inc (PFM) and others over the 2003 ill-fated trash-to-energy project, which saddled the city with more than $360 million of debt.

The city filed for bankruptcy in 2011 but the case was later thrown out. In its time, Harrisburg’s debt saga was the most dramatic episode in U.S. public finance, coming before both Detroit and Puerto Rico filed their respective bankruptcies.

“It is time to hold those responsible for the failed incinerator debt scheme accountable and recoup the taxpayer dollars wasted by their negligence and deception,” Wolf said in a statement.

In their push to close bond deals so they could be paid, the professionals named in the lawsuit, dubbed the Working Group, misled the city by providing false information and concealing important facts, according to the complaint.

The city backed the bonds used to finance the project. After the bonds defaulted, the city was forced into the state’s first and only municipal receivership – paid for by state and local taxpayers.

A spokeswoman for RBC declined to comment. Representatives of Buchanan Ingersoll & Rooney and PFM did not immediately respond to emails seeking comment.

Eckert Seamans, which provided legal advice to underwriters of the 2003 bonds and in 2007 to the authority that issued the bonds, said on Monday that it had cooperated fully with investigations over the years “because we are confident that the firm represented its clients professionally, competently, and ethically.””We will vigorously defend our service to our clients and aggressively fight these unfounded allegations,” the firm’s Chief Executive Officer Timothy Hudak said in a statement.

The state seeks punitive damages, with interest.

Adding to taxpayer frustration was the case of Stephen Reed, who was mayor at the time and who ended his 28-year tenure in 2010.

Reed was charged in 2015 with hundreds of criminal counts for using some bond proceeds to travel the country and buy a bizarre list of roughly 10,000 artifacts, including a sarcophagus, a suit of armor and a “vampire hunting kit,” that he said were destined for museums.

Last year he pleaded guilty and received probation to a shortened list of charges.

BY HILARY RUSS

May 21, 2018

(Reporting by Hilary Russ; editing by Richard Chang and Lisa Shumaker)

Summary

• FINRA Rule 2232 requires municipal bond markups.
• Bond transaction fees examined.
• Market impact yet to be seen.

As of May 14th, 2018, FINRA Rule 2232 went into effect which requires broker dealers to disclose on customer confirmations their markup for principal trades executed within the same day. Previously, these markups were not disclosed and were rarely discussed. Since bonds are bought and sold on a yield basis, if an investor was looking for a certain yield, maturity, and credit quality, brokers would make sure they achieved these goals while still making a mark-up for themselves. Sometimes this markup was minuscule as is the case with high quality, very short-term bonds. Sometimes it was as much as 3% as it would be on a highly speculative, long dated bond. Dealers would buy bonds in the open market and mark the price up to their clients to cover their expenses and earn a living.

Now some of you may be saying ‘what if I was looking for 5% and I could really get 6%, but my broker’s undisclosed markup ate away at that return?’ If that was occurring, your broker is a jerk (to put it politely). I am not here to defend anyone who does/did that. I am here to defend the reasonable fee charged on the onset of what is typically a multiple year and often a many decade long investment.

In many of the articles I read about the implementation of Rule 2232, the example that I always see is that a customer who invests $100,000.00 and is charged a 1% mark-up will now see that $1,000 one-time fee disclosed on their trade confirmation. This is true, that is how this new rule should work. Without a doubt, there will be some initial and significant sticker shock to seeing this markup printed on an investor’s trade confirmations. “$1,000 for one phone call WTF?!?” What needs to be explained clearly by brokers and understood by investors, is that this is a one-time fee, in contrast to the annual fees charged by other competing products.

I read often that bond investors should look to bond funds or bond ETFs to avoid the fees that come with purchasing individual bonds. Fees that many deem too steep. Let’s use the example of the $100k invested and the 1% fee charged and dig a little deeper. Let’s assume, for argument’s sake, that an investor is looking for a 20-year bond. Not too short, not too long, right in the meat of the yield curve to give a fair representation of an average bond investment time frame. The 1% fee charged at the outset of this investment breaks down to just 0.05% annually. Now, compare that to the 0.36% charged by the Fidelity Intermediate Municipal Income Fund (MUTF:FLTMX), or the 0.09% charged by the Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB), or the 0.25% charged by the iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB). One percent on the onset of the investment doesn’t stack up too bad. Now, bonds can be called in early, or might need to be liquidated by investors prior to maturity, which would increase the transactional annual fee. That I cannot argue with. If you are a true buy and hold investor, transactional fees, on annual basis, are very reasonable.

Fixed income investments, overall, are the buy and hold portion of an investor’s portfolio. Meaning they are not bought and sold frequently to capture short-term gains (as one could do in the stock market) and generate mark ups for broker dealers. Rather bonds are purchased to preserve capital and/or to generate a predictable amount of income over a longer time frame.

I hope that the implementation of this rule does not kick off a large wave of investors moving into bond ETFs from traditional bond portfolios. I feel that these products are a square peg in a round hole. That they appear to accomplish the same goals as individual bond investing but do so by sacrificing certain objectives. We will see how the market reacts.

NatAlliance Securities LLC may hold a position in all bonds/funds referenced, and in the future may be a buyer or a seller of the securities. This is not a recommendation to buy, sell, or hold the securities. Las Olas Wealth Management is a wealth management group within NatAlliance Securities LLC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha

by Dean Myerow
Las Olas Wealth Management of NatAlliance

May 16, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today requested comment on a draft proposal to re-establish a standalone rule governing the handling of transactions in discretionary accounts — those customer accounts in which a dealer is authorized to determine what municipal securities will be purchased or sold.

The MSRB’s proposal also seeks to address other uses of discretion for transactions in customer accounts, including when discretion is granted to a third-party agent of the customer, who is not an associated person of the dealer. Specifically, the MSRB believes it is important to expand the scope of the rulemaking to address these scenarios to recognize current practices in the municipal market and to provide investors with basic protections from unauthorized trading in their customer accounts.

The limited new proposed requirements for municipal securities customer accounts are harmonized with requirements of other financial regulators.

Comments should be submitted no later than July 16, 2018. Read the request for comment. Following the public comment period, the MSRB will carefully consider the comments received and may amend the proposal, submit the proposed rule with any necessary amendments to the Securities and Exchange Commission for its consideration and approval, or take no further action at this time.

Date: May 16, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

Why mayors are ‘completely baffled’ by loss of advance refunding

The beginning of Infrastructure Week 2018 presents us with the perfect opportunity to highlight a major blow to community control and to local government infrastructure investment: the repeal of advance refunding of municipal bonds in the Tax Cuts and Jobs Act.

I deeply appreciate that the Tax Cuts and Jobs Act maintained the century-old tax exemption for municipal bonds. State and local governments make more than 75% of our nation’s infrastructure investments, most of them financed with municipal bonds, and the tax law’s preservation of the tax exemption for municipal bonds recognized that the best thing the federal government can do on infrastructure is to first do no harm.

Unfortunately, the tax law’s elimination of the tax exemption for the advance refunding of municipal bonds will do considerable harm. This ill-conceived provision robs local governments of the ability to stretch infrastructure dollars and save taxpayer money by taking advantage of lower interest rates. Between 2012 and 2017, advanced refunding saved South Carolina cities, counties, school districts, universities, and utilities (and their taxpayers and ratepayers) approximately $164 million.

Indeed, I am at a loss as to why the same tax law that recognizes the central role of municipal bonds to our nation’s infrastructure is the same one that eliminated advanced refunding of municipal bonds. I am, to quote one of my fellow mayors, “completely baffled” by the law’s advance refunding provision. Summaries of the tax law offered no policy justification for this provision, making it clear that it was nothing more than a money grab from local governments and local taxpayers to finance tax cuts elsewhere in the bill.

Even worse, I fear that eliminating advanced refunding does not even work as an offset for tax cuts: the Joint Tax Committee’s estimate that it will generate $17 billion in revenue over the next decade seems to assume that issuers will continue to move forward with advanced refunding issues per usual, an assumption that defies common sense.

As Infrastructure Week launches and we focus on our nation’s infrastructure challenge, Congress has an opportunity to make things right. Representatives Randy Hultgren, R-Ill., and Dutch Ruppersberger, D-Md., the Chairs of the bipartisan Municipal Finance Caucus have introduced legislation to reinstate that tax exemption for advanced refunding of municipal bonds.

It is no surprise that Hultgren and Ruppersberger are leading this charge. Both spent much of their careers in public service in local government and they are therefore fully aware of how infrastructure gets built, who builds it, and what tools are needed to do so. Members of Congress who care about infrastructure should follow their leadership and support their legislation to correct this blow to our nation’s infrastructure, municipal finance, and local taxpayers.

Bond Dealers of America

by Steve Benjamin

Steve Benjamin is the Mayor of Columbia, South Carolina. He serves as Chair of Municipal Bonds for America, a non-partisan coalition of municipal bond issuers and State and local government officials along with other municipal market professionals working together to explain the benefits of the tax-exempt municipal bond market which provides the financing needed to build vital infrastructure throughout the United States.

May 15, 2018

The SEC recently adopted a set of rule amendments removing certain personally identifiable information (PII) from a group of SEC forms, including Forms MA and MA-I (and their variants). Specifically, the amendments eliminate portions of the forms that request filers to provide certain PII, including Social Security numbers, dates of birth, or Foreign ID numbers. The amendments take effect today, May 14th. Information on the amendments can be viewed here.

Though the rules have been amended, the actual forms the filers complete in EDGAR have not yet been updated to reflect the rule amendments. As a result, when completing Form MA, MA/A, MA-A, or Form MA-I or MA-I/A, filers will see sections that ask for PII. Filers should not provide this information.

A copy of the Commission’s Adopting Release regarding the rule amendments can be viewed here.

Bond Dealers of America

May 14, 2018

Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today received approval from the Securities and Exchange Commission (SEC) to establish a new advertising rule for municipal advisors and to enhance the MSRB’s existing advertising rule for municipal securities dealers. To assist municipal advisors in complying with MSRB Rule G-40, the MSRB will provide guidance in advance of the effective date of February 7, 2019. Read the approval notice.

“Preventing misleading advertisements is an important component of a comprehensive regulatory framework for financial services professionals,” said MSRB President and Chief Executive Officer Lynnette Kelly. “The implementation of the new advertising rule is an important piece of the MSRB’s foundational work to create standards of fair practice for municipal advisors. We took this opportunity to revisit and enhance our long-standing dealer advertising rules to build on our fair practice provisions and to align more closely our advertising rules with rules of other financial regulators.”

The MSRB plans to provide guidance for municipal advisors relating to a municipal advisor’s use of case studies and municipal advisory client lists; Rule G-40’s content standards; and a municipal advisor’s use of social media.

The MSRB is hosting a virtual compliance workshop in a question-and-answer format to discuss key provisions of the advertising rules on Thursday, November 8, 2018 at 3:00 p.m. – 4:00 p.m. ET.  Register for the workshop.

Date: May 7, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org

On May 7, 2018, official notice was sent stating that the SEC approved FINRA’s request to extend the effective date of implementation of Rule 4210 until March 25th, 2019. As a result of exhaustive advocacy efforts from BDA membership with the SEC, FINRA and Capitol Hill, the delay was granted, in large part, to further study of BDA’s “capital charge” proposal.
The FINRA notice can be viewed – Here

Background
In December 2017, BDA member firms met with FINRA CEO Robert Cook and urged FINRA consider a new solution to the margin requirements under Rule 4210. This BDA-member proposal would allow dealers to either charge margin to counterparties or to take a regulatory capital charge to cover any mark-to-market deficiency in excess of the de minimis threshold. This would allow dealers to remain competitive and still manage any systemic risk in the marketplace.

Additionally, BDA members discussed Rule 4210 Amendments in-person with SEC Chairman Clayton and SEC commissioners in January 2018. In February 2018, BDA received confirmation that FINRA is considering a change to Rule 4210 based on the capital charge idea BDA members brought up during the December 2017 meeting.

Next Steps
The BDA is pleased with this development, and will continue to work with FINRA on of the capital charge proposal in lieu of margin. In the coming weeks, the BDA will conduct outreach to members to further gather empirical data to provide with regulators in advocacy for the capital charge proposal.

Bond Dealers of America

May 7, 2018

A new rule going into effect Monday will let retail investors see how much money their brokers earn in commissions selling them bonds, the Wall Street Journal reports.

Brokers will be required to disclose their profits on the corporate and municipal bonds they buy and then sell to retail investors on the same day, according to the paper. In addition to markups, brokers will also need to disclose markdowns — the reductions in bond prices investors take when bonds are sold before their maturity, the Journal writes. Retail investors control the largest share of the $3.85 trillion market in state and local government bonds, according to the paper.

The new rule is a result of a multiyear effort by Finra and the Municipal Securities Rulemaking Board and was in fact ready in 2016, but the industry’s two self-regulators delayed implementation until this month to allow brokers time to adjust, the Journal writes. Brokers have complained that automating the process for calculating markups on thousands of trades a day would cause complications, according to the paper. Don Winton, chief operating officer at brokerage Crews & Associates Inc., tells the Journal that the rule cost the firm “well into six figures” to prepare for and will continue eating up “high five figures” annually to implement.

Brokers may have to make further changes still in light of the rule. The new disclosures may cause some investors to try to negotiate their fees, according to the Journal. In addition, the rule could accelerate the current transition from direct ownership of bonds to ownership through managed funds such as mutual funds or exchange traded funds that typically come with lower fees, the paper writes.

Finra and MSRB say the rule is a major transparency improvement in the bond market and will save investors money, according to the Journal. Current and former officials of the two agencies have said that investor testing prior to the rule revealed little understanding of markups and markdowns or how brokers are paid on bond trades, the paper writes. Now, the disclosures on bond trades will be comparable to information provided to investors on stock trades, a spokesman for Finra tells the Journal.

Financial Advisor

By Alex Padalka

May 11, 2018

For years, retail investors have groped in the dark with respect to the fees they pay to buy bonds. On Monday, the light’s going on.

Thanks to a new rule designed to curb abusive sales practices, brokers will have to say how much they earn when they buy corporate and municipal bonds and sell them to retail investors later that day, The Wall Street Journal reports. At issue is the potential for excessive markups that can cut into returns. Regulators currently require dealer markups to be “reasonable” but there’s no strict limit.

The new disclosures—which have been in the works for years—could lead some investors to bargain with their broker for lower fees. Some investors may also opt for lower-cost bond funds or ETFs instead.

Of course there are critics. Brokers are understandably concerned about their bottom line. Some industry participants, meanwhile, say the rule doesn’t do enough to help investors. For instance, since many brokers will send the details of the markup via snail mail, investors can easily discard the information without a second thought, critics contend. Even if they read the disclosures, investors won’t have a viable way to compare fees, opponents say.

“This is an inefficient way of promoting price competition,” Larry Harris, of the University of Southern California, who has studied bond-trading costs, tells the Journal. The Municipal Securities Rulemaking Board and Finra prepared the new rule and defend it as necessary to improve bond-market transparency, among other benefits.

Barron’s

Cheryl Winokur Munk

May 11, 2018 11:52 a.m. ET

NEW YORK, May 10 (Reuters) – U.S. municipal bond firms are rushing to comply with a new mandate taking effect on Monday that will force brokers for the first time to disclose how much they charge individual investors on some trades in the tax-exempt debt market.

The so-called markup disclosure rule is aimed at adding transparency to a $3.8 trillion market where the debt of states, local governments, hospitals, universities is traded though an opaque network of dealers as opposed to a central exchange.

“Everyone has been racing towards this deadline,” said Michael Ruvo, president of Wheaton, Illinois-based BondWave, which focuses on fixed income analytics and other services for the financial services industry.

Dealers will now be required to disclose fees, known as markups for selling and markdowns for buying muni bonds, to retail customers, who owned $1.57 trillion of the debt last year.

The rule was first proposed by the Municipal Securities Rulemaking Board, the muni market’s self regulator, in September 2016 and approved by the U.S. Securities and Exchange Commission later that year.

Trading in some corporate bonds, under an amendment to Financial Industry Regulatory Authority rules, will also be affected.

Under the rule, muni brokers will be required to determine a baseline number, known as a “prevailing market price,” in order to show retail investors how much prices for a bond transaction were marked up or down.

With just days left before the rule is rolled out, Ruvo said he is receiving last-minute calls from clients requesting help with the calculation models to determine those prices among other needs related to the rule change.

The process of determining prevailing market prices for individual muni bonds can be particularly arduous because of the diverse, vast and sparsely traded nature of the market in comparison to U.S. Treasuries or equity markets, said Jeffrey MacDonald, head of fixed income strategies for Fiduciary Trust Company International in New York.

Smaller broker-dealers may find it especially challenging to get their systems into compliance by the deadline, MacDonald said. The new rule could also make brokers cautious about adding cost to investors, he said.

Those difficulties, along with heightened investor awareness of the costs, could lead to a shift in the market, analysts said.

Over the longer-term, individual investors could opt to replace their direct muni bond holdings with professionally managed portfolios, such as mutual funds or separately managed accounts (SMA).

“If SMA assets start to grow at an even faster pace as a result of the mark-up rule, we might see demand for 5-10 (year) paper increase, as this part of the curve is preferred by SMAs,” Barclays municipal credit analyst Mikhail Foux said in a recent research note. That, in turn, would lead to a steepening yield curve, he added.

Financial advisers for investors, who sometimes buy individual bonds for clients, could also turn to larger investment management firms to handle those transactions due, in part, to the added burden of the new pricing disclosure rule, said Dawn Daggy-Mangerson, director of the muni bond team at McDonnell Investment Management in Oakbrook Terrace, Illinois.

The next step will be explaining and defending the number to investors.

by Laila Kearney

(Additional reporting by Karen Pierog in Chicago; Editing by Daniel Bases and Cynthia Osterman)

New rule effective Monday is meant to curb abusive practices, but critics say getting the details by snail mail means they might be ignored

WASHINGTON — Starting next week, mom-and-pop investors will learn how much their broker made selling them bonds.

The change in practice is due to a new rule meant to curb abusive sales practices. Beginning Monday, brokers will have to say how much they pocket when they buy corporate and municipal bonds and sell them to retail investors later that day.

The disclosures are aimed at addressing long-standing concerns that individual investors who buy bonds don’t know how much they are paying in fees, known as markups, that can eat into returns. Retail investors pay a variety of different prices for the same securities.

Continue reading.

The Wall Street Journal

By Andrew Ackerman and Heather Gillers

May 9, 2018

• As of May 14, broker-dealers must disclose the “transaction costs” customers pay when buying and selling corporate and municipal bonds.
• A 2007 study found that retail investors trading $20,000 of municipal bonds faced an average transaction cost of 2 percent.
• So-called “mark-ups” and “mark-downs” imposed by your brokerage firm are reflected in the price you pay for bonds.

Let’s be honest: Do you actually know much your broker earns when you put in an order to buy a municipal bond?

You’ll be able to answer that question today. Starting on May 14, broker-dealers will need to disclose mark-ups and mark-downs they charge on bonds bought and sold to retail investors on the same trading day.

Firms will also have to tell customers the time they executed the trade and provide a reference and a hyperlink to a page detailing the publicly available trading data for the bond.

Continue reading.

CNBC

BY Darla Mercado

From Invesco: Effective May 14, 2018, new regulations will be adopted aimed at increasing the transparency of bond pricing. The new rules require dealers of corporate, municipal and agency bonds to clearly disclose bond markups and provide retail investors with relevant price comparisons.

Although this initiative was spearheaded by the Municipal Securities Regulatory Board (MSRB) to cover municipal bonds, the Financial Industry Regulatory Authority (FINRA) has been working in tandem with the MSRB on language that covers corporate and agency bonds as well. Ultimately, the two regulatory agencies came up with similar sets of rules approved by the Securities and Exchange Commission that will be unveiled on the same timeline.

As retail investors discover the real cost of owning individual bonds, we believe these regulatory changes will strengthen the case for both fixed income exchange-traded funds (ETFs) and active fixed income investment managers.

What are bond markups?

When selling bonds, a dealer may acquire the bonds at one price and then sell them for a higher price as compensation for the dealer’s services. Markups represent the spread between the price paid for a bond and the price the dealer receives when selling the bond. Seeing the need to “enhance the transparency of costs associated with municipal securities transactions,” in November 2016 the MSRB amended existing Rules G-15 and G-30, which cover confirmation, clearance, prices and commissions. Working in concert with the MSRB, FINRA drafted disclosure requirements that are “materially the same” as the MSRB’s.1 The rule changes for both agencies take effect on May 14 and target non-institutional investors.

What has changed?

1. Increased disclosure around bond markups

In a nutshell, the new rules require bond dealers to disclose any markups (or markdowns) on bonds bought and sold to retail investors on the same day. Markups and markdowns must be expressed both in dollar terms and as a percentage of each bond’s prevailing market price.1

In order to make these disclosure requirements meaningful, retail investors must understand a bond’s prevailing market price. That is the other key component of the rule changes.

2. Determining prevailing market prices

In the case of municipals, dealers will be required to provide a hyperlink to the MSRB’s website, which hosts publicly available trading data for each security.1 Presumably, the data would allow retail investors to assess the fairness of the prices being charged by bond dealers. Because of its broader regulatory reach, FINRA offers its member firms wider latitude in disclosing prevailing market prices. Regardless of how members choose to disclose prevailing market prices, however, the “timing of the determination must be applied consistently across all transactions in corporate and agency debt securities.”2

Ramifications for retail investors

US bond trading volume eclipses that of the equity markets by a large margin. Nonetheless, bond markets have long been shrouded in mystery. Unlike stocks, bonds are traded over the counter rather than on standardized exchanges. This means that bond pricing is less transparent and trades are often conducted on a one-off basis through informal networks of dealers. As a result, bond pricing can be confusing, while US bond markets can be inaccessible to retail investors. We believe these changes should help de-mystify bond pricing.

We believe these regulatory changes also highlight the benefits of managed fixed income strategies. Invesco offers a broad lineup of active and passive fixed income strategies covering municipals, investment grade and high yield asset classes. Our fixed income professionals are experienced in navigating the complexities of the bond markets. In fact, Invesco Fixed Income is a leading global fixed income manager — focused entirely on helping clients meet their investment objectives. And because of Invesco Fixed Income’s global scale, we are able to purchase bonds in large blocks and secure institutional pricing.

Investors who currently invest in individual bonds might wish to consider our BulletShares suite of ETFs, which offers the precision and flexibility of individual bonds with the cost and tax efficiency of the ETF structure.3 BulletShares ETFs encompass both investment grade and high yield corporate bonds, enabling investors to build customized portfolios tailored to specific maturity profiles, risk preferences and investment goals.

Choosing Invesco as your fixed income partner can help simplify fixed income investing.

If you don’t know how much you’re paying, you may be paying too much. That’s the idea behind a major change being ushered into the $3.9 trillion state and local government debt market, a haven for retail investors where the trading fees that securities dealers charge have largely gone undisclosed. That will change on May 14, when brokers will be required to start disclosing some of the fees that are embedded in the prices investors pay — or receive — when they buy and sell their securities.

1. What prompted the rule change?

Securities regulators are trying to inject more transparency into the trading of municipal bonds, which are largely held by individual investors looking for tax-free income. By forcing the disclosure, regulators think it may increase competition among brokers and ultimately drive down costs for investors.

2. Will the fees on all trades be disclosed?

No. A broker will have to break out how much it marked up the price of a bond — or how much they marked it down when buying from a client — to individual investors only in some circumstances. The disclosure will be required when the dealer uses its own money that day to trade the same securities as its customer, unless the volume of that trading is less than what the client bought or sold. For example, if a customer sold $5,000 of New York City bonds to a dealer that only resold $1,000 worth that day, the mark-down wouldn’t be reported. So the fee reporting will capture cases where the broker soon offloads a bond, rather than taking on the risk of holding it in inventory.

3. How many trades are we talking about?

A sizable chunk. The Municipal Securities Rulemaking Board, the industry’s regulator, estimated that it would have covered 8,546, or about 55 percent, of the trades of bonds with a face value of $100,000 or less made each day during the third-quarter of 2015 when the dealer acted as a principal by using its own money to buy or sell the security. It’s possible, though, that some dealers may report the mark-ups on all their secondary-market trades with individual investors in the interest of transparency or to avoid the hassle of determining whether they need to on a case-by-case basis.

4. How is the mark-up calculated?

The firm must disclose the mark-up or mark-down in both dollar terms and as a percentage of the prevailing market price. For example, if a dealer went out and bought $10,000 of New York City bonds from a another dealer at 99 cents on the dollar and then resold them to a customer that ordered them at par, the mark-up would be 1 percent, or $100.

5. What if there was a big mid-day market move?

If the market was whipsawed by a big price move between the time when a dealer bought the securities and resold them, the broker will have to rely on a more complicated, step-by-step procedure known as “the waterfall.” In such cases, the first step would be to use trades between securities firms as a baseline. If there’s none to go on, they can rely on trades by big institutional investors — like mutual funds — that are made in blocks of $1 million or more. Absent that, they can turn to the quotes dealers put out for bid on electronic trading platforms. Similar securities or pricing models could serve as benchmarks as a last-ditch option, if all the others aren’t available.

6. What will this mean for investors and brokers?

Giving buyers the information will help ensure they’re not overcharged and may put some downward pressure on fees. Mutual-fund managers — who would love for investors to invest through them instead of trading in their own accounts — hope they will see an influx of cash from sticker-shocked investors surprised at the size of the fees they’re paying. It cost about 0.54 percent a year to invest through such fee-based accounts in 2016, about half what the average trading fee was, according figures from the Investment Company Institute and S&P Global Inc. But some brokers are dismissive, saying buy-and-hold investors are better off paying a one-time fee, even if it’s bigger, than paying their fund manager year after year.

Bloomberg

By Martin Z Braun

May 11, 2018

• Hinojosa, his firm didn’t disclose conflicts to district: SEC
• SEC says one-time paralegal misled issuers about experience

The U.S. Securities and Exchange Commission sued a municipal-bond adviser and his firm for lying to a south Texas school district by misrepresenting its experience and failing to disclosing conflicts of interest.

Mario Hinojosa, who set up his firm Barcelona Strategies LLC while working as a paralegal, defrauded the district by creating the “misleading impression” that he and the firm had worked as an adviser on many municipal bond deals and failed to reveal that he had a financial interest in the district’s offerings, the SEC said. Misrepresenting his experience and omitting the conflicts of interest allowed Hinojosa and his firm to reap hundreds of thousands of dollars in fees, according to the SEC.

The lawsuit stems from the powers that the SEC was given to police the municipal-bond advisory business under the Dodd-Frank law, which Congress enacted to address last decade’s credit-market crash. Until then, the business had been largely unregulated.

“Undisclosed conflicts of interest can lead to significant investment losses, and prevent municipal entities from making informed decisions in their selection of municipal advisors,” Shamoil Shipchandler, director of the SEC’s Fort Worth regional office, said in a statement. “Barcelona fell well short of its obligations to this school district client.”

Hinojosa and his firm settled with the SEC without admitting or denying the accusations. Both agreed to a cease-and-desist order and must pay $362,606 for disgorgement and $19,514 in prejudgment interest. The fraud accusations were connected to three municipal bond offerings between January 2013 and December 2014, the SEC said.

Hinojosa was unable to be reached for comment.

Bloomberg

By Elizabeth Campbell

May 9, 2018, 8:54 AM PDT

The municipal advisor overstated its municipal finance experience and failed to disclose conflicts of interest.

The Securities and Exchange Commission charged a registered municipal advisor and its owner with defrauding a south Texas school district in connection with multiple municipal bond offerings.

According to the SEC’s order Mario Hinojosa and his wholly owned municipal advisor, Barcelona Strategies LLC, acted as the municipal advisor to the La Joya Independent School District on three bond offerings between January 2013 and December 2014, earning more than $386,000 in fees.

During the school district’s process of selecting Barcelona as its municipal advisor, Barcelona and Hinojosa overstated and misrepresented their municipal finance experience, according to the SEC.

While working as a paralegal, Hinojosa set up Barcelona, registered it as an SEC municipal advisor, drafted a marketing brochure about the firm, and circulated the brochure to the school district and other municipalities.

The brochure created the misleading impression that Hinojosa and Barcelona had served as a municipal advisor on numerous muni bond issuances and failed to disclose that Hinojosa had a financial interest in the school district’s offerings. According to the SEC, Hinojosa was employed by the attorneys who served as bond counsel for all three bond offerings.
By virtue of their misrepresentations and omissions, Barcelona and Hinojosa improperly earned hundreds of thousands of dollars in municipal advisory fees, the SEC says.

“Municipal advisors owe a fiduciary duty to their municipal clients, who rely on advisors to make important financial decisions,” Shamoil Shipchandler, director of the SEC’s Fort Worth Regional Office, said in a statement. “Undisclosed conflicts of interest can lead to significant investment losses, and prevent municipal entities from making informed decisions in their selection of municipal advisors. As described in today’s order, Barcelona fell well short of its obligations to this school district client.”

The SEC’s order found that Hinojosa and Barcelona engaged in fraudulent, deceptive or manipulative acts and breached their fiduciary duties to municipal clients.

Without admitting or denying the allegations, Barcelona and Hinojosa consented to a cease-and-desist order and are jointly and severally liable for paying $362,606 in disgorgement and $19,514 in prejudgment interest.

Barcelona was also assessed a civil penalty of $160,000, while Hinojosa was assessed a civil penalty of $20,000.

Hinojosa was barred from association with various regulated entities, including muni advisors.

ThinkAdvisor

By Emily Zulz | May 09, 2018

• ‘It’s so much cheaper to pay a one-time charge on a bond’
• FMSbonds President Klotz says brokers not worried about rule

On May 14, new rules will require brokerage firms to start disclosing some of the fees they charge individuals to buy and sell state and local government debt. Those fees, which firms build into the trades by marking the price up or down, averaged about 1.1 percent on investment-grade bonds in 2016, or $1,100 for a $100,000 bond, according to S&P Global.

Some analysts have speculated the new disclosures could accelerate a shift by individual investors toward mutual funds and other fee-based accounts. On average, long-term municipal bonds funds charged fees of 0.54 percent in 2016, according to the Investment Company Institute.

James Klotz, president of Boca Raton, Florida-based broker-dealer FMSbonds Inc., disputes that the disclosure of fees will have a big impact on behavior. He said individual investors, who tend to buy and hold municipal securities until they mature, are better off paying a one-time markup than annual fees to professionals to manage their portfolio.

Q: Why do you think individual investors will continue to buy individual bonds rather than shift to funds?

A: It’s so much cheaper to pay a one-time charge on a bond an investor might hold 10, 15, 20, 30 years with no annual fees. Individual investors are buy and hold investors. They might get [bonds] called, they might sell them, but bonds aren’t intended to be bought and sold every three months. They’re bonds, not stocks.

Q: What’s the average mark-up at FMSbonds?

A: I can tell you it’s between 1% and 1.5% on a long-term bond. You have different situations. Bonds of a lesser quality may have more markup because of the risk.

Q: Isn’t there some value to credit research that funds provide?

A: The percentage of defaults on investment grade bonds is less than 1%. 99.5 of 100 bonds are going to mature at par. That’s history. There’s no promise of face value when you invest in a mutual fund. Every bond dealer spends a great deal of money on research and on creditworthiness because that’s our livelihood. If dealers were selling bonds that were defaulting, they wouldn’t be in business very long. We’ve been in business since 1978.

Q: Are you worried about losing customers because of the markup disclosure rule?

A: No bond dealers are scared of this new rule. The only thing we’re scared of is the instrumentation to be able to report it properly. Let’s say I sell you a Boca Raton 4% bond at par at 10 a.m. and I’m looking at trades that came before me, they were all at par or a little premium. At 4 p.m., somebody does a trade at 98.5. What’s the prevailing price? That’s the difficulty. You can’t just think what preceded your price, you have to think what came after your price, that’s what’s going to make it difficult. All those trades have to be reviewed the following morning. We’re doing 300 trades a day. I don’t think the SEC understands how complex it is.

Bloomberg

By Martin Z Braun

April 30, 2018, 8:30 AM PDT

In this Corporate Crime column, Steven M. Witzel and Daniel C. Fishbein focus on recent and novel enforcement actions in the municipal bond space. They survey municipal securities regulatory changes and enforcement innovations geared toward municipal issuers, and look at the future direction for enforcement and regulation in the muni-bond market.

The historically sedate municipal bond market has been jarred by recent civil enforcement actions and criminal prosecutions. In the past several years, in a focused targeting of the muni-bond marketplace previously afforded “second-class treatment,” the SEC has brought many “first-of-their-kind” actions against municipal bond issuers, underwriters and public officials. As this column went to press, the federal criminal trial of former Town of Oyster Bay Supervisor John Venditto (and former Nassau County Executive John Mangano) on securities fraud charges related to municipal bond sales by the Town of Oyster Bay was heading to conclusion. This trial follows on the heels of the December 2017 sentencing to 30 months’ imprisonment of former Ramapo, New York Town Supervisor Christopher St. Lawrence after his conviction on the DOJ’s first-ever criminal securities fraud trial related to municipal bonds.

In the wake of the financial crisis, disclosure requirements and other regulations protecting the $4 trillion municipal debt market were strengthened. Despite its importance, the muni-bond market had been substantially less regulated than most others. This regulatory ramp up was the result of an announced effort by regulators to police the muni-bond market and try to make it more transparent for investors.

Continue reading.

New York Law Journal

By Steven M. Witzel and Daniel C. Fishbein | May 02, 2018

Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met April 25-26, 2018, where it discussed numerous initiatives related to its oversight of the municipal securities market, focused on several retrospective rule reviews and advanced the development of a new professional qualification exam for municipal advisor principals.

The MSRB is midway through a fiscal year during which regulated entities are adapting to previously adopted rules aimed at protecting investors and municipal entities. The Board discussed ongoing efforts to assist municipal securities dealers in implementing a mark-up disclosure rule, and the numerous compliance support resources and events the MSRB is providing to assist regulated entities in understanding and complying with rules.

At its meeting, the Board discussed several market practices and agreed to seek public comment on potential rule updates and interpretations in the interest of market fairness and efficiency, and regulatory clarity. For example, the Board agreed to seek public comment on potential guidance or uniform practices for underwriters related to the dissemination of information about new bond issues and refunding transactions. This action is part of a long-term retrospective review of MSRB rules on syndicate practices.

Separately, the Board agreed to seek public comment on draft interpretive guidance for dealers that would clarify existing regulations on the practice of “pennying,” sometimes called “last look,” and draft revisions to existing guidance on the MSRB’s best-execution rule to clarify how dealers can satisfy their obligations without posting bid-wanteds on multiple electronic bidding platforms.

The Board also considered regulations governing duties owed by dealers to issuers when underwriting municipal securities that are codified in interpretive guidance under MSRB Rule G-17 issued in 2012 and agreed to publish a request for comment on the merits of any potential changes to the guidance.

“With over five years of experience with the application of our Rule G-17 guidance, we think it is the appropriate time to engage in a retrospective review to determine its effectiveness, as well as any opportunities to improve the guidance,” said MSRB President Lynnette Kelly.

Kelly said the Board recognizes that industry responses to requests for comment can be time-consuming and will continue to be cognizant of how it sequences new and planned requests and provide stakeholders with adequate time to respond. “We have multiple initiatives that require public feedback, and we want to ensure that we receive substantive input on the scope and substance of these proposals and their potential impacts,” Kelly added. Those initiatives include a proposed consolidation of MSRB requirements related to transactions in discretionary accounts and a proposal to streamline submission of data submitted by underwriters related to new offerings and the potential collection of additional information that could support market transparency.

The Board also discussed the MSRB’s ongoing development of a professional qualification examination for municipal advisors, consistent with its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act. With a baseline qualification exam for municipal advisor representatives in place since September 2016, the MSRB has been developing a principal-level exam to qualify individuals engaged in the management, direction or supervision of the municipal advisory activities of the firm and its associated persons. At its meeting, the Board approved proposed amendments to MSRB Rule G-3, on professional qualification requirements, and to MSRB Rule A-16, on examination fees, and the filing of the Municipal Advisor Principal Qualification Examination (Series 54) Content Outline to formally establish the Series 54 exam. The proposal includes a 12-month grace period for municipal advisor principals to take and pass the Series 54 exam once the permanent exam becomes available following a pilot of the exam.

Date: April 30, 2018

Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org